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, 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 October 31, 1998 were 7,638,057 and
658,231, respectively.
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
FORM 10-Q
CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at September 30, 1998
and December 31, 1997 3
Consolidated Statements of Operations for the nine months ended
September 30, 1998 and September 30, 1997 4
Consolidated Statements of Operations for the three months ended
September 30, 1998 and September 30, 1997 5
Consolidated Statements of Cash Flows for the nine months ended
September 30, 1998 and September 30,1997 6
Notes to Consolidated Financial Statements 7-13
Management's Discussion and Analysis of Financial Condition and
Results of Operations 14-21
PART II - OTHER INFORMATION 22
Signature 22
2
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED BALANCE SHEETS
<TABLE>
September December
30, 31,
1998 1997
------------ ------------
ASSETS (unaudited)
Investments
<S> <C> <C>
Cash and cash equivalents $ 11,694,481 $ 25,014,019
Fixed maturities available for sale, at fair value (amortized cost
$128,501,955 and $121,119,346, respectively) 134,607,174 123,585,708
Equity securities, at fair value (cost $1,163,842 and $987,081,
respectively) 1,095,926 945,116
Policy loans 7,205,592 7,185,014
Property tax liens 70,963 136,713
Mortgage loans 4,544,858 2,562,008
------------ ------------
Total investments 159,218,994 159,428,578
Accrued investment income 4,015,660 3,357,624
Deferred policy acquisition costs 21,927,181 20,832,060
Amounts due from reinsurers 86,819,019 76,576,040
Due and unpaid premiums 611,704 548,271
Deferred income tax asset - 105,413
Goodwill 4,393,087 4,508,596
Present value of future profits 1,613,200 1,281,807
Other assets 10,383,797 5,936,947
------------ ------------
Total assets 288,982,642 272,575,336
============ ============
LIABILITIES, SERIES C PREFERRED STOCK, REDEMPTION ACCRUAL ON SERIES
C PREFERRED STOCK AND STOCKHOLDERS' EQUITY
LIABILITIES
Policyholder account balances 156,915,481 145,085,687
Reserves for future policy benefits 39,716,874 38,327,612
Policy and contract claims - life 2,248,296 1,167,213
Policy and contract claims - health 21,762,315 22,592,441
Loan payable 5,000,000 3,500,000
Amounts due to reinsurers 15,621,042 17,769,695
Deferred income tax liability 1,582,604 -
Deferred revenues 217,228 264,745
Other liabilities 10,965,798 12,743,775
------------ ------------
Total liabilities 254,029,638 241,451,168
------------ ------------
Series C Preferred Stock (Issued and outstanding, 51,680 and 51,680,
respectively) 5,168,000 5,168,000
------------ ------------
Redemption accrual on Series C Preferred Stock 574,858 249,790
------------ ------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Series B Preferred Stock (Issued and outstanding 400 and 400,
respectively) 4,000,000 4,000,000
Common stock (Authorized, 20,000,000 issued and outstanding
7,633,507 and 7,325,860, respectively) 76,335 73,259
Common stock warrants (Authorized, issued and outstanding 658,281
and 668,481, respectively) - -
Additional paid-in capital 16,559,709 15,992,497
Accumulated other comprehensive income 2,085,534 841,620
Retained earnings 6,488,568 4,799,002
------------ ------------
Total stockholders' equity 29,210,146 25,706,378
------------ ------------
Total liabilities, Series C preferred stock, redemption accrual
on Series C preferred stock and stockholders' equity $288,982,642 $272,575,336
============ ============
</TABLE>
See notes to unaudited consolidated financial statements
3
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Nine Months Ended Sept. 30,
1998 1997
----------- --------------
<S> <C> <C>
Revenues:
Gross premium and policyholder fees earned $95,945,350 $ 73,773,391
Reinsurance premiums assumed 657,519 266,158
Reinsurance premiums ceded (64,763,193) (44,196,036)
----------- --------------
Net premium and policyholder fees earned 31,839,676 29,843,513
Net investment income 8,056,325 7,511,045
Net realized gains on investments 280,548 914,859
Fee income 1,989,789 1,850,043
Amortization of deferred revenue 47,517 69,909
----------- --------------
Total revenues 42,213,855 40,189,369
----------- --------------
Benefits, claims and expenses:
Increase in future policy benefits 2,069,093 439,466
Claims and other benefits 20,656,621 19,143,562
Interest credited to policyholders 5,426,434 4,527,720
Increase in deferred acquisition costs (2,813,933) (2,106,368)
Amortization of present value of future profits 130,801 -
Amortization of goodwill 115,509 83,864
Commissions 19,530,706 14,156,831
Commission and expense allowances on reinsurance
ceded (21,489,576) (13,240,477)
Other operating costs and expenses 15,535,725 14,678,173
----------- --------------
Total benefits, claims and other deductions 39,161,380 37,682,771
----------- --------------
Operating income before taxes 3,052,475 2,506,598
Federal income tax expense 1,037,842 852,243
----------- --------------
Net income 2,014,633 1,654,355
Redemption accrual on Series C Preferred Stock 325,068 146,430
=========== ==============
Net income applicable to common shareholders $1,689,565 $ 1,507,925
=========== ==============
Earnings per common share:
Basic $ 0.23 $ 0.21
=========== ==============
Diluted $ 0.15 $ 0.14
=========== ==============
</TABLE>
See notes to unaudited consolidated financial statements
4
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
Three Months Ended Sept.
30,
1998 1997
------------- ------------
<S> <C> <C>
Revenues:
Gross premium and policyholder fees earned $ 32,265,182 $24,812,323
Reinsurance premiums assumed 217,523 90,134
Reinsurance premiums ceded (21,954,983) (14,717,593)
------------- ------------
Net premium and policyholder fees earned 10,527,722 10,184,864
Net investment income 2,686,850 2,493,762
Net realized gains on investments 63,773 769,404
Fee income 774,130 558,544
Amortization of deferred revenue 15,839 23,303
------------- ------------
Total revenues 14,068,314 14,029,877
------------- ------------
Benefits, claims and expenses:
Increase (decrease) in future policy benefits 1,304,143 410,046
Claims and other benefits 6,134,060 6,613,183
Interest credited to policyholders 1,892,820 1,471,788
Increase in deferred acquisition costs (1,174,305) (697,013)
Amortization of present value of future profits 17,383 -
Amortization of goodwill 38,503 27,955
Commissions 6,514,724 4,799,266
Commission and expense allowances on reinsurance ceded (6,899,143) (4,552,959)
Other operating costs and expenses 5,221,979 4,719,901
------------- ------------
Total benefits, claims and other deductions 13,050,164 12,792,167
------------- ------------
Operating income before taxes 1,018,150 1,237,710
Federal income tax expense 346,172 420,820
------------- ------------
Net income 671,978 816,890
Redemption accrual on Series C Preferred Stock 108,356 91,230
------------- ------------
Net income applicable to common shareholders $ 563,622 $ 725,660
============= ============
Earnings per common share:
Basic $ 0.07 $ 0.10
============= ============
Diluted $ 0.05 $ 0.07
============= ============
</TABLE>
See notes to unaudited consolidated financial statements
5
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
Nine Months Ended Sept. 30,
1998 1997
---------------- -------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 2,014,633 $ 1,654,355
Adjustments to reconcile net income to net cash used by operating activities:
Deferred income taxes 1,037,842 852,243
Change in reserves for future policy benefits (798,147) (1,886,540)
Change in policy and contract claims (2,889,043) (5,365,445)
Change in deferred policy acquisition costs (2,813,933) (2,106,368)
Change in deferred revenue (47,517) (69,909)
Amortization of present value of future profits 130,801 -
Amortization of goodwill 115,509 83,862
Change in policy loans (20,578) (299,436)
Change in accrued investment income (658,036) (390,376)
Change in reinsurance balances (935,097) 2,604,443
Change in due and unpaid premium (63,433) 1,259,103
Realized gains on investments (280,548) (914,860)
Other, net (4,476,836) 4,534,259
---------------- -------------
Net cash used by operating activities (9,684,383) (44,669)
---------------- -------------
Cash flows from investing activities:
Proceeds from sale of fixed maturities available for sale 19,428,930 26,008,608
Proceeds from redemption of fixed maturities available for sale 3,108,323 7,043,732
Cost of fixed maturities purchased available for sale (29,622,727) (31,434,282)
Change in amounts held in trust by reinsurer (3,413,068) (4,112,556)
Change in amounts held for reinsurer (1,769,221) (2,788,769)
Proceeds from sale of equity securities 343,102 290,572
Cost of equity securities purchased (532,922) (876,207)
Change in other invested assets 1,515,382 (1,289,809)
Change in amounts due from broker (1,751,523) 29,532
(Purchase)/sale of business, net of cash (acquired)/held (2,562,824) 2,020,496
---------------- -------------
Net cash used by investing activities (15,256,548) (5,108,683)
---------------- -------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 570,288 211,345
Net proceeds from insurance of Series C Preferred Stock - 4,618,356
Increase in policyholder account balances 11,829,794 5,058,610
Change in reinsurance balances on policyholder account balances (2,278,689) (2,477,857)
Increase in loan payable 1,850,000 -
Principal payment on notes payable ( 350,000) -
---------------- -------------
Net cash provided from financing activities 11,621,393 7,410,454
---------------- -------------
Net (decrease)/increase in cash and cash equivalents (13,319,538) 2,257,102
Cash and cash equivalents at beginning of period 25,014,019 15,403,450
---------------- -------------
Cash and cash equivalents at end of period $ 11,694,481 $17,660,552
================ =============
Supplemental cash flow information:
Cash paid during the period for interest $ 200,523 $ 56,557
================ =============
Cash paid during the period for income taxes $ - $ 61,515
================ =============
</TABLE>
See notes to unaudited consolidated financial statements
6
<PAGE>
22
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. ("Universal" or the "Parent Company") 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 nine months ended
September 30, 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 year's financial statements to conform
with current period classifications.
In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities," which is required to be adopted
in years beginning after June 15, 1999. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
In June 1997, the FASB issued 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 and will be implemented by the Company starting with
December, 1998 financial statements. 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.
7
<PAGE>
The components of comprehensive income, net of related tax, for the
nine-month periods ended September 30, 1998 and 1997 are as follows:
For the Nine Months
Ended Sept. 30,
-------------------------------
1998 1997
------------- -------------
Net income $ 2,014,633 $ 1,654,355
Unrealized gain on securities 1,243,910 1,885,142
------------- -------------
Comprehensive income $ 3,258,543 $ 3,539,497
============= =============
The components of comprehensive income, net of related tax, for the
three-month periods ended September 30, 1998 and 1997 are as follows:
For the Three Months
Ended Sept. 30,
-------------------------------
1998 1997
------------- -------------
Net income $ 671,978 $ 816,890
Unrealized gain on securities 1,057,791 1,712,339
------------- -------------
Comprehensive income $ 1,729,769 $ 2,529,229
============= =============
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, with the
approval of 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 nine months ended September 30, 1998, net premium earned on
this block amounted to $2,081,258.
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,
8
<PAGE>
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 nine months ended September 30, 1998 and 1997 is as follows:
<TABLE>
For the Nine Months Ended Sept. 30, 1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
<S> <C> <C> <C>
Net income $ 2,014,633
Less: Redemption accrual on Series C
Preferred Stock (325,068)
-------------
Basic EPS
Net income applicable to common shareholders 1,689,565 7,497,878 $ 0.23
===========
Effect of Dilutive Securities
Series B Preferred Stock 1,777,777
Series C Preferred Stock 325,068 2,176,000
Non-registered warrants 2,015,760
Registered warrants 658,281
Incentive stock options 173,262
Director stock options 15,300
Treasury stock purchased from proceeds of
options and warrants (1,244,184)
------------- --------------
Diluted EPS
Net income applicable to common
shareholders plus assumed conversions $ 2,014,633 13,070,074 $ 0.15
============= ============== ===========
</TABLE>
<TABLE>
For the Nine Months Ended Sept. 30, 1997
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
<S> <C> <C> <C>
Net income $1,654,355
Less: Redemption accrual on Series C
Preferred
Stock (146,430)
-------------
Basic EPS
Net income applicable to common shareholders 1,507,925 7,234,510 $ 0.21
===========
Effect of Dilutive Securities
Series B Preferred Stock 1,777,777
Series C Preferred Stock 146,430 1,027,930
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
options and warrants (1,479,194)
------------- --------------
Diluted EPS
Net income applicable to common
shareholders plus assumed conversions $1,654,355 11,669,264 $ 0.14
============= ============== ===========
</TABLE>
9
<PAGE>
A reconciliation of the numerators and the denominators of the basic and
diluted EPS for the three months ended September 30, 1998 and 1997 is as
follows:
<TABLE>
For the Three Months Ended Sept. 30, 1998
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
<S> <C> <C> <C>
Net income $ 671,978
Less: Redemption accrual on Series C
Preferred
Stock (108,356)
-------------
Basic EPS
Net income applicable to common shareholders 563,622 7,610,901 $ 0.07
===========
Effect of Dilutive Securities
Series B Preferred Stock 1,777,777
Series C Preferred Stock 108,356 2,176,000
Non-registered warrants 2,015,760
Registered warrants 658,281
Incentive stock options 221,786
Director stock option 15,300
Treasury stock purchased from proceeds of
options and warrants (1,267,535)
------------- --------------
Diluted EPS
Net income applicable to common
shareholders plus assumed conversions $ 671,978 13,208,270 $ 0.05
============= ============== ===========
</TABLE>
<TABLE>
For the Three Months Ended Sept 30, 1997
--------------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
------------- -------------- -----------
<S> <C> <C> <C>
Net income $ 816,890
Less: Redemption accrual on Series C
Preferred
Stock (91,230)
-------------
Basic EPS
Net income applicable to common shareholders 725,660 7,250,110 $ 0.10
===========
Effect of Dilutive Securities
Series B Preferred Stock 1,777,777
Series C Preferred Stock 91,230 1,917,474
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
options and warrants (1,405,396)
------------- --------------
Diluted EPS
Net income applicable to common
shareholders plus assumed conversions $ 816,890 12,648,206 $ 0.07
============= ============== ===========
</TABLE>
10
<PAGE>
5. Investments
As of September 30, 1998 and December 31, 1997, 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 accumulated other comprehensive
income.
<TABLE>
September 30, 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 $ 8,542,831 $ 473,962 $ (10,398) $ 9,006,395
Corporate debt securities 56,899,002 2,631,568 (413,769) 59,116,801
Mortgage-backed securities 63,060,122 3,885,314 (461,458) 66,483,978
----------------- ------------------ --------------- --------------
$ 128,501,955 $ 6,990,844 $ (885,625) $134,607,174
================= ================== =============== ==============
</TABLE>
<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 September 30,
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 $ 2,853,349 $ 2,865,386
Due after 1 year through 5 years 28,122,204 29,031,995
Due after 5 years through 10 years 17,951,556 19,095,342
Due after 10 years 13,830,362 14,199,764
Mortgage-backed securities 65,744,484 69,414,687
--------------- --------------
$ 128,501,955 $ 134,607,174
=============== ==============
11
<PAGE>
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 nine months ended September 30, 1998 and
1997, $325,068 and $146,430 of redemption accruals was accumulated,
respectively, and cumulatively as of September 30, 1998, $574,858 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 September 30, 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).
Series B Preferred Stock
The Company has 400 shares of Series B Preferred Stock issued and outstanding,
with a par value of $10,000 per share, which are held by Wand/Universal
Investments L.P. I and II ("Wand"). 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 holders of the Series B Preferred Stock may not require
the Company to redeem it unless 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 September 30, 1998
and December 31, 1997 were 7,633,507, and 7,325,860, respectively. During the
nine months ended September 30, 1998, the Company issued 307,647 shares of its
common stock for $570,288.
Common Stock Warrants
The Company had 658,281 common stock warrants issued and outstanding at
September 30, 1998 and 668,481 issued and outstanding at December 1997, which
are registered under the Securities Exchange Act of 1934. At September 30, 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.
8. Intercompany Sale of American Pioneer
When American Pioneer was acquired in 1993, it became a wholly-owned
subsidiary of American Progressive. Pursuant to an agreement, dated June, 1996,
between Universal and American Progressive, Universal was obligated to purchase
all of the outstanding stock of American Pioneer from American Progressive over
12
<PAGE>
a five-year period for a total purchase price of $15,800,000. Under the terms of
the agreement, the purchase was to be implemented in segments with the purchase
price of the shares included in each segment being paid one half in cash and one
half in five-year debentures, The debentures are payable by Universal to
American Progressive with interest at 8.5% per annum.
The first segments of the unstacking were consummated in September and
December of 1997. In the aggregate for 1997, Universal acquired 75% of American
Pioneer from American Progressive for $11,850,000 consisting of $5,925,000 in
cash and $5,925,000 in debentures.
In May 1998, Universal purchased the remaining 25% of American Pioneer for
$3,950,000 consisting of $1,975,000 in cash and $1,975,000 in debentures.
9. Amendment to Bank Loan
On September 30, 1998, the Company executed the First Amendment to its
Credit Agreement with Chase Manhattan Bank, which Amendment refinanced the
current loan agreement with the bank. Under the Amendment, the Company executed
a new $5,000,000 five-year secured term loan. The principle amount outstanding
on the prior loan was $3,150,000 and was paid off with the proceeds of the new
loan. The new loan agreement calls for interest at the London Interbank Offered
Rate (LIBOR) plus 200 basis points. The Company's three-year interest rate swap
agreement with the Bank remains in effect. The effective interest rate as of
September 30, 1998 on the refinanced loan is 7.865%.
The loan remains to be secured by a first priority interest in all the
assets of WorldNet Services Corp. and Quincy Corp., a pledge of 9.9% of the
outstanding common shares of American Progressive and 100% of the shares of
Quincy Coverage Corp.
13
<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 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 nine
months ended September 30, 1998, the Company began the repayment of the loan by
making principal payments totaling $350,000. The loan agreement called 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 nine months
ended September 30, 1998, the Company paid $206,523 in interest for the period
December 4, 1997 to September 30, 1998.
On September 30, 1998, the Company executed the First Amendment to its
Credit Agreement with Chase Manhattan Bank, which Amendment refinanced the
current loan agreement with the bank. Under the Amendment, the Company executed
a new $5,000,000 five-year secured term loan. The principle amount outstanding
on the prior loan was $3,150,000 and was paid off with the proceeds of the new
loan. The new loan agreement calls for interest at the London Interbank Offered
Rate (LIBOR) plus 200 basis points. The Company's three-year interest rate swap
agreement with the Bank remains in effect. The effective interest rate as of
September 30, 1998 on the refinanced loan is 7.865%. The loan remains to be
secured by a first priority interest in all the assets of WorldNet Services
Corp. and Quincy Corp., a pledge of 9.9% of the outstanding common shares of
American Progressive and 100% of the shares of Quincy Coverage Corp. The Company
believes that the cash flow from WorldNet will be able to sufficiently service
the installment payments required by the loan agreement.
14
<PAGE>
Insurance Subsidiaries
American Progressive, American Pioneer and American Exchange (the
"Insurance Subsidiaries") are required to maintain minimum amounts of capital
and surplus as determined by statutory accounting. The minimum statutory capital
and surplus requirements of American Progressive, American Pioneer and American
Exchange as of September 30, 1998, for the maintenance of authority to do
business, were $2,500,000, $2,710,000 and $770,000, respectively. However,
substantially more than such minimum amounts are needed to meet statutory and
administrative requirements of adequate capital and surplus to support the
current level of the Company's operations. At September 30, 1998 the adjusted
statutory capital and surplus, including asset valuation reserve, of American
Progressive, American Pioneer and American Exchange was $9,698,000, $11,162,000
and $4,025,000, respectively.
On September 30, 1998, Universal made a $1,000,000 capital contribution
to American Pioneer from the proceeds of the First Amendment to the Credit
Agreement discussed above. The capital contribution was made to support the
growth in new business production at American Pioneer.
At September 30, 1998, the investment portfolios of the Insurance
Subsidiaries included cash and short-term investments totaling $10,249,000, as
well as fixed maturity securities carried at their fair values which amounted to
$134,607,000 and equity securities carried at fair values which amounted to
$1,096,000, all of which could be readily converted to cash. The fair value of
these liquid investments totaled more than $145,952,000 and constituted
approximately 93% of the Insurance Subsidiaries' investments at September 30,
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 the 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 that may be made. The Company currently engages
the services of an 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
September 30, 1998 and December 31, 1997, the Company held unrated or
less-than-investment grade corporate debt securities of approximately $2,047,000
and $2,616,000, respectively. These holdings amounted to 1.3% of total
investments and 0.7% of total assets at September 30, 1998 compared to 1.6% of
total investments and 1.0% of total assets at December 31, 1997.
At September 30, 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.
Impact of Year 2000
The Year 2000 Issue is the result of computer programs being written
using two digits rather than four to define the applicable year. As a result,
those computer programs have time-sensitive software that recognize a date using
"00" as the year 1900 rather than the year 2000. This could cause a system
15
<PAGE>
failure or miscalculations causing disruptions of operations, including, among
other things, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company's plan to resolve the Year 2000 Issue involves the following
phases: (1) assessment phase which determines the impact of the Year 2000 Issue,
(2) remediation phase which is the updating or modifying of affected systems,
(3) testing phase which determines the effectiveness of the remediation phase,
(4) implementation phase which applies all proven systems to the operating
environment and (5) contingency planning phase which develops plans in the event
that the Year 2000 Issue was not appropriately addressed.
The Company has completed its assessment of the systems that could be
significantly affected by the Year 2000 Issue. The completed assessment
indicated that the Company's main policy administration system utilizes programs
that were written using four digit codes to define the applicable year. This
main policy administration system was tested to determine the system's ability
to operate after January 1, 2000. Test results indicated that the system should
continue to process transactions without disruption. Some of the Company's
computer programs used to process portions of the Company's business outside of
the main policy administration system were written using two digits rather than
four to define the applicable year and have to be modified or replaced. As a
result, the Company began a conversion process to bring all of the Company's
products onto its main policy administration system. It is anticipated that all
of the Company's products will be on this system by January 1, 1999.
In addition to its policy administration system, the Company performed
assessments of other processing systems and determined that a claims paying
system for a small block of business was not Year 2000 compliant. The Company
obtained the vendor upgrade for this system. It is anticipated that the
installation, testing and implementation of this upgrade will be completed by
March 31, 1999.
The Company recently acquired blocks of business (the First National and
Dallas General blocks) and American Exchange Life Insurance Company. In
connection with those acquisitions, the Company has converted all of the
acquired businesses onto the Year 2000 compliant systems currently in place.
In addition to resolving the internal Year 2000 Issue, the Company is
working with all external organizations, business partners and vendors to assess
Year 2000 Issues associated with the exchange of electronic data. The Company is
in the process of testing the interfaces with these business partners. The
Company has also begun the process of obtaining Year 2000 readiness statements
from all its external business partners to determine the extent to which the
Company might be vulnerable to those third parties' failure to remediate their
own Year 2000 Issues. There is no guarantee that the systems of other companies
on which the Company's systems rely will be timely converted and will not have
an adverse effect on the Company's systems.
The Company estimates that its plan to resolve the Year 2000 Issue will
be completed by March 31, 1999, which is prior to any anticipated impact on its
operating systems, and that the Year 2000 Issue should not pose significant
operational problems for its computer systems. However, if the Company's plan is
not successfully implemented, the Year 2000 Issue could have a material impact
on the operations of the Company.
The Company's plan includes the development of contingency plans for any
significant risks that might result from Year 2000 Issues. As discussed above,
the Company is not presently aware of any specific significant business risk
that it believes it is exposed to regarding the Year 2000 Issues. Therefore, the
Company has not developed a contingency plan for Year 2000 Issues. The Company
will continue to monitor and assess risks for which contingency plans will be
required.
Currently, the Company expects the Year 2000 project costs to be limited
to the allocation of its data processing department resources, and significant
external expenses are not expected. Accordingly, no specific budget for such
16
<PAGE>
costs has been allocated. The costs of the project and the date on which the
Company believes it will complete the Year 2000 modifications are based on
management's best estimates, which were derived utilizing numerous assumptions
of future events, including the continued availability of certain resources and
other factors. There can be no guarantee that these estimates will be achieved
and actual results could differ materially from those anticipated. Specific
factors that might cause such material differences include, but are not limited
to, the availability and cost of personnel trained in this area, the ability to
locate and correct all relevant computer codes, and similar uncertainties.
Results of Operations
Nine Months Ended September 30, 1998
For the nine months ended September 30, 1998, the Company earned net
income after Federal income taxes of $2,015,000 ($0.15 per diluted share)
compared to $1,654,000 ($0.14 per diluted share) in the year ago period.
Operating income before Federal income taxes amounted to $3,052,000 for the nine
months ended September 30, 1998 compared to $2,507,000 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 $2,025,000 to
approximately $42,214,000 for the nine months ended September 30, 1998 compared
to total revenues of approximately $40,189,000 in the year ago period. In the
nine months ended September 30, 1998, the Company's gross premium and
policyholder fees earned (including reinsurance premiums assumed) amounted to
$96,603,000, a $22,564,000 increase over the $74,039,000 amount in 1997. This
gross premium increase is primarily related to the Company's acquisitions of the
stock of American Exchange Life Insurance Company in December 1997 and a
Medicare Supplement block of business from Dallas General Life Insurance Company
effective January 1, 1998, which premiums, in total, amounted to $23,377,000. In
addition, the gross premiums on the Company's following currently marketed
programs increased as follows:
<TABLE>
1998 Total
Product Premium Increase Premium Earned
------------------------------------- ------------------- ------------------
<S> <C> <C>
Senior market accident and health $ 6,614,000 $ 14,381,000
Senior market life insurance 743,000 2,421,000
Specialty life insurance 421,000 1,111,000
Specialty medical 2,296,000 4,514,000
Group life insurance 12,000 2,554,000
------------------- ------------------
Totals $ 10,086,000 $ 24,981,000
=================== ==================
</TABLE>
These increases totaled $33,463,000 and were offset by the decrease in
premiums on the products terminated and not currently marketed by the Company as
follows:
<TABLE>
1998 Total
Product Premium Decrease Premium Earned
------------------------------------- ------------------- -------------------
<S> <C> <C>
First National assumed business $ 4,146,000 $ 35,090,000
Non-marketed life insurance 1,096,000 5,009,000
Non-marketed accident & health 616,000 8,146,000
Group dental insurance 5,041,000 -
------------------- -------------------
Totals $ 10,899,000 $ 48,245,000
=================== ===================
</TABLE>
17
<PAGE>
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 will continue to perform the
administration on the business for a fee.
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, 1998 amounted to $64,763,000, a $20,567,000 increase from the 1997
amount of $44,196,000. Details of the changes in reinsurance premiums ceded is
as follows:
<TABLE>
Ceded Premium 1998 Total
Product Increase (Decrease) Premium Ceded
------------------------------------- -------------------- ----------------
<S> <C> <C>
Business acquired
American Exchange $ 12,009,000 $ 12,009,000
Dallas General 6,191,000 6,191,000
Senior market accident and health 3,701,000 6,982,000
Senior market life insurance (241,000) 698,000
Specialty life insurance 251,000 793,000
Specialty medical 2,040,000 4,045,000
First National assumed business (3,364,000) 28,331,000
Other lines (20,000) 5,714,000
-------------------- ----------------
Totals $ 20,567,000 $ 64,763,000
==================== ================
</TABLE>
Net investment income of the Company increased $545,000 to $8,056,000
for the nine months ended September 30, 1998, compared to $7,511,000 in the year
ago period. This increase is attributable to the increase in invested assets
outstanding during the nine month period in 1998 compared to 1997. Realized
gains on investments amounted to $281,000 for the nine months ended September
30, 1998 compared to $915,000 in the year ago period. Included in the 1997
amount is the $569,000 realized gain on the sale of Amerifirst Insurance Company
to an unaffiliated third party.
Fee income amounted to $1,990,000 for the nine months ended September
30, 1998, an increase of $140,000 from the $1,850,000 amount for the year ago
period. The amortization of deferred revenue amounted to $48,000 for the nine
months ended September 30, 1998 compared to $70,000 in the year ago period.
Benefits, Claims and Other Deductions. Total benefits, claims and other
deductions increased approximately $1,478,000 to $39,161,000 for the nine months
ended September 30, 1998, compared to $37,683,000 in the year ago period.
Claims and other benefits increased $1,513,000 to $20,657,000 for the
nine months ended September 30, 1998 compared to $19,144,000 in the year ago
period. The change in reserves for the nine months ended September 30, 1998
amounted to an increase of $2,069,000 compared to an increase of $439,000 in the
year ago period generating a variance of $1,630,000. These increases in claims
and change in reserves are the result of the $1,997,000 increase in net premiums
earned for the nine months ended September 30, 1998 discussed above.
Interest credited to policyholders increased $898,000 to $5,426,000,
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 increased by $708,000 for the
nine months ended September 30, 1998 compared to 1997. The amount of acquisition
costs capitalized increased $1,036,000 from $4,945,000 in 1997 to $5,982,000 in
1998. The overall increase in capitalized costs is the result of the increase in
new premium production in the nine months ended September 30, 1998 compared to
the year ago period. The amortization of deferred acquisition costs increased
18
<PAGE>
$329,000 from $2,839,000 in 1997 to $3,168,000 in 1998. This increase is the
result of the increase in the asset balance. In the nine months ended September
30, 1998, the Company amortized $116,000 of goodwill generated in the
acquisitions of First National ($84,000) and American Exchange ($32,000) and
$131,000 of present value of future profits generated in the acquisitions of
American Exchange ($96,000) and Dallas General ($35,000).
Commissions increased $5,374,000 in the nine months ended September 30,
1998 to $19,531,000, compared to $14,157,000 in the year ago period. This
increase is the direct result of the $22,564,000 increase in total premium
discussed above. Commissions and expense allowances on reinsurance ceded
increased $8,249,000 in the nine months ended September 30, 1998 to $21,490,000,
compared to $13,241,000 in the year ago period. This increase is the direct
result of the $20,567,000 increase in reinsurance premium ceded discussed above.
Other operating costs and expenses increased $858,000 in the nine months
ended September 30, 1998 to $15,536,000, compared to $14,678,000 in the year ago
period. The insurance companies' expenses amounted to $13,249,000 for the nine
months ended September 30, 1998 compared to $12,668,000 in the year ago period,
an increase of $581,000. This increase is the result of an increase of expenses
incurred in generating new business ($781,000) and the result of expenses
incurred at American Exchange ($482,000), which was not owned by the Company in
the 1997 period. These increases were offset by decreases in the general
overhead incurred at the insurance companies ($572,000) and expenses incurred on
exited businesses ($110,000). The non-insurance companies' expenses increased
$276,000 to $2,287,000 for the nine months ended September 30, 1998. This
increase is the result of additional expenses incurred by the Parent Company of
$458,000, which is primarily the interest expense on the new loan outstanding
and increased activity of the public company operations in 1998 relative to
1997. This increase was offset by a decrease of $148,000 in expenses incurred at
WorldNet Miami.
Results of Operations
Three Months Ended September 30, 1998
For the three months ended September 30, 1998, the Company earned net
income after Federal income taxes of $672,000 ($0.05 per diluted share) compared
to $817,000 ($0.07 per diluted share) in the year ago period. Operating income
before Federal income taxes amounted to $1,018,000 for the three months ended
September 30, 1998 compared to $1,238,000 in the year ago period.
Revenues. Total revenues increased approximately $38,000 to
approximately $14,068,000 for the three months ended September 30, 1998,
compared to total revenues of approximately $14,030,000 in the year ago period.
In the three months ended September 30, 1998, the Company's gross premium and
policyholder fees earned (including reinsurance premiums assumed) amounted to
$32,483,000, a $7,581,000 increase over the $24,902,000 amount in 1997. This
gross premium increase is primarily related to the Company's acquisitions of the
stock of American Exchange Life Insurance Company in December, 1997 and a
Medicare Supplement block of business from Dallas General Life Insurance Company
effective January 1, 1998, which premiums, in total, amounted to $7,813,000 for
the three month period ended September 30, 1998. In addition, the gross premiums
on the Company's following currently marketed programs increased as follows:
19
<PAGE>
<TABLE>
1998 Total
Product Premium Increase Premium Earned
------------------------------------- ------------------- ----------------
<S> <C> <C>
Senior market accident and health $ 2,669,000 $ 5,677,000
Senior market life insurance 245,000 893,000
Specialty life insurance 108,000 425,000
Specialty medical 795,000 1,652,000
Group life insurance - 841,000
------------------- ----------------
Totals $ 3,817,000 $ 9,488,000
=================== ================
</TABLE>
These increases totaled $11,630,000 and were offset by the decrease in
premiums on the products terminated and not currently marketed by the Company as
follows:
<TABLE>
1998 Total
Product Premium Decrease Premium Earned
------------------------------------- ------------------- -------------------
<S> <C> <C>
First National assumed business $ 1,472,000 $ 11,057,000
Non-marketed life insurance 804,000 1,421,000
Non-marketed accident & health 196,000 2,704,000
Group dental insurance 1,577,000 -
------------------- -------------------
Totals $ 4,049,000 $ 15,182,000
=================== ===================
</TABLE>
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.
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, 1998 amounted to $21,955,000, a $7,238,000 increase from the 1997
amount of $14,717,000. Details of the changes in reinsurance premiums ceded is
as follows:
<TABLE>
Ceded Premium 1998 Total
Product Increase (Decrease) Premium Ceded
------------------------------------- -------------------- ----------------
<S> <C> <C>
Business acquired
American Exchange $ 4,374,000 $ 4,374,000
Dallas General 1,851,000 1,851,000
Senior market accident and health 1,578,000 2,867,000
Senior market life insurance 66,000 398,000
Specialty life insurance 87,000 288,000
Specialty medical 723,000 1,490,000
First National assumed business (964,000) 8,994,000
Other lines (477,000) 1,693,000
-------------------- ----------------
Totals $ 7,238,000 $ 21,955,000
==================== ================
</TABLE>
Net investment income of the Company increased $193,000 to $2,687,000
for the three months ended September 30, 1998, compared to $2,494,000 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 gains on investments amounted to $64,000 for the three months ended
September 30, 1998 compared to $769,000 in the year ago period due in part to a
$100,000 write down of bonds during the third quarter. Included in the 1997
amount is the $569,000 gain realized on the sale of Amerifirst Insurance Company
to an unaffiliated third party.
20
<PAGE>
Fee income amounted to $774,000 for the three months ended September 30,
1998, an increase of $215,000 over the $559,000 amount for the year ago period.
The amortization of deferred revenue amounted to $16,000 for the three months
ended September 30, 1998 compared to $23,000 in the year ago period.
Benefits, Claims and Other Deductions. Total benefits, claims and other
deductions increased approximately $258,000 to $13,050,000 for the three months
ended September 30, 1998, compared to $12,792,000 in the year ago period.
Claims and other benefits decreased $479,000 to $6,134,000 for the three
months ended September 30, 1998 compared to $6,613,000 in the year ago period.
The change in reserves for the three months ended September 30, 1998 amounted to
an increase of $1,304,000 compared to an increase of $410,000 in the year ago
period generating a variance of $894,000. These variances in claims and change
in reserves are the result of the $343,000 increase in net premiums earned for
the three months ended September 30, 1998 discussed above.
Interest credited to policyholders increased $421,000 to $1,893,000,
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 increased by $477,000 for the
three months ended September 30, 1998 compared to 1997. This increase is the
result of the increase in new premium production in the three months ended
September 30, 1998 compared to the year ago period. In the three months ended
September 30, 1998, the Company amortized $39,000 of goodwill generated in the
acquisitions of First National ($29,000) and American Exchange ($10,000). In the
three months ended September 30, 1998, the Company amortized $17,000 of present
value of future profits generated in the acquisition of Dallas General.
Commissions increased $1,715,000 in the three months ended September 30,
1998 to $6,515,000, compared to $4,799,000 in the year ago period. This increase
is the direct result of the $7,580,000 increase in total premium discussed
above. Commissions and expense allowances on reinsurance ceded increased
$2,346,000 in the three months ended September 30, 1998 to $6,899,000, compared
to $4,553,000 in the year ago period. This increase is the direct result of the
$7,237,000 increase in reinsurance premium ceded discussed above.
Other operating costs and expenses increased $502,000 in the three
months ended September 30, 1998 to $5,222,000, compared to $4,720,000 in the
year ago period. The insurance companies' expenses amounted to $4,497,000 for
the three months ended September 30, 1998 compared to $4,095,000 in the year ago
period, an increase of $402,000. This increase is the result an increase in
expenses incurred in generating new business of $419,000. The non-insurance
companies' expenses increased $100,000 to $725,000 for the three months ended
September 30, 1998. This increase is the result of the increase in expenses
incurred by the Parent Company of $137,000, which increase is primarily the
interest expense on the new loan outstanding and increased activity of the
public company operations in 1998 relative to 1997. This increase was offset by
a decrease of $32,000 in expenses incurred at WorldNet Miami.
21
<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 13, 1998
22
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Sep-30-1998
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 134607174
<DEBT-MARKET-VALUE> 134607174
<EQUITIES> 1095926
<MORTGAGE> 4544858
<REAL-ESTATE> 70963
<TOTAL-INVEST> 159218994
<CASH> 11694481
<RECOVER-REINSURE> 86819019
<DEFERRED-ACQUISITION> 21927181
<TOTAL-ASSETS> 288982642
<POLICY-LOSSES> 39716874
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 156915481
<POLICY-HOLDER-FUNDS> 24010611
<NOTES-PAYABLE> 5000000
0
9168000
<COMMON> 76335
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 288982642
31839676
<INVESTMENT-INCOME> 8056325
<INVESTMENT-GAINS> 280548
<OTHER-INCOME> 2037306
<BENEFITS> 20656621
<UNDERWRITING-AMORTIZATION> (2813933)
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 3052475
<INCOME-TAX> 1037842
<INCOME-CONTINUING> 2014633
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2014633
<EPS-PRIMARY> 0.23
<EPS-DILUTED> 0.15
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
