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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[FEE REQUIRED]
For the fiscal year ended December 31, 1995.
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
[NO FEE REQUIRED]
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For the Transition period from to .
Commission file number 0-14320
UNITED INSURANCE COMPANIES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 75-2044750
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
4001 MCEWEN DRIVE, SUITE 200 75244
DALLAS, TEXAS (Zip Code)
(Address of principal executive offices)
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Registrant's telephone number, including area code: (214) 960-8497
Securities registered pursuant to Section 12(b) of the Act:
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NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
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None Not Applicable
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Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, $0.01 PAR VALUE
(Title of class)
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 (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 6, 1996 was $655,658,122.
The number of shares outstanding of $0.01 par value Common Stock, as of March 6,
1996 was 38,263,745.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the annual proxy statement for the Annual Meeting of Stockholders
are incorporated by reference into Part III.
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PART I
ITEM 1. BUSINESS
GENERAL
United Insurance Companies, Inc. (the "Company" or "UICI"), through its
subsidiaries, provides health, life and other financial products to selected
niche markets. The Company issues health insurance policies to the self-employed
and student markets. For the self-employed market, which includes self-employed
individuals and individuals who work for small businesses with five or fewer
employees, the Company offers a range of health insurance products. Catastrophic
hospital and basic hospital-medical expense plans are tailored to an insured's
individual needs and include managed care options such as a Preferred Provider
Organization ("PPO") plan as well as other coverage modifications. The Company
markets these products through "dedicated" agency sales forces, consisting of
approximately 5,000 independent contractors who primarily sell the Company's
products. For the student market, the Company offers tailored insurance programs
which generally provide single school year coverage to individual students
primarily at universities but also at public and private schools for
kindergarten through grade 12. In this market, the Company sells its products
through in-house account executives who focus on colleges and universities on a
national basis. Health insurance premiums were $473.8 million in 1995, or 74% of
the Company's total revenues.
The Company issues life insurance products to selected niche markets and
acquires blocks of life insurance and annuity policies from other insurers on an
opportunistic basis. The life insurance policies issued by the Company are
marketed through a dedicated agency sales force. The Company also offers managed
health care services, including marketing, risk management and other services to
large employers, managed care organizations, and other insurers. In addition,
the Company assists individuals with no, or troubled, credit experience in
obtaining a nationally recognized credit card by providing financial support for
the card. This product is marketed through a sales force of independent
contractors.
At its inception in 1984, the Company's business consisted solely of
coinsurance of health and term life insurance policies sold by United Group
Association, Inc. ("UGA") agents to the self-employed market and issued by
subsidiaries of AEGON USA, Inc. (together with its subsidiaries, "AEGON").
Principally through acquisitions of insurance companies and blocks of life
insurance and annuity policies, and the development of the underwriting and
administrative capabilities to issue insurance policies directly, the percentage
of the Company's total revenues in 1995 relating to the coinsurance business
decreased to 35% (although in absolute terms such revenues continued to increase
over prior years).
The Company's principal subsidiaries through which the business of the
Self-Employed Health Insurance Division, Student Health Insurance Division and
the Life Insurance and Annuity Division are conducted are The MEGA Life and
Health Insurance Company ("MEGA"), which is wholly-owned by the Company,
Mid-West National Life Insurance Company of Tennessee ("Mid-West"), in which the
Company owns 79% of the outstanding stock, and The Chesapeake Life Insurance
Company ("Chesapeake"), in which the Company owns 78% of the outstanding stock.
MEGA is an insurance company domiciled in Oklahoma and is licensed to issue
health and life insurance policies in all states except New York. Mid-West is an
insurance company domiciled in Tennessee and is licensed to issue health and
life insurance policies in all states except Connecticut, Maine, New Hampshire,
New York, and Vermont. Chesapeake is an insurance company domiciled in Oklahoma
and is licensed to issue health and life insurance policies in all states except
Kansas, New Jersey and New York. MEGA is currently rated "A (Excellent),"
Mid-West is currently rated "A- (Excellent)," and Chesapeake is currently rated
"B++ (Very Good)" by A.M. Best. A.M. Best's ratings currently range from "A++
(Superior)" to "F (Liquidation)." A.M. Best's ratings are based upon factors
relevant to policyholders, agents, insurance brokers and intermediaries and are
not directed to the protection of investors.
The HealthCare Solutions Division operates through a number of wholly-owned
and partially owned subsidiaries, as well as companies in which the Company does
not hold a majority interest. The business of the Credit Services Division is
conducted primarily through United Membership Marketing Group, LLC, in which the
Company owns 85% of the outstanding equity.
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The Company's principal executive offices are located at 4001 McEwen Drive,
Suite 200, Dallas, Texas 75244. Its telephone number is (214) 960-8497.
BUSINESS STRATEGY
The Company seeks to continue to expand its business profitably and
strengthen its position in the markets in which it competes. The key elements of
its strategy are as follows:
DEDICATED AGENT NETWORK. The Company's strategy in the self-employed
market is to align itself closely with its sales forces. Substantially all of
the health insurance either issued or coinsured by the Company in the
self-employed market is sold through a nationwide network of agents associated
with UGA or agents associated with Cornerstone Marketing of America ("CMA").
UGA, with over 4,000 agents, is wholly-owned by Mr. Ronald L. Jensen, Chairman
of the Board of Directors of the Company. UGA has agreed with the Company that
UGA will not market insurance products of another insurance carrier competitive
with the insurance products of the Company, subject to certain exceptions. CMA,
with over 1,000 agents, is a marketing division of the Company. The agents, as a
condition of receiving customer leads, exclusively sell insurance products
offered by UGA and CMA. The Company believes that the use of dedicated sales
forces, as opposed to insurance brokers who sell products for a number of
carriers, leads to better marketing performance because such agents are
committed to the Company's products. The Company also believes that the
recruitment, training and motivation of agents are key factors in the success
and growth of the Company. The number of dedicated agents selling the Company's
health insurance products has grown from approximately 900 in 1986 to over 5,000
as of December 31, 1995.
EMPLOYEE AND AGENT STOCK OWNERSHIP. The Company believes that agents and
employees are more productive and remain associated with the Company longer when
they own the common stock of the Company ("Common Stock"). Since 1987, the
Company and UGA have provided agents and employees with stock plans that allow
them to systematically buy Common Stock. Through these stock ownership plans,
the agents and employees of the Company and UGA owned in the aggregate
approximately 16% of the Common Stock as of December 31, 1995, which does not
include any shares held by agents and employees outside of these plans.
The Company believes that the stock plans have grown primarily due to their
design and the performance of the Company's stock price over the last ten years.
The plans are structured to encourage participation in a disciplined manner.
Agents are eligible to participate in the plans after one full calendar year of
service. Participant contributions are matched by contributions from the
Company, in the case of employees and Company agents, and UGA, in the case of
UGA agents. The amount of permitted contributions made by the agents is based on
sales performance. Matching contributions of terminated participants which have
not vested (or are otherwise not payable under the applicable plans) do not
revert back to the Company or UGA, but rather are allocated to the remaining
participants, providing further incentive to remain with the Company or UGA.
Share purchases pursuant to the plans are made in the open market, thus avoiding
dilution to existing stockholders.
FOCUS ON NICHE MARKETS. The Company attempts to identify niche markets
which it believes are underserved by larger competitors and in which it has the
skills and marketing resources required to achieve profitability and growth.
Initially, the Company targeted the self-employed health insurance market. By
focusing on this market, the Company has been able to design and market its
product offerings, structure its coverage benefits and process claims to more
effectively service the needs of the self-employed. In 1987, the Company
identified a niche opportunity in the student health insurance market, and has
subsequently increased premiums from $17.0 million in 1987 to $90.4 million in
1995. The Company believes that it provides student health insurance plans to
more universities than any other single insurer. The Company also markets a life
insurance product which includes a rider committing the Company to provide loans
to fund the higher education of the children of the insured. In 1995, annualized
premiums for the product were
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approximately $15.0 million, as compared to approximately $2.0 million in 1993.
In 1993, the Company began offering credit support services to individuals not
being served by the larger financial institutions that issue major credit cards.
In 1995, this division had revenues of $28.0 million.
POLICY DESIGN AND CLAIMS MANAGEMENT. The Company's traditional indemnity
health insurance products are principally designed to limit coverages to the
occurrence of significant events which require hospitalization. This policy
design, which includes high deductibles, reduces the frequency of covered claims
requiring processing, thus controlling administrative expenses. The Company
seeks to price its products in a manner that accurately reflects its
underwriting assumptions and targeted margins, and relies on the marketing
capabilities of its dedicated agency sales forces to sell these products at
prices consistent with these objectives. For the last five fiscal years, the
Company's average combined ratio for the Self-Employed Health Insurance Division
was 94% and the combined ratio has ranged from 90% to 98%.
Historically, the Company has coinsured insurance products sold by UGA
agents and designed and issued by AEGON. The Company maintains administrative
centers with full underwriting, claims management and administrative
capabilities, and, on April 1, 1996, the Company will acquire AEGON's insurance
center operations. See "-- Recent Developments." The Company believes that by
processing its own claims it can better assure that claims are properly
processed and utilize the claims information to periodically modify the benefits
and coverages of its policies.
MANAGED CARE. The Company recently formed the HealthCare Solutions
Division to leverage its capabilities in insurance underwriting, claims
administration, risk management and marketing in order to provide services that
enhance the delivery of quality managed health care. The division focuses on
providing administrative services, underwriting and risk management, and health
care delivery services to clients in the managed health care market, including
groups of physicians, large employers, managed care organizations and other
insurers. In 1995, the Company acquired controlling interests in several
companies related to the HealthCare Solutions Division for $32.4 million, in
cash and common stock. In addition, in 1995 the Company also placed additional
emphasis on incorporating managed care features of a PPO into its health plans
in order to further control health care costs. The health plans with managed
care options generally provide greater coverage for preventive and other
services not requiring hospitalization such as periodic examinations and doctor
visits. These plans also generally have lower deductibles and co-payments for
services that are received from providers that are in the PPO network.
ACQUISITIONS OF EXISTING BLOCKS OF BUSINESS. The Company has grown through
opportunistic acquisitions of blocks of life insurance and annuity policies. In
an acquisition of a block of business, the Company assumes policy liabilities
and receives assets (net of the purchase price) sufficient, based on actuarial
assumptions, to cover such estimated future liabilities. The profitability of a
block of business depends on the amount of investment income from the assets and
the amount of premiums received less the amount of benefits and expenses
actually paid. The Company believes that its success in profitably acquiring and
servicing blocks has been principally due to its experience and expertise in
analyzing the characteristics of the policies in the blocks and its ability to
cost-effectively administer the policies. The Company most recently acquired a
block of life insurance and annuity policies in 1994. Although the Company
believes that it can continue to exploit acquisition opportunities and continues
to analyze potential transactions, the current climate for acquisitions of life
insurance and annuity policies has become very competitive, making it more
difficult to successfully complete acquisitions which meet the Company's
financial goals.
HEALTH INSURANCE
The Company directly markets or coinsures health insurance policies
primarily to two markets. The Self-Employed Health Insurance Division serves the
self-employed market, which includes self-employed individuals and individuals
who work for small businesses, generally with five or fewer employees. The
Student Health Insurance Division serves the student market, which includes
college and university students and students in kindergarten through grade 12.
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Self-Employed Health Insurance Division
Market. According to the Bureau of Labor Statistics, there were
approximately 10.5 million self-employed individuals at the end of 1995. There
are currently in force approximately 235,000 basic health policies issued or
coinsured by the Company. The Company believes that there is significant
opportunity to increase its penetration in this market.
Products. The health insurance products directly issued and coinsured by
the Company are substantially similar. The two basic health insurance plans are
as follows:
- The Group Catastrophic Hospital Expense Plan provides a lifetime maximum
benefit ranging from $2,000,000 to $5,000,000 and a lifetime maximum
benefit for each injury or sickness ranging from $500,000 to $1,000,000.
Covered expenses are subject to a deductible and are reimbursed at a
benefit payment rate ranging from 50% to 100%, as determined by the
policy. After a pre-selected dollar amount of covered expenses has been
reached, the remaining expenses are reimbursed at 100% for the remainder
of the period of confinement. The benefits for this plan tend to increase
as hospital care expenses increase and therefore the premiums for these
policies are subject to increase as overall hospital care expenses rise.
- The Group Basic Hospital-Medical Expense Plan has a $1,000,000 lifetime
maximum benefit and $500,000 lifetime maximum benefit for each injury or
sickness. Covered expenses are subject to a deductible. Covered hospital
room and board charges are reimbursed at 100% up to a pre-selected
maximum. Covered expenses for inpatient hospital miscellaneous charges,
same-day surgery facility, surgery, assistant surgeon, anesthesia, second
surgical opinion, doctor visits, and ambulance services are reimbursed at
80% to 100% up to a scheduled maximum. This type of health insurance
policy is of a "scheduled benefit" nature, and as such, provides benefits
equal to the lesser of the actual cost incurred for covered expenses or
the maximum benefit stated in the policy. These limitations allow for more
certainty in predicting future claims experience and thus future premium
increases for this policy are expected to be less than on the catastrophic
policy.
Each of the policies is available with options providing for some
modification of coverage so that the insurance may be tailored to meet the needs
of the individual policyholder. In 1995, the Company placed additional emphasis
on policies which incorporate managed care features of a PPO, which are designed
to control health care costs. The health plans that provide the PPO option
generally provide greater coverage for preventive medical and other services not
requiring hospitalization such as periodic examinations and doctor visits. The
policies that provide for the use of a PPO impose a higher deductible and
co-payment if the policyholder uses providers outside of the PPO network. The
increased benefits in the PPO products are expected to result in a higher loss
ratio than the traditional indemnity products. This higher loss ratio is
expected to be offset by a lower expense ratio due to lower commissions on the
PPO products.
The Self-Employed Health Insurance Division had premium revenues of $383.4
million, $330.8 million, and $269.5 million (60%, 63%, and 60% of total
revenue), in 1995, 1994 and 1993, respectively.
Marketing and Sales. The Company's marketing strategy in the self-employed
market is to closely align itself with dedicated agent sales forces.
Substantially all of the health insurance products issued or coinsured by the
Company are sold through dedicated independent agents associated with UGA and
CMA. UGA is a nationwide network of over 4,000 agents which is wholly-owned by
Mr. Jensen. The agency has been aligned with the Company since 1984, originally
selling health insurance policies underwritten by AEGON and coinsured by the
Company. Subsequently, a small percentage of health insurance sold by UGA agents
was directly issued by the Company. Following a transition period beginning
April 1, 1996, the UGA agents will begin selling health insurance directly
issued by the Company. See "-- Recent Developments." CMA was established by the
Company in 1989 and has expanded to become a nationwide agency of over 1,000
agents. The policies sold by the CMA agents are issued by the Company.
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UGA agents and CMA agents are independent contractors and not employees of
UGA or the Company and all of the compensation they receive from UGA or the
Company is based upon their sales production. UGA and CMA are each organized
into geographical regions having regional directors and two additional levels of
field leaders. At December 31, 1995, the number of field leaders and "writing"
agents (i.e., the agents that are not involved in management) were as follows:
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CMA UGA
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Writing agents......................................................... 853 3,775
District leaders....................................................... 116 300
Division leaders....................................................... 46 65
Regional directors..................................................... 7 8
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1,022 4,148
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The retention of qualified, effective field leaders who can recruit, train
and motivate writing agents is a key factor in the success and growth of the
Company's business. Although the agent base at the writing level has
historically been subject to a high rate of turnover, the field leader levels
have remained relatively stable. As of December 31, 1995, UGA's regional
directors had been associated with UGA for an average of nine years, division
leaders had been associated with UGA for an average of seven years and district
leaders had been associated with UGA for an average of four years.
UGA and CMA are each responsible for the recruitment and training of their
field leaders and writing agents. UGA and CMA generally seek persons with
previous sales experience. The process of recruiting agents is extremely
competitive. The Company and UGA believe that the primary factors in
successfully recruiting and retaining effective agents and field leaders are the
policies regarding advances on commissions, the quality of the leads provided,
common stock ownership plans, the quality of the products offered, proper
training, and agent incentives and support. Classroom and field training is made
available to the agents under the direction of the field leaders, who are
frequently assisted by Company and UGA personnel.
The health insurance products issued or coinsured by the Company are
primarily issued to members of various independent membership associations which
endorse the products and act as the master policyholder for such products. Two
principal membership associations in the self-employed market are the National
Association for the Self-Employed ("NASE") and the Alliance for Affordable
Health Care ("AAHC"). The associations provide their membership with a number of
endorsed products, although health insurance is often the product of major
interest to potential members. Individuals may not obtain insurance under the
associations' master policies unless they are members. UGA agents and CMA agents
also act as enrollers of new members for the associations. Although the Company
has no formal agreements with these associations requiring the associations to
continue as the master policyholder and endorse the Company's insurance products
to their respective members, the Company considers its relationship with these
associations to be good.
UGA generates leads for its agents and the CMA agents through the efforts
of approximately 400 telephone operators. From various sources of data, a pool
of approximately 7.0 million names has been developed. Individuals in this pool
are contacted by telephone or by mail to determine their interest in obtaining
health insurance. The names of persons expressing an interest are provided as
leads to agents which the Company believes results in a higher success rate than
would be the case if the agents made unsolicited calls on prospective customers.
Coinsurance Arrangements. Under the terms of its coinsurance agreement,
AEGON has agreed to cede (i.e., transfer), and the Company has agreed to
coinsure, a specified percentage of the health insurance sold by UGA agents and
issued by AEGON. The Company receives this percentage of premiums collected and
is liable for this percentage of commission expenses, administrative costs,
claims payments, premium taxes, legal expenses, extra-contractual charges and
other payments. Such insurance policies are underwritten and administered at the
AEGON insurance center. The coinsurance percentage is 57.5% in 1996 and 60%
thereafter.
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On April 1, 1996 the Company will acquire AEGON's underwriting, claims
management and administrative capabilities related to products coinsured by the
Company. In connection with this transaction, UGA agents will begin to market
health insurance products of the Company rather than the coinsured product. See
"-- Recent Developments."
Acquisition of Blocks. From time to time, the Company may acquire blocks
of health insurance policies or companies that own such blocks. These
opportunities are pursued on a case-by-case basis and have generally not
represented a material percentage of Self-Employed Health Insurance Division
revenue.
Student Health Insurance Division
Market. The student market is comprised of students attending colleges and
universities in the United States and those attending public and private schools
in kindergarten through grade 12. Generally, the marketing strategy of the
Company has been to focus on college students whose circumstances are such that
health insurance may not otherwise be available through their parents. In
particular, older undergraduates, graduate and international students often have
a need to obtain insurance as "first-time buyers." According to industry
sources, there are approximately 2,100 four-year universities and colleges in
the United States which have a combined enrollment of approximately 8.7 million
students. For the 1994-1995 school year, 369 of these institutions with a
combined enrollment of approximately 2.0 million authorized the Company to offer
its health insurance plans to their students. Approximately 215,000 of these
students purchased health insurance from the Company during this period. The
Company believes that it provides student health insurance plans to more
universities than any other single insurer.
Products. The insurance programs sold in the student market are designed
to meet the requirements of each individual school. The programs generally
provide coverage for one school year and the maximum benefits available to any
individual student enrolled in the program range from $10,000 to $250,000
depending on the coverage level desired by the school. All students at any one
school enrolled in the program have the same coverage. The benefits on the lower
limit policies are usually paid according to schedules in the policy while
substantially all coverage under the higher limit policies is tied to a PPO
arrangement.
The Student Health Insurance Division had premium revenues of $90.4
million, $84.4 million and $74.2 million (14%, 16% and 16% of total revenue), in
1995, 1994, and 1993, respectively.
Marketing and Sales. The Company markets to colleges and universities on a
national basis through in-house account executives whose compensation is based
primarily on commissions. Account executives make presentations to the
appropriate school officials and the Company, if selected, is endorsed as the
provider of health insurance for students attending that school. At December 31,
1995, there were 15 account executives.
The kindergarten through grade 12 business has been marketed primarily in
Arkansas, Florida, Louisiana, Oklahoma and Texas.
LIFE INSURANCE AND ANNUITY
At December 31, 1995, the Life Insurance and Annuity Division had over $4.4
billion of life insurance in force and approximately 310,000 individual
policyholders. The division has grown primarily through acquisitions of blocks
of life insurance and annuity policies. The Company also issues life insurance
and annuity policies directly in certain niche markets.
The Life Insurance and Annuity Division had premium revenues of $38.5
million, $37.0 million and $25.0 million (6%, 7% and 6% of total revenue), in
1995, 1994 and 1993, respectively.
Direct Business
The Company offers an interest sensitive life insurance product generally
with an annuity and child's term rider. At December 31, 1995, the average face
amount for the policy was $38,000 and the average annual premium was
approximately $1,200. The child's term rider includes a special provision under
which the Company commits to provide loans to help fund the named child's higher
education if certain restrictions and
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qualifications are satisfied. Currently, loans are available in amounts up to
$30,000 for undergraduate school and up to $20,000 for graduate school. Loans
made under this rider are guaranteed as to principal and interest by a guarantee
agency and are not funded or supported by the federal government. However, as a
part of the program, the Company is a qualified lender under applicable
Department of Education regulations and makes available, outside of the
Company's commitment under the rider, loans under Federal Family Education Loan
Programs. Currently, any such loans are funded by qualified third parties.
Life insurance products are marketed and sold through the Company's network
of 800 dedicated agents. This marketing organization was acquired in 1993 and
has since been expanded to cover 35 states from only five at the time of the
acquisition. Annualized premiums for policies issued in 1995 increased to $15.0
million from $2.0 million in 1993.
The division also offers a credit life and credit disability policy through
brokers.
Acquired Blocks
The Company has grown through opportunistic acquisitions of blocks of life
insurance and annuities. In an acquisition of a block of business, the Company
assumes policy liabilities and receives assets (net of the purchase price)
sufficient, based on actuarial assumptions, to cover such estimated future
liabilities. The profitability of a block of business depends on the amount of
investment income from the assets and the amount of premiums received less the
amount of benefits and expenses actually paid. The Company believes that its
success in profitably acquiring and servicing blocks has been principally due to
its experience and expertise in analyzing the characteristics of the policies in
the blocks and its ability to cost-effectively administer the policies. The
Company most recently acquired a block of life insurance and annuities in 1994.
Although the Company believes that it can continue to exploit acquisition
opportunities and continues to analyze potential transactions, the Company
believes that the current climate for acquisitions of life insurance and
annuities has become very competitive, making it more difficult to successfully
complete acquisitions which meet the Company's financial goals.
Since 1991 the Company has added approximately $267.0 million in life
reserves and $214.0 million in annuity reserves, on a statutory basis as of the
respective acquisition dates, through twelve acquisitions of insurers and blocks
of insurance.
In 1991, the Company entered into an agreement whereby it services a block
of policies with life insurance and annuity reserves of $125.0 million, as of
the date of the service agreement, for an unrelated company. At December 31,
1995, total life insurance and annuity reserves for this block were $95.0
million. The Company receives a fee for servicing the policies and will also
participate in 50% of the profits or losses of the block of business after the
unrelated company has realized statutory earnings equal to its purchase price of
$20.0 million. There was no financial investment by the Company. No assets or
liabilities, income or expense of this block of business are reflected in the
Company's Consolidated Financial Statements but rather are carried on the
unrelated company's financial statements. The Company's Consolidated Financial
Statements reflect only the servicing fee currently earned. As of December 31,
1995, the unrelated company had realized statutory earnings of $16.8 million on
this block and the Company anticipates that it will begin to share in profits
and losses of this business during 1997.
In August 1994, the Company entered into a similar transaction whereby the
Company acquired a block of life insurance and annuity policies. At December 31,
1995, total life insurance and annuity reserves for this block were $39.7
million. In conjunction with this acquisition, the Company ceded through a
coinsurance agreement 100% of the policy liabilities to an unrelated reinsurer.
The acquisition required no financial investment by the Company. The Company
administers the life insurance and annuity policies and receives a servicing fee
from the unrelated insurer. Also, after the unrelated reinsurer recovers its
investment in this block, the coinsurance agreement will be terminated and all
remaining policies will be recaptured by the Company at no cost. The Company
anticipates that it will begin to receive 100% of the profits and losses of this
business in 1998.
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HEALTHCARE SOLUTIONS
The Company believes the delivery of health care in the United States will
continue to change and that the infrastructure required to meet the needs of
emerging health care market opportunities must incorporate "value added"
sophistication while lowering costs for various components of the health care
delivery system. The Company formed the HealthCare Solutions Division to
leverage its capabilities in insurance underwriting, claims administration, risk
management and marketing in order to provide services that enhance the delivery
of quality managed health care. The division focuses on providing administrative
services, underwriting and risk management, and health care delivery services to
clients in the managed health care market, including groups of physicians, large
employers, managed care organizations and other insurers. In 1995, the Company
acquired controlling interests in several companies related to the HealthCare
Solutions Division for $32.4 million, in cash and common stock. The HealthCare
Solutions Division had revenues of $17.8 million and an operating loss of $4.2
million in 1995.
Administrative Services
Health benefit claims processing (medical and dental) for insurance
companies and Blue Cross plans has historically been relatively costly and
inefficient, requiring significant amounts of paper to complete a transaction.
The Company believes that the elimination of paper claims processing and the
move to a fully electronic environment for both claims submission and payment
will increase efficiency and lower costs.
Through its ownership interests in several businesses, the Company seeks to
deliver claims processing solutions to payors such as other insurers, Blue Cross
plans, health maintenance organizations ("HMOs") and third party administrators.
In addition, the Company seeks to deliver systems solutions to physician and
hospital groups for both claims processing and total business office
outsourcing.
Paperless Adjudication, Ltd., in which the Company and Mr. Jensen each own
approximately a one-third interest, has developed a system that provides
"on-line, real time" medical claim submission, eligibility determination,
benefit calculation and electronic funds transfer to participating physicians.
Claims are submitted directly from the physician's office and payment is made
via electronic funds transfer. The system eliminates the majority of the
paperwork typically inherent in such a transaction, as well as a significant
portion of the associated costs of claims processing for both physicians and
insurers. The system is designed to work with most health care payor systems and
is currently operational in two markets processing medical and dental claims.
Insurdata Incorporated ("Insurdata"), in which the Company owns a 51%
interest, is a health care payor systems development company providing
technological solutions for health claims processing and claims data management.
The system is used by Blue Cross health plan administrators, insurers and third
party administrators. Insurdata integrates a variety of technologies to
eliminate paper and human intervention in claims processing.
IPN Network, LLC ("IPN"), in which the Company owns a 75% interest,
provides comprehensive outsourcing services for hospital business office
management and health claims clearinghouse functions. IPN provides business
office management services for approximately 25 hospitals, primarily in the
southeastern United States, and health claim clearinghouse functions for over
100 hospitals.
Insurnational Insurance Administrators, Incorporated ("Insurnational"), in
which the Company owns an 80% interest, is a full service third party
administrator employing advanced "paperless" technology, serving employers who
elect to self-fund their medical, dental or other employee benefit plans under
ERISA and for insurers who wish to outsource their claims processing and payment
functions.
Underwriting and Risk Management
The Company believes that physicians and hospitals will increasingly assume
greater financial risk, either on a stand-alone basis or in partnership with
insurance companies, large self-funded customers or HMOs. With its knowledge of
insurance, underwriting and risk management, the Company has the capability to
partner with physician and hospital groups to share this risk. In addition, the
Company manages underwriting
9
<PAGE> 10
facilities for physician and hospital excess loss insurance, HMO reinsurance and
stop loss insurance for large employers with self-funded health plans.
Health Care Delivery Services
The Company believes that as the health care market changes, managed care
organizations will focus on their strengths and look to outsource certain
functions. For example, many HMOs outsource their dental programs. The Company
offers a discounted fee for service dental plan to over 100,000 members
nationwide and owns a dental HMO servicing approximately 230,000 members in
Florida. The Company currently has plans to expand its dental HMO operations to
other states.
WinterBrook HealthCare Management ("WinterBrook"), which is 72% owned by
the Company, provides managed care network management services to employers,
insurers, managed care organizations and provider groups. WinterBrook also
manages PPO networks for insurers and large employers.
CREDIT SERVICES
The Credit Services Division, started in 1992, offers assistance to persons
with no, or troubled, credit experience in obtaining a nationally recognized
credit card by providing financial support for the card. Applicants must meet
certain requirements in order to become members of the American Fair Credit
Association ("AFCA"), an independent membership association which provides
credit education programs and other benefits. Individuals must be enrolled as
members in AFCA, and pay initiation and monthly membership fees, in order to
obtain a credit card.
The credit program is administered by United Membership Marketing Group,
LLC ("UMMG"), an 85%-owned subsidiary of the Company, which markets through a
sales force of independent contractors located in 39 states. At December 31,
1995, there were approximately 950 representatives. UMMG and its sales
representatives receive commissions from AFCA for enrolling members in the
association.
The credit card has an annual fee which is collected before the card is
issued. The interest rate for outstanding balances on the card is comparable to
rates charged by many other card issuers and commensurate with the greater risks
associated with this group of cardholders. The credit limit on each card issued,
initially set at $300 may be increased up to $1,000 over a two-year period if
the cardholder meets certain requirements which are indicative of the proper use
of credit. The credit card is not secured.
The credit card is issued by a bank in South Dakota which receives a
monthly fee for each card issued. The Company assumes the credit risk for the
cards issued and retains the profit, if any, from the credit card business. The
Company also provides cardholder services and performs collection services at
its service center located in South Dakota. The Company has plans to charter its
own credit card bank to issue the credit cards. However, there can be no
assurance of when, if ever, the Company will be successful in obtaining the
charter, which must be approved by the Office of the Comptroller of the
Currency.
The Credit Services Division had revenues of $28.0 million in 1995.
INVESTMENTS
The Company has an Investment Committee which monitors the investment
portfolio of the Company and its subsidiaries. The Investment Committee receives
investment management services from external professionals. The largest part of
the Company's portfolio is managed by an AEGON. At December 31, 1995,
approximately 81% of the Company's investment portfolio of $931.3 million was
invested in bonds and other debt instruments, including collateralized mortgage
obligations, asset backed securities, U.S. Treasury bonds, corporate bonds and
"pass-through" certificates.
See "Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Investments."
10
<PAGE> 11
REINSURANCE
The Company's insurance subsidiaries reinsure portions of the coverages
provided by their insurance products with other insurance companies on both an
excess of loss and coinsurance basis. The maximum retention by the Company on
one individual in the case of life insurance is $100,000. The Company uses
reinsurance for its health insurance business only for limited purposes. It does
not reinsure any health insurance issued or coinsured in the self-employed
market and currently expects that this will continue following the consummation
of the AEGON Transaction. See "-- Recent Developments."
Reinsurance agreements are intended to limit an insurer's maximum loss. The
ceding of reinsurance does not discharge the primary liability of the original
insurer to the insured.
Although the Company, through coinsurance, assumes risks under policies
sold by UGA agents and issued by AEGON, and has occasionally used assumption
reinsurance to acquire blocks of insurance from other insurers, it does not
regularly assume risks of other insurance companies. See "-- Health Insurance --
Coinsurance Arrangements."
COMPETITION
The Company operates in highly competitive industries. The Company's
insurance subsidiaries compete with large national insurers, regional insurers
and specialty insurers, many of which are larger and have substantially greater
financial resources or higher A.M. Best ratings than the Company. In addition to
claims paying ratings, insurers compete on the basis of price, breadth and
flexibility of coverage, ability to attract and retain agents and the quality
and level of agent and policyholder services provided. The Company's other
divisions compete with financial services companies, managed care consultants,
and third party administrators, among others. Many of the competitors may have
greater financial resources, broader product lines or greater experience in
particular lines of business. The HealthCare Solutions Division has only
recently been formed and therefore competes with other companies with
significantly greater experience in highly competitive markets. There can be no
assurance that the HealthCare Solutions Division will be successful competing in
such markets.
REGULATION
The Company's insurance subsidiaries are subject to extensive regulation in
their domiciliary states and the other states in which they do business under
statutes which typically delegate broad regulatory, supervisory and
administrative powers to insurance departments. The method of regulation varies,
but the subject matter of such regulation covers, among other things: the amount
of dividends and other distributions that can be paid by the Company's insurance
subsidiaries without prior approval or notification; the granting and revoking
of licenses to transact business; trade practices, including with respect to the
protection of consumers; minimum loss ratios; premium rate regulation;
underwriting standards; approval of policy forms; claims payment; licensing of
insurance agents and the regulation of their conduct; the amount and type of
investments that the Company's subsidiaries may hold, minimum reserve and
surplus requirements; risk-based capital requirements; and compelled
participation in, and assessments in connection with, risk sharing pools and
guaranty funds. Such regulation is intended to protect policyholders rather than
investors. Federal regulations, including ERISA, also affect the manner in which
the Company's insurance subsidiaries conduct their businesses.
Many states have also enacted insurance holding company laws which require
registration and periodic reporting by insurance companies controlled by other
corporations. Such laws vary from state to state but typically require periodic
disclosure concerning the corporation which controls the controlled insurer and
prior notice to, or approval by, the applicable regulator of intercorporate
transfers of assets and other transactions (including payments of dividends in
excess of specified amounts by the controlled insurer) within the holding
company system. Such laws often also require the prior approval for the
acquisition of a significant ownership interest (e.g., 10% or more) in the
insurance holding company. The Company's insurance subsidiaries are subject to
such laws and the Company believes they are in compliance in all material
respects with all applicable insurance holding company laws and regulations.
11
<PAGE> 12
Under the risk-based capital initiatives adopted in 1992 by the National
Association of Insurance Commissioners ("NAIC"), insurance companies must
calculate and report information under a risk-based capital formula. Risk-based
capital formulas are intended to evaluate risks associated with: asset quality;
adverse insurance experience; loss from asset and liability mismatching; and
general business hazards. This information is intended to permit regulators to
identify and require remedial action for inadequately capitalized insurance
companies but is not designed to rank adequately capitalized companies. Based on
year-end 1995 calculations, the Company's insurance subsidiaries were
significantly above required capital levels.
The states in which the Company is licensed have the authority to change
the minimum mandated statutory loss ratios to which the Company is subject, the
manner in which these ratios are computed and the manner in which compliance
with these ratios is measured and enforced. Loss ratios are commonly defined as
incurred claims divided by earned premiums. Most states in which the Company
writes insurance have adopted the loss ratios recommended by the NAIC but
frequently the loss ratio regulations do not apply to the types of health
insurance issued by the Company. The Company is unable to predict the impact of
(i) any changes in the mandatory statutory loss ratios for individual or group
policies to which the Company may become subject, or (ii) any change in the
manner in which these minimums are computed or enforced in the future. Such
changes could result in a narrowing of profit margins and have a material
adverse effect upon the Company. The Company has not been informed by any state
that it does not meet mandated minimum ratios, and the Company believes that it
is in compliance with all such minimum ratios. In the event the Company is not
in compliance with minimum statutory loss ratios mandated by regulatory
authorities with respect to certain policies, the Company may be required to
reduce or refund premiums, which could have a material adverse effect upon the
Company.
NAIC and state insurance departments are continually re-examining existing
laws and regulations, including those related to reducing the risk of insolvency
and related accreditation standards. To date, the increase in solvency-related
oversight has not had a significant impact on the Company's insurance business.
Certain of the Company's subsidiaries, and the manner in which their
businesses are conducted, are also subject to regulation not directly related to
the business of insurance. The marketing practices of the Credit Services
Division are subject to state credit service organization laws and other
consumer protection statutes. In order to continue to have government guaranteed
student loans made through the Company funded or guaranteed by USAF, the Company
is required to maintain its status as a qualified lender for federal student
loan programs under applicable Department of Education regulation.
Compliance with legal or regulatory restrictions may limit the ability of
the Company's subsidiaries to conduct their operations. A failure to comply may
subject the affected subsidiary to a loss or suspension of a right to engage in
certain businesses or business practices, criminal or civil fines, an obligation
to make restitution or pay refunds or other sanctions, which could adversely
affect the manner in which the Company's subsidiaries conduct their businesses
and the Company's results of operations.
State and federal regulation is continually changing and the Company is
unable to predict whether or when any such changes will be adopted. It is
possible, however, that the adoption of such changes could adversely affect the
manner in which the Company's subsidiaries conduct their business and the
Company's results of operations. See also Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Health Care
Reform."
EMPLOYEES
The Company had approximately 1,350 employees at March 1, 1996. The Company
considers its employee relations to be good. UGA agents and the dedicated agents
of the Company are independent contractors and are not employees of UGA or the
Company.
RECENT DEVELOPMENTS
Since the Company's inception, a substantial portion of the health
insurance policies sold by UGA agents has been issued by AEGON and coinsured by
the Company. Effective April 1, 1996, substantially all new
12
<PAGE> 13
health insurance policies sold by UGA will be directly issued by the Company,
following a transition period, pursuant to agreements between the Company and
AEGON (the "AEGON Transaction"). The Company will retain 100% of the premiums
and pay all of the costs of such new policies. During the transition period, UGA
agents will continue to sell health insurance policies issued by AEGON and
coinsured by the Company in each state where UGA sells insurance until
regulatory approvals for the Company to directly issue its policies in such
state are received. The Company and AEGON will maintain the coinsurance
agreement for policies issued by AEGON prior to April 1, 1996 and during the
transition period. The Company's coinsurance percentage will be 57.5% in 1996
and 60% thereafter until December 31, 2000, at which time the Company will
acquire all remaining policies from AEGON at a formula price described in the
agreement.
The Company does not anticipate that this transaction will have a material
impact on the results of operations for the Company in 1996. However, as new
health insurance policies are issued by the Company (of which the Company will
retain 100%) and as health insurance policies issued by AEGON (of which the
Company will have coinsured a maximum of only 60%) lapse, the Company expects
premiums will increase as its share of premiums on the policies sold by UGA
increases from 55% in 1995 to 100% in 2001. In 1995, health insurance policies
sold by UGA and issued by AEGON produced premiums of $390.2 million of which the
Company's share was 55%, or $214.6 million. There can be no assurance that the
Company's premium revenues from these operations will actually achieve any
specified level. As the premiums for insurance issued directly by the Company
increase, the Company will be required to increase the statutory capital and
surplus in its insurance subsidiaries in order to maintain the ratings it
currently has from A.M. Best and other rating agencies.
As part of the AEGON Transaction, the Company will acquire AEGON's
underwriting, claims management and administrative capabilities related to the
products coinsured by the Company, through the purchase of AEGON's insurance
center for approximately $10 million. The Company will also offer employment to
substantially all of the 700 employees located at the center. The Company
believes that this will ensure a continuation of the quality, cost effective
underwriting, claims processing and customer service expertise that has
contributed to the profitability of the coinsured business.
Under general agency agreements effective April 1, 1996, UGA will sell
insurance directly issued by the Company. The agreements will be terminable by
either party at any time on 15 months' written notice or immediately for cause
(as defined). Commissions will be agreed upon by the parties from time to time
under the agreements. UGA will agree that until such agreements are terminated,
UGA will not market, and will use its reasonable efforts to prevent UGA agents
from marketing, insurance products of other insurance carriers that are
competitive with the Company's insurance products, unless the Company has
declined to market such products.
ITEM 2. PROPERTIES
The Company and its subsidiaries rent office space at various locations. In
connection with the AEGON Transaction, the Company will acquire AEGON's
insurance center located in North Richland Hills, Texas.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various pending legal
proceedings arising in the ordinary course of business, including some asserting
significant damages arising from claims under insurance policies, disputes with
agents and other matters. Based in part upon the opinion of counsel as to the
ultimate disposition of such lawsuits and claims, the Company believes that the
liability, if any, resulting from the disposition of such proceedings will not
be material.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
13
<PAGE> 14
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock is traded on the Nasdaq National Market
("NASDAQ") under the symbol UICI. The table below sets forth on a per share
basis, for the period indicated, the high and low closing sales prices of the
Common Stock on Nasdaq. All stock prices have been restated for periods prior to
the second quarter of 1995 to reflect the four-for-one stock split effective
June 1, 1995.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
FISCAL YEAR ENDING DECEMBER 31, 1994
1st Quarter.............................................................. $ 6 13/16 $ 6 1/4
2nd Quarter.............................................................. 6 13/16 6 7/32
3rd Quarter.............................................................. 7 15/16 6 9/16
4th Quarter.............................................................. 8 1/2 7 5/8
FISCAL YEAR ENDING DECEMBER 31, 1995
1st Quarter.............................................................. $10 3/8 $ 8 9/16
2nd Quarter.............................................................. 15 3/8 10 3/16
3rd Quarter.............................................................. 15 5/8 12 3/8
4th Quarter.............................................................. 19 14
</TABLE>
As of February 28, 1996, there were approximately 6,200 holders of record
of Common Stock.
The Company has not paid cash dividends on its Common Stock to date. The
Company currently intends to retain all future earnings to finance continued
expansion and operation of its business and subsidiaries. Any decision as to the
payment of dividends to the stockholders of the Company will be made by the
Company's Board of Directors and will depend upon the Company's future results
of operations, financial condition, capital requirements and such other factors
as the Board of Directors considers appropriate.
In addition, dividends paid by the domestic insurance subsidiaries of the
Company to the Company out of earned surplus in any year without prior approval
of state regulatory authorities are limited by the laws and regulations of the
state of domicile. Prior approval by state regulatory authorities is required
for the payment of dividends by domestic insurance companies which exceed the
limits set by the laws of the state of domicile. See Note H of the Notes to
Consolidated Financial Statements included in this Report.
14
<PAGE> 15
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data as of and for each of
the five years in the period ended December 31, 1995 have been derived from the
audited Consolidated Financial Statements of the Company. The following data
should be read in conjunction with the Consolidated Financial Statements and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS
AND OPERATING STATISTICS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues
Premiums:
Health...................................................... $ 473,778 $ 415,251 $343,743 $299,955 $267,282
Life........................................................ 38,530 36,987 24,977 11,815 8,625
Net investment income......................................... 65,054 47,956 39,226 36,987 25,220
Fees and other income......................................... 61,549 28,592 35,898 10,032 5,114
Gains (losses) on sale of investments......................... 2,163 (5,840) 7,945 12,555 5,723
---------- ---------- -------- -------- --------
Total revenues.......................................... 641,074 522,946 451,789 371,344 311,964
Benefits and expenses
Benefits, claims, and settlement expenses................... 317,172 273,786 224,360 184,669 157,648
Underwriting, acquisition and insurance expenses............ 233,332 191,232 173,013 136,643 124,940
Interest expense............................................ 3,909 1,913 1,397 1,625 1,935
---------- ---------- -------- -------- --------
Total benefits and expenses............................. 554,413 466,931 398,770 322,937 284,523
Income before federal income taxes and minority interests... 86,661 56,015 53,019 48,407 27,441
Federal income taxes........................................ 29,040 18,399 17,503 16,398 9,340
---------- ---------- -------- -------- --------
Income before minority interests............................ 57,621 37,616 35,516 32,009 18,101
Minority interests.......................................... 4,293 1,438 2,671 4,467 1,193
---------- ---------- -------- -------- --------
Net Income.............................................. $ 53,328 $ 36,178 $ 32,845 $ 27,542 $ 16,908
========= ========= ======== ======== ========
Fully diluted net income per share(1)......................... $1.41 $0.96 $0.88 $0.79 $0.50
========= ========= ======== ======== ========
Operating net income per share(1)(2).......................... $1.37 $1.06 $0.75 $0.60 $0.40
========= ========= ======== ======== ========
Weighted average fully diluted shares outstanding(1)............ 37,940 37,626 37,575 35,844 36,190
OPERATING DATA:
Health Ratios:
Loss ratio(3)................................................. 58% 57% 55% 55% 54%
Expense ratio(4).............................................. 33% 36% 39% 40% 44%
---------- ---------- -------- -------- --------
Combined ratio................................................ 91% 93% 94% 95% 98%
========= ========= ======== ======== ========
Return on average equity(5)..................................... 24.7% 21.2% 25.1% 33.3% 35.1%
BALANCE SHEET DATA:
Total investments and cash...................................... $ 937,185 $ 842,867 $727,248 $506,797 $413,816
Total assets(6)................................................. 1,130,859 1,031,263 814,793 577,726 483,159
Total policy liabilities........................................ 787,905 778,676 616,615 426,193 356,436
Total debt...................................................... 50,381 56,155 19,500 -- 37,350
Stockholders' equity............................................ 248,819 170,923 154,768 110,999 59,173
Stockholders' equity per share(1)(5)............................ $6.33 $5.04 $4.09 $3.13 $2.12
STATUTORY DATA:
Statutory admitted assets....................................... $ 911,219 $ 861,899 $737,519 $625,637 $422,909
Statutory capital and surplus and asset valuation reserve(7).... 168,283 135,115 108,300 93,217 66,413
</TABLE>
- ---------------
(1) Share and per share amounts have been restated to reflect the effect of the
June 1995 four-for-one stock split and the September 1992 two-for-one stock
split.
(2) Operating net income represents net income excluding realized gains or
losses on sale of investments, net of federal income taxes and minority
interests.
(3) The health loss ratio represents benefits, claims and settlement expenses
related to health insurance policies stated as a percentage of health
premiums. Expenses relating to providing administrative services for fees
are not included.
(4) The health expense ratio represents underwriting, acquisition and insurance
expenses related to health insurance policies stated as a percentage of
health premiums.
(5) Excludes the net unrealized investment gains or losses which is reported as
a separate component of stockholders' equity. Return on average equity
represents net income as a percentage of average stockholders' equity during
the year.
(6) Total assets and total policy liabilities prior to 1993 have been restated
to reflect the adoption of Financial Accounting Standard (FAS) 113
"Accounting and Reporting for Reinsurance of Short-Duration and
Long-Duration Contracts."
(7) Includes the Asset Valuation Reserve at December 31, 1995, 1994, 1993, and
1992 and the Mandatory Securities Valuation Reserve at December 31, 1991.
15
<PAGE> 16
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion of the Company's historical results of operations
and of its liquidity and capital resources should be read in conjunction with
the Selected Financial Data and the Consolidated Financial Statements of the
Company and related notes thereto included herein.
The Company's business segments are: (i) Health Insurance, which includes
the businesses of the Self-Employed Health Insurance Division and the Student
Health Insurance Division; (ii) Life Insurance and Annuity; and (iii) Corporate
and Other, which includes the businesses of the HealthCare Solutions Division
and the Credit Services Division, invested income not allocated to the other
segments, expenses relating to corporate operations, goodwill amortization,
interest expense and realized gains or losses on sale of investments. Net
investment income is allocated to the Health Insurance segment and the Life
Insurance and Annuity segment based on policyholder liabilities. The interest
rate for the allocation is based on a high credit quality investment portfolio
with a duration consistent with the targeted duration of the segment's policy
liabilities.
The following table sets forth income statement data as a percentage of
revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1995 1994 1993
----- ----- -----
<S> <C> <C> <C>
Revenues............................................................. 100.0% 100.0% 100.0%
Benefits, claims, and settlement expenses............................ 49.5 52.3 49.7
Underwriting, acquisition and insurance expenses..................... 36.4 36.6 38.3
Interest expense..................................................... 0.6 0.4 0.3
----- ----- -----
86.5 89.3 88.3
Income before federal income taxes and minority interests............ 13.5 10.7 11.7
Federal income taxes................................................. 4.5 3.5 3.8
----- ----- -----
Income before minority interests..................................... 9.0 7.2 7.9
Minority interests................................................... 0.7 0.3 0.6
----- ----- -----
Net income................................................. 8.3% 6.9% 7.3%
===== ===== =====
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS FOR 1995 COMPARED TO 1994
Revenues. Revenues increased to $641.1 million in 1995 from $522.9 million
in 1994, an increase of $118.2 million, or 23%. The increase was a result of
increases in premiums, net investment income, fees and other income and gains on
sales of investments.
Health premiums. Health premiums increased to $473.8 million in 1995 from
$415.3 million in 1994, an increase of $58.5 million, or 14%. The increase was
primarily due to the growth in sales of new health insurance policies and
increased premiums from coinsured policies sold by UGA and issued by AEGON. In
1995, the coinsurance percentage on both in force and new health insurance
policies issued by AEGON increased to 55% from 52.5% in 1994. During 1995, the
Company also acquired a block of health insurance policies that contributed to
the increase in health premiums.
Life premiums. Life premiums increased to $38.5 million in 1995 from $37.0
million in 1994, an increase of $1.5 million, or 4%. The increase was a result
of the sale of new life policies.
Net investment income. Net investment income increased to $65.1 million in
1995 from $48.0 million in 1994, an increase of $17.1 million, or 36%. The
increase was due to both an increase in invested assets and an increase in the
yield on invested assets. Investments increased to $931.3 million at December
31, 1995 from $835.2 million at December 31, 1994. During 1995, the Company
extended the asset portfolio duration to
16
<PAGE> 17
more closely match the Company's target duration for its policy liabilities,
which contributed to a higher yield on invested assets. Market yields on short
term investments were also higher in 1995 than in 1994.
Fees and other income. Fees and other income increased to $61.5 million in
1995 from $28.6 million in 1994, an increase of $32.9 million, or 115%. The
increase related primarily to the increase in Credit Services Division revenue
and revenue from the companies acquired by the HealthCare Solutions Division in
1995.
Gains (losses) on sale of investments. The Company recognized gains on
sales of investments of $2.2 million in 1995 compared to losses of $5.8 million
in 1994. The amount of realized gains or losses on the sale of investments is a
function of interest rates, market trends and the timing of sales. Gains are
more likely during periods of decreasing long term interest rates, as occurred
in 1995. Losses are more likely during periods of increasing long term interest
rates, as occurred in 1994. In addition, due to decreasing long term interest
rates in 1995, the net unrealized investment gains on securities classified as
"available for sale," reported as a separate component of stockholders' equity
and net of applicable income taxes and minority interests, was $6.8 million at
December 31, 1995 compared to net unrealized investment losses of $18.1 million
at December 31, 1994.
Benefits, claims, and settlement expenses. Benefits, claims, and
settlement expenses increased to $317.2 million in 1995 from $273.8 million in
1994, an increase of $43.4 million, or 16%. The increase was primarily due to
the growth in premium volume. As a percentage of revenues, these expenses
decreased to 49.5% in 1995 from 52.3% in 1994, as a result of the increased
revenues from the Credit Services Division and HealthCare Solutions Division,
whose expenses are primarily classified as underwriting, acquisition, and
insurance expenses.
Underwriting, acquisition and insurance expenses. Underwriting,
acquisition and insurance expenses increased to $233.3 million in 1995 from
$191.2 million in 1994, an increase of $42.1 million, or 22%. The increase was
primarily due to the growth in premium volume and costs associated with the
expanded operations of the Credit Services Division and the operations of
businesses acquired by the HealthCare Solutions Division in 1995. As a
percentage of revenues, these expenses remained relatively constant at 36.4% in
1995 compared to 36.6% in 1994, as the increased costs associated with Credit
Services and HealthCare Solutions divisions were offset by the decrease in the
health expense ratio to 33% in 1995 from 36% in 1994.
Interest expense. Interest expense increased to $3.9 million in 1995 from
$1.9 million in 1994, an increase of $2.0 million. The increase was due to the
8.75% Senior Notes issued June 22, 1994 and additional debt incurred in the
financing of the credit card loans.
Income before federal income taxes and minority interests ("operating
income"). Operating income increased to $86.7 million in 1995 from $56.0
million in 1994, an increase of $30.7 million, or 55%. Operating income for each
of the Company's segments and divisions was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1995 1994
------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Health Insurance:
Self-Employed Health Insurance Division...................... $53,008 $41,272
Student Health Insurance Division............................ 11,448 10,663
------- -------
Total Health Insurance............................... 64,456 51,935
Life Insurance and Annuity..................................... 11,569 10,627
Corporate and Other:
HealthCare Solutions Division................................ (4,162) (2,206)
Credit Services Division..................................... 1,424 (1,154)
Other........................................................ 13,374 (3,187)
------- -------
Total Corporate and Other............................ 10,636 (6,547)
------- -------
$86,661 $56,015
======= =======
</TABLE>
17
<PAGE> 18
Health Insurance. Operating income for the Health Insurance segment
increased to $64.5 million in 1995 from $51.9 million in 1994, an increase of
$12.6 million, or 24%. This increase was due primarily to a 14% increase in
health premiums and a decrease in the combined health ratio to 91% in 1995 from
93% in 1994. Operating income increased $11.8 million for the Self-Employed
Health Insurance Division and $0.8 million for the Student Health Insurance
Division.
Life Insurance and Annuity. Operating income for the Life Insurance and
Annuity segment increased to $11.6 million in 1995 from $10.6 million in 1994,
an increase of $1.0 million, or 9%. The increase was due to an increase in
premiums, an increase in net investment income allocated to life insurance and
annuity products, and a decrease in administrative expenses.
Corporate and Other. Operating income for Corporate and Other was $10.6
million in 1995 compared to a loss of $6.5 million in 1994. The HealthCare
Solutions Division incurred an operating loss of $4.2 million in 1995. The loss
primarily resulted from the losses of certain companies in the development stage
which was partially offset by operating income of other businesses. Operating
income for the Credit Services Division was $1.4 million in 1995 compared to a
loss of $1.2 million in 1994. The change of $2.6 million was due to the growth
in new sales of the credit card program and a decrease in expenses, as a
percentage of revenues. Operating income from other corporate activities was
$13.4 million in 1995 compared to a loss of $3.2 million in 1994. The increase
was primarily due to the increase in invested income not allocated to the other
segments and gains on sale of investments. The increase was partially offset by
an increase in interest expense.
CONSOLIDATED RESULTS OF OPERATIONS FOR 1994 COMPARED TO 1993
Revenues. Revenues increased to $522.9 million in 1994 from $451.8 million
in 1993, an increase of $71.1 million or 16%. The increase was a result of
increases in premiums and net investment income which was partially offset by a
decrease in fees and other income and losses on sales of investments in 1994
compared to gains in 1993.
Health premiums. Health premiums increased to $415.3 million in 1994 from
$343.7 million in 1993, an increase of $71.6 million, or 21%. The increase was
primarily due to the growth in sales of new health insurance policies, rate
increases and increased premiums from coinsured policies sold by UGA and issued
by AEGON. In 1994, the coinsurance percentage on both in force and new health
policies issued by AEGON increased to 52.5% from 50% in 1993.
Life premiums. Life premiums increased to $37.0 million in 1994 from $25.0
million in 1993, an increase of $12.0 million, or 48%. The increase was
primarily a result of an acquisition of a life insurance company in March 1994.
Net investment income. Net investment income increased to $48.0 million in
1994 from $39.2 million in 1993, an increase of $8.8 million, or 22%. The
increase was due to both an increase in invested assets and an increase in the
yield on invested assets. Investments increased to $835.2 million at December
31, 1994 from $723.2 million at December 31, 1993, an increase of $112.0
million, or 15%.
Fees and other income. Fees and other income decreased to $28.6 million in
1994 from $35.9 million in 1993, a decrease of $7.3 million, or 20%. The
decrease was primarily a result of reduced fees for servicing a block of health
insurance policies for an unrelated company.
Gains (losses) on sale of investments. The Company recognized losses on
sales of investments of $5.8 million in 1994 compared to gains of $7.9 million
in 1993. The amount of realized gains or losses on the sale of investments is a
function of interest rates, market trends and the timing of sales. Losses are
more likely during periods of increasing long term interest rates, as occurred
in 1994. Gains are more likely during periods of decreasing long term interest
rates, as occurred in 1993.
Benefits, claims, and settlement expenses. Benefits, claims, and
settlement expenses increased to $273.8 million in 1994 from $224.4 million in
1993, an increase of $49.4 million, or 22%. The increase was primarily due to
the growth in premium volume. As a percentage of revenues, these expenses
increased to
18
<PAGE> 19
52.3% in 1994 from 49.7% in 1993, primarily as a result of the increased health
loss ratio which increased to 57% in 1994 from 55% in 1993.
Underwriting, acquisition and insurance expenses. Underwriting,
acquisition and insurance expenses increased to $191.2 million in 1994 from
$173.0 million in 1993, an increase of $18.2 million, or 11%. The increase was
primarily due to the growth in premium volume. As a percentage of revenues,
these expenses decreased to 36.6% in 1994 from 38.3% in 1993 primarily due to a
decrease in the health expense ratio to 36% in 1994 from 39% in 1993.
Interest expense. Interest expense increased to $1.9 million in 1994 from
$1.4 million in 1993, an increase of $0.5 million. The increase was due to the
8.75% Senior Notes issued June 22, 1994.
Income before federal income taxes and minority interests ("operating
income"). Operating income increased to $56.0 million in 1994 from $53.0
million in 1993, an increase of $3.0 million, or 6%. Operating income for each
of the Company's segments and divisions was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1994 1993
------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Health Insurance:
Self-Employed Health Insurance Division.................. $41,272 $35,878
Student Health Insurance Division........................ 10,663 5,426
------- -------
Total Health Insurance........................... 51,935 41,304
Life Insurance and Annuity................................. 10,627 7,733
Corporate and Other:
HealthCare Solutions Division............................ (2,206) --
Credit Services Division................................. (1,154) 600
Other.................................................... (3,187) 3,382
------- -------
Total Corporate and Other........................ (6,547) 3,982
------- -------
$56,015 $53,019
======= =======
</TABLE>
Health Insurance. Operating income for the Health Insurance segment
increased to $51.9 million in 1994 from $41.3 million in 1993, an increase of
$10.6 million, or 26%. This increase was due to a 21% increase in health
premiums and a decrease in the combined health ratio to 93% in 1994 from 94% in
1993. Operating income increased $5.4 million for the Self-Employed Health
Insurance Division and $5.2 million for the Student Health Insurance Division.
The increase in operating income for the Student Health Insurance Division in
1994 was primarily due to the fact that 1993 was the last year that the Company
paid a commission that was based on a percentage of the profits of the Student
Health Insurance Division.
Life Insurance and Annuity. Operating income for the Life Insurance and
Annuity segment increased to $10.6 million in 1994 from $7.7 million in 1993, an
increase of $2.9 million, or 37%. The increase was primarily due to an increase
in premiums resulting from an acquisition of a life insurance company in March
1994.
Corporate and Other. The operating loss for Corporate and Other was $6.5
million in 1994 compared to operating income of $4.0 million in 1993. The
HealthCare Solutions and Credit Services Divisions did not have significant
operations in 1993. The decrease was primarily due to losses on the sale of
investments and partially offset by the increase in invested income not
allocated to the other segments.
19
<PAGE> 20
QUARTERLY RESULTS
The following table sets forth consolidated results of operations for each
of the Company's eight fiscal quarters in 1995 and 1994. This information is
unaudited and has been prepared on the same basis as the audited Consolidated
Financial Statements of the Company included herein and, in management's
opinion, reflects all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the information for the
periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
QUARTER ENDED
-----------------------------------------------------------------------------------------
DEC. 31, SEPT. 30, JUNE 30, MARCH 31, DEC. 31, SEPT. 30, JUNE 30, MARCH 31,
1995 1995 1995 1995 1994 1994 1994 1994
-------- --------- -------- --------- -------- --------- -------- ---------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues................. $177,511 $ 158,431 $154,293 $150,839 $142,364 $ 133,478 $130,093 $117,011
Benefits, claims and
settlement expenses.... 84,592 73,067 79,083 80,430 73,171 67,828 68,955 63,832
Underwriting, acquisition
and insurance
expenses............... 66,179 63,478 52,759 50,916 52,546 49,420 46,230 43,036
Interest expense......... 1,135 820 844 1,110 628 621 353 311
-------- --------- -------- --------- -------- --------- -------- ---------
Income before federal
income taxes and
minority interests..... 25,605 21,066 21,607 18,383 16,019 15,609 14,555 9,832
Federal income taxes..... 9,192 7,197 6,764 5,887 5,437 5,157 4,655 3,150
-------- --------- -------- --------- -------- --------- -------- ---------
Income before minority
interests.............. 16,413 13,869 14,843 12,496 10,582 10,452 9,900 6,682
Minority interests....... 1,565 1,326 1,049 353 404 334 631 69
-------- --------- -------- --------- -------- --------- -------- ---------
Net income...... $ 14,848 $ 12,543 $ 13,794 $ 12,143 $ 10,178 $ 10,118 $ 9,269 $ 6,613
========= ========= ========= ========= ========= ========= ========= =========
Fully diluted net income
per share.............. $ 0.39 $ 0.33 $ 0.37 $ 0.32 $ 0.27 $ 0.27 $ 0.25 $ 0.17
========= ========= ========= ========= ========= ========= ========= =========
Fully diluted operating
net income per share... $ 0.37 $ 0.35 $ 0.34 $ 0.31 $ 0.28 $ 0.27 $ 0.27 $ 0.24
========= ========= ========= ========= ========= ========= ========= =========
</TABLE>
HEALTH CARE REFORM
Many proposals have been introduced in Congress and various state
legislatures to reform the present health care system. Some of these proposals
are specifically directed at the small group health care market, which could
affect the Company's principal business. At the state level, a number of states
have passed or are considering legislation that would limit the differentials in
rates that carriers could charge between new business and renewal business and
with respect to similar demographic groups. Legislation also has been adopted or
is being considered that would make health insurance available to all small
groups by requiring coverage of all employees and their dependents, by limiting
the applicability of pre-existing conditions exclusions, by requiring carriers
to offer a basic plan exempt from certain mandated benefits as well as a
standard plan and by establishing a mechanism to spread the risk of high risk
employees to all small group carriers.
At the federal level, several competing proposals have been introduced in
Congress. One bill receiving serious current consideration is the Health
Insurance Reform Act of 1995 (S. 1028), which was introduced by Senators Nancy
Kassebaum and Edward Kennedy (the "Kassebaum-Kennedy bill"). The bill is
scheduled to be debated in the Senate in mid-April. Among other provisions, the
Kassebaum-Kennedy bill, if enacted, would build upon state initiatives by
guaranteeing "group-to-individual" portability. Under the bill, any person
governed by a group insurance plan for at least eighteen months would, on
leaving the group plan, have the right to buy an individual policy from any
insurance company selling individual health insurance policies in that person's
state regardless of whether that person has a pre-existing condition. This
provision, if enacted, could result in the Company insuring individuals who
under the Company's current underwriting standards would not be insured by the
Company, which could have a material adverse effect on the Company.
20
<PAGE> 21
The Company is unable to predict when or whether any federal or state
proposals, or some combination thereof, will be enacted or, if enacted, the
likely impact on the Company. It is possible, however, that the enactment of
such health care reform legislation could materially adversely affect the
Company's results of operations. The Company has ceased issuing or coinsuring
insurance in the self-employed market in two states as a result of legislative
developments.
ACCOUNTING
Deferred acquisition costs. Under generally accepted accounting
principles, certain policy acquisition costs may be deferred and amortized over
the expected life of the policy. For all of the business in the Health Insurance
segment, only the commissions and premium taxes related to the unearned premiums
are deferred. This amount increased to $16.1 million at December 31, 1995 from
$14.1 million at December 31, 1994, due to an increase in health insurance
policies issued or coinsured. As a result of an increase in life insurance and
annuity policies issued in the Life Insurance and Annuity segment, deferred
acquisition costs increased to $19.6 million at December 31, 1995 from $12.6
million at December 31, 1994. The remaining deferred acquisition costs of $20.4
million at December 31, 1995 and $30.1 million at December 31, 1994 relates
primarily to the cost of various blocks of insurance acquired. Amortization of
the cost of insurance acquired accounts for the decrease on this portion.
Deferred acquisition costs are reviewed periodically to determine that the
unamortized portion does not exceed expected recoverable amounts.
Claims liabilities. The Company records a claims liability for its
estimate of the ultimate cost of all reported and unreported claims which are
unpaid as of the end of the applicable financial reporting period. Liabilities
for medical claims represent the significant majority of claims liability. The
Company uses the "incurred date" method to estimate its liability rather than
the "service date" method. The "service date" method estimates the liability for
all medical services received by the insured prior to the end of the applicable
financial reporting period. The "incurred date" method estimates the liability
for all medical services related to an accident or illness incurred prior to the
end of the period, even though the medical services may not be received by the
insured until a later financial reporting period. The "incurred date" method is
a more conservative method.
The Company's claims liabilities are computed using the Company's own
experience to estimate outstanding claims. The Company periodically tests its
estimation process to monitor the degree to which the Company's method continues
to properly estimate future obligations.
INCOME TAXES
The Company's effective tax rate was 33.5% for 1995 compared to 32.9% for
1994 and 33.0% in 1993 which varied from the federal tax rate of 35% primarily
due to the small life insurance company deduction allowed for certain insurance
subsidiaries of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of cash for the Company are premium revenues from
policies issued or coinsured, investment income and fees and other income. The
primary uses of cash are payments for benefits, claims and commissions under
those policies and operating expenses. Net cash provided from operations totaled
approximately $84.2 million in 1995, $64.8 million in 1994, and $63.8 million in
1993. The Company's insurance subsidiaries invest a substantial portion of these
funds, pending payment of their pro rata share of future benefits and claims.
The Company's invested assets increased to $931.3 million at December 31,
1995 from $835.2 million at December 31, 1994, an increase of $96.1 million. The
primary sources for asset growth were increases in the funds retained for future
payments of health insurance policy liabilities, cash provided by current year
earnings, and the increase in market values of the fixed maturity securities
held as "available for sale." The increase in market values were the direct
result of decreases in long term interest rates. These sources were offset by
withdrawals from investment products (primarily annuities) and the acquisition
of companies relating to the HealthCare Solutions Division in 1995.
21
<PAGE> 22
On June 22, 1994, the Company issued its 8.75% Senior Notes Payable due
June 2004 ("8.75% Senior Notes") in the aggregate amount of $27.7 million. The
proceeds from the sale of the 8.75% Senior Notes were used to repay $9.0 million
of bank debt and to repay the then $10.0 million of existing debt on a revolving
credit note with AEGON. The balance of the proceeds were used for other general
corporate purposes. Interest on the 8.75% Senior Notes is paid semi-annually.
The notes do not require principal repayments until June 1, 1998 and on each
June 1 thereafter in the amount of $4.0 million each until repaid.
The Company had no outstanding balance on its revolving credit note with
AEGON at December 31, 1995. The note bears interest at prime plus 0.875%.
Subsequent to year end, the Company amended the note to increase the amount
available on the revolving credit note to $12.0 million. Any amount outstanding
will be due August 1, 2002.
During October 1995, the Company acquired two companies related to the
HealthCare Solutions Division. The acquisitions were funded with cash and the
issuance of promissory notes to the former stockholders in the amount of $12.0
million due in January 1996. The promissory notes were non-interest bearing
loans and were repaid in January 1996.
During 1995, the Company borrowed $10.7 million from Mr. Jensen which was
principally used to pay off the then existing indebtedness on the AEGON
revolving credit note. The note is due on demand and bears interest at the prime
rate. At March 21, 1996, the outstanding principal amount of the note was $2.4
million.
During December 1995, the Company sold $51.6 million of credit card loans
in two separate transactions. The sales involved an asset backed securitization
in which the Company purchased participating interests totaling $16.0 million. A
portion of the proceeds received by the Company was used to repay $12.0 million
of promissory notes due January 1996 and for general corporate purposes
including the purchase of investments. There was no gain or loss recorded as a
result of these transactions.
At December 31, 1995, the Company had approximately $546.1 million in
student loan commitments outstanding of which the Company expects to fund
approximately $74.0 million. These commitments will continue to come due in
years 1996 through 2017. The Company estimates that approximately $6.0 million
in student loans will be funded in 1996.
The Company has commitments to fund the unused line of credit on certain
credit cards and to purchase the credit card receivables related to the credit
cards issued by the Credit Services Division. At December 31, 1995, the
outstanding commitment for the unused line of credit was $14.5 million.
The Company has the right and may be required by the minority stockholders
to purchase certain of the shares of the minority stockholders of the insurance
subsidiaries of the Company at a predetermined formula price. The formula price
based on information available at December 31, 1995 was $12.5 million. Beginning
in December 1996, and in December of each year thereafter, the Company may be
required by the minority stockholders to purchase the remaining shares of the
minority stockholders of one of the companies acquired by the Company in 1995,
for the HealthCare Solutions Division, at a predetermined formula price. The
formula price based on information available at December 31, 1995 was $14.5
million.
The AEGON Transaction is to be effective April 1, 1996. There is no cost to
the Company other than the purchase of the building and equipment. The purchase
price is estimated to be approximately $10.0 million which will be funded by one
of the insurance subsidiaries of the Company from existing funds. The increase
in premiums resulting from the AEGON Transaction will require additional capital
in the insurance subsidiaries to maintain the ratings of the Company's insurance
subsidiaries. See "Item 1. Business -- Recent Developments."
Reinsurance receivables decreased to $65.3 million at December 31, 1995
from $83.7 million at December 31, 1994. In 1994, the Company assumed a block of
life and annuity policies which were ceded to an unrelated reinsurer. These
policies were subject to a moratorium on withdrawals and surrenders at the time
of purchase. A significant portion of the decrease in the reinsurance
receivables relates to the surrenders and withdrawals on these policies, which
were made in 1995 after the expiration of the moratorium period. There was a
corresponding decrease in future policy and contract benefits.
22
<PAGE> 23
Goodwill increased to $15.6 million at December 31, 1995 from $3.3 million
at December 31, 1994. The increase was the result of two companies acquired in
October 1995 related to the HealthCare Solutions Division. The goodwill
associated with these acquisitions is being amortized straight-line over 15
years.
The state of domicile of each of the Company's domestic insurance
subsidiaries imposes minimum risk-based capital requirements which were
developed by the National Association of Insurance Commissioners. The formulas
for determining the amount of risk-based capital specify various weighting
factors that are applied to financial balances and premium levels based on the
perceived degree of risk. Regulatory compliance is determined by a ratio of a
company's regulatory total adjusted capital, as defined, to its authorized
control level risk-based capital, as defined. Companies' specific trigger points
or ratios are classified within certain levels, each of which requires specified
corrective action. The risk-based capital ratio of each of the Company's
domestic insurance subsidiaries significantly exceeds the ratios in which
regulatory corrective action would be required.
Dividends paid by domestic insurance companies out of earned surplus in any
year are limited by the law of the state of domicile. See "Item 5. Market for
Registrant's Common Stock and Related Stockholder Matters."
INVESTMENTS
General. The Company has an Investment Committee which monitors the
investment portfolio of the Company and its subsidiaries. The Investment
Committee receives investment management services from external professionals.
The largest portion of the Company's portfolio is managed by AEGON.
Investments are selected based upon the parameters established in the
Company's investment policies. Emphasis is given to the selection of high
quality, liquid securities that provide current investment returns. Maturities
or liquidity characteristics of the securities are managed by continually
structuring the duration of the investment portfolio to be consistent with the
duration of the policy liabilities. Consistent with regulatory requirements and
internal guidelines, the Company invests in a range of assets, but limits its
investments in certain classes of assets, and limits its exposure to certain
industries and to single issuers.
Shown below are the Company's investments by category:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
--------------------- ---------------------
% OF TOTAL % OF TOTAL
CARRYING CARRYING CARRYING CARRYING
AMOUNT VALUE AMOUNT VALUE
-------- ---------- -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Securities available for sale --
Fixed maturities, at fair value
(cost: 1995 -- $743,945; 1994 -- $591,480)....... $754,473 81.0% $562,983 67.4%
Equity securities, at fair value
(cost: 1995 -- $5,114; 1994 -- $4,179)........... 5,288 0.6 4,146 0.5
Guaranteed student loans.............................. 12,159 1.3 20,137 2.4
Mortgage and collateral loans......................... 15,559 1.7 9,152 1.1
Policy loans.......................................... 24,042 2.6 25,021 3.0
Credit card loans..................................... 36,727 3.9 51,770 6.2
Short-term investments................................ 83,024 8.9 161,949 19.4
-------- ---------- -------- ----------
Total investments........................... $931,272 100.0% $835,158 100.0%
======== ======== ======== ========
</TABLE>
Investment accounting policies. The Company has classified its entire
fixed maturity portfolio as "available for sale" which requires the portfolio to
be carried at fair value with the resulting unrealized gains or losses, net of
applicable income taxes and minority interests, reported as a separate component
of stockholders' equity. As a result, fluctuations in interest rates will result
in increases or decreases to the Company's stockholders' equity.
At December 31, 1995, the estimated fair value of the Company's fixed
maturity securities available for sale was $754.5 million or $10.6 million more
than the amortized cost of $743.9 million. The ending balance of
23
<PAGE> 24
stockholders' equity at December 31, 1995 was increased by $6.8 million (net of
applicable deferred income taxes and minority interests) to reflect the net
unrealized gain on fixed maturity securities.
Fixed maturity securities. Fixed maturity securities accounted for 81.0%
of the Company's total investments at December 31, 1995. Fixed maturity
securities consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
% OF TOTAL
CARRYING CARRYING
VALUE VALUE
-------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Treasury and U.S. Government agency obligations......... $130,837 17.3%
Corporate bonds.............................................. 307,342 40.8
Mortgage-backed securities issued by U.S. Government agencies
and authorities............................................ 131,874 17.5
Other mortgage and asset backed securities................... 184,420 24.4
-------- ----------
$754,473 100.0%
======== ========
</TABLE>
Included in the fixed maturity portfolio is a concentration of
mortgage-backed securities such as collateralized mortgage obligations and
mortgage-backed pass-throughs. To limit its credit risk, the Company invests in
mortgage-backed securities which are rated investment grade by the public rating
agencies. Also, 42% of the mortgage-backed securities are backed by U.S.
Government agencies. The Company's mortgage-backed securities portfolio is a
conservatively structured portfolio that is concentrated in the less volatile
tranches, in the form of planned amortization classes, sequential payment and
commercial mortgage-backed securities. The objectives are to minimize prepayment
risk during periods of declining interest rates and minimize duration extension
risk during periods of rising interest rates. The Company has less than 1%
invested in the more volatile tranches, such as inverse floaters, interest only
and principal only type mortgage-backed securities.
As of December 31, 1995, $722.5 million or 95.8% of the fixed maturity
securities portfolio was rated BBB or better (investment grade) and only $32.0
million or 4.2% of the fixed maturity securities portfolio were invested in
below investment grade securities (less than BBB). A quality distribution for
fixed maturity securities is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------
% OF TOTAL
CARRYING CARRYING
RATING VALUE VALUE
------ -------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
U.S. Governments and AAA..................................... $420,841 55.8%
AA........................................................... 50,585 6.7
A............................................................ 90,478 12.0
BBB.......................................................... 160,573 21.3
Less than BBB................................................ 31,996 4.2
-------- ----------
$754,473 100.0%
======== ========
</TABLE>
INFLATION
Inflation historically has had a significant impact on the health insurance
business. In recent years, inflation in the costs of medical care covered by
such insurance has exceeded the general rate of inflation. Under the major
hospital insurance coverage, established ceilings for covered expenses limit the
impact of inflation on the amount of claims paid. Under the catastrophic
hospital expense plans, covered expenses are generally limited only by a maximum
lifetime benefit and a maximum lifetime benefit per accident or sickness. Thus,
inflation may have a significantly greater impact on the amount of claims paid
under catastrophic hospital expense plans as compared to claims under major
hospital coverage. As a result, trends in health care costs must be monitored
and rates adjusted accordingly. Under the health insurance policies issued
24
<PAGE> 25
in the self-employed market, the primary insurer generally has the right to
increase rates upon 30-60 days written notice.
The annuity and universal life-type policies issued directly and assumed by
the Company are significantly impacted by inflation. Interest rates affect the
amount of interest that existing policyholders expect to have credited to their
policies. However, the Company believes that the annuity and universal life-type
policies are generally competitive with those offered by other insurance
companies of similar size, and the investment portfolio is managed to minimize
the effects of inflation.
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 1995, the FASB issued Statement No. 121, "Accounting For The
Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of".
Since goodwill and fixed assets represent less than 2.5% of total assets, this
new standard will not have a material effect on the Company. In October 1995,
the FASB, issued Statement No. 123, "Accounting For Stock-Based Compensation".
The Company accounts for its stock compensation arrangements under the provision
of APB 25, "Accounting For Stock Issued To Employees" and intends to continue
doing so, therefore this new standard will not have a material impact on the
Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The audited consolidated financial statements of the Company and other
information required by this Item 8 are included in this Form 10-K beginning on
page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS AND ACCOUNTING AND
FINANCIAL DISCLOSURE
Incorporated by reference to the current report on Form 8-K filed with the
Securities and Exchange Commission on November 18, 1994, as amended by Form 8-KA
filed with the Securities and Exchange Commission on December 19, 1994.
25
<PAGE> 26
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Set forth below are the names, ages, positions and certain other
information concerning the current directors and executive officers of the
Company as of March 28, 1996.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------------------------------------------
<S> <C> <C>
Ronald L. Jensen............. 65 Chairman of the Board of Directors
W. Brian Harrigan............ 41 President, Chief Executive Officer and Director
Richard J. Estell............ 50 Executive Vice President and Director
Charles T. Prater............ 44 Vice President and Director
Vernon R. Woelke............. 47 Vice President, Treasurer and Director
Robert B. Vlach.............. 55 Vice President, Secretary and General Counsel
Ernest S. Auerbach........... 59 Senior Vice President
Gary L. Friedman............. 41 Director
J. Michael Jaynes............ 48 Director
Richard T. Mockler........... 58 Director
</TABLE>
Mr. Jensen has served as Chairman of the Board of Directors of the Company
and its predecessor Company since December 1983. Mr. Jensen served as President
of the Company until January 1995 and for the preceding five years except for a
three-month period in 1992. Mr. Jensen is a member of the Executive and Stock
Option Committees of the Board of Directors. Mr. Jensen is the sole owner of
UGA.
Mr. Harrigan has served as President and Chief Executive Officer of the
Company since January 1995 and as a Director since February 1995. He is a member
of the Executive Committee of the Board of Directors. Mr. Harrigan has served as
Chief Executive Officer of the HealthCare Solutions Division since June 1995.
Mr. Harrigan has served as President of WinterBrook Holdings, Inc. since October
1993. From July 1987 until October 1993, Mr. Harrigan served as Executive Vice
President of Westport Management Services, Inc. in which Mr. Jensen had an
ownership interest. Mr. Harrigan has also performed services for UGA.
Mr. Estell has served as Executive Vice President and Director of the
Company since January 1989. He is a member of the Executive, Investment and
Audit Committees of the Board of Directors. Mr. Estell has served as Chief
Executive Officer of the Self-Employed Health Insurance Division since 1989. Mr.
Estell has served as Chairman of the Board for Mid-West and MEGA and as
President of MEGA since January 1989. He has served as Chairman of the Board of
Chesapeake since November 1991. Mr. Estell became a director of UGA in 1996.
Mr. Prater has served as a Vice President of the Company since 1993 and as
a Director since March 1996. Mr. Prater is Chairman of the Investment Committee
of the Board of Directors. Mr. Prater has been Chief Executive Officer of the
Life and Annuity Division since 1988. Mr. Prater has served as Vice President of
Mid-West since March 1987, Vice President of MEGA since April 1991, Director of
MEGA and Mid-West since May 1990 and Vice President and Director of Chesapeake
since November 1991.
Mr. Woelke has served as a Director of the Company since January 1991 and
as Vice President and Treasurer since 1985. Mr. Woelke is a member of the
Executive and Investment Committees of the Board of Directors. He has served as
a Director of MEGA since 1988, Vice President since April 1991 and Treasurer
from April 1988 to April 1991; and as President of Mid-West since 1988 and as a
Director since 1987. He has also served as a Director and Executive Vice
President of Chesapeake since November 1991. Mr. Woelke has also performed
services for other companies in which Mr. Jensen owns an interest.
Mr. Vlach has served as Vice President, Secretary, and General Counsel of
the Company since May 1990. Mr. Vlach has also served as Vice President,
Secretary, General Counsel, and Director for MEGA and Mid-West since May 1990
and for Chesapeake since November 1991.
Mr. Auerbach has served as Senior Vice President of the Company since
September 1995 and as Chief Executive Officer of the Student Health Division
since February 1996. From May 1995 until joining the
26
<PAGE> 27
Company, he was a partner with the law firm of Soules & Wallace. He served as
Senior Consultant and Senior Manager of Andersen Consulting, Mexico City, Mexico
from August 1993 until April 1995. From February 1992 until May 1993, Mr.
Auerbach was Director General of Seguros Azteca, Mexico City, Mexico, and from
May 1991 until January 1992, served as President and Chief Executive Officer of
Paperless Claims, Inc.
Mr. Friedman has served as a Director of the Company since 1984. He is a
member of the Stock Option Committee of the Board of Directors. Mr. Friedman has
served as Director and Treasurer of UGA since August 1985, and as Secretary of
UGA since July 1990. Since 1994, Mr. Friedman has served as a Director and
Secretary of Matrix Telecom, Inc., a company in which Mr. Jensen and his adult
children own a majority interest.
Mr. Jaynes has served as a Director of the Company since January 1989. He
is a member of the Audit and Stock Option Committees of the Board of Directors.
Mr. Jaynes has been a sole practitioner of law in Irving, Texas since 1974.
Mr. Mockler has served as a Director of the Company since January 1991. Mr.
Mockler is a member of the Audit Committee of the Board of Directors. Mr.
Mockler retired as a partner with Ernst & Young in 1989, after 27 years of
service. Mr. Mockler served as a member of the Board of Directors of Georgetown
Railroad Company from 1990 to 1991 and has served as a member of the Board of
Directors of Georgetown Rail Equipment Company since 1994. Mr. Mockler has
served as a Director of Snead Research Labs since 1995.
ITEM 11. EXECUTIVE COMPENSATION
See the Company's Proxy Statement to be filed in connection with the 1996
Annual Meeting of Stockholders, of which the subsection entitled "Executive
Compensation" is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
See the Company's Proxy Statement to be filed in connection with the 1996
Annual Meeting of Stockholders, of which the subsection entitled "Nominees" and
the subsection entitled "Beneficial Ownership of Common Stock" are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Under the Company's by-laws, any contract or other transaction between the
Company and any director (or company in which the director is interested) is
valid for all purposes if authorized by the Board, provided that the interest of
such director is disclosed or known and such authorization is by a majority of
directors, not including the interested director. The Board has further adopted
a resolution requiring that, where Mr. Jensen is the interested director, a
contract or transaction with Mr. Jensen, UGA or other company in which Mr.
Jensen has a substantial ownership interest (i.e., at least 30% of the
outstanding equity of such company) be approved (or retroactively ratified) by a
majority of the independent directors, to the extent independent directors are
then serving on the Board. For the purposes of the foregoing, a director is
deemed "independent" if he or she is not an employee of the Company (or its
subsidiaries) or of Mr. Jensen, UGA or other company in which Mr. Jensen has a
substantial ownership interest, or any person acting, pursuant to written
agreement, as an independent insurance agent or sales representative of the
Company (or its subsidiaries) or any such company. While the Board attempts to
review all significant transactions between Mr. Jensen and the Company, the
formal Board policy on independent director approval does not apply to a
contract or transaction involving payments of less than $500,000 in any twelve
month period and less than $2.5 million over the life of such contract or
transaction. Mr. Jensen has not voted with respect to matters in which his adult
children or Onward and Upward, Inc. have an interest.
The relationships between the Company and UGA and other companies owned by
Mr. Jensen -- which comprise a part of the strategy that the Company be closely
aligned with its sales forces -- were an important consideration at the time the
Company was organized and remain material to the Company and its prospects. The
Company believes that it has benefited from such relationships and expects that
such relationships, in
27
<PAGE> 28
some form, will continue. The Company believes that the terms of the
transactions described below are fair to the Company.
UGA agents sell insurance products issued by AEGON and coinsured by the
Company. Sales of such insurance accounted for 35% of the total revenues of the
Company in 1995. UGA agents sell such insurance pursuant to general agency
agreements between UGA and AEGON. Under an agreement dated July 7, 1985, between
the Company and UGA, UGA agreed that at least 80% of the insurance policies sold
by UGA (determined on the basis of premiums) would be coinsured by the Company.
Historically, substantially all insurance policies sold by UGA were coinsured by
the Company or issued by the Company. In 1995, UGA received $45.5 million in
commissions. In 1995, through the coinsurance agreements with AEGON, the amount
of these commissions received by UGA attributable to the Company was $26.1
million. UGA also markets insurance directly issued by the Company. During 1995,
the Company paid commissions of $1.9 million to UGA relating to such insurance.
In connection with the AEGON Transaction, under agreements effective April 1,
1996, UGA will agree to sell insurance issued directly by the Company. The
agreements will be terminable by either party at any time on 15 months' written
notice or immediately for cause (as defined). See "Item 1. Business -- Recent
Developments."
UGA provides customer leads to its agents, CMA agents and other agent sales
forces organized by the Company. UGA will agree that it will not cease to offer
customer leads to CMA agents without giving at least 180 days' prior notice. If
UGA ceases to provide leads to the Company, the sales efforts of CMA's sales
force could be materially adversely affected. In 1995, the Company paid UGA $4.3
million for leads.
In November 1994, the Company extended a $10 million line of credit to
Excell Agent Services, LLC ("Excell"), in which Mr. Jensen owns a majority
interest. The line of credit bears interest at the rate of prime plus 2% and
matures on December 31, 1997. The line of credit is collateralized by certain of
Excell's tangible assets and is guaranteed by Mr. Jensen. At December 31, 1995,
Excell had drawn the full $10 million on the line of credit. In 1995, the
Company received $483,000 in interest income from Excell.
The Company has an unsecured loan from Mr. Jensen in the amount of $2.4
million as of March 21, 1996 ($10.7 million at December 31, 1995), bearing
interest at the prime rate of a local bank, and is due on demand.
During 1995, the Company and UGA entered into an agreement whereby the
Company receives a 20% interest in the profits or losses relating to certain
lead activities of UGA. During 1995, the Company had losses of $1.6 million
related to these activities. It is expected that these activities will result in
a small gain during the three-year period ending December 31, 1997.
Mr. Jensen and his adult children own a majority interest in Matrix
Telecom, Inc. ("Matrix"), a telephone company. In 1995, the Company paid Matrix
$686,180 for long distance telephone services.
The adult children of Mr. Jensen own a controlling interest in Specialized
Association Services, Inc. ("SAS"). In 1995, the Company paid SAS $301,470 for
marketing, printing and graphic design services.
In 1991, the Company entered into an agreement whereby it retired a portion
of its outstanding convertible subordinated debentures held by Onward and
Upward, Inc. ("Onward and Upward") at par and issued a warrant to purchase
357,600 shares of the Common Stock for $2.50 per share. Onward and Upward is a
corporation owned by the five adult children of Mr. Jensen and is a major
stockholder of the Company. During 1995, 20% of the warrants were exercised and
71,520 shares of common stock were issued for proceeds of $178,800. At December
31, 1995, there were 71,520 warrants outstanding. The remaining warrants expire
on July 1, 1996.
Onward and Upward, and the adult children of Mr. Jensen, own approximately
18.6% of Mid-West and a minority interest in certain other subsidiaries of the
Company. Onward and Upward and the adult children of Mr. Jensen have the right
to cause the Company, and has granted the Company a right, to purchase their
ownership of the subsidiaries' stock at prices based on a predetermined formula
which approximates their acquisition cost plus their pro rata share of
accumulated retained earnings (or losses) from the date of their acquisition.
28
<PAGE> 29
On December 29, 1995, the Company securitized $26.5 million of credit card
loans and Onward and Upward purchased the senior tranche for $15.0 million. This
transaction was accounted for as a sale. The transaction did not result in a
gain or loss for the Company. The Company purchased the remaining interest for
$11.5 million.
During 1995, the Company issued 28,947 shares of Common Stock to one of the
adult children of Mr. Jensen in exchange for 80% of the outstanding common stock
of Association Dental Plan, Inc. The Company also purchased the remaining 20%
from an unrelated individual at the same price per share.
During 1995, the Company issued 427,900 shares of Common Stock to W. Brian
Harrigan, the President, Chief Executive Officer and Director of the Company, in
exchange for 97.25% of the outstanding common stock of WinterBrook Holdings,
Inc. The Company also purchased the remaining 2.75% from an unrelated individual
at the same price per share.
Mr. Harrigan has outstanding debt owed to the Company in the amount of
$74,000 at December 31, 1995, which was also the largest amount of debt owed by
him to the Company during 1995. The debt was incurred in connection with the
purchase of restricted stock of the Company in January 1995. The debt bears
interest at the prime rate of a local bank and interest is due monthly. The
outstanding amount of the debt at March 1, 1996 was $59,200.
Charles T. Prater, Vice President and Director of the Company, has
outstanding debt owed to the Company in the amount of $128,000 at December 31,
1995, which was also the largest amount of debt owed by him to the Company in
1995. The debt was incurred in connection with the purchase of restricted stock
of the Company. The debt bears interest at the prime rate of a local bank and
interest is due monthly. The outstanding amount of the debt owed to the Company
at March 1, 1996 was $58,000.
29
<PAGE> 30
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of United Insurance
Companies, Inc. and subsidiaries are included in Item 8:
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Reports on Financial Statements and Financial Statement
Schedules............................................................................. F-2
Consolidated balance sheets -- December 31, 1995 and 1994............................... F-4
Consolidated statements of income -- Years ended December 31, 1995, 1994, and 1993...... F-5
Consolidated statements of stockholders' equity -- Years ended December 31, 1995,
1994,
and 1993.............................................................................. F-6
Consolidated statements of cash flows -- Years ended December 31, 1995, 1994, and
1993.................................................................................. F-7
Notes to consolidated financial statements.............................................. F-8
</TABLE>
(a) 2. Financial Statement Schedules
<TABLE>
<S> <C> <C>
Schedule I -- Summary of Investments................................................ F-28
Schedule II -- Condensed Financial Information of Registrant December 31, 1995, 1994,
and 1993:
United Insurance Companies, Inc. (Parent Company)..................... F-29
Schedule III -- Supplementary Insurance Information................................... F-32
Schedule IV -- Reinsurance........................................................... F-33
Schedule V -- Valuation and Qualifying Accounts..................................... F-34
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are non-applicable and therefore have
been omitted.
(a) 3. Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report beginning on page 32.
(b) Reports on Form 8-K
None.
30
<PAGE> 31
Pursuant to the requirements of Section 13 or 15(d) 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.
UNITED INSURANCE COMPANIES, INC.
(Registrant)
Date March 29, 1996 By /s/ W. BRIAN HARRIGAN
----------------------------------
W. Brian Harrigan,
President
Pursuant to the requirements of Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
- --------------------------------------------- ---------------------------- -----------------
<C> <S> <C>
/s/ RONALD L. JENSEN Chairman of the Board and March 29, 1996
- --------------------------------------------- Director
Ronald L. Jensen
/s/ W. BRIAN HARRIGAN President (Principal March 29, 1996
- --------------------------------------------- Executive Officer) and
W. Brian Harrigan Director
/s/ RICHARD J. ESTELL Director and Executive Vice March 29, 1996
- --------------------------------------------- President
Richard J. Estell
/s/ J. MICHAEL JAYNES Director March 29, 1996
- ---------------------------------------------
J. Michael Jaynes
/s/ RICHARD T. MOCKLER Director March 29, 1996
- ---------------------------------------------
Richard T. Mockler
/s/ GARY L. FRIEDMAN Director March 29, 1996
- ---------------------------------------------
Gary L. Friedman
/s/ VERNON R. WOELKE Vice President, Treasurer March 29, 1996
- --------------------------------------------- (Principal Financial
Vernon R. Woelke Officer and Principal
Accounting Officer) and
Director
/s/ CHARLES T. PRATER Vice President and Director March 29, 1996
- ---------------------------------------------
Charles T. Prater
</TABLE>
31
<PAGE> 32
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- ---------- ---------------------------------------------------------------------- ----------
<C> <S> <C>
2 -- Plan of Reorganization of United Group Insurance Company, as
subsidiary of United Group Companies, Inc. and Plan and Agreement
of Merger of United Group Companies, Inc. into United Insurance
Companies, Inc., filed as Exhibit 2-1 to the Registration Statement
on Form S-1, File No. 33-2998, filed with the Securities and
Exchange Commission on January 30, 1986 and incorporated by
reference herein.
3.1(A) -- Certificate of Incorporation of United Insurance Companies, Inc.,
as amended, filed as Exhibit 3.5 to the Form 10-Q dated March 31,
1995, filed on May 12, 1995, as amended on March 28, 1996, File No.
0-14320, and incorporated by reference herein.
3.2(A) -- Restated By-Laws of United Insurance Companies, Inc.
10.1(B) -- Reinsurance Agreement between AEGON USA Companies and UICI
Companies effective January 1, 1995, as amended through November
21, 1995.
10.2 -- Agreements Relating to United Group Association Inc., filed as
Exhibit 10-2 to the Registration Statement on Form S-18, File No.
2-99229, filed with the Securities and Exchange Commission on July
26, 1985 and incorporated by reference herein.
10.3 -- Agreement for acquisition of capital stock of Mark Twain Life
Insurance Corporation by Mr. Ronald L. Jensen, filed as Exhibit
10-4 to the Registration Statement on Form S-1, File No. 33-2998,
filed with the Securities and Exchange Commission on January 30,
1986 and incorporated by reference herein.
10.3(A) -- Assignment Agreement among Mr. Ronald L. Jensen, the Company and
Onward and Upward, Inc. dated February 12, 1986 filed as Exhibit
10-4(A) to Amendment No. 1 to Registration Statement on Form S-1,
File No. 33-2998, filed with the Securities and Exchange Commission
on February 13, 1986 and incorporated by reference herein.
10.4 -- Agreement for acquisition of capital stock of Mid-West National
Life Insurance Company of Tennessee by the Company filed as Exhibit
2 to the Report on Form 8-K of the Company, File No. 0-14320, dated
August 15, 1986 and incorporated by reference herein.
10.5(A) -- Stock Purchase Agreement, dated July 1, 1986, among the Company,
Charles E. Stuart and Stuart Holding Company, as amended July 7,
1986, filed as Exhibit 11(c)(1) to Statement on Schedule 14D-1 and
Amendment No. 1 to Schedule 13D, filed with the Securities and
Exchange Commission on July 14, 1986 and incorporated by reference
herein.
10.5(B) -- Acquisition Agreement, dated July 7, 1986 between Associated
Companies, Inc. and the Company, together with exhibits thereto,
filed as Exhibit (c)(2) to Statement on Schedule 14D-1 and
Amendment No. 1 to Schedule 13D, filed with the Securities and
Exchange Commission on July 14, 1986 and incorporated by reference
herein.
10.5(C) -- Offer to Purchase, filed as Exhibit (a)(1) to Statement on Schedule
14D-1 and Amendment No. 1 to Schedule 13D, filed with the
Securities and Exchange Commission on July 14, 1986 and
incorporated by reference herein.
10.6 -- Agreement for acquisition of capital stock of Life Insurance
Company of Kansas, filed as Exhibit 10.6 to the 1986 Annual Report
on Form 10-K, File No. 0-14320, filed with the Securities and
Exchange Commission on March 27, 1987 and incorporated by reference
herein.
</TABLE>
32
<PAGE> 33
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- ---------- ---------------------------------------------------------------------- ----------
<C> <S> <C>
10.7 -- Agreement Among Certain Stockholders of the Company, filed as
Exhibit 10-6 to the Registration Statement on Form S-18, File No.
2-99229, filed with the Securities and Exchange Commission on July
26, 1985 and incorporated by reference herein.
10.8 -- Form of Subscription Agreement for 1985 Offering, filed as Exhibit
10-7 to the Registration Statement on Form S-1, File No. 33-2998,
filed with the Securities and Exchange Commission on January 30,
1986 and incorporated by reference herein.
10.9 -- Repurchase Agreement between Life Investors Inc., UGIC, Ronald
Jensen and Keith Wood dated January 6, 1984, filed as Exhibit 10-8
to Registration Statement on Form S-1, File No. 33-2998, filed with
the Securities and Exchange Commission on January 30, 1986 and
incorporated by reference herein.
10.10 -- Treaty of Assumption and Bulk Reinsurance Agreement for acquisition
of certain assets and liabilities of Keystone Life Insurance
Company, filed as Exhibit 10.10 to the 1987 Annual Report on Form
10-K, File No. 0-14320, filed with the Securities and Exchange
Commission on March 28, 1988 and incorporated by reference herein.
10.11 -- Acquisition and Sale-Purchase Agreements for the acquisition of
Orange State Life and Health Insurance Company and certain other
assets, filed as Exhibit 10.11 to the 1987 Annual Report on Form
10-K, File No. 0-14320, filed with the Securities and Exchange
Commission on March 28, 1988 and incorporated by reference herein.
10.12 -- United Insurance Companies, Inc. 1987 Stock Option Plan, included
with the 1988 Proxy Statement filed with the Securities and
Exchange Commission on April 25, 1988 and incorporated by reference
herein, filed as Exhibit 10.12 to the 1988 Annual Report on Form
10-K, File No. 0-14320, filed with the Securities and Exchange
Commission on March 30, 1989 and incorporated by reference herein.
10.13 -- Amendment to the United Insurance Companies, Inc. 1987 Stock Option
Plan, filed as Exhibit 10.13 to the 1988 Annual Report on Form
10-K, File No. 0-14320, filed with the Securities and Exchange
Commission on March 30, 1989 and incorporated by reference herein.
10.14 -- Stock Purchase Agreement between American Capital Insurance Company
and United Insurance Companies, Inc., filed as Exhibit 10.14 to the
1988 Annual Report on Form 10-K, File No. 0-14320, filed with the
Securities and Exchange Commission on March 30, 1989 and
incorporated by reference herein.
10.15 -- Amendment to Stock Purchase Agreement between American Capital
Insurance Company and United Insurance Companies, Inc., filed as
Exhibit 10.15 to the 1988 Annual Report on Form 10-K, File No.
0-14320, filed with the Securities and Exchange Commission on March
30, 1989 and incorporated by reference herein.
10.16 -- Agreement of Substitution and Assumption Reinsurance dated as of
January 1, 1991 by and among Farm and Home Life Insurance Company,
the Arizona Life and Disability Insurance Guaranty Fund and United
Group Insurance Company, as modified by a Modification Agreement
dated August 26, 1991, together with schedules and exhibits
thereto, filed as Exhibit 2 to Schedule 13D, filed with the
Securities and Exchange Commission on September 3, 1991 and
incorporated by reference herein.
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- ---------- ---------------------------------------------------------------------- ----------
<C> <S> <C>
10.17 -- Stock Purchase Agreement dated as of August 26, 1991 by and among
Farm and Home Life Insurance Company, First United, Inc. and The
MEGA Life and Health Insurance Company, filed as Exhibit 3 to
Schedule 13D, filed with the Securities and Exchange Commission on
September 3, 1991 and incorporated by reference herein.
10.18 -- Stock Purchase Agreement dated as of August 26, 1991 by and among
Farm and Home Life Insurance Company, The Chesapeake Life Insurance
Company and Mid-West National Life Insurance Company of Tennessee,
filed as Exhibit 4 to Schedule 13D, filed with the Securities and
Exchange Commission on September 3, 1991 and incorporated by
reference herein.
10.19 -- Second Agreement of Modification to Agreement of Substitution and
Assumption Reinsurance dated as of November 15, 1991 among Farm and
Home Life Insurance Company, United Group Insurance Company, and
the Arizona Life and Disability Insurance Guaranty Fund, filed as
Exhibit 1 to Amendment No. 1 to Schedule 13D, filed with the
Securities and Exchange Commission on February 5, 1992 and
incorporated by reference herein. This agreement refers to a
Modification Agreement dated September 12, 1991. The preliminary
agreement included in the initial statement was originally dated
August 26, 1991.
10.20 -- Addendum to Agreement of Substitution and Assumption Reinsurance
dated as of November 22, 1991 among United Group Insurance Company,
Farm and Home Life Insurance Company, and the Arizona Life and
Disability Insurance Guaranty Fund, filed as Exhibit 2 to Amendment
No. 1 to Schedule 13D, filed with the Securities and Exchange
Commission on February 5, 1992 and incorporated by reference
herein.
10.21 -- Modification Agreement dated November 15, 1991 between First
United, Inc., Underwriters National Assurance Company, and Farm and
Home Life Insurance Company, The MEGA Life and Health Insurance
Company, and the Insurance Commissioner of the State of Indiana,
and filed as Exhibit 3 to Amendment No. 1 to Schedule 13D, filed
with the Securities and Exchange Commission on February 5, 1992 and
incorporated by reference herein.
10.22 -- Agreement of Reinsurance and Assumption dated December 14, 1992 by
and among Mutual Security Life Insurance Company, in Liquidation,
National Organization of Life and Health Insurance Guaranty
Associations, and The MEGA Life and Health Insurance Company, and
filed as Exhibit 2 to the Company's Current Report on Form 8-K
dated March 29, 1993, (File No. 0-14320), and incorporated by
reference herein.
10.23 -- Acquisition Agreement dated January 15, 1993 by and between United
Insurance Companies, Inc. and Southern Educators Life Insurance
Company, and filed as Exhibit 2 to the Company's Current Report on
Form 8-K dated March 29, 1993, (File No. 0-14320), and incorporated
by reference herein.
10.24 -- Stock Exchange Agreement effective January 1, 1993 by and between
Onward and Upward, Inc. and United Insurance Companies, Inc. and
filed as Exhibit 2 to the Company's Current Report on Form 8-K
dated March 29, 1993, (File No. 0-14320), and incorporated by
reference herein.
10.25 -- Stock Purchase Agreement by and among United Insurance Companies,
Inc. and United Group Insurance Company and Landmark Land Company
of Oklahoma, Inc. dated January 6, 1994, and filed as Exhibit 10.27
to Form 10-Q dated March 31, 1994, (File No. 0-14320), and
incorporated by reference herein.
</TABLE>
34
<PAGE> 35
<TABLE>
<CAPTION>
EXHIBIT PAGE
NUMBER DESCRIPTION OF EXHIBIT NUMBER
- ---------- ---------------------------------------------------------------------- ----------
<C> <S> <C>
10.26 -- Private Placement Agreement dated June 1, 1994 of 8.75% Senior
Notes Payable due June 2004 in the aggregate amount of $27,655,000,
and filed as Exhibit 28.1 to the Company's Current Report on Form
8-K dated June 22, 1994, (File No. 0-14320), and incorporated by
reference herein.
11 -- Statement re: computation of per share earnings.
21 -- Subsidiaries of United Insurance Companies, Inc.
23.1 -- Consent of Independent Auditors
23.2 -- Consent of Independent Accountants
27 -- Financial Data Schedule
</TABLE>
35
<PAGE> 36
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(A)(1) AND (2), (C), AND (D)
FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 1995
UNITED INSURANCE COMPANIES, INC.
AND
SUBSIDIARIES
DALLAS, TEXAS
F-1
<PAGE> 37
REPORT OF INDEPENDENT AUDITORS
Board of Directors
United Insurance Companies, Inc.
We have audited the accompanying consolidated balance sheets of United
Insurance Companies, Inc. and Subsidiaries (the "Company") as of December 31,
1995 and 1994, and the related consolidated statements of income, stockholders'
equity, and cash flows for the years then ended. Our audits also included the
financial statement schedules listed in the Index at Item 14(a) for the two
years ended December 31, 1995. These financial statements and schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 1995 and 1994 consolidated financial statements
referred to above present fairly, in all material respects, the consolidated
financial position of United Insurance Companies, Inc. and Subsidiaries at
December 31, 1995 and 1994, and the consolidated results of their operations and
their cash flows for the years then ended in conformity with generally accepted
accounting principles. Also, in our opinion, the related financial statement
schedules for the two years ended December 31, 1995, when considered in relation
to the basic financial statements taken as a whole, present fairly in all
material respects the information set forth therein.
ERNST & YOUNG LLP
Dallas, Texas
March 8, 1996,
except for Note O, as to which the date is
March 27, 1996
F-2
<PAGE> 38
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors and Shareholders
United Insurance Companies, Inc.:
We have audited the accompanying consolidated statements of income,
stockholders' equity and cash flows of United Insurance Companies, Inc. and
Subsidiaries (the "Company") for the year ended December 31, 1993. We have also
audited the financial statement schedules for the year ended December 31, 1993.
These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated results of operations, changes in
stockholders' equity and cash flows of United Insurance Companies, Inc. and
Subsidiaries for the year ended December 31, 1993, in conformity with generally
accepted accounting principles. In addition, in our opinion, the financial
statement schedules referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all material respects,
the information required to be included therein.
COOPERS & LYBRAND,
L.L.P.
Dallas, Texas
March 29, 1994
F-3
<PAGE> 39
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------
1995 1994
---------- ----------
<S> <C> <C>
ASSETS
Investments -- Note C
Securities available for sale --
Fixed maturities, at fair value (cost: 1995 -- $743,945;
1994 -- $591,480)............................................... $ 754,473 $ 562,983
Equity securities, at fair value (cost: 1995 -- $5,114;
1994 -- $4,179)................................................. 5,288 4,146
Guaranteed student loans............................................ 12,159 20,137
Mortgage and collateral loans....................................... 15,559 9,152
Policy loans........................................................ 24,042 25,021
Credit card loans -- Note C......................................... 36,727 51,770
Short-term investments.............................................. 83,024 161,949
---------- ----------
Total Investments........................................... 931,272 835,158
Cash.................................................................. 5,913 7,709
Agents' receivables, less allowances of $2,986 in 1995 and $3,623 in
1994................................................................ 4,538 3,747
Reinsurance receivables -- Note E..................................... 65,332 83,656
Federal income taxes -- Note G........................................ 4,987 14,739
Due premiums and other receivables.................................... 19,256 8,691
Investment income due and accrued..................................... 11,283 8,612
Deferred acquisition costs -- Note B.................................. 56,122 56,802
Goodwill -- Note B.................................................... 15,564 3,307
Furniture and equipment, net.......................................... 12,937 6,220
Other................................................................. 3,655 2,622
---------- ----------
$1,130,859 $1,031,263
========= =========
LIABILITIES
Policy liabilities -- Notes D and E:
Future policy and contract benefits................................. $ 526,777 $ 560,232
Claims.............................................................. 179,809 143,188
Unearned premiums................................................... 68,099 61,740
Other policy liabilities............................................ 13,220 13,516
Other liabilities..................................................... 25,501 15,566
Short-term debt -- Note F............................................. 22,726 20,100
Long-term debt -- Note F.............................................. 27,655 36,055
---------- ----------
863,787 850,397
MINORITY INTERESTS.................................................... 18,253 9,943
COMMITMENTS AND CONTINGENCIES -- Note I
STOCKHOLDERS' EQUITY -- Note H
Common Stock, par value $.01 per share -- authorized 40,000,000
shares, issued and outstanding 38,220,000 shares in 1995 and
authorized 10,000,000 shares, issued and outstanding 9,375,000 in
1994............................................................. 382 94
Additional paid-in capital.......................................... 50,554 50,723
Net unrealized investment gains (losses)............................ 6,789 (18,102)
Retained earnings................................................... 191,094 138,208
---------- ----------
248,819 170,923
---------- ----------
$1,130,859 $1,031,263
========= =========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 40
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Premiums -- Note E:
Health.................................................... $473,778 $415,251 $343,743
Life...................................................... 38,530 36,987 24,977
-------- -------- --------
512,308 452,238 368,720
Net investment income -- Note C.............................. 65,054 47,956 39,226
Fees and other income........................................ 61,549 28,592 35,898
Gains (losses) on sale of investments -- Note C.............. 2,163 (5,840) 7,945
-------- -------- --------
641,074 522,946 451,789
BENEFITS AND EXPENSES -- Note E
Benefits, claims, and settlement expenses.................... 317,172 273,786 224,360
Underwriting, acquisition, and insurance expenses -- Note
P......................................................... 233,332 191,232 173,013
Interest expense............................................. 3,909 1,913 1,397
-------- -------- --------
554,413 466,931 398,770
-------- -------- --------
INCOME BEFORE FEDERAL INCOME TAXES AND MINORITY
INTERESTS............................................... 86,661 56,015 53,019
Federal income taxes -- Note G................................. 29,040 18,399 17,503
-------- -------- --------
INCOME BEFORE MINORITY INTERESTS.......................... 57,621 37,616 35,516
Minority Interests............................................. 4,293 1,438 2,671
-------- -------- --------
NET INCOME........................................... $ 53,328 $ 36,178 $ 32,845
======== ======== ========
NET INCOME PER SHARE -- Note H....................... $ 1.41 $ 0.96 $ 0.88
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 41
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
COMMON STOCK
Beginning of year........................................ $ 94 $ 93 $ 87
Four-for-one stock split................................. 282 -- --
Exercise of stock options................................ -- 1 1
Adjustment for business combinations..................... 6 -- --
Purchase of minority interest............................ -- -- 5
-------- -------- --------
End of year.............................................. 382 94 93
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Beginning of year........................................ 50,723 50,650 39,305
Purchase of minority interest............................ -- 10,509
Restricted common stock issued........................... -- 719
Adjustment for business combinations..................... 71...... -- --
Exercise of warrants..................................... 178 179 179
Exercise of stock options................................ 53 48 42
Four-for-one stock split................................. (282) -- --
Retirement of treasury stock............................. (189) (154) (104)
-------- -------- --------
End of year.............................................. 50,554 50,723 50,650
-------- -------- --------
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Beginning of year........................................ (18,102) 1,995 2,422
Change in unrealized investment gains or losses during
the year.............................................. 39,232 (31,744) (1,507)
Deferred income taxes.................................... (12,593) 10,278 776
Minority interests....................................... (1,748) 1,369 304
-------- -------- --------
End of year.............................................. 6,789 (18,102) 1,995
-------- -------- --------
RETAINED EARNINGS
Beginning of year........................................ 138,208 102,030 69,185
Adjustment for business combinations..................... (442) -- --
Net income............................................... 53,328 36,178 32,845
-------- -------- --------
End of year.............................................. 191,094 138,208 102,030
-------- -------- --------
TREASURY STOCK
Beginning of year........................................ -- -- --
Purchase of stock........................................ (189) (154) (104)
Retirement of treasury stock............................. 189 154 104
-------- -------- --------
End of year.............................................. -- -- --
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY................................. $248,819 $170,923 $ 54,768
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 42
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------------
1995 1994 1993
--------- --------- -----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income......................................................... $ 53,328 $ 36,178 $ 32,845
Adjustments to reconcile net income to cash provided by operating
activities:
Increase in policy liabilities................................... 11,918 102,784 28,248
Increase (decrease) in other liabilities......................... 4,933 (871) (2,535)
Deferred income tax benefit...................................... (3,683) (3,073) (2,248)
Increase (decrease) in federal income taxes payable.............. 1,435 908 (2,367)
Decrease (increase) in accrued investment income, reinsurance
receivables and other receivables.............................. 13,654 (75,921) 13,090
Acquisition costs deferred....................................... (14,349) (14,693) (6,589)
Amortization of deferred acquisition costs....................... 15,029 13,776 8,093
Amortization of goodwill......................................... 544 152 1,014
Net income attributable to minority interests.................... 4,293 1,438 2,671
(Gains) losses on sale of investments............................ (2,163) 5,840 (7,945)
Other items, net................................................. (690) (1,714) (472)
--------- --------- -----------
Cash Provided by Operations................................. 84,249 64,804 63,805
--------- --------- -----------
INVESTING ACTIVITIES
Securities available-for-sale
Purchases........................................................ (542,362) (508,002) (1,652,212)
Sales............................................................ 225,988 231,852 741,552
Maturities, calls and redemptions................................ 165,284 293,309 765,981
Credit card loans
Purchases........................................................ (154,138) (81,154) (32,704)
Repayments....................................................... 117,619 56,812 9,001
Sales............................................................ 51,562 -- --
Other investments Purchases........................................ (17,027) (21,055) (19,782)
Sales, repayments and maturities................................. 18,680 25,265 100,312
Short-term investments-net......................................... 91,158 (82,894) 107,148
Purchase of subsidiaries and life, health and annuity business, net
of cash acquired of $3,428 and $5,635 in 1995 and 1994,
respectively (Note B
and P)........................................................... (20,024) (7,134) (20,594)
Minority interests purchased....................................... -- -- (148)
Decrease (increase) in agents' receivables......................... 959 5,619 (3,983)
--------- --------- -----------
Cash Used in Investing Activities........................... (62,301) (87,382) (5,429)
--------- --------- -----------
FINANCING ACTIVITIES
Proceeds from notes payable........................................ 18,091 59,655 28,500
Repayment of notes payable......................................... (34,600) (23,000) (23,000)
Proceeds from payable to related party............................. 10,735 940 --
Repayment of payable to related party.............................. (275) (1,500) (6,000)
Deposits from investment products.................................. 21,145 33,391 18,347
Withdrawals from investment products............................... (36,878) (43,027) (75,884)
Proceeds from exercise of warrants................................. 178 179 179
Proceeds from exercise of stock options............................ 29 33 32
Purchase of treasury stock......................................... (189) (154) (104)
Distributions to minority interests................................ (1,980) (230) (714)
--------- --------- -----------
Cash Provided by (Used in) Financing Activities............. (23,744) 26,287 (58,644)
Net Increase (Decrease) in Cash............................. (1,796) 3,709 (268)
Cash at Beginning of Period................................. 7,709 4,000 4,268
--------- --------- -----------
Cash at End of Period....................................... $ 5,913 $ 7,709 $ 4,000
========== ========== ============
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE> 43
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
The Company is a financial services company primarily engaged in the
insurance business. Information on the Company's operations by segment are
included in Note N to the financial statements.
The Company's primary business, conducted by the Health Insurance segment,
has been the issuance and coinsurance of health insurance policies, including
catastrophic coverages, to niche markets, particularly to the self-employed and
student markets. The Life Insurance and Annuity segment has acquired blocks of
life and annuity policies from other insurers and also sells insurance products
in selected niche markets.
Principles of Consolidation: The consolidated financial statements include
the accounts of United Insurance Companies, Inc. and its subsidiaries (the
Company). All significant intercompany accounts and transactions have been
eliminated in consolidation.
Use of Estimates: The preparation of the consolidated financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the amounts reported in the
consolidated financial statements and accompanying notes. Actual results could
differ from those estimates.
Basis of Presentation: The consolidated financial statements have been
prepared on the basis of generally accepted accounting principles (GAAP). The
more significant variances between GAAP and statutory accounting practices
prescribed or permitted by regulatory authorities are securities are carried at
market value for investments classified as available for sale for GAAP rather
than generally at amortized cost; the deferral of new business acquisition
costs, rather than expensing them as incurred; the determination of the
liability for future policyholder benefits based on realistic assumptions,
rather than on statutory rates for mortality and interest; the provision for
deferred income taxes; and the exclusion of non-admitted assets for statutory
purposes. (See Note H for stockholders' equity and net income as determined
using statutory accounting practices.)
Investments: Investments are valued as follows:
Fixed maturities consist of bonds, notes, or bills issued by
governments, businesses, or other entities; mortgage and asset backed
securities and similar securitized loans. All fixed maturity investments
are classified as available for sale and carried at fair value.
Equity securities consist of common and nonredeemable preferred stocks
and are carried at fair value.
Guaranteed student loans are stated at the unpaid balances, less
allowance for losses. The carrying amount approximates fair value due to
agreements whereby the Company's federally insured loans will be sold (see
Note I).
Mortgage and collateral loans are carried at unpaid balances, less
allowance for losses.
Policy loans are carried at unpaid balances.
Credit card loans are carried at unpaid balances, less allowance for
losses, which approximates fair value.
Cash and short-term investments are carried at cost which approximates
fair value.
Realized gains and losses on sales of investments are recognized in
net income on the specific identification basis and include write downs on
those investments deemed to be permanently impaired. Unrealized investment
gains or losses on securities carried at fair value, net of applicable
deferred income tax and minority interests, are reported as a separate
component of stockholders' equity and accordingly have no effect on net
income.
F-8
<PAGE> 44
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchases and sales of short-term financial instruments are part of
investing activities and not necessarily a part of the cash management
program. Short-term financial instruments are classified as investments in
the Consolidated Balance Sheets and are included as investing activities in
the Consolidated Statements of Cash Flows.
Deferred Acquisition Costs: The costs of writing new business, principally
commissions, which vary with and are directly related to the production of new
business, have been deferred. The costs of business acquired through acquisition
of subsidiaries or blocks of business is determined based upon estimates of the
future profits inherent in the business acquired. Costs associated with
traditional life business are being amortized over the estimated premium-paying
period of the related policies in proportion to the ratio of the annual premium
revenue to the total premium revenue anticipated. Such anticipated premium
revenue, which is modified to reflect actual lapse experience, was estimated
using the same assumptions as were used for computing policy benefits. For
universal life-type and annuity contracts, deferrable costs are amortized in
proportion to the ratio of a contract's annual gross profits to total
anticipated gross profits. Costs associated with health business are being
amortized over the effective period for the related unearned premiums. That
amortization is adjusted when estimates of current or future gross profits to be
realized from a group of products are revised.
Furniture and Equipment: Furniture and equipment are reported at
depreciated cost that is computed using an accelerated method based upon the
estimated useful lives of the assets. The accumulated depreciation for furniture
and equipment was $15.7 million and $5.7 million at December 31, 1995 and 1994,
respectively.
Goodwill: The excess of cost over the underlying value of the net assets
of companies acquired is generally amortized on a straight-line basis over
fifteen to forty years. The Company continually reevaluates the propriety of the
carrying amount of goodwill, as well as the amortization period to determine
whether current events and circumstances warrant adjustments to the carrying
value and/or revised estimates of useful life. Adjustments, if any, are
reflected in current operations.
Future Policy and Contract Benefits and Claims: Traditional life insurance
future policy benefit liabilities are computed on a net level premium method
using assumptions with respect to current investment yield, mortality,
withdrawal rates, and other assumptions determined to be appropriate as of the
date the business was issued or purchased by the Company. Future contract
benefits related to universal life-type and annuity contracts are generally
based on policy account values. Claims liabilities represent the estimated
liabilities for claims reported plus claims incurred but not yet reported. The
liability for health claims are generally computed using the "incurred date"
method. The liabilities are subject to the impact of actual payments and future
changes in claim factors; as adjustments become necessary they are reflected in
current operations.
Participating Insurance Contracts: Participating life insurance policies
have been issued by the Company's life insurance subsidiaries and entitle
policyholders to share in the earnings of the participating policies, provided
that a dividend distribution is authorized by the insurance company.
Approximately 2% of the ordinary life insurance volume in force was from
participating policies at December 31, 1995 and 1994. During 1995 and 1994, the
Company did not issue any new participating policies. Policyholder dividends do
not have a significant effect on net income.
Recognition of Premium Revenues and Costs: Premiums on traditional life
insurance are recognized as revenue when due. Benefits and expenses are matched
with premiums so as to result in recognition of income over the term of the
contract. This matching is accomplished by means of the provision for future
policyholder benefits and expenses and the deferral and amortization of
acquisition costs. Revenues for universal life-type and annuity contracts
consist of policy and surrender charges assessed during the year. Contract
benefits that
F-9
<PAGE> 45
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
are charged to expense include benefit claims incurred in the period in excess
of related contract balances, and interest credited to contract balances.
Unearned Premiums: Premiums on health insurance contracts are recognized
as earned over the period of coverage on a pro rata basis.
Reinsurance: Insurance liabilities are reported before the effects of
ceding reinsurance. Reinsurance receivables and prepaid reinsurance premiums are
reported as assets rather than netted against the related insurance liabilities.
The cost of reinsurance is accounted for over the terms of the underlying
reinsured policies using assumptions consistent with those used to account for
the policies.
Federal Income Taxes: Deferred income taxes are recorded to reflect the
tax consequences on future years of differences between the tax bases of assets
and liabilities and their financial reporting amounts at each year-end. Such
deferrals have been computed in accordance with Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
Stock Compensation: The Company accounts for its stock compensation
arrangements under the provision of APB 25, "Accounting for Stock Issued to
Employees" and intends to continue doing so.
Earnings Per Share: Primary earnings per common and common equivalent
share are computed by dividing net income by the weighted average number of
common and common equivalent shares outstanding during each quarterly period and
for the year. A four-for-one stock split was effected on June 1, 1995 for
shareholders of record as of May 22, 1995.
Reclassification: Certain amounts in the 1994 and 1993 financial
statements have been reclassified to conform with the 1995 financial statement
presentation.
NOTE B -- ACQUISITIONS AND DISPOSITIONS
During 1995, the Company acquired majority interest in three companies and
a block of health insurance policies for $11.5 million in cash and issued $12.0
million in notes due in January 1996. The total cost to acquire these companies
and block of health insurance policies was $23.5 million. Total fair value of
assets acquired was $46.0 million and total fair value of liabilities assumed
was $22.5 million. Two of the companies acquired accounted for the increase in
goodwill during 1995. The goodwill related to these acquisitions is being
amortized straight-line over 15 years. For financial reporting purposes, these
acquisitions were accounted for using the purchase method of accounting, and as
a result, the assets and liabilities acquired were recorded at fair value on the
dates acquired. The Consolidated Statements of Income for the year ended
December 31, 1995 include the results of operations of each acquired company
from their respective dates of acquisitions. The effect of these acquisitions on
the Company's results of operations was not material. Accordingly, pro forma
financial information has not been presented.
During 1995, the Company issued 617,600 shares of common stock for the
acquisition of 100% of the outstanding stock of three companies, the effect of
which was not material to the consolidated financial statements. The President
and Chief Executive Officer of the Company owned substantially all of one of the
companies acquired (see Note L).
During 1994, the Company acquired (i) on March 31, 1994 all of the common
stock of First Life Assurance Company ("FLAC") for a purchase price of $12.8
million and, (ii) a block of health insurance policies for $2.6 million. For
financial reporting purposes, these acquisitions were accounted for using the
purchase method of accounting, and as a result, the assets and liabilities
acquired were recorded at fair value on the dates acquired.
F-10
<PAGE> 46
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition of FLAC and the health insurance policies purchased in 1994
consisted of the following revalued assets and liabilities at the dates
acquired:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
ASSETS:
Investments..................................................... $ 63,612
Cost of business acquired....................................... 11,967
Other assets.................................................... 9,605
----------
85,184
----------
Liabilities:
Policy liabilities.............................................. 69,239
Other liabilities............................................... 3,176
----------
72,415
----------
Net assets acquired, as revalued........................ $ 12,769
==========
</TABLE>
The Consolidated Statement of Income for the year ended December 31, 1994
includes results of operations of each acquisition from their respective date of
acquisition. The following unaudited pro forma consolidated results of
operations for the years ended December 31, 1994 and 1993 assumes that all the
acquisitions had occurred on January 1, 1993. The pro forma financial
information does not purport to be indicative of the results of operations that
actually would have been obtained if the combined operations had been conducted
during the periods presented and is not intended to be a projection of future
results of operations.
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31,
-------------------
1994 1993
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Revenues................................................................. $533,992 $495,248
Operating income before minority interests............................... 38,189 36,841
Minority interests....................................................... (1,438) (2,671)
-------- --------
Net Income..................................................... $ 36,751 $ 34,170
======== ========
Net income per share -- adjusted for stock split (see Note H).......... $ 0.98 $ 0.91
======== ========
</TABLE>
During 1993, the Company acquired (i) acquired a block of annuity policies
for a purchase price of $3.9 million and, (ii) in March 1993, all of the common
stock of Southern Educators Life Insurance Company (SOED) for a purchase price
of $20.6 million. For financial reporting purposes, these acquisitions were
accounted for using the purchase method of accounting, and as a result, the
assets and liabilities acquired were recorded at fair value on the dates
acquired.
Also, in January 1993, the Company acquired under a Stock Exchange
Agreement the 25% minority interest of its subsidiary, The MEGA Life and Health
Insurance Company (MEGA) based on a predetermined formula price. The Company
acquired the 25% minority interest in MEGA from Onward and Upward, Inc. which is
a corporation owned by the five adult children of the Chairman of the Board of
the Company. Onward and Upward, Inc. and the five adult children are hereinafter
referred to as Onward and Upward. The purchase was completed by issuance of 2.2
million shares of the Company's common stock, adjusted for stock split (see Note
H), in exchange for the approximately $10.8 million of minority interest. As a
result of the acquisition MEGA became a wholly owned subsidiary of the Company.
The effect of purchase accounting relating to this transaction was
insignificant.
F-11
<PAGE> 47
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Consolidated Statement of Income for the year ended December 31, 1993
includes the results of operations for each of the 1993 acquisitions from their
respective dates of acquisition.
Deferred Acquisition Costs
Included in deferred acquisition costs are the unamortized costs of writing
new business and the costs of business acquired through acquisitions. The
following is an analysis of the costs of business acquired:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Costs of business acquired:
Beginning of year....................................... $30,061 $26,425 $ 9,372
Additions............................................ -- 11,967 22,681
Amortization(a)...................................... (9,647) (8,331) (5,628)
------- ------- -------
End of year............................................. 20,414 30,061 26,425
Costs of business produced................................ 35,708 26,741 17,814
------- ------- -------
$56,122 $56,802 $44,239
======= ======= =======
</TABLE>
- ---------------
(a) The discount rate used in the amortization of the costs of business acquired
ranges from 7% to 8%.
The amortization for the next five years and thereafter for costs of
business acquired is estimated to be as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
<S> <C>
1996.......................................................... 5,136
1997.......................................................... 4,061
1998.......................................................... 2,724
1999.......................................................... 2,136
2000.......................................................... 1,628
2001 and thereafter........................................... 4,729
--------
$ 20,414
--------
--------
</TABLE>
NOTE C -- INVESTMENTS
Under the terms of various reinsurance agreements (see Note E), the Company
is required to maintain assets in escrow with a fair value equal to the
statutory reserves assumed under the reinsurance agreements. Under these
agreements, the Company had on deposit, securities with a fair value of
approximately $237.2 million as of December 31, 1995. In addition, at December
31, 1995, the life insurance subsidiaries had securities with a fair value of
$27.6 million on deposit with insurance departments in various states.
F-12
<PAGE> 48
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of net investment income is as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Fixed maturities.......................................... $47,391 $35,337 $32,268
Equity securities......................................... 247 182 23
Guaranteed student loans.................................. 1,496 1,663 1,589
Mortgage and collateral loans............................. 1,493 913 1,126
Policy loans.............................................. 1,388 1,428 928
Credit card loans......................................... 7,643 4,093 499
Short-term investments.................................... 6,107 4,935 2,621
Other investments......................................... 1,842 1,955 2,178
------- ------- -------
67,607 50,506 41,232
Less investment expenses.................................. (2,553) (2,550) (2,006)
------- ------- -------
$65,054 $47,956 $39,226
======= ======= =======
</TABLE>
Realized gains (losses) and the change in unrealized investment gains
(losses) on fixed maturity and equity security investments are summarized as
follows:
<TABLE>
<CAPTION>
GUARANTEED GAINS NET GAINS
FIXED EQUITY STUDENT OTHER (LOSSES) ON TAX MINORITY (LOSSES) ON
MATURITIES SECURITIES LOANS INVESTMENTS INVESTMENTS EFFECTS INTEREST INVESTMENTS
---------- ---------- ---------- ----------- ----------- -------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended December 31:
1995
Realized............. $ 2,298 $ (19) $ 100 $ (216) $ 2,163 $ (638) $ (192 ) $ 1,333
Change in
unrealized......... 39,025 207 -- -- 39,232 (12,593) (1,748 ) 24,891
---------- ---------- ---------- ---------- ----------- -------- -------- -----------
Combined......... $ 41,323 $ 188 $ 100 $ (216) $ 41,395 $(13,231) $(1,940 ) $ 26,224
========= ========= ========== ========== =========== ======== ======== ===========
1994
Realized............. $ (5,880) $ 245 $ 93 $ (298) $ (5,840) $ 1,952 $ 206 $ (3,682)
Change in
unrealized......... (31,389) (355) -- -- (31,744) 10,278 1,369 (20,097)
---------- ---------- ---------- ----------- ----------- -------- -------- -----------
Combined......... $(37,269) $ (110) $ 93 $ (298) $ (37,584) $ 12,230 $ 1,575 $ (23,779)
========= ========= ========== ========== =========== ======== ======== ===========
1993
Realized............. $ 14,606 $ (1,331) $ (912) $(4,418) $ 7,945 $ (2,060) $(1,087 ) $ 4,798
Change in
unrealized......... (1,258) (249) -- -- (1,507) 776 304 (427)
---------- ---------- ---------- ----------- ----------- -------- -------- -----------
Combined......... $ 13,348 $ (1,580) $ (912) $(4,418) $ 6,438 $ (1,284) $ (783 ) $ 4,371
========= ========= ========== ========== =========== ======== ======== ===========
</TABLE>
Gross unrealized investment gains pertaining to equity securities was
$787,000 and $626,000 at December 31, 1995 and 1994, respectively. Gross
unrealized investment losses pertaining to equity securities was $613,000 and
$659,000 at December 31, 1995 and 1994, respectively.
F-13
<PAGE> 49
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The amortized cost and fair value of investments in fixed maturities are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agency
obligations................................. $ 128,898 $ 1,993 $ (54) $130,837
Mortgage-backed securities issued by U.S.
Government agencies and authorities......... 129,499 2,803 (428) 131,874
Other mortgage and asset backed securities.... 182,611 2,996 (1,187) 184,420
Other corporate bonds......................... 302,937 6,511 (2,106) 307,342
--------- ---------- ---------- --------
Total fixed maturities.............. $ 743,945 $ 14,303 $ (3,775) $754,473
======== ======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
----------------------------------------------
GROSS GROSS
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
--------- ---------- ---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
U.S. Treasury and U.S. Government agency
obligations................................. $ 48,621 $ 78 $ (1,543) $ 47,156
Mortgage-backed securities issued by U.S.
Government agencies and authorities......... 175,909 621 (7,534) 168,996
Other mortgage-backed securities.............. 144,760 562 (10,726) 134,596
Other corporate bonds......................... 222,190 318 (10,273) 212,235
--------- ---------- ---------- --------
Total fixed maturities.............. $ 591,480 $1,579 $ (30,076) $562,983
======== ======== ======== ========
</TABLE>
Fair values for fixed maturity securities are based on quoted market
prices, where available. For fixed maturity securities not actively traded, fair
values are estimated using values obtained from quotation services.
The amortized cost and fair value of fixed maturities at December 31, 1995,
by contractual maturity, are shown below. Fixed maturities subject to early or
unscheduled prepayments have been included below based upon their contractual
maturity dates. Actual maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED FAIR
MATURITY COST VALUE
- -------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
One year or less..................................................... $ 29,928 $ 29,961
Over 1 year through 5 years.......................................... 223,559 225,407
Over 5 years through 10 years........................................ 113,002 116,045
Over 10 years........................................................ 65,346 66,766
--------- --------
431,835 438,179
Mortgage and asset backed securities................................. 312,110 316,294
--------- --------
Total fixed maturities..................................... $ 743,945 $754,473
======== ========
</TABLE>
Proceeds from the sale of investments in fixed maturities were $226.0
million, $231.9 million, and $741.6 million for 1995, 1994, and 1993,
respectively. Gross gains of $4.1 million, $2.2 million, and $21.4 million and
gross losses of $1.9 million, $8.1 million, and $6.8 million were realized on
fixed maturity sales during 1995, 1994, and 1993, respectively.
F-14
<PAGE> 50
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On December 29, 1995, the Company sold approximately $51.6 million of
credit card loans to two separate trusts, one of which was a related party (see
Note L), for the benefit of investors in certificates representing undivided
fractional interest in the trusts. The Company purchased participating interests
in each of the trusts totalling $16.0 million and has recorded these amounts as
credit card loans. These transactions were accounted for as sales. No gain or
loss was recognized related to these transactions.
The fair values of the Company's equity securities, which also represent
the carrying amounts, are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
------ ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Common Stocks.................................................... $2,518 $2,358
Non-redeemable preferred stocks.................................. 2,770 1,788
------ ------
$5,288 $4,146
====== ======
</TABLE>
The fair value of equity securities are based on quoted market prices,
where available.
The carrying amounts and fair values of the Company's investments in
mortgage, collateral and policy loans are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- --------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Commercial mortgages........................ $ 2,492 $ 3,763 $ 4,776 $ 5,510
Residential mortgages....................... 2,517 3,032 3,682 3,259
-------- ------- -------- -------
5,009 6,795 8,458 8,769
Collateral loans............................ 10,550 10,550 694 694
-------- ------- -------- -------
$ 15,559 $17,345 $ 9,152 $ 9,463
======= ======= ======= =======
Policy loans................................ $ 24,042 $22,636 $ 25,021 $23,564
======= ======= ======= =======
</TABLE>
The fair values for mortgage, collateral and policy loans and policy loans
are estimated using discounted cash flow analysis, using interest rates
currently being offered for similar loans to borrowers with similar credit
ratings.
The carrying values for guaranteed student loans, mortgage loans, and
credit card loans are net of allowances for losses. The balances of those
allowances are summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Mortgage loans.................................................... $ 650 $ 650
Credit card loans................................................. 12,129 4,252
Student loans..................................................... 178 196
------- ------
$12,957 $5,098
======= ======
</TABLE>
The Company has an investment of $36.7 million in a fixed maturity issued
by GE Capital Mortgage Services that exceeds 10% of Stockholders' Equity as of
December 31, 1995.
The Company recognizes the credit risk involved in the fixed maturities
portfolio. The credit risk is minimized by investing primarily in investment
grade securities. Included in fixed maturities is a concentration
F-15
<PAGE> 51
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
of mortgage and asset backed securities. At December 31, 1995, the Company had a
carrying amount of $316.3 million of mortgage and asset backed securities, of
which, $131.9 million are government backed, $142.6 million are rated AAA, $30.1
million are rated AA, and $11.7 million are rated A by external rating agencies.
At December 31, 1994, the Company had a carrying amount of $303.6 million of
mortgage-backed securities, of which $168.9 million are government backed,
$100.5 million are rated AAA, $28.1 million are rated AA, $6.1 million are rated
A.
Delivery and payment for U.S. Treasury obligations and mortgage-backed
securities purchased on a "to be announced" (TBA) basis can take place a month
or more after the date of the transaction. These securities are subject to
market fluctuations during this period and it is the Company's policy to
recognize, on an aggregate basis, any losses during this period as they occur
and to recognize gains only when they are realized. The Company maintains cash
and securities with a fair value at least equal to the amount of its TBA
purchase commitments. At December 31, 1995, the TBA purchase commitments
amounted to $10.7 million and had a current fair value of $10.8 million. At
December 31, 1994, the TBA purchase commitments amounted to $61.8 million and
had a fair value of $61.7 million. The TBA purchase commitments in excess of its
fair value was recognized as a loss on sale of investments for the year ended
December 31, 1994. Fair values for the TBA purchase commitments are based on
quoted market prices.
NOTE D -- POLICY LIABILITIES
Liability for future policy and contract benefits consists of the
following:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1994
-------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Life............................................................. $268,839 $271,086
Annuity.......................................................... 257,938 289,146
-------- --------
$526,777 $560,232
======== ========
</TABLE>
With respect to traditional life insurance, future policy benefits are
computed on a net level premium method using assumptions with respect to current
investment yield, mortality and withdrawal rates determined to be appropriate as
of the date the business was acquired by the Company. Substantially all reserve
interest assumptions range from 7% to 8%. Such liabilities are graded to equal
statutory values or cash values prior to maturity.
Interest rates credited to future contract benefits related to universal
life-type contracts approximated 5.7% and 5.5% during 1995 and 1994,
respectively. Interest rates credited to the liability for future contract
benefits related to annuity contracts generally ranged from 4.0% to 6.8% during
1995; 4.0% to 7.4% during 1994; and 4.5% to 7.0% during 1993.
As described in Note E, the Company assumes certain life and annuity
business from subsidiaries of AEGON USA (AEGON), and uses the same actuarial
assumptions as the ceding company. The liability for future policy benefits
related to life business has been calculated using an interest rate of 9% graded
to 5% over twenty years for life policies. Mortality and withdrawal rates are
based on published industry tables or experience of the ceding company and
include margins for adverse deviation. Interest rates credited to the liability
for future contract benefits related to annuity contracts generally ranged from
4.8% to 6.8% during 1995, 4.7% to 7.4% during 1994, and 5.2% to 6.5% during
1993.
F-16
<PAGE> 52
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The carrying amounts and fair values of the Company's liabilities for
investment-type contracts (included in future policy and contract benefits and
other policy liabilities in the balance sheets) are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- -------- -------- --------
(DOLLARS IN THOUSANDS) (DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Direct annuities.............................. $127,778 $ 21,747 $158,568 $ 51,084
Assumed annuities............................. 130,160 126,829 130,578 127,313
Supplemental contracts without life
contingencies............................... 4,045 4,045 4,779 4,779
-------- -------- -------- --------
$261,983 $ 52,621 $293,925 $ 83,176
======== ======== ======== ========
</TABLE>
Fair values under investment-type contracts consisting of direct annuities
and supplemental contracts without life contingencies are estimated using the
assumption-reinsurance pricing method, based on estimating the amount of profits
or losses an assuming company would realize, and then discounting those amounts
at a current market interest rate. Fair values for the Company's liabilities
under assumed annuity investment-type contracts are estimated using the cash
surrender value of the annuity.
Activity in the claims liability is summarized as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1995
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Claims liability at beginning of year, net of related
reinsurance recoverables............................. $140,660 $114,111 $103,675
Add:
Acquired claims liability............................ 12,585 6,145 220
Incurred losses, net of reinsurance, occurring
during:
Current year...................................... 332,208 280,110 214,013
Prior years....................................... (44,886) (33,594) (21,072)
-------- -------- --------
287,322 246,516 192,941
-------- -------- --------
Deduct payments for claims, net of reinsurance,
occurring during:
Current year...................................... 187,776 163,077 125,107
Prior years....................................... 76,461 63,035 57,618
-------- -------- --------
264,237 226,112 182,725
-------- -------- --------
Claims liability at end of year, net of related
reinsurance recoverables:
1995 -- $3,479, 1994 -- $2,528 and
1993 -- $3,318.................................. $176,330 $140,660 $114,111
======== ======== ========
</TABLE>
The above reconciliation shows a better than originally estimated
development of prior years incurred losses due in part to the Company's
reserving methodology which has been applied on a consistent basis from year to
year.
NOTE E -- REINSURANCE
In 1995, 1994, and 1993, approximately 50%, 54%, and 54%, respectively, of
the Company's health premiums and 5% of the Company's life premiums were assumed
from AEGON on business produced by United Group Association, Inc. (UGA) an
agency owned by the Chairman of the Board of the Company.
The Company assumed 55% in 1995, 52.5% in 1994 and 50% in 1993 of the
health and group life business produced by UGA. The premiums, commissions,
claims and premium taxes on the business are shared
F-17
<PAGE> 53
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
according to the percentage assumed and the Company paid administrative expenses
equal to an agreed upon percentage of premiums collected and health claims paid.
The Company has also assumed other life and annuity policies issued by
AEGON. At December 31, 1995 and 1994, the Company's portion of the life
insurance in force assumed was approximately $173.0 million and $115.9 million,
respectively. At December 31, 1995 and 1994, $2.6 million and $1.1 million,
respectively, was due from AEGON under all reinsurance agreements.
The Company's insurance subsidiaries, in the ordinary course of business,
reinsure certain risks with other insurance companies. These arrangements
provide greater diversification of risk and limit the maximum net loss potential
to the Company arising from large risks. To the extent that reinsurance
companies are unable to meet their obligations under the reinsurance agreements,
the Company remains liable.
Reinsurance transactions reflected in the consolidated financial statements
are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Direct............................................. $255,892 $223,695 $178,125
Assumed............................................ 276,044 245,619 199,791
Ceded.............................................. (19,628) (17,076) (9,196)
-------- -------- --------
Net Premiums............................. $512,308 $452,238 $368,720
======== ======== ========
Ceded benefits, claims and settlement expenses..... $ 13,500 $ 11,689 $ 8,362
======== ======== ========
Life insurance in force ceded...................... $776,086 $767,580 $213,817
======== ======== ========
</TABLE>
NOTE F -- DEBT
The Company's short-term and long-term debt is summarized as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------
1995 1994
------- -------
(DOLLARS IN
THOUSANDS)
<S> <C> <C>
Short-term debt:
Other notes payable.............................................. $22,726 $ --
Bank note........................................................ -- 20,000
Current portion long-term debt................................... -- 100
------- -------
Total short-term debt.................................... $22,726 $20,100
======= =======
Long-term debt:
8.75% senior notes payable....................................... $27,655 $27,655
AEGON revolving credit note...................................... -- 8,500
------- -------
27,655 36,155
Less: current portion............................................ -- (100)
------- -------
Total long-term debt..................................... $27,655 $36,055
======= =======
</TABLE>
In October 1995 the Company acquired a majority interest in two companies
(see Note B). The acquisitions were funded with existing cash and the issuance
of promissory notes to the previous shareholders totalling approximately $12.0
million due in January 1996. The promissory notes were non-interest bearing
loans.
F-18
<PAGE> 54
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1995, the Company borrowed $10.7 million from the Company's Chairman
of the Board which was principally used to repay the then existing indebtedness
on the AEGON revolving credit note. The note bears interest at the Texas
Commerce Bank prime rate and is due on demand.
On December 29, 1994, the Company borrowed $20.0 million from a bank to
finance the purchase of credit card loans. The loan, collateralized by the
Company's stock of MEGA, was repaid in 1995.
On June 22, 1994, the Company authorized an issue of its 8.75% Senior Notes
Payable (8.75% Senior Notes) due June 2004 in the aggregate amount of $27.7
million. In accordance with the agreement, on June 1, 1998 and on each June 1
thereafter to and including June 1, 2003, the Company will repay $4.0 million
aggregate principal together with accrued interest thereon to the date of such
repayment. The note agreement contains restrictive covenants which include
limitations of additional indebtedness as a percentage of certain defined equity
amounts, disposal of subsidiaries, and of certain financial ratios. The proceeds
from the sale of the 8.75% Senior Notes were used to prepay $9.0 million of bank
debt and to repay the then $10.0 million of existing indebtedness on the AEGON
revolving credit note. The balance of the proceeds was used for other general
corporate purposes.
The Company has a revolving credit note with AEGON bearing interest at
prime plus 0.875% with a maximum line of credit of $8.4 million through July 31,
1996. The line of credit declines by $1.2 million annually through July 31,
2002. Under terms of the agreement, a percentage of the outstanding shares of
the Company's stock of The Chesapeake Life Insurance Company is pledged as
collateral, depending on the outstanding loan balance. There were no outstanding
borrowings on the line of credit at December 31, 1995. Subsequent to year end,
the Company amended the revolving credit note to increase it to $12.0 million
through August 1, 2002.
Principal payments required in each of the next five years after December
31, 1995 are as follows:
<TABLE>
<CAPTION>
(DOLLARS IN THOUSANDS)
----------------------
<S> <C>
1996.............................................................. $ 22,726
1997.............................................................. --
1998.............................................................. 3,951
1999.............................................................. 3,951
2000.............................................................. 3,951
</TABLE>
The carrying amounts of the Company's short-term debt approximate fair
values.
The fair value of the long-term debt was $29.3 million and $34.7 million at
December 31, 1995 and 1994, respectively. The fair value of the Company's
long-term debt is estimated using discounted cash flow analyses, based on the
Company's current incremental borrowing rates for similar types of borrowing
arrangements.
Total interest paid was $3.4 million, $1.9 million and $1.1 million, for
1995, 1994, and 1993, respectively.
F-19
<PAGE> 55
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE G -- FEDERAL INCOME TAXES
Deferred income taxes for 1995 and 1994 reflect the impact of temporary
differences between the financial statement carrying amounts and tax bases of
assets and liabilities. The temporary differences that give rise to a
significant portion of the deferred tax (asset) or liability at December 31,
1995 and 1994 relate to the following:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------
1995 1994
------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs and costs of business acquired........ $12,125 $ 12,710
Investment in subsidiaries.............................................. 3,327 2,836
Net unrealized investment gains......................................... 3,336 --
Other................................................................... 927 38
------- --------
Total gross deferred tax liabilities............................ 19,715 15,584
------- --------
Deferred tax assets:
Policy liabilities...................................................... 18,549 17,681
Allowance for losses on investments..................................... 5,508 3,822
Operating loss carryforwards............................................ 2,985 3,394
Capital loss carryforwards.............................................. 1,648 1,235
Net unrealized investment losses........................................ -- 9,257
Other................................................................... 2,439 426
------- --------
Total gross deferred tax assets................................. 31,129 35,815
Less: Valuation allowance............................................ (4,234) (4,734)
------- --------
Net deferred tax assets.............................................. 26,895 31,081
------- --------
Net deferred tax asset............................................... (7,180) (15,497)
Net current tax liability............................................ 2,193 758
------- --------
Federal income tax asset............................................. $(4,987) $(14,739)
======= ========
</TABLE>
The nature of the Company's deferred tax assets and liabilities are such
that the reversal pattern for these temporary differences should generally
result in realization of the Company's deferred tax assets. The Company
establishes a valuation allowance when management believes, based on the weight
of the available evidence, that it is more likely than not that some portion of
the deferred tax asset will not be realized. The net change in the total
valuation allowance for the year ended December 31, 1995 was a decrease of
$500,000.
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1995 1994 1993
------- ------- -------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Current tax expense....................................... $32,723 $21,472 $19,751
Deferred tax benefit...................................... (3,683) (3,073) (2,248)
------- ------- -------
$29,040 $18,399 $17,503
======= ======= =======
</TABLE>
F-20
<PAGE> 56
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company's effective income tax rates varied from the maximum statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------
1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate.............................. 35.0% 35.0% 35.0%
Small life insurance company deduction......................... (1.7) (1.9) (4.4)
Valuation allowance............................................ (0.6) 1.3 1.5
Other items, net............................................... 0.8 (1.5) 0.9
---- ---- ----
Effective income tax rate.................................... 33.5% 32.9% 33.0%
==== ==== ====
</TABLE>
Under pre-1984 life insurance company federal income tax laws, a portion of
a life insurance company's "gain from operations" was not subject to current
income taxation but was accumulated for tax purposes in a memorandum account
designated as "policyholders' surplus account". These amounts are not taxable
unless distributed to the Company or unless they exceed certain statutory
limitations. The aggregate accumulation in this account for the Company's life
insurance subsidiaries was approximately $11.7 million at December 31, 1995.
Taxes have not been provided on this amount since the Company contemplates no
action and can foresee no events that would result in such a tax on the
remaining portion.
At December 31, 1995, certain acquired subsidiaries of the Company had
aggregate federal tax loss carryforwards of $8.6 million for use to offset
future taxable income, under certain circumstances, with expiration dates
ranging between 2002 and 2007. The maximum amounts of federal tax loss
carryforwards available are $1.2 million in 1996, $1.1 million in 1997, $658,000
per year from 1998 through 2006, and $386,000 in 2007.
Total federal income taxes paid were $31.3 million, $20.6 million, and
$21.4 million, for 1995, 1994, and 1993, respectively.
United Insurance Companies, Inc. and its non-life insurance subsidiaries
file a consolidated federal income tax return. The Company's life insurance
subsidiaries are taxed as life insurance companies and all file separate federal
income tax returns.
NOTE H -- STOCKHOLDERS' EQUITY
At the Annual Meeting of Shareholders on May 8, 1995, approval for an
increase in authorized shares from 10.0 million shares to 40.0 million shares
was obtained and the Board of Directors of the Company declared a four-for-one
stock split, in the form of a three hundred percent stock dividend. Each
shareholder received three additional shares of the Company's stock for each
share of the Company's stock they currently owned. The four-for-one split was
distributed on June 1, 1995 to shareholders of record at the close of business
on May 22, 1995. All share and per share amounts have been restated for 1994 and
1993 to reflect the stock split, except the authorized, issued and outstanding
shares at December 31, 1994.
Generally, total stockholders' equity of domestic insurance subsidiaries,
as determined in accordance with statutory accounting practices, in excess of
minimum statutory capital requirements is available for transfer to the parent
company subject to the tax effects of distribution from the "policyholders'
surplus account" described in Note G on federal income taxes. The minimum
statutory capital and surplus requirements of domestic insurance subsidiaries at
December 31, 1995 was $7.3 million.
Prior approval by statutory authorities is required for the payment of
dividends by a domestic insurance company which exceed certain limitations. At
December 31, 1995, the insurance companies could pay aggregate dividends to the
parent company of approximately $17.2 million without prior approval of
statutory authorities.
F-21
<PAGE> 57
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Combined net income and stockholders' equity for the Company's domestic
insurance subsidiaries determined in accordance with statutory accounting
practices and adjusted for percentage of ownership and pro rata share of net
income are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Net income............................................. $ 39,256 $ 33,567 $ 31,197
Stockholders' equity................................... $150,543 $117,956 $100,823
</TABLE>
The Company's domestic insurance subsidiaries prepare their statutory
financial statements in accordance with accounting practices prescribed or
permitted by their respective state insurance departments. Prescribed statutory
accounting practices include state laws, regulations, and general administrative
rules, as well as a variety of publications of the National Association of
Insurance Commissioners (NAIC). Permitted statutory accounting practices
encompass all accounting practices that are not prescribed; such practices
differ from state to state, may differ from company to company within a state,
and may change in the future. The Company has no permitted statutory accounting
practices. Furthermore, the NAIC has a project to codify statutory accounting
practices, the result of which is expected to constitute the only source of
"prescribed" statutory accounting practices. Accordingly, that project, which is
expected to be completed in 1997, will likely change to some extent prescribed
statutory accounting practices, and may result in changes to the accounting
practices that insurance enterprises use to prepare their statutory financial
statements.
NOTE I -- COMMITMENTS AND CONTINGENCIES
Off-Balance Sheet risk: The Company has commitments to purchase securities
on a "to be announced" basis where delivery and payment can take place a month
or more after the date of the transaction. (See Note C.)
Various lawsuits and claims are pending against the Company and its
subsidiaries. Based in part upon the opinion of counsel as to the ultimate
disposition of such lawsuits and claims, management believes that the liability,
if any, will not be material.
The Company has extended a $1.0 million line of credit with an interest
rate of 12%. The line is secured by an interest in premium accounts receivable.
There were no amounts outstanding under this line of credit during 1995.
The Company has commitments to fund the unused line of credit on certain
credit card loans. At December 31, 1995, the outstanding commitment was $14.5
million.
The Company has the right and may be required to purchase shares of certain
minority stockholders, certain of which are related parties, based on a
predetermined formula. This obligation at December 31, 1995 was approximately
$12.5 million. (See Note L).
Beginning in December of 1996, and in December of each year thereafter, the
Company may be required to purchase the remaining shares of the minority
shareholders of one of the subsidiary companies acquired in 1995 based on a
predetermined formula price. Also, the minority shareholders of this subsidiary
may require the Company to purchase all of their remaining shares based on the
same predetermined formula price. The formula price based on information
available at December 31, 1995 is $14.5 million.
The Company and its subsidiaries lease office space and data processing
equipment under various lease agreements with initial lease periods of three to
ten and one-half years. Minimum lease commitments, at December 31, 1995 amount
to $2.5 million in 1996, $2.2 million in 1995, $1.9 million in 1998, $1.3
million in 1999 and $629,000 in 2000. Rent expense amounted to $2.8 million,
$1.7 million and $1.7 million for 1995, 1994, and 1993, respectively.
F-22
<PAGE> 58
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has an agreement whereby it services a block of life insurance
policies for an unrelated company. The Company receives a fee for servicing the
policies and will also participate in the profits or losses relating to the
performance of the block of life insurance policies after amortization of the
unrelated Company's purchase price. The Company does not anticipate losses
relating to the performance of the block of life insurance policies, but if
losses should occur the Company is liable for its portion.
In conjunction with its life insurance operations, the Company commits to
assist in funding the higher education of its insureds with student loans. As of
December 31, 1995, the Company has outstanding student loan commitments for the
years 1996 through 2017. The interest rate on these commitments vary as
described below. Loans are limited to the cost of school or prescribed maximums.
These loans are guaranteed as to principal and interest by an appropriate
guarantee agency and are also collateralized by either the related insurance
policy or the co-signature of a parent or guardian. The Company also makes
available federally insured loans as a part of its arrangement with the
guarantee agency. Any such loans are funded by qualified third parties. The
total commitment for the next five school years and thereafter as well as the
amount the Company expects to fund considering lapses and utilization rate are
as follows:
<TABLE>
<CAPTION>
TOTAL EXPECTED
COMMITMENT FUNDING
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
1996............................................................ $ 21,854 $ 6,000
1997............................................................ 40,804 10,000
1998............................................................ 61,147 11,000
1999............................................................ 77,067 12,000
2000............................................................ 86,711 11,000
Thereafter...................................................... 258,498 24,000
---------- --------
$546,081 $ 74,000
========= =======
</TABLE>
Interest rates on the above commitments are as follows:
<TABLE>
<CAPTION>
TOTAL EXPECTED
COMMITMENT FUNDING
---------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
9.50%........................................................... $ 952 $ 416
9.75%........................................................... 69,046 10,775
Variable (Prime plus 2%)........................................ 476,083 62,809
---------- --------
$546,081 $ 74,000
========= =======
</TABLE>
NOTE J -- EMPLOYEE BENEFIT PLANS
The Company has an Employee Stock Ownership Plan (ESOP) which requires the
Company to contribute 3% of the participants' compensation and match one-half of
participants' contributions up to 6% of the participants' compensation.
Substantially all full-time employees are eligible to participate in the ESOP.
Contributions by the Company for 1995, 1994, and 1993 totaled $1.1 million,
$893,000, and $808,000, respectively.
The ESOP borrowed $381,000 from the Company in 1991, at 8.75% to purchase
42,000 shares of the Company's common stock. The loan was repaid in 1995. The
note receivable had an unpaid balance of $76,000 at December 31, 1994 and was
secured by 33,600 shares of the Company's common stock.
F-23
<PAGE> 59
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE K -- STOCK OPTION PLAN AND WARRANTS
The Company has a stock option plan which provides options on 1.6 million
shares of common stock for granting to officers, key employees, and certain
eligible non-employees at fair market value at the date of grant. The options
vest at 20% every twelve months subject to continuing employment, provided that
an option will vest 100% upon death, permanent disability, or change of control
of the Company. All options under the plan are exercisable over a five year
period.
A summary of stock option transactions adjusted for stock split (see Note
H) are as follows:
<TABLE>
<CAPTION>
NUMBER AVERAGE OPTION
OF SHARES PRICE PER SHARE ($)
--------- -------------------
<S> <C> <C>
Outstanding options at January 1, 1993.................... 643,200 1.46
Granted................................................... --
Canceled.................................................. (217,904) 1.07
Exercised................................................. (225,616) 1.15
---------
Outstanding options at December 31, 1993.................. 199,680 2.04
Granted................................................... 400,000 7.50
Canceled.................................................. (47,468) 1.95
Exercised................................................. (56,972) 1.64
---------
Outstanding options at December 31, 1994.................. 495,240 6.51
Granted................................................... 20,000 10.00
Canceled.................................................. (418,561) 6.70
Exercised................................................. (29,439) 1.96
---------
Outstanding options at December 31, 1995.................. 67,240 4.82
---------
Options Exercisable at December 31,
1993.................................................... 69,040 2.05
1994.................................................... 51,960 2.22
1995.................................................... 35,880 2.55
</TABLE>
During 1991, the Company entered into an agreement with Onward and Upward
whereby it retired a portion of the convertible subordinated debentures at par
and issued a warrant to purchase 357,600 shares of the Company's common stock
for $2.50 per share, adjusted for stock split (see Note H). During 1995, 1994,
and 1993, 20% of the warrants were exercised in each year and 71,520 shares of
common stock were issued for proceeds of $179,000 in each year. Warrants
outstanding were 71,520, 143,040, and 214,560 at December 31, 1995, 1994, and
1993, respectively. The remaining warrants expire equally on January 1, 1996 and
on July 1, 1996.
NOTE L -- RELATED PARTY TRANSACTIONS
Onward and Upward owns common stock of various subsidiaries of the Company
and has granted the Company a right of first refusal to purchase its ownership
interests at prices based on a predetermined formula. Onward and Upward has the
right to require the Company to purchase its ownership in the subsidiaries'
stock at prices based on the same predetermined formula. During 1993, the
Company acquired the 25% minority interest in MEGA from Onward and Upward. (See
Note B)
The Company has issued warrants to Onward & Upward. (See Note K)
In August 1993, the Company sold the future commissions of one of the
Company's agencies to the Chairman of the Board of the Company. The purchase
price of $3.6 million was based on the present value of the future commissions
which was calculated using assumptions based on recent experience.
F-24
<PAGE> 60
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
During 1993, the Company entered into an agreement with the Company's
Chairman of the Board to participate in an interest in a start-up company which
has developed a paperless claims system. Until the long-term viability of the
start-up company is determined, the Company has substantially written off its
investment of $4.0 million with $1.4 million, $2.2 million and $300,000
occurring in 1995, 1994 and 1993, respectively.
During 1995, the Company issued 427,900 shares of its common stock in
exchange for 97.5% of the outstanding common stock of WinterBrook Holdings, Inc.
(WinterBrook) from the Company's President and Chief Executive Officer. The
Company also purchased the remaining 2.75% from an unrelated individual at the
same price per share.
In November 1994, the Company extended a $10.0 million line of credit to a
related company of which the Chairman of the Board of the Company has an
ownership interest. The line of credit bears interest at the rate of prime plus
two percent (2%) maturing December 31, 1997. The line of credit is
collateralized by certain tangible assets of the related company. The line of
credit is guaranteed by the Company's Chairman of the Board. At December 31,
1995, the related company had drawn the full $10.0 million on the line of
credit.
At December 31, 1995, the Company had an unsecured loan payable to the
Chairman of the Board of the Company in the amount of $10.7 million, bearing
interest at the prime rate of a local bank, and is due on demand.
On December 29, 1995, the Company sold $26.5 million of credit card loans
to a trust established for the benefit of investors in certificates representing
undivided fractional interests in the trust. Onward & Upward purchased a $15.0
million participating interest in this trust. This transaction was accounted for
as a sale. The transaction did not result in a gain or loss for the Company. The
Company purchased a participating interest in the trust totaling $11.5 million.
During 1995, the Company and UGA entered into an agreement whereby the
Company receives a 20% interest in the profits or losses relating to certain
lead activities of UGA. During 1995, the Company had losses of $1.6 million on
these activities. It is expected that these activities will result in a small
gain for the three year period ending December 31, 1997.
UGA receives commissions from insurance subsidiaries of AEGON with respect
to insurance policies that the Company coinsures. UGA received $45.5 million,
$50.3 million, and $43.2 million in such commissions in 1995, 1994, and 1993,
respectively. Through the coinsurance agreements with AEGON, the amount of these
commissions received by UGA attributable to the Company were $26.1 million,
$26.3 million, and $31.4 million in 1995, 1994, and 1993, respectively.
UGA generates sales leads for agents and management expertise for an
insurance subsidiary of the Company. The insurance subsidiary of the Company
paid UGA $4.3 million and $4.7 million in 1995 and 1994, respectively.
UGA markets products which are directly underwritten by insurance
subsidiaries of the Company. The insurance subsidiaries paid commissions of $1.9
million and $894,000 to UGA in 1995 and 1994, respectively.
NOTE M -- INVESTMENT ANNUITY SEGREGATED ACCOUNTS
The Company has deferred investment annuity policies which have segregated
account assets and liabilities amounting to $210.5 million and $193.3 million at
December 31, 1995 and 1994, respectively, which are funded by specific assets
held in segregated custodian accounts for the purposes of providing policy
benefits and paying applicable premiums, taxes and other charges as due. Because
investment decisions with respect to these segregated accounts are made by the
policyholders, these assets and liabilities are not presented in these financial
statements. The assets are held in individual custodian accounts from which the
Company has received hold harmless agreements and indemnifications.
F-25
<PAGE> 61
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE N -- SEGMENT INFORMATION
The Company's operations are classified and summarized in three industry
segments. The business segments are health insurance, life insurance and
annuity, and corporate and other. Allocations of investment income and certain
general expenses are based on a number of assumptions and estimates, and the
Company's reported operating results would change if different methods were
applied. Certain assets are not individually identifiable by segment and,
accordingly, have been allocated by formulas. Segment revenues include premiums
and other policy charges and considerations, net investment income, and other
income. Realized investment gains and losses and general corporate expenses are
included in corporate and other. Operations which do not constitute reportable
business segments have been combined with corporate and other. Depreciation
expense and capital expenditures are not considered material. Financial
information by industry segment for revenues, income before federal income
taxes, and identifiable assets are summarized as follows:
<TABLE>
<CAPTION>
LIFE
HEALTH INSURANCE/ CORPORATE
TOTAL INSURANCE ANNUITY AND OTHER
---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Year ended December 31, 1995
Revenues.......................................... $ 641,074 $ 495,976 $ 79,038 $ 66,060
Income before federal income taxes................ 86,661 64,456 11,569 10,636
Identifiable assets*.............................. 1,130,859 259,205 528,700 342,954
Year ended December 31, 1994
Revenues.......................................... $ 522,946 $ 440,432 $ 72,440 $ 10,074
Income (loss) before federal income taxes......... 56,015 51,935 10,627 (6,547)
Identifiable assets*.............................. 1,031,263 217,325 561,351 252,587
Year ended December 31, 1993
Revenues.......................................... $ 451,789 $ 372,089 $ 60,335 $ 19,365
Income (loss) before federal income taxes......... 53,019 41,304 7,733 3,982
Identifiable assets*.............................. 814,793 176,140 440,475 198,178
</TABLE>
- ---------------
* At end of year.
NOTE O -- SUBSEQUENT EVENT
In January 1996, the Company agreed in principle to acquire the health
administrative office from PFL Life Insurance Company ("PFL"), a subsidiary of
AEGON, to be effective April 1, 1996. The facility underwrites and services the
majority of the health business produced by UGA. All in force business will
continue to be serviced and will continue to be shared by the Company and AEGON
through an existing coinsurance agreement. After a short transition period, all
new business produced by UGA will be underwritten by one of the Company's
subsidiaries and will not be shared with AEGON through coinsurance arrangements.
The Company anticipates purchasing the building and equipment from PFL.
On January 29, 1996, the Board of Directors approved an amendment to the
Company's Certificate of Incorporation, subject to approval of stockholders, to
increase the authorized shares of common stock from 40 million shares to 50
million shares and to create a class of preferred stock consisting of 10 million
shares with a par value of $.01. In addition, on March 27, 1996, the Board of
Directors approved issuance of up to 5.8 million shares of common stock and
passed a resolution to authorize a Board Committee to approve a planned common
stock offering including the price and number of shares to be offered.
F-26
<PAGE> 62
UNITED INSURANCE COMPANIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE P -- SUPPLEMENTAL FINANCIAL STATEMENT DATA
Disclosures of non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Exchange of Company's common stock for remaining minority
interest of subsidiary................................. $ -- $ -- $ 10,800
Purchase of subsidiaries and life, annuity and health
business:
Fair value of assets acquired.......................... 45,990 85,184 258,694
Liabilities assumed.................................... 22,538 72,415 238,100
------- ------- --------
Net cash paid.......................................... $23,452 $12,769 $ 20,594
======= ======= ========
</TABLE>
Details of underwriting, acquisitions, and insurance expenses are as
follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Amortization of deferred policy acquisition
costs............................................ $ 15,029 $ 13,776 $ 8,093
Commissions........................................ 93,522 89,584 82,385
Administrative expenses............................ 111,292 76,681 71,981
Premium taxes...................................... 12,945 11,038 9,540
Amortization of goodwill........................... 544 153 1,014
-------- -------- --------
$233,332 $191,232 $173,013
======== ======== ========
</TABLE>
<TABLE>
<CAPTION>
1995
-----------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $150,839 $154,293 $158,431 $177,511
Income before federal income taxes and minority
interests..................................... 18,383 21,607 21,066 25,605
Net income...................................... 12,143 13,794 12,543 14,848
Net income per share............................ $ 0.32 $ 0.37 $ 0.33 $ 0.39
</TABLE>
<TABLE>
<CAPTION>
1994
-----------------------------------------------
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C>
Revenues........................................ $117,011 $130,093 $133,478 $142,364
Income before federal income taxes and minority
interests..................................... 9,832 14,555 15,609 16,019
Net income...................................... 6,613 9,269 10,118 10,178
Net income per share............................ $ 0.17 $ 0.25 $ 0.27 $ 0.27
</TABLE>
Computation of earnings per share for each quarter are made independently
of earnings per share for the year. All per share amounts have been restated for
periods prior to the second quarter of 1995 to reflect the four-for-one stock
split effective June 1, 1995 (see Note H).
F-27
<PAGE> 63
UNITED INSURANCE COMPANIES, INC.
AND SUBSIDIARIES
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED
PARTIES
DECEMBER 31, 1995
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
AMOUNT
AT WHICH
FAIR SHOWN IN THE
TYPE OF INVESTMENTS COST VALUE BALANCE SHEET
- --------------------------------------------------------- -------- -------- -------------
<S> <C> <C> <C>
Fixed Maturity Securities, available for sale:
Bonds:
U.S. Treasury obligations and U.S. Government agency
obligations......................................... $128,898 $130,837 $ 130,837
Mortgage-backed securities issued by U.S. Government
agencies and authorities............................ 129,499 131,874 131,874
Other mortgage and asset backed securities............. 182,611 184,420 184,420
Other corporate bonds.................................. 302,937 307,342 307,342
-------- -------- --------
TOTAL FIXED MATURITIES......................... 743,945 $754,473 754,473
========
-------- --------
Equity Securities, available for sale:
Common stocks.......................................... 2,065 2,518 2,518
Nonredeemable preferred stocks......................... 3,049 2,770 2,770
-------- -------- --------
TOTAL EQUITY SECURITIES........................ 5,114 $ 5,288 5,288
========
-------- --------
Guaranteed student loans................................. 12,337 12,159*
Mortgage and collateral loans............................ 16,209 15,559*
Policy loans............................................. 24,042 24,042
Credit card loans........................................ 48,856 36,727*
Short-term investments................................... 83,024 83,024
-------- --------
TOTAL INVESTMENTS.............................. $933,527 $ 931,272
======== ========
</TABLE>
- ---------------
* Differences between cost and carrying value result from certain valuation
allowances and declines in value that are other than temporary.
F-28
<PAGE> 64
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UNITED INSURANCE COMPANIES, INC. (PARENT COMPANY)
BALANCE SHEETS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31
---------------------
1995 1994
-------- --------
<S> <C> <C>
ASSETS:
Investments:
Investments and advances in subsidiaries*......................... $242,031 $170,501
Investment in agents' receivables................................. 5,358 4,617
Credit card loans................................................. 36,727 51,770
Collateral loan................................................... 2,500 --
Short-term investments............................................ 14,472 1,147
-------- --------
Total Investments............................................ 301,088 228,035
Cash................................................................. 1,005 1,117
Due from related parties............................................. 578 730
Other................................................................ 2,829 1,491
-------- --------
$305,500 $231,373
======== ========
LIABILITIES:
Accrued expenses and other liabilities............................... $ 5,845 $ 2,429
Due to related party................................................. 455 440
Short-term debt...................................................... 22,726 20,100
Long-term debt....................................................... 27,655 36,055
Federal income taxes payable......................................... -- 1,426
-------- --------
56,681 60,450
STOCKHOLDERS' EQUITY
Common stock......................................................... 382 94
Additional paid-in capital........................................... 50,554 50,723
Net unrealized investment gains (losses) held by subsidiaries........ 6,789 (18,102)
Retained earnings.................................................... 191,094 138,208
-------- --------
248,819 170,923
-------- --------
$305,500 $231,373
======== ========
</TABLE>
- ---------------
* Eliminated in consolidation.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of United Insurance
Companies, Inc. and Subsidiaries.
F-29
<PAGE> 65
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT -- (CONTINUED)
UNITED INSURANCE COMPANIES, INC. (PARENT COMPANY)
STATEMENTS OF INCOME
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------------
1995 1994 1993
------- ------- -------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries*................................ $24,586 $ 6,039 $14,215
Service fee income.......................................... -- 2,271 7,087
Interest income............................................. 7,245 3,715 1,478
Interest and other income from subsidiaries*................ 827 829 692
Losses on sale of investments............................... -- (164) (163)
Fees and other income....................................... 9,396 2,716 791
------- ------- -------
42,054 15,406 24,100
------- ------- -------
Expenses:
General and administrative expenses......................... 18,448 7,655 2,245
Administrative expenses to subsidiaries*.................... 4,702 -- --
Interest expense............................................ 3,894 1,913 1,186
------- ------- -------
27,044 9,568 3,431
------- ------- -------
Income before equity in undistributed earnings of
subsidiaries and federal income taxes............. 15,010 5,838 20,669
Equity in undistributed earnings of subsidiaries.............. 39,033 31,553 13,746
------- ------- -------
Income before federal income taxes.................. 54,043 37,391 34,415
Federal income taxes.......................................... 715 1,213 1,570
------- ------- -------
Net income.......................................... $53,328 $36,178 $32,845
======= ======= =======
</TABLE>
- ---------------
* Eliminated in consolidation.
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of United Insurance
Companies, Inc. and Subsidiaries.
F-30
<PAGE> 66
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
UNITED INSURANCE COMPANIES, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1995 1994 1993
--------- --------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income............................................. $ 53,328 $ 36,178 $ 32,845
Adjustments to reconcile net income to cash provided by
operating activities:
Equity in undistributed earnings of subsidiaries.... (39,033) (31,553) (13,746)
Losses on sale of investments....................... -- 164 163
Decrease in amounts due from related companies...... 442 22 89
Increase in accrued expenses and other
liabilities....................................... 3,756 1,909 284
Deferred income taxes (benefit)..................... (2,498) (1,923) 756
Increase (decrease) in federal income taxes
payable........................................... 1,057 1,536 (699)
Other items, net.................................... (2,006) (797) 183
--------- --------- --------
Cash Provided by Operations............................ 15,046 5,536 19,875
--------- --------- --------
INVESTING ACTIVITIES
Purchase of subsidiaries............................... (23,452) -- (20,594)
Decrease (increase) of investments in and advances to
subsidiaries........................................ 15,846 (8,673) (1,343)
Sale and maturity of investments....................... 156,123 65,275 4,720
Purchase of investments................................ (156,904) (105,958) (6,436)
Decrease (increase) in agents' receivables............. (741) 7,223 (8,880)
--------- --------- --------
Cash Used in Investing Activities.............. (9,128) (42,133) (32,533)
--------- --------- --------
FINANCING ACTIVITIES
Proceeds of notes payable.............................. 18,091 59,655 28,500
Repayment of notes payable............................. (34,600) (23,000) (9,000)
Proceeds from payable to related party................. 10,735 940 --
Repayment of payable to related party.................. (275) (1,500) (6,000)
Proceeds from exercise of warrants..................... 179 179 179
Proceeds from exercise of stock options................ 29 33 32
Purchase of treasury stock............................. (189) (154) (104)
--------- --------- --------
Cash Provided by (Used in) Financing
Activities................................... (6,030) 36,153 13,607
--------- --------- --------
Increase (decrease) in Cash.................... (112) (444) 949
Cash at Beginning of Period.................... 1,117 1,561 612
--------- --------- --------
Cash at End of Period.......................... $ 1,005 $ 1,117 $ 1,561
========= ========= ========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of United Insurance
Companies, Inc. and Subsidiaries.
F-31
<PAGE> 67
UNITED INSURANCE COMPANIES, INC.
AND SUBSIDIARIES
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
COL. C
COL. B ----------------
----------- FUTURE POLICY
DEFERRED BENEFITS, COL. D COL. E
POLICY LOSSES, -------- ------------
ACQUISITION CLAIMS, AND LOSS UNEARNED POLICYHOLDER
COL. A COSTS EXPENSES PREMIUMS FUNDS
------ ----------- ---------------- -------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
December 31, 1995:
Life insurance and annuities............. $42,960 $514,964 $ 4,826 $ 8,910
Health insurance......................... 13,162 191,622 63,273 4,310
------- -------- ------- -------
Total............................ $56,122 $706,586 $68,099 $ 13,220
======= ======== ======= =======
December 31, 1994:
Life insurance and annuities............. $42,599 $548,065 $ 2,806 $ 10,480
Health insurance......................... 14,203 155,355 58,934 3,036
------- -------- ------- -------
Total............................ $56,802 $703,420 $61,740 $ 13,516
======= ======== ======= =======
December 31, 1993:
Life insurance and annuities............. $35,199 $426,034 $ 427 $ 14,014
Health insurance......................... 9,040 130,017 46,123 --
------- -------- ------- -------
Total............................ $44,239 $556,051 $46,550 $ 14,014
======= ======== ======= =======
</TABLE>
<TABLE>
<CAPTION>
COL. H
---------------- COL. I COL. J
COL. F COL. G BENEFITS, CLAIMS ----------------- --------- COL. K
-------- ---------- LOSSES, AND AMORTIZATION OF OTHER --------
PREMIUM INVESTMENT SETTLEMENT DEFERRED POLICY OPERATING PREMIUMS
REVENUE INCOME* EXPENSES ACQUISITION COSTS EXPENSES* WRITTEN
-------- ---------- ---------------- ----------------- --------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
1995:
Life insurance and
annuities........... $ 38,530 $ 32,485 $ 44,444 $11,703 $ 11,321
Health insurance....... 473,778 14,373 272,728 3,326 155,466 $480,021
========
-------- ------- -------- ------- --------
Total.......... $512,308 $ 46,858 $317,172 $15,029 $ 166,787
======== ======= ======== ======= ========
1994:
Life insurance and
annuities........... $ 36,987 $ 30,692 $ 37,010 $10,107 $ 14,696
Health insurance....... 415,251 10,457 236,776 3,669 148,051 $418,760
========
-------- ------- -------- ------- --------
Total.......... $452,238 $ 41,149 $273,786 $13,776 $ 162,747
======== ======= ======== ======= ========
1993:
Life insurance and
annuities........... $ 24,977 $ 31,144 $ 35,400 $ 6,421 $ 10,781
Health insurance....... 343,743 9,011 188,961 1,672 140,153 $341,161
========
-------- ------- -------- ------- --------
Total.......... $368,720 $ 40,155 $224,361 $ 8,093 $ 150,934
======== ======= ======== ======= ========
</TABLE>
- ---------------
* Allocations of Net Investment Income and Other Operating Expenses are based on
a number of assumptions and estimates, and the results would change if
different methods were applied.
F-32
<PAGE> 68
UNITED INSURANCE COMPANIES, INC.
AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
PERCENTAGE
OF AMT.
GROSS NET ASSUMED
AMOUNT CEDED ASSUMED AMOUNT TO NET
---------- -------- -------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1995
Life insurance in force........ $3,778,008 $776,086 $635,697 $3,637,619 17.5%
========== ======== ======== ========== ====
Premiums:
Life insurance.............. $ 40,558 $ 8,459 $ 6,431 $ 38,530 16.7%
Health insurance............ 215,334 11,169 269,613 473,778 56.9%
---------- -------- -------- ----------
$ 255,892 $ 19,628 $276,044 $ 512,308
========== ======== ======== ==========
Year ended December 31, 1994
Life insurance in force........ $3,717,845 $767,580 $569,482 $3,519,747 16.2%
========== ======== ======== ========== ====
Premiums:
Life insurance.............. $ 40,390 $ 7,707 $ 4,304 $ 36,987 11.6%
Health insurance............ 183,305 9,369 241,315 415,251 58.1%
---------- -------- -------- ----------
$ 223,695 $ 17,076 $245,619 $ 452,238
========== ======== ======== ==========
Year ended December 31, 1993
Life insurance in force........ $2,115,327 $213,817 $613,263 $2,514,773 24.4%
========== ======== ======== ========== ====
Premiums:
Life insurance.............. $ 22,588 $ 1,827 $ 4,216 $ 24,977 16.9%
Health insurance............ 155,537 7,369 195,575 343,743 56.9%
---------- -------- -------- ----------
$ 178,125 $ 9,196 $199,791 $ 368,720
========== ======== ======== ==========
</TABLE>
F-33
<PAGE> 69
UNITED INSURANCE COMPANIES, INC.
AND SUBSIDIARIES
SCHEDULE V -- VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
RECOVERIES/ DEDUCTIONS
BALANCE AT ADDITIONS CHARGED AMOUNTS BALANCE
BEGINNING COST AND TO OTHER CHARGED AT END OF
OF PERIOD EXPENSES ACCOUNTS OFF PERIOD
---------- --------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
Allowance for losses
Year ended December 31, 1995
Credit card receivables.......... $4,252 $16,968 $ 2,090 $(11,181) $12,129
Agents' receivables.............. 3,623 129 175 (941) 2,986
Mortgage loans................... 650 650
Guaranteed student loans......... 196 (18) 178
Year ended December 31, 1994
Credit card receivables.......... $2,620 $ 6,837 $ (366) $ (4,839) $ 4,252
Agents' receivables.............. 1,997 1,422 357 (153) 3,623
Mortgage loans................... 650 650
Guaranteed student loans......... 195 -- 1 -- 196
Year ended December 31, 1993
Credit card receivables.......... $1,675 $ 2,486 $ 452 $ (1,993) $ 2,620
Agents' receivables.............. 494 1,325 178 -- 1,997
Mortgage loans................... 650 650
Guaranteed student loans......... 195 -- -- -- 195
</TABLE>
F-34
<PAGE> 70
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -----------------------------------------------------------------------------------
<C> <S> <C>
2 -- Plan of Reorganization of United Group Insurance Company, as
subsidiary of United Group Companies, Inc. and Plan and Agreement of
Merger of United Group Companies, Inc. into United Insurance
Companies, Inc., filed as Exhibit 2-1 to the Registration Statement
on Form S-1, File No. 33-2998, filed with the Securities and Exchange
Commission on January 30, 1986 and incorporated by reference herein.
3.1(A) -- Certificate of Incorporation of United Insurance Companies, Inc., as
amended, filed as Exhibit 3.5 to the Form 10-Q dated March 31, 1995,
filed on May 12, 1995, as amended on March 28, 1996, File No.
0-14320, and incorporated by reference herein.
3.2 -- Restated By-Laws of United Insurance Companies, Inc.
10.1(B) -- Reinsurance Agreement between AEGON USA Companies and UICI Companies
effective January 1, 1995, and amended through November 21, 1995.
10.2 -- Agreements Relating to United Group Association Inc., filed as
Exhibit 10-2 to the Registration Statement on Form S-18, File No.
2-99229, filed with the Securities and Exchange Commission on July
26, 1985 and incorporated by reference herein.
10.3 -- Agreement for acquisition of capital stock of Mark Twain Life
Insurance Corporation by Mr. Ronald L. Jensen, filed as Exhibit 10-4
to the Registration Statement on Form S-1, File No. 33-2998, filed
with the Securities and Exchange Commission on January 30, 1986 and
incorporated by reference herein.
10.3(A) -- Assignment Agreement among Mr. Ronald L. Jensen, the Company and
Onward and Upward, Inc. dated February 12, 1986 filed as Exhibit
10-4(A) to Amendment No. 1 to Registration Statement on Form S-1,
File No. 33-2998, filed with the Securities and Exchange Commission
on February 13, 1986 and incorporated by reference herein.
10.4 -- Agreement for acquisition of capital stock of Mid-West National Life
Insurance Company of Tennessee by the Company filed as Exhibit 2 to
the Report on Form 8-K of the Company, File No. 0-14320, dated August
15, 1986 and incorporated by reference herein.
10.5(A) -- Stock Purchase Agreement, dated July 1, 1986, among the Company,
Charles E. Stuart and Stuart Holding Company, as amended July 7,
1986, filed as Exhibit 11(c)(1) to Statement on Schedule 14D-1 and
Amendment No. 1 to Schedule 13D, filed with the Securities and
Exchange Commission on July 14, 1986 and incorporated by reference
herein.
10.5(B) -- Acquisition Agreement, dated July 7, 1986 between Associated
Companies, Inc. and the Company, together with exhibits thereto,
filed as Exhibit (c)(2) to Statement on Schedule 14D-1 and Amendment
No. 1 to Schedule 13D, filed with the Securities and Exchange
Commission on July 14, 1986 and incorporated by reference herein.
10.5(C) -- Offer to Purchase, filed as Exhibit (a)(1) to Statement on Schedule
14D-1 and Amendment No. 1 to Schedule 13D, filed with the Securities
and Exchange Commission on July 14, 1986 and incorporated by
reference herein.
10.6 -- Agreement for acquisition of capital stock of Life Insurance Company
of Kansas, filed as Exhibit 10.6 to the 1986 Annual Report on Form
10-K, File No. 0-14320, filed with the Securities and Exchange
Commission on March 27, 1987 and incorporated by reference herein.
</TABLE>
<PAGE> 71
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -----------------------------------------------------------------------------------
<C> <S> <C>
10.7 -- Agreement Among Certain Stockholders of the Company, filed as Exhibit
10-6 to the Registration Statement on Form S-18, File No. 2-99229,
filed with the Securities and Exchange Commission on July 26, 1985
and incorporated by reference herein.
10.8 -- Form of Subscription Agreement for 1985 Offering, filed as Exhibit
10-7 to the Registration Statement on Form S-1, File No. 33-2998,
filed with the Securities and Exchange Commission on January 30, 1986
and incorporated by reference herein.
10.9 -- Repurchase Agreement between Life Investors Inc., UGIC, Ronald Jensen
and Keith Wood dated January 6, 1984, filed as Exhibit 10-8 to
Registration Statement on Form S-1, File No. 33-2998, filed with the
Securities and Exchange Commission on January 30, 1986 and
incorporated by reference herein.
10.10 -- Treaty of Assumption and Bulk Reinsurance Agreement for acquisition
of certain assets and liabilities of Keystone Life Insurance Company,
filed as Exhibit 10.10 to the 1987 Annual Report on Form 10-K, File
No. 0-14320, filed with the Securities and Exchange Commission on
March 28, 1988 and incorporated by reference herein.
10.11 -- Acquisition and Sale-Purchase Agreements for the acquisition of
Orange State Life and Health Insurance Company and certain other
assets, filed as Exhibit 10.11 to the 1987 Annual Report on Form
10-K, File No. 0-14320, filed with the Securities and Exchange
Commission on March 28, 1988 and incorporated by reference herein.
10.12 -- United Insurance Companies, Inc. 1987 Stock Option Plan, included
with the 1988 Proxy Statement filed with the Securities and Exchange
Commission on April 25, 1988 and incorporated by reference herein,
filed as Exhibit 10.12 to the 1988 Annual Report on Form 10-K, File
No. 0-14320, filed with the Securities and Exchange Commission on
March 30, 1989 and incorporated by reference herein.
10.13 -- Amendment to the United Insurance Companies, Inc. 1987 Stock Option
Plan, filed as Exhibit 10.13 to the 1988 Annual Report on Form 10-K,
File No. 0-14320, filed with the Securities and Exchange Commission
on March 30, 1989 and incorporated by reference herein.
10.14 -- Stock Purchase Agreement between American Capital Insurance Company
and United Insurance Companies, Inc., filed as Exhibit 10.14 to the
1988 Annual Report on Form 10-K, File No. 0-14320, filed with the
Securities and Exchange Commission on March 30, 1989 and incorporated
by reference herein.
10.15 -- Amendment to Stock Purchase Agreement between American Capital
Insurance Company and United Insurance Companies, Inc., filed as
Exhibit 10.15 to the 1988 Annual Report on Form 10-K, File No.
0-14320, filed with the Securities and Exchange Commission on March
30, 1989 and incorporated by reference herein.
10.16 -- Agreement of Substitution and Assumption Reinsurance dated as of
January 1, 1991 by and among Farm and Home Life Insurance Company,
the Arizona Life and Disability Insurance Guaranty Fund and United
Group Insurance Company, as modified by a Modification Agreement
dated August 26, 1991, together with schedules and exhibits thereto,
filed as Exhibit 2 to Schedule 13D, File No. 0-14320 filed with the
Securities and Exchange Commission on September 3, 1991 and
incorporated by reference herein.
</TABLE>
<PAGE> 72
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -----------------------------------------------------------------------------------
<C> <S> <C>
10.17 -- Stock Purchase Agreement dated as of August 26, 1991 by and among
Farm and Home Life Insurance Company, First United, Inc. and The MEGA
Life and Health Insurance Company, filed as Exhibit 3 to Schedule
13D, File No. 0-14320 filed with the Securities and Exchange
Commission on September 3, 1991 and incorporated by reference herein.
10.18 -- Stock Purchase Agreement dated as of August 26, 1991 by and among
Farm and Home Life Insurance Company, The Chesapeake Life Insurance
Company and Mid-West National Life Insurance Company of Tennessee,
filed as Exhibit 4 to Schedule 13D, File No. 0-14320 filed with the
Securities and Exchange Commission on September 3, 1991 and
incorporated by reference herein.
10.19 -- Second Agreement of Modification to Agreement of Substitution and
Assumption Reinsurance dated as of November 15, 1991 among Farm and
Home Life Insurance Company, United Group Insurance Company, and the
Arizona Life and Disability Insurance Guaranty Fund, filed as Exhibit
1 to Amendment No. 1 to Schedule 13D, File No. 0-14320 filed with the
Securities and Exchange Commission on February 5, 1992 and
incorporated by reference herein. This agreement refers to a
Modification Agreement dated September 12, 1991. The preliminary
agreement included in the initial statement was originally dated
August 26, 1991.
10.20 -- Addendum to Agreement of Substitution and Assumption Reinsurance
dated as of November 22, 1991 among United Group Insurance Company,
Farm and Home Life Insurance Company, and the Arizona Life and
Disability Insurance Guaranty Fund, filed as Exhibit 2 to Amendment
No. 1 to Schedule 13D, File No. 0-14320 filed with the Securities and
Exchange Commission on February 5, 1992 and incorporated by reference
herein.
10.21 -- Modification Agreement dated November 15, 1991 between First United,
Inc., Underwriters National Assurance Company, and Farm and Home Life
Insurance Company, The MEGA Life and Health Insurance Company, and
the Insurance Commissioner of the State of Indiana, and filed as
Exhibit 3 to Amendment No. 1 to Schedule 13D, File No. 0-14320 filed
with the Securities and Exchange Commission on February 5, 1992 and
incorporated by reference herein.
10.22 -- Agreement of Reinsurance and Assumption dated December 14, 1992 by
and among Mutual Security Life Insurance Company, in Liquidation,
National Organization of Life and Health Insurance Guaranty
Associations, and The MEGA Life and Health Insurance Company, and
filed as Exhibit 2 to the Company's Current Report on Form 8-K dated
March 29, 1993, (File No. 0-14320), and incorporated by reference
herein.
10.23 -- Acquisition Agreement dated January 15, 1993 by and between United
Insurance Companies, Inc. and Southern Educators Life Insurance
Company, and filed as Exhibit 2 to the Company's Current Report on
Form 8-K dated March 29, 1993, (File No. 0-14320), and incorporated
by reference herein.
10.24 -- Stock Exchange Agreement effective January 1, 1993 by and between
Onward and Upward, Inc. and United Insurance Companies, Inc. and
filed as Exhibit 2 to the Company's Current Report on Form 8-K dated
March 29, 1993, (File No. 0-14320), and incorporated by reference
herein.
10.25 -- Stock Purchase Agreement by and among United Insurance Companies,
Inc. and United Group Insurance Company and Landmark Land Company of
Oklahoma, Inc. dated January 6, 1994, and filed as Exhibit 10.27 to
Form 10-Q dated March 31, 1994, (File No. 0-14320), and incorporated
by reference herein.
</TABLE>
<PAGE> 73
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- -----------------------------------------------------------------------------------
<C> <S> <C>
10.26 -- Private Placement Agreement dated June 1, 1994 of 8.75% Senior Notes
Payable due June 2004 in the aggregate amount of $27,655,000, and
filed as Exhibit 28.1 to the Company's Current Report on Form 8-K
dated June 22, 1994, (File No. 0-14320), and incorporated by
reference herein.
11 -- Statement re: computation of per share earnings.
21 -- Subsidiaries of United Insurance Companies, Inc.
23.1 -- Consent of Independent Auditors
23.2 -- Consent of Independent Accountants
27 -- Financial Data Schedule
</TABLE>
<PAGE> 1
RESTATED BYLAWS
OF
UNITED INSURANCE COMPANIES, INC.
(Incorporated under the General Corporation Law
of the State of Delaware)
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
PREAMBLE . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I OFFICES
1.01 Registered Office and Agent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.02 Other offices . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II STOCKHOLDERS
2.01 Annual Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.02 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.03 Place of Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.04 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.05 Voting List . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.06 Voting of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
2.07 Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.08 Majority Vote; Withdrawal of Quorum . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.09 Method of Voting; Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.10 Closing of Transfer Books; Record Date . . . . . . . . . . . . . . . . . . . . . . . 4
2.11 Presiding Officials at Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III DIRECTORS
3.01 Management . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.02 Qualification; Election; Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.03 Number . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.04 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.05 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.06 First Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
3.07 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.08 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.09 Quorum; Majority Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.10 Procedure; Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.11 Presumption of Assent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
3.12 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
3.13 Interested Directors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
ARTICLE IV COMMITTEES
4.01 Designation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.02 Number; Qualification; Term . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.03 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
4.04 Committee Changes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.05 Regular Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.06 Special Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
4.07 Quorum; Majority Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8
</TABLE>
i
<PAGE> 3
<TABLE>
<S> <C>
ARTICLE IV COMMITTEES (CONTINUED)
4.08 Minutes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.09 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
4.10 Responsibility . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
ARTICLE V GENERAL PROVISIONS RELATING TO MEETINGS
5.01 Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
5.02 Waiver of Notice . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.03 Telephone and Similar Meetings . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
5.04 Action Without Meeting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
ARTICLE VI OFFICES AND OTHER AGENTS
6.01 Number; Titles; Election; Term . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
6.02 Removal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.03 Vacancies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.04 Authority . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.05 Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.06 Employment and Other Contracts . . . . . . . . . . . . . . . . . . . . . . . . . . . 11
6.07 Chairman of the Board . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.08 President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.09 Vice President . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.10 Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
6.11 Assistant Treasurer . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.12 Secretary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
6.13 Assistant Secretaries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13
ARTICLE VII CERTIFICATES AND STOCKHOLDERS
7.01 Certificates for Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
7.02 Lost, Stolen, or Destroyed Certificates . . . . . . . . . . . . . . . . . . . . . . . 14
7.03 Transfer of Shares . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
7.04 Registered Stockholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
ARTICLE XIII MISCELLANEOUS PROVISIONS
8.01 Dividends and Reserves . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
8.02 Fiscal Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.03 Seal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.04 Resignation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.05 Securities of Other Corporations . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.06 Amendment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.07 Invalid Provisions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
8.08 Indemnification . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
8.09 Table of Contents; Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
ii
<PAGE> 4
RESTATED BYLAWS
OF
UNITED INSURANCE COMPANIES, INC.
(INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE)
PREAMBLE
These Bylaws are subject to, and governed by, the General Corporation
Law of Delaware (the "Act") and the Certificate of Incorporation (the
"Certificate") of United Insurance Companies, Inc. (the "Company"). In the
event of a direct conflict between the provisions of these Bylaws and the
mandatory provisions of the Act or the provisions of the Certificate, such
provisions of the Act or the Certificate, as the case may be, will be
controlling.
ARTICLE I
OFFICES
1.01 Registered Office and Agent. The registered office and
registered agent of the Company shall be as from time to time set forth in the
Certificate or as authorized from time to time by the Board of Directors of the
Company and set forth in a statement filed with the Secretary of State of
Delaware.
1.02 Other Offices. The Company may also have offices at such other
places, both within and without the State of Delaware, as the Board of
Directors may, from time to time, determine or as the business of the Company
may require.
ARTICLE II
STOCKHOLDERS
2.01 Annual Meetings. An annual meeting of stockholders of the
Company shall be held during each calendar year on such date and at such time as
shall be designated from time to time by the Board of Directors and stated in
the notice of the meeting. At such meeting, the stockholders shall elect
directors and transact such other business as may properly be brought before the
meeting.
2.02 Special Meetings. Special meetings of the stockholders, for
any purpose or purposes, may be called by the Chairman of the Board, the
President, the Board of Directors or the
BYLAWS OF UNITED INSURANCE COMPANIES, INC. PAGE 1
<PAGE> 5
holders of not less than one-tenth (1/10) of all the shares entitled to vote at
the meeting. Only such business shall be transacted at a special meeting as may
be stated or indicated in the notice of the meeting.
2.03 Place of Meetings. The annual meeting of stockholders may be
held at any place within or without the State of Delaware as may be designated
by the Board of Directors. Special meetings of stockholders may be held at any
place within or without the State of Delaware as may be designated by the
person or persons calling such special meeting as provided in Section 2.02. If
no place for a meeting is designated, it shall be held at the principal place
of business.
2.04 Notice. Written or printed notice stating the place, day and
hour of the meeting and, in case of a special meeting, the purpose or purposes
for which the meeting is called, shall be delivered not less than ten (10) nor
more than sixty (60) days before the date of the meeting, either personally or
by mail, by or at the direction of the Chairman of the Board, the President,
the Secretary or the person calling the meeting, to each stockholder of
recorded entitled to vote at the meeting.
2.05 Voting List. At least ten (10) days before each meeting of
stockholders, a complete list of the stockholders entitled to vote at such
meeting, arranged in alphabetical order, with the residence of each and the
number of voting shares held by each, shall be prepared by the Secretary. For
a period of ten (10) days prior to such meeting, such list shall be kept on
file at the registered office of the Company and shall be subject to inspection
by any stockholder at any time during usual business hours. The list shall be
produced and kept at the time and place of the meeting during the whole time
thereof, and may be inspected by any stockholder who is present.
2.06 Voting of Shares. Treasury shares, shares of the Company's own
stock owned by another corporation the majority of the voting stock of which is
owned or controlled by the Company, and shares of the Company's own stock held
by another corporation in a fiduciary capacity for the benefit of the Company
or such majority-owned corporation, shall not be shares entitled to be voted at
any meeting of stockholders or to be counted in determining the total number of
outstanding shares. Shares held by an administrator, executor, guardian or
conservator may be voted by him, either in person or by proxy, without transfer
of such shares into his name so long as such shares form a part of the estate
and are in the possession of the estate being served by him. Shares standing in
the name of a trustee may be voted by him, either in person or by proxy, only
after the shares have been transferred into his name as trustee. Shares
standing in the name of a receiver may be voted by such receiver, and shares
held by or
BYLAWS OF UNITED INSURANCE COMPANIES, INC. PAGE 2
<PAGE> 6
under the control of a receiver may be voted by such receiver without transfer
of such shares into his name if authority to do so is contained in the court
order by which such receiver was appointed. Shares standing in the name of
another domestic or foreign corporation of any kind may be voted by such
officer, agent or proxy as the bylaws of such corporation may provide or, in
the absence of such provision, as the board of directors of such corporation
may determine. A stockholder whose shares are pledged shall be entitled to vote
such shares until they have been transferred into the name of the pledgee, and
thereafter, the pledgee shall be entitled to vote such shares.
2.07 Quorum. The holders of a majority of the shares of the
Company's capital stock issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall be requisite and shall
constitute quorum at all meetings of the Company's stockholders for the
transaction of business, except as otherwise provided by law, the Certificate
or these Bylaws. If, however, such quorum shall not be present or represented
at any meeting of the Company's stockholders, a majority of the stockholders
entitled to vote thereat, present in person or represented by proxy, shall have
the power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. If
the adjournment is for more than thirty (30) days, or if after the adjournment
a new record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting. At any reconvening of an adjourned meeting at which a quorum shall be
present or represented, any business may be transacted which might have been
transacted at the meeting as originally notified.
2.08 Majority Vote; Withdrawal of Quorum. If a quorum is present in
person or represented by proxy at any meeting of the Company's stockholders,
the vote of the holders of a majority of the Company's outstanding shares
entitled to be voted thereat, present in person or represented by proxy at such
meeting, shall decide any question brought before such meeting, unless the
question is one upon which, by express mandatory provision shall govern and
control the decision of such question. The stockholders present at a duly
convened meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of the holders of sufficient voting shares to
leave less than a quorum.
2.09 Method of Voting; Proxies. On each matter submitted to a vote
at a meeting of stockholders, every stockholder of record shall be entitled at
every meeting of stockholders to one (1) vote for every outstanding share of
the Company's capital stock standing in his name on the original stock transfer
books of the Company, except to the extent that the voting rights of the
shares of any class or classes are limited or denied by the Certificate. Such
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transfer books shall be prima facie evidence as to the identity of stockholders
entitled to vote. At a meeting of the stockholders, every stockholder having
the right to vote may vote either in person or by proxy appointed by an
instrument in writing subscribed by such stockholder or by his duly authorized
attorney-in-fact. No proxy shall be valid after three (3) years from the date
of its execution, unless such instrument provides for a longer period. Each
proxy shall be revocable unless expressly provided therein to be irrevocable or
unless otherwise made irrevocable by law. Each proxy shall be filed with the
Secretary before or at the time of the meeting to which it relates.
2.10 Closing of Transfer Books; Record Date. For the purpose of
determining stockholders entitled to notice of or to vote at any meeting of
stockholders or any reconvening thereof or entitled to receive payment of any
dividend or in order to make a determination of stockholders for any other
proper purpose, the Board of Directors may provide that the stock transfer
books of the Company shall be closed for a stated period but not to exceed in
any event sixty (60) days. If the stock transfer books are closed for the
purpose of determining stockholders entitled to notice of or to vote at a
meeting of stockholders, such books shall be closed for at least ten (10) days
immediately preceding such meeting. In lieu of closing the stock transfer
books, the Board of Directors may fix in advance a date as the record date for
any such determination of stockholders, such date in any case to be not more
than sixty (60) days and, in case of a meeting of stockholders, not less than
ten (10) days prior to the date on which the particular action requiring such
determination of stockholders is to be taken. If the stock transfer books are
not closed and if no record date is fixed for the determination of stockholders
entitled to notice of or to vote at a meeting of stockholders or entitled to
receive payment of dividends, the day next preceding the date on which the
notice of the meeting is mailed or the date on which the resolution of the
Board of Directors declaring such dividend is adopted, as the case may be,
shall be the record date for such determination of stockholders.
2.11 Presiding Officials at Meetings. Unless some other person or
persons are elected by vote of a majority of the shares then entitled to vote
at a meeting of stockholders, the Chairman of the Board (or, in the absence of
the Chairman of the Board, the President) shall preside at and the Secretary
shall prepare minutes of each meeting of stockholders.
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ARTICLE III
DIRECTORS
3.01 Management. The business and affairs of the Company shall be
managed by the Board of Directors who may exercise all such powers of the
Company and do all such lawful acts and things as are not by law, the
Certificate or these Bylaws directed or required to be exercised or done by the
stockholders.
3.02 Qualification; Election; Term. At each annual meeting of
stockholders, directors shall be elected to hold office until the next annual
meeting of stockholders and until their successors are elected and qualified or
until their earlier resignation, death, or removal. No director need be a
stockholder, a resident of the State of Delaware, or a citizen of the United
States.
3.03 Number. The initial Board of Directors shall consist of the
five (5) directors named in the Certificate. Thereafter, a change in the number
of directors which shall constitute the entire Board of Directors may be made
by resolution of the Board of Directors or in such other manner permitted or
required by law or the Certificate, but such number of Directors shall never be
less than one (1) director. Any directorship to be filled by reason of any
increase in the number of directors serving shall be filled by either the
affirmative vote of a majority of the directors of the Board of Directors, or
by election at an annual meeting of the stockholders or at a special meeting of
the stockholders called for that purpose as provided in these Bylaws and as may
be required by law or the Certificate. No decrease in the number of the
directors serving shall have the effect of shortening the term of any incumbent
director.
3.04 Removal. At any meeting of stockholders called expressly for
the purpose, any director or the entire Board of Directors may be removed, with
or without cause, by the affirmative vote of the holders of a majority of
shares then entitled to vote for the election of such director or directors;
provided, however, that notice of intention to act upon such matter shall have
been given in the notice calling such meeting.
3.05 Vacancies. Any vacancy occurring in the Board of Directors (by
death, resignation, removal or otherwise) may be filled by the affirmative vote
of a majority of the remaining directors though less than a quorum of the Board
of Directors. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office.
3.06 First Meeting. Each newly elected Board of Directors may hold
its first meeting for the purpose of
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organization and the transaction of business, if a quorum is present,
immediately after and at the same place as the annual meeting of stockholders,
and notice of such meeting shall not be necessary.
3.07 Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at such times and places as may be designated from
time to time by resolution of the Board of Directors and communicated to all
directors.
3.08 Special Meetings. A special meeting of the Board of Directors
shall be held whenever called by any two (2) or more directors at such time and
place as such directors shall designate in the notice of such special meeting.
The directors calling any special meeting shall cause notice of such special
meeting to be given to each director at least twenty-four (24) hours before
such special meeting. Neither the business to be transacted at, nor the purpose
of, any special meeting of the Board of Directors need be specified in the
notice or waiver of notice of any special meeting.
3.09 Quorum; Majority Vote. At all meetings of the Board of
Directors, a majority of the directors, fixed in the manner provided in these
Bylaws, shall constitute a quorum for the transaction of business. If a quorum
is not present at a meeting, a majority of the directors present may adjourn
the meeting from time to time, without notice other than an announcement at the
meeting, until a quorum is present. The vote of a majority of the directors
present at a meeting at which a quorum is in attendance shall be the act of the
Board of Directors, unless the vote of a different number is otherwise required
by law, the Certificate or these Bylaws. The directors present at a duly
convened meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of a sufficient number of directors to leave
less than a quorum.
3.10 Procedure; Minutes. At all meetings of the Board of Directors,
business shall be transacted in such order as the Board of Directors may
determine from time to time. The Board of Directors shall appoint at each
meeting a person to preside at the meeting and a person to act as secretary of
the meeting. The secretary of the meeting shall prepare minutes of the meeting
which shall be delivered to the Secretary of the Company for placement in the
minute book of the Company.
3.11 Presumption of Assent. A director of the Company who is
present at any meeting of the Board of Directors at which action on any matter
is taken shall be presumed to have assented to the action unless his dissent
shall be entered in the minutes of the meeting or unless he shall file his
written dissent to such action with the person acting as secretary of the
meeting before the adjournment thereof or shall forward any dissent by
certified
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or registered mail to the Secretary of the Company immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
3.12 Compensation. Directors, in their capacity as directors,
may receive,, by resolution of the Board of Directors, a fixed sum and expenses
of attendance, if any, for attending meetings of the Board of Directors or a
stated salary. No director shall be precluded from serving the Company in any
other capacity or receiving compensation therefor.
3.13 Interested Directors. Any contract or other transaction
between the Company and any of its directors (or any corporation or firm in
which any of its directors is directly or indirectly interested) shall be valid
for all purposes notwithstanding the presence of such director at the meeting
authorizing such contract or transaction, or his participation in such meeting.
The foregoing shall, however, apply only if the interest of such director is
known or disclosed to the Board of Directors and it shall nevertheless
authorize or ratify such contract or transaction by vote of a majority of the
directors present, each such interested director to be counted in determining
whether a quorum is present but not in calculating the majority necessary to
carry such vote. This section shall not be construed to invalidate any contract
or transaction which would be valid in the absence of this Section 3.13.
ARTICLE IV
COMMITTEES
4.01 Designation. The Board of Directors may, by resolution
adopted by a majority of the entire Board of Directors at any time serving,
designate executive and other committees.
4.02 Number; Qualification; Term. Each committee shall consist of
two or more directors appointed by resolution adopted by a majority of the
entire Board of Directors at any time serving. The number of committee members
may be increased or decreased from time to time by resolution adopted by a
majority of the entire Board of Directors. Each committee member shall serve
as such so long as he remains and continues to be elected a director of the
Company, or until his earlier resignation, unless sooner removed as a committee
member or as a director.
4.03 Authority. The executive committee, unless expressly
restricted in the resolution adopted by a majority of the entire Board of
Directors establishing the executive committee, shall have and may exercise all
of the authority of the Board of Directors in the management of the business
and affairs of the
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Company. Each other committee, to the extent expressly provided for in the
resolution adopted by a majority of the entire Board of Directors establishing
such committee, shall have and may exercise all of the authority of the Board
of Directors in the management of the business and affairs of the Company.
However, no committee shall have the authority of the Board of Directors in
reference to (a) amending the Certificate, (b) approving a plan of merger or
consolidation, (c) recommending to the stockholders the sale, lease or exchange
of all or substantially all of the property and assets of the Company otherwise
than in the usual and regular course of its business, (d) recommending to the
stockholders a voluntary dissolution of the Company or a revocation thereof,
(e) amending, altering or repealing these Bylaws or adopting new bylaws, (f)
filling vacancies in or removing members of the Board of Directors or of any
committee, (g) electing or removing officers or committee members, (h) fixing
the compensation of any committee member, or (i) altering or repealing any
resolution of the Board of Directors which by its terms provides that it shall
not be amendable or repealable. In the resolution adopted by a majority of the
entire Board of Directors establishing an executive or other committee, the
Board of Directors may expressly authorize such committee to declare dividends
or to authorize the issuance of shares of the Company's capital stock.
4.04 Committee Changes. The Board of Directors shall have the power
at any time to remove committee members and to fill vacancies in, to change the
membership of, and to discharge any committee. The removal of a committee
member shall be without prejudice to the contract rights, if any, of the person
so removed.
4.05 Regular Meetings. Regular meetings of any committee may be
held without notice at such times and places as may be designated from time to
time by resolution of the committee and communicated to all committee members.
4.06 Special Meetings. A special meeting of any committee may be
held whenever called by any committee member at such time and place as such
committee member shall designate in the notice of such special meeting. The
committee member calling any special meeting shall cause notice of such special
meeting to be given to each committee member at least twelve (12) hours before
such special meeting. Neither the business to be transacted at, nor the purpose
of, any special meeting of any committee need be specified in the notice or
waiver of notice of any special meeting.
4.07 Quorum; Majority Vote. At all meetings of any committee, a
majority of the number of committee members designated by the Board of
Directors shall constitute a quorum for the transaction of business. If a
quorum is not present at a meeting of any committee, a majority of the
committee members present may adjourn the meeting from time to time, without
notice other than
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an announcement at the meeting, until a quorum is present. The vote of a
majority of the committee members present at any meeting at which a quorum is
in attendance shall be the act of the committee, unless the vote of a different
number is otherwise required by law, the Certificate of these Bylaws. The
committee members present at a duly convened meeting may continue to transact
business until adjournment, notwithstanding the withdrawal of a sufficient
number of committee members to leave less than a quorum.
4.08 Minutes. Each committee shall cause minutes of its proceedings
to be prepared and shall report the same to the Board of Directors upon the
request of the Board of Directors. The minutes of the proceedings of each
committee shall be delivered to the Secretary of the Company for placement in
the minute book of the Company.
4.09 Compensation. Committee members may, by resolution of the
Board of Directors, be allowed a fixed sum and expenses of attendance, if any,
for attending any committee meetings or a stated salary.
4.10 Responsibility. The designation of any committee and the
delegation of authority to it shall not operate to relieve the Board of
Directors or any director of any responsibility imposed upon it or such
director by law. The Board of Directors may modify, alter, revise and/or
approve any actions taken by any committee; provided, however, that no rights
or acts of third parties shall be affected by any such modification, alteration
or revision.
ARTICLE V
GENERAL PROVISIONS RELATING TO MEETINGS
5.01 Notice. Whenever by law, the Certificate, or these Bylaws
notice is required to be given to any stockholder, director or committee member
and no provision is made as to how such notice shall be given, it shall be
construed to mean that notice may be given either (a) in person, (b) in
writing, by mail, (c) except in the case of a stockholder, by telegram, telex,
cable, telecopy, or similar means, or (d) by any other method permitted by law.
Any notice required or permitted to be given hereunder (other than personal
notice) shall be addressed to such stockholder, director, or committee member
at his address as it appears on the books of the Company or, in the case of a
stockholder, on the stock transfer records of the Company or at such other
place as such stockholder, director, or committee member is known to be at the
time notice is mailed or transmitted. Any notice required or permitted to be
given by mail shall be deemed to be delivered and given at the time when the
same is deposited in the United States mail, postage
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prepaid. Any notice required or permitted to be given by telegram, telex,
cable, telecopier, or similar means shall be deemed to be delivered and given
at the time transmitted.
5.02 Waiver of Notice. Whenever by law, the Certificate, or these
Bylaws any notice is required to be given to any stockholder, director, or
committee member of the Company, a waiver thereof in writing signed by the
person or persons entitled to such notice, whether before or after the time
such notice should have been given, shall be equivalent to the giving of such
notice. Attendance of a director at a meeting shall constitute a waiver OF
notice of such meeting, except where a director attends a meeting for the
express purpose of objecting to the transaction of any business on the ground
that the meeting is not lawfully called or convened.
5.03 Telephone and Similar Meetings. Stockholders, directors or
committee members may participate in and hold a meeting by means of a
conference telephone or similar communications equipment by means of which
persons participating in the meeting can hear each other. Participation in
such a meeting shall constitute presence in person at such meeting, except
where a person participates in the meeting for the express purpose of objecting
to the transaction of any business on the ground that the meeting is not
lawfully called or convened.
5.04 Action Without Meeting. Any action which may be taken, or is
required by law, the Certificate or these Bylaws to be taken, at a meeting of
stockholders, directors or committee members may be taken without a meeting if
a consent in writing, setting forth the action so taken, shall be signed by all
of the stockholders, directors, or committee members, as the case may be,
entitled to vote with respect to the subject matter thereof, and such consent
shall have the same force and effect, as of the date stated therein, as a
unanimous vote of such stockholders, directors, or committee members, as the
case may be, and may be stated as such in any document filed with the Secretary
of State of Delaware or in any certificate or other document delivered to any
person. The consent may be in one or more counterparts so long as each
stockholder, director, or committee member signs one of the counterparts. The
signed consent shall be placed in the minute book of the Company.
ARTICLE VI
OFFICERS AND OTHER AGENTS
6.01 Number; Titles; Election; Term. The Company shall have a
Chairman of the Board, a President, one or more Vice Presidents (and, in the
case of each Vice President, with such
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descriptive title, if any, as the Board of Directors shall determine), a
Secretary, a Treasurer, and such other officers and agents as the Board of
Directors may deem desirable. The Board of Directors shall elect a Chairman of
the Board, a President, Vice President, Treasurer, and Secretary at its first
meeting at which a quorum shall be present after the annual meeting of
stockholders or whenever a vacancy exists. The Board of Directors then, or from
time to time, may also elect or appoint one or more other officers or agents as
it shall deem advisable. Each officer and agent shall hold office at the
discretion of the Board of Directors. Any two or more offices may be held by
the same person. No officer or agent need be a stockholder, a director, a
resident of the State of Delaware, or a citizen of the United States.
6.02 Removal. Any officer or agent elected or appointed by the
Board of Directors may be removed by the Board of Directors at any time, with
or without cause, but such removal shall be without prejudice to the contract
rights, if any, of the person so removed. Election or appointment of an officer
or agent shall not of itself create contract rights.
6.03 Vacancies. Any vacancy occurring in any office of the Company
(by death, resignation, removal, or otherwise) may be filled by the Board of
Directors.
6.04 Authority. Officers and agents shall have such authority and
perform such duties in the management of the Company as are provided in these
Bylaws or as may be determined by resolution of the Board of Directors, or an
executive committee thereof, not inconsistent with these Bylaws.
6.05 Compensation. The compensation, if any, of officers and agents
shall be fixed, increased, or decreased from time to time by the Chairman of
the Board, the President or Vice President; provided, however, that the Board
of Directors, or any executive committee thereof, may by resolution withdraw
the authority of the Chairman of the Board, the President and/or the Vice
President to fix, increase, or decrease officers' or agents' compensation and
retain such authority for itself or delegate such authority to any other
officer or officers of the Company.
6.06 Employment and Other Contracts. The Board of Directors may
authorize any officer or officers or agent or agents to enter into any contract
or execute and deliver any instrument in the name or on behalf of the Company,
and such authority may be general or confined to specific instances. The Board
of Directors may, when it believes the interests of the Company will best be
served thereby, authorize executive employment contracts which will have terms
no longer than ten (10) years (both which may be renewed or extended) and
contain such other terms and conditions as the Board of Directors may deem
appropriate. Nothing herein shall
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limit the authority of the Board of Directors to authorize employment contracts
for shorter terms.
6.07 Chairman of the Board. The Chairman of the Board shall be the
chief executive officer of the Company and, subject to the supervision of the
Board of Directors and any executive committee thereof, shall have charge of
the general management of the business and property of the Company in the
ordinary course of its business with all such powers with respect to such
business and property as may be reasonably incident to such responsibilities,
including, but not limited to, the power to employ, discharge, or suspend
employees or agents of the Company, to fix the compensation of officers (unless
such power has been withdrawn by resolution of the Board of Directors or any
executive committee thereof), to fix the compensation of employees and agents,
and to suspend, with or without cause, any officer of the Company pending final
action by the Board of Directors with respect to continued suspension, removal,
or reinstatement of such officer. The Chairman of the Board shall see that all
orders and resolutions of the Board of Directors and any executive committee
thereof are carried into effect and shall perform such other duties and have
such other authority and powers as the Board of Directors, or any executive
committee thereof, may from time to time prescribe.
6.08 President. The President shall have such powers and duties as
may be prescribed from time to time by the Board of Directors or any executive
committee thereof, or as may be delegated from time to time by the Chairman of
the Board and shall exercise the powers of the Chairman of the Board during
such officer's absence or inability to act.
6.09 Vice President. Each Vice President shall have such powers and
duties as may be prescribed from time to time by the Board of Directors, or any
executive committee thereof, or as may be delegated from time to time by the
Chairman of the Board or President and (in the order as designated by the Board
of Directors, or any executive committee thereof, or in the absence of such
designation, as determined by the length of time each has held the office of
Vice President continuously) shall exercise the powers of the President during
such officer's absence or inability to act.
6.10 Treasurer. The Treasurer shall have custody of the Company's
funds and securities, shall keep full and accurate accounts of receipts and
disbursements, and shall deposit all moneys and valuable effects in the name
and to the credit of the Company in such depository or depositories as may be
designated by the Board of Directors or any executive committee thereof.
Additionally, the Treasurer shall have the power to endorse for deposit,
collection or otherwise, all checks, drafts, notes, bills of exchange, and
other commercial paper payable to the Company and
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to give proper receipts and discharges for all payments to the Company. The
Treasurer shall perform such other duties as may be prescribed from time to
time by the Board of Directors, or any executive committee thereof, or as may
be delegated from time to time by the Chairman of the Board, the President or
any Vice President.
6.11 Assistant Treasurer. Each Assistant Treasurer shall perform
such duties as may be prescribed from time to time by the Board of Directors,
or any executive committee thereof, or as may be delegated from time to time
by the Treasurer, the Chairman of the Board, the President, or any Vice
President. The Assistant Treasurers (in the order as designated by the Board
of Directors, or any executive committee thereof, or in the absence of such
designation, as determined by the length of time each has held the office of
Assistant Treasurer continuously) shall exercise the powers of the Treasurer
during such officer's absence or inability to act.
6.12 Secretary. The Secretary shall maintain minutes of all
meetings of the Board of Directors, of any committee, and of the stockholders
or consents in lieu of such minutes in the Company's minute book, and shall
cause notice of such meetings to be given when requested by any person
authorized to call such meetings. With respect to any contract, deed, deed of
trust, mortgage, or other instrument executed by the Company through its duly
authorized officer or officers, the attestation to such execution by the
Secretary shall not be necessary to constitute such contract, deed of trust,
mortgage, or other instrument a valid and binding obligation against the
Company unless the resolution, if any, of the Board of Directors authorizing
such execution expressly states that such attestation is necessary. The
Secretary shall have charge of the certificate books, stock transfer books, and
stock papers as the Board of Directors, or any executive committee thereof, may
direct, all of which shall at all reasonable times be open to inspection by any
director. The Secretary shall perform such other duties as may be prescribed
from time to time by the Board of Directors, or any executive committee
thereof, or as may be delegated from time to time by the Chairman of the Board,
the President or any Vice President.
6.13 Assistant Secretaries. Each Assistant Secretary shall
perform such duties as may be prescribed from time to time by the Board of
Directors or as may be delegated from time to time by the Secretary, the
Chairman of the Board, the President or any Vice President. The Assistant
Secretaries (in the order designated by the Board of Directors, or an executive
committee thereof, or, in the absence of such designation, as determined by the
length of time each has held the office of Assistant Secretary continuously)
shall exercise the powers of the Secretary during such officer's absence or
inability to act.
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ARTICLE VII
CERTIFICATES AND STOCKHOLDERS
7.01 Certificates for Shares. The certificates for shares of stock
of the Company shall be in such form as shall be approved by the Board of
Directors in conformity with law. The certificates shall be consecutively
numbered, shall be entered as they are issued in the books of the Company or in
the records of the Company's designated transfer agent, if any, and shall state
the stockholder's name, the number of shares, and such other matters as may be
required by law. The certificates shall be signed by the Chairman of the
Board, the President or any Vice President and also by the Secretary, an
Assistant Secretary, or any other officer, and may be sealed with the seal of
the Company or a facsimile thereof. If any certificate is countersigned by a
transfer agent or registered by a registrar, which is other than the Company
itself or an employee of the Company, the signatures of the foregoing officers
may be a facsimile.
7.02 Lost, Stolen, or Destroyed Certificates. The Company shall
issue a new certificate in place of any certificate for shares previously
issued if the registered owner of the certificate, or his legal representative:
(a) Claim. Makes proof by affidavit, in form and substance
satisfactory to the Board of Directors, that a previously
issued certificate for shares has been lost, destroyed, or
stolen;
(b) Timely Request. Requests the issuance of a new certificate
before the Company has notice that the certificate has been
acquired by a purchaser for value in good faith and without
notice of an adverse claim;
(c) Bond. If requested by the Board of Directors, or any executive
committee thereof, delivers to the Company a bond, in form and
substance satisfactory to the Board of Directors, or any
executive committee thereof, with such surety or sureties and
with fixed or open penalty, as the Board of Directors, or any
executive committee thereof, may direct, in its discretion, to
indemnify the Company (and its transfer agent and registrar,
if any) against any claim that may be made on account of the
alleged loss, destruction, or theft of the certificate;
(d) Advertisement. If requested by the Board of Directors, or any
executive committee thereof, advertises the loss, theft or
destruction of such certificate in such manner
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as the Board of Directors or any executive committee thereof,
may specify; and
(e) Other Requirements. Satisfies any other reasonable
requirements imposed by the Board of Directors
When a certificate has been lost, destroyed, or stolen, and the stockholder of
record fails to notify the Company within a reasonable time after he has notice
of it, and the Company registers a transfer of the shares represented by the
certificate before receiving such notification, the stockholder of record is
precluded from making any claim against the Company or any transfer agent or
registrar for the transfer or for a new certificate.
7.03 Transfer of Shares. Shares of stock of the Company shall be
transferable only on the books of the Company by the stockholders thereof in
person or by their duly authorized attorneys or legal representatives. Upon
surrender to the Company or the transfer agent of the Company of a certificate
representing shares duly endorsed or accompanied by proper evidence of
succession, assignment, or authority to transfer, the Company or its transfer
agent shall issue a new certificate, and record the transaction upon its books.
7.04 Registered Stockholders. The Company shall be entitled to
treat the stockholder of record as the stockholder in fact of any shares and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such shares on part of any other person, whether or not it shall
have actual or other notice thereof, except as otherwise provided by law.
ARTICLE VIII
MISCELLANEOUS PROVISIONS
8.01 Dividends and Reserves. Subject to provisions of law and the
Certificate, dividends may be declared by the Board of Directors at any regular
or special meeting and may be paid in cash, in property or in shares of the
Company. Such declaration and payment shall be at the discretion of the Board
of Directors. There may be created by resolution of the Board of Directors out
of the earned surplus of the Company such reserve or reserves as the Board of
Directors from time to time thinks proper to provide for contingencies,
equalize dividends or repair or maintain any property of the Company, or for
such other purpose as the Board of Directors thinks beneficial to the Company,
and the Board of Directors may modify or abolish any such reserve in the manner
in which it was created.
BYLAWS OF UNITED INSURANCE COMPANIES, INC. PAGE 15
<PAGE> 19
8.02 Fiscal Year. The fiscal year of the Company shall be fixed by
the Board of Directors; provided, however, that if such fiscal year is not
fixed by the Board of Directors it shall be the calendar year.
8.03 Seal. The seal, if any, of the Company shall be in such form
as may be approved from time to time by the Board of Directors, or any
executive committee thereof. If the Board of Directors, or any executive
committee thereof, approves a seal, the affixation of such seal shall not be
required to create a valid and binding obligation against the Company.
8.04 Resignation. A director, committee member, officer, or agent
may resign by so stating at any meeting of the Board of Directors or by giving
written notice to the Company. The effective time of such resignation shall be
any time specified in the statement made at the Board of Directors' meeting or
in the written notice given to the Company, but in no event may the effective
time of such resignation be prior to the time such statement is made or such
notice is given. If no effective time is specified in the resignation, the
resignation shall be effective immediately. Unless a resignation specified
otherwise, it is effective without being accepted.
8.05 Securities of Other Corporations. The Chairman of the Board,
the President or any Vice President of the Company or any other person
authorized by resolution of the Board of Directors, or an executive committee
thereof, shall have the power and authority to transfer, endorse for transfer,
vote, consent, or take any other action with respect to any securities of
another issuer which may be held or owned by the Company and to make, execute,
and deliver any waiver, proxy, or consent with respect to any such securities.
8.06 Amendment. The power to alter, amend, or repeal these Bylaws
or adopt new bylaws is vested in the Board of Directors, subject to repeal or
change by action of the stockholders.
8.07 Invalid Provisions. If any provision of these Bylaws is held
to be illegal, invalid, or unenforceable under present or future laws, such
provision shall be fully severable; these Bylaws shall be construed and
enforced as if such illegal, invalid, or unenforceable provision had never
comprised a part hereof; and the remaining provisions hereof shall remain in
full force and effect and shall not be affected by the illegal, invalid, or
unenforceable provision or by its severance herefrom. Furthermore, in lieu of
such illegal, invalid, or unenforceable provision, there shall be added
automatically as a part of these Bylaws a provision as similar in terms to such
illegal, invalid,
BYLAWS OF UNITED INSURANCE COMPANIES, INC. PAGE 16
<PAGE> 20
or unenforceable provision as may be possible and be legal, valid, and
enforceable.
8.08 Indemnification. (a) The Company shall indemnify, to the
extent provided in paragraphs (b), (c) or (d) of this Section 8.08: (1) any
person who is or was a director or officer of the Company; (2) any person who
served at the Company's request as a director or officer of another
corporation.
(b) In case of a suit by or in the right of the Company against a
person named in paragraph (a) of this Section 8.08 by reason of his holding a
position specified in such paragraph (a), the Company shall indemnify him for
expenses (including attorneys' fees but excluding amounts paid in settlement)
actually and reasonably incurred by him in connection with the defense or
settlement of the suit, if: (1) he is successful on the merits or otherwise; or
(2) he acted in good faith in the transaction which is the subject of the suit,
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Company; he shall not, however, be indemnified in respect of
any claim, issue or matter as to which he has been adjudged liable for
negligence or misconduct in the performance of his duty to the Company unless
(and only to the extent that) the court in which the suit was brought shall
determine, upon application, that despite the adjudication but in view of all
circumstances he is fairly and reasonably entitled to indemnity for such
expenses as the court shall deem proper.
(c) In case of a suit, action or proceeding (whether civil,
criminal, administrative or investigative), other than a suit by or in the
right of the Company, together hereinafter referred to as a "nonderivative
suit", against a person named in paragraph (a) of this Section 8.08 by reason
of his holding a position specified in such paragraph (a), the Company shall
indemnify him in connection with the defense or settlement of the nonderivative
suit as expenses (including attorneys' fees), amounts paid as penalties or
fines if (1) he is successful on the merits or otherwise; or (2) he acted in
good faith in the transaction which is the subject of the nonderivative suit,
and in a manner he reasonably believed to be in, or not opposed to, the best
interests of the Company and, with respect to any criminal action or
proceeding, he had no reason to believe his conduct was unlawful. The
termination of a nonderivative suit by judgment, order, settlement, conviction,
or upon a plea of nolo contendere or its equivalent shall not, of itself create
a presumption that the person failed to satisfy the standard of paragraph
(c)(2) of this Section 8.08.
(d) A determination that the standard of paragraph (b) or (c) of
this Section 8.08 has been satisfied may be made by a court, or by: (1) a
majority of the directors of the Company (whether or not a quorum) who were not
parties to the action, suit or proceeding;
BYLAWS OF UNITED INSURANCE COMPANIES, INC. PAGE 17
<PAGE> 21
(2) independent legal counsel in a written opinion; or (3) the
stockholders of the Company.
(e) Anyone making a determination under paragraph (d) of this
Section 8.08 may determine that a person has met the standard as to some
matters but not as to others and may reasonably prorate amounts to be
indemnified.
(f) The Company may pay in advance any expenses (including
attorneys' fees) which may become subject to indemnification under paragraphs
(a)-(e) of this Section 8.08 if: (1) The Board of Directors authorizes the
specific payment; and (2) the person receiving the payment undertakes in
writing to repay unless it is ultimately determined that he is entitled to
indemnification by the Company under paragraphs (a)-(e) of this Section 8.08.
(g) The indemnification provided by paragraphs (a)-(e) of this
Section 8.08 shall not be exclusive of any other rights to which a person may
be entitled by law, agreement, vote of stockholders or directors, or otherwise.
(h) The indemnification and advance payment provided by paragraphs
(a)-(f) of this Section 8.08 shall continue as to a person who has ceased to
hold a position named in paragraph (a) of this Section 8.08 and shall inure to
his heirs, executors and administrators.
(i) The Company may purchase and maintain insurance on behalf of
any person who holds or who has held any position named in paragraph (a)
against any liability incurred by him or in any such position, or arising out
of his status as such, whether or not the Company would have power to indemnify
him against such liability under paragraphs (a)-(f) of this Section 8.08.
(j) Indemnification payments, advance payments and insurance
payments under paragraphs (a)-(i) of this Section 8.08 shall be reported in
writing to the stockholders of the Company with the next notice of annual
meeting, or within six months, whichever is sooner.
8.09 Table of Contents; Headings. The Table of Contents and
headings used in these Bylaws have been inserted for administrative convenience
only and do not constitute matter to be construed or interpreted in connection
with these Bylaws.
BYLAWS OF UNITED INSURANCE COMPANIES, INC. PAGE 18
<PAGE> 22
The undersigned Secretary of the Company hereby certifies that the
foregoing Restated Bylaws have been duly adopted by the Board of Directors and
the Stockholders of the Company; that all amendments heretofore adopted are
incorporated herein; that the Bylaws have not subsequently been amended or
rescinded; that said Bylaws are in full force and effect as of the date hereof.
Date: May 25, 1990
/s/ ROBERT B. VLACH
----------------------------------
Robert B. Vlach, Secretary
BYLAWS OF UNITED INSURANCE COMPANIES, INC. PAGE 19
<PAGE> 1
REINSURANCE AGREEMENT
between
AEGON USA COMPANIES
and
UICI COMPANIES
Effective January 1, 1995
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
Section 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance Pool
Section 2 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Designated Representative
Section 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . "Exhibit B" Annual Settlements
Section 4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinsurance Cash Flow Payable
Section 5 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Liability
Section 6 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Claims
Section 7 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Inspection
Section 8 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reserves
Section 9 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Term and Cancellation
Section 10 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Reinstatements
Section 11 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Custodial Account
Section 12 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Temporary Offsetting of Custodial Accounts
Section 13 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administration
Section 14 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Joint Election Pursuant to IRC Reg 1.848-2(g)(8)
Section 15 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Oversights
Section 16 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Arbitration
Section 17 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Insolvency
Section 18 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Assignment
Section 19 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Amendment
Section 20 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Choice of Law
Exhibit A . . . . . . . . . . . . . . . . . . . . . . . . . . Policy Identification and Reinsurance Risk Percentage Ceded
Exhibit B . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Annual Settlements Worksheet
Exhibit C . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Quota Share Percentage
Exhibit D . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Administration Fee
Exhibits E.1/E.4 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Custodial Agreement
Exhibit F . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Designated Representative
</TABLE>
<PAGE> 3
REINSURANCE AGREEMENT
This Reinsurance Agreement (effective January 1, 1995) is entered into
by and between
NATIONAL MANAGERS LIFE INSURANCE COMPANY,
a Turks and Caicos Island, British West Indies company,
UNITED GROUP REINSURANCE INC.,
a Turks and Caicos Island, British West Indies company,
U. S. MANAGERS LIFE INSURANCE COMPANY,
a British Virgin Island company,
FINANCIAL SERVICES REINSURANCE COMPANY,
a British Virgin Island company,
MEGA LIFE INSURANCE COMPANY,
an Oklahoma insurance company.
These companies shall hereinafter be referred to as "UICI Companies".
and
PFL LIFE INSURANCE COMPANY,
an Iowa insurance company,
LIFE INVESTORS INSURANCE COMPANY OF AMERICA,
an Iowa insurance company,
BANKERS UNITED LIFE ASSURANCE COMPANY,
an Iowa insurance company,
MONUMENTAL LIFE INSURANCE COMPANY,
a Maryland insurance company.
These companies shall hereinafter be referred to as "AEGON Companies".
1
<PAGE> 4
WITNESSETH:
WHEREAS, AEGON Companies and UICI Companies have been parties to
contracts of reinsurance in prior years and all parties to this contract of
reinsurance wish to alter the allocation of risk ceded to UICI Companies on
policies or certificates described on "Exhibit A" attached hereto and made a
part hereof;
NOW, THEREFORE, in consideration of the premises, the mutual
agreements contained herein and the good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, it is agreed:
The AEGON Companies and UICI Companies mutually agree to terminate the
following individual Reinsurance Agreements:
<TABLE>
<S> <C>
PFL Life Insurance Company and Financial Services Reinsurance Company
Dated February 14, 1994
PFL Life Insurance Company and U. S. Managers Life Insurance Company
Dated February 14, 1994
Bankers United Life Assurance Company and United Group Insurance Company
Dated February 14, 1994 and amended for merger of United Group Insurance Company into MEGA Life
Insurance Company on September 30, 1994
Life Investors Insurance Company of America and National Managers Life Insurance Company
Dated February 14, 1994
PFL Life Insurance Company and National Managers Life Insurance Company
Dated February 14, 1994
Monumental Life Insurance Company and Financial Services Reinsurance Company
Dated February 14, 1994
Monumental Life Insurance Company and National Managers Life Insurance Company
Dated February 14, 1994
Monumental Life Insurance Company and United Group Insurance Company
Dated February 14, 1994 and amended for merger of United Group Insurance Company into MEGA Life
Insurance Company on September 30, 1994
PFL Life Insurance Company and United Group Insurance Company
Dated February 14, 1994 and amended for merger of United Group Insurance Company into MEGA Life
Insurance Company on September 30, 1994
</TABLE>
<PAGE> 5
These Reinsurance Agreements will be replaced by agreement of reinsurance
between AEGON Companies and UICI Companies. AEGON Companies and UICI Companies
individually waive their rights under the Term and Cancellation Paragraph 8 of
the Reinsurance Agreements executed on February 14, 1994.
1. Reinsurance Pool. Each of the AEGON Companies will create a
Reinsurance Pool. These Reinsurance Pools will be comprised of the policies
and certificates described in "Exhibit A" multiplied by the appropriate
"Reinsurance Ceded Percentage" for the product and time period. The
"Reinsurance Ceded Percentage" is defined in "Exhibit A". The AEGON Companies
hereby individually cede to the individual UICI Companies, and the UICI
Companies hereby assume from the AEGON Companies, on a "Quota Share Percentage
Reinsurance" basis, their applicable risk percentage as defined in "Exhibit C"
of the Reinsurance Pool.
Where applicable in states which have maximum reinsurance retention
rates for what they term as "Small Group Health Insurance" the applicable risk
percentage as defined in "Exhibit A" shall not exceed the maximum ceded
retention in applicable states for health insurance policies referred to as
"Small Employer Health Insurance". AEGON Companies will increase the retention
percentage rate on non small employer health insurance policies and
certificates included in the reinsurance pool "Exhibit A" to achieve an overall
percentage of reinsurance defined in "Exhibit C" Quota Share Percentage
Reinsurance.
2. Designated Representative. Each member of the UICI Companies
have designated in "Exhibit F" a representative company to be the "Designated
Representative" to the AEGON Companies for purposes of communication concerning
this Reinsurance Agreement. With the mutual consent of the parties of the UICI
Companies, the Designated Representative can be changed with 10 days notice to
the AEGON Companies. The Designated Representative will have the
responsibility to send and receive communications for the UICI Companies.
3. "Exhibit B" Annual Settlements. As referenced above in
Section 1. and "Exhibit A", the Reinsurance Percentage increases in each
calendar year from 1995 through 1997. During the first quarter of each
accounting period subsequent to a Reinsurance Percentage
3
<PAGE> 6
change, the settlement sheet shown as "Exhibit B" will be completed
by each AEGON Company. Each AEGON Company will transfer assets equal to the
"Net Assets Transferred" multiplied by the respective "Quota Share Percentage"
defined in "Exhibit C" to each UICI Company.
4. Reinsurance Pool Cash Flow Payable. Each AEGON Company on a
monthly basis will prepare a worksheet showing the monthly cash activity in the
Reinsurance Pool. Net Life and Accident and Health Premiums shall mean
premiums collected less premiums refunded on policies or certificates described
in Exhibit "A" less any stop loss reinsurance costs incurred on policies
described in Exhibits "A". The Net Life and Accident and Health Reinsurance
Pool Premiums shall equal the current reinsurance percentage described in
Exhibits "A" of the Net Life and Accident and Health Premiums. The Reinsurance
Pool Cash Flow Payable is defined as Net Life and Accident and Health
Reinsurance Premiums less the current reinsurance percentage as described in
Exhibits "A" of benefit payments, less the current reinsurance percentage of
commission payments, less administrative expenses as defined in Section 13.
The Reinsurance Pool Cash Flow Payable will be multiplied by the Quota Share
Percentage as defined in "Exhibit C" for settlement with the appropriate UICI
Company. Settlement for each calendar month will occur within 25 days
following the close of such calendar month during the term of this Agreement.
5. Liability. Each UICI Company shall be liable to each AEGON
Company for its prorated share, calculated on the basis of the Quota Share
Percentage of risk assumed by UICI Company, of all claim payments, cash
surrender payments, policyholder benefit payments, premium taxes, legal
expenses, extra contractual damages, claims cost containment expenses, PPO
charges, or any other payments made under the policies reinsured hereunder or
as a result of the sale or issuance of any policies reinsured hereunder. UICI
Companies shall not be liable to AEGON Companies for costs attributable to the
operation of AEGON Companies, or of any affiliates of AEGON Companies, nor
shall UICI Companies be liable to AEGON Companies for fees attributable to any
service provided by an employee of AEGON Companies or an employee of any
affiliate of AEGON Companies, except as expressly provided for in Section 13
below.
4
<PAGE> 7
6. Claims. Each UICI Company will accept the decision of the
AEGON Companies on payment of a claim under policies reinsured hereunder
providing the settlement of that claim does not include litigation.
Each AEGON Company shall advise UICI Companies' Designated
Representative of its intention to litigate a claim involving a policy or
policies reinsured hereunder. UICI Companies reserve the right to choose not
to participate in litigation. If UICI Companies so choose, it will discharge
its liability by payment of the "full amount of reinsurance" to AEGON
Companies. In the event UICI Companies choose to discharge their liability by
payment of the "full amount of reinsurance", in lieu of participating in or
litigation, the "full amount of reinsurance" shall be UICI Companies's prorated
share calculated on the basis of the Quota Share Percentage of the amount of
the most recent settlement demand made upon the AEGON Companies by or on behalf
of the litigant.
If no settlement demand has been made by or on behalf of the litigant
at the time UICI Companies chooses not to participate in the litigation, the
AEGON Company shall have a reasonable time within which to solicit a settlement
demand from the litigant in order that UICI Companies' "full amount of
reinsurance" may be calculated.
IF UICI Companies tender to the AEGON Companies the "full amount of
reinsurance" as specified herein, the AEGON Companies shall be entitled to
retain said funds regardless of the outcome of the litigation. Further, the
AEGON companies shall be entitled to utilize said funds to negotiate a
settlement with the litigant if it so chooses, or to satisfy any judgement
rendered against the AEGON Companies.
UICI Companies will have 15 days after the election to not participate
to make payment equal to its prorated share of the full settlement. If payment
is not received within the 15 days then UICI Companies' election to not
participate will be at the discretion of the AEGON Companies. Failure to make
payment in no way effects UICI companies decision not to participate in future
elections.
7. Inspection. UICI Companies' Designated Representative shall
have the right at any time to inspect all of the AEGON Companies' records
concerning any policy reinsured hereunder or concerning any claim made against
a policy reinsured hereunder. Upon request
5
<PAGE> 8
made by UICI Companies' Designated Representative, AEGON Companies shall make
all such records available to UICI Companies during normal business hours at
the administrative offices in North Richland Hills, Texas of the AEGON
Companies. Upon request made by UICI Companies' Designated Representative, the
AEGON Companies shall deliver to UICI Companies' Designated Representative
copies of all papers connected with claims made on any policies reinsured
hereunder.
8. Reserves. UICI Companies shall fund and maintain statutory
reserves against its quota share percentage of liabilities under policies
reinsured under this Agreement in an amount equal to the reserves required by
the Insurance Department of the Ceding AEGON Company's state of Domicile (the
"Statutory Reserves"). The Reserves shall be funded and maintained according
to the provisions of the Ceding AEGON Company's state of domicile Insurance
Code. The assets constituting the Statutory Reserves shall consist of cash,
Certificates of Deposit in State or Federally chartered banks or Savings and
Loan Associations, Government obligations, or corporate obligations of the
types permitted as reserve investments for an insurance company under the
provisions of the applicable insurance code.
If the AEGON Company determines that the Statutory Reserves are
insufficient with respect to the risk reinsured hereunder, the AEGON Company
may require the UICI Company to maintain reserves in an amount which is
calculated in accordance with sound actuarial practices. UICI Companies shall
maintain such additional reserves.
9. Term and Cancellation. This Agreement may be terminated by
AEGON Companies or UICI Companies jointly by giving sixty (60) days written
notice by certified mail to the other group. The effective date of such
termination shall be sixty (60) days from the date such written notice is
mailed by certified mail (the "Termination Date"). Upon termination by either
group, the terms and conditions of this Agreement shall continue to apply to
all policies described in Exhibits "A", which are issued prior to the
Termination Date. The Reinsurance Percentage Ceded (as tabled in Exhibits "A")
shall be the percentage in effect at the date of notice of termination of the
Agreement.
6
<PAGE> 9
Notice to AEGON Companies from the Designated Representative of UICI
Companies of a change in the distribution of the Quota Share Percentage
allocation of the Reinsurance Pool among the members of the UICI Company group
shall not be deemed a termination of this agreement. Such change in the
allocation of the Quota Share Percentages shall be accomplished by mutual
agreement to a replacement of Exhibit C. Likewise, a change of a member of the
group of UICI Companies shall not be deemed a termination of this agreement,
and shall be noted as an amendment to the agreement. All provisions of the
then current contract will be acknowledged as acceptable by the current group
of UICI Companies.
UICI Companies agree that, when a policy is reinsured hereunder, it
shall be bound to retain such risk so long as the original policy shall remain
in force, either continuously or by reinstatement. In the event the policy is
terminated, the risk of such policy shall also terminate on the effective date
of the termination of the policy. In the event the face amount of any policy
reinsured hereunder is increased or reduced because of an overstatement or
understatement of age being established after the death of the insured, AEGON
Companies and UICI Companies shall share proportionately in such increase or
reduction. Any adjustment for the difference in reinsurance premiums arising
from reductions, increases, terminations or changes as described in this
section shall be made, without interest, in the month following the calendar
month in which the reduction, termination or change becomes effective.
10. Reinstatements. If any policy reinsured hereunder shall lapse
and if it is subsequently reinstated in accordance with its terms and prior to
any termination of this Agreement, the applicable reinsurance shall be
reinstated by UICI Companies subject to the condition that AEGON Companies
shall pay to UICI Companies all reinsurance premiums in arrears with interest
at the same rate and in like manner as AEGON Companies has received. The
payment of all such reinsurance premiums in arrears shall be made in the month
following the calendar month in which a policy is reinstated.
11. Custodial Account. Each of the UICI Companies hereto agree to
maintain a Custodial Account ("Custodian") with a bank selected by UICI
Companies and agreed to by the AEGON Companies in the form attached hereto as
Exhibit "E". The bank or trust company selected shall have corporate trust
powers and is duly authorized to act as a Custodian or Trustee
7
<PAGE> 10
and is organized under the laws of the United States of America or any State
thereof and is either a member of the Federal Reserve System or is a member of
the Federal Deposit Insurance Corporation.
Each UICI Company hereby agrees to deposit and maintain asset value
equal to the reserves as described in Section 8 above, in the Custodial Account
in the form of cash, Certificates of Deposit in State or Federally chartered
banks or Savings and Loan Associations, Government obligations, or corporation
obligations of the types permitted as reserve investments for an insurance
company under the provisions of the applicable insurance code. The basis of
valuation of the assets in the Custodial Account will be "admitted asset" value
which is the lower of the applicable provisions of the AEGON Companies' states
of Domicile law and the rules and regulations of the Insurance Commissioner of
the States of Domicile of the AEGON Company and the National Association of
Insurance Commissioners, or market. Within 20 days following notification to
UICI Companies' Designated Representative by AEGON Companies of a deficiency
between the Reserves and the value of the Custodial Account, UICI Companies
shall deposit in the Custodial Account additional assets that will bring the
value of the Custodial Account to the above defined minimum balance as of the
close of the preceding calendar month. Such assets will be held by the UICI
Companies' Custodian for the sole use and benefit of the insurance policies of
AEGON companies which have been reinsured by UICI companies in accordance with
this Agreement.
UICI companies agree that the assets of UICI companies held by the
Custodian shall be utilized by UICI Companies and AEGON Companies or their
successors in interest in accordance with the terms hereof, for the following:
a. To reimburse AEGON Companies for UICI Companies'
Quota Share Percentage of the Liability for the insurance ceded
hereunder; and
b. To reimburse AEGON Companies for UICI Companies'
Quota Share Percentage of returned premiums for the insurance ceded
hereunder or of cash surrenders.
In the event that UICI Companies fail, for a period of 10 days
following the due date of settlement for the Reinsurance Pool Cash Flow
Payable, providing that the AEGON Companies have supplied written notice of the
required settlement within the dates required by Section 4
8
<PAGE> 11
above, to reimburse AEGON Companies for the Reinsurance Pool Cash Flow Payable,
then the AEGON Companies shall have the right to withdraw the amounts owed by
UICI Companies from the Custodial Account.
UICI Companies agree that it shall have no withdrawal rights from the
Custodial Account until such time as the account balance in the Custodial
Account exceed the Reserves as described in Section 8.
Notwithstanding the provisions of the preceding paragraph, each UICI
Company may from time to time, with prior written consent from AEGON Companies,
withdraw assets from the Custodial Account, provided that at the time of such
withdrawal the UICI Company replaces the withdrawn assets with assets of a
similar kind and quality and of equal value.
Each UICI Company shall pay all fees charged by the Custodian for
services provided in connection with their Custodial Account.
12. Temporary Offsetting of Custodial Assets. The parties to this
agreement have agreed to strictly comply to Sections 8 and 11 of this
Reinsurance Agreement concerning the establishment, funding, and maintenance of
Custodial Accounts by each UICI Company. As detailed in Section 11 above,
additional funding of the custodial accounts is required by the AEGON Companies
when the admitted asset value of a UICI company's Custodial Account is less
than the Statutory Reserves ceded to the respective UICI company. This
additional funding is to be completed within 20 days of notification of the
deficiency by AEGON Companies to UICI Companies. This time period could result
in creating undue financial and other hardships on a UICI Company.
a. Notification Option. If notification is given by
AEGON Companies to one or more of the UICI Companies, the other UICI
Companies (hereinafter called non-notified companies) of this
agreement mutually agree to pledge their custodial assets to reduce or
eliminate any "shortfall" to the extent that the non-notified
companies of this agreement have assets which are in excess of that
required to meet their own admitted asset requirements. "Notification
option" is the exercising of the rights under this agreement by the
notified party to reduce or eliminate any "shortfall" in its custodial
account with pledged assets from the other non-notified companies.
9
<PAGE> 12
b. In the event that two or more of the UICI Companies
should elect to exercise their "notification option" and the
non-notified companies have excess assets to pledge, then such
custodial assets will be applied to the first party properly
exercising its notification options and any remaining excess custodial
assets will be applied equally among the other notified parties.
c. One or more of the UICI Companies can exercise their
"notification option" by written communication from the UICI
Designated Representative to AEGON Companies and the other UICI
parties to this agreement. The notified companies or company
exercising their right under the "notification option" have 50 days
from its election to fund its asset "shortfall". During the period of
the "shortfall" the assets used to reduce or eliminate the "shortfall"
can't be used for any other purpose by any of the parties of this
agreement.
4. This agreement does not change title of the assets,
interest, dividends or other income earned on the assets of the
custodial accounts. In the event that the UICI Company(s) have failed
to satisfy the "shortfall" in their Custodial Account by the 50th day,
AEGON Companies shall have the right to withdraw assets from the other
UICI companies accounts to offset the "shortfall" amount from the
"notified" UICI company. AEGON will not be able to transfer assets
from any UICI company's custodial account that would reduce that UICI
company's custodial account below the required balance for the
statutory reserves ceded to that company.
13. Administration. The inforce hereunder shall be administered
by AEGON Companies. Administration shall include all functions necessary to
service and administer all insurance policies, including but not limited to
premium billing and the payment of policy benefits. The AEGON Companies shall
be entitled to a Monthly Expense Allowance which shall be the sum of the
following:
(a) an Administrative Fee equal to the current percentage
listed in Exhibit "D" multiplied by the "net life and accident and
health reinsurance premiums" collected during the preceding calendar
month on all premiums reinsured hereunder; and
10
<PAGE> 13
(b) a Claim Administration Fee equal to three percent (3%) of
UICI Companies' Quota Share Percentage of claim payments accumulated
in the Reinsurance Pool actually made for policy benefits, during the
preceding calendar month on all policies described in Exhibits "A" and
reinsured hereunder.
(c) the current reinsurance percentage described in Exhibits
"A" of the actual expense paid by the Company for various Cost
Containment Services and Outside Legal Services that involve insurance
policies and certificates covered by this Agreement multiplied by the
appropriate Quota Share Percentage. Neither Cost Containment Services
nor Outside Legal Services shall include any cost for services
provided by AEGON Companies employees or any functions AEGON Companies
was paying to have done on a routine basis prior to the effective date
of this Agreement. Cost Containment Services include, but are not
limited to, amounts paid to preferred provider organizations, and
amounts paid for services such as utilization review, preadmission
authorization and case management. Outside Legal Services include,
but are not limited to, amounts paid to Outside Counsel for litigation
charges, and/or legal opinions.
(e) a Premium Tax Fee equal to the effective premium tax rate
paid by the AEGON Companies which includes prorated statutory
assessments charged to expense on all premium ceded to UICI Companies
on policies described in Exhibits "A". AEGON Companies shall report
to UICI Companies no later than the 20th day of each calendar month on
all policies reinsured hereunder and upon which premiums were
collected during the preceding calendar month or which were issued,
terminated, changed or reduced during the preceding calendar month,
showing the reinsurance premiums due on all premiums collected,
adjusted as provided in Section 4 (the "Reinsurance Pool Cash Flow
Payable"). The accounting furnished UICI Companies by AEGON Companies
shall also contain all pertinent information with respect to all
premiums, benefits, commissions, and cash surrenders paid or made
during the preceding calendar month. UICI Companies has the right to
request a detailed listing of the premium collections, commission
payments, or claims payments made under this reinsurance Agreement.
AEGON Companies shall also provide to UICI Companies a statement of
statutory assets and liabilities (statutory amounts may be estimated
on an interim basis; however, each
11
<PAGE> 14
calendar quarter such reports shall be stated on the basis of actual
data processing reports) which shall be reviewed and approved by
qualified actuaries and their determination shall be final. Reporting
forms have been mutually agreed upon between the parties.
14. Joint Election Pursuant to IRC proposed regulation
1.848-2(g)(8). NOW THEREFORE, the undersigned parties agree that the party
with net positive consideration for each taxable year as determined under
Regulation 1.848- 2(f) and 1.848-3 will capitalize specified policy acquisition
expenses with respect to the Reinsurance Agreement without regard to the
general deductions limitation under IRC Section 848(c)(1).
The parties also agree to exchange information by June 1st, following
the end of the year, pertaining to the amount of net consideration under the
Reinsurance Agreements to ensure consistency. Any disagreement between the
parties as to the amount of net consideration shall be resolved no later than
July 1st.
All parties represent and warrant they are subject to U.S. taxation
under Subchapter L of the Internal Revenue code. The parties agree that the
party with net positive consideration for each taxable year, as determined
pursuant to this Agreement, will capitalize specified policy acquisition
expenses with respect to the Reinsurance Agreement without regard to its
general deductions limitation.
15. Oversights. It is understood and agreed that either party may
correct its failure to comply with a requirement of this Agreement if the
failure was unintentional or caused by clerical oversight or misunderstanding,
within ninety (90) days after the notice of the failure is given to such party
in writing. In the event any such failure is corrected in a timely manner,
both parties shall be restored to the position they would have occupied had the
failure not occurred.
16. Arbitration. It is the intention of the parties that customs
and usages of the business of reinsurance shall be given full effect to the
interpretation of this Agreement. The parties shall act in all matters with
the highest of good faith. Any dispute or difference between
12
<PAGE> 15
the parties with respect to the operation or interpretation of this Agreement
on which an amicable understanding cannot be reached shall be decided by
arbitration reserving to each party the right to seek civil injunctive relief
pending the decision of the arbitrators. The arbitrators are empowered to
decide all questions or issues and shall be free to reach their decision from
the standpoint of equity and customary practices of the insurance industry.
The Court of Arbitration shall be held in a city mutually agreed upon by the
parties and shall consist of three arbitrators. AEGON Companies shall appoint
one arbitrator and UICI Companies the second. These two arbitrators shall then
select the third before arbitration begins. Should one of the parties decline
to appoint an arbitrator or should the two arbitrators be unable to agree upon
the choice of a third, such appointment shall be made by the American
Arbitration Association (AAA), and the AAA appointed arbitrator shall act as
chairman of the arbitration tribunal. The arbitrators shall decide by a
majority of votes, and from their written decision there can be no appeal. The
court of arbitration, including the fees of arbitrators, shall be borne as the
arbitrators decide; however, the parties hereto shall bear their own costs,
including attorney's fees, for their presentations to the arbitrators.
17. Insolvency. In the event of the insolvency of any AEGON
Company, all reinsurance under this Agreement shall be payable directly to its
liquidator, receiver or statutory successor without diminution because of
insolvency. It is agreed that the liquidator, receiver or statutory successor
of the AEGON Company shall give written notice to UICI Companies' Designated
Representative of the pendency of a claim against the AEGON Company on any of
the reinsured policies within a reasonable time after such claim is filed in
the insolvency proceeding and during the pendency of such claim, UICI Companies
may investigate such claim and interpose itself, at its own expense, in the
proceeding where such claim is to be adjudicated and may raise any defense or
defenses which are available to the AEGON Company or its liquidator, receiver
or statutory successor. The expenses thus incurred by UICI Companies shall be
chargeable, subject to Court approval, against the AEGON Company as part of the
expense of liquidation. Notwithstanding anything in the preceding portions of
this paragraph to the contrary, the liability of UICI Companies as Reinsurer
shall neither increase nor decrease because of the insolvency of the AEGON
Company.
13
<PAGE> 16
In the event any UICI Company shall become insolvent, then AEGON
Companies shall have the right to terminate this Agreement upon notice to UICI
Companies, its liquidator, receiver, or statutory successor. If AEGON
Companies shall terminate this Agreement pursuant to the terms of this Section
17, then AEGON Companies shall be entitled to withdraw from the Custodial
Account an amount equal to (1) the reserves which are required to be maintained
under the Insurance Code of the State of State of Domicile of the AEGON
Companies, as of the date of termination, for the insurance ceded hereunder and
(2) any other amounts which are due and owing to AEGON Companies, on the date
of termination, under the terms of this Agreement.
18. Assignment. This Agreement, or any right hereunder, shall not
be voluntarily assigned by either party without the prior written consent of
the other party. Furthermore, UICI Companies agrees that it will not enter
into any other agreement with respect to the business reinsured under this
Agreement without the express written consent of AEGON Companies and the AEGON
Companies agree that such consent shall not be unreasonably withheld. Subject
to the foregoing, the obligations of the parties hereunder shall be binding
upon and inure to the benefit of the parties hereto, and their respective
transferees, successors and assigns.
19. Amendment. This Agreement constitutes the entire contract
between the parties and may not be altered, modified, or in any way amended,
except by an instrument in writing duly executed by the proper officers of both
parties.
20. Choice of Law. Whereas, UICI Companies are not licensed to
act as an insurer in each state that the coinsured business referred to above
is written; and
Whereas, various state insurance departments have rules and
regulations affecting the accounting for assets of each insurance company
committed to the liabilities under coinsurance and reinsurance agreements; and
Whereas, the above referred parties have entered into a custodian
agreement with custodian to provide for the establishment of a custodial
account to hold securities of UICI Companies in regard to assets received as a
result of the coinsurance agreements; and
14
<PAGE> 17
Whereas, the parties desire to take credit for reserves on risks ceded
or may be ceded in the future to UICI Companies;
Now, therefore, in consideration of the mutual agreements contained
herein, the parties agree as follows:
(1) That in the event of the failure of UICI Companies to perform
its obligations under the terms of the reinsurance agreement, UICI Companies,
at the request of AEGON Companies, shall submit to the jurisdiction of any
court of competent jurisdiction in any state of the United States, shall comply
with all requirements necessary to give such court jurisdiction, and shall
abide by the final decision of such court or of any appellate court in the
event of an appeal.
(2) That the respective AEGON Companies State of Domicile
Insurance Commissioner is the true and lawful attorney of UICI Companies upon
whom may be served any lawful process in any action, suit, or proceeding
instituted by or on behalf of AEGON Companies.
15
<PAGE> 18
IN WITNESS HEREOF, the parties have caused this Reinsurance
Agreement to be executed by their respective officers this 20 day of
March, 1995.
<TABLE>
<CAPTION>
UICI COMPANIES AEGON COMPANIES
<S> <C>
National Managers Life Insurance Company PFL Life Insurance Company
/s/ Vernon R. Woelke /s/ James Parker
- ---------------------------------------- -------------------------------------------
President Vice President
- ---------------------------------------- -------------------------------------------
United Group Reinsurance Inc. Life Investors Insurance Company of America
/s/ Vernon R. Woelke /s/ James Parker
- ---------------------------------------- -------------------------------------------
President Vice President
- ---------------------------------------- -------------------------------------------
U. S. Managers Life Insurance Company Bankers United Life Assurance Company
/s/ Vernon R. Woelke /s/ James Parker
- ---------------------------------------- -------------------------------------------
President Vice President
- ---------------------------------------- -------------------------------------------
Financial Services Reinsurance Company Monumental Life Insurance Company
/s/ Vernon R. Woelke /s/ James Parker
- ---------------------------------------- -------------------------------------------
President Vice President
- ---------------------------------------- -------------------------------------------
EGA Life Insurance Company
/s/ Vernon R. Woelke
- ----------------------------------------
Vice President
- ----------------------------------------
</TABLE>
16
<PAGE> 19
EXHIBIT "A" Effective 1/1/95
POLICY IDENTIFICATION AND REINSURANCE PERCENTAGE CEDED
Policy Identification
The block of life and accident and health policies reinsured are all
policies and certificates of insurance (including riders thereto) which are
identified on the Company's in force runs by the following Division Codes:
BLOCK 1
<TABLE>
<CAPTION>
RLOB DIV RLOB DIV RLOB DIV
- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C>
07 05/80 08 15/18/80 09 05
10 05 12 05 13 05
14 04/84 15 05/80 16 05/80
17 05/80 20 23 28 15/18
32 15/18 39 37 39 87
56 56/85 ADB
</TABLE>
BLOCK 2
<TABLE>
<CAPTION>
RLOB DIV RLOB DIV
- ---- --- ---- ---
<S> <C> <C> <C>
05 26/83 11 62/82
18 06/86 19 24/82
34 03
</TABLE>
It is agreed that the above listed plans of insurance shall include any state
variations whether group or individual coverage regardless of different form
numbers due to filing of forms for state approval purposes.
Reinsurance Ceded Percentage
It is agreed that AEGON Companies will increase the percentage of
reinsurance ceded to be applied to the policies/certificates listed as Block 1
above in this "Exhibit A" pursuant to the table below:
<TABLE>
<S> <C>
January 1, 1995-December 31, 1995 55.0%
January 1, 1996-December 31, 1996 57.5%
January 1, 1997 and thereafter 60.0%
</TABLE>
The policies/certificates listed as Block 2 above in this "Exhibit A"
shall have a Reinsurance Ceded Percentage of 50%.
17
<PAGE> 20
EXHIBIT "B" EFFECTIVE 1/1/94
ANNUAL SETTLEMENT WORKSHEET
On each January 1 of the years 1996 and 1997, the reinsurance
percentage to be ceded by AEGON Companies is to increase according to the
schedule in Exhibit "A". The net settlement of reserves, policy liabilities,
policy assets, expense allowances, and the consideration shall be completed by
AEGON Companies for the review of UICI Companies. The following settlement
worksheet shall be completed for review within 75 days of the effective date of
the reinsurance percentage change. The transfer of cash or cash equivalents by
AEGON Companies will be completed no later than March 31.
ANNUAL SETTLEMENT WORKSHEET
January 1, 199X
Reinsurance Percentage Increasing from ____ to ____
<TABLE>
<S> <C>
POLICY ASSETS
Due Premium XXX.
Deferred Premium Assets XXX.
POLICY LIABILITIES
Advance Premium XXX.
Unearned Premium XXX.
Due Commission XXX.
RESERVES
Claim Reserves XXX.
Active Life Reserves XXX.
NET STATUTORY RESERVES X,XXX.
------
GAAP ADJUSTMENTS
Deferred Premium XX.
PAC Unearned Comm XX.
Assets XXX.
Unearned Premium XX.
Active Life Reserve XX.
Liabilities XXX.
NET GAAP ADJUSTMENTS X,XXX.
------
CONSIDERATION XXX
---
NET CASH TRANSFERRED XX,XXX.
-------
</TABLE>
<PAGE> 21
EXHIBIT C EFFECTIVE 1/1/95
QUOTA SHARE PERCENTAGE
The percentage of reinsurance risk ceded by each AEGON Company to each
UICI Company will be based on the following table:
United Group Reinsurance Inc. 75%
National Managers Life Insurance Company 10%
U.S. Managers Life Insurance Company 5%
Financial Services Reinsurance Company 10%
The percentage of reinsurance risk will be applied equally to each
component of the Reinsurance Pool Cash Flow Payable for monthly financial
activity as defined in Section 4. of the Reinsurance Agreement.
<PAGE> 22
EXHIBIT D EFFECTIVE 1/1/95
ADMINISTRATIVE FEE
UICI Companies shall pay AEGON Companies a fixed percentage of net
life and accident and health reinsurance premiums for administrative expenses.
This payment of expense allowance shall be reimbursement for policy
underwriting, policy issue, billing and collection, and general policy
administration. The expense percent is five and 79/100 percent (5.79%).
<PAGE> 23
EXHIBIT "E.1" Effective 1/1/95
AGREEMENT FOR CUSTODIAL ACCOUNT
AGREEMENT by and between MELLON BANK OF PHILADELPHIA, PA (the "Bank")
and NATIONAL MANAGERS LIFE INSURANCE COMPANY, a Turks and Caicos Island,
British West Indies company, hereinafter referred to as "NMLIC",
and
PFL LIFE INSURANCE COMPANY,
an Iowa insurance company,
LIFE INVESTORS INSURANCE COMPANY OF AMERICA,
an Iowa insurance company,
BANKERS UNITED LIFE ASSURANCE COMPANY,
an Iowa insurance company,
MONUMENTAL LIFE INSURANCE COMPANY,
a Maryland insurance company.
These companies shall hereinafter be referred to as "AEGON Companies".
In consideration of the mutual covenants and agreements hereinafter
set forth and the mutual benefits hereunder, the parties hereto agree as
follows:
1. The Bank agrees to open and establish a separate Custodial
Account (the "Account") for and in the name of AEGON Companies and NMLIC and to
hold therein, as Custodian for the AEGON Companies and NMLIC, all stocks,
bonds, securities and any other property (the "Assets") from time to time
deposited with or received by the Bank for the account of the AEGON Companies
and NMLIC.
2. The Bank is authorized to collect, receive, and hold for the
account of the AEGON Companies and NMLIC all income from the Assets within the
custody of the Bank from time to time under the terms hereof. All such income
shall be credited to the Account at the Bank subject to further instruction of
the AEGON Companies and NMLIC.
3. The Bank is authorized to sign any declarations, affidavits,
certificates of ownership or other documents that are or may hereafter be
required concerning all coupons, registered interest, dividends or other income
on Assets that may from time to time be within the custody of the Bank under
the terms hereof, and NMLIC agrees to reimburse, indemnify and hold the Bank
harmless of and from any and all liability, loss, claim, damage, fees, or
expenses that may arise or to which the Bank may be subjected by reason of
executing any of these documents.
4. The Bank is authorized to collect, receive, and hold the
principal of all Assets that may from time to time be within the custody of the
Bank under the terms hereof when and as the same may mature or be redeemed,
sold, exchanged, or otherwise disposed of upon the order of AEGON Companies and
NMLIC. All principal collected or received by the Bank shall be
<PAGE> 24
credited to the Account at the Bank subject to further instructions of AEGON
Companies and NMLIC.
5. Within fifteen (15) days following the close of a calendar
month, the Bank will, upon the written request of AEGON Companies or NMLIC,
forward to AEGON Companies and NMLIC a statement of principal and income
transactions effected during the preceding calendar month together with a
statement reflecting all Assets within the custody of the Bank under the terms
hereof as of the close of the preceding calendar month.
6. The Bank, upon written instructions of AEGON Companies and
NMLIC, will make delivery for the sale of securities held by the Bank for the
account of AEGON Companies and NMLIC in deliverable form against payment for
these securities. The Bank will not be liable or responsible for or on account
of any act or omission of any broker or other agent designated by AEGON
Companies and NMLIC.
7. The Bank will, in the absence of written instructions of AEGON
Companies and NMLIC, be under no obligation to take any action regarding stock
dividends, warrants, rights to subscribe, plans of reorganization or
recapitalization, or plans for the exchanges of Assets that may from time to
time be within the custody of the Bank under the terms hereof.
8. Any and all Assets deposited with the Bank hereunder may be
withdrawn from the Bank at any time only upon receipt by the Bank of a written
order or request executed by the Commissioner of Insurance of the state of
Domicile of the AEGON Company, the Commissioner of Insurance of the NMLIC
domicile, or a duly authorized representative of either of such Commissioners
of Insurance, or a duly authorized Officer of AEGON Companies designated to the
Bank by appropriate resolution and incumbency certificates of the AEGON
Companies relating to such Officers.
9. NMLIC assumes the duty of filing any and all tax reports and
returns as well as full responsibility for paying all taxes due on the income
and principal collected by the Bank under the terms hereof.
10. All Assets that may from time to time be within the custody of
the Bank under the terms hereof shall be kept separate from the assets of the
Bank.
11. The Bank will hold certificates representing or evidencing
Assets that may from time to time be within the custody of the Bank under the
terms hereof separate from certificates representing or evidencing assets owned
by other insurance companies for which the Bank serves as custodian. The
certificates representing or evidencing these Assets shall be kept separate and
physically apart from all other assets for which the Bank serves as a custodian
or fiduciary.
12. No certificate representing or evidencing Assets that may from
time to time be within the custody of the Bank under the terms hereof may be
merged into or with one or more certificates of a larger denomination
representing or evidencing those Assets of any third party including any other
insurance company.
13. The Bank will furnish upon written request by AEGON Companies,
NMLIC, the Commissioner of Insurance of the AEGON Companies states of domicile,
the Commissioner of Insurance of the NMLIC domicile, or a duly authorized
representative of either of such Commissioners of Insurance, a certified list
of all Assets held by the Bank in the Account. AEGON Companies and NMLIC
expressly authorize the Bank to respond to any direct inquiry made by the
Commissioner of Insurance of the AEGON Companies state of domicile, the
Commissioner of Insurance of the NMLIC domicile, or a duly authorized
representative of such Commissioners of Insurance, and the Bank shall permit
such parties to examine and audit all
<PAGE> 25
Assets held by the Bank hereunder.
14. All Assets, other than obligations of the United States
Government, that may from time to time be within the custody of the Bank under
the terms hereof shall remain physically on the Bank's premises and the Bank
will not deposit these Assets with correspondent banks, investment bankers,
brokers of any other third party. The Bank will not pledge or hypothecate any
Asset in any manner nor will the Bank be permitted to use these Assets for the
benefit of the Bank.
15. During the term of this Agreement, the Bank will maintain
fidelity and other insurance coverage that the Bank deems necessary or
appropriate to cover any certificates representing or evidencing Assets that
are lost because of any error, omission or other culpable act of the Bank or
any agent, employee or authorized representative of the Bank. All insurance
coverage of this type shall be in addition to and not in substitution of, the
full faith and credit of the Bank.
16. The Bank will provide the Assets that may from time to time be
within the custody of the Bank the same degree of care and protection that the
Bank provides its own property, and the AEGON Companies and NMLIC agree that
the Bank will not be liable for loss or damage caused directly or indirectly by
invasion, insurrection, riot, civil war or commotion, or military or usurped
power, or by order of any civil authority, or other cause beyond the control of
the Bank.
17. The Bank will not be under any obligation to defend any legal
action or engage in any legal proceedings regarding the Account or regarding
any Assets that may from time to time be within the custody of the Bank unless
the Bank is indemnified in advance to its own satisfaction.
18. NMLIC agree to indemnify and hold the Bank harmless from any
and all costs, damages, expenses, fees and liability that it may incur from any
action taken or omitted to be taken by it upon instruction of AEGON Companies
and NMLIC concerning the Account or in the case of a withdrawal pursuant to
Paragraph 19 hereof in instruction of AEGON Companies, the Commissioner of
Insurance of the AEGON Companies state of domicile, the Commissioner of
Insurance of the NMLIC domicile, or a duly authorized representative of either
of such Commissioner of Insurance.
19. The AEGON Companies or the Commissioner of Insurance of the
AEGON Companies state of domicile, or a duly authorized representative of such
Commissioner, will have the right, without the consent of NMLIC, to withdraw
assets within the custody of the Bank from time to time for the purpose of
satisfying any liability of NMLIC under the Agreement of Reinsurance between
AEGON Companies and NMLIC dated March 20, 1995. No Assets within the custody
of the Bank under the terms hereof and no income thereon collected by the Bank
will be withdrawn from the Account by NMLIC without the approval of AEGON
Companies, which approval shall be given for all withdrawals made pursuant to
the terms of the Agreement of Reinsurance between the AEGON Companies and NMLIC
dated March 20, 1995.
<PAGE> 26
DATED: March 20,1995
- ----------------------
<TABLE>
<S> <C>
AEGON COMPANIES
National Managers Life Insurance Company PFL Life Insurance Company
/s/ Vernon R. Woelke /s/ James Parker
- ---------------------------------------- -------------------------------------------
President Vice President
- ---------------------------------------- -------------------------------------------
Life Investors Insurance Company of America
/s/ James Parker
-------------------------------------------
Vice President
-------------------------------------------
Bankers United Life Assurance Company
/s/ James Parker
-------------------------------------------
Vice President
-------------------------------------------
Monumental Life Insurance Company
/s/ James Parker
-------------------------------------------
Vice President
-------------------------------------------
</TABLE>
<PAGE> 27
EXHIBIT "E.2" Effective 1/1/95
AGREEMENT FOR CUSTODIAL ACCOUNT
AGREEMENT by and between MELLON BANK OF PHILADELPHIA (the "Bank") and
UNITED GROUP REINSURANCE, INC., a Turks and Caicos Island, British West Indies
company, hereinafter referred to as "UGRI",
and
PFL LIFE INSURANCE COMPANY,
an Iowa insurance company,
LIFE INVESTORS INSURANCE COMPANY OF AMERICA,
an Iowa insurance company,
BANKERS UNITED LIFE ASSURANCE COMPANY,
an Iowa insurance company,
MONUMENTAL LIFE INSURANCE COMPANY,
a Maryland insurance company.
These companies shall hereinafter be referred to as "AEGON Companies".
In consideration of the mutual covenants and agreements hereinafter
set forth and the mutual benefits hereunder, the parties hereto agree as
follows:
1. The Bank agrees to open and establish a separate Custodial
Account (the "Account") for and in the name of AEGON Companies and UGRI and to
hold therein, as Custodian for the AEGON Companies and UGRI, all stocks, bonds,
securities and any other property (the "Assets") from time to time deposited
with or received by the Bank for the account of the AEGON Companies and UGRI.
2. The Bank is authorized to collect, receive, and hold for the
account of the AEGON Companies and UGRI all income from the Assets within the
custody of the Bank from time to time under the terms hereof. All such income
shall be credited to the Account at the Bank subject to further instruction of
the AEGON Companies and UGRI.
3. The Bank is authorized to sign any declarations, affidavits,
certificates of ownership or other documents that are or may hereafter be
required concerning all coupons, registered interest, dividends or other income
on Assets that may from time to time be within the custody of the Bank under
the terms hereof, and UGRI agrees to reimburse, indemnify and hold the Bank
harmless of and from any and all liability, loss, claim, damage, fees, or
expenses that may arise or to which the Bank may be subjected by reason of
executing any of these documents.
4. The Bank is authorized to collect, receive, and hold the
principal of all Assets that may from time to time be within the custody of the
Bank under the terms hereof when and as the same may mature or be redeemed,
sold, exchanged, or otherwise disposed of upon the order of AEGON Companies and
UGRI. All principal collected or received by the Bank shall be credited to the
Account at the Bank subject to further instructions of AEGON Companies and
<PAGE> 28
UGRI.
5. Within fifteen (15) days following the close of a calendar
month, the Bank will, upon the written request of AEGON Companies or UGRI,
forward to AEGON Companies and UGRI a statement of principal and income
transactions effected during the preceding calendar month together with a
statement reflecting all Assets within the custody of the Bank under the terms
hereof as of the close of the preceding calendar month.
6. The Bank, upon written instructions of AEGON Companies and
UGRI, will make delivery for the sale of securities held by the Bank for the
account of AEGON Companies and UGRI in deliverable form against payment for
these securities. The Bank will not be liable or responsible for or on account
of any act or omission of any broker or other agent designated by AEGON
Companies and UGRI.
7. The Bank will, in the absence of written instructions of AEGON
Companies and UGRI, be under no obligation to take any action regarding stock
dividends, warrants, rights to subscribe, plans of reorganization or
recapitalization, or plans for the exchanges of Assets that may from time to
time be within the custody of the Bank under the terms hereof.
8. Any and all Assets deposited with the Bank hereunder may be
withdrawn from the Bank at any time only upon receipt by the Bank of a written
order or request executed by the Commissioner of Insurance of the state of
Domicile of the AEGON Company, the Commissioner of Insurance of the UGRI
domicile, or a duly authorized representative of either of such Commissioners
of Insurance, or a duly authorized Officer of AEGON Companies designated to the
Bank by appropriate resolution and incumbency certificates of the AEGON
Companies relating to such Officers.
9. UGRI assumes the duty of filing any and all tax reports and
returns as well as full responsibility for paying all taxes due on the income
and principal collected by the Bank under the terms hereof.
10. All Assets that may from time to time be within the custody of
the Bank under the terms hereof shall be kept separate from the assets of the
Bank.
11. The Bank will hold certificates representing or evidencing
Assets that may from time to time be within the custody of the Bank under the
terms hereof separate from certificates representing or evidencing assets owned
by other insurance companies for which the Bank serves as custodian. The
certificates representing or evidencing these Assets shall be kept separate and
physically apart from all other assets for which the Bank serves as a custodian
or fiduciary.
12. No certificate representing or evidencing Assets that may from
time to time be within the custody of the Bank under the terms hereof may be
merged into or with one or more certificates of a larger denomination
representing or evidencing those Assets of any third party including any other
insurance company.
13. The Bank will furnish upon written request by AEGON Companies,
UGRI, the Commissioner of Insurance of the AEGON Companies states of domicile,
the Commissioner of Insurance of the UGRI domicile, or a duly authorized
representative of either of such Commissioners of Insurance, a certified list
of all Assets held by the Bank in the Account. AEGON Companies and UGRI
expressly authorize the Bank to respond to any direct inquiry made by the
Commissioner of Insurance of the AEGON Companies state of domicile, the
Commissioner of Insurance of the UGRI domicile, or a duly authorized
representative of such Commissioners of Insurance, and the Bank shall permit
such parties to examine and audit all Assets held by the Bank hereunder.
<PAGE> 29
14. All Assets, other than obligations of the United States
Government, that may from time to time be within the custody of the Bank under
the terms hereof shall remain physically on the Bank's premises and the Bank
will not deposit these Assets with correspondent banks, investment bankers,
brokers of any other third party. The Bank will not pledge or hypothecate any
Asset in any manner nor will the Bank be permitted to use these Assets for the
benefit of the Bank.
15. During the term of this Agreement, the Bank will maintain
fidelity and other insurance coverage that the Bank deems necessary or
appropriate to cover any certificates representing or evidencing Assets that
are lost because of any error, omission or other culpable act of the Bank or
any agent, employee or authorized representative of the Bank. All insurance
coverage of this type shall be in addition to and not in substitution of, the
full faith and credit of the Bank.
16. The Bank will provide the Assets that may from time to time be
within the custody of the Bank the same degree of care and protection that the
Bank provides its own property, and the AEGON Companies and UGRI agree that the
Bank will not be liable for loss or damage caused directly or indirectly by
invasion, insurrection, riot, civil war or commotion, or military or usurped
power, or by order of any civil authority, or other cause beyond the control of
the Bank.
17. The Bank will not be under any obligation to defend any legal
action or engage in any legal proceedings regarding the Account or regarding
any Assets that may from time to time be within the custody of the Bank unless
the Bank is indemnified in advance to its own satisfaction.
18. UGRI agree to indemnify and hold the Bank harmless from any
and all costs, damages, expenses, fees and liability that it may incur from any
action taken or omitted to be taken by it upon instruction of AEGON Companies
and UGRI concerning the Account or in the case of a withdrawal pursuant to
Paragraph 19 hereof in instruction of AEGON Companies, the Commissioner of
Insurance of the AEGON Companies state of domicile, the Commissioner of
Insurance of the UGRI domicile, or a duly authorized representative of either
of such Commissioner of Insurance.
19. The AEGON Companies or the Commissioner of Insurance of the
AEGON Companies state of domicile, or a duly authorized representative of such
Commissioner, will have the right, without the consent of UGRI, to withdraw
assets within the custody of the Bank from time to time for the purpose of
satisfying any liability of UGRI under the Agreement of Reinsurance between
AEGON Companies and UGRI dated March 20, 1995. No Assets within the custody of
the Bank under the terms hereof and no income thereon collected by the Bank
will be withdrawn from the Account by UGRI without the approval of AEGON
Companies, which approval shall be given for all withdrawals made pursuant to
the terms of the Agreement of Reinsurance between the AEGON Companies and UGRI
dated March 20, 1995.
<PAGE> 30
DATED: March 20, 1995
<TABLE>
<S> <C>
AEGON COMPANIES
United Group Reinsurance, Inc. PFL Life Insurance Company
/s/ Vernon R. Woelke /s/ James Parker
- ----------------------------------------- -------------------------------------------
President Vice President
- ----------------------------------------- -------------------------------------------
Life Investors Insurance Company of America
/s/ James Parker
-------------------------------------------
Vice President
-------------------------------------------
Bankers United Life Assurance Company
/s/ James Parker
-------------------------------------------
Vice President
-------------------------------------------
Monumental Life Insurance Company
/s/ James Parker
-------------------------------------------
Vice President
-------------------------------------------
</TABLE>
<PAGE> 31
EXHIBIT "E.3" Effective 1/1/95
AGREEMENT FOR CUSTODIAL ACCOUNT
AGREEMENT by and between MELLON BANK OF PHILADELPHIA (the "Bank") and
U. S. MANAGERS LIFE INSURANCE COMPANY, INC., a British Virgin Island Company,
hereinafter referred to as "USMLIC",
and
PFL LIFE INSURANCE COMPANY,
an Iowa insurance company,
LIFE INVESTORS INSURANCE COMPANY OF AMERICA,
an Iowa insurance company,
BANKERS UNITED LIFE ASSURANCE COMPANY,
an Iowa insurance company,
MONUMENTAL LIFE INSURANCE COMPANY,
a Maryland insurance company.
These companies shall hereinafter be referred to as "AEGON Companies".
In consideration of the mutual covenants and agreements hereinafter
set forth and the mutual benefits hereunder, the parties hereto agree as
follows:
1. The Bank agrees to open and establish a separate Custodial
Account (the "Account") for and in the name of AEGON Companies and USMLIC and
to hold therein, as Custodian for the AEGON Companies and USMLIC, all stocks,
bonds, securities and any other property (the "Assets") from time to time
deposited with or received by the Bank for the account of the AEGON Companies
and USMLIC.
2. The Bank is authorized to collect, receive, and hold for the
account of the AEGON Companies and USMLIC all income from the Assets within the
custody of the Bank from time to time under the terms hereof. All such income
shall be credited to the Account at the Bank subject to further instruction of
the AEGON Companies and USMLIC.
3. The Bank is authorized to sign any declarations, affidavits,
certificates of ownership or other documents that are or may hereafter be
required concerning all coupons, registered interest, dividends or other income
on Assets that may from time to time be within the custody of the Bank under
the terms hereof, and USMLIC agrees to reimburse, indemnify and hold the Bank
harmless of and from any and all liability, loss, claim, damage, fees, or
expenses that may arise or to which the Bank may be subjected by reason of
executing any of these documents.
4. The Bank is authorized to collect, receive, and hold the
principal of all Assets that may from time to time be within the custody of the
Bank under the terms hereof when and as the same may mature or be redeemed,
sold, exchanged, or otherwise disposed of upon the order of AEGON Companies and
USMLIC. All principal collected or received by the Bank shall be credited to
the Account at the Bank subject to further instructions of AEGON Companies and
<PAGE> 32
USMLIC.
5. Within fifteen (15) days following the close of a calendar
month, the Bank will, upon the written request of AEGON Companies or USMLIC,
forward to AEGON Companies and USMLIC a statement of principal and income
transactions effected during the preceding calendar month together with a
statement reflecting all Assets within the custody of the Bank under the terms
hereof as of the close of the preceding calendar month.
6. The Bank, upon written instructions of AEGON Companies and
USMLIC, will make delivery for the sale of securities held by the Bank for the
account of AEGON Companies and USMLIC in deliverable form against payment for
these securities. The Bank will not be liable or responsible for or on account
of any act or omission of any broker or other agent designated by AEGON
Companies and USMLIC.
7. The Bank will, in the absence of written instructions of AEGON
Companies and USMLIC, be under no obligation to take any action regarding stock
dividends, warrants, rights to subscribe, plans of reorganization or
recapitalization, or plans for the exchanges of Assets that may from time to
time be within the custody of the Bank under the terms hereof.
8. Any and all Assets deposited with the Bank hereunder may be
withdrawn from the Bank at any time only upon receipt by the Bank of a written
order or request executed by the Commissioner of Insurance of the state of
Domicile of the AEGON Company, the Commissioner of Insurance of the USMLIC
domicile, or a duly authorized representative of either of such Commissioners
of Insurance, or a duly authorized Officer of AEGON Companies designated to the
Bank by appropriate resolution and incumbency certificates of the AEGON
Companies relating to such Officers.
9. USMLIC assumes the duty of filing any and all tax reports and
returns as well as full responsibility for paying all taxes due on the income
and principal collected by the Bank under the terms hereof.
10. All Assets that may from time to time be within the custody of
the Bank under the terms hereof shall be kept separate from the assets of the
Bank.
11. The Bank will hold certificates representing or evidencing
Assets that may from time to time be within the custody of the Bank under the
terms hereof separate from certificates representing or evidencing assets owned
by other insurance companies for which the Bank serves as custodian. The
certificates representing or evidencing these Assets shall be kept separate and
physically apart from all other assets for which the Bank serves as a custodian
or fiduciary.
12. No certificate representing or evidencing Assets that may from
time to time be within the custody of the Bank under the terms hereof may be
merged into or with one or more certificates of a larger denomination
representing or evidencing those Assets of any third party including any other
insurance company.
13. The Bank will furnish upon written request by AEGON Companies,
USMLIC, the Commissioner of Insurance of the AEGON Companies states of
domicile, the Commissioner of Insurance of the USMLIC domicile, or a duly
authorized representative of either of such Commissioners of Insurance, a
certified list of all Assets held by the Bank in the Account. AEGON Companies
and USMLIC expressly authorize the Bank to respond to any direct inquiry made
by the Commissioner of Insurance of the AEGON Companies state of domicile, the
Commissioner of Insurance of the USMLIC domicile, or a duly authorized
representative of such Commissioners of Insurance, and the Bank shall permit
such parties to examine and audit all Assets held by the Bank hereunder.
<PAGE> 33
14. All Assets, other than obligations of the United States
Government, that may from time to time be within the custody of the Bank under
the terms hereof shall remain physically on the Bank's premises and the Bank
will not deposit these Assets with correspondent banks, investment bankers,
brokers of any other third party. The Bank will not pledge or hypothecate any
Asset in any manner nor will the Bank be permitted to use these Assets for the
benefit of the Bank.
15. During the term of this Agreement, the Bank will maintain
fidelity and other insurance coverage that the Bank deems necessary or
appropriate to cover any certificates representing or evidencing Assets that
are lost because of any error, omission or other culpable act of the Bank or
any agent, employee or authorized representative of the Bank. All insurance
coverage of this type shall be in addition to and not in substitution of, the
full faith and credit of the Bank.
16. The Bank will provide the Assets that may from time to time be
within the custody of the Bank the same degree of care and protection that the
Bank provides its own property, and the AEGON Companies and USMLIC agree that
the Bank will not be liable for loss or damage caused directly or indirectly by
invasion, insurrection, riot, civil war or commotion, or military or usurped
power, or by order of any civil authority, or other cause beyond the control of
the Bank.
17. The Bank will not be under any obligation to defend any legal
action or engage in any legal proceedings regarding the Account or regarding
any Assets that may from time to time be within the custody of the Bank unless
the Bank is indemnified in advance to its own satisfaction.
18. USMLIC agree to indemnify and hold the Bank harmless from any
and all costs, damages, expenses, fees and liability that it may incur from any
action taken or omitted to be taken by it upon instruction of AEGON Companies
and USMLIC concerning the Account or in the case of a withdrawal pursuant to
Paragraph 19 hereof in instruction of AEGON Companies, the Commissioner of
Insurance of the AEGON Companies state of domicile, the Commissioner of
Insurance of the USMLIC domicile, or a duly authorized representative of either
of such Commissioner of Insurance.
19. The AEGON Companies or the Commissioner of Insurance of the
AEGON Companies state of domicile, or a duly authorized representative of such
Commissioner, will have the right, without the consent of USMLIC, to withdraw
assets within the custody of the Bank from time to time for the purpose of
satisfying any liability of USMLIC under the Agreement of Reinsurance between
AEGON Companies and USMLIC dated March 20, 1995. No Assets within the custody
of the Bank under the terms hereof and no income thereon collected by the Bank
will be withdrawn from the Account by USMLIC without the approval of AEGON
Companies, which approval shall be given for all withdrawals made pursuant to
the terms of the Agreement of Reinsurance between the AEGON Companies and
USMLIC dated March 20, 1995.
<PAGE> 34
DATED: March 20, 1995
--------------
<TABLE>
<S> <C>
AEGON COMPANIES
U.S. Managers Life Insurance Company PFL Life Insurance Company
/s/ Vernon R. Woelke /s/ James Parker
- ----------------------------------- --------------------------------
President Vice President
- ----------------------------------- --------------------------------
Life Investors Insurance Company of America
/s/ James Parker
---------------------------------
Vice President
---------------------------------
Bankers United Life Assurance Company
/s/ James Parker
----------------------------------
Vice President
----------------------------------
Monumental Life Insurance Company
/s/ James Parker
----------------------------------
Vice President
----------------------------------
</TABLE>
<PAGE> 35
EXHIBIT "E.4" Effective 1/1/95
AGREEMENT FOR CUSTODIAL ACCOUNT
AGREEMENT by and between MELLON BANK OF PHILADELPHIA (the "Bank") and
FINANCIAL SERVICES REINSURANCE COMPANY, INC., a British Virgin Island Company,
hereinafter referred to as "FSR",
and
PFL LIFE INSURANCE COMPANY,
an Iowa insurance company,
LIFE INVESTORS INSURANCE COMPANY OF AMERICA,
an Iowa insurance company,
BANKERS UNITED LIFE ASSURANCE COMPANY,
an Iowa insurance company,
MONUMENTAL LIFE INSURANCE COMPANY,
a Maryland insurance company.
These companies shall hereinafter be referred to as "AEGON Companies".
In consideration of the mutual covenants and agreements hereinafter
set forth and the mutual benefits hereunder, the parties hereto agree as
follows:
1. The Bank agrees to open and establish a separate Custodial
Account (the "Account") for and in the name of AEGON Companies and FSR and to
hold therein, as Custodian for the AEGON Companies and FSR, all stocks, bonds,
securities and any other property (the "Assets") from time to time deposited
with or received by the Bank for the account of the AEGON Companies and FSR.
2. The Bank is authorized to collect, receive, and hold for the
account of the AEGON Companies and FSR all income from the Assets within the
custody of the Bank from time to time under the terms hereof. All such income
shall be credited to the Account at the Bank subject to further instruction of
the AEGON Companies and FSR.
3. The Bank is authorized to sign any declarations, affidavits,
certificates of ownership or other documents that are or may hereafter be
required concerning all coupons, registered interest, dividends or other income
on Assets that may from time to time be within the custody of the Bank under
the terms hereof, and FSR agrees to reimburse, indemnify and hold the Bank
harmless of and from any and all liability, loss, claim, damage, fees, or
expenses that may arise or to which the Bank may be subjected by reason of
executing any of these documents.
4. The Bank is authorized to collect, receive, and hold the
principal of all Assets that may from time to time be within the custody of the
Bank under the terms hereof when and as the same may mature or be redeemed,
sold, exchanged, or otherwise disposed of upon the order of AEGON Companies and
FSR. All principal collected or received by the Bank shall be credited to the
Account at the Bank subject to further instructions of AEGON Companies and
<PAGE> 36
FSR.
5. Within fifteen (15) days following the close of a calendar
month, the Bank will, upon the written request of AEGON Companies or FSR,
forward to AEGON Companies and FSR a statement of principal and income
transactions effected during the preceding calendar month together with a
statement reflecting all Assets within the custody of the Bank under the terms
hereof as of the close of the preceding calendar month.
6. The Bank, upon written instructions of AEGON Companies and
FSR, will make delivery for the sale of securities held by the Bank for the
account of AEGON Companies and FSR in deliverable form against payment for
these securities. The Bank will not be liable or responsible for or on account
of any act or omission of any broker or other agent designated by AEGON
Companies and FSR.
7. The Bank will, in the absence of written instructions of AEGON
Companies and FSR, be under no obligation to take any action regarding stock
dividends, warrants, rights to subscribe, plans of reorganization or
recapitalization, or plans for the exchanges of Assets that may from time to
time be within the custody of the Bank under the terms hereof.
8. Any and all Assets deposited with the Bank hereunder may be
withdrawn from the Bank at any time only upon receipt by the Bank of a written
order or request executed by the Commissioner of Insurance of the state of
Domicile of the AEGON Company, the Commissioner of Insurance of the FSR
domicile, or a duly authorized representative of either of such Commissioners
of Insurance, or a duly authorized Officer of AEGON Companies designated to the
Bank by appropriate resolution and incumbency certificates of the AEGON
Companies relating to such Officers.
9. FSR assumes the duty of filing any and all tax reports and
returns as well as full responsibility for paying all taxes due on the income
and principal collected by the Bank under the terms hereof.
10. All Assets that may from time to time be within the custody of
the Bank under the terms hereof shall be kept separate from the assets of the
Bank.
11. The Bank will hold certificates representing or evidencing
Assets that may from time to time be within the custody of the Bank under the
terms hereof separate from certificates representing or evidencing assets owned
by other insurance companies for which the Bank serves as custodian. The
certificates representing or evidencing these Assets shall be kept separate and
physically apart from all other assets for which the Bank serves as a custodian
or fiduciary.
12. No certificate representing or evidencing Assets that may from
time to time be within the custody of the Bank under the terms hereof may be
merged into or with one or more certificates of a larger denomination
representing or evidencing those Assets of any third party including any other
insurance company.
13. The Bank will furnish upon written request by AEGON Companies,
FSR, the Commissioner of Insurance of the AEGON Companies states of domicile,
the Commissioner of Insurance of the FSR domicile, or a duly authorized
representative of either of such Commissioners of Insurance, a certified list
of all Assets held by the Bank in the Account. AEGON Companies and FSR
expressly authorize the Bank to respond to any direct inquiry made by the
Commissioner of Insurance of the AEGON Companies state of domicile, the
Commissioner of Insurance of the FSR domicile, or a duly authorized
representative of such Commissioners of Insurance, and the Bank shall permit
such parties to examine and audit all Assets held by the Bank hereunder.
<PAGE> 37
14. All Assets, other than obligations of the United States
Government, that may from time to time be within the custody of the Bank under
the terms hereof shall remain physically on the Bank's premises and the Bank
will not deposit these Assets with correspondent banks, investment bankers,
brokers of any other third party. The Bank will not pledge or hypothecate any
Asset in any manner nor will the Bank be permitted to use these Assets for the
benefit of the Bank.
15. During the term of this Agreement, the Bank will maintain
fidelity and other insurance coverage that the Bank deems necessary or
appropriate to cover any certificates representing or evidencing Assets that
are lost because of any error, omission or other culpable act of the Bank or
any agent, employee or authorized representative of the Bank. All insurance
coverage of this type shall be in addition to and not in substitution of, the
full faith and credit of the Bank.
16. The Bank will provide the Assets that may from time to time be
within the custody of the Bank the same degree of care and protection that the
Bank provides its own property, and the AEGON Companies and FSR agree that the
Bank will not be liable for loss or damage caused directly or indirectly by
invasion, insurrection, riot, civil war or commotion, or military or usurped
power, or by order of any civil authority, or other cause beyond the control of
the Bank.
17. The Bank will not be under any obligation to defend any legal
action or engage in any legal proceedings regarding the Account or regarding
any Assets that may from time to time be within the custody of the Bank unless
the Bank is indemnified in advance to its own satisfaction.
18. FSR agree to indemnify and hold the Bank harmless from any and
all costs, damages, expenses, fees and liability that it may incur from any
action taken or omitted to be taken by it upon instruction of AEGON Companies
and FSR concerning the Account or in the case of a withdrawal pursuant to
Paragraph 19 hereof in instruction of AEGON Companies, the Commissioner of
Insurance of the AEGON Companies state of domicile, the Commissioner of
Insurance of the FSR domicile, or a duly authorized representative of either of
such Commissioner of Insurance.
19. The AEGON Companies or the Commissioner of Insurance of the
AEGON Companies state of domicile, or a duly authorized representative of such
Commissioner, will have the right, without the consent of FSR, to withdraw
assets within the custody of the Bank from time to time for the purpose of
satisfying any liability of FSR under the Agreement of Reinsurance between
AEGON Companies and FSR dated March 20, 1995. No Assets within the custody of
the Bank under the terms hereof and no income thereon collected by the Bank
will be withdrawn from the Account by FSR without the approval of AEGON
Companies, which approval shall be given for all withdrawals made pursuant to
the terms of the Agreement of Reinsurance between the AEGON Companies and FSR
dated March 20, 1995.
<PAGE> 38
DATED: March 20, 1995
--------------
<TABLE>
<S> <C>
AEGON COMPANIES
Financial Services Reinsurance Company PFL Life Insurance Company
/s/ Vernon R. Woelke /s/ James Parker
- -------------------------------------- -------------------------------
President Vice President
- -------------------------------------- -------------------------------
Life Investors Insurance Company of America
/s/ James Parker
-------------------------------
Vice President
-------------------------------
Bankers United Life Assurance Company
/s/ James Parker
--------------------------------
Vice President
--------------------------------
Monumental Life Insurance Company
/s/ James Parker
---------------------------------
Vice President
---------------------------------
</TABLE>
<PAGE> 39
Exhibit F Effective 1/1/95
Designated Representative
National Managers Life Insurance Company, Financial Services Reinsurance
Company, U. S. Managers Life Insurance Company, and United Group Reinsurance
Inc. hereby mutually agree the Designated Representative of the UICI Companies
for purposes of communicating to AEGON Companies will be an officer of United
Group Reinsurance Inc.
PFL Life Insurance Company, Bankers United Life Assurance Company, Monumental
Life Insurance Company, and Life Investors Insurance Company of America hereby
mutually agree the Designated Representative of the AEGON Companies for
purposes of communicating to UICI Companies will be an officer of PFL Life
Insurance Company.
<PAGE> 40
AMENDMENT NUMBER ONE
EXHIBIT D EFFECTIVE 7/1/95
ADMINISTRATIVE FEE
The Administrative Fee discussed in Exhibit D of the reinsurance
agreement between "AEGON Companies" and "UICI Companies" dated March 20, 1995,
is hereby replaced with this Exhibit D effective 7/1/95.
The UICI Companies shall pay AEGON Companies a fixed percentage of net
life and accident and health reinsurance premiums for administrative expenses.
This payment of expense allowance shall be reimbursement for policy
underwriting, policy issue, billing and collection, and general policy
administration. The expense percent is five and 50/100 percent (5.5%).
IN WITNESS HEREOF, the parties have caused this Amendment Number One
to be executed by their respective officers this 2nd day of August, 1995.
<TABLE>
<S> <C>
UICI COMPANIES AEGON COMPANIES
National Managers Life Insurance Company PFL Life Insurance Company
/s/ Robert B. Vlach /s/ James Parker
- ---------------------------------------- -------------------------------------------
Vice President and Secretary Vice President
- ---------------------------------------- -------------------------------------------
United Group Reinsurance Inc. Life Investors Insurance Company of America
/s/ Mark D. Hauptman /s/ James Parker
- ---------------------------------------- -------------------------------------------
Treasurer Vice President
- ---------------------------------------- -------------------------------------------
U. S. Managers Life Insurance Company Bankers United Life Assurance Company
/s/ Mark D. Hauptman /s/ James Parker
- ---------------------------------------- -------------------------------------------
Treasurer Vice President
- ---------------------------------------- -------------------------------------------
Financial Services Reinsurance Company Monumental Life Insurance Company
/s/ Mark D. Hauptman /s/ James Parker
- ---------------------------------------- -------------------------------------------
Treasurer Vice President
- ---------------------------------------- -------------------------------------------
</TABLE>
<PAGE> 41
AMENDMENT NUMBER TWO
EXHIBIT "A" EFFECTIVE 11/1/95
IN WITNESS HEREOF, the parties have caused this Amendment Number Two
to be executed by their respective officers this 1st day of November, 1995.
This Exhibit "A" shall replace Exhibit "A" that was effective 1/1/95.
POLICY IDENTIFICATION AND REINSURANCE PERCENTAGE CEDED
Policy Identification
The block of life and accident and health policies reinsured are all
policies and certificates of insurance (including riders thereto) which are
identified on the Company's in force runs by the following Division Codes:
BLOCK 1
<TABLE>
<CAPTION>
RLOB DIV RLOB DIV RLOB DIV
- ---- --- ---- --- ---- ---
<S> <C> <C> <C> <C> <C>
07 05/80/90 08 15/18/80 09 05
10 05 12 05 13 05
14 04/84/94 15 05/80/90 16 05/80/90
17 05/80/90 20 23 28 15/18
32 15/18 39 37/87/97 56 56/85/95
ADB 38 33 73 73/88/98
</TABLE>
BLOCK 2
<TABLE>
<CAPTION>
RLOB DIV RLOB DIV
- ---- --- ---- ---
<S> <C> <C> <C>
05 26/83/93 11 62/82
18 06/86/96 19 24/82
34 03
</TABLE>
It is agreed that the above listed plans of insurance shall include any state
variations whether group or individual coverage regardless of different form
numbers due to filing of forms for state approval purposes.
<PAGE> 42
Reinsurance Ceded Percentage
It is agreed that AEGON Companies will increase the percentage of
reinsurance ceded to be applied to the policies/certificates listed as Block 1
above in this "Exhibit A" pursuant to the table below:
<TABLE>
<S> <C>
January 1, 1995-December 31, 1995 55.0%
January 1, 1996-December 31, 1996 57.5%
January 1, 1997 and thereafter 60.0%
</TABLE>
The policies/certificates listed as Block 2 above in this "Exhibit A"
shall have a Reinsurance Ceded Percentage of 50%.
<TABLE>
<CAPTION>
UICI COMPANIES AEGON COMPANIES
<S> <C>
National Managers Life Insurance Company PFL Life Insurance Company
/s/ Robert B. Vlach /s/ James Parker
- ------------------------------- -------------------------------
Vice President and Secretary Vice President
- ------------------------------- -------------------------------
United Group Reinsurance Inc. Life Investors Insurance Company of America
/s/ Mark D. Hauptman /s/ James Parker
- ------------------------------- -------------------------------
Treasurer Vice President
- ------------------------------- -------------------------------
U. S. Managers Life Insurance Company Bankers United Life Assurance Company
/s/ Mark D. Hauptman /s/ James Parker
- ------------------------------- -------------------------------
Treasurer Vice President
- ------------------------------- -------------------------------
Financial Services Reinsurance Company Monumental Life Insurance Company
/s/ Mark D. Hauptman /s/ James Parker
- ------------------------------- -------------------------------
Treasurer Vice President
- ------------------------------- -------------------------------
</TABLE>
<PAGE> 43
AMENDMENT NUMBER THREE
CONSENT TO ASSIGNMENT OF
REINSURANCE AGREEMENT
WHEREAS, United Insurance Companies, Inc., a Delaware corporation, is
in the process of incorporating two new companies to be governed under the laws
of the Turks and Caicos Islands to be named, respectively, U.S. Managers Life
Insurance company, Ltd. ("U.S. Managers-TCI") and Financial Services
Reinsurance, Ltd. ("Financial Services-TCI"), for the sole purpose of
redomesticating to the Turks and Caicos Islands U.S. Managers Life Insurance
Company, Ltd., a corporation organized under the laws of the British Virgin
Islands ("U.S. Managers-BVI") and Financial Services Reinsurance, Ltd., a
corporation organized under the laws of the British Virgin Islands ("Financial
Services-BVI"); and
WHEREAS, upon the issuance of a license under the Insurance Ordinance
1989 to carry on business in or from within the Turks and Caicos Islands to
U.S. Managers-TCI, the existence of U.S. Managers-BVI will cease and all assets
and liabilities will be transferred to U.S. Managers-TCI; and
WHEREAS, upon the issuance of a license under the Insurance Ordinance
1989 to carry on business in or from within the Turks and Caicos Islands to
Financial Services-TCI, the existence of Financial Services-BVI will cease and
all assets and liabilities will be transferred to Financial Services-TCI; and
WHEREAS, U.S. Managers-BVI and Financial Services-BVI are parties to
that certain Reinsurance Agreement effective January 1, 1995 (the "Agreement")
by and between the "UICI Companies" and the "AEGON Companies", as those terms
are defined in the Agreement, and, pursuant to Paragraph 18 of the Agreement,
the assignment of the Agreement may not occur without the prior written consent
of the AEGON Companies;
IT IS HEREBY AGREED, that the interests and liabilities of U.S.
Managers-BVI and Financial Services-BVI under this Contract shall be
transferred to U.S. Managers-TCI and Financial Services-TCI, respectively. In
accordance therewith, U.S. Managers-BVI and Financial Services-BVI shall assign
and U.S. Managers-TCI and Financial Services-TCI shall assume all of the
rights, interests, liabilities and obligations of the "UICI Companies" under
this Contract. U.S. Managers-TCI and Financial Services-TCI shall then be
subject to all of the terms and conditions of this contract, and the term "UICI
Companies" wherever it is used in this contract shall include reference to U.S.
Managers-TCI and Financial Services-TCI.
NOW, THEREFORE, the AEGON Companies hereby consent to assignment of
the Agreement by U.S. Managers-BVI to U. S. Managers-TCI, and the assignment
by Financial Services-BVI to Financial Services-TCI, such assignments to be
effective immediately upon the issuance of a license to each company under the
Insurance Ordinance 1989 to carry on business in or from within the Turks and
Caicos Islands.
<PAGE> 44
This consent of Assignment may be executed in any number of
counterparts, and by different parties hereto on separate counterparts, each of
which counterparts, when so executed and delivered, shall be deemed to be
original and all or which counterparts, taken together, shall constitute but
one and the same document.
This Consent to Assignment of Reinsurance Agreement has been executed
as of the 21st of November, 1995.
<TABLE>
<CAPTION>
UICI COMPANIES AEGON COMPANIES
<S> <C>
National Managers Life Insurance Company PFL Life Insurance Company
/s/ Robert B. Vlach /s/ James Parker
- ------------------------------- -------------------------------
Vice President and Secretary Vice President
- ------------------------------- -------------------------------
United Group Reinsurance Inc. Life Investors Insurance Company of America
/s/ Mark D. Hauptman /s/ James Parker
- ------------------------------- -------------------------------
Treasurer Vice President
- ------------------------------- -------------------------------
U. S. Managers Life Insurance Company Bankers United Life Assurance Company
/s/ Mark D. Hauptman /s/ James Parker
- ------------------------------- -------------------------------
Treasurer Vice President
- ------------------------------- -------------------------------
Financial Services Reinsurance Company Monumental Life Insurance Company
/s/ Mark D. Hauptman /s/ James Parker
- ------------------------------- -------------------------------
Treasurer Vice President
- ------------------------------- -------------------------------
</TABLE>
<PAGE> 1
UNITED INSURANCE COMPANIES, INC.
AND SUBSIDIARIES
EXHIBIT 11 -- STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-----------------------------
1995 1994 1993
------- ------- -------
(DOLLARS AND SHARES IN THOUSANDS,
EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
PRIMARY
Average shares outstanding.................................... 37,899 37,620 37,577
======= ======= =======
Net income.................................................... $53,328 $36,178 $32,845
======= ======= =======
Primary net income per share.................................. $ 1.41 $ 0.96 $ 0.88
======= ======= =======
FULLY DILUTED
Average shares outstanding.................................... 37,940 37,626 37,575
======= ======= =======
Net income.................................................... $53,328 $36,178 $32,845
======= ======= =======
Fully diluted net income per share.................... $ 1.41 $ 0.96 $ 0.88
======= ======= =======
</TABLE>
NOTE: All share and per share amounts have been restated for prior periods
presented to reflect the four-for-one stock split effective June 1, 1995.
<PAGE> 1
UNITED INSURANCE COMPANIES, INC.
AND SUBSIDIARIES
EXHIBIT 21 -- SUBSIDIARIES OF UNITED INSURANCE COMPANIES, INC.
<TABLE>
<CAPTION>
JURISDICTION
-------------------------
<S> <C>
The Chesapeake Life Insurance Company............................... Oklahoma
Mid-West National Life Insurance Company of Tennessee............... Tennessee
The MEGA Life and Health Insurance Company.......................... Oklahoma
Southern Educators Life Insurance Company........................... Georgia
First Life Assurance Company........................................ Oklahoma
National Managers Life Insurance Company, Inc....................... Turks and Caicos Islands
United Group Reinsurance, Inc....................................... Turks and Caicos Islands
United Membership Marketing Group, Ltd. Liability Company........... Colorado
</TABLE>
<PAGE> 1
EXHIBIT 23.1 -- CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8, No. 33-11323) pertaining to the Employee Stock Ownership Plan of
United Insurance Companies, Inc. of our report dated March 8, 1996 (except for
Note O, as to which the date is March 27, 1996), with respect to the 1995 and
1994 consolidated financial statements and schedules of United Insurance
Companies, Inc. and Subsidiaries included in the Annual Report on Form 10-K for
the year ended December 31, 1995.
ERNST & YOUNG LLP
Dallas, Texas
March 29, 1996
<PAGE> 1
EXHIBIT 23.2 -- CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of United Insurance Companies, Inc. and Subsidiaries on Form S-8 (File No.
33-11323) of our report dated March 29, 1994 on our audit of the consolidated
financial statements and financial statement schedules of United Insurance
Companies, Inc. and Subsidiaries for the year ended December 31, 1993, which
report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND
L.L.P.
Dallas, Texas
March 29, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 754,473
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 5,288
<MORTGAGE> 15,559
<REAL-ESTATE> 0
<TOTAL-INVEST> 931,272
<CASH> 5,913
<RECOVER-REINSURE> 65,332
<DEFERRED-ACQUISITION> 56,122
<TOTAL-ASSETS> 1,130,859
<POLICY-LOSSES> 706,586
<UNEARNED-PREMIUMS> 68,099
<POLICY-OTHER> 13,220
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 50,381
<COMMON> 382
0
0
<OTHER-SE> 248,437
<TOTAL-LIABILITY-AND-EQUITY> 1,130,859
512,308
<INVESTMENT-INCOME> 65,054
<INVESTMENT-GAINS> 2,163
<OTHER-INCOME> 61,549
<BENEFITS> 317,172
<UNDERWRITING-AMORTIZATION> 15,029
<UNDERWRITING-OTHER> 218,303
<INCOME-PRETAX> 86,661
<INCOME-TAX> 29,040
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 53,328
<EPS-PRIMARY> 1.41
<EPS-DILUTED> 1.41
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
