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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
From the transition period from to .
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Commission File No. 0-14320
UICI
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(Exact name of registrant as specified in its charter)
Delaware 75-2044750
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(State or other jurisdiction of incorporation (IRS Employer
or organization) Identification No.)
4001 McEwen Drive, Suite 200, Dallas, Texas 75244
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (972) 960-8497
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.01 par value
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(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
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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. [x]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 7, 1997 was $1,051.4 million.
The number of shares outstanding of $0.01 par value Common Stock, as of March
7, 1997 was 45,130,859.
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
UICI and subsidiaries (the "Company") provides health and life
insurance and other service financial products to selected niche markets. On
June 27, 1996, the Company announced that shareholders had approved a name
change for the Company from United Insurance Companies, Inc. to UICI. The
change was effective July 1, 1996. The name change is indicative of the
Company's broadening activities beyond its historical core life, accident and
health insurance business. 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 over 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
$501.2 million in 1996, or 69% 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. 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. The
Company also offers a variety of services and technologies focused on lower
cost associated with healthcare administration. The Company acquired a real
estate organization in 1996 that is focused on the development, acquisition and
management of institutional quality multifamily communities in the Southeast,
Southwest and Midwest areas of the United States.
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 1996 relating to the coinsurance
business decreased to 32% from 35% in 1995 (although in absolute terms such
revenues continued to increase over prior years).
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On April 1, 1996 the Company acquired AEGON's underwriting, claims
management and administrative capabilities related to products coinsured by the
Company. In connection with this transaction, UGA agents began to market
health insurance products of the Company rather than the coinsured product.
See "Health Insurance -- Coinsurance Arrangements." Effective January 1, 1997,
the Company acquired the agency force and certain assets of UGA for a price
equal to the net book value of the tangible assets acquired and assumed certain
agent commitments which are estimated not to exceed $5.0 million. UGA was
owned 100% by the Company's Chairman at December 31, 1996. The tangible assets
acquired consist primarily of agent debit balances, a building, and related
furniture and fixtures having a net book value of approximately $11.0 million,
which approximates market value of the tangible assets. The elimination of the
sharing of business with AEGON and the acquisition of the agency force are
expected to have a positive impact on the long term future of the Company.
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 99% 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 Puerto Rico and all states except 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, New York and Vermont. 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 business of the Credit Services Division is conducted primarily
through UICI, Specialized Card Services, Inc., a wholly-owned subsidiary, and
United Membership Marketing Group, LLC, in which the Company owns 85% of the
outstanding equity.
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. Effective January 1, 1997, the
Company acquired the remaining interest of its subsidiaries Insurdata
Incorporated ("Insurdata") and UICI Insurance Administrators, Incorporated
("UAI"), formerly Insurnational Insurance Administrators Inc., based on a
predetermined formula price of $15.1 million. The Company acquired a majority
interest in Insurdata and UAI in October 1995.
In November 1996, the Company acquired through a privately negotiated
stock exchange agreement 100% of Amli Realty Co. ("ARC"). ARC is a full-
service real estate organization whose principal investment is a 11% equity
interest in Amli Residential Properties Trust, a
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publicly traded real estate investment trust. The Company, including ARC, has
a 14% equity interest in Amli Residential Properties Trust.
The Company's principal executive offices are located at 4001 McEwen
Drive, Suite 200, Dallas, Texas 75244. Its telephone number is (972) 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 3,800 agents, was wholly owned by Mr. Ronald L. Jensen, Chairman of
the Board of Directors of the Company as of December 31, 1996. Effective
January 1, 1997, the Company acquired the agency force and certain assets of
UGA. CMA, with approximately 1,200 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.
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 Common Stock of the Company ("Common Stock"). Since 1987, the
Company has 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 owned in the aggregate approximately 13% of
the Common Stock as of December 31, 1996, 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
eleven 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. 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, but rather are allocated
to the remaining participants, providing further incentive to remain with the
Company. 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
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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 $91.3 million in 1996. 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. Annualized
premiums of new policies sold in 1996 for this product were approximately $20.0
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 1996,
this division had revenues of $39.7 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 93% and the combined ratio has ranged from 91% to 95%.
The Company maintains administrative centers with full underwriting,
claims management and administrative capabilities. 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 Products. 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.
HealthCare Solutions. The Company formed the HealthCare Solutions
Division in 1995 to leverage its capabilities in systems development, insurance
underwriting, claims processing, risk management and marketing in order to
provide services that enhance the delivery of quality health care
administration. The division focuses on providing advanced paperless
technologies to reduce costs associated with "traditional" health care
administration, value added administrative and outsourcing services to health
care payers and providers, and underwriting, risk management and consulting
services to clients in the self insured and managed health care markets,
including groups of physicians, large employers, managed care organizations and
other insurers. Since June 1995, the Company has started and acquired
controlling interests in several companies related to the HealthCare Solutions
Division for $53.3 million, in cash and common stock.
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HEALTH INSURANCE
The Company directly markets 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.
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 1996. There
are currently in force approximately 323,000 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 basic health insurance plans are
as follows:
o 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.
o 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.
o Group Preferred Provider Plan - The Company has 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
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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.
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.
The Self-Employed Health Insurance Division had premium revenues of
$409.9 million, $383.4 million, and $330.8 million, (56%, 60%, and 63% of total
revenue), in 1996, 1995 and 1994, 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 by the Company are
sold through dedicated independent agents associated with the Company.
The agents are independent contractors and not employees of the
Company and all of the compensation they receive from the Company is based upon
their sales production. UGA and CMA are each organized into geographical
regions having regional directors, two additional levels of field leaders and
writing agents (i.e., the agents that are not involved in management).
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 believes 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.
The health insurance products issued 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 enrollees 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
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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, 60% of the health insurance sold by UGA agents and issued
by AEGON. The Company receives 60% of premiums collected and is liable for 60%
of commission expenses, administrative costs, claims payments, premium taxes,
legal expenses, extracontractual charges and other payments. Such insurance
policies are underwritten and administered by the Company.
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 health insurance
policies sold by UGA were directly issued by the Company, following a
transition period, pursuant to agreements between the Company and AEGON (the
"AEGON Transaction"). The Company retains 100% of the premiums and pays 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 expects to obtain approval from all of the few remaining states in
1997. The Company and AEGON maintain the coinsurance agreement for policies
issued by AEGON prior to April 1, 1996 and during the transition period. The
Company's coinsurance percentage is 60% in 1997 and 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.
As anticipated, the AEGON Transaction did not have a material impact
on the results of the 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. In 1996, health insurance policies sold by UGA and issued by AEGON
produced premiums of $387.8 million of which the Company's share was 57.5%, or
$223.0 million. There can be no assurance that the Company's premium revenues
from the 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 acquired 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 $10.0 million. The Company also offered 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.
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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 Puerto Rico 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 10.3 million students. For the 1995-1996
school year, 370 of these institutions, with a combined enrollment of
approximately 2.8 million, authorized the Company to offer its health insurance
plans to their students. Approximately 275,000 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 $91.3
million, $90.4 million, and $84.4 million (13%, 14%, and 16% of total revenue),
in 1996, 1995, and 1994, 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, 1996, there were 21 account executives.
The kindergarten through grade 12 business will be marketed primarily
in Oregon, Washington, Louisiana, Oklahoma and Texas.
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LIFE INSURANCE AND ANNUITY
At December 31, 1996, the Life Insurance and Annuity Division had over
4.9 billion of life insurance in force and approximately 337,000 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 $46.6
million, $45.3 million, and $40.7 million (6%, 7%, and 8% of total revenue), in
1996, 1995, and 1994, respectively.
Direct Business
The Company offers an interest sensitive life insurance product
generally with an annuity and child's term rider. 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
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.
Marketing and Sales.
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 1996 increased
to $20.0 million from $2.0 million in 1993.
The division also offers a credit life and credit disability policy
through brokers and reinsures over fifty percent (50%) of the business.
Annualized gross direct premiums for policies issued in 1996 increased to $30.0
million from $19.2 million in 1995.
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
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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, 1996, total life insurance and annuity reserves for this block were $88.8
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,
1996, the unrelated company had realized statutory earnings of $20.0 million on
this block and the Company anticipates that it will begin participating in the
profits of this business in 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, 1996, total life insurance and annuity reserves for this block
were $31.5 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 reinsurer. 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.
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 35 states. At
March 1, 1997, there were approximately
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780 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.
Historically, the credit card was 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 successfully chartered a new special-purpose national
bank for the purpose of issuing these credit cards in the future. United
Credit National Bank in Sioux Falls, South Dakota was officially chartered on
February 3, 1997 and the Company anticipates that the first account will be
issued in April 1997. This will reduce the costs associated with credit card
account issuance and maintenance.
The Company was successful in the offering of $29.0 million of credit
card asset backed securities in September of 1996. The requisite AAA rating by
Standard & Poors and Moody's was obtained through a combination of
collateralization and insurance, both of which required satisfactory results of
extensive due diligence reviews of the Credit Services Division. This enhances
the Company's cash flows and ability to tap into other market sources.
The Credit Services Division had revenues of $39.7 million,$28.3
million and $10.8 million in 1996, 1995 and 1994, respectively.
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 systems development, insurance underwriting,
claims processing, risk management and marketing in order to provide services
that enhance the delivery of quality health care administration. The division
focuses on providing advanced paperless technologies to reduce costs associated
with "traditional" health care administration, value added administrative and
outsourcing services to health care payers and providers and underwriting, risk
management and consulting services to clients in the self insured and managed
health care markets, including groups of physicians, large employers, managed
care organizations and other insurers. Since June 1995, the Company has
started and acquired controlling interests in various companies related to the
HealthCare Solutions Division for $53.3 million, in cash and common stock.
12
<PAGE> 13
In September 1996, the Company entered into stock purchase agreements
to sell its three dental benefit companies. Total proceeds to be received by
the Company on the sale will be approximately $12.0 million. The Company will
realize a gain on the sale of the companies of approximately $6.5 million. The
Company has completed two of the sales, one in October 1996 and one in January
1997 for a realized gain of $2.0 million and $3.2 million, respectively. The
Company expects to complete the remaining sale by March 31, 1997.
The HealthCare Solutions Division had revenues of $42.8 million and
$17.8 million in 1996 and 1995, respectively.
Paperless Technologies
Health benefit claims processing (medical and dental) for insurance
companies and Blue Cross plans has historically been a costly activity,
requiring significant amounts of paper to complete a single transaction. The
Company believes that the elimination of paper claims processing and the move
to a fully electronic environment for claims submission adjudication and
payment will increase payer efficiency and lower overall administrative costs.
Paperless Adjudication, Ltd. ("PAL"), in which the Company and the
Company's Chairman of the Board 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 enhance
most health care payer claim systems and is currently operational in three
markets processing medical and dental claims.
In August 1996, the Company started two new entities which fit well
with our paperless technology. Satellite Image Systems, LLC ("SIS"), in which
the Company owns a 51% interest, provides data capture and document processing
services and converts paper health claim forms into electronic data for
insurance companies, Blue Cross plans, third party administrators ("TPAs") and
managed care organizations. BT Systems Integrators, LLC ("BTSI"), in which the
Company owns an 80% interest, image enables the health claim process through
scanned or faxed digitized images and provides image work flow for any health
claim payer. Both SIS and BTSI work with current payer systems.
With the addition of SIS and its ability to integrate with PAL, the
number of health care transactions PAL and SIS can process has increased. The
Company anticipates the number of health care transactions PAL and SIS will
process in 1997 will increase dramatically over 1996.
Administration and Outsourcing Services
Through its ownership interests in several businesses, the Company
seeks to deliver claims processing solutions to payers such as other insurers,
Blue Cross plans, health maintenance organizations ("HMOs") and TPAs. In
addition, the Company seeks to deliver
13
<PAGE> 14
system solutions to physician and hospital groups for both claims processing
and total business office outsourcing.
Insurdata, in which the Company owns a 100% interest, is a health care
payer systems development company providing technological solutions for health
claims processing and claims data management. The system is used by several
Blue Cross health plan administrators, insurers and TPAs. 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, accounts receivable management for hospitals and health claims
clearinghouse functions. IPN provides business office management services for
approximately 20 hospitals, primarily in the southeastern United States, health
claim clearinghouse functions for over 100 hospitals and home health care and
outpatient services billing for over 150 clients.
UAI, in which the Company owns a 100% interest, is a full service TPA
employing Insurdata's systems, advanced imaging technology and paperless
workflow 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.
WinterBrook HealthCare Management ("WinterBrook"), in which the
Company owns a 73% interest, 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 and
provides claims repricing services to insurers and TPAs.
Underwriting, Risk Management and Consulting Services
The Company believes that physicians, hospitals and large employers
will increasingly assume greater financial risk, either on a stand-alone basis
or in partnership with insurance companies 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 facilities for physician and hospital excess
loss insurance, HMO reinsurance and other types of managed care reinsurance.
The Company also manages underwriting facilities for employer stop loss, works
with physician organizations and provides employee benefit consulting services.
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.
14
<PAGE> 15
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 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 "Business -- 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
15
<PAGE> 16
(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.
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 1996 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.
The NAIC and state insurance departments are continually reexamining
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. The Credit Services Division's products are also
subject to regulations promulgated by the Federal Reserve, Federal Deposit
Insurance Corporation ("F.D.I.C.") and the Comptroller of the Currency
("O.C.C."). The Company's credit card product was recently reviewed by the
O.C.C. and F.D.I.C. in conjunction with their evaluation and subsequent
approval of the Company's application to charter a new national bank. In order
to continue to have government guaranteed student loans made available through
the Company, the Company is required to maintain its status as a qualified
lender for federal student loan programs under applicable Department of
Education regulation.
16
<PAGE> 17
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 "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Health Care
Reform."
EMPLOYEES
The Company had approximately 2,100 employees at March 3, 1997. The
Company considers its employee relations to be good. The dedicated agents of
the Company are independent contractors and not employees of the Company.
ITEM 2. PROPERTIES
The Company and its subsidiaries rent office space at various
locations. The Company also owns two office buildings in Tarrant County, Texas
with approximately 150,000 square feet.
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.
17
<PAGE> 18
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Company's Common Stock trades on the Nasdaq National Market tier
of The Nasdaq Stock 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. The stock prices for the
first quarter of 1995 have been restated to reflect the four-for-one stock
split effective June 1, 1995.
<TABLE>
<CAPTION>
FISCAL YEAR ENDING DECEMBER 31, 1995 HIGH LOW
- ------------------------------------ -------- ---------
<S> <C> <C>
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
FISCAL YEAR ENDING DECEMBER 31, 1996
- ------------------------------------
1st Quarter ................................. $ 23 1/2 $ 19
2nd Quarter ................................. 22 3/4 19 5/8
3rd Quarter ................................. 27 1/4 20 5/8
4th Quarter ................................. 33 5/8 25 1/4
</TABLE>
As of February 28, 1997, there were approximately 9,100 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.
In November 1996, the Company acquired through a stock exchange 100%
of Amli Realty Co. ("ARC"). Pursuant to the stock exchange agreement, the
Company issued an aggregate of 1,634,876 shares of Common Stock to the
stockholders of ARC and to persons who held options to acquire shares of ARC
stock. Exemption from registration for this issuance was claimed pursuant to
Section 4(2) of the Securities Act of 1933, as amended, as a private placement
pursuant to a privately negotiated transaction.
18
<PAGE> 19
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, 1996 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,
---------------------------------------------------------------------
1996 1995 1994 1993 1992
------------ ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING RATIOS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues
Premiums:
Health ...................................... $ 501,185 $ 473,778 $ 415,251 $ 343,743 $ 299,955
Life and other considerations................ 46,570 45,353 40,659 24,977 11,815
Net investment income .......................... 71,345 65,054 47,956 39,226 36,987
Fees and other income .......................... 110,841 54,726 24,920 35,898 10,032
Gains (losses) on sale of investments .......... 652 2,163 (5,840) 7,945 12,555
---------- ---------- ---------- ---------- ----------
Total revenues .......................... 730,593 641,074 522,946 451,789 371,344
Benefits and expenses
Benefits, claims, and settlement expenses ... 335,895 320,501 275,945 224,360 184,669
Underwriting, acquisition and insurance
expenses ................................ 280,802 230,003 189,073 173,013 136,643
Interest expense ............................ 2,514 3,909 1,913 1,397 1,625
---------- ---------- ---------- ---------- ----------
Total benefits and expenses ............. 619,211 554,413 466,931 398,770 322,937
Income before federal income taxes and
minority interests ...................... 111,382 86,661 56,015 53,019 48,407
Federal income taxes ........................ 36,190 29,040 18,399 17,503 16,398
---------- ---------- ---------- ---------- ----------
Income before minority interests ............ 75,192 57,621 37,616 35,516 32,009
Minority interests .......................... 5,945 4,293 1,438 2,671 4,467
---------- ---------- ---------- ---------- ----------
Net Income .............................. $ 69,247 $ 53,328 $ 36,178 $ 32,845 $ 27,542
========== ========== ========== ========== ==========
Fully diluted net income per share(1) .......... $ 1.66 $ 1.41 $ 0.96 $ 0.88 $ 0.79
========== ========== ========== ========== ==========
Operating net income per share(1)(2) ........... $ 1.65 $ 1.37 $ 1.06 $ 0.75 $ 0.60
========== ========== ========== ========== ==========
Weighted average fully diluted
shares outstanding(1) ....................... 41,642 37,940 37,626 37,575 35,844
OPERATING RATIOS:
Health Ratios:
Loss ratio(3) ............................... 58% 58% 57% 55% 55%
Expense ratio(4) ............................ 33% 33% 36% 39% 40%
---------- ---------- ---------- ---------- ----------
Combined health ratio ....................... 91% 91% 93% 94% 95%
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Total investments and cash ..................... $1,098,313 $ 937,185 $ 842,867 $ 727,248 $ 506,797
Total assets(6) ................................ 1,320,988 1,130,859 1,031,263 814,793 577,726
Total policy liabilities ....................... 807,324 787,905 778,676 616,615 426,193
Total debt ..................................... 30,943 50,381 56,155 19,500 --
Stockholders' equity ........................... 432,918 248,819 170,923 154,768 110,999
Stockholders' equity per share(1)(5) ........... $ 9.55 $ 6.33 $ 5.04 $ 4.09 $ 3.13
STATUTORY DATA:
Statutory admitted assets ........................ $ 981,675 $ 911,219 $ 861,899 $ 737,519 $ 625,637
Statutory capital and surplus and
asset valuation reserve ........................ 222,215 168,283 135,115 108,300 93,217
</TABLE>
(1) Share and per share amounts have been restated to reflect the effect of the
June 1995 four-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.
(4) The health expense ratio represent underwriting, acquisition and insurance
expenses related to health insurance policies stated as a percentage of
health premiums. Expenses relating to providing administrative services
are not included.
(5) Excludes the net unrealized investment gains or losses which is reported as
a separate component of stockholders' equity.
(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."
19
<PAGE> 20
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995
Certain statements set forth herein or incorporated by reference
herein from the Company's filings that are not historical facts are
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act. Actual results may differ materially from those
included in the forward-looking statements. These forward-looking statements
involve risks and uncertainties including, but not limited to, the following:
changes in general economic conditions, including the performance of financial
markets, and interest rates; competitive, regulatory or tax changes that affect
the cost of or demand for the Company's products; health care reform, ability
to predict and effectively manage claims related to health care costs; reliance
on key management and adequacy of claim liabilities. The Credit Card segment's
future results also could be adversely affected by the possibility of future
economic downturns causing an increase in credit losses. Investors are also
directed to other risks and uncertainties discussed in documents filed by the
Company with the Securities and Exchange Commission, specifically the Company's
prospectus filed April 26, 1996.
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, (iii)
Credit Services, and (iv) Corporate and Other, which includes the businesses of
the HealthCare Solutions Division, Real Estate Division, investment income not
allocated to the other segments, interest expense and general expenses relating
to corporate operations 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 policy liabilities. The interest rate
for the allocation is based on a high credit quality investment portfolio with
a duration consistent with the duration of the segment's policy liabilities.
20
<PAGE> 21
The following table sets forth income statement data as a percentage
of revenues for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Revenues .................................................... 100.0% 100.0% 100.0%
Benefits, claims, and settlement expenses ................... 46.0 50.0 52.8
Underwriting, acquisition and insurance expenses ............ 38.4 35.9 36.1
Interest expense ............................................ 0.3 0.6 0.4
------ ------ ------
84.7 86.5 89.3
Income before federal income taxes and minority interests ... 15.3 13.5 10.7
Federal income taxes ........................................ 5.0 4.5 3.5
------ ------ ------
Income before minority interests ............................ 10.3 9.0 7.2
Minority interests .......................................... 0.8 0.7 0.3
------ ------ ------
Net income .......................................... 9.5% 8.3% 6.9%
====== ====== ======
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS FOR 1996 COMPARED TO 1995
Revenues. Revenues increased to $730.6 million in 1996 from $641.1
million in 1995, an increase of $89.5 million, or 14%. The increase was a
result of increases in premiums, net investment income, and fees and other
income.
Health premiums. Health premiums increased to $501.2 million in 1996
from $473.8 million in 1995, an increase of $27.4 million, or 6%. After
deducting the health premiums from a 1995 acquired block of health insurance
policies, health premiums increased 9% in 1996 compared to 1995. The increase
was primarily due to the growth in sales of new health insurance policies and
increased premiums from coinsured policies. In 1996, the coinsurance
percentage on both in force and new health insurance policies issued by AEGON
increased to 57.5% from 55% in 1995.
Life premiums and other considerations. Life premiums and other
considerations increased to $46.6 million in 1996 from $45.3 million in 1995,
an increase of $1.3 million, or 3%. The increase was a result of the sale of
new life policies. The increase was partially offset by the decrease in
premiums and other considerations from closed blocks of life and annuity
business.
Net investment income. Net investment income increased to $71.3
million in 1996 from $65.1 million in 1995, an increase of $6.2 million, or
10%. The increase was due to an increase in invested assets which was
partially offset by a lower yield on invested assets. Invested assets
increased to $1,082.9 million at December 31, 1996 from $931.3 million at
December 31, 1995.
Fees and other income. Fees and other income increased to $110.8
million in 1996 from $54.7 million in 1995, an increase of $56.1 million, or
103%. The increase related primarily to the increase in revenue from the
Credit Services segment, revenue from the companies acquired by the HealthCare
Solutions Division in 1995 and administrative fees from the administrative
operation acquired from AEGON on April 1, 1996.
21
<PAGE> 22
Gains on sale of investments. The Company recognized gains on sale
of investments of $652,000 in 1996 compared to $2.2 million in 1995. 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. In addition, due to
increasing long term interest rates in 1996, 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 $2.2 million at December 31, 1996 compared to $6.8
million at December 31, 1995.
Benefits, claims, and settlement expenses. Benefits, claims, and
settlement expenses increased to $335.9 million in 1996 from $320.5 million in
1995, an increase of $15.4 million, or 5%. The increase was primarily due to
the growth in premium volume. As a percentage of revenues, these expenses
decreased to 46.0% in 1996 from 50.0% in 1995. The decrease in these expenses
were the result of the increased revenues from the Credit Services segment 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 $280.8 million in 1996 from
$230.0 million in 1995, an increase of $50.8 million, or 22%. The increase was
primarily due to the growth in premium volume, costs associated with the
businesses acquired by the HealthCare Solutions Division in 1995 and expenses
relating to the administrative operation acquired from AEGON. As a percentage
of revenues, these expenses increased to 38.4% in 1996 from 35.9% in 1995.
Interest expense. Interest expense decreased to $2.5 million in 1996
from $3.9 million in 1995, a decrease of $1.4 million. The decrease was due to
a lower cost of borrowing and a lower average amount of debt outstanding in
1996 compared to 1995, due to the use of part of the proceeds from the public
offering to pay off $10.3 million of debt.
Income before federal income taxes and minority interests ("operating
income"). Operating income increased to $111.4 million in 1996 from $86.7
million in 1995, an increase of $24.7 million, or 29%. Operating income (loss)
for each of the Company's segments and divisions was as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995
-------- -------
(Dollars in thousands)
<S> <C> <C>
Health Insurance:
Self-Employed Health Insurance Division ......... $ 58,280 $53,008
Student Health Insurance Division ............... 14,400 11,448
-------- ------
Total Health Insurance ....................... 72,680 64,456
Life Insurance and Annuity ........................ 11,354 11,569
Credit Services ................................... 14,163 1,424
Corporate and Other:
HealthCare Solutions Division ................... (4,156) (4,162)
Real Estate ..................................... 1,013 --
Other ........................................... 16,328 13,374
-------- -------
Total Corporate and Other .................... 13,185 9,212
-------- -------
$111,382 $86,661
======== =======
</TABLE>
22
<PAGE> 23
Health Insurance. Operating income for the Health Insurance segment
increased to $72.7 million in 1996 from $64.5 million in 1995, an increase of
$8.2 million, or 13%. Operating income increased $5.2 million for the Self-
Employed Health Insurance Division and $3.0 million for the Student Health
Insurance Division. The increase was primarily due to a 6% increase in health
premiums, an increase in investment income allocated to the Health Insurance
products and profits related to certain lead activities of UGA. The combined
health ratio has remained constant at 91% for both years ended December 31,
1996 and 1995.
Life Insurance and Annuity. Operating income was comparable in 1996
and 1995. Operating income for the Life Insurance and Annuity segment
decreased to $11.4 million in 1996 from $11.6 million in 1995, a decrease of
$200,000, or 2%. The decrease related primarily to higher commission and
agency expenses incurred. The decrease was partially offset by a decrease in
policyholder benefits.
Credit Services. Operating income for the Credit segment business
increased to $14.2 million in 1996 from $1.4 million in 1995, an increase of
$12.8 million. This is primarily due to an increase in the profit per card and
a 38% increase in the number of cards outstanding at December 31, 1996 compared
to December 31, 1995.
Corporate and Other. Operating income for Corporate and Other was
$13.2 million in 1996 compared to $9.2 million in 1995. HealthCare Solutions
Division incurred comparable operating losses in 1996 and 1995. The losses
primarily resulted from the losses of certain companies in the development
stage which was partially offset by operating income of other businesses. In
October 1996, the Company acquired through a stock exchange agreement 100% of
Amli Realty Co. ("ARC"). ARC is a full-service real estate organization whose
principal investment is a 11% equity interest in Amli Residential Properties
Trust, a publicly traded real estate investment trust. The operations of this
acquisition are reported as the Real Estate Division. The Company reported
operating income from the Real Estate Division of $1.0 million in 1996.
Operating income from other corporate activities increased to $16.3 million in
1996 from $13.4 million in 1995, an increase of $2.9 million. The increase was
primarily due to the increase in investment income not allocated to the other
segments and the decrease in interest expense. The primary reason for the
increase in investment income not allocated to the other segments was due to
the investment income earned on the net proceeds from the public offering
completed by the Company on May 1, 1996. The increase was partially offset by
fewer gains realized on sale of investments in 1996 compared to 1995.
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 22%. 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
23
<PAGE> 24
1995, the Company also acquired a block of health insurance policies that
contributed to the increase in health premiums.
Life premiums and other considerations. Life premiums and other
considerations increased to $45.3 million in 1995 from $40.7 million in 1994,
an increase of $4.6 million, or 11%. 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. Invested assets 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 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 $54.7
million in 1995 from $24.9 million in 1994, an increase of $29.8 million, or
120%. The increase relates primarily to the increase in Credit Services
segment 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. In addition, due to decreasing 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 $320.5 million in 1995 from $275.9 million in
1994, an increase of $44.6 million, or 16%. The increase was primarily due to
the growth in premium volume. As a percentage of revenues, these expenses
decreased to 50.0% in 1995 from $52.8 in 1994, as a result of the increased
revenues from the Credit Services segment 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 $230.0 million in 1995 from
$189.1 million in 1994, an increase of $40.9 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 segment and the operations of
businesses acquired by the HealthCare Solutions Division in 1995. As a
percentage of revenues, these expenses remained relatively constant at 35.9% in
1995 compared to 36.1% in 1994, as the increased costs associated with the
Credit Services segment and the HealthCare Solutions Division were offset by
the decrease in the health expense ratio to 33% in 1995 from 36% in 1994.
24
<PAGE> 25
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 (loss)
for each of the Company's segments and divisions were as follow:
<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
Credit Services ...................................... 1,424 (1,154)
Corporate and Other:
HealthCare Solutions Division ...................... (4,162) (2,206)
Other .............................................. 13,374 (3,187)
-------- --------
Total Corporate and Other ....................... 9,212 (5,393)
-------- --------
$ 86,661 $ 56,015
======== ========
</TABLE>
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 $785,000 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, or 9%. The increase was due to an increase in
premiums, an increase in net investment income allocated to life and annuity
products, and a decrease in administrative expenses.
Credit Services. Operating income for the Credit Services segment was
$1.4 million in 1995 compared to a loss of $1.1 million in 1994. The change of
$2.5 million was due to the growth in new sales of the credit card program and
a decrease in expenses, as a percentage of revenues.
Corporate and Other. Operating income for Corporate and Other was
$9.2 million in 1995 compared to a loss of $5.4 million in 1994. The
HealthCare Solutions Division incurred an operating loss of $4.2 million in
1995 compared to a loss of $2.2 million in 1994. The loss was primarily a
result of the losses of certain companies in the development stage which was
partially offset by operating income of other businesses. Operating income
from other corporate activities was $13.4 million in 1995 compared to a loss of
$3.2 million in 1994. The
25
<PAGE> 26
increase was primarily due to the excess net investment income not allocated to
the other segments and gains on sale of investments. The increase was
partially offset by an increase in interest expense.
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
or passed in Congress. One law which was introduced by Senators Nancy
Kassebaum and Edward Kennedy (the "Kassebaum-Kennedy legislation") was passed
in 1996. The Kassebaum-Kennedy legislation builds upon state initiatives by
guaranteeing "group-to-individual" portability. Under the legislation, any
person governed by a group insurance plan for at least eighteen months will, 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 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.
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 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 ("GAAP"), 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 $17.3 million at
December 31, 1996 from $16.1 million at December 31, 1995, due to an increase
in insurance issued or coinsured. As a result of an increase in insurance
issued in the Life Insurance and Annuity segment, deferred acquisition costs
increased to $28.7 million at December 31, 1996 from $19.6 million at December
31, 1995. The remaining deferred acquisition costs of $14.0 million at
December 31, 1996 and $20.4 million at December 31, 1995 relates primarily to
the cost of various blocks of insurance acquired. Amortization of the
26
<PAGE> 27
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 service related to an accident or illness
incurred prior to the end of the period, even though the medical service 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 32.5% for 1996 compared to 33.5%
for 1995 and 32.9% in 1994. The 1996, 1995, and 1994 effective rate 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 $125.5 million in 1996, $86.8 million in 1995, and $67.2
million in 1994. 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 $1,082.9 million at
December 31, 1996 from $931.3 million at December 31, 1995, an increase of
$151.6 million. The primary sources for the asset growth were the investment
of the net proceeds from the public offering completed May 1, 1996 and the cash
provided by current year operations. The sources were partially offset by the
decreases in market values of the fixed maturity securities held as "available
for sale", the payment of debt, the purchase of property and equipment, the
acquisition of substantially all of the minority interest of an insurance
subsidiary, and the withdrawals, net of deposits, from investment products.
The decrease in market values was the direct result of increases in long term
interest rates.
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
27
<PAGE> 28
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 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, 1996. The note bears interest at prime plus 0.875%.
In 1996, 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 1996, the Company borrowed $10.3 million from its revolving
credit note with AEGON. On May 1, 1996, the Company repaid the then
outstanding balance of $10.3 million with the proceeds from the public offering
commenced on April 25, 1996.
At December 31, 1995, the Company owed $10.7 million to the Company's
Chairman of the Board. The note was repaid in full during 1996.
Effective April 25, 1996, the Company commenced a public offering of
5,175,000 shares of common stock at a price of $20.50 per share. The net
proceeds to the Company (after deducting underwriting discounts and commissions
and offering expenses) from the sale of the shares was approximately $100.1
million. The Company used $10.3 million of the proceeds to repay the AEGON
revolving credit note. The Company also intends to use a portion of the
proceeds for capital contributions to its insurance subsidiaries. The
insurance subsidiaries of the Company are required by state regulation to
maintain certain levels of capital and surplus. In addition, in order to
maintain the current ratings of the Company's insurance subsidiaries or improve
such ratings in the future, higher levels of capital and surplus may be
required. The required levels are generally based on the amount of insurance
issued and the quality of invested assets. As premiums increase, the Company
is generally required to increase the capital and surplus of the insurance
companies. The AEGON Transaction is expected to result in increased premiums
for the Company. While the Company is not able to project the exact amount of
additional capital and surplus which will be required in the insurance
subsidiaries, a portion of the proceeds are expected to be used for this
purpose. The remainder of the proceeds are being and will be used for general
corporate purposes, including acquisitions of complementary businesses and
assets. Pending such uses, the remaining proceeds are being invested by the
Company in accordance with its current investment policies.
During October 1995, the Company acquired the majority interest in
Insurdata and UAI, both 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 1996, the Company securitized $31.6 million of credit card
loans. The securitization involved the sale of $29.0 million of asset backed
securities in which the Company purchased participating interests totaling $2.9
million. The proceeds received by the Company were used for general corporate
purposes including the purchase of investments.
28
<PAGE> 29
Effective August 1, 1996, the Company acquired an additional 20%
interest in its subsidiary, Mid-West, for $9.8 million in cash. This increased
the Company's ownership percentage to 99% from 79%. The purchase price was
based on a predetermined formula price which approximated GAAP book value.
In September 1996, UICI entered into three separate stock purchase
agreements with United Dental Care, Inc. to sell its three dental benefit
companies in the HealthCare Solution Division. Total proceeds to be received
by the Company on the sale will be approximately $12.0 million. UICI will
realize a gain on the sale of the companies of approximately $6.5 million. The
Company completed two of the sales, one in October 1996 and one in January
1997, for a realized gain of $2.0 million and $3.2 million, respectively. The
completion of the sale of the remaining company is contingent upon certain
conditions including approvals from the appropriate state insurance department.
The operations of the dental benefit companies were not material to the
operations of the Company.
At December 31, 1996, the Company had approximately $765.4 million in
student loan commitments outstanding of which the Company expects to fund
approximately $110.0 million. These commitments will continue to come due in
years 1997 through 2019. The Company estimates that approximately $11.4
million in student loans will be funded in 1997.
The Company may be required by certain minority stockholders to
purchase their shares of subsidiaries of the Company at a predetermined formula
price which approximates GAAP book value. The formula price based on
information available at December 31, 1996 was $5.7 million.
Effective January 1, 1997, the Company acquired the remaining interest
of Insurdata and UAI, based on a predetermined formula price of $15.1 million.
The Company has commitments to fund the unused line of credit on the
credit card loans. At December 31, 1996, the Company had a $6.0 million letter
of credit covering the outstanding commitments.
The state of domicile of each of the Company's domestic insurance
subsidiaries imposes minimum risk-based capital requirements which were
developed by the NAIC. 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 and Note H
to the Audited Consolidated Financial Statements."
29
<PAGE> 30
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.
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, 1996 December 31, 1995
------------------------- --------------------------
% 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: 1996--$761,168; 1995--$743,945 .... $ 762,927 70.5% $754,473 81.0%
Equity securities, at fair value
(cost: 1996--$13,553; 1995--$5,114) ...... 15,106 1.4 5,288 0.6
Guaranteed student loans ...................... 18,042 1.7 12,159 1.3
Mortgage and collateral loans ................. 15,282 1.4 15,559 1.7
Policy loans .................................. 22,689 2.1 24,042 2.6
Credit card loans ............................. 22,489 2.1 36,727 3.9
Real estate investments ....................... 30,822 2.8 1,687 0.2
Short-term investments ........................ 195,536 18.0 81,337 8.7
---------- ----- -------- -----
Total investments ........................... $1,082,893 100.0% $931,272 100.0%
========== ===== ======== =====
</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.
Fixed maturity securities. Fixed maturity securities accounted for
70.5% of the Company's total investments at December 31, 1996. Fixed maturity
securities consisted of the following:
<TABLE>
<CAPTION>
December 31, 1996
---------------------
% of Total
Carrying Carrying
Value Value
---------- --------
(Dollars in thousands)
<S> <C> <C>
U.S. Treasury and U.S. Government agency obligations ...... $133,650 17.5%
Corporate bonds ........................................... 358,235 47.0
Mortgage-backed securities issued by U.S...................
Government agencies and authorities ..................... 99,875 13.1
Other mortgage and asset backed securities ................ 171,167 22.4
-------- -----
$762,927 100.0%
======== =====
</TABLE>
30
<PAGE> 31
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, 37% 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 approximately 1% invested in the more volatile tranches.
As of December 31, 1996, $730.6 million or 95.8% of the fixed maturity
securities portfolio was rated BBB or better (investment grade) and only $32.3
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, 1996
--------------------------
% of Total
Carrying Carrying
Value Value
---------- --------
Rating (Dollars in thousands)
------
<S> <C> <C>
U.S. Governments and AAA .................... $383,532 50.3%
AA .......................................... 45,551 6.0
A ........................................... 108,665 14.2
BBB ......................................... 192,807 25.3
Less than BBB ............................... 32,372 4.2
-------- -----
$762,927 100.0%
======== =====
</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, a maximum lifetime benefit per accident or
sickness, and preferred provider contracts. 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 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.
31
<PAGE> 32
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
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" which is an option allowed by FAS 123.
In June 1996, the FASB issued Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This statement provides new accounting and reporting standards
for sales, securitizations, and servicing of receivables and other financial
assets, for certain secured borrowing and collateral transactions, and for
extinguishment of liabilities. The provisions of the statement are to be
applied to transactions occurring after December 31, 1996 (regardless of an
entity's fiscal year) even for transfers of receivables pursuant to
securitization structures that previously were established. The Company will
implement this statement on any transactions occurring after December 31, 1996.
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
Not applicable.
32
<PAGE> 33
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 14, 1997.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
<S> <C> <C>
Ronald L. Jensen ........... 66 Chairman of the Board of Directors
W. Brian Harrigan .......... 42 President, Chief Executive Officer and Director
Richard J. Estell .......... 51 Executive Vice President and Director
Charles T. Prater .......... 45 Vice President and Director
Vernon R. Woelke ........... 48 Vice President, Treasurer and Director
Robert B. Vlach ............ 56 Vice President, Secretary and General Counsel
Gary L. Friedman ........... 42 Director
J. Michael Jaynes .......... 49 Director
Richard T. Mockler ......... 59 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 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. He
has served as President and Director of National Managers Life Insurance
Company, Inc. since December 1991. Mr. Estell became a Director of UGA in
1996. He has served as Director of Fidelity First Insurance Company since
February 1997.
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
33
<PAGE> 34
President and Director of Chesapeake since November 1991. He has served as
Chairman of the Board and President of Fidelity First Insurance Company since
September 1996.
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; as President
of Mid-West since 1988 and as a Director since 1987; and Director of Fidelity
First Insurance Company since September 1996. He has also served as a Director
and Executive Vice President of Chesapeake since November 1991. He has also
served as Treasurer and Director of National Managers Life Insurance Company,
Inc. since December 1991. He has also served as President and Director of
United Group Reinsurance, Inc. since January 1995. 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. 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 has served as a member of the Board of
Directors of Georgetown Rail Equipment Company since 1994 and as Treasurer
since October 1996. Mr. Mockler has served as a Director of Snead Research
Labs since 1995 and as Treasurer since October 1996.
ITEM 11. EXECUTIVE COMPENSATION
See the Company's Proxy Statement to be filed in connection with the
1997 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
1997 Annual Meeting of Stockholders, of which the subsection entitled
"Nominees" and the subsection entitled "Beneficial Ownership of Common Stock"
are incorporated herein by reference.
34
<PAGE> 35
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Company's Proxy Statement to be filed in connection with the
1997 Annual Meeting of Stockholders, of which the subsection entitled "Certain
Relationships and Related Transactions" is incorporated herein by reference.
35
<PAGE> 36
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The following consolidated financial statements of UICI and subsidiaries
are included in Item 8:
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditors' Report on Financial Statements and Financial
Statement Schedules ................................................... F-2
Consolidated Balance sheets--December 31, 1996 and 1995 ................... F-3
Consolidated Statements of Income--Years ended
December 31, 1996, 1995, and 1994 ..................................... F-4
Consolidated Statements of Stockholders' Equity--Years
ended December 31, 1996, 1995, and 1994 ............................... F-5
Consolidated Statements of Cash Flows--Years ended
December 31, 1996, 1995, and 1994 ..................................... F-6
Notes to Consolidated Financial Statements ................................ F-7
(a) 2. Financial Statement Schedules
Schedule II -- Condensed Financial Information of Registrant
December 31, 1996, 1995, and 1994:
UICI (Parent Company) .............................. F-31
Schedule III -- Supplementary Insurance Information .................... F-34
Schedule IV -- Reinsurance ............................................ F-35
Schedule V -- Valuation and Qualifying Accounts ...................... F-36
</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 38.
(b) Reports on Form 8-K
None.
36
<PAGE> 37
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.
UICI
--------------
(Registrant)
Date March 24, 1997 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>
<S> <C>
/s/ Ronald L. Jensen Date March 24, 1997
- ------------------------------------------------- --------------------
Ronald L. Jensen, Chairman of the Board
and Director
/s/ W. Brian Harrigan Date March 24, 1997
- ------------------------------------------------- --------------------
W. Brian Harrigan, President (Principal
Executive Officer) and Director
/s/ Vernon R. Woelke Date March 24, 1997
- ------------------------------------------------- --------------------
Vernon R. Woelke, Vice President, Treasurer
(Principal Financial Officer and
Principal Accounting Officer) and Director
/s/ Richard J. Estell Date March 24, 1997
- ------------------------------------------------- --------------------
Richard J. Estell, Director and
Executive Vice President
/s/ J. Michael Jaynes Date March 24, 1997
- ------------------------------------------------- --------------------
J. Michael Jaynes, Director
/s/ Richard T. Mockler Date March 24, 1997
- ------------------------------------------------- --------------------
Richard T. Mockler, Director
/s/ Gary L. Friedman Date March 24, 1997
- ------------------------------------------------- --------------------
Gary L. Friedman, Director
/s/ Charles T. Prater Date March 24, 1997
- ------------------------------------------------- --------------------
Charles T. Prater, Vice President and Director
</TABLE>
37
<PAGE> 38
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <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 UICI, as amended, filed as Exhibit
3.1 to the Form 10-Q dated June 30, 1996, filed on August 13, 1996,
File No. 0-14320, and incorporated by reference herein.
3.2(A) Restated By-Laws, as amended, of the Company, filed as Exhibit 3.2
to the Company's Annual Report on Form 10K for the year ended
December 31, 1995, filed on March 29, 1996 and incorporated by
reference herein.
10.1(B) Reinsurance Agreement between AEGON USA Companies and UICI
Companies Effective January 1, 1995, as amended through November
21, 1995 and incorporated by reference herein.
10.1(C) Amendment No. 3 to Reinsurance Agreement between AEGON USA
Companies and UICI Companies effective April 1, 1996, and filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
April 1, 1996 (File No. 0-14320), and incorporated by reference
herein. The Amendment No. 3 amends the Reinsurance Agreement
between AEGON USA Companies and UICI Companies effective January 1,
1995, as amended through November 21, 1995, filed as Exhibit
10.1(B) on Annual Report on Form 10-K for year ended December 31,
1995, (File No. 0-14320), filed on March 29, 1996, and incorporated
by reference herein.
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.
</TABLE>
38
<PAGE> 39
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <C>
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.
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.
</TABLE>
39
<PAGE> 40
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <C>
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>
40
<PAGE> 41
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <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, 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.
</TABLE>
41
<PAGE> 42
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <C>
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.
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.
10.27 Asset Purchase Agreement between UICI Companies and PFL Life
Insurance Company, Bankers United Life Assurance Company, Life
Investors Insurance Company of America and Monumental Life
Insurance Company and Money Services, Inc. effective April 1, 1996,
as filed as Exhibit 10.2 to the Company's Current Report on Form
8-K dated April 1, 1996 (File No. 0-14320) and incorporated by
reference herein.
10.28 General Agent's Agreement between Mid-West National Life Insurance
Company of Tennessee and United Group Association, Inc. effective
April 1, 1996, and filed as Exhibit 10.3 to the Company's Current
Report on Form 8-K dated April 1, 1996 (File No. 0-14320), and
incorporated by reference herein.
10.29 General Agent's Agreement between The MEGA Life and Health
Insurance Company and United Group Association, Inc. effective
April 1, 1996, and filed as Exhibit 10.4 to the Company's Current
Report on Form 8-K dated April 1, 1996 (File No. 0-14320) and
incorporated by reference herein.
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <C>
10.30 Agreement between United Group Association, Inc. and Cornerstone
Marketing of America effective April 1, 1996, and filed as Exhibit
10.5 to the Company's Current Report on Form 8-K dated April 1,
1996 (File No. 0-14320) and incorporated by reference herein.
11 Statement re: computation of per share earnings.
21 Subsidiaries of UICI
23 Consent of Independent Auditors
27 Financial Data Schedule
</TABLE>
43
<PAGE> 44
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, 1996
UICI
AND
SUBSIDIARIES
DALLAS, TEXAS
F-1
<PAGE> 45
REPORT OF INDEPENDENT AUDITORS
Board of Directors
UICI
We have audited the accompanying consolidated balance sheets of UICI and
subsidiaries (the "Company") (formerly United Insurance Companies, Inc.) as of
December 31, 1996 and 1995, and the related consolidated statements of income,
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1996. Our audits also included the financial statement
schedules listed in the Index at Item 14(a). 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 consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of UICI
and subsidiaries at December 31, 1996 and 1995, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted accounting
principles. Also, in our opinion, the related financial statement schedules,
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 14, 1997
F-2
<PAGE> 46
UICI AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31
-----------------------
ASSETS 1996 1995
---------- ----------
<S> <C> <C>
Investments--Note C
Securities available for sale--
Fixed maturities, at fair value
(cost: 1996--$761,168; 1995--$743,945) .............. $ 762,927 $ 754,473
Equity securities, at fair value
(cost: 1996--$13,553; 1995--$5,114) ................. 15,106 5,288
Guaranteed student loans ............................... 18,042 12,159
Mortgage and collateral loans .......................... 15,282 15,559
Policy loans ........................................... 22,689 24,042
Credit card loans ...................................... 22,489 36,727
Real estate investments ................................ 30,822 1,687
Short-term investments ................................. 195,536 81,337
---------- ----------
Total Investments ................................... 1,082,893 931,272
Cash ...................................................... 15,420 5,913
Agents' receivables, less allowances of $55
in 1996 and $2,986 in 1995 .......................... 6,740 4,538
Reinsurance receivables--Note E ........................... 68,438 65,332
Federal income taxes--Note G .............................. -- 4,987
Due premiums and other receivables ........................ 25,149 19,256
Investment income due and accrued ......................... 12,735 11,283
Deferred acquisition costs--Note B ........................ 59,955 56,122
Goodwill .................................................. 17,126 15,564
Property and equipment, net ............................... 26,061 12,937
Other ..................................................... 6,471 3,655
---------- ----------
$1,320,988 $1,130,859
========== ==========
LIABILITIES
Policy liabilities--Notes D and E:
Future policy and contract benefits .................... $ 512,670 $ 526,777
Claims ................................................. 201,276 179,809
Unearned premiums ...................................... 79,378 68,099
Other policy liabilities ............................... 14,000 13,220
Federal income taxes--Note G .............................. 4,705 --
Other liabilities ......................................... 32,214 25,501
Short-term debt--Note F ................................... 1,032 22,726
Long-term debt--Note F .................................... 29,911 27,655
---------- ----------
875,186 863,787
MINORITY INTERESTS ........................................... 12,884 18,253
COMMITMENTS AND CONTINGENCIES--Note I
STOCKHOLDERS' EQUITY--Note H
Common Stock, par value $0.01 per share--authorized
50,000,000 shares, issued and outstanding 45,121,000
shares in 1996 and authorized 40,000,000 shares,
issued and outstanding 38,220,000 shares in 1995 ....... 451 382
Additional paid-in capital ................................ 165,668 50,554
Net unrealized investment gains ........................... 2,153 6,789
Retained earnings ......................................... 264,646 191,094
---------- ----------
432,918 248,819
---------- ----------
$1,320,988 $1,130,859
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 47
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Premiums--Note E:
Health ...................................... $501,185 $473,778 $415,251
Life premiums and other considerations ...... 46,570 45,353 40,659
-------- -------- --------
547,755 519,131 455,910
Net investment income--Note C ................... 71,345 65,054 47,956
Fees and other income ........................... 110,841 54,726 24,920
Gains (losses) on sale of investments--Note C ... 652 2,163 (5,840)
-------- -------- --------
730,593 641,074 522,946
BENEFITS AND EXPENSES -- Note E
Benefits, claims, and settlement expenses ....... 335,895 320,501 275,945
Underwriting, acquisition, and
insurance expenses--Note P .................. 280,802 230,003 189,073
Interest expense ................................ 2,514 3,909 1,913
-------- -------- --------
619,211 554,413 466,931
-------- -------- --------
INCOME BEFORE FEDERAL
INCOME TAXES AND MINORITY
INTERESTS ............................... 111,382 86,661 56,015
Federal income taxes--Note G ........................ 36,190 29,040 18,399
-------- -------- --------
INCOME BEFORE
MINORITY INTERESTS ...................... 75,192 57,621 37,616
Minority Interests .................................. 5,945 4,293 1,438
-------- -------- --------
NET INCOME .............................. $ 69,247 $ 53,328 $ 36,178
======== ======== ========
NET INCOME PER SHARE--Note H ............ $ 1.66 $ 1.41 $ 0.96
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 48
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
COMMON STOCK
Beginning of year ................................. $ 382 $ 94 $ 93
Four-for-one stock split .......................... -- 282 --
Exercise of stock options ......................... 1 -- 1
Adjustment for business combinations .............. 16 6 --
Public sale of common stock at
$20.50 per share, net of expenses ............... 52 -- --
-------- -------- --------
End of year ....................................... 451 382 94
-------- -------- --------
ADDITIONAL PAID-IN CAPITAL
Beginning of year ................................. 50,554 50,723 50,650
Public sale of common stock at
$20.50 per share, net of expenses ............... 100,096 -- --
Adjustment for business combinations .............. 15,119 71 --
Exercise of stock options and warrants ............ 170 231 227
Four-for-one stock split .......................... -- (282) --
Retirement of treasury stock ...................... (271) (189) (154)
-------- -------- --------
End of year ....................................... 165,668 50,554 50,723
-------- -------- --------
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Beginning of year ................................. 6,789 (18,102) 1,995
Change in unrealized investment gains or losses
during the year ................................. (7,391) 39,232 (31,744)
Deferred income taxes ............................. 2,197 (12,593) 10,278
Minority interests ................................ 558 (1,748) 1,369
-------- -------- --------
End of year ....................................... 2,153 6,789 (18,102)
-------- -------- --------
RETAINED EARNINGS
Beginning of year ................................. 191,094 138,208 102,030
Adjustment for business combinations .............. 4,305 (442) --
Net income ........................................ 69,247 53,328 36,178
-------- -------- --------
End of year ....................................... 264,646 191,094 138,208
-------- -------- --------
TREASURY STOCK
Beginning of year ................................. -- -- --
Purchase of stock ................................. (271) (189) (154)
Retirement of treasury stock ...................... 271 189 154
-------- -------- --------
End of year ....................................... -- -- --
-------- -------- --------
TOTAL STOCKHOLDERS' EQUITY ........................... $432,918 $248,819 $170,923
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 49
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income ...................................................... $ 69,247 $ 53,328 $ 36,178
Adjustments to reconcile net income to cash
provided by operating activities:
Increase in policy liabilities ................................ 40,599 11,918 102,784
Increase (decrease) in other liabilities ...................... 4,632 4,933 (871)
Deferred income tax (benefit) payable ......................... 6,425 (3,683) (3,073)
Increase in federal income taxes payable ...................... 4,715 1,435 908
Decrease (increase) in accrued investment income,
reinsurance receivables and other receivables .............. (6,735) 13,654 (75,921)
Acquisition costs deferred .................................... (20,913) (14,349) (14,693)
Amortization of deferred acquisition costs .................... 17,080 15,029 13,776
Depreciation and amortization ................................. 7,209 2,958 1,229
Net income attributable to minority interests ................. 5,945 4,293 1,438
(Gains) losses on sale of investments ......................... (652) (2,163) 5,840
Other items, net .............................................. (2,014) (595) (354)
-------- -------- --------
Cash Provided by Operations ................................ 125,538 86,758 67,241
-------- -------- --------
INVESTING ACTIVITIES
Securities available-for-sale
Purchases ..................................................... (646,421) (542,362) (508,002)
Sales ......................................................... 499,717 225,988 231,852
Maturities, calls and redemptions ............................. 121,162 165,284 293,309
Credit card loans
Purchases ..................................................... (102,744) (154,138) (81,154)
Repayments .................................................... 83,585 117,619 56,812
Sales ......................................................... 33,397 51,562 --
Other investments
Additions to property and equipment ........................... (17,722) (2,509) (2,437)
Purchases ..................................................... (20,881) (17,027) (21,055)
Sales, repayments and maturities .............................. 6,456 18,680 25,265
Short-term investments-net ...................................... (111,769) 91,158 (82,894)
Purchase of subsidiaries and life, health and annuity business,
net of cash acquired of $3,996, $3,428 and $5,635 in
1996, 1995 and 1994, respectively (Note B and P) .............. (4,291) (20,024) (7,134)
Minority interest purchased ..................................... (9,831) -- --
Decrease (increase) in agents' receivables ...................... (2,202) 959 5,619
-------- -------- --------
Cash Used in Investing Activities .......................... (171,544) (64,810) (89,819)
-------- -------- --------
FINANCING ACTIVITIES
Proceeds from notes payable ..................................... 11,264 18,091 59,655
Repayment of notes payable ...................................... (22,242) (34,600) (23,000)
Proceeds from payable to related party .......................... -- 10,735 940
Repayment of payable to related party ........................... (10,735) (275) (1,500)
Deposits from investment products ............................... 17,078 21,145 33,391
Withdrawals from investment products ............................ (38,258) (36,878) (43,027)
Proceeds from exercise of stock options and warrants ............ 179 207 212
Purchase of treasury stock ...................................... (271) (189) (154)
Proceeds from issuance of common stock, net of expenses ......... 100,148 -- --
Distributions to minority interests ............................. (1,650) (1,980) (230)
-------- -------- --------
Cash Provided by (Used in) Financing Activities ............ 55,513 (23,744) 26,287
-------- -------- --------
Net Increase (Decrease) in Cash ............................ 9,507 (1,796) 3,709
Cash at Beginning of Period ................................ 5,913 7,709 4,000
-------- -------- --------
Cash at End of Period ...................................... $ 15,420 $ 5,913 $ 7,709
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 50
UICI AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--Significant Accounting Policies
Principles of Consolidation: The consolidated financial statements
include the accounts of UICI and its subsidiaries (the "Company"). All
significant intercompany accounts and transactions have been eliminated in
consolidation.
On June 27, 1996, the Company announced that shareholders had approved
a name change for the Company from United Insurance Companies, Inc. to UICI.
The change was effective July 1, 1996. The name change was indicative of the
Company's broadening activities beyond its historical core life, accident and
health insurance business.
Nature of Operations: The Company is a financial services company
primarily engaged in the life and accident and health insurance business.
Information on the Company's operations by segment is 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. The Credit Services segment
offers assistance to persons with no or troubled credit experience in obtaining
a nationally recognized credit card by providing financial support for the
card.
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 for GAAP; the recording of reinsurance receivables as
assets for GAAP rather than as reductions of liabilities; 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.)
F-7
<PAGE> 51
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.
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.
Real estate investments are principally stated at the Company's cost
as adjusted for contributions or distributions and the Company's share of
partnership income or loss. Investments are not adjusted for a share of loss
in excess of the Company's investment in any partnership, if the Company's
percentage share of that partnership's operations is insignificant and if the
Company does not anticipate funding such share of loss.
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.
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
F-8
<PAGE> 52
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.
Property and Equipment: Property and equipment are reported at
depreciated cost that is computed using straight line and accelerated methods
based upon the estimated useful lives of the assets. The accumulated
depreciation for property and equipment was $22.5 million and $15.7 million at
December 31, 1996 and 1995, 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.
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 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.
F-9
<PAGE> 53
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.
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.
Accounting Changes: 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. The effect of
applying FAS 123 fair value method to the Company's stock-based awards results
in net income and earnings per share not materially different from that
reported.
In June 1996, the FASB issued Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of
Liabilities". This statement provides new accounting and reporting standards
for sales, securitizations, and servicing of receivables and other financial
assets, for certain secured borrowing and collateral transactions, and for
extinguishment of liabilities. The provisions of the statement are to be
applied to transactions occurring after December 31, 1996 (regardless of an
entity's fiscal year) even for transfers of receivables pursuant to
securitization structures that previously were established. The Company will
implement this statement on any transactions occurring after December 31, 1996.
Reclassification: Certain amounts in the 1995 and 1994 financial
statements have been reclassified to conform with the 1996 financial statement
presentation.
NOTE B--Acquisitions and Dispositions
Effective August 1, 1996, the Company acquired an additional 20%
interest in its subsidiary, Mid-West National Life Insurance Company of
Tennessee ("Mid-West") for $9.8 million in cash. This increased the Company's
ownership percentage in Mid-West to 99% from 79%. The purchase price was based
on a predetermined formula which approximated GAAP book value. Of the 20%
acquired, 18.6% was acquired from Onward and Upward, Inc. and the five adult
children of the Company's Chairman of the Board. Onward and Upward, Inc. is a
corporation owned by the five adult children of the Company's Chairman of the
Board. The effect of purchase accounting relating to this transaction was
insignificant.
During 1996, the Company acquired three companies for $8.3 million in
cash. Total fair value of assets acquired were $9.6 million and total fair
value of liabilities assumed were $1.3 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.
The Consolidated Statements of Income for the year ended December 31,
1996 include the results of operations of each acquired company from their
respective dates of acquisition in
F-10
<PAGE> 54
1996. The effect of these acquisitions on the Company's results of operations
was not material. Accordingly, pro forma financial information has not been
presented.
In November 1996, the Company acquired through a stock exchange
agreement 100% of Amli Realty Co. ("ARC"). The Company exchanged 1,634,876
shares of its common stock for all of the outstanding common stock of ARC. The
effect of this acquisition was not material to the consolidated financial
statements.
In September 1996, the Company entered into three separate stock
purchase agreements to sell its three dental benefit companies in the
HealthCare Solutions Division. The Company completed two of the sales, one in
October 1996 and one in January 1997, for realized gains of $2.0 million and
$3.2 million, respectively. The operations of the dental benefit companies
were not material to the Company's financial condition or results of
operations.
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. 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) 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. 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.
F-11
<PAGE> 55
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
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Costs of business acquired:
Beginning of year ........................ $ 20,414 $ 30,061 $ 26,425
Additions ............................ -- -- 11,967
Amortization (a) ..................... (6,436) (9,647) (8,331)
-------- -------- --------
End of year ............................ 13,978 20,414 30,061
Costs of business produced ................. 45,977 35,708 26,741
-------- -------- --------
$ 59,955 $ 56,122 $ 56,802
======== ======== ========
</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>
1997 ......................................... $ 3,577
1998 ......................................... 2,501
1999 ......................................... 1,864
2000 ......................................... 1,500
2001 ......................................... 822
2002 and thereafter .......................... 3,714
-------
$13,978
=======
</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 $246.5 million as of December 31, 1996. In addition, at December
31, 1996, the domestic insurance subsidiaries had securities with a fair value
of $18.8 million on deposit with insurance departments in various states.
F-12
<PAGE> 56
A summary of net investment income is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Fixed maturities ........................... $ 51,922 $ 47,391 $ 35,337
Equity securities .......................... 748 247 182
Guaranteed student loans ................... 1,855 1,496 1,663
Mortgage and collateral loans .............. 1,704 1,493 913
Policy loans ............................... 1,549 1,388 1,428
Credit card loans .......................... 6,138 7,643 4,093
Short-term investments ..................... 7,085 6,107 4,935
Real estate and other investments .......... 2,780 1,842 1,955
-------- -------- --------
73,781 67,607 50,506
Less investment expenses ................... (2,436) (2,553) (2,550)
-------- -------- --------
$ 71,345 $ 65,054 $ 47,956
======== ======== ========
</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:
1996
Realized ............... $ (1,976) $ 604 $ -- $ 2,024 $ 652 $ (216) $ 4 $ 440
Change in unrealized ... (8,769) 1,378 -- -- (7,391) 2,197 558 (4,636)
---------- ---------- ---------- ----------- ----------- -------- -------- -----------
Combined ............. $ (10,745) $ 1,982 $ -- $ 2,024 $ (6,739) $ 1,981 $ 562 $ (4,196)
========== ========== ========== =========== =========== ======== ======== ===========
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)
========== ========== ========== =========== =========== ======== ======== ===========
</TABLE>
Gross unrealized investment gains pertaining to equity securities was
$1.8 million and $787,000 at December 31, 1996 and 1995, respectively. Gross
unrealized investment losses pertaining to equity securities was $249,000 and
$613,000 at December 31, 1996 and 1995, respectively.
F-13
<PAGE> 57
The amortized cost and fair value of investments in fixed maturities
are as follows:
<TABLE>
<CAPTION>
December 31, 1996
-----------------------------------------------
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 ........................ $ 133,970 $ 366 $ (686) $ 133,650
Mortgage-backed securities issued
by U.S. Government agencies
and authorities ........................... 98,691 1,698 (514) 99,875
Other mortgage and asset backed securities ... 171,313 1,611 (1,757) 171,167
Other corporate bonds ........................ 357,194 4,301 (3,260) 358,235
---------- ---------- ---------- ----------
Total fixed maturities ................... $ 761,168 $ 7,976 $ (6,217) $ 762,927
========== ========== ========== ==========
</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 ........................ $ 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>
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,
1996, 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
Cost Value
--------- --------
(Dollars in thousands)
<S> <C> <C>
Maturity
- --------
One year or less ....................................... $ 17,969 $ 17,925
Over 1 year through 5 years ............................ 168,762 168,893
Over 5 years through 10 years .......................... 214,741 214,848
Over 10 years .......................................... 89,692 90,219
-------- --------
491,164 491,885
Mortgage and asset backed securities ................... 270,004 271,042
-------- --------
Total fixed maturities ............................... $761,168 $762,927
======== ========
</TABLE>
F-14
<PAGE> 58
Proceeds from the sale of investments in fixed maturities were $499.7
million, $226.0 million and $231.9 million for 1996, 1995, and 1994,
respectively. Gross gains of $4.7 million, $4.1 million, and $2.2 million and
gross losses of $6.7 million, $1.9 million, and $8.1 million were realized on
fixed maturity sales during 1996, 1995, and 1994, respectively.
In September 1996, the Company securitized $31.6 million of credit
card loans. The securitization involved the sale of $29.0 million of asset
backed securities in which the Company purchased participating interests
totaling $2.9 million. This transaction was accounted for as a sale. No gain
or loss was recognized related to this transaction.
On December 29, 1995, the Company sold approximately $51.6 million of
credit card loans to two separate trusts established for the benefit of
investors, one of which was a related party (see Note L), in certificates
representing undivided fractional interest in the trusts. The Company
purchased participating interests in each of the trusts totaling $16.0 million
and recorded these amounts as credit card loans. These transactions were
accounted for as sales. No gain or loss was recognized related to these
transactions. During 1996, one of the trusts was dissolved and the $15.0
million senior certificate held by a related party was retired.
Following is a summary of the Company's equity securities:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------- --------------------
Fair Fair
Cost Value Cost Value
-------- -------- -------- --------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Common Stocks ..................... $ 6,836 $ 8,076 $ 2,065 $ 2,518
Non-redeemable preferred stocks ... 6,717 7,030 3,049 2,770
-------- -------- -------- --------
$ 13,553 $ 15,106 $ 5,114 $ 5,288
======== ======== ======== ========
</TABLE>
The fair values, which represent carrying amounts, of equity
securities are based on quoted market prices, where available.
F-15
<PAGE> 59
The carrying amounts and fair values of the Company's investments in
mortgage, collateral and policy loans and real estate investments are as
follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
-------------------- --------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in thousands) (Dollars in thousands)
<S> <C> <C> <C> <C>
Commercial mortgages ........... $ 3,416 $ 3,378 $ 2,492 $ 3,763
Residential mortgages .......... 1,866 1,867 2,517 3,032
-------- -------- -------- --------
5,282 5,245 5,009 6,795
Collateral loans ............... 10,000 10,000 10,550 10,550
-------- -------- -------- --------
$ 15,282 $ 15,245 $ 15,559 $ 17,345
======== ======== ======== ========
Policy loans ................... $ 22,689 $ 21,363 $ 24,042 $ 22,636
======== ======== ======== ========
Real estate investments ........ $ 30,822 $ 73,498 $ 1,687 $ 1,687
======== ======== ======== ========
</TABLE>
The fair values for mortgage, collateral and policy loans and real
estate investments 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 and
collateral loans, credit card loans, and real estate investments are net of
allowances for losses. The balances of those allowances are summarized as
follows:
<TABLE>
<CAPTION>
December 31
---------------------
1996 1995
-------- --------
(Dollars in thousands)
<S> <C> <C>
Guaranteed student loans ............................. $ 278 $ 178
Mortgage and collateral loans ........................ 650 650
Credit card loans .................................... 8,728 12,129
Real estate investments .............................. 2,614 --
-------- --------
$ 12,270 $ 12,957
======== ========
</TABLE>
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
of mortgage and asset backed securities. At December 31, 1996, the Company had
a carrying amount of $271.0 million of mortgage and asset backed securities, of
which, $99.9 million are government backed, $119.0 million are rated AAA, $28.0
million are rated AA, $19.0 million are rated A, and $5.1 million are rated BBB
by external rating agencies. 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.
F-16
<PAGE> 60
NOTE D--Policy Liabilities
Liability for future policy and contract benefits consists of the
following:
<TABLE>
<CAPTION>
December 31
------------------------
1996 1995
-------- --------
(Dollars in thousands)
<S> <C> <C>
Life ........................................ $271,065 $268,839
Annuity ..................................... 241,605 257,938
-------- --------
$512,670 $526,777
======== ========
</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 5.6% and 5.7% during 1996 and 1995,
respectively. Interest rates credited to the liability for future contract
benefits related to annuity contracts generally ranged from 4.0% to 6.8% during
1996 and 1995, and 4.0% to 7.4% during 1994.
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 4.9% to 6.8% during 1996, 4.8% to 6.8% during 1995, and
4.7% to 7.4% during 1994.
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 consolidated balance sheets) are as follows:
<TABLE>
<CAPTION>
December 31, 1996 December 31, 1995
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in thousands)(Dollars in thousands)
<S> <C> <C> <C> <C>
Direct annuities ................... $117,269 $111,734 $127,778 $121,747
Assumed annuities .................. 124,336 121,408 130,160 126,829
Supplemental contracts
without life contingencies ...... 3,042 3,042 4,045 4,045
-------- -------- -------- --------
$244,647 $236,184 $261,983 $252,621
======== ======== ======== ========
</TABLE>
F-17
<PAGE> 61
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,
-----------------------------------
1996 1995 1994
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Claims liability at beginning of year, net
of related reinsurance recoverables ................. $ 176,330 $ 140,660 $ 114,111
Add:
Acquired claims liability ............................. -- 12,585 6,145
Incurred losses, net of reinsurance, occurring during:
Current year ........................................ 371,260 332,208 280,110
Prior years ......................................... (61,254) (44,886) (33,594)
--------- --------- ---------
310,006 287,322 246,516
--------- --------- ---------
Deduct payments for claims, net of reinsurance,
occurring during:
Current year ........................................ 213,844 187,776 163,077
Prior years ......................................... 79,570 76,461 63,035
--------- --------- ---------
293,414 264,237 226,112
--------- --------- ---------
Claims liability at end of year,
net of related reinsurance recoverables:
1996--$8,354, 1995--$3,479, and 1994--$2,528 ........ $ 192,922 $ 176,330 $ 140,660
========= ========= =========
</TABLE>
The above reconciliation shows incurred losses related to prior years
developed in amounts less than originally anticipated due to better than
expected experience. The Company's reserving methodology has been applied on a
consistent basis from year to year.
NOTE E--Reinsurance
In 1996, 1995, and 1994, approximately 48%, 50%, 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 (See Note O).
The Company assumed 57.5% in 1996, 55% in 1995, and 52.5% in 1994 of
the health and group life business produced by UGA. The premiums, commissions,
claims and premium taxes on the business are shared according to the percentage
assumed and the Company paid administrative expenses equal to an agreed upon
percentage of premiums collected and health claims paid.
F-18
<PAGE> 62
The Company has also assumed other life and annuity policies issued by
AEGON. At December 31, 1996 and 1995, the Company's portion of the life
insurance in force assumed was approximately $228.3 million and $173.0 million,
respectively. At December 31, 1996 and 1995, $833,000 and $2.6 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,
----------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Direct .................................. $319,689 $262,715 $227,367
Assumed ................................. 255,436 276,044 245,619
Ceded ................................... (27,370) (19,628) (17,076)
-------- -------- --------
Net Premiums .......................... $547,755 $519,131 $455,910
======== ======== ========
Ceded benefits, claims and
settlement expenses ................... $ 17,426 $ 13,500 $ 11,689
======== ======== ========
Life insurance in force ceded ........... $836,957 $776,086 $767,580
======== ======== ========
</TABLE>
NOTE F--Debt
The Company's short-term and long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31
---------------------
1996 1995
-------- --------
(Dollars in thousands)
<S> <C> <C>
Short-term debt:
Other notes payable ................................ $ -- $ 22,726
Current portion long-term debt ..................... 1,032 --
-------- --------
Total short-term debt ........................... $ 1,032 $ 22,726
======== ========
Long-term debt:
8.75% senior notes payable ......................... $ 27,655 $ 27,655
Other notes payable ................................ 3,288 --
-------- --------
30,943 27,655
Less: current portion .............................. 1,032 --
-------- --------
Total long-term debt ............................ $ 29,911 $ 27,655
======== ========
</TABLE>
The other notes payable of $3.3 million at December 31, 1996, are
obligations of one of the Company's subsidiaries. The notes have interest
rates ranging from 6% to 9% with
F-19
<PAGE> 63
maturities ranging from May 1, 1997 to March 31, 2003. Approximately $1.7
million is collateralized by real estate with the remaining balance being
unsecured.
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 certain financial ratios, limitations of additional indebtedness as a
percentage of certain defined equity amounts and the disposal of subsidiaries.
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 totaling
approximately $12.0 million due in January 1996. The promissory notes were
non-interest bearing loans and were repaid in January 1996.
At December 31, 1995, the Company owed $10.7 million to the Company's
Chairman of the Board. The note was repaid in full during 1996.
The Company has a revolving credit note with AEGON bearing interest at
prime plus 0.875% with a maximum line of credit of $12.0 million through August
1, 2002. Under terms of the agreement, a percentage of the outstanding shares
of the Company's stock in 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, 1996.
Principal payments required in each of the next five years after
December 31, 1996 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1997 ............................... $1,032
1998 ............................... 4,665
1999 ............................... 4,675
2000 ............................... 4,609
2001 ............................... 4,027
</TABLE>
The carrying amounts of the Company's short-term debt approximate fair
values.
The fair value of the long-term debt was $31.6 million and $29.3
million at December 31, 1996 and 1995, 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 $3.1 million, $3.4 million, and $1.9 million,
for 1996, 1995, and 1994, respectively.
F-20
<PAGE> 64
NOTE G--Federal Income Taxes
Deferred income taxes for 1996 and 1995 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, 1996
and 1995 relate to the following:
<TABLE>
<CAPTION>
December 31
--------------------
1996 1995
-------- --------
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs
and costs of business acquired ..................... $ 13,635 $ 12,125
Investment in subsidiaries ........................... 4,232 3,327
Net unrealized investment gains ...................... 1,139 3,336
Other ................................................ 349 927
-------- --------
Total gross deferred tax liabilities ............ 19,355 19,715
-------- --------
Deferred tax assets:
Policy liabilities ................................... 15,745 18,549
Allowance for losses on investments .................. 3,332 5,508
Operating loss carryforwards ......................... 2,755 2,985
Capital loss carryforwards ........................... 1,740 1,648
Other ................................................ 1,024 2,439
-------- --------
Total gross deferred tax assets .................. 24,596 31,129
Less: Valuation allowance ....................... (2,677) (4,234)
-------- --------
Net deferred tax assets .......................... 21,919 26,895
-------- --------
Net deferred tax asset ........................... (2,564) (7,180)
Net current tax liability ........................ 7,269 2,193
-------- --------
Federal income tax liability (asset) ............. $ 4,705 $ (4,987)
======== ========
</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, 1996 was a decrease of $1.6
million.
F-21
<PAGE> 65
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Current tax expense ......................... $ 29,765 $ 32,723 $ 21,472
Deferred tax expense (benefit) .............. 6,425 (3,683) (3,073)
-------- -------- --------
$ 36,190 $ 29,040 $ 18,399
======== ======== ========
</TABLE>
The Company's effective income tax rates varied from the maximum
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate ................ 35.0% 35.0% 35.0%
Small life insurance company deduction ........... (2.2) (1.7) (1.9)
Valuation allowance .............................. (1.4) (0.6) 1.3
Other items, net ................................. 1.1 0.8 (1.5)
---- ---- ----
Effective income tax rate ................... 32.5% 33.5% 32.9%
==== ==== ====
</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, 1996. 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, 1996, certain acquired subsidiaries of the Company had
aggregate federal tax loss carryforwards of $7.4 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 $1.1 million in 1997, $658,000 per year from 1998
through 2006, and $385,000 in 2007.
Total federal income taxes paid were $25.2 million, $31.3 million, and
$20.6 million, for 1996, 1995, and 1994, respectively.
UICI 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 Stockholders on April 16, 1996, approval for
an increase in authorized shares of common stock with a par value of $0.01 from
40,000,000 shares to 50,000,000 shares was obtained in order to facilitate the
public offering of 5,175,000 shares of
F-22
<PAGE> 66
common stock at $20.50 per share, completed on May 1, 1996. All of the shares
were sold by the Company. The net proceeds to the Company (after deducting
underwriting discounts and commissions and offering expenses) from the sale of
the shares was approximately $100.1 million.
During 1995, approval for an increase in authorized shares from
10,000,000 shares to 40,000,000 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 to reflect the stock split.
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, 1996 was $4.5 million.
Prior approval by insurance regulatory authorities is required for the
payment of dividends by a domestic insurance company which exceed certain
limitations based on statutory surplus and net income. At December 31, 1996,
the domestic insurance companies could pay aggregate dividends to the parent
company of approximately $18.4 million without prior approval of statutory
authorities.
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,
----------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Net income .............................. $ 32,723 $ 39,256 $ 33,567
Stockholders' equity .................... $190,917 $150,543 $117,956
</TABLE>
The Company's domestic insurance subsidiaries prepare their statutory
financial statements in accordance with accounting practices prescribed or
permitted by the respective state insurance departments in their state of
domicile. 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 in 1996, 1995 and 1994.
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
F-23
<PAGE> 67
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.
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.
The Company may be required by certain minority stockholders to
purchase their shares of subsidiaries of the Company at a predetermined formula
price which approximates GAAP book value. This obligation at December 31, 1996
was approximately $5.7 million.
During 1996 the Company exercised an option to acquire effective
January 1, 1997 the remaining shares of the minority shareholders of two
subsidiary companies acquired in 1995 based on a predetermined formula. The
formula price was determined to be $15.1 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,
1996 amount to $4.6 million in 1997, $4.2 million in 1998, $3.1 million in
1999, $1.8 million in 2000 and $936,000 in 2001. Rent expense amounted to $5.0
million, $2.8 million, and $1.7 million for 1996, 1995, and 1994, respectively.
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.
The Company will begin to share in the profits or losses of this business in
1997.
The Company has commitments to fund the unused line of credit on the
credit card loans. At December 31, 1996, the Company had a $6.0 million letter
of credit covering the outstanding commitments.
One of the Company's subsidiaries has guaranteed various loans to and
issued letters of credit upon behalf of its real estate investments. The
outstanding balances of these contingent liabilities approximates $10.8 million
at December 31, 1996.
F-24
<PAGE> 68
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, 1996, the Company has outstanding student loan commitments
for the years 1997 through 2019. 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 has
arranged an ongoing agreement whereby request for federally insured loans will
be forwarded to United Student Aid Funds which will fund the loans on behalf of
the Company. 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 rates are as follows:
<TABLE>
<CAPTION>
Total Expected
Commitment Funding
---------- --------
(Dollars in thousands)
<S> <C> <C>
1997 ................................ $ 34,738 $ 11,371
1998 ................................ 64,491 15,776
1999 ................................ 94,614 17,883
2000 ................................ 116,010 17,771
2001 ................................ 125,117 15,685
Thereafter .......................... 330,451 31,500
-------- --------
$765,421 $109,986
======== ========
</TABLE>
Interest rates on the above commitments are as follows:
<TABLE>
<CAPTION>
Total Expected
Commitment Funding
----------- --------
(Dollars in thousands)
<S> <C> <C>
9.50% ................................................ $ 465 $ 221
9.75% ................................................ 48,610 3,001
Variable (Prime plus 2%) ............................. 716,346 106,764
-------- --------
$765,421 $109,986
======== ========
</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 1996, 1995, and 1994
totaled $3.1 million, $1.1 million, and $893,000, respectively.
NOTE K--Stock Option Plan and Warrants
The Company has a stock option plan which provides options on
1,600,000 shares of common stock for granting to officers, key employees, and
certain eligible non-employees at fair market value at the date of grant. The
options vest at 20% every twelve months subject to continuing employment,
provided that an option will vest 100% upon death, permanent
F-25
<PAGE> 69
disability, or change of control of the Company. All options under the plan
are exercisable over a five year period.
A summary of stock option transactions adjusted for a 1995 stock split
(see Note H) are as follows:
<TABLE>
<CAPTION>
Number Average Option
of Shares Price Per Share ($)
----------- -------------------
<S> <C> <C>
Outstanding options at January 1, 1994 ...................... 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
Granted ..................................................... 91,150 12.67
Canceled .................................................... (20,000) 10.00
Exercised ................................................... (31,240) 3.72
--------
Outstanding options at December 31, 1996 .................... 107,150 11.21
========
Options Exercisable at December 31,
1994 ..................................................... 51,960 2.20
1995 ..................................................... 35,880 2.55
1996 ..................................................... 84,363 10.82
</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 1996,
1995, and 1994, 20% of the warrants were exercised in each year and 71,520
shares of common stock were issued for proceeds of $178,000 in each year.
There were no outstanding warrants at December 31, 1996. Warrants outstanding
were 71,520, and 143,040, at December 31, 1995, and 1994, respectively.
In connection with the acquisition of Amli Realty Co. on November
1996, the Company issued 91,150 options at an average option price of $12.67.
The right to acquire stock pursuant to this plan is contingent upon numerous
factors, including continuity of employment and/or the passage of time.
F-26
<PAGE> 70
NOTE L--Related Party Transactions
Onward and Upward owns common stock of two 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 subsidiary's
stock at prices based on the same predetermined formula.
The Company has issued warrants to Onward & Upward. (See Note K)
During 1993, the Company entered into an agreement with the Company's
Chairman of the Board to participate in an interest in a company which has
developed a paperless claims system. Until the long-term viability of that
company is determined, the Company has substantially written off its investment
of $5.0 million with $1.2 million, $1.4 million and $2.2 million occurring in
1996, 1995, and 1994, respectively.
During 1995, the Company issued 427,900 shares of its common stock in
exchange for 97.25% of the outstanding common stock of WinterBrook Holdings,
Inc. 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.
The Company acquired an 18.6% interest in its subsidiary, Mid-West
from Onward and Upward in 1996. (See Note B)
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 terms of the line of credit were renegotiated in 1996
so that the interest rate increased to prime plus four percent (4%) from prime
plus two percent (2%), maturing September 30, 1998 instead of December 31,
1997. The line of credit is collateralized by certain tangible assets of the
related company and guaranteed by the Company's Chairman of the Board. At
December 31, 1996, 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. The loan was repaid in 1996.
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. During 1996, this trust was dissolved
and the $15.0 million certificate was retired for no gain or loss.
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. The Company had gains of $2.0 million and losses of
$1.6 million for 1996 and 1995, respectively, on these activities.
F-27
<PAGE> 71
UGA receives commissions from insurance subsidiaries of AEGON with
respect to insurance policies that the Company coinsures. UGA received $46.7
million, $45.5 million, and $50.3 million in such commissions in 1996, 1995,
and 1994, respectively. Through the coinsurance agreements with AEGON, the
amount of these commissions received by UGA attributable to the Company were
$29.2 million, $26.1 million, and $26.3 million in 1996, 1995, and 1994,
respectively.
UGA markets products which are directly underwritten by insurance
subsidiaries of the Company. The insurance subsidiaries paid commissions of
$4.2 million, $1.9 million and $894,000 to UGA in 1996, 1995, and 1994,
respectively.
UGA generates sales leads for agents and provides management expertise
for an insurance subsidiary of the Company. The insurance subsidiary of the
Company paid UGA $5.0 million, $4.3 million, and $4.7 million in 1996, 1995,
and 1994, respectively.
The Company's Chairman of the Board and Onward and Upward own a
majority interest in Matrix Telecom, Inc. ("Matrix"), a telephone company.
The Company paid $1.3 million and $686,180 to Matrix for services rendered in
1996 and 1995, respectively.
The Company receives a fee for performing marketing and administrative
services for a company owned by certain officers of a subsidiary of the
Company. The Company received fees of $9.7 million and $1.9 million in 1996
and 1995, respectively.
NOTE M--Investment Annuity Segregated Accounts
The Company has deferred investment annuity policies which have
segregated account assets and liabilities amounting to $207.4 million and
$210.5 million at December 31, 1996 and 1995, 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.
NOTE N--Segment Information
The Company's operations are classified and summarized in four
industry segments. The business segments are health insurance, life insurance
and annuity, credit services 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 fees 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:
F-28
<PAGE> 72
<TABLE>
<CAPTION>
Life
Health Insurance/ Credit Corporate
Total Insurance Annuity Services and Other
---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
- ----------------------------
Revenues .................................... $ 730,593 $ 542,712 $ 79,815 $ 39,658 $ 68,408
Income before federal income taxes
and minority interests ..................... 111,382 72,680 11,354 14,163 13,185
Identifiable assets* ........................ 1,320,988 284,935 521,913 30,957 483,183
Year ended December 31, 1995
- ----------------------------
Revenues .................................... $ 641,074 $ 495,976 $ 79,038 $ 28,255 $ 37,805
Income before federal income taxes
and minority interests ..................... 86,661 64,456 11,569 1,424 9,212
Identifiable assets* ........................... 1,130,859 259,205 528,700 39,499 303,455
Year ended December 31, 1994
- ----------------------------
Revenues .................................... $ 522,946 $ 440,432 $ 72,440 $ 10,823 (749)
Income (loss) before federal income taxes
and minority interests ..................... 56,015 51,935 10,627 (1,154) (5,393)
Identifiable assets* ........................ 1,031,263 217,325 561,351 59,013 193,574
</TABLE>
*At end of year.
NOTE O--Subsequent Event
Effective January 1, 1997, the Company acquired the agency force and
certain assets of UGA for a price equal to the net book value of the tangible
assets acquired and assumed certain agent commitments which are estimated not
to exceed $5.0 million. UGA was owned 100% by the Company's Chairman as of
December 31, 1996. The tangible assets acquired consist primarily of agent
debit balances, a building, and related furniture and fixtures having a net
book value of approximately $11.0 million, which approximates market value of
the assets.
Effective January 1, 1997, the Company acquired the remaining interest
of two subsidiary companies acquired in 1995 based on a predetermined formula
price of $15.1 million. This transaction closed on February 28, 1997.
NOTE P--Supplemental Financial Statement Data
Disclosures of non-cash investing and financing activities are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Fair value of assets acquired ................. $ 9,575 $ 45,990 $ 85,184
Liabilities assumed ........................... 1,288 22,538 72,415
-------- -------- --------
Net cash paid ................................. $ 8,287 $ 23,452 $ 12,769
======== ======== ========
</TABLE>
F-29
<PAGE> 73
Details of underwriting, acquisitions, and insurance expenses are as
follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1996 1995 1994
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Amortization of deferred policy acquisition costs ... $ 17,080 $ 15,029 $ 13,776
Commissions ......................................... 91,686 93,522 89,584
Administrative expenses ............................. 156,127 107,963 74,522
Premium taxes ....................................... 14,158 12,945 11,038
Amortization of goodwill ............................ 1,751 544 153
-------- -------- --------
$280,802 $230,003 $189,073
======== ======== ========
</TABLE>
The quarterly results for 1996 and 1995 were as follow:
<TABLE>
<CAPTION>
1996
-----------------------------------------
First Second Third Fourth
-------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues ........................... $171,616 $186,185 $176,710 $196,082
Income before federal income taxes
and minority interests ........... 25,058 28,444 28,905 28,975
Net income ......................... 15,222 17,017 18,121 18,887
Net income per share ............... $ 0.40 $ 0.41 $ 0.42 $ 0.43
</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>
Computation of earnings per share for each quarter are made
independently of earnings per share for the year. The per share amount for the
first quarter 1995 has been restated to reflect the four-for-one stock split
effective June 1, 1995 (see Note H).
F-30
<PAGE> 74
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UICI (PARENT COMPANY)
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
-------- --------
<S> <C> <C>
ASSETS:
Investments:
Investments in and advances to subsidiaries* ..... $328,837 $242,031
Investment in agents' receivables ................ 8,064 5,358
Guaranteed student loans ......................... 6,139 --
Collateral loan .................................. 2,500 2,500
Credit card loans ................................ 22,489 36,727
Short-term investments ........................... 98,460 14,472
-------- --------
Total Investments ............................ 466,489 301,088
Cash (overdraft) ..................................... (1,939) 1,005
Due from related parties ............................. 547 578
Other ................................................ 4,496 2,829
-------- --------
$469,593 $305,500
======== ========
LIABILITIES:
Accrued expenses and other liabilities ............... $ 5,407 $ 5,845
Due to related party ................................. -- 455
Short-term debt ...................................... -- 22,726
Long-term debt ....................................... 27,655 27,655
Federal income taxes payable ......................... 3,613 --
-------- --------
36,675 56,681
STOCKHOLDERS' EQUITY
Common stock ......................................... 451 382
Additional paid-in capital ........................... 165,668 50,554
Net unrealized investment gains
held by subsidiaries ............................... 2,153 6,789
Retained earnings .................................... 264,646 191,094
-------- --------
432,918 248,819
-------- --------
$469,593 $305,500
======== ========
</TABLE>
* Eliminated in consolidation.
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto of UICI and
Subsidiaries.
F-31
<PAGE> 75
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
UICI (PARENT COMPANY)
STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries* ................... $ 27,198 $ 24,586 $ 6,039
Service fee income ............................. -- -- 2,271
Interest income ................................ 9,578 7,245 3,715
Interest and other income from subsidiaries* ... 621 827 829
Gains (losses) on sale of investments .......... 2,283 -- (164)
Fees and other income .......................... 17,114 9,396 2,716
-------- -------- --------
56,794 42,054 15,406
-------- -------- --------
Expenses:
General and administrative expenses ............ 18,978 18,448 7,655
Administrative expenses to subsidiaries* ....... 6,462 4,702 --
Interest expense ............................... 2,471 3,894 1,913
-------- -------- --------
27,911 27,044 9,568
-------- -------- --------
Income before equity in undistributed
earnings of subsidiaries
and federal income taxes ................ 28,883 15,010 5,838
Equity in undistributed earnings of
subsidiaries ................................. 46,642 39,033 31,553
-------- -------- --------
Income before federal income taxes ........ 75,525 54,043 37,391
Federal income taxes .............................. 6,278 715 1,213
-------- -------- --------
Net income ................................ $ 69,247 $ 53,328 $ 36,178
======== ======== ========
</TABLE>
* Eliminated in consolidation.
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto of UICI and
Subsidiaries.
F-32
<PAGE> 76
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF
REGISTRANT--(CONTINUED) UICI
(PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income ................................................ $ 69,247 $ 53,328 $ 36,178
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed earnings of subsidiaries ..... (46,642) (39,033) (31,553)
(Gains) losses on sale of investments ................ (2,283) -- 164
Decrease in amounts due from related companies ....... 31 442 22
Increase (decrease) in accrued expenses
and other liabilities .............................. (905) 3,756 1,909
Deferred income taxes (benefit) ...................... 2,118 (2,498) (1,923)
Increase in federal income taxes payable ............. 1,510 1,057 1,536
Other items, net ..................................... (1,677) (2,006) (797)
---------- ---------- ----------
Cash Provided by Operations ............................. 21,399 15,046 5,536
---------- ---------- ----------
INVESTING ACTIVITIES
Purchase of subsidiaries .................................. (275) (23,452) --
Minority interest purchased ............................... (9,831) -- --
Decrease (increase) of investments in and
advances to subsidiaries ................................ (12,971) 15,846 (8,673)
Sale and maturity of investments .......................... 118,769 156,123 65,275
Purchase of investments ................................... (194,658) (156,904) (105,958)
Decrease (increase) in agents' receivables ................ (2,706) (741) 7,223
---------- ---------- ----------
Cash Used in Investing Activities ....................... (101,672) (9,128) (42,133)
---------- ---------- ----------
FINANCING ACTIVITIES
Proceeds of notes payable ................................. 10,250 18,091 59,655
Repayment of notes payable ................................ (22,242) (34,600) (23,000)
Proceeds from payable to related party .................... -- 10,735 940
Repayment of payable to related party ..................... (10,735) (275) (1,500)
Proceeds from exercise of warrants and stock options ...... 179 208 212
Proceeds from issuance of common stock, net of expenses ... 100,148 -- --
Purchase of treasury stock ................................ (271) (189) (154)
---------- ---------- ----------
Cash Provided by (Used in) Financing Activities ......... 77,329 (6,030) 36,153
---------- ---------- ----------
Decrease in Cash ........................................ (2,944) (112) (444)
Cash at Beginning of Period ............................. 1,005 1,117 1,561
---------- ---------- ----------
Cash (overdraft) at End of Period ....................... $ (1,939) $ 1,005 $ 1,117
========== ========== ==========
</TABLE>
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto of UICI and
Subsidiaries.
F-33
<PAGE> 77
UICI
AND SUBSIDIARIES
SCHEDULE III-- SUPPLEMENTARY INSURANCE INFORMATION
<TABLE>
<CAPTION>
COL. A COL. B COL. C COL. D COL. E
------ -------------- -------------- -------------- --------------
Deferred Future Policy
Policy Benefits, Losses,
Acquisition Claims, and Loss Unearned Policyholder
Costs Expenses Premiums Funds
----------- ---------------- -------- ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
December 31, 1996:
Life insurance and annuities .................. $ 46,791 $ 502,008 $ 7,293 $ 8,504
Health insurance .............................. 13,164 211,938 72,085 5,496
--------- ---------- ---------- ---------
Total .................................... $ 59,955 $ 713,946 $ 79,378 $ 14,000
========= ========== ========== =========
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
========= ========== ========== =========
</TABLE>
<TABLE>
<CAPTION>
COL. F COL. G COL. H COL. I COL J COL. K
------- ---------- ---------- ------------------ --------- --------
Benefits, Claims Amortization
Losses, and of Deferred Other
Premium Investment Settlement Policy Acquisition Operating Premiums
Revenue Income* Expenses Costs Expenses* Written
------- ---------- ---------- ------------------ --------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1996:
Life insurance and annuities .. $ 46,570 $30,231 $ 43,037 $13,959 $ 11,464
Health insurance .............. 501,185 15,996 292,858 3,121 159,252 $506,699
--------- ------- --------- ------- --------- ========
Total .................... $547,755 $46,227 $ 335,895 $17,080 $ 170,716
========= ======= ========= ======= =========
1995:
Life insurance and annuities .. $ 45,353 $32,485 $ 44,444 $11,703 $ 11,321
Health insurance .............. 473,778 14,373 276,057 3,326 152,137 $480,021
--------- ------- --------- ------- --------- ========
Total .................... $ 519,131 $46,858 $ 320,501 $15,029 $ 163,458
========= ======= ========= ======= =========
1994:
Life insurance and annuities .. $ 40,659 $30,692 $ 37,010 $10,107 $ 14,696
Health insurance .............. 415,251 10,457 238,935 3,669 145,892 $418,760
--------- ------- --------- ------- --------- ========
Total .................... $ 455,910 $41,149 $ 275,945 $13,776 $ 160,588
========= ======= ========= ======= =========
</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-34
<PAGE> 78
UICI
AND SUBSIDIARIES
SCHEDULE IV -- REINSURANCE
(Dollars in thousands)
<TABLE>
<CAPTION>
Percentage
Of Amount
Gross Net Assumed
Amount Ceded Assumed Amount to Net
------ ----- ------- ------- ------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1996
- ----------------------------
Life insurance in force ........... $ 4,262,222 $ 863,957 $ 731,827 $ 4,130,092 17.7%
============ ========== ========== =========== ====
Premiums:
Life insurance .................... $ 51,334 $ 11,823 $ 7,059 $ 46,570 15.2%
Health insurance .................. 268,355 15,547 248,377 501,185 49.6%
------------ ---------- ---------- -----------
$ 319,689 $ 27,370 $ 255,436 $ 547,755
============ ========== ========== ===========
Year ended December 31, 1995
----------------------------
Life insurance in force ........... $ 3,778,008 $ 776,086 $ 635,697 $ 3,637,619 17.5%
============ ========== ========== =========== ====
Premiums:
Life insurance .................... $ 47,381 $ 8,459 $ 6,431 $ 45,353 14.2%
Health insurance .................. 215,334 11,169 269,613 473,778 56.9%
------------ ---------- ---------- -----------
$ 262,715 $ 19,628 $ 276,044 $ 519,131
============ ========== ========== ===========
Year ended December 31, 1994
- ----------------------------
Life insurance in force ........... $ 3,717,845 $ 767,580 $ 569,482 $ 3,519,747 16.2%
============ ========== ========== =========== ====
Premiums:
Life insurance .................... $ 44,062 $ 7,707 $ 4,304 $ 40,659 10.6%
Health insurance .................. 183,305 9,369 241,315 415,251 58.1%
------------ ---------- ---------- -----------
$ 227,367 $ 17,076 $ 245,619 $ 455,910
============ ========== ========== ===========
</TABLE>
F-35
<PAGE> 79
UICI
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, 1996
- ----------------------------
Credit card receivables .................... $12,129 $13,526 $ 604 $(17,531) $ 8,728
Agents' receivables ........................ 2,986 -- -- (2,931) 55
Mortgage loans ............................. 650 -- -- -- 650
Guaranteed student loans ................... 178 100 -- -- 278
Real estate ................................ -- 2,614 -- -- 2,614
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
</TABLE>
F-36
<PAGE> 80
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBIT
- ------- ----------------------
11 Statement re: computation of per share earnings.
21 Subsidiaries of UICI
23 Consent of Independent Auditors
27 Financial Data Schedule
<PAGE> 1
UICI
AND SUBSIDIARIES
EXHIBIT 11--STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------
1996 1995 1994
-------- -------- --------
(Dollars and shares in thousands,
except per share amounts)
<S> <C> <C> <C>
PRIMARY
Average shares outstanding .................. 41,635 37,899 37,620
======== ======== ========
Net income .................................. $ 69,247 $ 53,328 $ 36,178
======== ======== ========
Primary net income per share ................ $ 1.66 $ 1.41 $ 0.96
======== ======== ========
FULLY DILUTED
Average shares outstanding .................. 41,642 37,940 37,626
======== ======== ========
Net income .................................. $ 69,247 $ 53,328 $ 36,178
======== ======== ========
Fully diluted net income per share ...... $ 1.66 $ 1.41 $ 0.96
======== ======== ========
</TABLE>
NOTE: The shares and per share amounts have been restated for the year ended
December 31, 1994 to reflect the four- for-one stock split effective
June 1, 1995.
<PAGE> 1
UICI
AND SUBSIDIARIES
EXHIBIT 21--SUBSIDIARIES OF UICI
<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
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--CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
(Form S-8 No. 33-11323) pertaining to the United Insurance Companies, Inc.
Employee Stock Ownership Plan of UICI, in the Registration Statement (Form S-3
No. 333- 02043) of United Insurance Companies, Inc. and in the related
Prospectus, and in the Registration Statement (Form S-8 No. 333-14320)
pertaining to the United Insurance Companies, Inc. Employee Stock Ownership
Plan of UICI of our report dated March 14, 1997, with respect to the
consolidated financial statements and schedules of UICI included in the Annual
Report (Form 10-K) for the year ended December 31, 1996.
Dallas, Texas ERNST & YOUNG LLP
March 24, 1997
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 762,927
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 15,106
<MORTGAGE> 15,282
<REAL-ESTATE> 30,822
<TOTAL-INVEST> 1,082,893
<CASH> 15,420
<RECOVER-REINSURE> 68,438
<DEFERRED-ACQUISITION> 59,955
<TOTAL-ASSETS> 1,320,988
<POLICY-LOSSES> 713,946
<UNEARNED-PREMIUMS> 79,378
<POLICY-OTHER> 14,000
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 30,943
0
0
<COMMON> 451
<OTHER-SE> 432,467
<TOTAL-LIABILITY-AND-EQUITY> 1,320,988
547,755
<INVESTMENT-INCOME> 71,345
<INVESTMENT-GAINS> 652
<OTHER-INCOME> 110,841
<BENEFITS> 335,895
<UNDERWRITING-AMORTIZATION> 17,080
<UNDERWRITING-OTHER> 263,722
<INCOME-PRETAX> 111,382
<INCOME-TAX> 36,190
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 69,247
<EPS-PRIMARY> 1.66
<EPS-DILUTED> 1.66
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
