===============================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For The Period Ended September 30, 1997
Commission File #0-11321
UNIVERSAL AMERICAN FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
NEW YORK 11-2580136
------------------------ --------------------------
(State of Incorporation) (I.R.S. Employer I.E. No.)
Mt. Ebo Corporate Park, Brewster, NY 10509
---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 278-4094
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
----- -----
The number of shares outstanding of each of the Registrant's Common Stock
and Common Stock Warrants as of October 31, 1997 were 7,262,710 and 668,481,
respectively.
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
FORM 10-Q
CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at September 30, 1997 and
December 31, 1996 3
Consolidated Statements of Operations for the nine months
ended September 30, 1997 and September 30, 1996 4
Consolidated Statements of Operations for the three months
ended September 30, 1997 and September 30, 1996 5
Consolidated Statements of Cash Flows for the nine months
ended September 30, 1997 and September 30, 1996 6
Notes to Consolidated Financial Statements 7-11
Management's Discussion and Analysis of Financial Condition
and Results of Operations 12-18
PART II - OTHER INFORMATION 19
Signature 19
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
(unaudited)
----------- ------------
<S> <C> <C>
ASSETS:
Investments:
Cash and cash equivalents, at cost which
approximates fair value $17,660,552 $ 15,403,450
Fixed maturities available for sale, at
fair value (amortized cost of $119,923,304 in
1997 and $122,511,012 in 1996) (Notes 5 and 6) 123,127,054 121,492,167
Equity securities, at fair value (cost $675,568
in 1997 and $46,133 in 1996) 719,832 33,562
Policy loans 6,720,687 6,421,251
Mortgage loans 2,483,935 1,199,110
Property tax liens 136,713 131,729
----------- -----------
Total investments 150,848,773 144,681,269
Accrued investment income 3,219,521 2,875,497
Deferred policy acquisition costs 19,273,880 19,091,514
Amounts due from reinsurers 69,444,100 60,838,289
Due and unpaid premiums 1,452,918 2,712,021
Deferred income tax asset 747,350 2,069,876
Goodwill 3,270,683 3,529,529
Other assets 4,057,985 6,438,743
------------ ------------
Total assets $252,315,210 $242,236,738
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Policyholder account balances $139,597,564 $134,538,954
Reserves for future policy benefits 38,269,645 40,156,185
Policy and contract claims-life 1,239,424 1,186,702
Policy and contract claims-health 19,209,852 24,628,019
Short-term debt 800,000 800,000
Amounts due to reinsurers 12,960,304 11,129,232
Deferred revenues 288,048 357,957
Other liabilities 9,502,647 7,361,163
----------- ------------
Total liabilities 221,867,484 220,158,212
----------- ------------
Series C preferred stock (Note 7) 5,094,430 -
----------- ------------
STOCKHOLDERS' EQUITY (Note 7):
Series B preferred stock 4,000,000 4,000,000
Common stock (authorized 20,000,000, issued
and outstanding 7,250,110 and 7,149,221,
respectively) 72,501 71,492
Common stock warrants (authorized, issued and
outstanding 668,481 for both periods) - -
Additional paid-in capital 15,930,580 16,049,888
Retained earnings 4,437,310 2,929,383
Net unrealized investment gain (loss) 912,905 (972,237)
---------- -----------
Total stockholders' equity 25,353,296 22,078,526
---------- ------------
Total liabilities, Series C preferred
stock and stockholders' equity $252,315,210 $242,236,738
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
-------------------------
1997 1996
----------- -----------
<S> <C> <C>
REVENUES:
Gross premium and policyholder fees earned $73,773,391 $34,191,053
Reinsurance premium assumed 266,158 6,239,623
Reinsurance premiums ceded (44,196,036) (12,198,838)
------------- ------------
Premiums and policyholder fees earned 29,843,513 28,231,838
Net investment income 7,511,045 7,309,238
Realized gains on investments 914,859 173,133
Fee income 1,850,043 2,270,608
Amortization of deferred revenue 69,909 210,254
------------ -----------
Total revenues 40,189,369 38,195,071
------------ -----------
BENEFITS, CLAIMS & OTHER DEDUCTIONS:
Increase in future policy benefits 439,466 1,077,154
Claims and other benefits 19,143,562 16,678,786
Interest credited to policyholders 4,527,720 5,075,777
Increase in deferred policy acquisition costs (2,106,368) (1,755,621)
Amortization of goodwill 83,864 -
Commissions 14,156,831 11,990,913
Commission and expense allowances on
reinsurance ceded (13,240,477) (6,695,626)
Other operating costs and expenses 14,678,173 11,158,869
------------ ------------
Total benefits, claims & other deductions 37,682,771 37,530,252
------------ ------------
Operating income before Federal income taxes 2,506,598 664,819
Federal income tax expense 852,243 158,543
------------ ------------
Net income 1,654,355 506,276
Redemption accrual on Series C preferred
stock (Note 7) 146,430 -
------------ ------------
Net income applicable to common shareholders $ 1,507,925 $ 506,276
============ ============
Earnings per common equivalent shares (Note 4) $ 0.14 $ 0.05
============ ============
</TABLE>
See notes to unaudited consolidated financial statement
4
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended
September 30,
---------------------------
1997 1996
------------ -----------
<S> <C> <C>
REVENUES:
Gross premium and policyholder fees earned $24,812,323 $11,727,684
Reinsurance premium assumed 90,134 3,365,492
Reinsurance premium ceded (14,717,593) (4,221,634)
------------ ------------
Premiums and policyholder fees earned 10,184,864 10,871,542
Net investment income 2,493,762 2,541,551
Realized gains on investments 769,404 78,196
Fee income 558,544 638,528
Amortization of deferred revenue 23,303 70,084
------------ ------------
Total revenues 14,029,877 14,199,901
------------ ------------
BENEFITS, CLAIMS & OTHER DEDUCTIONS:
Increase in future policy benefits 410,046 1,034,933
Claims and other benefits 6,613,183 5,780,883
Interest credited to policyholders 1,471,788 1,910,621
Increase in deferred policy acquisition costs (697,013) (429,570)
Amortization of goodwill 27,955 -
Commissions 4,799,266 4,784,046
Commission and expense allowances on
reinsurance ceded (4,552,959) (2,689,064)
Other operating costs and expenses 4,719,901 3,657,787
------------ ------------
Total benefits, claims & other deductions 12,792,167 14,049,636
------------ ------------
Operating income before Federal income taxes 1,237,710 150,265
Federal income tax expense 420,820 49,011
------------ ------------
Net income 816,890 101,254
Redemption accrual on Series C preferred
stock (Note 7) 91,230 -
------------ -------------
Net income applicable to common shareholders $ 725,660 $ 101,254
============ =============
Earnings per common equivalent shares (Note 4) $ 0.07 $ 0.01
============ =============
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Nine months ended
September 30,
------------------------
1997 1996
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,654,355 $ 506,276
Adjustments to reconcile net income to net
cash used by operating activities:
Change in reserves for future policy benefits (1,886,540) 2,041,091
Change in policy and contract claims (5,365,445) (761,137)
Change in deferred policy acquisition costs (2,106,368) (1,755,621)
Amortization of goodwill 83,862 -
Change in deferred revenue (69,909) (210,255)
Change in policy loans (299,436) (540,902)
Change in accrued investment income (390,376) (718,908)
Change in reinsurance balances (6,774,739) (1,159,907)
Realized gains on investments (914,860) (173,133)
Change in other assets and liabilities 6,675,137 (2,739,114)
------------ ------------
Net cash used by operating activities (9,394,319) (5,511,610)
------------ ------------
Cash flows from investing activities:
Proceeds from sale of fixed maturities 26,008,608 28,789,369
Proceeds from redemption of fixed maturities 7,043,732 8,073,216
Cost of fixed maturities purchased (31,434,282) (45,637,138)
Proceeds from sale of equity securities 290,572 506,250
Cost of equity securities purchased (876,207) (501,250)
Change in other invested assets (1,289,809) 230,900
Proceeds from sale of AmeriFirst, net of cash held 2,020,496 -
------------ ------------
Net cash provided from (used by) investing activities 1,763,110 (8,538,653)
------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 211,345 69,849
Net proceeds from issuance of
Series C preferred stock 4,618,356 -
Increase in policyholder account balances 5,058,610 14,625,050
Decrease in notes payable - (369,698)
------------ ------------
Net cash provided from financing activities 9,888,311 14,325,201
------------ ------------
Net increase in cash and cash equivalents 2,257,102 274,938
Cash and cash equivalents at beginning of period 15,403,450 12,289,801
------------ ------------
Cash and cash equivalents at end of period $ 17,660,552 $ 12,564,739
============ ============
Supplemental cash flow information:
Cash paid during the period for interest $ 56,557 $ 63,125
============ ============
Cash paid during the period for income taxes $ 61,515 $ -
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
6
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles and consolidate the accounts of
Universal American Financial Corp. ("UHCO"), and its subsidiaries (collectively
the "Company"), American Progressive Life & Health Insurance Company of
New York ("American Progressive"), American Pioneer Life Insurance Company
("American Pioneer"), WorldNet Services Corp. ("WorldNet") and Quincy
Coverage Corp. ("Quincy"). AmeriFirst Insurance Company ("AmeriFirst") was
sold to an unaffiliated third party on September 4, 1997, therefore, its
operating results were included for the period January 1, 1997 to
September 4, 1997.
The interim financial information herein is unaudited, but in the opinion
of management, includes all adjustments (consisting of normal, recurring
adjustments) necessary to present fairly the financial position and results of
operations for such periods. The results of operations for the nine months
ended September 30, 1997 are not necessarily indicative of the results to be
expected for the full year. The consolidated financial statements should be
read in conjunction with the Form 10-K for the year ended December 31, 1996.
Certain reclassifications have been made to prior years' financial statements to
conform with current period classifications.
In June, 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting
Comprehensive Income" ("FAS 130"), effective for years beginning after December
15, 1997. FAS 130 establishes standards for reporting and display of
comprehensive income and its components (revenues, expenses, gains and losses)
in a full set of general purpose financial statements. FAS 130 requires that
all items that are required to be recognized under accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements and requires
that the accumulated balance of other comprehensive income be displayed
separately from retained earnings and additional paid-in capital in the equity
section of the balance sheet. The adoption of FAS 130 will only affect the
presentation of the statement of income and the balance sheet and will not
affect results of operations or financial position.
Also in June, 1997, the FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("FAS 131"), effective for
years beginning after December 15, 1997. FAS 131 requires that a public company
report financial and descriptive information about its reportable operating
segments pursuant to criteria that differ from current accounting practice.
Operating segments, as defined, are components of an enterprise about which
separate financial information is available that is evaluated regularly by the
chief operating decision-maker in deciding how to allocate resources and in
assessing performance. The financial information to be reported includes
segment profit and loss, certain revenue and expense items and segment assets
and reconciliations to corresponding amounts in the general purpose financial
statements. FAS 131 also requires information about revenues from products or
services, countries where the company has operations or assets and major
customers. The adoption of FAS 131 will not affect results of operations or
financial position.
In February, 1997, the FASB issued SFAS No. 128, "Earnings per share"
("FAS 128"). FAS 128 is effective for both interim and annual periods ending
after December 15, 1997. Earlier application is not permitted. This Statement
replaces primary earnings per share ("EPS") with basic EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. The
Company's basic EPS for the nine and three months ended September 30, 1997,
were $0.21 and $0.10 per share, respectively.
7
<PAGE>
2. Pending Acquisitions
American Exchange Life Insurance Company
In July, 1997, the Company executed a contract, subsequently amended, to
acquire American Exchange Life Insurance Company of Dallas, Texas ("American
Exchange") for $7.0 million in cash. The closing, which is expected to occur
in the fourth quarter of 1997, is subject to completion of due diligence and
regulatory approvals in the appropriate jurisdictions. American Exchange,
which is licensed in Texas and two other states, has premium revenues in excess
of $15 million, primarily in Medicare Supplement and other limited benefit
accident and health products. The Company has 16,000 policies in force and
1,000 insurance agents, all based in Texas.
Dallas General Life Insurance Company
In August, 1997, the Company executed a contract to acquire a $15 million
bloc of Medicare Supplement business from Dallas General Life Insurance Company
of Dallas, Texas ("Dallas General"). The business will be assumed by American
Pioneer Life Insurance Company. The closing, which is expected to occur in the
fourth quarter of 1997, is subject to completion of due diligence and
appropriate regulatory approvals. The Dallas General bloc has approximately
10,000 policies in force produced by approximately 400 agents, all in Texas. In
addition, the principals of Dallas General have entered into a contract to
continue to produce business for American Pioneer through an agency
relationship.
3. Federal Income Taxes
The Company and its non life subsidiaries file a consolidated Federal
income tax return. The life insurance subsidiaries file a separate
consolidated Federal income tax return.
4. Earnings Per Share
Earnings per common equivalent share were computed by dividing the net
income applicable to common shareholders by the weighted average number of
common shares outstanding during each period.
(Intentionally left blank)
8
<PAGE>
5. Investments
As of September 30, 1997 and December 31, 1996, fixed maturity securities
are classified as investments available for sale and are carried at fair value,
with the unrealized gain or loss, net of tax and other adjustments (deferred
policy acquisition costs), included in stockholders' equity.
The amortized cost and fair value of debt securities classified as
available for sale as of September 30, 1997 and December 31, 1996 are as
follows:
<TABLE>
<CAPTION>
September 30, 1997
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- ------------------------------- ------------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US government $ 8,933,062 $ 173,945 $ (50,678) $ 9,056,329
Foreign government debt securities 924,419 3,997 (4,812) 923,604
Corporate debt securities 61,071,551 1,562,691 (471,218) 62,163,024
Mortgage-backed securities 48,994,272 2,860,038 (870,213) 50,984,097
-------------- ----------- ------------ -------------
$ 119,923,304 $ 4,600,671 $ (1,396,921) $ 123,127,054
============== =========== ============ =============
</TABLE>
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- ---------------------------- ------------- ----------- ------------ -------------
<S> <C> <C> <C> <C>
US Treasury securities and
obligations of US government $ 12,141,823 $ 121,631 $ (85,890) $ 12,177,564
Corporate debt securities 74,020,305 1,167,066 (1,244,311) 73,943,060
Mortgage-backed securities 36,348,884 414,210 (1,391,551) 35,371,543
------------- ----------- ------------ -------------
$ 122,511,012 $ 1,702,907 $ (2,721,752) $ 121,492,167
============= =========== ============ =============
(/TABLE>
The amortized cost and fair value of fixed maturities at September 30,
1997 by contractual maturity are shown below. Expected maturities may differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Fair
Cost Value
-------------- --------------
Due in 1 year or less $ 1,482,836 $ 1,484,767
Due after 1 year through 5 years 20,103,459 20,558,041
Due after 5 years through 10 years 23,988,327 24,594,036
Due after 10 years 21,508,176 21,523,810
Mortgage-backed securities 52,840,506 54,966,400
-------------- -------------
$ 119,923,304 $ 123,127,054
============== =============
During September, 1997, the Company sold AmeriFirst Insurance Company, a
non operating subsidiary, to an unaffiliated company for $3,379,250 in cash and
realized a gain of $569,474 before provision for Federal income taxes.
9
<PAGE>
6. Financial Instruments with Concentrations of Credit Risk
At September 30, 1997 and December 31, 1996, the Company held unrated or
less-than-investment grade corporate debt securities with carrying and fair
values as follows:
September 30, December 31,
1997 1996
----------- -----------
Carrying value (at fair value) $ 3,195,190 $ 3,850,510
=========== ===========
Amortized cost $ 3,026,840 $ 3,918,477
=========== ===========
Carrying value as percentage of total assets 1.3% 1.6%
=========== ===========
The holdings of less-than-investment grade securities are widely
diversified and the investment in any one such security is currently less than
$1,000,000, which is approximately 0.4% of total assets.
7. Stockholders' Equity
Series B Preferred Stock
The Company has 2,000,000 authorized shares of preferred stock to be
issued in series with 400 shares, par value $10,000 classified as Series B,
issued and outstanding at September 30, 1997 and December 31, 1996. The Series
B preferred stock carries no interest and is convertible into common stock at
$2.25 per share.
Series C Preferred Stock
During the second quarter of 1997, the Company issued 41,550 shares (par
value $100) of Series C Preferred Stock for $4,155,000, of which $2.4 million
was purchased by UAFC L.P. ("AAM") an unaffiliated investment firm, $600,000 by
Chase Equity Partners, L.P., and $1,155,000 by Richard A. Barasch (the Chief
Executive Officer of the Company), members of his family, and members and
associates of the Company's management. This transaction received the approval
of the Florida Insurance Department.
During the third quarter of 1997, the Company issued an additional 7,930
shares of Series C Preferred Stock for $793,000, which shares were purchased by
owners and employees of Ameri-Life & Health Services, a general agency that
sells the Company's senior market products.
The Series C Preferred shares will be convertible by the holders at any
time at a conversion price of $2.375 per common share (subject to anti-dilution
adjustment). The Company can require conversion if it executes a public
offering of common stock at over $3.45 per share (or equivalent equity), with
gross proceeds in excess of $10 million, or if the average bid price of its
common stock exceeds $3.45 per share for any 60 day period through December 31,
2001. In the event that the Company takes certain action without the consent of
the holders of a majority of the Series C Preferred Stock, those holders who
voted against such action have the right to require its redemption at the
Redemption Price or the Call Price, (which Prices are defined below) depending
on the nature of the action taken.
The Company will also have the right to call all of the Series C Preferred
Stock at any time between January 1, 2000 and December 31, 2002, at a per share
call price (the "Call Price") of $150 in the year 2000 or $175 in the years
2001 and 2002, in each case increased by the redemption accrual at the rate of
8% of the par value. Unless converted or called earlier, the Series C
Convertible Preferred Stock will be redeemed on December 31, 2002, at a per
10
<PAGE>
share redemption price (the "Redemption Price") equal to par, increased by a
redemption accrual at the rate of 8% per annum. The redemption price will be
payable in two equal installments on December 31, 2002 and December 31, 2003.
The redemption accrual is not payable upon any conversion. No dividends will
be paid on the Series C Preferred Stock, unless dividends are paid on the
common stock, in which case the Series C Preferred Stock will participate as if
converted. As of September 30, 1997, $146,430 of dividends were accumulated on
the Series C preferred stock for the period April 25, 1997 to September 30,
1997.
The Company, AAM, the holders of the Series C Preferred Stock, Barasch
Associates Limited Partnership ("BALP") and Richard A. Barasch entered into a
shareholders agreement, under which the holders of the Series C Preferred Stock
were given registration rights and informational rights, the Series C Preferred
Stockholders agreed to vote their shares for the election of a person designated
by AAM as the director elected by that Series, and BALP and Mr. Barasch granted
the Series C holders a co-sale right should they sell any shares of the
Company's common stock held by them, except to certain "permitted transferees".
The holders of the Series C Preferred Stock (excluding a portion of such series
which was issued without voting rights) will have the right to elect one
director of the Company.
Common Stock
The par value of common stock is $.01 per share with 20,000,000 shares
authorized for issuance. The shares issued and outstanding at September 30,
1997 and December 31, 1996 were 7,250,110 and 7,149,221, respectively. As of
September 30, 1997, 6,877,176 shares of common stock are reserved for issuance
which would be required if all warrants and conversion rights outstanding were
exercised.
Common Stock Warrants
At September 30, 1997 and December 31, 1996, the Company had 668,481
common stock warrants issued and outstanding, respectively, which are
registered under the Securities Exchange Act of 1934 and 2,015,760 warrants not
so registered. All of the warrants have no par value, have an exercise price to
purchase common stock at $1.00 per share, and expire on December 31, 1999.
8. Note Payable
On October 13, 1997, the Company entered into a letter of intent with
Chase Manhattan Bank to obtain a $3,500,000 secured five year term loan. A
portion of the loan proceeds are to be used to retire the $800,000 amount
outstanding on the current term loan agreement with Country Bank. The loan
will bear interest at the London Interbank Offering Rate (LIBOR) plus 200 basis
points. The loan will be secured by a first priority interest in all the
assets of WorldNet Services Corp. and Quincy Coverage Corp., a pledge of 9.9% of
the outstanding common shares of American Progressive and 100% of the shares of
Quincy Coverage Corp.
11
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The purpose of this section is to discuss and analyze the company's
consolidated results of operations, financial condition, and liquidity and
capital resources. This analysis should be read in conjunction with the
consolidated financial statements and related notes which appear elsewhere in
this report and also contained in the Form 10-K for the year ended December
31, 1996.
The Company cautions readers regarding certain forward-looking statements
contained in the following discussion and elsewhere in this report and in any
other oral or written statements, either made by, or on behalf of, the Company,
whether or not in future filings with the Securities and Exchange Commission
("SEC"). Forward-looking statements are statements not based on historical
information. They relate to future operations, strategies, financial results
or other developments. In particular, statements using verbs such as "expect,"
"anticipate," "believe" or similar words generally involve forward-looking
statements. Forward-looking statements include statements that represent the
Company's products, investment spreads or yields, or the earnings or
profitability of the Company's activities.
Forward-looking statements are based upon estimates and assumptions that
are subject to significant business, economic and competitive uncertainties,
many of which are beyond the Company's control and are subject to change. These
uncertainties can affect actual results and could cause actual results to differ
materially from those expressed in any forward-looking statements made by, or on
behalf of, the Company. Whether or not actual results differ materially from
forward-looking statements may depend on numerous foreseeable and unforeseeable
events or developments, some of which may be national in scope, such as general
economic conditions and interest rates. Some of these events may be related to
the insurance industry generally, such as pricing competition, regulatory
developments and industry consolidation. Others may relate to Universal
specifically, such as credit, volatility and other risks associated with the
Company's investment portfolio, and other factors. Universal disclaims any
obligation to update forward-looking information.
Liquidity and Capital Resources
Parent Company
Between April 25, 1997 and September 30, 1997, the Company issued 49,380
shares of Series C Preferred Stock for $4,953,000, of which $2.4 million was
purchased by UAFC L.P., $600,000 by Chase Equity Partners, L.P. $1,155,000 by
Richard A. Barasch (the Chief Executive Officer of the Company), members of his
family, and members and associates of the Company's management and $798,000 by
Ameri-Life & Health Services, a general agency that sells the Company's senior
market products. Expenses incurred in connection with the Series C Preferred
stock issuance amounted to $329,644 and were charged to paid-in capital. For
terms of the Series C Preferred Stock please refer to Footnote 7 in the
accompanying financial statements.
The Company has borrowed $800,000 under a term loan agreement with its
commercial bank which matures on December 31, 1997, which loan is extendable by
the Company for a second year. The loan is secured by the pledge of 100% of the
outstanding common stock of Quincy, the receivables of Quincy and WorldNet and
9.9% of the outstanding common stock of American Progressive. The loan bears
interest at 1.0% over prime.
12
<PAGE>
On October 13, 1997, the Company entered into a letter of intent with
Chase Manhattan Bank to obtain a $3,500,000 secured five-year term loan. The
use of the loan proceeds are to finance the intercompany sale of American
Pioneer from American Progressive to Universal and to retire the $800,000
amount outstanding on the current term loan agreement with the commercial bank.
The loan will bear interest at the London Interbank offering rate (LIBOR) plus
200 basis points. The loan will be secured by a first priority, interest in all
the assets of WorldNet Services Corp. and Quincy Coverage Corp., a pledge of
9.9% of the outstanding common shares of American Progressive and 100% of the
shares of Quincy Coverage Corp.
Unstacking
Since its acquisition in May 1993, American Pioneer has been a direct
subsidiary of American Progressive. The Company has decided to acquire
American Pioneer from American Progressive, and make it a direct subsidiary of
Universal.
The proposed acquisition will strengthen the financial condition of
American Progressive and is expected to result in an improvement of American
Progressive's risk based capital ratio and the ratings of both American Pioneer
and American Progressive, as well as making American Pioneer's dividend paying
potential available to Universal. To comply with the requirements of the
Holding Company's provisions of the New York Insurance Law, Universal and
American Progressive on July 26, 1996 entered into a purchase agreement, which
has been approved by the New York Insurance Department (the "Department"),
providing for:
- - the sale of all of American Pioneer stock to Universal, to be paid for and
delivered, in one or more segments, over a period of not more than five
years, at a fixed price per share determined by an appraisal performed by
an independent actuarial firm selected by the Department.
- - the payment for the first segment of American Pioneer stock with a purchase
price of at least $6 million, within 90 days after the receipt of the
appraisal report.
- - the payment of the purchase price for the initial segment and each
subsequent segment, one half in cash and one half by Universal's five year
debenture, bearing interest at the prime rate at the time each debenture
is issued, and secured by pledge of all of the purchased stock.
On September 23, 1997, the Company and the Department agreed upon a
purchase price of $15.8 million for American Pioneer. On September 29, 1997,
Universal paid $7 million to American Progressive for American Pioneer
consisting of $3.5 million in cash and a $3.5 million Debenture under the terms
noted above. The Company expects to complete this unstacking transaction prior
to September 29, 2002 (five years from the date of payment of the first
segment). This unstacking transaction has no impact on the accompanying
consolidated financial statements.
Insurance Subsidiaries
The Company's two principal operating insurance companies, American
Progressive and American Pioneer, are required to maintain minimum amounts of
capital and surplus as determined by statutory accounting ("statutory
capital"). The minimum statutory capital and surplus requirements of American
Progressive and American Pioneer as of September 30, 1997 for the maintenance of
authority to do business were $2,500,000 and $2,091,000, respectively, but
substantially more than this is needed to permit continued writing of new
business. At September 30, 1997 the statutory capital and surplus of American
Progressive and American Pioneer were $9,046,000 and $12,099,000, respectively.
At September 30, 1997, the investment portfolios of the life insurance
subsidiaries included cash and short-term investments totaling $15,746,000 as
well as fixed maturity securities carried at their fair values which amounted
to $123,127,000 and equity securities carried at fair values which amounted to
13
<PAGE>
$720,000 that could be readily converted to cash. The fair value of these
liquid investments totaled more than $139,593,000 and constituted approximately
94% of the insurance subsidiaries' investments at September 30, 1997.
Investments
The Company's investment policy is to balance the portfolio between long-
term and short-term investments so as to achieve investment returns consistent
with the preservation of capital and maintenance of liquidity adequate to meet
payment of policy benefit and claims. The Company invests in assets permitted
under the insurance laws of the various states in which it operates, such laws
generally prescribe the nature, quality of and limitations on various types of
investments which may be made. The Company currently engages the services of
an unaffiliated investment advisor, Asset Allocation and Management Company, to
manage the Company's fixed maturity portfolio, under the direction and
management of the Insurance Subsidiaries and in accordance with guidelines
adopted by their respective Boards of Directors.
The Company has invested in a limited number of non-investment grade
securities which provide higher yields than investment grade securities. As of
September 30, 1997 and December 31, 1996, the Company held unrated or less-than-
investment grade corporate debt securities of approximately $3,195,000 and
$3,851,000, respectively. These holdings amounted to 2.1% of total investments
and 1.3% of total assets at September 30, 1997 compared to 2.7% of total
investments and 1.6% of total assets at December 31, 1996.
At September 30, 1997, all of the Company's investments were income
producing and current in interest and principal payments. In addition, the
Company has no investment in any derivative instruments or other hybrid
securities that contain any off balance sheet risk.
Results of Operations
Nine Months Ended September 30, 1997
For the nine months ended September 30, 1997, the Company earned net
income after Federal income taxes of $1,654,000 ($0.14 per share) compared to
$506,000 ($0.05 per share) in the year ago period. Operating income before
Federal income taxes amounted to $2,507,000 for the nine months ended September
30, 1997 compared to $665,000 in the year ago period. During September 1997,
the Company sold AmeriFirst Insurance Company, an inactive insurance company,
for $3,379,000 and realized a pretax gain of $569,000 ($376,000 after tax or
$0.03 per share).
REVENUES. Total revenues increased approximately $1,994,000 to
approximately $40,189,000 for the nine months ended September 30, 1997,
compared to total revenues of approximately $38,195,000 in the year ago period,
which increase is primarily attributable to the Company's growth in premium
volume. In the nine months ended September 30, 1997, the Company's gross
premium and policyholder fees earned amounted to $73,773,000, a $39,582,000
increase over the $34,191,000 amount in 1996. This gross premium increase is
significantly attributable to the premiums received on the policies assumed
from First National Life Insurance Company ("First National"), which premiums
amounted to $39,237,000. In addition, the gross premiums on the Company's
following currently marketed programs increased as follows:
Product Premium Increase Premium Earned
- --------------------------------- ---------------- ---------------
Senior market accident and health $ 2,754,000 $ 7,766,000
Senior market life insurance 1,133,000 2,289,000
Group dental 845,000 5,042,000
Group life insurance 84,000 2,542,000
---------------- ---------------
Totals $ 4,816,000 $ 17,639,000
================ ===============
14
<PAGE>
These increases totaled $44,053,000 and were offset by the decrease in
premiums on the products terminated and not currently marketed by the Company.
Effective December 31, 1996, the Company withdrew its participation in the
NAIU specialty accident and health insurance pool and also sold its New York
State DBL business in force. Premium for the New York State DBL amounted to
$3,357,000 for the nine months ended September 30, 1996. In addition, other
life insurance premiums decreased $131,000 to $5,919,000, while accident and
health insurance premiums on policies not currently marketed decreased $977,000.
The premiums from the NAIU pool were included in reinsurance premiums assumed
and amounted to $5,965,000 for the nine months ended September 30, 1996.
While the Company was able to increase its gross premium revenue from its
core products, it continues to reinsure a portion of these risks to unaffiliated
reinsurers. Reinsurance premiums ceded for the nine months ended September 30,
1997 amounted to $44,196,000, a $31,997,000 increase from the 1996 amount of
$12,199,000. Of this increase, $31,695,000 relates to the business assumed
from First National, while $1,253,000 relates to senior market accident and
health and $223,000 to senior market life insurance. In addition to these
increases, the Company participates in a reinsurance treaty under which it
writes international medical insurance and cedes 90% in 1997 (95% in 1996) out
to an unaffiliated insurer. Gross and ceded premium amounts for the nine months
ended September 30, 1997 amounted to $2,217,000 and $2,004,000, respectively,
compared to $1,446,000 and $1,373,000, respectively, in the year ago period.
Effective January 1, 1997, the Company entered into a new reinsurance agreement
on American Pioneer's major medical/major hospital business. Under the new
treaty, the Company retains 50% of the first $60,000 in claims risk compared to
25% under the prior agreement. As a result, reinsurance premiums ceded on this
product decreased $1,263,000 in the nine months ended September 30, 1997.
(Gross premiums on this business continue to decline, which decrease for the
nine months ended September 30, 1997 amounted to $454,000). Accident and health
premiums ceded on the policies not currently marketed also decreased $396,000.
In continuation of its restructuring activity the Company executed an
agreement, with an unaffiliated insurer, to 100% reinsure its group dental block
of business effective September 1, 1997. The Company received an initial ceding
allowance of $200,000 and anticipates receiving additional allowances totaling
$525,000 over a five-year period. The Company will continue to perform the
administration on the business for a fee. At September 1, 1997, the in force
group dental premium amounted to $7.8 million.
Net investment income of the Company increased $202,000 to $7,511,000 for
the nine months ended, compared to $7,309,000 in the year ago period. Realized
gains on investments amounted to $915,000 for the nine months ended September
30, 1997 compared to $173,000 in the year ago period. Included in the 1997
amount is the $569,000 gain realized on the Sale of AmeriFirst Insurance Company
to an unaffiliated third party.
Fee income amounted to $1,850,000 for the nine months ended September 30,
1997, a decrease of $421,000 over the $2,271,000 amount for the year ago period.
This decrease is the result of the cancellation of WorldNet's Ontario Blue
Cross contract in 1996. The amortization of deferred revenue amounted to
$70,000 for the nine months ended September 30, 1997 compared to $210,000 in the
year ago period.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Total benefits, claims and other
deductions increased approximately $153,000 to $37,683,000 for the nine months
ended September 30, 1997, compared to $37,530,000 in the year ago period.
Claims and other benefits increased $2,465,000 to $19,144,000 for the nine
months ended September 30, 1997 compared to $16,679,000 in the year ago period.
Net claims on the business assumed from First National amounted to $5,836,000,
while net claims on the senior market accident and health increased $631,000.
Claims on the group dental product increased $275,000 to $3,639,000 for the
ninemonths ended September 30, 1997. As discussed above, the Company is
retaining a higher amount of major medical/major hospital business under a new
15
<PAGE>
reinsurance agreement and, as a result, the Company's claims on this product
increased $712,000 to $1,560,000. (This increase corresponds to the $810,000
increase in retained premiums.) These increases of $7,454,000 were offset by
decreases in the claims incurred on the runoff accident and health business
($209,000) and the terminated businesses (NAIU - $2,590,000; New York State
DBL - $2,434,000). The remaining increase of $150,000 represents an increase
in life insurance claims.
The change in reserves for the nine months ended September 30, 1997
amounted to an increase of $439,000 compared to an increase of $1,077,000 in the
year ago period generating a decrease of $638,000. Included in the 1996 change
in reserves is $706,000 generated by the NAIU accident pool business which the
Company has exited. Interest credited to policyholders decreased $548,000 to
$4,528,000, resulting from the aging of the in force.
The change in deferred acquisition costs increased $351,000 for the nine
months ended September 30, 1997 compared to 1996. The amount of acquisition
costs capitalized increased $1,304,000 from $3,641,000 in 1996 to $4,945,000 in
1997. This increase is the result of the increase in new premium production in
the nine months ended September 30, 1997 compared to the year ago period. The
amortization of deferred acquisition costs increased $953,000 from $1,886,000 in
1996 to $2,839,000 in 1997. This increase is the result of the increase in the
asset balance. In the nine months ended September 30, 1997, the Company
amortized $84,000 of the goodwill generated in the First National acquisition.
Commissions increased $2,166,000 in the nine months ended September 30,
1997 to $14,157,000, compared to $11,991,000 in the year ago period. This
increase is the direct result of the $39,582,000 increase in gross premium
earned discussed above. Commissions and expense allowances on reinsurance
ceded increased $6,545,000 for the nine months ended September 30, 1997 to
$13,241,000, compared to $6,696,000 in the year ago period. This increase is
the direct result of the $31,997,000 increase in reinsurance premium ceded
discussed above.
Other operating costs and expenses increased $3,519,000 in the nine months
ended September 30, 1997 to $14,678,000, compared to $11,159,000 in the year ago
period. The insurance companies' expenses amounted to $12,668,000 for the nine
months ended September 30, 1997 compared to $8,793,000 in the year ago period,
an increase of $3,875,000. Expenses incurred administrating the recently
acquired business from First National amounted to $3,218,000, while new business
expenses increased $254,000 and premium taxes increased $798,000. These
increases totaled $4,270,000 and were offset by the decrease in the general
overhead of the insurance companies of $395,000. The non-insurance companies
expenses decreased $356,000 to $2,010,000 for the nine months ended September
30, 1997 as a result of the decrease in expenses incurred at WorldNet.
Results of Operations
Three Months Ended September 30, 1997
For the three months ended September 30, 1997, the Company earned net
income after Federal income taxes of $817,000 ($0.07 per share) compared to
$101,000 ($0.01 per share) in the year ago period. Operating income before
Federal income taxes amounted to $1,238,000 for the three months ended September
30, 1997 compared to $150,000 in the year ago period. During September 1997,
the Company sold AmeriFirst Insurance Company, an inactive insurance company,
for $3,379,000 and realized a pretax gain of $569,000 ($376,000 after tax or
$0.03 per share).
REVENUES. Total revenues decreased approximately $170,000 to
approximately $14,030,000 for the three months ended September 30, 1997,
compared to total revenues of approximately $14,200,000 in the year ago period,
which decrease is primarily related to the Company's exit from participating in
the NAIU accident pool. In the three months ended September 30, 1997, the
16
<PAGE>
Company's gross premium and policyholder fees earned amounted to $24,812,000, a
$13,084,000 increase over the $11,728,000 amount in 1996. This gross premium
increase is significantly attributable to the premiums received on the policies
assumed from First National Life Insurance Company ("First National"), which
premiums amounted to $12,530,000. In addition, the gross premiums on the
Company's following currently marketed programs increased as follows:
Product Premium Increase Premium Earned
- --------------------------------- ---------------- --------------
Senior market accident and health $ 1,052,000 $ 3,007,000
Senior market life insurance 818,000 1,257,000
Group dental 140,000 1,577,000
Group life insurance 9,000 842,000
---------------- --------------
Totals $ 2,019,000 $ 6,683,000
================ ==============
These increases totaled $14,549,000 and were offset by the decrease in
premiums on the products terminated and not currently marketed by the Company.
Effective December 31, 1996, the Company withdrew its participation in the NAIU
specialty accident and health insurance pool and also sold its New York State
DBL business in force. Premium on the New York State DBL amounted to $1,188,000
for the three months ended September 30, 1996. The premiums from the NAIU pool
were included in reinsurance premiums and amounted to $3,271,000.
While the Company was able to increase its gross premium revenue from its
core products, it continues to reinsure a portion of these risks to
unaffiliated reinsurers. Reinsurance premiums ceded for the three months ended
September 30, 1997 amounted to $14,718,000, a $10,496,000 increase from the 1996
amount of $4,222,000. Of this increase, $9,958,000 relates to the business
assumed from First National, while $432,000 relates to senior market accident
and health and $60,000 to senior market life insurance. In addition to these
increases, the Company participates in a reinsurance treaty under which it
writes international medical insurance and cedes 90% in 1997 (95% in 1996) out
to an unaffiliated insurer. Gross and ceded premium amounts for the three
months ended September 30, 1997 amounted to $857,000 and $767,000, respectively,
compared to $623,000 and $592,000, respectively, in the year ago period. Other
life insurance premiums ceded and runoff accident and health premiums ceded
decreased $32,000 for total increases of $10,593,000. Effective January 1,
1997, the Company entered into a new reinsurance agreement on American Pioneer's
major medical/major hospital business. Under the new treaty, the Company
retains 50% of the first $60,000 in claims risk compared to 25% under the prior
agreement. As a result, reinsurance premiums ceded on this product decreased
$447,000 in the three months ended September 30, 1997. (Gross premiums on this
business continue to decline, which decrease for the three months ended
September 30, 1997 amounted to $166,000.)
In continuation of its restructuring activity the Company executed an
agreement, with an unaffiliated insurer, to 100% reinsure its group dental block
of business effective September 1, 1997. The Company received an initial ceding
allowance of $200,000 and anticipates receiving additional allowances totaling
$525,000 over a five-year period. The Company will continue to perform the
administration on the business for a fee. At September 1, 1997, the in force
group dental premium amounted to $7.8 million.
Net investment income of the Company decreased $48,000 to $2,494,000 for
the three months ended September 30, 1997, compared to $2,542,000 in the year
ago period. Realized gains on investments amounted to $769,000 for the three
months ended September 30, 1997 compared to $78,000 in the year ago period.
Included in the 1997 amount is the $569,000 gain realized on the sale of
AmeriFirst Insurance Company to an unaffiliated third party.
17
<PAGE>
Fee income amounted to $559,000 for the three months ended September 30,
1997, a decrease of $80,000 over the $639,000 amount for the year ago period.
The amortization of deferred revenue amounted to $23,000 for the three months
ended September 30, 1997 compared to $70,000 in the year ago period.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Total benefits, claims and other
deductions decreased approximately $1,258,000 to $12,792,000 for the three
months ended September 30, 1997, compared to $14,050,000 in the year ago period.
Claims and other benefits increased $832,000 to $6,613,000 for the three
months ended September 30, 1997 compared to $5,781,000 in the year ago period.
Net claims on the business assumed from First National amounted to $2,033,000,
while net claims on the senior market accident and health increased $414,000.
Claims on the group dental product decreased $243,000 to $974,000 for the three
months ended September 30, 1997. As discussed above, the Company is retaining
a higher amount of major medical/major hospital business under a new reinsurance
agreement and, as a result, the Company's claims on this product increased
$246,000 to $552,000. (This increase corresponds to the $281,000 increase in
retained premiums). This net increase of $2,450,000 was offset by decreases in
the terminated businesses (NAIU - $1,000,000; New York State DBL - $846,000).
Mortality incurred by the Company increased $220,000.
The change in reserves for the three months ended September 30, 1997
amounted to an increase of $410,000 compared to an increase of $1,035,000 in the
year ago period generating a variance of $625,000. Interest credited to
policyholders decreased $439,000 to $1,472,000, resulting from the aging of the
in force.
The change in deferred acquisition costs increased to $267,000 for the
three months ended September 30, 1997 compared to 1996. The amount of
acquisition costs capitalized increased $513,000 from $1,090,000 in 1996 to
$1,603,000 in 1997. This increase is the result of the increase in new premium
production in the three months ended September 30, 1997 compared to the year ago
period. The amortization of deferred acquisition costs increased $246,000 from
$660,000 in 1996 to $906,000 in 1997. This increase is the result of the
increase in the asset balance. In the three months ended September 30, 1997,
the Company amortized $28,000 of the goodwill generated in the First National
acquisition.
Commissions increased $15,000 in the three months ended September 30, 1997
to $4,799,000, compared to $4,784,000 in the year ago period. Commissions and
expense allowances on reinsurance ceded increased $1,864,000 in the three months
ended September 30, 1997 to $4,553,000, compared to $2,689,000 in the year ago
period. This increase is the direct result of the $10,496,000 increase in
reinsurance premium ceded discussed above.
Other operating costs and expenses increased $1,062,000 in the three
months ended September 30, 1997 to $4,720,000, compared to $3,658,000 in the
year ago period. The insurance companies' expenses amounted to $4,095,000 for
the three months ended September 30, 1997 compared to $2,967,000 in the year ago
period, an increase of $1,128,000. Expenses incurred administrating the
recently acquired business from First National amounted to $1,163,000, while new
business expenses increased $74,000 and premium taxes increased $135,000. Other
operating costs of the insurance companies decreased $244,000. The non-
insurance companies expenses decreased $66,000 to $625,000 for the three months
ended September 30, 1997 as a result of the decrease in expenses incurred at
WorldNet.
18
<PAGE>
PART II - OTHER INFORMATION
NONE
------------------------------------------------------------
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
UNIVERSAL AMERICAN FINANCIAL CORP.
By: /S/ Robert A. Waegelein
-----------------------
Robert A. Waegelein
Senior Vice President
Chief Financial Officer
Date: November 14, 1997
19
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<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 123,127,054
<DEBT-CARRYING-VALUE> 123,127,054
<DEBT-MARKET-VALUE> 123,127,054
<EQUITIES> 719,832
<MORTGAGE> 2,483,935
<REAL-ESTATE> 0
<TOTAL-INVEST> 150,848,773
<CASH> 17,660,552
<RECOVER-REINSURE> 69,444,100
<DEFERRED-ACQUISITION> 19,273,880
<TOTAL-ASSETS> 252,315,210
<POLICY-LOSSES> 0
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 38,269,645
<POLICY-HOLDER-FUNDS> 139,597,564
<NOTES-PAYABLE> 0
0
4,000,000
<COMMON> 72,501
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 252,315,210
29,843,513
<INVESTMENT-INCOME> 7,511,045
<INVESTMENT-GAINS> 914,859
<OTHER-INCOME> 1,850,043
<BENEFITS> 19,143,562
<UNDERWRITING-AMORTIZATION> (2,106,368)
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 2,506,598
<INCOME-TAX> 852,243
<INCOME-CONTINUING> 1,654,355
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,507,925
<EPS-PRIMARY> .14
<EPS-DILUTED> .14
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
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