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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, 1997.
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 -
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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) 392-6700
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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 5, 1998 was $1,172.3 million.
The number of shares outstanding of $0.01 par value Common Stock, as of March 5,
1998 was 46,228,941.
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") is a diversified financial services
company which offers insurance and financial services to niche consumer markets.
The Company also provides technology and outsourcing solutions to the insurance
and health services community.
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 $653.9 million in 1997, or 68% of the Company's
total revenues.
The Company issues life and annuity insurance products to selected niche
markets and acquires blocks of life insurance and annuity policies from other
insurers on an opportunistic basis. The life and annuity 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. 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 has acquired a real estate
organization 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.
Through a series of acquisitions, the Company entered the student loan
business in 1997 where its goal is to provide financial solutions for college
students and the educational institutions they attend. In order to accomplish
this goal, the Company offers an integrated package of student loans, student
loan servicing, and student insurance.
Also in 1997, the Company acquired a provider of motor club services to
motorists. The Company markets and provides over 450,000 members with benefits
such as road and towing assistance, trip routing, emergency travel assistance,
and accident related indemnity benefits.
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 Inc.") 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
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capabilities to issue insurance policies directly, the percentage of the
Company's total revenues in 1997 relating to the coinsurance business decreased
to 21% from 72% in 1986 (although in absolute terms such revenues continued to
increase over prior years).
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 Inc. 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 ("UGA") and certain assets of UGA Inc. for a
price equal to the net book value of the tangible assets acquired and assumed
certain agent commitments of $3.9 million. UGA Inc. is owned 100% by the
Company's President and Chairman of the Board ("Chairman"). The tangible assets
acquired consist primarily of agent debit balances, a building, and related
furniture and fixtures having a net book value of $13.1 million, which
approximates fair 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 Agency Division, Student 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, life and annuity
insurance policies in all states except New York. Mid-West is an insurance
company domiciled in Tennessee and is licensed to issue health, life and annuity
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
New Jersey, New York and Vermont. The claims paying ability rating of MEGA and
Mid-West were upgraded to AA- from A+ by Duff & Phelps Credit Rating Co. in
February 1998. 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
United Credit National Bank and Specialized Card Services, Inc., both
wholly-owned subsidiaries, and United Membership Marketing Group, LLC ("UMMG"),
in which the Company owns 88% of the outstanding equity.
The Company entered the student loan business in May 1997 through the
formation of Educational Finance Group, LLP ("EFG") in which it acquired a 63.6%
interest for $20.0 million and contributing its student marketing operations. In
November 1997, EFG acquired a campus- based student loan servicing business for
a purchase price of $22.5 million. In December 1997, the Company exchanged
922,956 shares of its stock for 100% of the stock of ELA Corp. ("ELA"), a
company which markets student loans.
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The motor club business is conducted through National Motor Club of
America, Inc. ("Motor Club") which is licensed to do business in 47 states.
Motor Club was acquired in August 1997 in a $40.0 million cash transaction.
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 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) 392-6700.
BUSINESS STRATEGY
The Company seeks to continue to expand its business profitably and to
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 Inc., with
over 3,800 agents, was wholly owned by Mr. Ronald L. Jensen, Chairman. Effective
January 1, 1997, the Company acquired the agency force and certain assets of UGA
Inc. and the agency force became a marketing division of the Company. CMA, with
approximately 1,200 agents, is also a marketing division of the Company. The
agents, as a condition of receiving advances on future commissions, customer
leads and participating in stock ownership plans, 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 its exclusive
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 14% of
the Common Stock as of December 31, 1997, 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 twelve
years. The plans are structured to encourage participation in a disciplined
manner. Agents are eligible to participate in the plans
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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 resources required to achieve profitability and growth.
Initially, the Company targeted the self- employed agency 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 insurance market, and has
subsequently increased those premiums from $17.0 million in 1987 to $94.1
million in 1997. The Company believes that it provides student 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 1997 for this product were approximately $15.6
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 1997, the credit
division had revenues of $50.2 million. In 1997, through several acquisitions,
mainly EFG and ELA, the Company became a leader in developing, funding,
administering, and marketing student loan programs.
The Company, through acquisition of Motor Club, provides a product with the
usual motor club benefits plus certain health-related financial security
benefits.
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 number 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 it 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 Agency Division was 92%
and the combined ratio has ranged from 91% to 93%.
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 can 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
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doctor visits. These plans also generally have lower deductibles and copayments
for services that are received from providers that are in the PPO network.
HEALTH INSURANCE
The Company directly markets health insurance policies primarily to four
markets. The Self-Employed Agency 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 Insurance
Division serves the student market, which includes college and university
students and students in kindergarten through grade 12. The Motor Club Division
serves individuals in non-metropolitan areas with a product that provides motor
club benefits and health-related financial security benefits. The Special Risk
Division specializes in health-related products such as Employer Stop Loss and
Provider Excess of Loss coverages.
Self-Employed Agency Division
Market. According to the Bureau of Labor Statistics, there were
approximately 10.5 million self-employed individuals at the end of 1997. There
are currently in force approximately 258,000 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:
- The Group Catastrophic Hospital Expense Plan provides a lifetime maximum
benefit ranging from $2,000,000 to $5,000,000 and a lifetime maximum
benefit for each injury or sickness ranging from $500,000 to $1,000,000.
Covered expenses are subject to a deductible and are reimbursed at a
benefit payment rate ranging from 50% to 100% as determined by the policy.
After a pre-selected dollar amount of covered expenses has been reached,
the remaining expenses are reimbursed at 100% for the remainder of the
period of confinement. The benefits for this plan tend to increase as
hospital care expenses increase and therefore the premiums for these
policies are subject to increase as overall hospital care expenses rise.
- The Group Basic Hospital-Medical Expense Plan has a $1,000,000 lifetime
maximum benefit and $500,000 lifetime maximum benefit for each injury or
sickness. Covered expenses are subject to a deductible. Covered hospital
room and board charges are reimbursed at 100% up to a pre-selected maximum.
Covered expenses for inpatient hospital miscellaneous charges, same-day
surgery facility, surgery, assistant surgeon, anesthesia, second surgical
opinion, doctor visits, and ambulance services are reimbursed at 80% to
100% up to a scheduled maximum. This type of health insurance policy is of
a "scheduled benefit" nature, and as such, provides benefits equal to the
lesser of the actual cost incurred for covered expenses or the maximum
benefit stated in the policy. These
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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.
- 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 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 Agency Division had premium revenues of $559.8 million,
$409.9 million, and $383.4 million, (59%, 56%, and 60% of total revenue), in
1997, 1996, and 1995, 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 the 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
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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.
Leads for the agents of UGA and CMA are generated by Core Marketing, Ltd.
through the efforts of a direct mail team and approximately 350 telephone
operators. From various sources of data, a pool of approximately 7.0 million
names has been developed. Individuals in this pool are contacted by telephone or
by mail to determine their interest in obtaining health insurance. The names of
persons expressing an interest are provided as leads to agents which the Company
believes results in a higher success rate than would be the case if the agents
made unsolicited calls on prospective customers. Core Marketing, Ltd. is a
company owned by the five adult children of the Chairman of the Company.
Coinsurance Arrangements. 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 Inc. 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. 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. 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% 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. As new health insurance policies are
issued by the Company (of which the Company retains 100%) and as health
insurance policies issued by AEGON (of which the Company coinsures a maximum of
only 60%) lapse, the Company's premiums increase as its share of premiums on the
policies sold by UGA increase. In 1997, health insurance policies sold by UGA
and issued by AEGON produced premiums of $337.5 million of which the Company's
share was 60%, or $202.5 million. As the premiums for insurance issued directly
by the Company increase, the Company may 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. During 1997,
UICI, the parent company, contributed $7.0 million to Mid-West.
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 insurance
center for approximately $10.0 million. The Company also offered employment to
substantially all of the 700 employees located at the center. During 1997, the
Company combined the North Dallas administrative unit with AEGON's insurance
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 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 Agency Division revenue.
Student Health Division
Market. The student market is comprised primarily of students attending
colleges and universities in the United States and Puerto Rico and, to a lesser
extent, those attending public and private schools in kindergarten through grade
12. Generally, the marketing strategy of the Company has been to focus on
college students whose circumstances are such that health insurance may not
otherwise be available through their parents. In particular, older
undergraduates, graduate and international students often have a need to obtain
insurance as "first-time buyers." According to industry sources, there are
approximately 2,100 four-year universities and colleges in the United States
which have a combined enrollment of approximately 8.7 million students. For the
1996-1997 school year, 370 of these institutions, with a combined enrollment of
approximately 1.8 million, authorized the Company to offer its health insurance
plans to their students. Approximately 211,000 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 Insurance Division had premium revenues of $94.1 million, $91.3
million, and $90.4 million (10%, 13%, and 14% of total revenue), in 1997, 1996,
and 1995, 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,
1997, there were 21 account executives.
The kindergarten through grade 12 business is marketed primarily in
Washington, Florida, Arizona, Louisiana, Oklahoma and Texas.
Special Risk Division
The Special Risk Division was expanded dramatically in 1997. Special Risk
specializes in health-related products which are generally subject to less
regulation than the Self Employed and Student markets. Entering 1997, UICI had a
small penetration in Special Risk markets through Employer Stop Loss and
Provider Excess of Loss coverages. The Division was expanded in 1997 with the
acquisition of Excess, Inc. ("Excess"), a managing general underwriter of these
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and other special health-related coverages. The Excess acquisition led to the
purchase of a block of special risk coverages with annualized premiums
approximating $50.0 million net of reinsurance. Net collected premiums on this
block were $35.0 million in 1997.
The key personnel that managed this block joined UICI's Special Risk
Division. By concentrating efforts on specialty health markets this Division can
grow rapidly by developing programs and products utilizing the specialized
knowledge and talents of the people who have joined UICI. Emphasis will be
placed on the Stop Loss, marine crew accident, transplant and international
travel accident business.
Motor Club Division
Motor Club markets primarily to individuals in non-metropolitan areas
through a one-on- one, face-to-face field force which has similarities to UGA
and CMA. The products offered encompass the usual Motor Club benefits plus
certain health-related financial security benefits. The Company has been the
underwriter for the health benefits since 1991 which gave us familiarity with
Motor Club and its key personnel, fueling our enthusiasm to acquire the Company.
The vast majority of its membership is generated in the Midwestern states,
Georgia and North Carolina. The Company plans to aggressively grow its business
in all 47 states in which the Motor Club is licensed. A specially designed
association-endorsed Motor Club package has recently been introduced for sale by
the UGA and CMA field forces.
LIFE INSURANCE AND ANNUITY
At December 31, 1997, the Life Insurance and Annuity Division had over $4.9
billion of life insurance in force and approximately 416,000 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 $49.4
million, $46.6 million, and $45.3 million (5%, 6%, and 7% of total revenue), in
1997, 1996, and 1995, 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.
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Marketing and Sales.
Life insurance products are marketed and sold through the Company's network
of 719 dedicated agents. This marketing organization was acquired in 1993 and
has since been expanded to cover 39 states from only five at the time of the
acquisition. Annualized premiums for policies issued in 1997 increased to $15.6
million from $2.0 million in 1993.
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 last
block of life insurance and annuities acquired by the Company was in 1994.
Although the Company believes that it can continue to exploit acquisition
opportunities and continues to analyze potential transactions, the Company
believes that the current climate for acquisitions of life insurance and
annuities has become very competitive, making it more difficult to successfully
complete acquisitions which meet the Company's financial goals.
Since 1991 the Company has added approximately $267.0 million in life
reserves and $214.0 million in annuity reserves, on a statutory basis as of the
respective acquisition dates, through twelve acquisitions of insurers and blocks
of insurance.
In 1991, the Company entered into an agreement whereby it services a block
of policies with life insurance and annuity reserves of $125.0 million, as of
the date of the service agreement, for an unrelated company. At December 31,
1997, total life insurance and annuity reserves for this block were $85.3
million. The Company receives a fee for servicing the policies and in 1997, also
began to participate in 50% of the profits or losses on this business. The
Company's Consolidated Financial Statements reflect the servicing fee currently
earned and $2.2 million of profit participation.
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,
1997, total life insurance and annuity reserves for this block were $27.8
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.
11
<PAGE>
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. 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 card programs offered are administered by UMMG. The programs are
marketed through a variety of mediums including a sales force of 880 independent
contractors located in 35 states. UMMG and its sales representatives receive
commissions from AFCA for enrolling members in the association.
The programs are priced commensurate with the risk of the "sub-prime"
market yet competitive to rates charged by many other card issuers. The credit
limits of the accounts in the programs range from $300-$400 and can be increased
to as high as $2,000, depending on the program and upon proper account
performance by the cardholder. In all but one program, the credit card is not
secured. As of December 31, 1997 the total number of accounts from all programs
totaled 267,334 with managed receivables of $107.0 million.
The Company established a credit card service center in South Dakota in
1995. This service center, Specialized Card Services, Inc. ("SCS"), performs all
related account management activities, servicing and collections for all of the
credit card programs and currently employs the data processing services of
Equifax Card Services, Inc. of St. Petersburg, Florida. In 1998, all services
performed by Equifax Card Services, Inc. will be brought "in-house" which will
reduce operational costs associated with card servicing and maintenance.
In February 1997, the Company successfully chartered a special-purpose
national bank for the purpose of issuing the credit card accounts. United Credit
National Bank ("UCNB") in Sioux Falls began issuing its first accounts in May of
1997 and had issued 57,857 accounts with $15.8 million in receivables as of
December 31, 1997. Historically, the credit card was issued by another bank in
South Dakota which receives a monthly fee for each card issued and the Company
funded the receivables from the Company's operating capital. By chartering UCNB,
the company has reduced the costs associated with account issuance and is
funding these receivables from deposits at a more favorable cost of funds.
The Company has successfully completed two asset-backed securitizations of
credit card receivables. The first offering was for $29.0 million in September
of 1996 and the second was for $30.0 million in September of 1997. The requisite
AAA rating by Standard and Poors and Moody's was obtained through a combination
of collateralization and insurance, both of which required extensive due
diligence reviews of the Credit Services Division. A master-trust has been
established to provide the infrastructure for future securitizations. These
securitizations have enhanced the Company's cash flows and ability to tap into
other market sources.
The Credit Services Division had revenues of $50.3 million, $39.7 million
and $28.3 million in 1997, 1996, and 1995, respectively.
12
<PAGE>
STUDENT LOANS
EFG was established in May 1997. EFG's goal is to provide financial
solutions for college students and the educational institutions they attend. In
seeking to do this, EFG offers an integrated package of student loans, student
loan servicing and student insurance.
From its inception, EFG's approach to the student loan market provided an
opportunity in a huge market. The banking industry dominates student loan
originations. To banks, student loans are frequently looked upon as a
supplemental service. The student loan business is EFG's only business. Its
approach has been to narrowly specialize in segments of the student loan market.
It aggressively approaches business as a true marketer through a strong sales
effort while offering specialized products and services to students as opposed
to standing ready to take the student's "order." In addition to the various
federally guaranteed loan programs, EFG offers Alternative student loans,
guaranteed by private insurers, which have aggregated 12% of EFG's loan
originations. At the time of establishing EFG, it was believed the combination
of its knowledge of the student loan business with UICI's Student Insurance
Marketing Division's knowledge of the college and university marketplace would
further enhance EFG's marketing presence.
The acquisition of EFG Technologies put EFG in the college based loan
servicing business. EFG Technologies' 125 employees currently service 700
colleges and universities with 1.2 million active accounts and loan balances
aggregating $2.5 billion. It presents EFG an opportunity for expanded growth.
EFG's Student Marketing Division can leverage an established customer
relationship and offer a complete package of loan origination, loan servicing
and student health insurance. A longer term potential of this acquisition is
that it will give EFG the ability to directly service its student loan customers
on an ongoing basis. This is highly desirable as EFG's future plans call for
offering financial services to its student loan customers after graduation.
The acquisition of ELA materially expanded and diversified EFG student loan
generation capabilities. ELA specializes in offering parents of college bound
students federally guaranteed Parent Loans for Undergraduate Students ("PLUS")
loans. PLUS loans are credit underwritten and made directly to the parent,
rather than the student. Loans to parents require repayment of principal and
interest to begin within sixty days of the loan whereas direct student loan
payments are deferred until six months after graduation. PLUS loans greatly
enhance the economics of the securitized loan packages EFG is contemplating. In
1997, this 180-person organization generated $170.0 million of PLUS loans.
EFG has enabled UICI to enter the highly fragmented $25.0 billion student
loan market with a significant presence. The initial merger established a highly
successful company. Subsequent acquisitions have materially enhanced the
company's ability to expand its market share. EFG is now poised to be a dominant
player in its traditional graduate student market and through ELA the parent
borrower niche. The addition of EFG Technologies institutional customer
relationship provides EFG's marketing representatives with an entre to an
expanded market for federally insured undergraduate loans. The combination of
all these factors places EFG in a position to be a student loan industry leader.
13
<PAGE>
All of the loans originated by EFG are currently held by other financial
institutions. At December 31, 1997, EFG had rights to approximately $950.0
million of student loans of which it had commitments to sell approximately
$300.0 million. It is anticipated that the remaining $650.0 million will be
acquired by EFG in 1998 using a credit facility to be established. Ultimately,
it is planned that the loans will be financed by issuing notes secured by and
payable solely from payments received on the student loans.
TECHNOLOGY AND OUTSOURCING DIVISION
The Company believes the delivery of health care 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
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.
In 1996, this Division included 17 companies. Of those companies, eight
were sold or discontinued, three were transferred to Special Risk Division, and
two are now in Insurdata.
The Technology and Outsourcing Division had revenues of $67.2 million and
$42.8 million in 1997 and 1996, 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 reduction and eventual 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 each own approximately a one-third interest, has developed a
proprietary 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.
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 system solutions to physician and hospital groups for
both claims processing and total business office outsourcing.
14
<PAGE>
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. In 1997, the Self Employed Agency Division and the Student Health
Division outsourced its data processing operations to Insurdata.
IPN Network, LLC ("IPN"), in which the Company owns a majority interest,
provides comprehensive outsourcing services for hospital business office
management, accounts receivable management for hospitals and health claims
clearinghouse functions.
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.
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 markets. 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 greater claims paying ability ratings than the Company.
In addition to claims paying ability 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 student loan industry is highly competitive. The Company competes with
over 6,000 other lenders. Despite the large number of lenders, the top 100
lenders account for approximately 80% of new loan volume. The Company believes
that the volume of new loans originated in 1997 by the companies it acquired,
would make it one of the top lenders in 1997. The Company competes by designing
and offering an integrated package of government guaranteed and privately
guaranteed loan products. The Federal Direct Lending Program ("FDLP"), which
also provides federally guaranteed loans to students has reduced the amount of
loans made by the private sector.
15
<PAGE>
However, the FDLP market share of approximately 33% in 1997 from 1996 did not
change significantly.
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 may affect the manner in
which the Company's insurance subsidiaries conduct their businesses.
Many states have also enacted insurance holding company laws which require
registration and periodic reporting by insurance companies controlled by other
corporations. Such laws vary from state to state but typically require periodic
disclosure concerning the corporation which controls the controlled insurer and
prior notice to, or approval by, the applicable regulator of intercorporate
transfers of assets and other transactions (including payments of dividends in
excess of specified amounts by the controlled insurer) within the holding
company system. Such laws often also require the prior approval for the
acquisition of a significant ownership interest (e.g., 10% or more) in the
insurance holding company. The Company's insurance subsidiaries are subject to
such laws and the Company believes they are in compliance in all material
respects with all applicable insurance holding company laws and regulations.
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 1997 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,
16
<PAGE>
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 Office of the Comptroller of the
Currency ("O.C.C."). The Company's credit card product was reviewed in 1996 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 UCNB.
A significant portion of the student loans originated by the Company are
made under the Federal Family Education Loan Program ("FFELP") which is subject
to periodic legislative reauthorization and interim revision by legislation and
regulation. The Higher Education Act, which authorizes most federal aid
programs, went through its regular reauthorization process in 1992 and the next
reauthorization is scheduled for completion in 1998. The loans made under the
FFELP include Federal Stafford loans for students and Parent Loans for
Undergraduate Students ("PLUS") loans to parents.
The current federal law governing federally guaranteed student loan
programs will change the base interest rate for loans disbursed after July 1,
1998 from the 91-day T-bill (for Stafford loans) and the 52-week T-bill (for
PLUS loans) to the U.S. Treasury security with comparable maturity, which is
believed to be the 10-year Treasury Note. The current law will also change the
spreads over the base rate for the Stafford loans from 2.5% and 3.1% to 1% and
the spreads on the PLUS loans from 3.1% to 2%.
The House of Representatives Committee on Education and Workforce has
approved amendments to the current law that would reduce margins but would not
change the base interest rate. However, there can be no assurance the current
law will be changed.
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.
17
<PAGE>
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 3,400 employees at March 6, 1998. 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. The Company has also been notified by the U.S.
Department of Labor that it is investigating the Company's compliance with
certain rules and regulations related to the Employee Retirement Income Security
Act of 1974 ("ERISA"). Based in part upon the opinion of counsel as to the
ultimate disposition of such lawsuits and claims, management believes that the
liability, if any, resulting from the disposition of such proceedings will not
be material to the Company's financial condition or results of operations.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
18
<PAGE>
Executive Officers of the Company
- ---------------------------------
The Chairman of the Company is elected, and all other executive officers
listed below are appointed by the Board of Directors of the Company at its
Annual Meeting each year or by the Executive Committee of the Board of Directors
to hold office until the next Annual Meeting or until their successors are
elected or appointed. None of these officers have family relationships with any
other executive officer or director.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH COMPANY
- ---- --- ---------------------
<S> <C> <C>
Ronald L. Jensen ........ 67 President, Chief Executive Officer and Chairman
Richard J. Estell ....... 52 Executive Vice President and Chief Operating
Officer - Insurance Division
Warren B. Idsal ......... 52 Vice President and Chief Financial Officer
Charles T. Prater ....... 46 Vice President and Chief Operating Officer
- Life Insurance and Annuity Division
Robert B. Vlach ......... 57 Vice President, Secretary and General Counsel
Vernon R. Woelke ........ 49 Vice President and Treasurer
</TABLE>
Mr. Jensen has served as Chairman since December 1983. He served as
President for the past five years except for the period from January 1995
through September 1997.
Mr. Estell has served as Executive Vice President, Director and Chief
Operating Officer of the Insurance Division since January 1989.
Mr. Idsal joined the Company and has served in his current position since
March 1, 1998. Prior to joining UICI, Mr. Idsal served as Managing Director of
Principal Financial Securities, Inc. since 1991.
Mr. Prater has served as a Vice President of the Company since 1993 and as
a Director since March 1996. Mr. Prater has been Chief Operating Officer of the
Life and Annuity Division since 1988.
Mr. Vlach has served in his current position since May 1990.
Mr. Woelke has served in his current position since December 1985 and as a
Director since 1991.
19
<PAGE>
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.
<TABLE>
<CAPTION>
Fiscal Year Ending December 31, 1996 High Low
- ------------------------------------ ---- ---
<S> <C> <C>
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
Fiscal Year Ending December 31, 1997
- ------------------------------------
1st Quarter .......................... $ 31 3/8 $ 22 7/8
2nd Quarter .......................... 29 7/8 24
3rd Quarter .......................... 31 5/8 27 5/8
4th Quarter .......................... 35 7/8 29 9/16
</TABLE>
As of February 28, 1998, there were approximately 10,100 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 December 1997, the Company acquired through a stock exchange 100% of ELA
Corp. ("ELA"). Pursuant to the stock exchange agreement, the Company issued an
aggregate of 922,956 shares of Common Stock to the stockholders of ELA.
In April 1997, the Company acquired through a stock exchange 100% of
Excess, Inc. ("Excess"). Pursuant to the stock exchange agreement, the Company
issued an aggregate of 145,133 shares of common stock to the stockholders of
Excess.
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 issued options to purchase
20
<PAGE>
an aggregate of 91,150 shares of Common Stock to persons who held options to
acquire shares of ARC stock.
Exemption from registration for these issuances was claimed pursuant to
Section 4(2) of the Securities Act of 1933, as amended, as private placements
pursuant to privately negotiated transactions.
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, 1997 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,
---------------------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts and operating ratios)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues ............................... $ 955,829 $ 730,593 $ 641,074 $ 522,946 $ 451,789
Benefits and expenses .................. 819,983 619,211 554,413 466,931 398,770
---------- ---------- ---------- ---------- ----------
Income before federal income taxes
and minority interests ............... 135,846 111,382 86,661 56,015 53,019
Federal income taxes ................... 43,396 36,190 29,040 18,399 17,503
Minority interests ..................... 5,946 5,945 4,293 1,438 2,671
---------- ---------- ---------- ---------- ----------
Net Income ............................. $ 86,504 $ 69,247 $ 53,328 $ 36,178 $ 32,845
========== ========== ========== ========== ==========
Fully diluted net income per share ..... $ 1.91 $ 1.66 $ 1.41 $ 0.96 $ 0.88
Operating Ratios:
Health Ratios:
Loss ratio(1) ....................... 63% 58% 58% 57% 55%
Expense ratio(2) .................... 30% 33% 33% 36% 39%
---------- ---------- ---------- ---------- ----------
Combined health ratio ............... 93% 91% 91% 93% 94%
========== ========== ========== ========== ==========
Balance Sheet Data:
Total investments and cash ............. $1,149,698 $1,098,313 $ 937,185 $ 842,867 $ 727,248
Total assets ........................... 1,579,383 1,320,988 1,130,859 1,031,263 814,793
Total policy liabilities ............... 871,292 807,324 787,905 778,676 616,615
Total debt ............................. 50,202 30,943 50,381 56,155 19,500
Stockholders' equity ................... 536,290 432,918 248,819 170,923 154,768
Stockholders' equity per share(3) ...... $ 11.29 $ 9.55 $ 6.33 $ 5.04 $ 4.09
</TABLE>
(1) The health loss ratio represents benefits, claims and settlement expenses
related to health insurance policies stated as a percentage of health
premiums.
(2) 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.
(3) Excludes the net unrealized investment gains or losses which is reported as
a separate component of stockholders' equity.
21
<PAGE>
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. The Company has certain risks associated
with the Student Loan business. The changes in the Higher Education Act or other
relevant federal or state laws, rules and regulations and the programs
implemented thereunder may adversely impact the education credit market. In
addition, existing legislation and future measures to reduce the federal budget
deficit may adversely affect the amount and nature of federal financial
assistance available with respect to loans made through the U.S. Department of
Education. Finally the level of competition currently in existence in the
secondary market for loans made under the Federal Loan Programs could be
reduced, resulting in fewer potential buyers of the Federal Loans and lower
prices available in the secondary market for those loans. Investors are also
directed to other risks and uncertainties discussed in documents filed by the
Company with the Securities and Exchange Commission.
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 Agency Division, the Student Health
Division; the Special Risk Division and the Motor Club Division; (ii) Life
Insurance and Annuity, (iii) Credit Services, and (iv) Corporate and Other,
which includes the businesses of the Technology and Outsourcing Division, Real
Estate Division, the Student Loan Division, investment income not allocated to
the other segments, interest expense, general expenses relating to corporate
operations, goodwill amortization 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.
22
<PAGE>
CONSOLIDATED RESULTS OF OPERATIONS FOR 1997 COMPARED TO 1996
Revenues. Revenues increased to $955.8 million in 1997 from $730.6 million
in 1996, an increase of $225.2 million, or 31%. The increase was a result of
increases in premiums, net investment income, and fees and other income.
Health premiums. Health premiums increased to $653.9 million in 1997 from
$501.2 million in 1996, an increase of $152.7 million, or 30%. The increase in
health premiums for the year was the result of increased premiums in the self
employed and special risk markets. The increase in the self employed market is
due to increased sales of new health policies by CMA and due to discontinuing
the coinsurance arrangement in 1996 for new business written by UGA. The
increase in special risk premiums is due to the acquisition of a managing
general underwriter and the assumption of a block of business in 1997. In 1997,
the coinsurance percentage on both in force and new health insurance policies
issued by AEGON increased to 60% from 57.5% in 1996.
Life premiums and other considerations. Life premiums and other
considerations increased to $49.4 million in 1997 from $46.6 million in 1996, an
increase of $2.8 million, or 6%. The increase was a result of the sale of new
life policies and the recognition of the Company's share of the profits on a
closed block of business. 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 $84.2 million in
1997 from $71.3 million in 1996, an increase of $12.9 million, or 18%. The
increase was due to an increase in invested assets and yield on invested assets.
Invested assets increased to $1,133.8 million at December 31, 1997 from $1,082.9
million at December 31, 1996.
Fees and other income. Fees and other income increased to $164.3 million in
1997 from $110.8 million in 1996, an increase of $53.5 million, or 48%. The
increase related primarily to the increase in revenue from the Credit Services
segment, revenue from the Technology and Outsourcing companies acquired in 1995
and administrative fees from the administrative operation acquired from AEGON on
April 1, 1996.
Gains on sale of investments. The Company recognized gains on sale of
investments of $4.0 million in 1997 compared to $652,000 in 1996. 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 primarily to
decreasing long-term interest rates in 1997, 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 $14.3 million at December 31, 1997 compared to $2.2
million at December 31, 1996.
Benefits, claims, and settlement expenses. Benefits, claims, and settlement
expenses increased to $449.7 million in 1997 from $335.9 million in 1996, an
increase of $113.8 million, or 34%. The increase was primarily due to the growth
in premium volume and a higher loss ratio in the Health Insurance segment.
Underwriting, acquisition and other expenses. Underwriting, acquisition and
other expenses increased to $367.5 million in 1997 from $280.8 million in 1996,
an increase of $86.7 million, or 31%. The increase was primarily due to the
growth in premium volume, costs
23
<PAGE>
associated with the operations of the Credit Services segment, businesses
acquired in the third quarter of 1996 and first quarter of 1997 in the
Technology and Outsourcing Division, acquisitions in the Health Insurance
segment and the acquisition of EFG in the second quarter of 1997.
Income before federal income taxes and minority interests ("operating
income"). Operating income increased to $135.8 million in 1997 from $111.4
million in 1996, an increase of $24.4 million, or 22 %. Operating income (loss)
for each of the Company's segments and divisions was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1997 1996
--------- ---------
(Dollars in thousands)
<S> <C> <C>
Health Insurance ................................... $ 73,900 $ 73,889
Life Insurance and Annuity ......................... 17,492 15,112
Credit Services .................................... 20,542 15,189
Corporate and Other:
Technology and Outsourcing ...................... (2,694) (4,791)
Real Estate ..................................... 4,113 1,013
Other ........................................... 22,493 10,970
--------- ---------
Total Corporate and Other .................... 23,912 7,192
--------- ---------
$ 135,846 $ 111,382
========= =========
</TABLE>
Health Insurance. Operating income for the Health Insurance segment was
$73.9 million in 1997 and 1996. The level profits for the year reflect the
continued decrease in margins which have been offset by increased premium
volumes in the self employed and special risk markets. The combined ratio for
1997 was 93% compared to 91% in 1996. The combined ratio has been in the range
of 91% to 95% during the past six years.
Life Insurance and Annuity. Operating income for the Life Insurance and
Annuity segment increased to $17.5 million in 1997 from $15.1 million in 1996,
an increase of $2.4 million, or 16.0%. The increase related primarily to a
decrease in agency expenses, the continued growth from the sale of new life
policies, and the recognition of the Company's share of the profits on a closed
block of business.
Credit Services. Operating income for the Credit Services business
increased to $20.5 million in 1997 from $15.2 million in 1996, an increase of
$5.3 million or 35%. The increase is primarily due to the continued growth in
new sales which increases revenue and operating income and better performance by
the credit card portfolio.
Corporate and Other. Operating income for Corporate and Other was $23.9
million in 1997 compared to $7.2 million in 1996. Losses incurred on the
Technology and Outsourcing Division decreased to $2.7 million in 1997 from $4.8
million in 1996. Operating income for the Real Estate Division increased to $4.1
million in 1997 compared to $1.0 million in 1996. The increase relates primarily
to reporting a full year's operations for this division compared to 1996 when
this division was formed in the fourth quarter with the acquisition of ARC.
Operating income from other corporate activities increased to $22.5 million in
1997 from $11.0 million in 1996, an increase of $11.5 million. The increase was
primarily due to the addition of the Student
24
<PAGE>
Loan Division, an increase in investment income not allocated to the other
segments and realized gains on the sales of investments.
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 1995, 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 Technology and Outsourcing
Division in 1995 and administrative fees from the administrative operation
acquired from AEGON on April 1, 1996.
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 Technology and
Outsourcing Division, whose expenses are primarily classified as underwriting,
acquisition, and other expenses.
25
<PAGE>
Underwriting, acquisition and other expenses. Underwriting, acquisition
and other 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 Technology and Outsourcing 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 a 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 ........................... $ 73,889 $ 64,456
Life Insurance and Annuity ................. 15,112 14,770
Credit Services ............................ 15,189 1,424
Corporate and Other:
Institutional Technology and
Outsourcing Division .................... (4,791) (4,162)
Real Estate .............................. 1,013 --
Other .................................... 10,970 10,173
--------- ---------
Total Corporate and Other ............. 7,192 6,011
--------- ---------
$ 111,382 $ 86,661
========= =========
</TABLE>
Health Insurance. Operating income for the Health Insurance segment
increased to $73.9 million in 1996 from $64.5 million in 1995, an increase of
$9.4 million, or 15%. 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, Inc.. 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 increased to
$15.1 million in 1996 from $14.8 million in 1995, an increase of $300,000, or
2%. The increase related primarily to a decrease in policyholder benefits which
was partially offset by higher commission and agency expenses incurred.
Credit Services. Operating income for the Credit segment business increased
to $15.2 million in 1996 from $1.4 million in 1995, an increase of $13.8
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.
26
<PAGE>
Corporate and Other. Operating income for Corporate and Other was $7.2
million in 1996 compared to $6.0 million in 1995. Technology and Outsourcing
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 November
1996, the Company acquired ARC. The operations of ARC 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 $11.0 million in 1996 from $10.2 million in 1995. 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.
QUARTERLY RESULTS. The following table sets forth consolidated results of
operations for each of the Company's fiscal quarters in 1997 and 1996. This
information is unaudited and has been prepared on the same basis as the audited
Consolidated Financial Statements of the Company included herein and, in
management's opinion, reflects all adjustments, consisting only of normal
recurring adjustments, necessary for a fair presentation of the information for
the periods presented. The operating results for any quarter are not necessarily
indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
--------------------------------------------------------------------------------------
Dec. 31, Sept. 30 June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1997 1997 1997 1997 1996 1996 1996 1996
-------- -------- -------- -------- -------- -------- -------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues ............ $300,529 $236,311 $218,736 $200,253 $196,082 $176,710 $186,185 $171,616
Income before federal
income taxes and
minority interests ........ 36,058 35,370 32,819 31,599 28,975 28,905 28,444 25,058
Net income ................ $ 22,654 $ 22,614 $ 20,944 $ 20,292 $ 18,887 $ 18,121 $ 17,017 $ 15,222
Diluted net
income per share .......... $ 0.50 $ 0.50 $ 0.46 $ 0.45 $ 0.43 $ 0.42 $ 0.41 $ 0.40
</TABLE>
HEALTH CARE REFORM
Many proposals have been introduced in Congress and various state
legislatures to reform the present health care system. Some of these proposals
are specifically directed at the small group health care market, which could
affect the Company's health insurance 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.
27
<PAGE>
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.
INCOME TAXES
The Company's effective tax rate was 31.9% for 1997 compared to 32.5% for
1996 and 33.5% in 1995. The 1997, 1996, and 1995 effective rate varied from the
federal tax rate of 35% primarily due to income allocated to partners for tax
purposes, the small life insurance company deduction allowed for certain
insurance subsidiaries of the Company and the change in the valuation allowance
related to deferred tax assets.
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 $153.2 million in 1997, $125.5 million in 1996, and $86.8 million
in 1995. 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 $1,133.8 million at December 31,
1997 from $1,082.9 million at December 31, 1996, an increase of $50.9 million.
The primary sources for the asset growth were the cash provided by current year
operations and the increase in market values of the fixed maturity securities
held as "available for sale." The sources were partially offset by the
acquisition of several new companies and remaining interest of two companies,
and the withdrawals, net of deposits, from investment products. The increase in
market values was the direct result of decreases 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.
Interest on the 8.75% Senior Notes is paid semi-annually. The notes require
principal repayments starting June 1, 1998 and on each June 1 thereafter in the
amount of $4.0 million each until repaid.
28
<PAGE>
The Company had no outstanding balance on its revolving credit note with
AEGON at December 31, 1997. The note has a maximum line of credit of $12.0
million through August 1, 2002 and bears interest at prime plus 0.875%.
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 a public offering commenced on April 25,
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. During 1996, the Company used $10.3 million of the proceeds to repay
the AEGON revolving credit note. The majority of the remaining proceeds were
used for acquisitions during 1997.
During 1997, the Company acquired four companies and certain assets for
$88.2 million in cash. Total fair value of assets acquired were $112.1 million
and total fair value of liabilities assumed were $23.8 million.
Effective January 1, 1997, the Company acquired the agency force and
certain assets of UGA, Inc. for a price equal to the net book value of the
tangible assets acquired and assumed certain agent commitments of $3.9 million.
The tangible assets acquired consist primarily of agent debit balances, a
building, and related furniture and fixtures having a net book value of $13.1
million, which approximates fair market value of the tangible assets.
During 1997, the Company purchased $6.3 million of credit card receivables
from a bank owned by the Company's Chairman.
During October 1995, the Company acquired the majority interest in
Insurdata and UAI, both companies related to the Technology and Outsourcing
Division. The acquisitions were funded with cash and the issuance of promissory
notes to the former stockholders in the amount of $12.0 million, which were
repaid in January 1996. 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 securitized $30.0 million and $31.6 million of credit card
loans in September 1997 and 1996, respectively. The securitization involved the
sale of $30.0 million and $29.0 million in 1997 and 1996, respectively, of asset
backed securities in which the Company purchased participating interests
totaling $3.0 million and $2.9 million in 1997 and 1996, respectively.
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, the Company entered into three separate stock purchase
agreements to sell its three dental benefit companies. The Company completed one
sale in October 1996 and
29
<PAGE>
the other two in 1997, for a gain of $2.0 million and $4.7 million,
respectively. The operations of the dental benefit companies were not material
to the operations of the Company.
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, 1997 was $6.8 million.
At December 31, 1997, the Company had a $7.5 million letter of credit
related to the credit card loans.
The Company has commitments to fund the unused line of credit on credit
card loans. At December 31, 1997, the outstanding commitment was $21.1 million.
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 G to the
Audited Consolidated Financial Statements."
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.
30
<PAGE>
Shown below are the Company's investments by category:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
% 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: 1997--$811,757; 1996--$761,168 ....... $ 831,460 73.3% $ 762,927 70.5%
Equity securities, at fair value
(cost: 1997--$12,302; 1996--$13,553 ......... 14,555 1.3 15,106 1.4
Guaranteed student loans ........................ 11,254 1.0 18,042 1.7
Mortgage and collateral loans ................... 27,023 2.4 15,282 1.4
Policy loans .................................... 22,173 2.0 22,689 2.1
Credit card loans ............................... 54,068 4.8 22,489 2.1
Real estate investments ......................... 32,193 2.8 30,822 2.8
Short-term investments .......................... 141,040 12.4 195,536 18.0
---------- ----- ---------- -----
Total investments ............................. $1,133,766 100.0% $1,082,893 100.0%
========== ===== ========== =====
</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 73.3% of
the Company's total investments at December 31, 1997. Fixed maturity securities
consisted of the following:
December 31, 1997
-----------------
% of Total
Carrying Carrying
Value Value
-------- --------
(Dollars in thousands)
U.S. Treasury and U.S. Government agency obligations ..... $ 52,000 6.3%
Corporate bonds .......................................... 471,736 56.7
Mortgage-backed securities issued by U.S. ................
Government agencies and authorities .................... 47,869 5.8
Other mortgage and asset backed securities ............... 259,855 31.2
-------- -----
$831,460 100.0%
======== =====
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, 21% 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.
31
<PAGE>
As of December 31, 1997, $796.0 million or 95.7% of the fixed maturity
securities portfolio was rated BBB or better (investment grade) and only $35.4
million or 4.3% 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, 1997
-----------------
% of Total
Carrying Carrying
-------- ----------
Rating (Dollars in thousands)
<S> <C> <C>
U.S. Governments and AAA .................... $285,657 34.3%
AA .......................................... 87,738 10.5
A ........................................... 220,838 26.6
BBB ......................................... 201,797 24.3
Less than BBB ............................... 35,430 4.3
-------- -----
$831,460 100.0%
======== =====
</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.
IMPACT OF YEAR 2000
Some of the Company's older computer programs were written using two digits
rather than four to define the applicable year. As a result, those computer
programs have time-sensitive software that recognize a date using "00" as the
year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send premium notices, or
engage in similar normal business activities.
The Company has completed an assessment and will have to modify or replace
portions of its software so that its computer systems will function properly
with respect to dates in the year 2000 and thereafter. The total Year 2000
project cost is estimated at approximately $3.8 million.
32
<PAGE>
To date, the Company has incurred and expensed approximately $1.0 million
primarily for assessment of the Year 2000 issue and the development of a
modification plan.
The project is estimated to be completed not later than December 31, 1998,
which is prior to any anticipated impact on its operating systems. The Company
believes that with modifications to existing software and conversions to new
software, the Year 2000 Issue will not pose significant operational problems for
its computer systems. However, if such modifications and conversions are not
made, or are not completed timely, the Year 2000 Issue could have a material
impact on the operations of the Company.
The costs of the project and the date on which the Company believes it will
complete the Year 2000 modifications are based on management's best estimates,
which were derived utilizing numerous assumptions of future events, including
the continued availability of certain resources and other factors. However,
there can be no guarantee that these estimates will be achieved and actual
results could differ materially from those anticipated. Specific factors that
might cause such material differences include, but are not limited to, the
availability and cost of personnel trained in this area, the ability to locate
and correct all relevant computer codes, and similar uncertainties.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted. This statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company is required to adopt FAS
No. 130 effective January 1, 1998.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The statement is effective
for fiscal years beginning after December 15, 1997 with earlier application
permitted. This statement significantly changes the way public companies report
segment information in annual financial statements and also requires those
companies to report selected segment information in interim financial reports to
shareholders. The Company is required to adopt FAS No. 131 effective January 1,
1998.
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.
33
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the Company's Proxy Statement to be filed in connection with the 1998
Annual Meeting of Shareholders, of which the section entitled "Election of
Directors" is incorporated herein by reference.
For information on executive officers of the Company, reference is made to
the item entitled "Executive Officers of the Company" in Part I of this report.
ITEM 11. EXECUTIVE COMPENSATION
See the Company's Proxy Statement to be filed in connection with the 1998
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 1998
Annual Meeting of Stockholders, of which the subsection entitled "Nominees" and
the subsection entitled "Beneficial Ownership of Common Stock" are incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
See the Company's Proxy Statement to be filed in connection with the 1998
Annual Meeting of Stockholders, of which the subsection entitled "Certain
Relationships and Related Transactions" is incorporated herein by reference.
34
<PAGE>
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, 1997 and 1996 ................ F-3
Consolidated Statements of Income--Years ended
December 31, 1997, 1996, and 1995 .................................. F-4
Consolidated Statements of Stockholders' Equity--Years
ended December 31, 1997, 1996, and 1995 ............................ F-5
Consolidated Statements of Cash Flows--Years ended
December 31, 1997, 1996, and 1995 .................................. F-6
Notes to Consolidated Financial Statements ............................. F-7
(a) 2. Financial Statement Schedules
Schedule II -- Condensed Financial Information of Registrant December 31,
1997, 1996, and 1995:
UICI (Parent Company) .......................... F-29
Schedule III -- Supplementary Insurance Information .................... F-32
Schedule IV -- Reinsurance ............................................. F-33
Schedule V -- Valuation and Qualifying Accounts ........................ F-34
</TABLE>
All other schedules for which provision is made in the applicable
accounting regulations of the Securities and Exchange Commission are not
required under the related instructions or are non- applicable and therefore
have been omitted.
(a) 3. Exhibits
The response to this portion of Item 14 is submitted as a separate section
of this report beginning on page 37.
(b) Reports on Form 8-K
None.
35
<PAGE>
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 26, 1998 By /s/ Ronald L. Jensen
---------------- ---------------------------
Ronald L. Jensen, 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 26, 1998
- --------------------------------------- ----------------
Ronald L. Jensen, Chairman of the Board,
President and Director
/s/ Warren B. Idsal Date March 26, 1998
- --------------------------------------- ----------------
Warren B. Idsal, Vice President
/s/ Vernon R. Woelke Date March 26, 1998
- --------------------------------------- ----------------
Vernon R. Woelke, Vice President, Treasurer,
Principal Financial and Accounting
Officer, and Director
/s/ Richard J. Estell Date March 26, 1998
- --------------------------------------- ----------------
Richard J. Estell, Director and
Executive Vice President
/s/ J. Michael Jaynes Date March 26, 1998
- --------------------------------------- ----------------
J. Michael Jaynes, Director
/s/ Richard T. Mockler Date March 26, 1998
- --------------------------------------- ----------------
Richard T. Mockler, Director
</TABLE>
36
<PAGE>
<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 of UICI.
10.1(B) Reinsurance Agreement between AEGON USA Companies and UICI
Companies Effective January 1, 1995, as amended through
November 21, 1995.
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.
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.
</TABLE>
37
<PAGE>
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <C>
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>
38
<PAGE>
<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>
39
<PAGE>
<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
Report on Form 8-K dated March 29, 1993, (File No. 0-14320),
and incorporated by reference herein.
</TABLE>
40
<PAGE>
<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
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
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
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
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 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 Report on Form 8-K dated April 1, 1996 (File No.
0-14320) and incorporated by reference herein.
41
<PAGE>
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.
10.31 Stock exchange agreement dated October 1996 by and between
Amli Realty Co. and UICI, as amended by that first amendment
stock exchange agreement dated November 4, 1996 filed as
Exhibit 10.31 to the Registration Statement on Form S-3 File
No. 333-23899 filed with the Securities and Exchange
Commission on April 25, 1997 and incorporated by reference
herein.
10.32 Agreement dated December 6, 1997 by and between UICI, UICI
Acquisition Corp., ELA Corp., and Marcus A. Katz, Cary S.
Katz, Ryan D. Katz and RK Trust #2 filed as Exhibit 10.32 to
the Registration Statement on Form S-3 File No. 333-42937
filed with the Securities and Exchange Commission on December
22, 1997 and incorporated by reference herein.
21 Subsidiaries of UICI
23 Consent of Independent Accountants
27 Financial Data Schedule
</TABLE>
42
<PAGE>
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, 1997
UICI
AND
SUBSIDIARIES
DALLAS, TEXAS
F-1
<PAGE>
Report of Independent Auditors
Board of Directors
UICI
We have audited the accompanying consolidated balance sheets of UICI and
subsidiaries (the "Company') as of December 31, 1997 and 1996, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1997. 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, 1997 and 1996, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, 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 6, 1998
F-2
<PAGE>
UICI AND SUBSIDIARIES
Consolidated Balance Sheets
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31
ASSETS 1997 . 1996
---------- ----------
<S> <C> <C>
Investments--Note C
Securities available for sale--
Fixed maturities, at fair value
(cost: 1997--$811,757; 1996--$761,168) ................ $ 831,460 $ 762,927
Equity securities, at fair value
(cost: 1997--$12,302; 1996--$13,553) .................. 14,555 15,106
Student loans ............................................ 11,254 18,042
Mortgage and collateral loans ............................ 27,023 15,282
Policy loans ............................................. 22,173 22,689
Credit card loans ........................................ 54,068 22,489
Real estate investments .................................. 32,193 30,822
Short-term investments ................................... 141,040 195,536
---------- ----------
Total Investments ..................................... 1,133,766 1,082,893
Cash ....................................................... 15,932 15,420
Agents' receivables, less allowances of $1,491
in 1997 and $1,182 in 1996 ............................ 13,662 6,740
Reinsurance receivables--Note E ............................ 78,696 68,438
Due premiums and other receivables ......................... 58,822 25,149
Investment income due and accrued .......................... 14,063 12,735
Deferred acquisition costs--Note B ......................... 99,611 59,955
Goodwill ................................................... 111,067 17,126
Property and equipment, net ................................ 46,634 26,061
Other ...................................................... 7,130 6,471
---------- ----------
$1,579,383 $1,320,988
========== ==========
LIABILITIES
Policy liabilities--Notes D and E:
Future policy and contract benefits ...................... $ 487,024 $ 512,670
Claims ................................................... 258,821 201,276
Unearned premiums ........................................ 105,696 79,378
Other policy liabilities ................................. 19,751 14,000
Federal income taxes--Note G ............................... 19,891 4,705
Other liabilities .......................................... 60,477 32,214
Funds held for others ...................................... 25,957 --
Short-term debt--Note F .................................... 20,184 1,032
Long-term debt--Note F ..................................... 30,018 29,911
---------- ----------
1,027,819 875,186
========== ==========
MINORITY INTERESTS ............................................. 15,274 12,884
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 46,229,000
shares in 1997 and 45,121,000 shares in 1996 ............. 462 451
Preferred stock, par value $0.01 per share--authorized
10,000,000 shares; no shares issued and
outstanding 1997 and 1996 ................................ -- --
Additional paid-in capital ................................. 165,891 165,668
Net unrealized investment gains ............................ 14,280 2,153
Retained earnings .......................................... 355,657 264,646
---------- ----------
536,290 432,918
---------- ----------
$1,579,383 $1,320,988
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE>
UICI AND SUBSIDIARIES
Statements of Income
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUE
Premiums--Note E:
Health ............................................... $653,906 $501,185 $473,778
Life premiums and other considerations ............... 49,434 46,570 45,353
-------- -------- --------
703,340 547,755 519,131
Net investment income--Note C ........................... 84,174 71,345 65,054
Fees and other income ................................... 164,301 110,841 54,726
Gains on sale of investments--Note C .................... 4,014 652 2,163
-------- -------- --------
955,829 730,593 641,074
BENEFITS AND EXPENSES -- Notes D and E
Benefits, claims, and settlement expenses ............... 449,657 335,895 320,501
Underwriting, acquisition, and
other expenses--Note P ............................... 367,469 280,802 230,003
Interest expense ........................................ 2,857 2,514 3,909
-------- -------- --------
819,983 619,211 554,413
-------- -------- --------
INCOME BEFORE FEDERAL
INCOME TAXES AND MINORITY
INTERESTS ....................................... 135,846 111,382 86,661
Federal income taxes--Note G ................................. 43,396 36,190 29,040
-------- -------- --------
INCOME BEFORE
MINORITY INTERESTS .............................. 92,450 75,192 57,621
Minority Interests ........................................... 5,946 5,945 4,293
-------- -------- --------
NET INCOME ...................................... $ 86,504 $ 69,247 $ 53,328
======== ======== ========
NET INCOME PER SHARE-Basic
and Diluted--Notes H and O ...................... $ 1.91 $ 1.66 $ 1.41
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
UICI AND SUBSIDIARIES
Consolidated Statements of Stockholders' Equity
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
COMMON STOCK
Beginning of year .................................... $ 451 $ 382 $ 94
Four-for-one stock split ............................. -- -- 282
Exercise of stock options and warrants ............... 1 -- --
Adjustment for business combinations ................. 10 16 6
Public sale of common stock at
$20.50 per share, net of expenses ................. -- 52 --
--------- --------- ---------
End of year .......................................... 462 451 382
--------- --------- ---------
ADDITIONAL PAID-IN CAPITAL
Beginning of year .................................... 165,668 50,554 50,723
Four-for-one stock split ............................. -- -- (282)
Exercise of stock options and warrants ............... 417 170 231
Adjustment for business combinations ................. -- 15,119 71
Public sale of common stock at
$20.50 per share, net of expenses ................. -- 100,096 --
Retirement of treasury stock ......................... (194) (271) (189)
--------- --------- ---------
End of year .......................................... 165,891 165,668 50,554
--------- --------- ---------
NET UNREALIZED INVESTMENT GAINS (LOSSES)
Beginning of year .................................... 2,153 6,789 (18,102)
Change in unrealized investment gains or losses
during the year ................................... 18,645 (7,391) 39,232
Deferred income taxes ................................ (6,010) 2,197 (12,593)
Minority interests ................................... (508) 558 (1,748)
--------- --------- ---------
End of year .......................................... 14,280 2,153 6,789
--------- --------- ---------
RETAINED EARNINGS
Beginning of year .................................... 264,646 191,094 138,208
Adjustment for business combinations ................. 4,507 4,305 (442)
Net income ........................................... 86,504 69,247 53,328
--------- --------- ---------
End of year .......................................... 355,657 264,646 191,094
--------- --------- ---------
TREASURY STOCK
Beginning of year .................................... -- -- --
Purchase of stock .................................... (194) (271) (189)
Retirement of treasury stock ......................... 194 271 189
--------- --------- ---------
End of year .......................................... -- -- --
--------- --------- ---------
TOTAL STOCKHOLDERS' EQUITY .............................. $ 536,290 $ 432,918 $ 248,819
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
UICI AND SUBSIDIARIES
Consolidated Statements of Cash Flows
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income ...................................................... $ 86,504 $ 69,247 $ 53,328
Adjustments to reconcile net income to cash
provided by operating activities:
Increase in policy liabilities ............................... 61,769 40,599 11,918
Increase in funds held for others ............................ 6,751 -- --
Increase in other liabilities ................................ 15,787 4,632 4,933
Deferred income tax (benefit) payable ........................ 6,957 6,425 (3,683)
(Decrease) increase in federal income taxes payable .......... (3,298) 4,715 1,435
Decrease (increase) in accrued investment income,
reinsurance receivables and other receivables .............. (8,933) (6,735) 13,654
Acquisition costs deferred ................................... (45,263) (20,913) (14,349)
Amortization of deferred acquisition costs ................... 21,001 17,080 15,029
Depreciation and amortization ................................ 11,458 7,209 2,958
Net income attributable to minority interests ................ 5,946 5,945 4,293
Gains on sale of investments ................................. (4,014) (652) (2,163)
Other items, net ............................................. (1,490) (2,014) (595)
--------- --------- ---------
Cash Provided by Operations ................................ 153,175 125,538 86,758
--------- --------- ---------
INVESTING ACTIVITIES
Securities available-for-sale
Purchases .................................................... (686,999) (646,421) (542,362)
Sales ........................................................ 516,246 499,717 225,988
Maturities, calls and redemptions ............................ 125,616 121,162 165,284
Credit card loans
Purchases .................................................... (172,350) (102,744) (154,138)
Repayments ................................................... 110,770 83,585 117,619
Sales ........................................................ 30,000 33,397 51,562
Other investments
Additions to property and equipment .......................... (19,187) (17,722) (2,509)
Purchases .................................................... (27,687) (20,881) (17,027)
Sales, repayments and maturities ............................. 22,267 6,456 18,680
Short-term investments-net ...................................... 79,262 (111,769) 91,158
Purchase of subsidiaries and life and health business
net of cash acquired of $2,137, $3,996, and $3,428 in
1997, 1996, and 1995, respectively (Notes B and P) ........... (95,312) (4,291) (20,024)
Minority interest purchased ..................................... (15,062) (9,831) --
Decrease (increase) in agents' receivables ...................... (1,088) (2,202) 959
--------- --------- ---------
Cash Used in Investing Activities .......................... (133,524) (171,544) (64,810)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds from notes payable ..................................... 11,615 11,264 18,091
Repayment of notes payable ...................................... (5,931) (22,242) (34,600)
Proceeds from payable to related party .......................... -- -- 10,735
Repayment of payable to related party ........................... -- (10,735) (275)
Deposits from investment products ............................... 17,746 17,078 21,145
Withdrawals from investment products ............................ (44,038) (38,258) (36,878)
Proceeds from exercise of stock options and warrants ............ 418 179 207
Purchase of treasury stock ...................................... (194) (271) (189)
Proceeds from issuance of common stock, net of expenses ......... -- 100,148 --
Contributions (distributions) to minority interests ............. 1,245 (1,650) (1,980)
--------- --------- ---------
Cash Provided by (Used in) Financing Activities ............ (19,139) 55,513 (23,744)
--------- --------- ---------
Net Increase (Decrease) in Cash ............................ 512 9,507 (1,796)
Cash at Beginning of Period ................................ 15,420 5,913 7,709
--------- --------- ---------
Cash at End of Period ...................................... $ 15,932 $ 15,420 $ 5,913
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
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.
Nature of Operations: The Company is a diversified financial services
company which offers insurance and financial services to niche consumer markets.
The Company also provides institutional technology and outsourcing solutions to
the insurance and health services community. 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.
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: fixed maturities 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.)
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.
F-7
<PAGE>
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 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 $31.7 million and $22.5 million at December 31, 1997 and 1996,
respectively.
F-8
<PAGE>
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
twenty-five 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
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. The cost of reinsurance is accounted for over the terms of
the underlying reinsured policies using assumptions consistent with those used
to account for the policies.
Federal Income Taxes: Deferred income taxes are recorded to reflect the tax
consequences on future years of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each year-end.
Changes in Accounting: In February 1997, the Financial Accounting Standards
Board ("FASB") issued Statement No. 128, "Earnings Per Share". Statement No. 128
replaces the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. Diluted earnings per share is very similar to the
previously reported fully diluted earnings per share. All earnings per share
amounts for all periods have been restated to conform to the Statement No. 128
requirements (see Note P).
In February 1997, the FASB issued Statement No. 129, "Disclosure of
Information about Capital Structure". This statement consolidates existing
guidance relating to an entity's capital
F-9
<PAGE>
structure regarding liquidation preferences of preferred stock, information
about rights and privileges of outstanding equity securities and redemption
amounts for all issues of capital stock that are redeemable at fixed or
determinable prices or fixed or determinable dates. This statement did not have
an impact on the Company.
In June 1997, the FASB issued Statement No. 130, "Reporting Comprehensive
Income," which is effective for fiscal years beginning after December 15, 1997,
with earlier application permitted. This statement establishes standards for the
reporting and display of comprehensive income and its components in a full set
of general purpose financial statements. The Company is required to adopt FAS
No. 130 effective January 1, 1998.
Also in June 1997, the FASB issued Statement No. 131, "Disclosures About
Segments of an Enterprise and Related Information." The statement is effective
for fiscal years beginning after December 15, 1997 with earlier application
permitted. This statement significantly changes the way public companies report
segment information in the annual financial statements also requires those
companies to report selected segment information in interim financial reports to
shareholders. The Company is required to adopt FAS No. 131 effective January 1,
1998.
Reclassification: Certain amounts in the 1996 and 1995 financial statements
have been reclassified to conform with the 1997 financial statement
presentation.
NOTE B--Acquisitions and Dispositions
During 1997, the Company made several acquisitions which have been
accounted for under the purchase method as follows: Four companies and certain
assets were acquired for $88.2 million in cash. Total fair value of assets
acquired, including $82.1 million of goodwill, were $112.1 million and total
fair value of liabilities assumed were $23.8 million. The Company also acquired
$44.8 million of life and health reserves and received $43.5 million of assets
for a purchase price of $1.3 million. The goodwill related to these
acquisitions is being amortized straight line over twenty-five years.
Effective January 1, 1997, the Company acquired the agency force and
certain assets of United Group Association, Inc. ("UGA Inc.") for a price equal
to the net book value of the tangible assets acquired and assumed certain agents
commitments of $3.9 million. UGA Inc. is owned 100% by the Company's President
and Chairman of the Board ("Chairman"). The tangible assets acquired consist
primarily of agent debit balances, a building, and related furniture and
fixtures having a net book value of $13.1 million, which approximates fair
market value of the tangible assets.
Effective January 1, 1997, the Company acquired the remaining interest of
Insurdata Incorporated ("Insurdata") and UICI Administrators, Incorporated
("UAI") based on a predetermined formula price of $15.1 million. The Company
acquired a majority interest in Insurdata and UAI in October 1995.
For financial reporting purposes, the above 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, 1997 include
the results of operations of each acquired company from their
F-10
<PAGE>
respective dates of acquisition in 1997. 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 1997, the Company acquired 100% of two companies through a stock
exchange agreement. The Company exchanged 1,068,089 shares of its common stock
for all of the outstanding common stock of the two companies. The effect of
these acquisitions was not material to the consolidated financial statements.
During 1997, the Company sold three subsidiaries and certain assets of a
subsidiary to the Company's Chairman for a price equal to the net book value of
the tangible assets totaling $1.2 million.
In September 1996, the Company entered into three separate stock purchase
agreements to sell its three dental benefit companies. The Company completed one
sale in October 1996 and the other two in 1997, for a gain of $2.0 million and
$4.7 million, respectively. The operations of the dental benefit companies were
not material to the operations of the Company.
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. Onward and Upward, Inc. is a corporation owned by the
five adult children of the Company's Chairman. 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 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.
During 1995, the Company acquired a 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
F-11
<PAGE>
amortized straight-line over 25 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.
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
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Costs of business acquired:
Beginning of year .......................... $13,978 $20,414 $30,061
Additions ............................. 15,505 -- --
Amortization (a) ...................... (4,545) (6,436) (9,647)
------- ------- -------
End of year ............................. 24,938 13,978 20,414
Costs of business produced ................... 74,673 45,977 35,708
------- ------- -------
$99,611 $59,955 $56,122
======= ======= =======
</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:
(Dollars in thousands)
1998..................................... $ 3,954
1999..................................... 3,117
2000..................................... 2,760
2001..................................... 2,117
2002..................................... 1,676
2003 and thereafter...................... 11,314
-------
$24,938
=======
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 $245.8 million as of December 31, 1997. In addition, at December
31, 1997, the domestic insurance subsidiaries had securities with a fair value
of $17.8 million on deposit with insurance departments in various states.
F-12
<PAGE>
A summary of net investment income is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Fixed maturities ............................ $57,902 $51,922 $47,391
Equity securities ........................... 675 748 247
Guaranteed student loans .................... 1,451 1,855 1,496
Mortgage and collateral loans ............... 2,635 1,704 1,493
Policy loans ................................ 1,398 1,410 1,388
Credit card loans ........................... 4,752 6,138 7,643
Short-term investments ...................... 9,591 7,224 6,107
Real estate ................................. 4,844 293 --
Other investments ........................... 3,395 2,487 1,842
------- ------- -------
86,643 73,781 67,607
Less investment expenses .................... (2,469) (2,436) (2,553)
------- ------- -------
$84,174 $71,345 $65,054
======= ======= =======
</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>
Gains Net Gains
Fixed Equity Other (Losses) on Tax Minority (Losses) on
Maturities Securities Investments Investments Effects Interest Investments
---------- ---------- ----------- ----------- ------- -------- -----------
(Dollars in thousands)
Year ended
December 31:
1997
<S> <C> <C> <C> <C> <C> <C> <C>
Realized ....................... $ 1,764 $2,436 $ (186) $ 4,014 $ (1,376) $ (28) $ 2,610
Change in unrealized ........... 17,944 701 -- 18,645 (6,010) (508) 12,127
-------- ------ ------ ------- -------- ------- -------
Combined ..................... $ 19,708 $3,137 $ (186) $22,659 $ (7,386) $ (536) $14,737
======== ====== ====== ======= ======== ======= =======
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) $ (116) $ 2,163 $ (638) $ (192) $ 1,333
Change in unrealized ........... 39,025 207 -- 39,232 (12,593) (1,748) 24,891
-------- ------ ------ ------- -------- ------- -------
Combined ..................... $ 41,323 $ 188 $ (116) $41,395 $(13,231) $(1,940) $26,224
======== ====== ====== ======= ======== ======= =======
</TABLE>
Gross unrealized investment gains pertaining to equity securities was $2.5
million and $1.8 million at December 31, 1997 and 1996, respectively. Gross
unrealized investment losses pertaining to equity securities was $280,000 and
$249,000 at December 31, 1997 and 1996, respectively.
F-13
<PAGE>
The amortized cost and fair value of investments in fixed maturities are as
follows:
<TABLE>
<CAPTION>
December 31, 1997
-----------------
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 ......................... $ 50,912 $ 1,103 $ (15) $133,650
Mortgage-backed securities issued
by U.S. Government agencies
and authorities ............................ 45,817 2.262 47,869 99,875
Other mortgage and asset backed securities ...... 255,377 4,932 259,855 171,167
Other corporate bonds ........................... 459,691 13,760 471,736 358,235
-------- -------- -------- --------
Total fixed maturities ................. $811,757 $ 22,057 $831,460 $762,927
======== ======== ======== ========
</TABLE>
<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>
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, 1997,
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 .................................. $ 18,073 $ 18,091
Over 1 year through 5 years ....................... 117,414 118,716
Over 5 years through 10 years ..................... 226,134 232,686
Over 10 years ..................................... 148,982 154,243
-------- --------
510,603 523,736
Mortgage and asset backed securities .............. 301,154 307,724
-------- --------
Total fixed maturities .......................... $811,757 $831,460
======== ========
</TABLE>
F-14
<PAGE>
Proceeds from the sale of investments in fixed maturities were $516.2
million, $499.7 million, and $226.0 million for 1997, 1996, and 1995,
respectively. Gross gains of $4.9 million, $4.1 million, and $2.2 million and
gross losses of $3.1 million, $6.7 million, and $1.9 million were realized on
fixed maturity sales during 1997, 1996, and 1995, respectively.
The Company securitized $30.0 million and $31.6 million of credit card
loans in September 1997 and 1996, respectively. The securitization involved the
sale of $30.0 million and $29.0 million in 1997 and 1996, respectively, of asset
backed securities in which the Company purchased participating interests
totaling $3.0 million and $2.9 million in 1997 and 1996, respectively. These
transactions have been accounted for as sales but there was no gain or loss
recognized at the time of the sale.
On December 29, 1995, the Company sold approximately $51.6 million of
credit card loans to two separate trusts, one of which was a related party (see
Note L), established for the benefit of investors in certificates representing
undivided fractional interest in the trusts. The Company purchased participating
interests in each of the trusts totaling $16.0 million and has recorded these
amounts as credit card loans. During 1996, the related party trust was dissolved
and the $15.0 million senior certificate held by a related party was retired.
The Company sold the remaining $9.1 million of credit card loans to an unrelated
party. These transactions were structured and accounted for as sales but there
was no gain or loss recognized at the time of sale.
Following is a summary of the Company's equity securities:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
----------------- -----------------
Fair Fair
Cost Value Cost Value
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Common Stocks......................... $ 766 $ 2,438 $6,836 $ 8,076
Non-redeemable preferred stocks....... 11,536 12,117 6,717 7,030
------- ------- ------- -------
$12,302 $14,555 $13,553 $15,106
======= ======= ======= =======
</TABLE>
The fair value, which represents carrying amounts, of equity securities are
based on quoted market prices. For equity securities not actively traded, market
values are estimated using values obtained from quotation services.
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, 1997 December 31, 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------- ------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Mortgage loans.................. $ 5,503 $ 5,633 $ 5,282 $ 5,245
Collateral loans................ 21,520 21,520 10,000 10,000
------- ------- ------- -------
$27,023 $27,153 $15,282 $15,245
======= ======= ======= =======
Policy loans.................... $22,173 $20,935 $22,689 $21,363
======= ======= ======= =======
Real estate investments......... $32,193 $71,878 $30,822 $73,498
======= ======= ======= =======
</TABLE>
F-15
<PAGE>
The fair values for mortgage, collateral and policy loans are estimated
using discounted cash flow analysis, using interest rates currently being
offered for similar loans to borrowers with similar credit ratings. The fair
value for real estate investments is principally based on quoted market prices
for the interest in the real estate investment trust.
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
-----------
1997 1996
------ -------
(Dollars in thousands)
<S> <C> <C>
Guaranteed student loans ............................. $ 400 $ 278
Mortgage and collateral loans ........................ 650 650
Credit card loans .................................... 4,283 8,728
Real estate investments .............................. 2,723 2,614
------ -------
$8,056 $12,270
====== =======
</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, 1997, the Company had a carrying
amount of $307.7 million of mortgage and asset backed securities, of which,
$47.9 million are government backed, $173.3 million are rated AAA, $45.5 million
are rated AA, $39.7 million are rated A, and $1.3 million are rated BBB by
external rating agencies. 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, and $19.0 million are rated A, and $5.1 million are rated BBB by
external rating agencies.
NOTE D--Policy Liabilities
Liability for future policy and contract benefits consists of the
following:
<TABLE>
<CAPTION>
December 31
-----------
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Life ................................................. $265,230 $271,065
Annuity .............................................. 221,794 241,605
-------- --------
$487,024 $512,670
======== ========
</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 5.8%, 5.6% and 5.7% during 1997, 1996 and 1995,
respectively. Interest rates credited to the liability for future contract
benefits related to annuity contracts generally ranged from 4.5% to 6.6% during
1997 and 4.0% to 6.8% during 1996 and 1995.
F-16
<PAGE>
As described in Note E, the Company assumes certain life and annuity
business from subsidiaries of AEGON USA, INC. (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 6.0% during 1997, 4.9% to 6.8% during 1996, and 4.8% to 6.8%
during 1995.
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, 1997 December 31, 1996
----------------- -----------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- -------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Direct annuities................................ $105,113 $100,488 $117,269 $111,734
Assumed annuities............................... 116,681 114,356 124,336 121,408
Supplemental contracts
without life contingencies................... 3,101 3,101 3,042 3,042
-------- -------- -------- --------
$224,895 $217,945 $244,647 $236.184
======== ======== ======== ========
</TABLE>
Fair values under investment-type contracts consisting of direct annuities
and supplemental contracts without life contingencies are estimated using the
assumption-reinsurance pricing method, based on estimating the amount of profits
or losses an assuming company would realize, and then discounting those amounts
at a current market interest rate. Fair values for the Company's liabilities
under assumed annuity investment-type contracts are estimated using the cash
surrender value of the annuity.
Activity in the claims liability is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
--------- --------- ---------
(Dollars in thousands)
<S> <C> <C> <C>
Claims liability at beginning of year, net
of related reinsurance recoverables ................ $ 192,922 $ 176,330 $ 140,660
Add:
Acquired claims liability ............................ 20,273 -- 12,585
Incurred losses, net of reinsurance, occurring during:
Current year ...................................... 478,671 371,260 332,208
Prior years ....................................... (49,741) (61,254) (44,886)
--------- --------- ---------
428,930 310,006 287,322
--------- --------- ---------
Deduct payments for claims, net of reinsurance,
occurring during:
Current year ...................................... 285,450 213,844 187,776
Prior years ....................................... 107,706 79,570 76,461
--------- --------- ---------
393,156 293,414 264,237
--------- --------- ---------
Claims liability at end of year, net of
related reinsurance recoverables:
1997--$9,852; 1996--$8,354, and 1995--$3,479 ....... $ 248,969 $ 192,922 $ 176,330
========= ========= =========
</TABLE>
F-17
<PAGE>
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 1997, 1996, and 1995, approximately 33%, 48%, and 50%, respectively, of
the Company's health premiums and 2%, 5% and 5% of the Company's life premiums
were assumed from AEGON. Prior to 1997, the health business assumed was produced
by UGA Inc. Under the terms of its coinsurance agreement, AEGON has agreed to
cede and the Company has agreed to coinsure 60% in 1997, of the health insurance
previously sold by UGA Inc. agents and issued by AEGON.
The Company has also assumed other life and annuity policies issued by
AEGON. At December 31, 1997 and 1996, the Company's portion of the life
insurance in force assumed was approximately $147.9 million and $228.3 million,
respectively. At December 31, 1997 $3.2 million was due to AEGON and at December
31, 1996 $833,000 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,
-----------------------
1997 1996 1995
----------- ----------- -----------
(Dollars in thousands)
<S> <C> <C> <C>
Direct ............................. $ 474,929 $ 319,689 $ 262,715
Assumed ............................ 270,728 255,436 276,044
Ceded .............................. (42,317) (27,370 (19,628)
----------- ----------- -----------
Net Premiums .................... $ 703,340 $ 547,755 $ 519,131
=========== =========== ===========
Ceded benefits, claims and
settlement expenses ............. $ 21,297 $ 17,426 $ 13,500
=========== =========== ===========
Life insurance in force ceded ...... $ 1,526,651 $ 836,957 $ 776,086
=========== =========== ===========
</TABLE>
F-18
<PAGE>
NOTE F--Debt
The Company's short-term and long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31
-----------
1997 1996
------- -------
(Dollars in thousands)
<S> <C> <C>
Short-term debt:
Other notes payable ......................... $14,841 $ --
Current portion long-term debt .............. 5,343 1,032
------- -------
Total short-term debt .................... $20,184 $ 1,032
======= =======
Long-term debt:
8.75% senior notes payable .................. $27,655 $27,655
Other notes payable ......................... 7,706 3,288
------- -------
35,361 30,943
Less: current portion ...................... 5,343 1,032
------- -------
Total long-term debt ..................... $30,018 $29,911
======= =======
</TABLE>
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.
The other notes payable of $22.5 million at December 31, 1997 are
obligations of the Company's subsidiaries. The notes have interest rates ranging
from 6.0% to 12% with maturities ranging from March 11, 1998 to March 31, 2003.
Approximately $10.1 million is collateralized with the remaining balance being
unsecured.
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. There were no outstanding borrowings on the line of credit at
December 31, 1997 or at December 31, 1996.
Principal payments required in each of the next five years after December
31, 1997 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1998.......................................... $20,184
1999.......................................... 5,379
2000.......................................... 8,659
2001.......................................... 4,027
2002.......................................... 4,031
Thereafter.................................... 7,922
</TABLE>
The carrying amounts of the Company's short-term debt approximate fair
values.
The fair value of the long-term debt was $36.2 million and $31.6 million at
December 31, 1997 and 1996, respectively. The fair value of the Company's
long-term debt is estimated using
F-19
<PAGE>
discounted cash flow analyses, based on the Company's current incremental
borrowing rates for similar types of borrowing arrangements.
Total interest paid was $2.9 million, $3.1 million, and $3.4 million, for
1997, 1996, and 1995, respectively.
NOTE G--Federal Income Taxes
Deferred income taxes for 1997 and 1996 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, 1997
and 1996 relate to the following:
<TABLE>
<CAPTION>
December 31
-----------
1997 1996
-------- --------
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs
and costs of business acquired ................ $ 26,995 $ 13,635
Investment in subsidiaries ...................... 4,395 4,232
Net unrealized investment gains ................. 7,150 1,139
Other ........................................... 3,895 349
-------- --------
Total gross deferred tax liabilities ....... 42,435 19,355
-------- --------
Deferred tax assets:
Policy liabilities .............................. 21,220 15,745
Allowance for losses on investments ............. 2,370 3,332
Operating loss carryforwards .................... 2,207 2,755
Capital loss carryforwards ...................... 955 1,740
Other ........................................... 1,950 1,024
-------- --------
Total gross deferred tax assets ............. 28,702 24,596
Less: Valuation allowance .................. (2,110) (2,677
-------- --------)
Net deferred tax assets ..................... 26,592 21,919
-------- --------
Net deferred tax liability (asset) .......... 15,843 (2,564)
Net current tax liability ................... 4,048 7,269
-------- --------
Federal income tax liability ................ $ 19,891 $ 4,705
======== ========
</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 was a decrease of $567,000 and $1.6 million for 1997 and
1996, respectively.
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Current tax expense ................. $ 36,439 $ 29,765 $ 32,723
Deferred tax expense (benefit) ...... 6,957 6,425 (3,683)
-------- -------- --------
$ 43,396 $ 36,190 $ 29,040
======== ======== ========
</TABLE>
F-20
<PAGE>
The Company's effective income tax rates varied from the maximum statutory
federal income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Statutory federal income tax rate ............. 35.0% 35.0% 35.0%
Small life insurance company deduction ........ (1.1) (2.2) (1.7)
Valuation allowance ........................... (0.5) (1.4) (0.6)
Limited liability corporations income ......... (2.0) (1.0) --
Other items, net .............................. 0.5 2.1 0.8
---- ---- ----
Effective income tax rate ................ 31.9% 32.5% 33.5%
==== ==== ====
</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, 1997.
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, 1997, certain acquired subsidiaries of the Company had
aggregate federal tax loss carryforwards of $6.3 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 $658,000 per year from 1998 through 2006, and
$385,000 in 2007.
Total federal income taxes paid were $39.4 million, $25.2 million, and
$31.3 million, for 1997, 1996, and 1995, 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.
The Company has interests in several limited liability corporations
("LLC"). The Company's LLC's file separate tax returns. The Company's
consolidated results of operations reflect 100% of the income but only the
Company's proportionate share of tax expense.
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 and 10,000,000 shares of preferred stock
with a par value of $0.01 was obtained. The increase in the common stock was
necessary in order to facilitate the public offering of 5,175,000 shares of
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.
F-21
<PAGE>
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, 1997 was $25.3 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, 1997, the
domestic insurance companies could pay aggregate dividends to the parent company
of approximately $22.3 million without prior approval by 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,
-----------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Net income ........................ $ 41,801 $ 32,723 $ 39,256
Stockholders' equity .............. $223,930 $190,917 $150,543
</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 had
no permitted statutory accounting practices in 1997, 1996, and 1995.
Furthermore, the NAIC has a project to codify statutory accounting practices,
the result of which is expected to constitute the only source of "prescribed"
statutory accounting practices. Accordingly, that project, which is expected to
be effective in 1999, 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
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. The Company has also been notified by the U.S.
Department of Labor that it is investigating the Company's compliance with
certain rules and regulations related to the Employee Retirement Income Security
Act of 1974. Based in part upon the opinion of counsel as to the ultimate
disposition of such lawsuits and claims, management believes that the liability,
if any, resulting from the disposition of such proceedings will not be material
to the Company's financial condition or results of operations.
F-22
<PAGE>
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, 1997 was
approximately $7.2 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, 1997 amount
to $5.3 million in 1998, $4.7 million in 1999, $3.4 million in 2000, $1.3
million in 2001 and $687,000 in 2002. Rent expense amounted to $8.6 million,
$5.0 million, and $2.8 million for 1997, 1996, and 1995, respectively.
At December 31, 1997, the Company had a $7.5 million letter of credit
related to the credit card loans.
The Company has commitments to fund the unused line of credit on credit
card loans. At December 31, 1997, the outstanding commitment was $21.1 million.
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 $9.4 million
at December 31, 1997.
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, 1997, the Company has outstanding student loan commitments for the
years 1998 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 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>
1998 ............................... $ 114,078 $ 15,388
1999 ............................... 166,154 20,069
2000 ............................... 269,813 21,646
2001 ............................... 303,923 20,141
2002 ............................... 319,959 16,764
Thereafter ......................... 538,546 31,616
---------- ----------
$1,712,473 $ 125,624
========== ==========
</TABLE>
Interest rates on the above commitments are principally variable (prime plus
2%).
NOTE J-Employee Benefit Plans
The Company has an Employee Stock Ownership and Savings 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 1997, 1996, and 1995 totaled $3.2
million, $3.1 million, and $1.1 million, respectively.
F-23
<PAGE>
NOTE K--Stock Option Plan and Warrants
In connection with the acquisition of Amli Realty Co. in 1996, the Company
issued 91,150 options at an average option price of $12.67. The right to acquire
stock pursuant to this plan is contingent upon numerous factors, including
continuity of employment and/or the passage of time.
The Company has a stock option plan which provides options on 1,600,000
shares of common stock for granting to officers, key employees, and certain
eligible non-employees at fair market value at the date of grant. There are no
options outstanding under the plan as of December 31, 1997.
A summary of stock option transactions are as follows:
<TABLE>
<CAPTION>
Number Average Option
of Shares Price Per Share ($)
--------- -------------------
<S> <C> <C>
Outstanding options at January 1, 1995 ......... 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
=======
Granted ........................................ -- --
Canceled ....................................... -- --
Exercised ...................................... (46,559) 8.02
-------
Outstanding options at December 31, 1997 ....... 60,591 12.72
======
Options Exercisable at December 31,
1995 ....................................... 35,880 2.55
1996 ....................................... 84,363 10.82
1997 ....................................... 41,693 12.74
</TABLE>
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.
During 1993, the Company entered into an agreement with the Company's
Chairman 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 written off its investment of $6.1 million over the
past four years. The Company incurred losses of $1.4 million, $1.2 million and
$1.4 million in 1997, 1996, and 1995, respectively.
F-24
<PAGE>
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 Company's Chairman has an ownership interest. The
terms of the line of credit were renegotiated in 1997 so that the interest rate
decreased to prime from prime plus four percent (4%), maturing December 31, 1998
instead of September 30, 1998. The line of credit is collateralized by certain
common stock. During 1997, the related company repaid $2.5 million leaving a
balance of $7.5 million outstanding at December 31, 1997. The collateral had a
market value of $12.1 million at December 31, 1997.
During 1997, the Company sold three subsidiaries and certain assets of a
subsidiary to the Company's Chairman for a price equal to the net book value of
the tangible assets totaling $1.2 million.
During 1997, the Company purchased $6.3 million of credit card receivables
from a bank owned by the Company's Chairman.
Included in other notes payable is a $10.5 million note payable owed to a
related party, who has an ownership interest in one of the Company's
subsidiaries, with an interest rate of 12% due in 1998.
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. During 1996, this trust was
dissolved and the $15.0 million certificate was retired for no gain or loss.
This transaction was accounted for as a sale.
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 former President and Chief Executive Officer. The
Company also purchased the remaining 2.75% from an unrelated individual at the
same price per share.
During 1995, the Company and UGA Inc. entered into an agreement whereby the
Company receives a 20% interest in the profits or losses relating to certain
lead activities of UGA Inc. The Company had profits of $1.1 million, $2.0
million and losses of $1.6 million for 1997, 1996 and 1995, respectively, on
these activities.
UGA Inc. receives commissions from insurance subsidiaries of AEGON with
respect to insurance policies that the Company coinsures. UGA Inc. received
$34.1 million, $46.7 million, and $45.5 million in such commissions in 1997,
1996, and 1995, respectively. Through the coinsurance agreements with AEGON, the
amount of these commissions received by UGA, Inc. attributable to the Company
were $20.4 million, $29.2 million and $26.1 million in 1997, 1996 and 1995,
respectively.
F-25
<PAGE>
Prior to 1997, UGA marketed products which were directly underwritten by
insurance subsidiaries of the Company. The insurance subsidiaries paid
commissions of $9.2 million, $4.2 million, and $1.9 million to UGA in 1997,
1996, and 1995, respectively.
Effective January 1, 1997, Core Marketing, Ltd., a company owned by the
five adult children of the Company's Chairman, generates sales leads for agents
of the Company. Prior to January 1, 1997, these leads were provided by UGA Inc.
The Company paid $17.7 million, $5.0 million and $4.3 million for leads in 1997,
1996 and 1995, respectively.
The Company's Chairman and Company's Chairman five adult children own a
controlling interest in AVTEL Communications, Inc. ("AVTEL"), a telephone
company. The Company paid $2.1 million, $1.3 million and $686,180 to AVTEL for
services rendered in 1997, 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 $20.8 million, $9.7 million and $1.9 million in
1997, 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 $222.3 million and $207.4 million at
December 31, 1997 and 1996, 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 into 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 business segments 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-26
<PAGE>
<TABLE>
<CAPTION>
Inter- Life
segment Health Insurance/ Credit Corporate
Total Eliminations Insurance Annuity Services and Other
---------- ------------ --------- -------- -------- ---------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1997
- ----------------------------
Revenues..................................... $ 955,829 $(14,772) $723,114 $ 83,509 $50,267 $113,711
Income before federal income taxes
and minority interests...................... 135,846 -- 73,900 17,492 20,542 23,912
Identifiable assets.......................... 1,579,383 -- 515,160 600,912 74,424 388,887
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 -- 73,889 15,112 15,189 7,192
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 14,770 1,424 6,011
Identifiable assets.......................... 1,130,859 -- 259,205 528,700 39,499 303,455
</TABLE>
NOTE O--Earnings Per Share
The following table sets forth the computation of basic and diluted earnings per
share:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
(In thousands, except per share amounts)
<S> <C> <C> <C>
Net income available to
common shareholders .............................. $86,504 $69,247 $53,328
------- ------- -------
Weighted average shares outstanding--
basic earnings per share ......................... 45,300 41,590 37,680
Effect of dilutive securities:
Employee stock options ........................... 35 50 250
------- ------- -------
Weighted average shares outstanding--
dilutive earnings per share ...................... 45,335 41,640 37,930
------- ------- -------
Basic and diluted earnings per share .................. $ 1.91 $ 1.66 $ 1.41
======= ======= =======
</TABLE>
The 1996 and 1995 earnings per share amounts have been restated to comply with
Statement of Financial Accounting Standards No. 128, Earnings Per Share. The
implementation of FAS 128 did not change previously reported amounts.
NOTE P--Supplemental Financial Statement Data
Disclosures of investing and financing activities are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Fair value of assets acquired ........ $169,939 $ 9,575 $ 45,990
Liabilities assumed .................. 72,490 1,288 22,538
-------- -------- --------
Net cash paid ........................ $ 97,449 $ 8,287 $ 23,452
======== ======== ========
</TABLE>
F-27
<PAGE>
Details of underwriting, acquisitions, and other expenses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1997 1996 1995
-------- -------- --------
(Dollars in thousands)
<S> <C> <C> <C>
Amortization of deferred policy acquisition costs ......... $ 21,001 $ 17,080 $ 15,029
Commissions ............................................... 92,394 91,686 93,522
Administrative expenses ................................... 227,235 156,127 107,963
Premium taxes ............................................. 24,498 14,158 12,945
Amortization of goodwill .................................. 2,341 1,751 544
-------- -------- --------
$367,469 $280,802 $230,003
======== ======== ========
</TABLE>
The unaudited quarterly results for 1997 and 1996 were as follow:
<TABLE>
<CAPTION>
1997
----
First Second Third Fourth
-------- -------- -------- --------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues ...................................... $200,253 $218,736 $236,311 $300,529
Income before federal income taxes
and minority interests ...................... 31,599 32,819 35,370 36,058
Net income .................................... 20,292 20,944 22,614 22,654
Net income per share .......................... $ 0.45 $ 0.46 $ 0.50 $ 0.50
</TABLE>
<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>
Computation of earnings per share for each quarter are made independently of
earnings per share for the year.
Earnings per share amounts have been calculated under Statement of Financial
Accounting Standards No. 128, Earnings Per Share. The implementation of FAS No.
128 in the fourth quarter of 1997 did not change previously reported amounts.
F-28
<PAGE>
SCHEDULE II -- Condensed Financial Information of Registrant
UICI (Parent Company)
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
December 31
-----------
1997 1996
--------- ---------
<S> <C> <C>
ASSETS:
Investments:
Investments in and advances to subsidiaries* .. $ 506,391 $ 328,837
Investment in agents' receivables ............. 18,666 8,064
Guaranteed student loans ...................... 1,062 6,139
Collateral loans .............................. 16,520 2,500
Credit card loans ............................. 21,410 22,489
Short-term investments ........................ 839 98,460
Equity securities ............................. 78 --
--------- ---------
Total Investments .......................... 564,966 466,489
Cash (overdraft) .................................. 3,577 (1,939)
Due from related parties .......................... -- 547
Other ............................................. 3,819 4,496
--------- ---------
$ 572,362 $ 469,593
========= =========
LIABILITIES:
Accrued expenses and other liabilities ............ $ 7,925 $ 5,407
Short-term debt ................................... 3,951 --
Long-term debt .................................... 23,704 27,655
Federal income taxes payable ...................... 492 3,613
--------- ---------
36,072 36,675
STOCKHOLDERS' EQUITY
Common stock ...................................... 462 451
Preferred stock ................................... -- --
Additional paid-in capital ........................ 165,891 165,668
Net unrealized investment gains
held by subsidiaries ............................ 14,280 2,153
Retained earnings ................................. 355,657 264,646
--------- ---------
536,290 432,918
--------- ---------
$ 572,362 $ 469,593
========= =========
</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-29
<PAGE>
SCHEDULE II -- Condensed Financial Information of Registrant--(Continued)
UICI (Parent Company)
STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries* .......................... $ 39,154 $ 27,198 $ 24,586
Interest income ....................................... 10,004 9,578 7,245
Interest and other income from subsidiaries* .......... 572 621 827
Gains (losses) on sale of investments ................. (162) 2,283 --
Fees and other income ................................. 13,013 17,114 9,396
-------- -------- --------
62,581 56,794 42,054
-------- -------- --------
Expenses:
General and administrative expenses ................... 8,802 18,978 18,448
Administrative expenses to subsidiaries* .............. 9,553 6,462 4,702
Interest expense ...................................... 2,449 2,471 3,894
-------- -------- --------
20,804 27,911 27,044
-------- -------- --------
Income before equity in undistributed
earnings of subsidiaries
and federal income taxes ........................ 41,777 28,883 15,010
Equity in undistributed earnings of
subsidiaries .......................................... 51,294 46,642 39,033
-------- -------- --------
Income before federal income taxes .................... 93,071 75,525 54,043
Federal income taxes ...................................... 6,567 6,278 715
-------- -------- --------
Net income ............................................ $ 86,504 $ 69,247 $ 53,328
======== ======== ========
</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-30
<PAGE>
SCHEDULE II -- Condensed Financial Information of Registrant--(Continued)
UICI (Parent Company)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
----------------------
1997 1996 1995
--------- --------- ---------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income ............................................................. $ 86,504 $ 69,247 $ 53,328
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed earnings of subsidiaries ................. (51,294) (46,642) (39,033)
(Gains) losses on sale of investments ............................ 162 (2,283) --
Decrease in amounts due from related companies ................... 547 31 442
Increase (decrease) in accrued expenses
and other liabilities ........................................ 2,517 (905) 3,756
Deferred income taxes (benefit) .................................. 1,914 2,118 (2,498)
Increase (decrease) in federal income taxes payable .............. (5,035) 1,510 1,057
Other items, net ................................................. 678 (1,677) (2,006)
--------- --------- ---------
Cash Provided by Operations ......................................... 35,993 21,399 15,046
--------- --------- ---------
INVESTING ACTIVITIES
Purchase of subsidiaries ............................................... (66,948) (275) (23,452)
Minority interest purchased ............................................ (15,062) (9,831) --
Decrease (increase) of investments in and
advances to subsidiaries ............................................ (27,767) (12,971) 15,846
Sale and maturity of investments ....................................... 219,777 118,769 156,123
Purchase of investments ................................................ (130,098) (194,658) (156,904)
Purchase of health business ............................................ (5,218) -- --
Increase in agents' receivables ........................................ (5,384) (2,706) (741)
--------- --------- ---------
Cash Used in Investing Activities ................................... (30,700) (101,672) (9,128)
--------- --------- ---------
FINANCING ACTIVITIES
Proceeds of notes payable .............................................. -- 10,250 18,091
Repayment of notes payable ............................................. -- (22,242) (34,600)
Proceeds from payable to related party ................................. -- -- 10,735
Repayment of payable to related party .................................. -- (10,735) (275)
Proceeds from exercise of warrants and stock options ................... 417 179 208
Proceeds from issuance of common stock, net of expenses ................ -- 100,148 --
Purchase of treasury stock ............................................. (194) (271) (189)
--------- --------- ---------
Cash Provided by (Used in) Financing Activities ..................... 223 77,329 (6,030)
--------- --------- ---------
Increase (decrease) in Cash ......................................... 5,516 (2,944) (112)
Cash (overdraft) at Beginning of Period ............................. (1,939) 1,005 1,117
--------- --------- ---------
Cash (overdraft) at End of Period ................................... $ 3,577 $ (1,939) $ 1,005
========= ========= =========
</TABLE>
The condensed financial statements should be read in conjunction with the
consolidated financial statements and notes thereto of UICI and Subsidiaries.
F-31
<PAGE>
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, 1997:
Life insurance and annuities ...................... $ 64,704 $467,378 $ 12,276 $ 10,811
Health insurance .................................. 34,907 278,467 93,420 8,940
-------- -------- -------- --------
Total ......................................... $ 99,611 $745,845 $105,696 $ 19,751
======== ======== ======== ========
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
======== ======== ======== ========
</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>
1997:
Life insurance and annuities ... $ 49,434 $ 32,541 $ 39,941 $ 15,017 $ 11,060
Health insurance ............... 653,906 19,880 409,716 5,984 194,584 $648,723
-------- -------- -------- -------- -------- ========
Total ...................... $703,340 $ 52,421 $449,657 $ 21,001 $205,644
======== ======== ======== ======== ========
1996:
Life insurance and annuities ... $ 46,570 $ 33,989 $ 43,037 $ 13,959 $ 11,464
Health insurance ............... 501,185 16,130 292,858 3,121 159,252 $506,699
-------- -------- -------- -------- -------- ========
Total ...................... $547,755 $ 50,119 $335,895 $ 17,080 $170,716
======== ======== ======== ======== ========
1995:
Life insurance and annuities ... $ 45,353 $ 35,686 $ 44,444 $ 11,703 $ 11,321
Health insurance ............... 473,778 14,373 276,057 3,326 152,137 $480,021
-------- -------- -------- -------- -------- ========
Total ...................... $519,131 $ 50,059 $320,501 $ 15,029 $163,458
======== ======== ======== ======== ========
</TABLE>
* Allocations of Net Investment Income and Other Operating Expenses are based
on a number of assumptions and estimates, and the results would change if
different methods were applied.
F-32
<PAGE>
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, 1997
- ----------------------------
Life insurance in force........................ $4,898,072 $1,526,651 $2,115,614 $5,487,035 38.6%
========== ========== ========== ========== ====
Premiums:
Life insurance................................. $ 54,497 $ 16,539 $ 11,476 $ 49,434 23.2%
Health insurance............................... 420,432 25,778 259,252 653,906 17.7%
---------- ---------- --------- ---------- 39.6%
$ 474,929 $ 42,317 $ 270,728 $ 703,340 ----
========== ========== ======== ==========
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
========== ======== ======== ==========
</TABLE>
F-33
<PAGE>
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, 1997
- ----------------------------
Credit card receivables........................ $ 8,728 $12,797 $ -- $(17,242) $4,283
Agents' receivables............................ 1,182 501 1 (193) 1,491
Mortgage and collateral loans.................. 650 -- -- -- 650
Guaranteed student loans....................... 278 122 -- -- 400
Real estate.................................... 2,614 109 -- -- 2,723
Year ended December 31, 1996
- ----------------------------
Credit card receivables........................ $12,129 $13,526 $ 604 $(17,531) $ 8,728
Agents' receivables............................ 2,986 -- -- (1,804) 1,182
Mortgage and collateral 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 and collateral loans.................. 650 -- -- -- 650
Guaranteed student loans....................... 196 -- -- (18) 178
</TABLE>
F-34
<PAGE>
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
Financial Services Reinsurance, Ltd. Turks and Caicos Islands
United Group Reinsurance, Inc. Turks and Caicos Islands
United Membership Marketing Group, Ltd.
Liability Company Colorado
National Motor Club of America, Inc. Texas
Amli Realty Company Illinois
Educational Finance Group,
Limited Liability Partnership Texas
Insurdata Texas
United Credit National Bank South Dakota
</TABLE>
F-35
<PAGE>
<PAGE>
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
Financial Services Reinsurance, Ltd. Turks and Caicos Islands
United Group Reinsurance, Inc. Turks and Caicos Islands
United Membership Marketing Group, Ltd.
Liability Company Colorado
National Motor Club of America, Inc. Texas
Amli Realty Company Illinois
Educational Finance Group,
Limited Liability Partnership Texas
Insurdata Texas
United Credit National Bank South Dakota
</TABLE>
F-35
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 related Prospectus, in
the Registration Statement (Form S-8 No. 333-14320) pertaining to the United
Insurance Companies, Inc. Employee Stock Ownership Plan of UICI, in the
Registration Statement (Form S-3 No. 333-23899) pertaining to the UICI and Amli
Realty Company stock exchange agreement and related Prospectus, and in the
Registration Statement (Form S-3 No. 333-42937) pertaining to the UICI and ELA
Corp. agreement and related Prospectus of our report dated March 6, 1998, with
respect to the consolidated financial statements and schedules of UICI and
subsidiaries included in the Annual Report (Form 10-K) for the year ended
December 31, 1997.
ERNST & YOUNG LLP
Dallas, Texas
March 26, 1998
F-36
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
<DEBT-HELD-FOR-SALE> 831,460
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 14,555
<MORTGAGE> 27,023
<REAL-ESTATE> 32,193
<TOTAL-INVEST> 1,133,766
<CASH> 15,932
<RECOVER-REINSURE> 78,696
<DEFERRED-ACQUISITION> 99,611
<TOTAL-ASSETS> 1,579,383
<POLICY-LOSSES> 745,845
<UNEARNED-PREMIUMS> 105,696
<POLICY-OTHER> 19,751
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 50,202
0
0
<COMMON> 462
<OTHER-SE> 535,828
<TOTAL-LIABILITY-AND-EQUITY> 1,579,383
703,340
<INVESTMENT-INCOME> 84,174
<INVESTMENT-GAINS> 4,014
<OTHER-INCOME> 164,301
<BENEFITS> 449,657
<UNDERWRITING-AMORTIZATION> 21,001
<UNDERWRITING-OTHER> 346,468
<INCOME-PRETAX> 135,846
<INCOME-TAX> 43,396
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 86,504
<EPS-PRIMARY> 1.91
<EPS-DILUTED> 1.91
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
