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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 June 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 July 31, 1997 were 7,228,660 and 668,481,
respectively.
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
FORM 10-Q
CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
---------------------
Consolidated Balance Sheets
at June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations
for the six months ended June 30, 1997 and June 30, 1996 4
Consolidated Statements of Operations
for the three months ended June 30, 1997 and June 30, 1996 5
Consolidated Statements of Cash Flows
for the six months ended June 30, 1997 and June 30, 1996 6
Notes to Consolidated Financial Statements 7-10
Management's Discussion and Analysis
of Financial Condition and Results of Operations 11-15
PART II - OTHER INFORMATION 16
Signature 16
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
(unaudited)
<S> <C> <C>
ASSETS:
Investments:
Cash and cash equivalents, at cost which approximates fair value $ 10,735,543 $ 15,403,450
Fixed maturities available for sale, at fair value (amortized cost
of $124,299,141 in 1997 and $122,511,012 in 1996) (Notes 4 and 5) 123,453,125 121,492,167
Equity securities, at fair value (cost $683,235 in 1997
and $46,133 in 1996) 673,459 33,562
Policy loans 6,672,367 6,421,251
Mortgage loans 2,545,292 1,199,110
Property tax liens 131,729 131,729
----------- -----------
Total investments 144,211,515 144,681,269
Accrued investment income 2,947,007 2,875,497
Deferred policy acquisition costs 20,498,036 19,091,514
Amounts due from reinsurers 67,399,694 60,838,289
Due and unpaid premiums 1,419,657 2,712,021
Deferred income tax asset 1,638,453 2,069,876
Goodwill 3,473,620 3,529,529
Other assets 6,456,852 6,438,743
----------- -----------
Total assets $248,044,834 $242,236,738
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES:
Policyholder account balances $138,593,086 $134,538,954
Reserves for future policy benefits 37,995,390 40,156,185
Policy and contract claims-life 741,486 1,186,702
Policy and contract claims-health 19,934,924 24,628,019
Short-term debt 800,000 800,000
Amounts due to reinsurers 12,422,196 11,129,232
Deferred revenues 311,351 357,957
Other liabilities 10,153,754 7,361,163
----------- -----------
Total liabilities 220,952,187 220,158,212
----------- -----------
Series C preferred stock (Note 6) 4,195,200 -
----------- -----------
STOCKHOLDERS' EQUITY (Note 6):
Series B preferred stock 4,000,000 4,000,000
Common stock (authorized 20,000,000, issued and
outstanding 7,228,660 and 7,149,221, respectively) 72,287 71,492
Common stock warrants (authorized, issued and outstanding
668,481 for both periods) - -
Additional paid-in capital 15,912,944 16,049,888
Retained earnings 3,711,650 2,929,383
Net unrealized investment loss (799,434) (972,237)
Total stockholders' equity 22,897,447 22,078,526
----------- -----------
Total liabilities, Series C preferred stock and stockholders'equity $248,044,834 $242,236,738
=========== ===========
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
REVENUES:
Gross premium and policyholder fees earned $49,958,362 $22,713,369
Reinsurance premium assumed 176,024 2,874,131
Reinsurance premiums ceded (30,475,737) (8,227,204)
---------- ----------
Premiums and policyholder fees earned 19,658,649 17,360,296
Net investment income 5,017,283 4,767,687
Realized gains on investments 145,455 94,937
Fee income 1,291,499 1,632,080
Amortization of deferred revenue 46,606 140,170
---------- ----------
Total revenues 26,159,492 23,995,170
---------- ----------
BENEFITS, CLAIMS, & OTHER DEDUCTIONS:
Increase in future policy benefits 29,420 42,221
Claims and other benefits 12,530,379 10,897,903
Interest credited to policyholders 3,055,932 3,165,156
Increase in deferred policy acquisition costs (1,409,355) (1,326,051)
Amortization of goodwill 55,909 -
Commissions 9,357,565 7,206,867
Commission and expense allowances on reinsurance ceded (8,687,518) (4,006,562)
Other operating costs and expenses 9,958,272 7,501,082
---------- ----------
Total benefits, claims & other deductions 24,890,604 23,480,616
---------- ----------
Operating income before Federal income taxes 1,268,888 514,554
Federal income tax expense 431,423 109,532
---------- ----------
Net income $ 837,465 $ 405,022
Redemption accrual on Series C preferred stock (Note 6) 55,200 -
---------- ----------
Net income applicable to common shareholders $ 782,265 $ 405,022
========== ==========
Earnings per common equivalent shares (Note 3): $ 0.07 $ 0.04
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
Three months ended June 30,
---------------------------
1997 1996
---------- ----------
<S> <C> <C>
REVENUES:
Gross premium and policyholder fees earned $25,363,969 $11,956,370
Reinsurance premium assumed 86,482 1,430,860
Reinsurance premiums ceded (15,500,495) (4,651,070)
---------- ----------
Premiums and policyholder fees earned 9,949,956 8,736,160
Net investment income 2,519,040 2,305,338
Realized gains on investments 103,946 14,245
Fee income 678,548 611,500
Amortization of deferred revenue 23,303 70,085
---------- ----------
Total revenues 13,274,793 11,737,328
---------- ----------
BENEFITS, CLAIMS & OTHER DEDUCTIONS:
(Decrease) increase in future policy benefits (89,684) 81,071
Claims and other benefits 6,321,982 5,416,334
Interest credited to policyholders 1,511,024 1,563,653
Increase in deferred policy acquisition costs (668,007) (584,345)
Amortization of goodwill 27,954 -
Commissions 4,856,806 3,953,728
Commission and expense allowances on reinsurance ceded (4,319,982) (2,185,147)
Other operating costs and expenses 4,925,440 3,305,023
---------- ----------
Total benefits, claims & other deductions 12,565,533 11,550,317
---------- ----------
Operating income before Federal income taxes 709,260 187,011
Federal income tax expense 241,410 63,584
---------- ----------
Net income 467,850 123,427
Redemption accrual on Series C preferred stock (Note 6) 55,200 -
---------- ----------
Net income applicable to common shareholders $ 412,650 $ 123,427
========== ==========
Earnings per common equivalent shares (Note 3): $ 0.04 $ 0.01
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
Six months ended June 30,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 837,465 $ 405,022
Adjustments to reconcile net income to net cash used by
operating activities:
Change in reserves for future policy benefits (2,160,795) 71,673
Change in policy and contract claims (5,138,311) (358,102)
Change in deferred policy acquisition costs (1,409,355) (1,326,051)
Amortization of goodwill 55,909 -
Change in deferred revenue (46,606) (140,171)
Change in policy loans (251,116) (199,547)
Change in accrued investment income (71,510) (362,419)
Change in reinsurance balances (5,268,441) (1,267,708)
Realized gains on investments (145,455) (94,937)
Change in other assets and liabilities 4,575,141 (99,104)
---------- ----------
Net cash used by operating activities (9,023,074) (3,371,344)
---------- ----------
Cash flows from investing activities:
Proceeds from sale of fixed maturities-available for sale 20,900,642 23,402,914
Proceeds from redemption of fixed maturities-available for sale 4,024,026 4,721,789
Cost of fixed maturities purchased-available for sale (26,652,146) (37,649,452)
Proceeds from sale of equity securities 95,396 506,250
Cost of equity securities purchased (724,552) (501,250)
Change in other invested assets (1,346,182) 124,605
---------- ----------
Net cash used by investing activities (3,702,816) (9,395,144)
---------- ----------
Cash flows from financing activities:
Net proceeds from issuance of common stock 170,425 33,602
Net proceeds from issuance of Series C preferrred stock 3,833,426 -
Increase in policyholder account balances 4,054,132 12,076,906
Decrease in notes payable - (369,698)
---------- ----------
Net cash provided from financing activities 8,057,983 11,740,810
---------- ----------
Net decrease in cash and cash equivalents (4,667,907) (1,025,678)
Cash and cash equivalents at beginning of period 15,403,450 12,289,801
---------- ----------
Cash and cash equivalents at end of period $10,735,543 $11,264,123
========== ==========
Supplemental cash flow information:
Cash paid during the period for interest $ 37,292 $ 42,169
========== ==========
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"), Quincy
Coverage Corp. ("Quincy") and Amerifirst Insurance Company ("Amerifirst").
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 six
months ended June 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.
2. 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.
3. 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.
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 six and three months ended
June 30, 1997, were $0.11 and $0.06 per share, respectively.
4. Investments
As of June 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 June 30, 1997 and December 31, 1996 are as follows:
<TABLE>
<CAPTION>
June 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 $ 10,143,438 $ 96,688 $ (104,353) $ 10,135,773
Foreign government debt securities 1,484,582 11,346 (18,367) 1,477,561
Corporate debt securities 64,746,779 1,100,019 (1,059,071) 64,787,727
Mortgage-backed securities 47,924,342 380,487 (1,252,765) 47,052,064
----------- --------- --------- -----------
$ 124,299,141 $ 1,588,540 $(2,434,556) $123,453,125
=========== ========= ========= ===========
</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 June 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 $ 1,643,771 $ 1,667,114
Due after 1 year through 5 years. 20,946,628 21,257,645
Due after 5 years through 10 years 27,159,215 27,277,148
Due after 10 years 23,258,577 22,822,124
Mortgage-backed securities 51,290,950 50,429,094
----------- -----------
$ 124,299,141 $ 123,453,125
=========== ===========
8
<PAGE>
5. Financial Instruments with Concentrations of Credit Risk
At June 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:
June 30, December 31,
1997 1996
--------- ---------
Carrying value (at fair value) $ 3,884,147 $ 3,850,510
========= =========
Amortized cost $ 3,762,683 $ 3,918,477
========= =========
Percentage of total assets 1.6% 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.
6. 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 June 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 41,400 shares (par
value $100) of Series C Preferred Stock for $4,140,000, 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 $1,140,000 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.
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 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 June 30, 1997, $55,200 of dividends were
accumulated on the Series C preferred stock for the period April 25, 1997 to
June 30, 1997.
9
<PAGE>
The Company, AAM, the holders of the Series C Preferred Stock, BALP and
Richard A. Barasch entered into a shareholders agreement, under which the
holder of the Series C Preferred Stock were given registration rights and
informational rights, the Series C Preferred Stock holder 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 June 30, 1997
and December 31, 1996 were 7,228,660 and 7,149,221, respectively. As of June
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 June 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 (the "Act"). The warrants have no
par value and an exercise price to purchase common stock at $1.00 per share.
(Intentionally Left Blank)
10
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Liquidity and Capital Resources
Parent Company
Between April 25, 1997 and June 30, 1997, the Company issued 41,400
shares of Series C Preferred Stock for $4,140,000, of which $2.4 million was
purchased by UAFC L.P., $600,000 by Chase Equity Partners, L.P. and $1,140,000
by Richard A. Barasch (the Chief Executive Officer of the Company), members of
his family, and members and associates of the Company's management. For terms
of the Series C Preferred Stock please refer to Footnote 6 in the accompanying
financial statements. The Company will use at least $3 million of the
proceeds to begin the acquisition by the Company of American Pioneer from
American Progressive so that American Pioneer beomes a direct subsidiary of
Universal, instead of a subsidiary of American Progressive.
The Company has borrowed $800,000 under a term loan agreement with its
commercial bank which matures on September 30, 1998, 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. The Company expects to renew this
note.
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 June 30, 1997 for the maintenance of
authority to do business were $2,500,000 and $2,130,000, respectively, but
substantially more than this is needed to permit continued writing of new
business. At June 30, 1997 the statutory capital and surplus of American
Progressive and American Pioneer were $6,052,000 and $12,355,000, respectively.
At June 30, 1997, the investment portfolios of the life insurance
subsidiaries included cash and short-term investments totaling $6,310,000 as
well as fixed maturity securities carried at their fair values which amounted
to $121,542,000 that could be readily converted to cash. These liquid
investments' fair values totaled more than $127,852,000 and constituted
approximately 93% of the insurance subsidiaries' investments at June 30, 1997.
At June 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
contained any off balance sheet risk or investments in other securities whose
market values and principal repayments would be highly volatile to changes in
interest rates, except for GNMA's, FNMA's and investment grade corporate
collateralized mortgage obligations.
Results of Operations
Six Months Ended June 30, 1997
For the six months ended June 30, 1997, the Company earned net income
after Federal income taxes of $837,000 ($0.07 per share) compared to $405,000
($0.04 per share) in the year ago period. Operating income before Federal
income taxes amounted to $1,269,000 for the six months ended June 30, 1997
compared to $515,000 in the year ago period.
Revenues. Total revenues increased approximately $2,164,000 to
approximately $26,159,000 for the six months ended June 30, 1997, compared to
total revenues of approximately $23,995,000 in the year ago period, which
increase is primarily attributable to the Company's growth in premium volume.
In the six months ended June 30, 1997, the Company's gross premium and
policyholder fees earned amounted to $49,958,000, a $27,245,000 increase over
the $22,713,000 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
$26,707,000. 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 $ 1,701,000 $ 4,759,000
Senior market life insurance 315,000 1,031,000
Group Dental 705,000 3,465,000
Group life insurance 75,000 1,700,000
--------- ----------
Totals $ 2,796,000 $ 10,955,000
========= ==========
These increases totaled $29,503,000 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
$2,175,000 for the six months ended June 30, 1996. In addition, other life
insurance premiums increased $635,000 to $5,074,000, while accident and health
insurance premiums on policies not currently marketed decreased $718,000. The
premiums from the NAIU pool were included in the reinsurance premium assumed
amount and amounted to $2,694,000 for the six months ended June 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 six months ended
June 30, 1997 amounted to $30,476,000, a $22,249,000 increase from the 1996
amount of $8,227,000. Of this increase, $21,737,000 relates to the business
assumed from First National, while $820,000 relates to senior market accident
and health and $164,000 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 six
months ended June 30, 1997 amounted to $1,361,000 and $1,237,000,
respectively, compared to $823,000 and $781,000, respectively, in the year ago
period. Other life insurance reinsurance premiums increased $182,000 for
total increases of $23,359,000. 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
$817,000 in the six months ended June 30, 1997. (Gross premiums on this
business continue to decline, which decrease for the six months ended June 30,
1997 amounted to $289,000). Accident and health premiums ceded on the
policies not currently marketed also decreased $294,000.
Net investment income of the Company increased $249,000 to $5,017,000
for the six months ended June 30, 1997, compared to $4,768,000 in the year ago
period, and realized gains on investments amounted to $145,000 for the six
months ended June 30, 1997 compared to $95,000 in the year ago period.
Fee income amounted to $1,291,000 for the six months ended June 30,
1997, a decrease of $341,000 over the $1,632,000 amount for the year ago
period. This decrease is the result of the cancellation of the OBC contract
in 1996. The amortization of deferred revenue amounted to $47,000 for the six
months ended June 30, 1997 compared to $140,000 in the year ago period.
Benefits, Claims and Other Deductions. Total benefits, claims and
other deductions increased approximately $1,410,000 to $24,891,000 for the six
months ended June 30, 1997, compared to $23,481,000 in the year ago period.
Claims and other benefits increased $1,632,000 to $12,530,000 for the
six months ended June 30, 1997 compared to $10,898,000 in the year ago period.
Net claims on the business assumed from First National amounted to
$3,802,000, while net claims on the senior market accident and health
increased $317,000. Claims on the group dental product increased $519,000 to
$2,665,000 for the six months ended June 30, 1997, a 24% increase which
corresponds to the 26% increase in premiums. 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 $466,000 to $1,008,000. (This increase corresponds to the
$530,000 increase in retained premiums.) These increases of $5,104,000 were
offset by decreases in the claims incurred on the runoff accident and health
business ($293,000) and the terminated businesses (NAIU - $1,591,000; New York
State DBL - $1,588,000).
The change in reserves for the six months ended June 30, 1997 amounted
to an increase of $29,000 compared to a increase of $42,000 in the year ago
period generating a variance of $13,000. Interest credited to policyholders
decreased $109,000 to $3,056,000, resulting from the aging of the in force.
The change in deferred acquisition costs increased $83,000 for the six
months ended June 30, 1997 compared to 1996. The amount of acquisition costs
capitalized increased $790,000 from $2,252,000 in 1996 to $3,342,000 in 1997.
This increase is the result of the increase in new premium production in the
six months ended June 30, 1997 compared to the year ago period. The
amortization of deferred acquisition costs increased $707,000 from $1,226,000
in 1996 to $1,933,000 in 1997. This increase is the result of the increase in
the asset balance. In the six months ended June 30, 1997, the Company
amortized $56,000 of the goodwill generated in the First National acquisition.
Commissions increased $2,151,000 in the six months ended June 30, 1997
to $9,358,000, compared to $7,207,000 in the year ago period. This increase
is the direct result of the $27,245,000 increase in gross premium earned
discussed above. Commissions and expense allowances on reinsurance ceded
increased $4,681,000 for the six months ended June 30, 1997 to $8,868,000,
compared to $4,007,000 in the year ago period. This increase is the direct
result of the $22,249,000 increase in reinsurance premium ceded discussed above.
Other operating costs and expenses increased $2,457,000 in the six
months ended June 30, 1997 to $9,958,000, compared to $7,501,000 in the year
ago period. The insurance companies' expenses amounted to $8,573,000 for the
six months ended June 30, 1997 compared to $5,826,000 in the year ago period,
an increase of $2,747,000. Expenses incurred administrating the recently
acquired business from First National amounted to $2,061,000, while new
business expenses increased $180,000 and premium taxes increased $663,000.
These increases totaled $2,904,000 and were offset by the decrease in the
general overhead of the insurance companies of $157,000. The non-insurance
companies expenses decreased $289,000 to $1,386,000 for the six months ended
June 30, 1997 as a result of the decrease in expenses incurred at WorldNet.
Results of Operations
Three Months Ended June 30, 1997
For the three months ended June 30, 1997, the Company earned net income
after Federal income taxes of $468,000 ($0.04 per share) compared to $123,000
($0.01 per share) in the year ago period. Operating income before Federal
income taxes and realized gains amounted to $709,000 for the three months
ended June 30, 1997 compared to $187,000 in the year ago period.
Revenues. Total revenues increased approximately $1,538,000 to
approximately $13,275,000 for the three months ended June 30, 1997, compared
to total revenues of approximately $11,737,000 in the year ago period, which
increase is primarily attributable to the Company's growth in premium volume.
In the three months ended June 30, 1997 the Company's gross premium and
policyholder fees earned amounted to $25,364,000, a $13,408,000 increase over
the $11,956,000 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
$12,463,000. In addition, the gross premiums on the Company's following
currently marketed programs increased as follows:
13
<PAGE>
Product Premium Increase Premium Earned
- ------- ---------------- --------------
Senior market accident and health $ 1,076,000 $ 2,085,000
Senior market life insurance 153,000 584,000
Group dental 349,000 1,757,000
Group life insurance 20,000 845,000
--------- ---------
Totals $ 1,598,000 $ 5,271,000
========= =========
These increases totaled $14,061,000 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
$1,103,000 for the three months ended June 30, 1996. The premiums from the
NAIU pool were included in the reinsurance premium assumed amount and amounted
to $1,325,000.
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 June 30, 1997 amounted to $15,500,000, a $10,849,000 increase from the
1996 amount of $4,651,000. Of this increase, $10,120,000 relates to the
business assumed from First National, while $529,000 relates to senior market
accident and health and $52,000 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 June 30, 1997 amounted to $795,000 and $718,000,
respectively, compared to $635,000 and $603,000, respectively, in the year ago
period. Other life insurance premiums ceded and runoff accident and health
premiums ceded increased $412,000 for total increases of $11,228,000.
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 $379,000 in the three months ended June 30,
1997. (Gross premiums on this business continue to decline, which decrease
for the three months ended June 30, 1997 amounted to $137,000.)
Net investment income of the Company increased $214,000 to $2,519,000
for the three months ended June 30, 1997, compared to $2,305,000 in the year
ago period, and realized gains on investments amounted to $104,000 for the
three months ended June 30, 1997 compared to $14,000 in the year ago period.
Fee income amounted to $679,000 for the three months ended June 30,
1997, an increase of $67,000 over the $612,000 amount for the year ago period.
The amortization of deferred revenue amounted to $23,000 for the three months
ended June 30, 1997 compared to $70,000 in the year ago period.
Benefits, Claims and Other Deductions. Total benefits, claims and
other deductions increased approximately $1,016,000 to $12,566,000 for the
three months ended June 30, 1997, compared to $11,550,000 in the year ago
period.
Claims and other benefits increased $906,000 to $6,322,000 for the three
months ended June 30, 1997 compared to $5,416,000 in the year ago period. Net
claims on the business assumed from First National amounted to $1,829,000,
while net claims on the senior market accident and health increased $256,000.
Claims on the group dental product increased $267,000 to $1,354,000 for the
three months ended June 30, 1997, a 24% increase which corresponds to the 26%
increase in premiums. 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
$168,000 to $459,000. (This increase corresponds to the $242,000 increase in
retained premiums). These increases of $2,520,000 were offset by decreases in
the terminated businesses (NAIU - $708,000; New York State DBL - $814,000).
Mortality incurred by the Company decreased $92,000.
The change in reserves for the three months ended June 30, 1997 amounted
to a decrease of $90,000 compared to an increase of $81,000 in the year ago
period generating a variance of $171,000. Interest credited to policyholders
decreased $53,000 to $1,511,000, resulting from the aging of the in force.
14
<PAGE>
The change in deferred acquisition costs increased to $84,000 for the
three months ended June 30, 1997 compared to 1996. The amount of acquisition
costs capitalized increased $530,000 from $1,144,000 in 1996 to $1,674,000 in
1997. This increase is the result of the increase in new premium production
in the three months ended June 30, 1997 compared to the year ago period. The
amortization of deferred acquisition costs increased $446,000 from $560,000 in
1996 to $1,006,000 in 1997. This increase is the result of the increase in
the asset balance. In the three months ended June 30, 1997, the Company
amortized $28,000 of the goodwill generated in the First National acquisition.
Commissions increased $903,000 in the three months ended June 30, 1997
to $4,857,000, compared to $3,954,000 in the year ago period. This increase
is the direct result of the $13,408,000 increase in gross premium earned
discussed above. Commissions and expense allowances on reinsurance ceded
increased $2,135,000 in the three months ended June 30, 1997 to $4,320,000,
compared to $2,185,000 in the year ago period. This increase is the direct
result of the $10,849,000 increase in reinsurance premium ceded discussed
above.
Other operating costs and expenses increased $1,620,000 in the three
months ended June 30, 1997 to $4,925,000, compared to $3,305,000 in the year
ago period. The insurance companies' expenses amounted to $4,226,000 for the
three months ended June 30, 1997 compared to $2,549,000 in the year ago
period, an increase of $1,677,000. Expenses incurred administrating the
recently acquired business from First National amounted to $988,000, while new
business expenses increased $81,000 and premium taxes increased $352,000.
Other operating costs of the insurance companies increased $256,000. The non-
insurance companies expenses decreased $57,000 to $699,000 for the three
months ended June 30, 1997 as a result of the decrease in expenses incurred at
WorldNet.
Investments
The Company invests its funds primarily in fixed income securities and
has invested in a limited number of non-investment grade securities which
provide higher yields than investment grade securities. As of June 30, 1997
and December 31, 1996, the Company held unrated or less-than-investment grade
corporate debt securities of approximately $3,884,000 and $3,851,000,
respectively. These holdings amounted to 2.7% of total investments and 1.6%
of total assets at June 30, 1997 compared to 3.8% of total investments and
1.6% of total assets at December 31, 1996.
15
<PAGE>
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders.
The Company held its annual meeting of stockholders on June 12, 1997, at which
one matter was voted upon.
1. Election of Directors:
Richard A. Barasch, Stuart Becker, Harry B. Henshel and Patrick J.
McLaughlin were re-elected as directors to serve until the annual
meeting of stockholders in the year 2000. In addition to these elected
directors, the following directors continue to serve as directors of the
Company: Mark M. Harmeling, Marvin Barasch and Bertram Harnett (terms
expire in 1998); Michael A. Barasch, David F. Bolger, Walter L. Harris
and Richard Veed (terms expire in 1999).
----------------------------------------------
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: August 11, 1997
16
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<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 123,453,125
<DEBT-CARRYING-VALUE> 125,453,125
<DEBT-MARKET-VALUE> 125,453,125
<EQUITIES> 673,459
<MORTGAGE> 2,545,292
<REAL-ESTATE> 0
<TOTAL-INVEST> 144,211,515
<CASH> 10,735,543
<RECOVER-REINSURE> 67,399,694
<DEFERRED-ACQUISITION> 20,498,036
<TOTAL-ASSETS> 248,044,834
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<POLICY-OTHER> 37,995,390
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0
4,000,000
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19,658,649
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<INCOME-PRETAX> 1,268,888
<INCOME-TAX> 431,423
<INCOME-CONTINUING> 837,465
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