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, 1999
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, 1999 were 9,957,060 and 657,031,
respectively.
<PAGE>
2
UNIVERSAL AMERICAN FINANCIAL CORP.
FORM 10-Q
CONTENTS
Page No.
PART I - FINANCIAL INFORMATION
Consolidated Balance Sheets at March 31, 1999 and December 31, 1998 3
Consolidated Statements of Operations for the three months ended March
31, 1999
and March 31, 1998 4
Consolidated Statements of Cash Flows for the three months ended March
31, 1999
and March 31, 1998 5
Notes to Consolidated Financial Statements 6-13
Management's Discussion and Analysis of Financial Condition and Results
of Operations 14-21
PART II - OTHER INFORMATION 22
Signature 22
<PAGE>
5
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<S> <C> <C>
ASSETS March 31, 1999 Dec. 31, 1998
-------------- -------------
(unaudited)
Investments:
Fixed maturities available for sale, at fair value
(amortized cost $136,623,611 and $132,227,114, respectively) $ 136,777,895 $ 134,797,634
Equity securities, at fair value (cost $981,283 and
$1,063,186, respectively) 876,609 1,019,780
Policy loans 7,353,133 7,276,163
Property tax liens 30,696 30,696
Mortgage loans 4,417,797 4,456,516
------------- -------------
Total investments 149,456,130 147,580,789
Cash and cash equivalents 8,925,729 17,092,938
Accrued investment income 3,707,145 3,538,573
Deferred policy acquisition costs 26,368,465 24,282,771
Amounts due from reinsurers 81,551,520 77,393,653
Due and unpaid premiums 724,254 525,909
Goodwill 4,316,081 4,354,584
Present value of future profits 1,526,001 1,569,601
Other assets 7,639,612 6,963,481
------------- -------------
Total assets 284,214,937 283,302,299
============= =============
LIABILITIES, Series C Preferred Stock, Series D Preferred Stock, Redemption
accrual on Series C and Series D Preferred Stock AND STOCKHOLDERS' EQUITY
LIABILITIES
Policyholder account balances 156,195,547 154,886,059
Reserves for future policy benefits 46,795,895 47,442,966
Policy and contract claims - life 1,991,458 2,297,446
Policy and contract claims - health 25,097,224 24,332,141
Loan payable 4,500,000 4,750,000
Amounts due to reinsurers 677,606 1,810,696
Deferred revenues 190,231 201,389
Deferred income tax liability 1,127,198 1,218,547
Other liabilities 9,205,872 9,943,970
------------- -------------
Total liabilities 245,781,031 246,883,214
------------- -------------
Series C Preferred Stock (Issued and outstanding 51,680) 5,168,000 5,168,000
------------- -------------
Redemption accrual on Series C Preferred Stock 800,238 683,214
------------- -------------
Series D Preferred Stock (Issued and outstanding 40,000
and 22,500, respectively) 4,000,000 2,250,000
------------- -------------
Redemption accrual on Series D Preferred Stock 62,500 -
------------- -------------
Commitments and contingencies
STOCKHOLDERS' EQUITY
Series B Preferred Stock (Issued and outstanding 400) 4,000,000 4,000,000
Common stock (Authorized, 20,000,000 issued
and outstanding 7,774,064 and 7,638,057, respectively) 77,741 76,381
Common stock warrants (Authorized, issued and
outstanding 657,031 and 658,231, respectively - -
Additional paid-in capital 16,727,176 16,410,412
Accumulated other comprehensive income 65,238 857,872
Retained earnings 7,533,013 6,973,206
------------- -------------
Total stockholders' equity 28,403,168 28,317,871
------------- -------------
Total liabilities, Series C Preferred Stock, Series
D Preferred Stock, Redemption accrual on Series C and
Series D Preferred Stock and stockholders' equity $ 284,214,937 $ 283,302,299
============== =============
</TABLE>
See notes to unaudited consolidated financial statements.
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
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Three Months Ended March 31,
1999 1998
----------- -----------
Revenues:
Gross premium and policyholder fees earned $ 32,065,891 $31,405,191
Reinsurance premiums assumed 249,718 203,508
Reinsurance premiums ceded (21,891,240) (21,124,418)
------------ -----------
Net premium and policyholder fees earned 10,424,369 10,484,281
Net investment income 2,798,928 2,708,238
Net realized gains/(losses) on investments 47,078 (26,563)
Fee income 568,090 632,921
Amortization of deferred revenue 11,158 15,839
------------ -----------
Total revenues 13,849,623 13,814,716
------------ -----------
Benefits, claims and expenses:
Increase in future policy benefits 316,718 319,875
Claims and other benefits 6,937,047 6,888,484
Interest credited to policyholders 1,918,138 1,742,876
Increase in deferred acquisition costs (856,245) (486,035)
Amortization of present value of future profits 43,600 56,709
Amortization of goodwill 38,503 38,503
Commissions 6,252,963 5,149,828
Commission and expense allowances on reinsurance ceded (7,413,729) (5,881,505)
Other operating costs and expenses 5,545,565 5,211,567
------------ -----------
Total benefits, claims and other deductions 12,782,560 13,040,302
------------ -----------
Operating income before taxes 1,067,063 774,414
Federal income tax expense 356,426 241,361
------------ -----------
Net income 710,637 533,053
Redemption accrual on Series C and Series D Preferred Stock 179,524 108,356
============ ===========
Net income applicable to common shareholders $ 531,113 $ 424,697
============ ===========
Earnings per common share:
Basic $ 0.07 $ 0.06
============ ===========
Diluted $ 0.05 $0.04
============ ===========
</TABLE>
See notes to unaudited consolidated financial statements
<PAGE>
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<S> <C> <C>
Three Months Ended March 31,
1999 1998
---------- ----------
Cash flows from operating activities:
Net income $ 710,637 $533,053
Adjustments to reconcile net income to net cash
used by operating activities:
Deferred income taxes 356,428 241,361
Change in reserves for future policy benefits (647,071) 2,411,454
Change in policy and contract claims 459,095 1,241,688
Change in deferred policy acquisition costs (856,245) (486,035)
Change in deferred revenue (11,158) (15,839)
Amortization of present value of future profits 43,600 56,709
Amortization of goodwill 38,503 38,503
Change in policy loans (76,970) (120,987)
Change in accrued investment income (168,572) (511,816)
Change in reinsurance balances (4,305,924) (6,017,415)
Change in due and unpaid premium (198,345) (117,120)
Realized (gains)/losses on investments (47,078) 26,563
Other, net (1,319,531) (756,014)
----------- ---------
Net cash used in operating activities (6,022,631) (3,475,895)
----------- ----------
Cash flows from investing activities:
Proceeds from sale of fixed maturities available for sale 1,547,670 123,817
Proceeds from redemption of fixed maturities available for sale 3,180,477 3,385,994
Cost of fixed maturities purchased available for sale (9,218,217) (4,164,824)
Change in amounts held in trust by reinsurer (282,773) (1,184,489)
Change in amounts held for reinsurer - -
Proceeds from sale of equity securities 205,800 192,260
Cost of equity securities purchased (104,106) (180,638)
Change in other invested assets 38,719 (327,236)
Sale of business, net of cash held - 1,457,733
----------- ---------
Net cash used in investing activities (4,632,430) (697,383)
----------- ---------
Cash flows from financing activities:
Net proceeds from issuance of common stock 318,124 247,933
Net proceeds from issuance of Series D Preferred Stock 1,812,500 -
Increase in policyholder account balances 1,309,488 1,533,089
Change in reinsurance balances on policyholder account balances (702,260) (588,429)
Increase in loan payable - -
Principal payment on notes payable (250,000) (175,000)
---------- ----------
Net cash provided by financing activities 2,487,852 1,017,593
---------- ----------
Net decrease in cash and cash equivalents (8,167,209) (3,155,685)
Cash and cash equivalents at beginning of period 17,092,938 25,014,019
----------- ----------
Cash and cash equivalents at end of period $ 8,925,729 $21,858,334
=========== ==========
Supplemental cash flow information:
Cash paid during the period for interest $ 92,934 $87,358
========== ==========
Cash paid during the period for income taxes $ 25,000 $ -
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements
<PAGE>
22
UNIVERSAL AMERICAN FINANCIAL CORP. AND SUBSIDIARIES
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 three months
ended March 31, 1999 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, 1998. 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 previous 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 was implemented by the Company starting in the
December, 1998 financial statements. The financial information 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 does not affect results of operations
or financial position.
2. COMPREHENSIVE INCOME
The components of comprehensive income, net of related tax, for the three-month
periods ended March 31, 1999 and 1998 are as follows:
For the Three Months
Ended March 31,
-------------------------
1999 1998
----------- -----------
Net income $ 710,637 $ 533,053
Unrealized gain/(loss) on (792,634) 124,232
securities ----------- ----------
Comprehensive income/(loss) $ (81,997) $ 657,285
=========== ===========
3. Pending Transactions
Universal American Financial Corp. Share Purchase Agreement with
Capital Z Financial Services Fund II, L.P.
On December 31, 1998, the Company executed a Share Purchase Agreement ("UA
Purchase Agreement") with Capital Z Financial Services Fund II, L.P. ("Capital
Z"), whereby Capital Z has agreed to purchase up to 26,031,746 shares of
Universal common stock for a purchase price of up to $82.0 million (the "Capital
Z Transaction") subject to adjustment as outlined in the Purchase Agreement.
Pursuant to terms of the UA Purchase Agreement, the number of shares of
Universal common stock and the aggregate purchase price to be paid by Capital Z
will be reduced based upon the aggregate number of shares of Universal common
stock purchased by certain members of management and agents of the companies
being acquired pursuant to the Penn Union Purchase Agreement discussed below,
but in no event will it be less than 19,841,270 shares. Thus, as a result of the
closing of the transactions contemplated by the UA Purchase Agreement, Capital Z
will acquire a controlling interest in Universal. Specifically, if Capital Z
purchases the minimum number shares under the UA Purchase Agreement, it will
acquire 45.6 % of the then outstanding shares of Universal common stock on a
fully diluted basis, and if Capital Z purchases the maximum number of shares, it
will acquire 59.8% of the then outstanding shares of Universal common stock on a
fully diluted basis.
The UA Purchase Agreement is subject to (i) regulatory approvals in the
states in which Universal's insurance subsidiaries are domiciled, (ii)
shareholder approval and (iii) the consummation of the Penn Union Transaction
(see below).
Penn Union Acquisition
On December 31, 1998, Universal entered into a purchase agreement (the
"Penn Union Purchase Agreement") with PennCorp Financial Group, Inc. ("PFG") and
certain subsidiaries of PFG to acquire all of the outstanding shares of common
stock of certain direct and indirect subsidiaries of PFG, including the
insurance companies as follows (the "Penn Union Transaction"):
Name of Insurance Company State or Province of Domicile
Pennsylvania Life Insurance Company Pennsylvania
Peninsular Life Insurance Company North Carolina
Union Bankers Insurance Company Texas
Constitution Life Insurance Company Texas
Marquette National Life Insurance Company Texas
Penncorp Life of Canada Ottawa
The Penn Union Purchase Agreement calls for a purchase price of $175
million with $136 million in cash and $39 million in seller financing. In
addition, the Company will incur approximately $12 million in transaction costs
associated with this transaction. The Company will finance the cash portion of
the acquisition with the $82 million of proceeds generated from the UA Purchase
Agreement discussed above and from the execution of a $80 million credit
facility that consists of a $70 million term loan and a $10 million revolving
loan facility.
The Penn Union Purchase Agreement is subject to approval by the insurance
regulators of the jurisdictions in which the acquired companies are domiciled.
Management expects this transaction to close in the second quarter of 1999,
although no assurances can be given that it will occur. Based on financial
information as of December 31, 1998, the assets and liabilities to be acquired
in connection with the Penn Union Transaction are approximately $844 million and
$669 million, respectively.
4. 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.
5. Earnings Per Share
Per share amounts for net income from operations are shown in the income
statement using i) an earnings per common share basic calculation and ii) an
earnings per common share-assuming dilution calculation. A reconciliation of the
numerators and the denominators of the basic and diluted EPS for the three
months ended March 31, 1999 and 1998 is as follows:
For the Three Months Ended
March 31, 1999
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ----------- ---------
Net income $ 710,637
Less: Redemption accrual on Series C
and Series D Preferred Stock (179,524)
-----------
Basic EPS
Net income applicable to common
shareholders 531,113 7,706,061 $ 0.07
========
Effect of Dilutive Securities
Series B Preferred Stock 1,777,777
Series C Preferred Stock 179,524 2,176,000
Series D Preferred Stock 1,123,457
Non-registered warrants 2,015,760
Registered warrants 657,031
Incentive stock options 374,250
Director stock options 23,000
Agents and others stock options 72,785
Treasury stock purchased from
proceeds of Options and warrants (1,071,636)
----------- -----------
Diluted EPS
Net income applicable to common
shareholders plus assumed conversions $ 710,637 14,854,485 $ 0.05
=========== =========== ========
For the Three Months Ended
March 31, 1998
-------------------------------------
Income Shares Per Share
(Numerator) (Denominator) Amount
----------- ------------- ---------
Net income $533,053
Less: 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 options and warrants (1,211,574)
----------- -----------
Diluted EPS
Net income applicable to common
shareholders plus assumed conversions $533,053 13,156,402 $ 0.04
=========== =========== =========
6. Investments
As of March 31, 1999 and December 31, 1998, 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.
March 31, 1999
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- ------------------------ ------------ ------------ ----------- --------
US Treasury securities
and obligations of
US government $ 5,751,777 $ 133,051 $ (31,153) $5,853,675
Foreign government
debt securities 399,863 8,077 - 407,940
Corporate debt
securities 67,066,345 969,352 (962,722) 67,072,975
Mortgage-backed
securities 63,405,626 878,005 (840,326) 63,443,305
------------- ----------- ----------- ------------
$ 136,623,611 $1,988,485 $(1,834,201) $136,777,895
============= =========== =========== ============
December 31, 1998
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Classification Cost Gains Losses Value
- ------------------------ -------------- -------------- ----------- ---------
US Treasury securities
and obligations of
US government $ 6,444,302 $ 181,694 $ (28,440) $ 6,597,556
Corporate debt
securities 63,502,687 1,680,539 (472,027) 64,711,199
Mortgage-backed
securities 62,280,125 1,821,084 (612,330) 63,488,879
------------ ----------- ----------- ------------
$132,227,114 $3,683,317 $(1,112,797) $134,797,634
============ =========== ============ ============
The amortized cost and fair value of fixed maturities at March 31, 1999 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 $ 2,578,523 $ 2,598,941
Due after 1 year through 5 years 27,970,700 28,304,024
Due after 5 years through 10 years 20,942,662 20,648,729
Due after 10 years 19,319,234 19,329,105
Mortgage-backed securities 65,812,492 65,897,096
------------ ------------
$136,623,611 $136,777,895
============ ============
7. Series C Preferred Stock
During 1997, the Company issued 51,680 shares (par value $100) of Series C
Preferred Stock for $5.2 million, of which $2.4 million was purchased by UAFC
L.P. ("AAM") an unaffiliated investment firm, $0.6 million by Chase Equity
Partners, L.P., $1.4 million by Richard A. Barasch (the Chairman and Chief
Executive Officer of the Company), members of his family, and members and
associates of the Company's management and $0.8 million by owners and employees
of Ameri-Life & Health Services, a general agency that sells the Company's
senior market products. This transaction received the approval of the Florida
Insurance Department.
Under the terms of the Series C Preferred Stock, the Company had the right
to require conversion of the Series C Preferred Stock into the Company's common
stock at a conversion price of $2.375 per common share if the average reported
bid price of its common stock for any 60 day period in which such bid prices are
reported exceeded $3.45 per common share. This condition was satisfied on March
5, 1999. On March 11, 1999 the Company gave notice of the conversion of the
Series C Preferred Stock, and all of the 51,680 outstanding shares of Series C
Preferred Stock were converted to 2,175,986 shares of common stock on April 1,
1999.
The Company, AAM, the holders of the Series C Preferred Stock, Barasch
Associates Limited Partnership ("BALP") and Richard A. Barasch entered into a
stockholders' agreement at the closing of the transaction which contained the
following conditions:
o The holders of the Series C Preferred Stock were given registration rights
and informational rights.
o The Series C Preferred Stockholders agreed to vote their shares for the
election of a person designated by AAM as the director elected by that
Series.
o BALP and Mr. Barasch granted the Series C holders a co-sale right should they
sell any shares of the Company's common stock held by them, except to certain
"permitted transferees".
This stockholders' agreement will be superceded by a new agreement upon
the closing of the Capital Z transaction. (See Note 3).
8. Series D Preferred Stock
On December 31, 1998, the Company contracted to sell 40,000 shares (par
value $100) of Series D Preferred Stock to UAFC, L.P. for $4.0 million. The
Series D Preferred Stock was divided into two sub-series, Series D-1 and Series
D-2. The 22,500 Series D-1 Shares were issued on December 31, 1998 and the
17,500 Series D-2 shares were issued on February 12, 1999. The Series D
Preferred Stock has the same provisions as the Series C-1, Preferred Stock,
except (i) that the Series D has no voting rights except as required by law,
(ii) the conversion price on the Series D-1 was $2.70 rather than $2.375 per
share, (iii) the conversion price of the series D-2 was $2.70 or, if a "change
of control" transaction, as defined, occurs in 1999, the conversion price will
be equal to the per share price at which common stock is issued in the change of
control transaction, and (iv) if the issuance of voting shares to a Series D
shareholder requires regulatory approval, the conversion will be postponed until
such approval is obtained or ceases to be required. The pending Capital Z
Transaction will be a "change of control" within the meaning of the terms of the
Series D Preferred Stock.
On March 11, 1999, the Company gave notice of conversion of the Series D-1
and D-2 Preferred Stock. Since the conversion of the Series D-1 and D-2
Preferred Stock held by UAFC, L.P. to common stock would result in its owning
more than 10% of the Company's voting stock, implementation of the conversion
would require that the New York Insurance Department either (i) approve of UAFC,
L.P. becoming a controlling shareholder of the Company or (ii) determine that
such conversion would not result in UAFC, L.P. becoming a controlling person of
Universal. The completion of the conversion of the Series D Preferred Stock was
therefore deferred until such conditions are satisfied or are no longer
applicable. If the pending Capital Z Transaction closes, no approval of the
conversion of the Series D Preferred Stock will be required, because the UAFC,
L.P. will, after conversion of the Series D Preferred Stock, hold less than 10%
of Universal's then outstanding stock. If the Capital Z Transaction does not
close, the Company anticipates that it will obtain the required approval of a
change of control or determination that no change of control is involved in the
conversion of the Series D Preferred Stock.
The shareholder agreement applicable to the Series C Preferred Stock also
applies to the Series D Preferred Stock.
9. Stockholders' Equity
Preferred Stock
The Company has 2,000,000 authorized shares of preferred stock to be
issued in series with 92,080 shares issued and outstanding at March 31, 1999, of
which 400 shares are Series B, 51,680 shares are Series C and 40,000 are Series
D (see Note 7 for a discussion of Series C Preferred Stock and Note 8 for a
discussion of Series D 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 March 31, 1999 and
December 31, 1998 were 7,774,064, and 7,638,057, respectively. During the three
months ended March 31, 1999, the Company issued 136,007 shares of its common
stock for $383,429.
Common Stock Warrants
The Company had 657,031 common stock warrants issued and outstanding at
March 31, 1999 and 658,231 issued and outstanding at December 1998, which are
registered under the Securities Exchange Act of 1934. At March 31, 1999 and
December 31, 1998, 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. Statutory Capital and Surplus Requirements and Dividend Restrictions
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 requirements of American
Progressive, American Pioneer and American Exchange as of March 31, 1999 for the
maintenance of authority to do business were $2.5 million, $2.7 million and $0.8
million, respectively. However, in these states 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 Insurance
Subsidiaries' operations. At March 31, 1999 the adjusted statutory capital and
surplus, including asset valuation reserve, of American Progressive, American
Pioneer and American Exchange was $9.8 million, $12.4 million, and $3.5 million,
respectively.
11. Business Segment Information
Universal has four business segments: Senior Market Accident & Health
Insurance, Other Accident & Health Insurance, Life Insurance, and Non-insurance
Businesses. The Senior Market Accident & Health segment offers Medicare
supplement, home health care, nursing home, and hospital indemnity products. The
Other Accident & Health Insurance segment offers mainly major medical insurance
and some products that are not currently material. Products offered by the Life
Insurance segment include annuities, universal life, and other traditional and
term life products. The Non-insurance Businesses segment consists mainly of the
Parent Company and WorldNet.
Financial data by segment as of and for the three months ended March 31,
1999 and 1998 is as follows:
<TABLE>
<S> <C> <C> <C> <C> <C>
March 31, 1999
---------------------------------------------------------------------
Senior Other
Accident Accident
& & Life Non-insurance
Health Health Insurance Businesses Total
---------- ---------- ----------- ------------- ------------
Net premiums and policyholder
fees earned $ 6,338,564 $ 2,394,771 $ 1,691,034 $ - $ 10,424,369
Net investment income 257,748 188,613 2,323,986 28,581 2,798,928
Realized gains 4,336 3,172 39,089 481 47,078
Fee and other income - - 11,158 568,090 579,248
---------- ---------- ----------- --------- ------------
6,600,648 2,586,556 4,065,267 597,152 13,849,623
Policyholder benefits 5,065,227 1,938,952 2,167,724 - 9,171,903
Increase in deferred
acquisition costs (938,832) (22,142) 104,729 - (856,245)
Commissions and general
expenses 2,093,137 661,975 1,459,447 252,343 4,466,902
----------- ---------- ----------- --------- ------------
Total benefits, claims
and other deductions 6,219,532 2,578,785 3,731,900 252,343 12,782,560
Operating income before
taxes $ 381,116 $ 7,771 $ 333,367 $ 344,809 $ 1,067,063
=========== ========== =========== ========= ============
ASSETS
Cash and investments $14,425,089 $ 10,555,889 $130,063,877 $3,337,004 $158,381,859
Deferred policy acquisition
costs 8,153,725 1,067,244 17,147,496 - 26,368,465
Accrued investment income 341,385 249,815 3,078,090 37,855 3,707,145
Goodwill 3,709,519 606,562 - - 4,316,081
Present value of future
profits 965,210 560,791 - - 1,526,001
Due and unpaid premiums 354,376 141,443 228,435 - 724,254
Reinsurance recoverable 37,117,483 9,725,164 34,708,873 - 81,670,793
Other assets - - - 7,639,612 7,639,612
=========== =========== =========== =========== ============
Total assets $65,066,787 $ 22,906,908 $185,226,771 $11,014,471 $284,214,937
=========== =========== =========== =========== ============
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
March 31, 1998
--------------------------------------------------------
Senior Other
Accident Accident
& & Life Non-insurance
Health Health Insurance Businesses Total
---------- ------------- ------------- -------------- -----------
Net premiums and policyholder
fees earned $5,750,573 $2,345,737 $2,387,971 $ - $10,484,281
Net investment income 84,765 174,072 2,428,131 21,270 2,708,238
Realized gains (831) (1,707) (23,816) (209) (26,563)
Fee and other income - - 15,839 632,921 648,760
---------- ----------- ----------- --------- ------------
Total revenues 5,834,507 2,518,102 4,808,125 653,982 13,814,716
Policyholder benefits 3,988,044 1,734,217 3,228,974 - 8,951,235
Increase in deferred
acquisition costs (472,876) 7,022 (20,181) - (486,035)
Commissions and general
expenses 2,024,960 770,132 1,346,616 433,394 4,575,102
---------- ---------- ----------- --------- -------------
Total benefits, claims
and other deductions 5,540,128 2,511,371 4,555,409 433,394 13,040,302
Operating income before
taxes $ 294,379 $ 6,731 $ 252,716 $ 220,588 $ 774,414
========== ========== =========== ========= =============
ASSETS
Cash and investments $5,042,770 $10,355,627 $144,450,626 $1,303,838 $161,152,862
Deferred policy acquisition
costs 5,008,311 569,207 15,468,110 - 21,045,628
Accrued investment income 121,109 248,708 3,469,233 30,390 3,869,440
Goodwill 3,842,434 627,660 - - 4,470,093
Present value of future
profits 1,044,278 618,014 - - 1,662,292
Due and unpaid premiums 312,638 120,246 232,507 - 665,391
Reinsurance recoverable 34,350,729 7,399,843 44,996,656 - 86,747,228
Other assets - - - 6,694,583 6,694,583
=========== ========== =========== ========== ============
Total assets $49,722,269 $19,939,305 $208,617,132 $8,028,811 $286,307,517
=========== ========== =========== ========== =============
</TABLE>
<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 1998 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.
Results of Operations
Three Months Ended March 31, 1999
For the three months ended March 31, 1999, the Company earned net income
after Federal income taxes of $0.5 million ($0.05 per share) compared to $0.4
million ($0.04 per share) in the prior year. Operating income before Federal
income taxes amounted to $1.1 million for the three months ended March 31, 1999
compared to $0.8 million in the prior year.
Revenues. Total revenues increased approximately $35 thousand to
approximately $13.8 million for the three months ended March 31, 1999, compared
to total revenues of approximately $13.8 million in the prior year.
Gross premium and policyholder fees earned and reinsurance assumed
In the three months ended March 31, 1999, the Company's gross premium and
policyholder fees earned (including reinsurance assumed) amounted to $32.3
million, a $0.7 million increase over the $31.6 million amount in 1998. This
gross premium increase is primarily related to the Company's currently marketed
programs which increased as follows:
Premium 1999 Total
Product Increase Premium Earned
-------------------------------- ---------------- ---------------
(in millions) (in millions)
Senior market accident & health $ 3.93 $ 7.61
Senior market life insurance 0.12 0.86
Specialty life insurance 0.24 0.55
Specialty medical 0.71 1.73
Major medical 0.09 1.55
---------------- ---------------
Totals $ 5.09 $ 12.30
================ ===============
These increases totaling $5.1 million were offset by the decrease of $1.1
million in premiums related to American Exchange. Total premiums of American
Exchange were $3.8 million for the three months ended March 31, 1999. In
addition, gross earned premiums decreased on the following products which have
been terminated and are not currently marketed by the Company as follows:
Premium 1999 Total
Product Decrease Premium Earned
-------------------------------- ---------------- ----------------
(in millions) (in millions)
First National assumed business $ 1.75 $ 10.57
Dallas General assumed business 1.06 2.18
Non-marketed life insurance .47 1.36
Non-marketed accident & health .01 1.22
Group life insurance .01 .85
---------------- ----------------
Totals $ 3.30 $ 16.18
================ ================
Reinsurance premiums ceded
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, 1999
amounted to $21.9 million, a $0.8 million increase from the 1998 amount of $21.1
million. Details of the changes in reinsurance premiums ceded is as follows:
Ceded Premium 1999 Total
Increase Premium
Product (Decrease) Ceded
-------------------------------- ---------------- -------------
(in millions) (in millions)
American Exchange products $(1.08) $2.82
Dallas General assumed business (0.24) 2.18
Senior market accident & health 2.58 4.28
Senior market life insurance 0.24 0.59
Specialty life insurance 0.27 0.49
Specialty medical 0.66 2.35
First National assumed business (1.80) 8.12
Other lines 0.14 1.06
---------------- -------------
Totals $0.77 $21.89
================ =============
Investment related revenue
Net investment income of the Company increased $91 thousand to $2.8
million for the three months ended March 31, 1999, compared to $2.7 million in
1998. This increase is attributable to the increase in invested assets
outstanding during 1999 compared to 1998. Realized gains on investments amounted
to $47 thousand for the three months ended March 31, 1999 compared to a loss of
$27 thousand in 1998. Included in the 1999 amount is the $60 thousand write down
of certain securities determined by management to be permanently impaired.
Other revenue
Fee income showed a slight decrease of $65 thousand to $0.6 million for
the three months ended March 31, 1999.
Benefits, Claims and Other Deductions. Total benefits, claims and other
deductions decreased approximately $0.2 million to $12.8 million for the three
months ended March 31, 1999, compared to $13.0 million for the three months
ended March 31, 1998.
Claims and other benefits increased $49 thousand to $6.9 million for the
three months ended March 31, 1999 compared to $6.9 million in 1998. The change
in reserves for the three months ended March 31, 1999 amounted to an increase of
$0.3 million consistent with the increase of $0.3 million in 1998. These
increases in claims and change in reserves are the result of the $60 thousand
increase in net premiums earned for the three months ended March 31, 1999
discussed above.
Interest credited to policyholders increased $0.2 million to $1.9 million,
which increase is the result of an increase in account values related to
interest sensitive policies in force.
The change in deferred acquisition costs increased by $0.4 million for the
three months ended March 31, 1999 compared to 1998. The overall increase in
deferred acquisition costs is the result of the increase in new premium
production in the three months ended March 31, 1999 compared to 1998 noted
above. In the three months ended March 31, 1999, the Company amortized $39
thousand of goodwill generated in the acquisitions of First National ($28
thousand) and American Exchange ($11 thousand) and $44 thousand of present value
of future profits generated in the acquisitions of American Exchange ($32
thousand) and Dallas General ($12 thousand).
Commissions increased $1.1 million in the three months ended March 31,
1999 to $6.3 million, compared to $5.2 million in 1998. This increase is the
result of the $5.1 million increase in new premium discussed above. Commissions
and expense allowances on reinsurance ceded increased $1.5 million in the three
months ended March 31, 1999 to $7.4 million, compared to $5.9 million in 1998.
This increase is the direct result of the increase in direct commission and
reinsurance premium ceded discussed above.
Other operating costs and expenses increased $0.3 million in the three
months ended March 31, 1999 to $5.5 million, compared to $5.2 million in 1998.
The insurance companies' expenses amounted to $5.1 million for the three months
ended March 31, 1999 compared to $4.8 million in 1998, an increase of $0.3
million. This increase is the result of an increase in general overhead incurred
at the insurance companies.
Federal Income Tax Expense. Federal income tax expense increased
approximately $0.1 million to $0.4 million for the three months ended March 31,
1999, compared to $0.3 million for the three months ended March 31, 1998. This
increase is the result of the increase in operating income before taxes to $1.1
million in 1999 from $0.8 million in 1998. The effective tax rate in 1999 was
33.4% compared to 31.2% in 1998. Liquidity and Capital Resources
The Company's need for capital has historically been to maintain or
increase the surplus of its Insurance Subsidiaries and to support the Company as
an insurance holding company, including the maintenance of its status as a
public company. In addition, the Company requires capital to fund its
anticipated growth through acquisitions of other companies and blocks of
insurance business.
The Company
The Company requires cash to pay the operating expenses necessary to
support its status as an insurance holding company (which under applicable
Insurance Department regulations must bear its own expenses), and to meet the
cost involved in being a publicly-owned company. In addition, it requires cash
to meet Universal's obligations under the debentures outstanding with American
Progressive and to meet the quarterly amortization of its bank loan.
As of March 31, 1999 the Company had outstanding $4.5 million pursuant to
a credit agreement with Chase Manhattan Bank. During the three months ended
March 31, 1999, the Company repaid $0.3 million in principal and $92.9 thousand
in interest.
In connection with the Unstacking Agreement whereby American Pioneer will
become a direct subsidiary of Universal, rather than an indirect subsidiary
owned through American Progressive, Universal has $7.9 million in debentures
outstanding to its subsidiary, American Progressive. The debentures pay interest
quarterly at 8.50% and are due between September 2002 and May 2003. During the
three months ended March 31, 1999 the Company paid $0.2 million in interest on
these debentures to American Progressive which was eliminated in consolidation.
Management believes that the current cash position and expected cash flows
of the non-insurance companies and the availability of dividends from American
Pioneer can support the obligations of Universal noted above for the foreseeable
future. However, there can be no assurance as to the expected future cash flows
or to the availability of dividends from American Pioneer.
Insurance Subsidiaries
American Progressive, American Pioneer and American Exchange
(collectively, 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 March 31, 1999 for the maintenance
of authority to do business were $2.5 million, $2.7 million and $0.8 million,
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 Insurance Subsidiaries' operations.
At March 31, 1999 the adjusted statutory capital and surplus, including asset
valuation reserve, of American Progressive, American Pioneer and American
Exchange was $9.8 million, $12.4 million and $3.5 million, respectively.
During 1998, the Company made capital contributions totaling $2 million to
American Pioneer. These amounts were generated by the proceeds of the First
Amendment to the Company's credit agreement and from the proceeds of the Series
D Preferred Stock issuance. The capital contributions were made to support the
growth in new business production at American Pioneer.
Liquidity for the life insurance subsidiaries is measured by their ability
to pay scheduled contractual benefits, pay operating expenses, and fund
investment commitments. Sources of liquidity include scheduled and unscheduled
principal and interest payments on investments, premium payments and deposits
and the sale of liquid investments. These sources of liquidity for the Insurance
Subsidiaries significantly exceed scheduled uses.
Liquidity is also affected by unscheduled benefit payments including death
benefits, benefits under accident & health policies and interest-sensitive
policy surrenders and withdrawals. The amount of surrenders and withdrawals is
affected by a variety of factors such as credited interest rates for similar
products, general economic conditions and events in the industry that affect
policyholders' confidence. Although the contractual terms of substantially all
of the Company's in force life insurance policies and annuities give the holders
the right to surrender the policies and annuities, the Company imposes penalties
for early surrenders. At March 31, 1999 the Company held reserves that exceeded
the underlying cash surrender values of its in force life insurance and
annuities by more than $18.0 million. The Insurance Subsidiaries, in
management's view, have not experienced any material changes in surrender and
withdrawal activity in recent years.
Investments
Changes in interest rates may affect the incidence of policy surrenders
and withdrawals. In addition to the potential impact on liquidity, unanticipated
surrenders and withdrawals in a changed interest rate environment could
adversely affect earnings if the Company were required to sell investments at
reduced values in order to meet liquidity demands. The Company manages the asset
and liability portfolios in order to minimize the adverse earnings impact of
changing market rates. The Company seeks to invest in assets that have duration
and interest rate characteristics similar to the liabilities that they support.
The net yield on the Company's cash and invested assets increased slightly
from 6.67% at December 31, 1998 to 6.93% at March 31, 1999. A significant
portion of these securities are held to support the liabilities for policyholder
account balances, which liabilities are subject to periodic adjustments to their
credited interest rates. The credited interest rates of the interest-sensitive
policyholder account balances are determined by management based upon factors
such as portfolio rates of return and prevailing market rates and typically
follow the pattern of yields on the assets supporting these liabilities.
The Company's investment policy is to balance the portfolio between
long-term and short-term investments to continue 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 investment advisor, Asset Allocation and Management Company,
an affiliate of AAM, to manage the Company's fixed maturity portfolio, under the
direction of the management of the Insurance Subsidiaries and in accordance with
guidelines adopted by their respective Boards of Directors. The Company does not
invest in derivative programs or other hybrid securities, except for GNMA's,
FNMA's and investment grade corporate collateralized mortgage obligations. It
invests primarily in fixed maturity securities of the U.S. Government and its
agencies and in corporate fixed maturity securities with investment grade
ratings of "Baa3" (Moody's), "BBB-" (Standard & Poor's) or higher. However, the
Company does own some investments that are rated "BB" or below (together 2.3%
and 2.4% of total fixed maturities as of December 31, 1998 and March 31, 1999,
respectively). As of March 31, 1999 all securities were current in the payment
of principal and interest.
At March 31, 1999, the Insurance Subsidiaries held cash and cash
equivalents totaling $5.5 million, as well as fixed maturity and equity
securities that could readily be converted to cash with carrying values (and
fair values) of $137.7 million.
Federal Income Taxation of the Company
At March 31, 1999 the Company had established a valuation allowance of
$1.3 million with respect to certain of its net operating loss carryforwards
(deferred tax assets). The Company determined the valuation allowance based upon
an analysis of projected taxable income and through its ability to implement
prudent and feasible tax planning strategies. The tax planning strategies
include the Company's recent reorganization and use of its administration
company WorldNet to generate taxable income. Management believes it is more
likely than not that the Company will realize the recorded net deferred tax
assets.
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 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) the assessment phase, which determines the impact of the Year 2000
issue, (2) the remediation phase, which is the updating or modifying of affected
systems, (3) the testing phase, which determines the effectiveness of the
remediation phase, (4) the implementation phase, which applies all proven
systems to the operating environment and (5) the 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 therefore 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. All of the
Company's products were placed 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. The installation, testing and
implementation of this upgrade was completed in April 1999.
The Company recently acquired blocks of business (the First National and
Dallas General blocks) and American Exchange. In connection with those
acquisitions, the Company has converted all of the acquired businesses into 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 June 30, 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 the Year 2000 issue. 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 issue. Therefore,
the Company has not developed a contingency plan for the Year 2000 issue. The
Company will continue to monitor and assess risks for which contingency plans
will be required.
A possible worst case scenario, although this is not considered likely,
would occur if the Federal government and its vendors were unable to continue to
process Medicare supplement claims electronically. In the event that this would
occur, the Company's current procedure of obtaining Medicare claim data through
an electronic interface would not occur and the Company would have to revert to
manually entering this data into the claims paying system. This would result in
the Company hiring approximately 20 additional employees to handle the increase
in this data entry function. The Company considers the clerical marketplace in
each of its primary office locations (Pensacola, Orlando, Miami and Rye Brooke)
cabable of handling this situation in a satisfactory manner.
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
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.
Quantitative and Qualitative Disclosures About Market Risk
Market risk relates, broadly, to changes in the value of financial
instruments that arise from adverse movements in interest rates, equity prices
and foreign exchange rates. The Company is exposed principally to changes in
interest rates that affect the market prices of its fixed income securities.
Interest Rate Risk
The Company could experience economic losses if it was required to
liquidate fixed income securities during periods of rising and/or volatile
interest rates. However, the Company attempts to mitigate its exposure to
adverse interest rate movements through a combination of active portfolio
management and by staggering the maturities of its fixed income investments to
assure sufficient liquidity to meet its obligations and to address reinvestment
risk considerations. The Company's insurance liabilities are generally long
tailed in nature, which generally permits ample time to prepare for their
settlement. To date, the Company has not utilized various financial risk
management tools on its investment securities, such as interest rate swaps,
forwards, futures and options to modify it exposure to changes in interest
rates. However, the Company may consider them in the future.
The Company is aware that certain classes of mortgage backed securities
are subject to significant prepayment risk due to the fact that in periods of
declining interest rates, individuals may refinance higher rate mortgages to
take advantage of the lower rates then available. The Company monitors
investment portfolio mix to mitigate this risk.
Sensitivity Analysis
The Company regularly conducts various analyses to gauge the financial
impact of changes in interest rate on it financial condition. The ranges
selected in these analyses reflect management's assessment as being reasonably
possible over the succeeding twelve-month period. The magnitude of changes
modeled in the accompanying analyses should, in no manner, be construed as a
prediction of future economic events, but rather, be treated as a simple
illustration of the potential impact of such events on the Company's financial
results.
The sensitivity analysis of interest rate risk assumes an instantaneous
shift in a parallel fashion across the yield curve, with scenarios of interest
rates increasing and decreasing 100 and 200 basis points from their levels at
March 31, 1999, and with all other variables held constant. A 100 and 200 basis
point increase in market interest rates would result in a pre-tax decrease in
the market value of the Company's fixed income investments of $6.1 million and
$11.7 million, respectively. Similarly, a 100 and 200 basis point decrease in
market interest rates would result in a pre-tax increase in the market value of
the Company's fixed income investments of $5.3 million and $11.5 million,
respectively.
<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, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-END> Mar-31-1999
<DEBT-HELD-FOR-SALE> 0
<DEBT-CARRYING-VALUE> 136777895
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<EQUITIES> 876609
<MORTGAGE> 4417797
<REAL-ESTATE> 30696
<TOTAL-INVEST> 149456130
<CASH> 8925729
<RECOVER-REINSURE> 81551520
<DEFERRED-ACQUISITION> 26368465
<TOTAL-ASSETS> 284214937
<POLICY-LOSSES> 46795895
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 156195547
<POLICY-HOLDER-FUNDS> 27088682
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0
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