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 March 31, 1998
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.)
Six International Drive, Suite 190, Rye Brook, NY 10573
------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 934-5200
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 April 30, 1998 were 7,478,684 and 666,381,
respectively.
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
FORM 10-Q
CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at March 31, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the
three months ended March 31,1998 and March 31, 1997 4
Consolidated Statements of Cash Flows for the three months
ended March 31,1998 and March 31,1997 5
Notes to Consolidated Financial Statements 6-10
Management's Discussion and Analysis of Financial
Condition and Results of Operations 11-14
PART II - OTHER INFORMATION 15
Signature 15
2
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
March 31, December 31,
1998 1997
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
Investments
Cash and cash equivalents $ 21,858,334 $25,014,019
Fixed maturities available for sale, at fair value
(amortized cost $121,694,141 and $121,119,346, respectively) 124,548,987 123,585,708
Equity securities, at fair value (cost $945,604 and 981,101 945,116
$987,081,respectively)
Policy loans 7,306,001 7,185,014
Property tax liens 70,963 136,713
Mortgage loans 6,387,476 2,562,008
------------- -------------
Total investments 161,152,862 159,428,578
Accrued investment income 3,869,440 3,357,624
Deferred policy acquisition costs 21,045,628 20,832,060
Amounts due from reinsurers 86,747,228 76,576,040
Due and unpaid premiums 665,391 548,271
Deferred income tax asset - 105,413
Goodwill 4,470,093 4,508,596
Present value of future profits 1,662,292 1,281,807
Other assets 6,694,583 5,936,947
------------- -------------
Total assets 286,307,517 272,575,336
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Policyholder account balances 146,618,776 145,085,687
Reserves for future policy benefits 44,306,482 38,327,612
Policy and contract claims - life 1,391,924 1,167,213
Policy and contract claims - health 26,749,418 22,592,441
Loan payable 3,325,000 3,500,000
Amounts due to reinsurers 18,770,543 17,769,695
Deferred tax liability 202,580 -
Deferred revenues 248,906 264,745
Other liabilities 12,664,501 12,743,775
------------- -------------
Totals liabilities 254,278,130 241,451,168
------------- -------------
Series C Preferred Stock (51,680 issued and outstanding, 5,168,000 5,168,000
respectively
------------- -------------
Redemption accrual on Series C Preferred Stock 358,146 249,790
------------- -------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Series B Preferred Stock (400 issued and outstanding, 4,000,000 4,000,000
respectively)
Common stock (20,000,000 authorized, 7,417,957 and 7,325,860
issued and outstanding, respectively) 74,179 73,259
Common stock warrants (668,381 and 668,481 authorized, issued and - -
outstanding, respectively)
Additional paid-in capital 16,239,510 15,992,497
Accumulated other comprehensive income 965,852 841,620
Retained earnings 5,223,700 4,799,002
------------- -------------
Total stockholders' equity 26,503,241 25,706,378
------------- -------------
Total liabilities and stockholders' equity $286,307,517 $272,575,336
============= =============
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended March 31,
1998 1997
--------------- ---------------
<S> <C> <C>
REVENUES:
Total premium and policyholder fees
Gross premium and policyholder fees earned $ 31,405,191 $ 24,594,393
Reinsurance premiums assumed 203,508 89,542
Reinsurance premiums ceded (21,124,418) (14,975,242)
--------------- ---------------
Net premium and policyholder fees earned 10,484,281 9,708,693
Net investment income 2,708,238 2,498,243
Realized gains (losses) on investments (26,563) 41,509
Fee income 632,921 612,951
Amortization of deferred revenue 15,839 23,303
--------------- ---------------
Total revenues 13,814,716 12,884,699
--------------- ---------------
BENEFITS, CLAIMS AND EXPENSES:
Increase in future policy benefits 319,875 119,104
Claims and other benefits 6,888,484 6,208,397
Interest credited to policyholders 1,742,876 1,544,908
Increase in deferred acquisition costs (486,035) (741,348)
Amortization of present value of future profits 56,709 -
Amortization of goodwill 38,503 27,955
Commissions 5,149,828 4,500,759
Commission and expense allowances on reinsurance (5,881,505) (4,367,536)
ceded
Other operating costs and expenses 5,211,567 5,032,832
--------------- ---------------
Total benefits, claims and other deductions 13,040,302 12,325,071
--------------- ---------------
Operating income before taxes 774,414 559,628
Federal income tax expense 241,361 190,013
--------------- ---------------
Net income 533,053 369,615
Redemption accrual on Series C preferred stock 108,356 -
--------------- ---------------
Net income applicable to
common shareholders $ 424,697 $ 369,615
=============== ===============
Earnings per common share:
Basic $ 0.06 $ 0.05
=============== ===============
Diluted $ 0.04 $ 0.03
=============== ===============
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Three Months Ended March 31,
1998 1997
------------- -------------
Cash flows from operating activities:
<S> <C> <C>
Net income $ 533,053 $ 369,615
Adjustments to reconcile net income to net cash
used by operating activities:
Deferred income taxes 241,361 190,013
Change in reserves for future policy benefits 2,411,454 124,231
Change in policy and contract claims 1,241,688 (4,056,763)
Change in deferred policy acquisition costs (486,035) (741,354)
Change in deferred revenue (15,839) (23,303)
Amortization of present value of future profits 56,709 -
Amortization of goodwill 38,503 27,955
Change in policy loans (120,987) (127,195)
Change in accrued investment income (511,816) (385,625)
Change in reinsurance balances (6,605,844) (2,102,860)
Change in due and unpaid premium (117,120) 1,253,037
Realized (gains) losses on investments 26,563 (41,509)
Other, net (756,014) 819,114
------------- -------------
Net cash used by operating activities (4,064,324) (4,694,644)
------------- -------------
Cash flows from investing activities:
Proceeds from sale of fixed maturities available for sale 123,817 4,961,298
Proceeds from redemption of fixed maturities available for sale 3,385,994 1,983,800
Cost of fixed maturities purchased available for sale (4,164,824) (10,008,099)
Change in amounts held in trust for reinsurer (1,184,489) (1,020,867)
Proceeds from sale of equity securities 192,260 -
Cost of equity securities purchased (180,638) (510,817)
Change in other invested assets (327,236) 12,870
Purchase of business, net of cash acquired 1,457,733 -
------------- -------------
Net cash used by investing activities (697,383) (4,581,815)
------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 247,933 143,476
Increase (decrease) in policyholder account balances 1,533,089 (605,411)
Principal payment on notes payable (175,000) -
------------- -------------
Net cash provided from (used by) financing activities 1,606,022 (461,935)
------------- -------------
Net decrease in cash and cash equivalents (3,155,685) (9,738,394)
------------- -------------
Cash and cash equivalents at beginning of period 25,014,019 15,403,450
------------- -------------
Cash and cash equivalents at end of period $ 21,858,334 $ 5,665,056
============= =============
Supplemental cash flow information:
Cash paid during the period for interest $ 87,358 $ 18,014
============= =============
Cash paid during the period for income taxes $ - $ 61,515
============= =============
</TABLE>
See notes to unaudited consolidated financial statements
5
<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"), American Exchange Life Insurance Company ("American Exchange"),
WorldNet Services Corp. ("WorldNet") and Quincy Coverage Corp. ("Quincy").
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 three months
ended March 31, 1998 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, 1997. 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. 131, "Disclosures about
Segments of an Enterprise and Related Information" ("Statement 131"), effective
for years beginning after December 15, 1997. Statement 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. Statement 131 also requires information about revenues from products
or services, countries where the company has operations or assets and major
customers. The adoption of Statement 131 will not affect results of operations
or financial position.
As of January 1, 1998, the Company adopted Statement 130, "Reporting
Comprehensive Income". Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on the Company's
available-for-sale securities, which prior to adoption were reported separately
in shareholders' equity, to be included in other comprehensive income. Prior
year financial statements have been reclassified to conform to the requirements
of Statement 130.
The components of comprehensive income, net of related tax, for the
three-month periods ended March 31, 1998 and 1997 are as follows:
1998 1997
------------- --------------
Net income $533,053 $ 369,615
Unrealized gain (loss) on 124,232 (1,354,635)
securities
------------- --------------
Comprehensive income $657,285 $ (985,020)
============= ==============
6
<PAGE>
2. Recent Reinsurance Transaction
Dallas General Life Insurance Company
On March 19, 1998, the Company acquired a $12.6 million block of annual
premiums in force of Medicare Supplement business from Dallas General, effective
January 1, 1998. This business was assumed by American Pioneer, which assumption
was approved by the Texas and Florida Departments of Insurance. The Dallas
General block 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. In connection with this
acquisition, American Pioneer entered into a 75% quota share reinsurance
agreement with an unaffiliated reinsurer. For the three months ended March 31,
1998, net premium earned on this block amounted to $815,286.
3. Federal Income Taxes
The Company files a consolidated return for Federal income tax purposes,
in which American Pioneer and American Exchange are not currently permitted to
be included. American Pioneer and American Exchange file a separate consolidated
Federal income tax return.
4. Earnings Per Share
The Company adopted FASB Statement No. 128, "Earnings per Share",
("Statement No. 128") as of December 31, 1997 and restated the prior period
earnings per share ("EPS") amounts. Statement No. 128 replaced primary EPS with
basic EPS. Basic EPS excludes dilution and is computed by dividing income
available to common shareholders, (after deducting the redemption accrual on the
Series C Preferred Stock), by the weighted average number of shares outstanding
for the period. Diluted EPS gives the dilutive effect of the stock options,
warrants and Series B and C Preferred Stock outstanding during the year. A
reconciliation of the numerators and the denominators of the basic and diluted
EPS for the three months ended March 31, 1998 and 1997 follows:
<TABLE>
For the Three Months Ended March 31, 1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
<S> <C> <C> <C>
Net income
$533,053
Redemption accrual on Series C Preferred
Stock (108,356)
-------------
Basic EPS
Net income applicable to common
shareholders 424,697 7,417,957 $ 0.06
===========
Effect of Dilutive Securities
Series B Preferred Stock
1,777,777
Series C Preferred Stock
108,356 2,176,001
Non-registered warrants
2,015,760
Registered warrants
668,481
Incentive stock options
296,000
Director stock option
16,000
Treasury stock purchased from proceeds of
exercise
of options and warrants (1,211,574)
------------- --------------
Diluted EPS
Net income applicable to common
Shareholders plus assumed conversions $533,053 13,156,402 $ 0.04
============= ============== ===========
</TABLE>
7
<PAGE>
<TABLE>
For the Three Months Ended March 31, 1997
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
<S> <C> <C> <C>
Net income $369,615
Redemption accrual on Series C Preferred
Stock -
Basic EPS
-------------
Net income applicable to common shareholders 369,615 7,204,210 $ 0.05
===========
Effect of Dilutive Securities
Series B Preferred Stock
1,777,777
Series C Preferred Stock -
Non-registered warrants
2,015,760
Registered warrants
668,481
Incentive stock options
415,000
Director stock option
9,000
Treasury stock purchased from proceeds of
exercise
of options and warrants (1,442,842)
------------- --------------
Diluted EPS
Net income applicable to common
Shareholders plus assumed conversions $369,615 10,647,386 $ 0.03
============= ============== ===========
</TABLE>
5. Investments
As of March 31, 1998 and December 31, 1997, all fixed maturity
securities are classified as 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 accumulated other comprehensive income.
<TABLE>
March 31, 1998
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- ---------------------------- ------------------ ------------------- ------------- ---------------
<S> <C> <C> <C> <C>
US Treasury securities
And obligations of
US government $ 9,899,834 $ 242,670 $ (15,266) $ 10,127,238
Corporate debt securities 52,989,519 1,808,588 (213,781) 54,584,326
Mortgage-backed securities 58,804,788 1,644,411 (611,776) 59,837,423
------------------ ------------------- ------------- ---------------
$ 121,694,141 $ 3,695,669 $(840,823) $124,548,987
================== =================== ============= ===============
</TABLE>
8
<PAGE>
<TABLE>
December 31, 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 $ 10,821,981 $ 224,552 $ (20,088) $ 11,026,445
Corporate debt securities 52,427,251 1,668,511 (261,644) 53,834,118
Mortgage-backed securities 57,870,114 1,506,116 (651,085) 58,725,145
------------------ ----------------- -------------- --------------
$ 121,119,346 $ 3,399,179 $ (932,817) $123,585,708
================== ================= ============== ==============
</TABLE>
The amortized cost and fair value of fixed maturities at March 31, 1998
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 $ 3,844,280 $ 3,842,550
Due after 1 year through 5 years 27,015,451 27,644,915
Due after 5 years through 10 years 16,107,279 16,826,925
Due after 10 years 12,886,010 13,239,486
Mortgage-backed securities 61,841,121 62,995,111
--------------- --------------
$121,694,141 $124,548,987
=============== ==============
6. Series C Preferred Stock
The Company has outstanding 51,680 shares (par value $100) of
Series C Preferred Stock. Unless converted or called earlier, the Series C
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 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. For the three months ended March 31,
1998, $108,356 of redemption accruals was accumulated and cumulatively as of
March 31, 1998, $358,146 of redemption accruals has been accumulated.
7. Stockholders' Equity
Preferred Stock
The Company has 2,000,000 authorized shares of preferred stock to be
issued in series with 52,080 shares issued and outstanding at March 31, 1998 and
December 31, 1997, respectively, of which 400 shares are Series B and 51,680
shares are Series C (see Note 6 for a discussion of Series C Preferred Stock).
9
<PAGE>
Series B Preferred Stock
The Company has 400 shares of Series B Preferred Stock issued and
outstanding, with a The Series B Preferred Stock is convertible into Common
Stock at $2.25 per share (subject to adjustment) and is entitled to dividends as
if already converted, only when and if dividends are declared on the Common
Stock. The holder of the Series B Preferred Stock may require the Company to
redeem it if the Company engages in certain defined transactions. The Company
has the right to require a conversion if it raises additional equity from the
public on pricing terms that meet certain criteria.
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 March 31, 1998 and
December 31, 1997 were 7,417,957, and 7,325,860, respectively. During the three
months ended March 31, 1998, the Company issued 92,097 of its common stock.
Common Stock Warrants
The Company had 668,381 common stock warrants issued and outstanding at
March 31, 1998 and 668,481 issued and outstanding at December 1997, which are
registered under the Securities Exchange Act of 1934. At March 31, 1998 and
December 31, 1997, the Company had 2,015,760 warrants outstanding which are not
registered under the Securities Exchange Act of 1934. The warrants have no par
value, have an exercise price to purchase common stock on a one to one basis at
$1.00 and expire on December 31, 1999.
10
<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 are also contained in the 1997 Form 10-K.
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
In December, 1997, the Company entered into an agreement with Chase
Manhattan Bank for a $3,500,000 five-year, secured term loan and during the
three months ended March 31, 1998, the Company began the repayment of the loan
by making a principal payment of $175,000. The loan agreement calls for interest
at the London Interbank Offered Rate ("LIBOR") plus 200 basis points. However,
the Company entered into a three-year interest rate swap agreement, (the "Swap
Agreement") with Chase Securities Corp., effective January 1, 1998, to lock in a
fixed rate of 8.19% for a three year period. During the three months ended March
31, 1998, the Company paid $87,000 in interest for the period December 4, 1997
to March 31, 1998. The Company believes that the cash flow from WorldNet will be
able to sufficiently service the installment payments required by the loan
agreement.
Insurance Subsidiaries
American Progressive, American Pioneer and American Exchange are
required to maintain minimum amounts of capital and surplus as determined by
statutory accounting. The minimum statutory capital and surplus requirement of
American Progressive, American Pioneer and American Exchange as of March 31,
1998, for the maintenance of authority to do business, was $2,500,000,
$2,618,725 and $770,000 respectively, but substantially more than such minimum
amounts are needed to support the current level of the Company's operations. At
11
<PAGE>
March 31, 1998 the adjusted statutory capital and surplus, including asset
valuation reserve, of American Progressive, American Pioneer and American
Exchange was $9,849,000, $10,754,000 and $4,301,000 respectively
At March 31, 1998, the investment portfolios of the life insurance
subsidiaries included cash and cash equivalents totaling $17,119,000, as well
as, fixed maturity securities carried at their fair values which amounted to
$124,549,000 and equity securities carried at fair values which amounted to
$981,000, that could be readily converted to cash. The fair value of these
liquid investments totaled more than $142,649,000 and constituted approximately
89% of the insurance subsidiaries' investments at March 31, 1998.
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 benefits 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 that 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 that provide higher yields than investment grade securities. As of
March 31, 1998 and December 31, 1997, the Company held unrated or
less-than-investment grade corporate debt securities of approximately $2,470,000
and $2,616,000, respectively. These holdings amounted to 1.5% of total
investments and 0.9% of total assets at March 31, 1998 compared to 1.6% of total
investments and 1.0% of total assets at December 31, 1997. 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.
At March 31, 1998, 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
Three Months Ended March 31, 1998
For the three months ended March 31, 1998, the Company earned net income
after Federal income taxes of $533,000 ($0.04 per diluted share) compared to
$370,000 ($0.03 per diluted share) in the year ago period. Operating income
before Federal income taxes amounted to $774,000 for the three months ended
March 31, 1998 compared to $560,000 in the year ago period.
Revenues. Total revenues increased approximately $930,000 to
approximately $13,815,000 for the three months ended March 31, 1998, compared to
total revenues of approximately $12,885,000 in the year ago period. This
increase is primarily related to the Company's acquisitions of American Exchange
Life Insurance Company in December 1997 and Dallas General Life Insurance
Company's Medicare Supplement block of business effective January 1, 1998. In
the three months ended March 31, 1998, the Company's gross premium and
policyholder fees earned (including reinsurance premiums assumed) amounted to
$31,609,000, a $6,925,000 increase over the $24,684,000 amount in the year ago
period. This gross premium increase is significantly attributable to the
12
<PAGE>
premiums received on the policies acquired with American Exchange and assumed
from Dallas General, which premiums amounted to $7,793,000. In addition, the
gross premiums on the Company's currently marketed programs increased as
follows:
<TABLE>
Product Premium Increase Premium Earned
------------------------------------ ------------------ ----------------
<S> <C> <C>
Senior market accident and health $1,929,000 $3,884,000
Senior market life insurance 292,000 740,000
Specialty life insurance 187,000 271,000
Specialty medical 458,000 1,024,000
Group life insurance 7,000 862,000
------------------ ----------------
Totals $2,873,000 $6,781,000
================== ================
</TABLE>
These increases were offset by the decrease in premiums on the products
terminated and not currently marketed by the Company as follows:
<TABLE>
Product Premium Decrease Premium Earned
------------------------------------ ------------------- ----------------
<S> <C> <C>
First National assumed business $1,927,000 $12,317,000
Non-marketed life insurance 38,000 1,869,000
Non-marketed accident & health 68,000 2,849,000
Group dental insurance 1,708,000 -
------------------- ----------------
Totals $3,741,000 $17,035,000
=================== ================
</TABLE>
In continuation of its restructuring activity, the Company executed an
agreement with an unaffiliated insurer to reinsure 100% of its group dental
block of business effective September 1, 1997. 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.
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
March 31, 1998 amounted to $21,124,000, a $6,149,000 increase from the year ago
period amount of $14,975,000 as follows:
<TABLE>
Increase (Decrease)
Product In Premiums Ceded Premium Ceded
------------------------------------ -------------------- ----------------
<S> <C> <C>
Business acquired
American Exchange $3,897,000 $3,897,000
Dallas General 2,423,000 2,423,000
Senior market accident and health 893,000 1,699,000
Senior market life insurance 78,000 354,000
Specialty life insurance 92,000 218,000
Specialty medical 401,000 921,000
First National assumed business (1,688,000) 9,928,000
Other lines 53,000 1,684,000
-------------------- ----------------
Totals $6,149,000 $21,124,000
==================== ================
</TABLE>
Net investment income of the Company increased $210,000 to $2,708,000
for the three months ended March 31, 1998, compared to $2,498,000 in the year
ago period. This increase is attributable to the increase in invested assets
outstanding during the three month period in 1998 compared to 1997. Realized
13
<PAGE>
gains (losses) on investments amounted to a loss of $27,000 for the three months
ended March 31, 1998 compared to a gain of $42,000 in the year ago period.
Fee income amounted to $633,000 for the three months ended March 31,
1998, an increase of $20,000 over the $613,000 amount for the year ago period.
The amortization of deferred revenue amounted to $16,000 for the three months
ended March 31, 1998 compared to $23,000 in the year ago period.
Benefits, Claims and Other Deductions. Total benefits, claims and other
deductions increased approximately $715,000 to $13,040,000 for the three months
ended March 31, 1998, compared to $12,325,000 in the year ago period.
Claims and other benefits increased $680,000 to $6,888,000 for the three
months ended March 31, 1998 compared to $6,208,000 in the year ago period. The
change in reserves for the three months ended March 31, 1998 amounted to an
increase of $320,000 compared to an increase of $119,000 in the year ago period
generating a variance of $201,000. These increases in claims and change in
reserves are the result of the $775,000 increase in net premiums earned for the
three months ended March 31, 1998 discussed above.
Interest credited to policyholders increased $198,000 to $1,742,000,
which increase is the result of more interest sensitive account values in force,
primarily from the sale of the Asset Enhancer product.
The change in deferred acquisition costs decreased by $255,000 for the
three months ended March 31, 1998 compared to the three months ended March 31,
1997. The amount of acquisition costs capitalized increased $217,000 from
$1,668,000 in the 1997 period to $1,885,000 in the 1998 period and represents
primarily an increase in commissions paid in the generation of new business. Non
commission expenses deferred decreased $86,000 to $695,000 in the 1998 period
compared to $781,000 in the 1997 period. The overall increase in capitalized
costs is the result of the increase in new premium production in the three
months ended March 31, 1998 compared to the year ago period. The amortization of
deferred acquisition costs increased $473,000 from $926,000 in 1997 to
$1,399,000 in 1998. This increase is the result of the increase in the asset
balance. In the three months ended March 31, 1998, the Company amortized $38,000
of goodwill generated in the acquisitions of First National ($28,000) and
American Exchange ($10,000). In the three months ended March 31, 1998, the
Company amortized $57,000 of present value of future profits generated in the
acquisitions of American Exchange ($45,000) and Dallas General ($11,000).
Commissions increased $649,000 in the three months ended March 31, 1998
to $5,150,000, compared to $4,501,000 in the year ago period. This increase is
the direct result of the $6,925,000 increase in total premium discussed above.
Commissions and expense allowances on reinsurance ceded increased $1,514,000 in
the three months ended March 31, 1998 to $5,882,000, compared to $4,368,000 in
the year ago period. This increase is the direct result of the $6,149,000
increase in reinsurance premium ceded discussed above.
Other operating costs and expenses increased $179,000 in the three
months ended March 31, 1998 to $5,212,000, compared to $5,033,000 in the year
ago period. The insurance companies' expenses amounted to $4,346,000 for the
three months ended March 31, 1998 compared to $4,634,000 in the year ago period,
an increase of $189,000. This increase is primarily the result of expenses
incurred at American Exchange, which was not owned by the Company in the 1997
period. The non-insurance companies' expenses decreased $10,000 to $677,000 for
the three months ended March 31, 1998. This decrease is the result of a $100,000
decrease in expenses incurred at WorldNet, offset by the increase in expenses
incurred by the Parent Company of $90,000, which increase is primarily the
interest expense on the new loan outstanding.
14
<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: May 14, 1998
15
<PAGE>
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<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Mar-31-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 124548987
<DEBT-MARKET-VALUE> 124548987
<EQUITIES> 981101
<MORTGAGE> 6387476
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<POLICY-HOLDER-FUNDS> 28141342
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0
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