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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, 1998.
OR
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
From the transition period from____________________to_________________
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
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 1, 1999 was $875.6 million.
The number of shares outstanding of $0.01 par value Common Stock, as of March
12, 1999 was 46,230,941.
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 and institutional markets. The Company also provides technology and
outsourcing solutions to the insurance and health services communities.
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 designed
toward individual needs and include both choice of doctor plans and managed
care options such as a Preferred Provider Organization ("PPO") plan as well as
other coverage modifications. The Company markets these higher deductible
products through "dedicated" agency sales forces 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 $747 million
in 1998, or 63% 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.
The Company markets credit support services to individuals with no, or
troubled, credit experience and assists them in obtaining a nationally
recognized credit card. This product is marketed through a sales force of
independent contractors and through direct mail and telemarketing. The credit
cards are issued and serviced by United Credit National Bank, a wholly-owned
subsidiary of the Company.
The Company entered the student loan business in 1997 and it markets,
originates, funds and services primarily Federally guaranteed loans. Its goal
is to provide solutions for college and graduate school students, their parents
and the educational institutions they attend. In order to accomplish this goal,
the Company offers a package of student loans, student loan servicing, and
student insurance.
The Company entered the student loan business in May 1997 through the
formation of Educational Finance Group, LLP ("EFG-LLP") in which it acquired a
63.6% interest for $20.0 million and contributing its student marketing
operations. In November 1997, EFG, LLP 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. In October 1998,
Educational
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Finance Group, Inc. ("EFG") was formed and it was merged with EFG-LLP with EFG
being the surviving entity. Also in October 1998, the Company exchanged the
shares of ELA for additional shares of EFG, Inc. which increased the Company's
ownership interest from 63.6% to 74.9%.
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. The motor club business is
conducted through National Motor Club of America, Inc. ("National Motor Club")
which is licensed to do business in 47 states. National Motor Club was acquired
in August 1997 in a $40.0 million cash transaction.
On April 1, 1996 the Company acquired underwriting, claims management
and administrative capabilities of AEGON USA, Inc. related to products
coinsured by the Company. In connection with this transaction, the agents of
United Group Association, Inc. ("UGA, Inc.") 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
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 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"), Mid-West National Life Insurance Company of
Tennessee ("Mid-West"), and The Chesapeake Life Insurance Company
("Chesapeake"), all of which are wholly-owned by the Company. 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%.
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In 1995 the Company purchased 51% of Insurdata, Inc. ("Insurdata")
which is an information technology company focusing on the health care industry
and insurers with specialized software, data center management, and improved
work processes. Effective December 31, 1996, the Company acquired the remaining
interest of Insurdata, based on a predetermined formula price of $15.1 million.
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 issued 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"). 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 11% of the Common Stock as of December 31, 1998, 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 since the stock
plans were established. The plans are structured to encourage participation in
a disciplined manner. Agents are eligible to participate in the plans after one
full calendar year of service. Participant contributions are matched by
contributions from the Company. The amount of permitted contributions made by
the agents is based on sales performance. Matching contributions of terminated
participants which have not vested (or are otherwise not payable under the
applicable plans) do not revert back to the Company, but rather are allocated
to the remaining participants, providing further incentive to remain with the
Company. Share purchases pursuant to the plans are made in the open market,
thus avoiding dilution to existing stockholders.
The Company has historically granted a minimal number of options. When
the Company's stock declined in price in 1998, the Company granted
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options to purchase 8.1 million shares of the Company's stock at $15.00 per
share to all agents and employees. Options granted were 17.5% of the then
outstanding shares. Options were designed with vesting periods, which means that
no options can be exercised prior to August 1999, and that agents or employees
must be active with the Company through August 2002 to exercise all options.
Through December 31, 1998, approximately 2.2 million options were terminated and
the Company believes that based on historical turnover rates, 3.5 million
options will ultimately vest.
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 insurance market. By focusing
on this market, the Company has been able to design and market its product
offerings, structure its coverage benefits and process claims to more
effectively service the needs of the self-employed. In 1987, the Company
identified a niche opportunity in the student insurance market, and has
subsequently increased those revenues from $17.0 million in 1987 to $111.0
million in 1998. 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 1998 for this product were approximately $13.9
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 1998,
the credit division had revenues of $123.2 million. In 1997, through several
acquisitions, the Company became a leader in developing, funding,
administering, and marketing student loan programs. The Company, through
acquisition of National Motor Club, provides a product with the usual motor
club benefits plus certain health-related financial security benefits.
HEALTH INSURANCE
Self-Employed Agency Division
Market. According to the Bureau of Labor Statistics, there were
approximately 10.3 million self-employed individuals at the end of 1998. There
are currently in force approximately 249,000 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 basic health insurance plans are as follows:
o The Group Catastrophic Hospital Expense Plan provides a lifetime
maximum benefit ranging from $2,000,000 to $5,000,000 and a lifetime
maximum benefit for each injury or sickness ranging from $500,000 to
$1,000,000. Covered expenses are subject to a deductible and are
reimbursed at a benefit payment rate ranging from 50% to 100% as
determined by the policy. After a pre-selected dollar amount of
covered expenses has been reached, the remaining expenses are
reimbursed at 100% for the remainder of the period of confinement. The
benefits for this plan tend to increase as hospital care expenses
increase and therefore the premiums for these policies are subject to
increase as overall hospital care expenses rise.
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o The Group Basic Hospital-Medical Expense Plan has a $1,000,000
lifetime maximum benefit and $500,000 lifetime maximum benefit for
each injury or sickness. Covered expenses are subject to a deductible.
Covered hospital room and board charges are reimbursed at 100% up to a
pre-selected maximum. Covered expenses for inpatient hospital
miscellaneous charges, same-day surgery facility, surgery, assistant
surgeon, anesthesia, second surgical opinion, doctor visits, and
ambulance services are reimbursed at 80% to 100% up to a scheduled
maximum. This type of health insurance policy is of a "scheduled
benefit" nature, and as such, provides benefits equal to the lesser of
the actual cost incurred for covered expenses or the maximum benefit
stated in the policy. These limitations allow for more certainty in
predicting future claims experience and thus future premium increases
for this policy are expected to be less than on the catastrophic
policy.
o The Group Preferred Provider Plan incorporates 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.
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 revenues of $610.1 million,
$538.3 million, and $429.7 million, (52%, 56%, and 59% of total revenue), in
1998, 1997, and 1996, 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 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.
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The health insurance products issued by the Company are primarily
issued to members of various independent membership associations which endorse
the products and act as the master policyholder for such products. Two
principal membership associations in the self-employed market are the National
Association for the Self-Employed ("NASE") and the Alliance for Affordable
Health Care ("AAHC"). The associations provide their membership with a number
of endorsed products, although health insurance is often the product of major
interest to potential members. Individuals may not obtain insurance under the
associations' master policies unless they are members. UGA agents and CMA
agents also act as enrollees of new members for the associations. Although the
Company has no formal agreements with these associations requiring the
associations to continue as the master policyholder and endorse the Company's
insurance products to their respective members, the Company considers its
relationship with these associations to be good.
Leads for the agents of UGA and CMA are generated 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.
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 prior
to 1998, the Company's average combined ratio for the Self-Employed Agency
Division was 92% and the combined ratio had ranged from 91% to 93%. The
combined ratio for 1998 was 105%. See "Management's Discussions and Analysis of
Financial Condition and Results of Operations" for a more detailed discussion
of the reasons for the increase in 1998. The combined ratio for the fourth
quarter of 1998 did decrease from prior quarters and the Company anticipates
that the combined ratio for 1999 will be less than 100%.
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 placed additional emphasis
on incorporating managed care features of a PPO into its health plans in order
to further control health care costs. The health plans with managed care
options generally provide greater coverage for preventive and other services
not requiring hospitalization such as periodic examinations and doctor visits.
These plans also generally have lower deductibles and copayments for services
that are received from providers that are in the PPO network. See "Management's
Discussion and
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Analysis of Financial Condition and results of Operations" for a discussion of
the changes in the PPO products in 1998.
Coinsurance Arrangements. Prior to 1996, 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.
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 Insurance 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 2,200 four-year universities and colleges in the United States
which have a combined enrollment of approximately 8.7 million students. For the
1997-1998 school year, 400 of these institutions, with a combined enrollment of
approximately 2.1 million, authorized the Company to offer its health insurance
plans to their students. Approximately 198,000 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.
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The Student Insurance Division had revenues of $111.0 million, $97.6
million, and $94.5 million (9%, 10%, and 13% of total revenue), in 1998, 1997,
and 1996, 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.
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, the
Company 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 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 $55.2 million and $35.0 million in 1998 and 1997, respectively.
The key personnel that managed this block joined the Company'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 key personnel. Emphasis will be placed
on the Stop Loss, marine crew accident, transplant and international travel
accident business.
National 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 provided a familiarity
with Motor Club and its key personnel. 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
is sold by the UGA field forces.
OKC DIVISION
At December 31, 1998, the OKC Division had over $4.9 billion of life
insurance in force and approximately 400,000 individual policyholders. The
division has grown primarily through acquisitions of blocks of life insurance
and annuity policies and its marketing efforts.
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The OKC Division had revenues of $98.8 million, $100.5 million, and
$102.5 million (8%, 11% and 14% of total revenue), in 1998, 1997, and 1996,
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. Most
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.
Marketing and Sales.
Life insurance products are marketed and sold through the Company's
network of 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 1998 increased to
$13.9 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, 1998, total life insurance and annuity reserves for this block were $81.2
million. The Company receives a fee for servicing the policies and in 1997,
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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 $2.3 million of profit participation in 1998 and $1.9 million in
1997.
In August 1994, the Company entered into a similar transaction whereby
the Company acquired a block of life insurance and annuity policies. At
December 31, 1998, total life insurance and annuity reserves for this block
were $29.0 million. In conjunction with this acquisition, the Company ceded
through a coinsurance agreement 100% of the policy liabilities to an unrelated
reinsurer. The acquisition required no financial investment by the Company. The
Company administers the life insurance and annuity policies and receives a
servicing fee from the unrelated reinsurer. Also, after the unrelated reinsurer
recovers its investment in this block, the coinsurance agreement will be
terminated and all remaining policies will be recaptured by the Company at no
cost.
CREDIT SERVICES
The Credit Services Division, started in 1992, markets credit support
services to individuals with no, or troubled, credit experience and assists them
in obtaining a nationally recognized credit card. Applicants must meet certain
requirements in order to become members of the American Fair Credit Association
("AFCA") or American Credit Educators ("ACE"), independent membership
associations which provide credit education programs and other benefits.
Individuals must be enrolled as members in AFCA, and pay initiation and monthly
membership fees or be enrolled in ACE, in order to obtain a credit card.
The credit support 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 and utilizing direct mail and
telemarketing. UMMG and its sales representatives receive commissions and fees
from the associations for enrolling members in the associations.
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, 1998 the total number of accounts from all
programs totaled 776,000 with managed receivables of $300.1 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, a portion of
the services performed by Equifax Card Services, Inc. were brought "in-house"
which should reduce operational costs associated with card servicing and
maintenance. The Company plans on transferring all cards to the "in-house"
system in 2000.
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
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Falls began issuing its first accounts in May of 1997 and had issued 678,500
accounts with $217.6 million in managed receivables as of December 31, 1998.
Prior to 1997, all of the credit cards were issued by another bank in South
Dakota which received 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 total
deposits base has grown from $7.6 million at December 31, 1997 to $98.9 million
at December 31, 1998.
The Company has successfully completed three asset-backed
securitizations of credit card receivables. The first offering was for $29.0
million in September of 1996, the second was for $30.0 million in September of
1997, and the third was completed in December 1998 for $60.0 million. The
requisite AAA rating by Standard and Poors and Moody's was obtained through a
combination of collateralization and insurance. 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 $123.2 million, $50.3
million, and $39.7 million in 1998, 1997, and 1996, respectively.
EDUCATIONAL FINANCE GROUP
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 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.
The acquisition of EFG Technologies put EFG in the college based loan
servicing business. EFG Technologies' 145 employees currently service
approximately 600 colleges and universities with 1.1 million active accounts
and loan balances aggregating $3.0 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
12
<PAGE> 13
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 1998, this 220-person organization
generated $282.5 million of PLUS loans.
EFG has enabled the Company 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 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.
At December 31, 1998, EFG had $654.7 million of student loans which it
had marketed. Funding for the student loans was obtained from the proceeds of
two credit facilities established by EFG with an investment bank. The first
facility which had an outstanding balance of $318.8 million at December 31,
1998 is secured by student loans, bears interest at LIBOR plus 75 basis points,
and is renewable every thirty days. The second facility which had an
outstanding balance of $350.2 million at December 31, 1998 has securities
issued by a bankruptcy remote entity with the AAA rated securities bearing
interest at LIBOR plus 75 basis points.
INSURDATA
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.
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
Insurance Division outsourced its data processing operations to Insurdata.
Insurdata had revenues of $41.2 million, $25.1 million and $12.7
million in 1998, 1997 and 1996, respectively.
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
13
<PAGE> 14
basis. The maximum retention by the Company on one individual in the case of
life insurance is $150,000. The Company uses reinsurance for its health
insurance business only for limited purposes. It does not reinsure any health
insurance issued 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 1998 would make it one of the top
lenders in 1998. 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. However, the FDLP market share of approximately 33% in 1998 did
not change significantly from 1997.
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
14
<PAGE> 15
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 1998 calculations, the Company's
insurance subsidiaries were significantly above required capital levels.
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company uses to prepare its statutory-basis financial
statements. Codification will require adoption by the various states before it
becomes the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification becomes
effective for the Company, the states of domicile must adopt Codification as
the prescribed basis of accounting on which domestic insurers must report their
statutory-basis results to the Insurance Department. At this time it is
anticipated that the states of domicile will adopt Codification. Management has
not yet determined the impact of Codification on the Company's statutory-basis
financial statements.
The states in which the Company is licensed have the authority to
change the minimum mandated statutory loss ratios to which the Company is
subject, the manner in which these ratios are computed and the manner in which
compliance with these ratios is measured and enforced. Loss ratios are commonly
defined as incurred claims divided by earned premiums. Most states in which the
Company writes insurance have adopted the loss ratios recommended by the NAIC
but frequently the loss ratio regulations do not apply to the types of health
insurance issued by the Company. The Company is unable to predict the impact of
(i) any changes in the mandatory statutory loss ratios for individual or group
policies to which the Company may become subject, or (ii) any change in the
manner in which these minimums are computed or enforced in the future. Such
changes could result in a narrowing of profit margins and have a material
adverse effect upon the Company. The Company has not been informed by any state
that it does not meet mandated minimum ratios, and the Company believes that it
is in compliance with all such minimum ratios. In the event the Company is not
in compliance with minimum statutory loss
15
<PAGE> 16
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 ("FDIC") and the Office of the Comptroller of the
Currency ("OCC"). The Company's credit card product was reviewed in 1996 by the
OCC and FDIC 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 1998.
The loans made under the FFELP include Federal Stafford loans for students and
Parent Loans for Undergraduate Students ("PLUS") loans to parents.
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
business and the Company's results of operations.
State and federal regulation is continually changing and the Company
is unable to predict whether or when any such changes will be adopted. It is
possible, however, that the adoption of such changes could adversely affect the
manner in which the Company's subsidiaries conduct their business and the
Company's results of operations. See also "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Health Care Reform."
EMPLOYEES
The Company had approximately 4,000 employees at March 6, 1999. The
Company considers its employee relations to be good. The dedicated agents of
the Company are independent contractors of the Company.
16
<PAGE> 17
ITEM 2. PROPERTIES
The Company and its subsidiaries rent office space at various
locations. The Company also owns three office buildings in Tarrant County,
Texas with approximately 190,000 square feet.
ITEM 3. LEGAL PROCEEDINGS
The Company and its subsidiaries are parties to various pending legal
proceedings arising in the ordinary course of business, including some
asserting significant damages arising from claims under insurance policies,
disputes with agents and other matters. Based in part upon the opinion of
counsel as to the ultimate disposition of such lawsuits and claims, 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.
The Company and its Chairman are involved in litigation with an
outside party concerning the distribution of proceeds from the sale of certain
assets. See Note T to the financial statements.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
17
<PAGE> 18
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>
BUSINESS EXPERIENCE
NAME OF OFFICER PRINCIPAL POSITION AGE DURING PAST FIVE YEARS
- --------------- ------------------ --- ----------------------
<S> <C> <C> <C>
Ronald L. Jensen Chairman of the Board 68 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.
Gregory T. Mutz President and Chief 53 Mr. Mutz joined the Company in 1996
Executive Officer through the acquisition of AMLI Realty
Co. Mr. Mutz was elected President and
Chief Executive Officer in January 1999.
Richard J. Estell Executive Vice President and 53 Mr. Estell has served as Executive Vice
Chief Operating Officer - President, Director and Chief Operating
Insurance Division Officer of the Insurance Division since
January 1989.
Warren B. Idsal Vice President and 53 Mr. Idsal joined the Company and has
Chief Financial Officer 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.
Charles T. Prater Vice President and 47 Mr. Prater has served as a Vice
Chief Operating Officer - OKC President of the Company since 1993 and
Division as a Director since March 1996. Mr.
Prater has been Chief Operating Officer of
the OKC Division since 1988.
Robert B. Vlach Vice President, Secretary and 58 Mr. Vlach has served in his current
General Counsel position since May 1990.
</TABLE>
18
<PAGE> 19
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, 1997 HIGH LOW
------ ------
<S> <C> <C>
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
FISCAL YEAR ENDING DECEMBER 31, 1998
1st Quarter................................................................. $ 36 3/16 $30 3/4
2nd Quarter................................................................. 35 3/8 25 5/8
3rd Quarter................................................................. 27 7/8 12 13/16
4th Quarter................................................................. 24 1/2 12
</TABLE>
As of February 28, 1999, there were approximately 10,600 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 K of the Notes to Consolidated Financial Statements included in this
Report.
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, 1998 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.
19
<PAGE> 20
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------------------------------
1998 1997 1996 1995 1994
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND OPERATING RATIOS)
INCOME STATEMENT DATA:
<S> <C> <C> <C> <C> <C>
Revenues.............................................. $1,179,903 $ 955,829 $ 730,593 $ 641,074 $ 522,946
Benefits and expenses ................................ 1,082,422 819,983 619,211 554,413 466,931
---------- ---------- ---------- ---------- ----------
Income before federal income taxes and
minority interests ................................ 97,481 135,846 111,382 86,661 56,015
Federal income taxes ................................. 30,235 43,396 36,190 29,040 18,399
Minority interests ................................... 8,477 5,946 5,945 4,293 1,438
---------- ---------- ---------- ---------- ----------
Net Income............................................ $ 58,769 $ 86,504 $ 69,247 $ 53,328 $ 36,178
========== ========== ========== ========== ==========
Diluted earnings per common share .................... $ 1.26 $ 1.91 $ 1.66 $ 1.41 $ 0.96
OPERATING RATIOS:
Health Ratios:
Loss ratio(1) ..................................... 75% 63% 58% 58% 57%
Expense ratio(2) .................................. 30% 30% 33% 33% 36%
---------- ---------- ---------- ---------- ----------
Combined health ratio ............................. 105% 93% 91% 91% 93%
========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Total investments and cash............................ $1,207,127 $1,076,876 $1,057,782 $ 888,299 $ 770,960
Total assets ......................................... 2,475,055 1,579,383 1,320,988 1,130,859 1,031,263
Total policy liabilities ............................. 916,754 871,292 807,324 787,905 778,676
Total debt ........................................... 51,543 50,270 30,943 50,381 56,155
Student loan credit facility ......................... 669,026 -- -- -- --
Stockholders' equity ................................. 594,791 536,290 432,918 248,819 170,923
Stockholders' equity per share(3) .................... $ 12.52 $ 11.29 $ 9.55 $ 6.33 $ 5.04
</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 unrealized gains on available for sale securities which is
reported in accumulated other comprehensive income as a separate component
of stockholders' equity.
20
<PAGE> 21
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 and the ability of the Company and
third party vendors to modify computer systems for the Year 2000 data
conversion in a timely manner. 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 or changes in regulations for credit cards
or credit card national banks. The Company has certain risks associated with
the Educational Finance Group 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 by the federal government
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 operating segments are: (i) Insurance, which includes
the businesses of the Self-Employed Agency Division; the Student Insurance
Division; the OKC Division; the Special Risk Division; and the National Motor
Club Division; (ii) Financial Services which includes the businesses of the
Credit Services Division, Educational Finance Group; and Insurdata; and (iii)
Other Key Factors which includes investment income not allocated to the other
segments, interest expense, general expenses relating to corporate operations,
goodwill amortization, realized gains or losses on sale of investments and the
AMLI operations. Net investment income is allocated to the Insurance 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.
21
<PAGE> 22
CONSOLIDATED RESULTS OF OPERATIONS FOR 1998 COMPARED TO 1997
Revenues. Revenues increased to $1,179.9 million in 1998 from $955.8
million in 1997, an increase of $224.1 million or 23%. The increase was a
result of increases in premiums, other interest income, credit card fees and
other fee income.
Health premiums. Health premiums increased to $747.3 million in 1998
from $653.9 million in 1997, an increase of $93.4 million or 14%. The increase
in health premiums for the year was primarily the result of increased premiums
in the self employed market. The increase in the self employed market is due to
increased sales of new health policies by the marketing organizations and due
to discontinuing the coinsurance arrangement in 1996 for new business written
by UGA.
Life premiums and other considerations. Life premiums and other
considerations were comparable in 1998 and 1997. This was a result of the sale
of new life policies which was offset by the decrease in premiums and other
considerations from closed blocks of life and annuity business.
Investment income. Investment income decreased to $74.9 in 1998 from
$78.0 million in 1997, a decrease of $3.1 million or 4%. The decrease is due to
a decrease in investment yield.
Other interest income. Other interest income increased to $41.9
million in 1998 from $6.2 million in 1997, an increase of $35.7 million. The
increase was due to the investment income earned on student loans in 1998 and
the increase in interest earned on credit card receivables.
Credit card fees. Credit card fees increased to $112.9 million in 1998
from $48.1 million in 1997, an increase of $64.8 million. The increase is due
to the growth in new sales from a program started in 1997.
Other fee income. Other fee income increased to $111.1 million in 1998
from $70.3 million in 1997, an increase of $40.8 million. The increase is due
to the increase in revenue from Educational Finance Group and reporting a full
year of operations from National Motor Club.
Other income. Other income decreased to $37.5 million in 1998 from
$45.9 million in 1997, a decrease of $8.4 million or 18%. The decrease is
attributed to the disposition of business units that were sold in 1998 which
was partially offset by the $9.7 million gain on sale of assets of a business.
Gains on sale of investments. The Company recognized gains on sale of
investments of $4.9 million in 1998 compared to $4.0 million in 1997. 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, the net
unrealized investment gains on securities classified as "available for sale",
reported in accumulated other comprehensive income as a separate component of
stockholders' equity and net of applicable income taxes and minority interests,
was $13.4 million at December 31, 1998 compared to $14.3 million at December
31, 1997.
22
<PAGE> 23
Benefits, claims, and settlement expenses. Benefits, claims, and
settlement expenses increased to $586.0 million in 1998 from $449.7 million in
1997, an increase of $136.3 million, or 30%. The increase was primarily due to
the growth in premium volume and a higher loss ratio in the SEA Division.
Underwriting, acquisition and insurance expenses. Underwriting,
acquisition and insurance expenses increased to $275.8 million in 1998 from
$253.4 million in 1997, an increase of $22.4 million or 9%. The increase was
primarily due to the growth in premium volume.
Other expenses. Other expenses increased to $123.3 million in 1998
from $100.5 million in 1997, an increase of $22.8 million or 23%. The increase
is primarily due to the costs associated with the operations of the Credit
Services Division and Educational Finance Group.
Provision for doubtful accounts. Provision for doubtful accounts
increased to $75.0 million in 1998 from $13.5 million in 1997, an increase of
$61.5 million. The increase is attributed to the growth in the Credit Services
Division.
Income before federal income taxes and minority interests ("operating
income"). Operating income decreased to $97 million in 1998 from $136 million
in 1997, a decrease of $39 million or 29%. Operating income (loss) for each of
the Company's segments and divisions was as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
1998 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Insurance:
Self Employed Agency ........... $ (4,765) $ 47,552
Student Insurance .............. 6,089 15,540
OKC Division ................... 20,436 18,880
Special Risk ................... 5,805 7,988
National Motor Club ............ 5,099 2,024
------------ ------------
32,664 91,984
Financial Services:
Credit Services ................ 46,295 20,543
Educational Finance Group ...... (1,339) 2,020
Insurdata ...................... 3,277 2,637
Other Business Units ........... 441 (5,844)
------------ ------------
48,674 19,356
Other Key Factors ................. 16,143 24,506
------------ ------------
$ 97,481 $ 135,846
============ ============
</TABLE>
Self Employed Agency Division ("SEA"). The SEA Division reported a
loss of $4.8 million in 1998 compared to income of $47.6 million in 1997. The
lower earnings of SEA are the result of the losses on certain managed care
products and adjustments in the estimates of claim reserves based on an
analysis completed in 1998.
The losses on the managed care products are primarily the result of
the losses from a specific PPO insurance product, for which marketing of new
policies was discontinued in the first
23
<PAGE> 24
quarter of 1998. The operating losses for the managed care products were a
continuation of the problems recognized in the fourth quarter of 1997 while the
traditional indemnity products continued to produce acceptable profits. The
losses were due to higher loss ratios on those managed care products and a
slower than anticipated implementation of rate increases on the managed care
products. The Company also encouraged current inforce policyholders to raise
their deductibles and co-payment amounts.
The Company implemented a substantial rate increase on these PPO
policies beginning in April 1998 which was completed in October 1998. A new
round of rate increases was also started in October. The marketing
organizations have also been successful in directing a larger portion of new
sales to the traditional indemnity products in which the Company has not
experienced the pricing problems and higher claims volume it has had with the
PPO products.
The claim reserving method employed by the previous administrator of a
portion of SEA's insurance business was not comparable to the traditional
reserving methods employed by the Company for its other self employed health
insurance. While both reserving methods are acceptable for statutory and GAAP
reporting, the Company's method is the more conservative of the two methods.
The decision to conform the two methods at a time when a continuing evaluation
of rates and rate changes was critical in managing the block to profitability.
Conforming the two methods resulted in an increase in the claim reserves of $12
million in March 1998.
Revenue for the SEA Division increased to $610.1 million for the year
ended in 1998 from $538.3 million in 1997, an increase of 13%. The increase in
revenues is the result of an increase in the proportion of direct business
compared to coinsured business. New sales in 1998 were lower than 1997 as a
result of fewer PPO products being sold. Profit margins on newly introduced PPO
products are proving to be substantially improved.
Student Insurance. The Student Insurance Division reported income of
$6.1 million in 1998 compared to $15.5 million in 1997. The reduced earnings
reflect lower margins resulting from aggressive pricing in response to
increased price competition and the impact of regulatory and compliance issues,
particularly in the university health insurance market. Profit margins in this
Division are expected to provide an adequate return on investment. However,
margins are not expected to return to pre-1998 levels. Revenue for the Student
Insurance Division increased to $111.0 million in 1998 from $97.6 million in
1997, an increase of 14%.
OKC Division. Operating income for the OKC Division increased to $20.4
million for the year ended in 1998 from $18.9 million in 1997, an increase of
8%. The earnings of this Division continued to increase while the capital
invested in this Division decreased. The reduced capital is attributable to the
fact that no major purchases of closed blocks of life insurance policies were
made during the last two years. The increased earnings are the result of the
development and marketing of new products and continuing efforts to realize
more profits from the closed blocks of policies. Revenue for the OKC Division
decreased to $98.8 million in 1998 from $100.5 million in 1997, a decrease of
2%. The decrease in revenue is the result of lower revenues on the closed
blocks of life policies.
24
<PAGE> 25
Special Risk Division. Operating income for the Special Risk Division
decreased to $5.8 million for the year in 1998 from $8.0 million in 1997.
Included in 1997 is a gain of $2.7 million from the sale of a discontinued
Health Care Solutions company. Revenue for the Special Risk Division was $66.8
million in 1998 compared to $56.1 million in 1997, an increase of 19%. The
major operations of this Division were acquired in the second and third quarter
of 1997.
National Motor Club. Operating income for the National Motor Club was
$5.1 million in 1998 compared to $2.0 million in 1997. The National Motor Club
was acquired by the Company in the third quarter of 1997. Revenue for the
twelve months ended December 31, 1998 was $27.3 million compared to $10.3
million for the five months ended December 31, 1997.
Credit Services. Operating income for Credit Services increased to
$46.3 million in 1998 from $20.5 million in 1997. Revenue for Credit Services
increased to $123.2 million in 1998 from $50.3 million in 1997, an increase of
145%. The increase is primarily due to growth in new sales from a program
started in 1997. The program was monitored in its early stages to fine tune the
marketing program and evaluate the risk through actual performance of the
credit cards. This growth resulted in the number of accounts increasing to
776,000 at December 31, 1998 from 252,000 at December 31, 1997. Of the accounts
added during 1998 under the new program, 67% were added during the last four
months. During this time, the net managed credit card receivables increased to
$233.4 million from $95.5 million. A substantial portion of the increased
receivables was financed through a securitization of $60 million of receivables
in December 1998 and a growth in time deposits to $98.9 million at December 31,
1998 from $7.6 million at December 31, 1997.
Educational Finance Group ("EFG"). EFG reported an operating loss of
$1.3 million in 1998 compared to income of $2.0 million in 1997. Revenue for
EFG increased to $57.2 million in 1998 from $8.0 million in 1997.
In 1998, there was a radical change in the business of EFG as it
evolved from a marketing company to an originator, holder, and servicer of
student loans. Student loans increased to $670.4 million at December 31, 1998
from $11.3 million at December 31, 1997. With this change, EFG also had to
establish funding sources for the student loans. The first facility was entered
into in March 1998 and subsequently increased to $750 million.
In December 1998, EFG completed a $550 million Variable Rate Note
("VRN") facility which replaced $550 million of the $750 million repo facility.
The advantage of the VRN is 97% of the notes are rated AAA, with the remainder
rated BBB, by both Standard and Poor's and Moody's. These high quality credit
ratings greatly enhance the marketability of the notes. The balance of the $750
million repo facility, or $200 million remains in place. EFG continues to
explore additional funding facilities which will provide the short term,
intermediate, and long term funding for the student loans which will be
originated.
Insurdata. Insurdata reported operating income of $3.3 million in 1998
compared to $2.6 million in 1997. The operating income in 1998 was reduced by
approximately $740,000 of expenses incurred in preparation of an initial public
offering of equity securities. This offering
25
<PAGE> 26
will not be completed in the foreseeable future. Revenue for Insurdata increased
to $41.2 million in 1998 from $25.1 million in 1997, an increase of 64%.
Insurdata revenue from other divisions of the Company were $21.1 million and
$10.4 million in 1998 and 1997, respectively.
Other Business Units. In the past, Other Business Units have primarily
been HealthCare Solutions companies. Over the past 18 months most companies in
this category have been sold or closed down, with the exception of Insurdata.
For 1998, the Company reported net income of $441,000 which included two
business units which were sold in 1998, one resulted in a gain of $9.7 million
from the sale of the assets of the business, the other had a loss from
operations of $10.5 million.
Other Key Factors. Other key factors include investment income not
allocated to the other segments, interest expense, general expenses relating to
corporate operations, amortization of goodwill, realized gains or losses on
sale of investments and the AMLI operations. Operating income for other key
factors decreased to $16.1 million in 1998 from $24.5 million in 1997. The
decrease in 1998 is mainly attributed to an increase in amortization of
goodwill of $3.4 million and a decrease of $4.4 million in investment income on
equity. The decrease in investment income on equity is attributed to a decrease
in investment yield.
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 is mainly
attributed to an increase in premiums and the growth in the other revenue
categories.
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 SEA and Special Risk divisions. The increase in SEA is due to increased
sales of new health policies by the marketing organizations 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.
Investment income. Investment income increased to $78.0 million in
1997 from $63.4 million in 1996, an increase of $14.6 million, or 23%. The
increase was due to an increase in invested assets and yield on invested
assets. Invested assets increased to $1,060.9 million at December 31, 1997 from
$1,032.4 million at December 31, 1996.
26
<PAGE> 27
Other interest income. Other interest income decreased to $6.2 million
in 1997 from $8.0 million in 1996. The decrease is due to a decrease in net
yield from the Credit Services Division assets.
Credit card fees. Credit card fees increased to $48.1 million in 1997
from $38.6 million in 1996, an increase of $9.5 million. The increase related
primarily to increase in fees from Credit Services Division.
Other fee income. Other fee income increased to $70.3 million in 1997
from $46.9 million in 1996, an increase of $23.4 million or 50%. The increase
related primarily from companies acquired in 1995 and administrative fees from
the administrative operations acquired from AEGON on April 1, 1996.
Other income. Other income increased to $45.9 million in 1997 from
$25.4 million in 1996, an increase of $20.5 or 81%. The increase is due to the
HealthCare Solutions Companies acquired in 1995 and 1996 and the AMLI
operations acquired in 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 in accumulated
other comprehensive income 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 insurance expenses. Underwriting,
acquisition and insurance expenses increased to $253.4 million in 1997 from
$206.9 million in 1996, an increase of $46.5 million, or 23%. The increase was
primarily due to the growth in premium volume.
Other expenses. Other expenses increased to $100.5 million in 1997
from $57.6 million in 1996, an increase of $42.9 million or 74%. The increase
is due to costs associated with the operations of the Credit Services Division
and businesses acquired in the third quarter of 1996 and the first half of
1997.
Provision for doubtful accounts. Provision for doubtful accounts
remained comparable in 1997 when compared to 1996.
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
27
<PAGE> 28
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)
Income (loss) before federal income taxes
<S> <C> <C>
Insurance:
Self Employed Agency ............................... $ 47,552 $ 57,872
Student Insurance .................................. 15,540 14,404
OKC Division ....................................... 18,880 16,117
Special Risk ....................................... 7,988 1,205
National Motor Club ................................ 2,024 --
--------- ---------
91,984 89,598
Financial Services:
Credit Services .................................... 20,543 15,190
Educational Finance Group .......................... 2,020 --
Insurdata .......................................... 2,637 (483)
Other Business Units ............................... (5,844) (4,301)
--------- ---------
19,356 10,406
--------- ---------
Other Key Factors ..................................... 24,506 11,378
--------- ---------
$ 135,846 $ 111,382
========= =========
</TABLE>
Self Employed Agency Division ("SEA"). The SEA Division reported
income of $47.6 million in 1997 compared to income of $57.9 million in 1996.
Revenue for the SEA Division increased to $538.3 million in 1997 from $429.7
million in 1996, an increase of 25%. The decrease in earnings is the result of
the continued decrease in margins which was somewhat offset by increased
premium volumes. The combined ratio for 1997 was 93% compared to 91% in 1996.
Student Insurance. The Student Insurance Division reported income of
$15.5 million for the year in 1997 compared to $14.4 million in 1996. The $1.1
million increase is attributed to increased premium volumes. Revenue for the
Student Insurance Division increased to $97.6 million in 1997 from $94.5
million in 1996, an increase of 3%.
OKC Division. Operating income for the OKC Division increased to $18.9
million for the year ended in 1997 from $16.1 million in 1996, a 17% increase.
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. Revenue for the OKC
Division decreased to $100.5 million in 1997 from $102.5 million in 1996, a
decrease of 2%. The decrease in revenue is the result of lower revenues on the
closed blocks of life policies.
Special Risk. Operating income for Special Risk Division increased to
$8.0 million in 1997 from $1.2 million in 1996. The major operations of this
Division were acquired during the second and third quarter of 1997. In 1997,
the Company purchased a block of special risk coverages with annualized
premiums approximating $50.0 million net of reinsurance. Net
28
<PAGE> 29
collected premiums on this block were $35.0 million in 1997. Included in 1997 is
a $2.7 million gain from the sale of a discontinued HealthCare Solutions
company.
National Motor Club. Operating income for National Motor Club was $2.0
million in 1997. National Motor Club was acquired by the Company in the third
quarter of 1997.
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%. Revenue for Credit Services increased to $50.3 million in
1997 from $39.7 million in 1996, an increase of 27%. The increase in operating
income and revenue is primarily due to the continued growth in new sales which
increases revenue and operating income and better performance by the credit
card portfolio.
Educational Finance Group. EFG reported revenue of $8.0 million and
income of $2.0 million in 1997. EFG was acquired during the second quarter of
1997.
Insurdata. Operating income for Insurdata was $2.6 million in 1997
compared to a loss of $483,000 in 1996. The loss in 1996 is attributed to two
entities that had losses of $2.3 that had previously been reported in other
business units. Revenue for Insurdata increased to $25.1 million in 1997 from
$12.7 million in 1996, an increase of 98%. A majority of the increase in
revenue and operating income was due to Insurdata's contract to provide
services to the SEA and Student Insurance Divisions.
Other Business Units. Other business units consist of the HealthCare
Solutions companies most of which were disposed of or merged into other
business units with the exception of Insurdata.
Other Key Factors. Other key factors include investment income not
allocated to the other segments, interest expense, general expenses relating to
corporate operations, amortization of goodwill, realized gains or losses on
sale of investments and the AMLI operations. Operating income for other key
factors was $24.5 million in 1997 compared to $11.4 million in 1996. The
increase was primarily due to reporting a full year's operations for AMLI in
1997 compared to 1996 and to an increase in investment income not allocated to
the other segments and an increase in realized gains on the sale of investments
from $652,000 in 1996 to $4.0 million in 1997.
QUARTERLY RESULTS. The following table sets forth consolidated results of
operations for each of the Company's fiscal quarters in 1998 and 1997. 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.
29
<PAGE> 30
<TABLE>
<CAPTION>
QUARTER ENDED
---------------------------------------------------------------------------------------------
Dec. 31, Sept. 30 June 30, March 31, Dec. 31, Sept. 30, June 30, March 31,
1998 1998 1998 1998 1997 1997 1997 1997
--------- --------- --------- --------- --------- --------- --------- ---------
(In thousands except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total revenues ......... $ 312,789 $ 288,532 $ 300,771 $ 277,811 $ 300,529 $ 230,865 $ 224,182 $ 200,253
Income before federal
income taxes and
minority interests ..... 36,860 22,362 22,676 15,583 36,058 35,370 32,819 31,599
Net income ............. 22,623 13,531 14,458 8,157 22,654 22,614 20,944 20,292
Diluted earnings
per common share ....... $ 0.48 $ 0.29 $ 0.31 $ 0.18 $ 0.50 $ 0.50 $ 0.46 $ 0.45
</TABLE>
Computation of earnings per share for each quarter are made
independently of earnings per share for the year. The lower earnings of the
first quarter of 1998 are the results of the SEA Division reporting losses on
certain managed care products. Included in the first quarter of 1998 is a $2.3
million gain from the sale of certain assets of an ATM processing company in
February 1998. The $2.3 million gain was reported in the Other Business Units
segment and was partially offset by $2.5 million in operating losses from a
company that was disposed of in the third quarter of 1998. During the second
quarter, a dispute arose among the Company and its Chairman on one side and the
minority shareholder of one of the Company's subsidiaries on the other, as to
the contract interpretation and the distribution of the proceeds from the sale
of the assets of this subsidiary. A liquidator was appointed to rule on the
proper distribution based upon the interpretation of the agreement among the
Company, its Chairman, and the minority shareholder. The liquidator ruled that
the proceeds should be distributed differently than had previously been
determined by the Company. Accordingly, the Company recorded its additional
portion of the gain of $7.4 million in the second quarter of 1998 based on that
ruling. Although by interlocutory appeal the court of appeals divested the
liquidator of his authority, the trial court ultimately endorsed the
liquidator's ruling. The additional $7.4 million gain was reported in the Other
Business Units segment. The second quarter included $8.0 million in operating
losses from a company that was disposed of in the third quarter of 1998. The
higher earnings of the fourth quarter of 1998 are the result of the SEA Division
returning to profitability and the Credit Services Division reporting
significant growth in sales and profits from a program started in 1997.
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.
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
30
<PAGE> 31
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 31.0% for 1998 compared to 31.9%
for 1997 and 32.5% in 1996. The 1998, 1997, and 1996 effective rate varied from
the federal tax rate of 35% primarily due to the small life insurance company
deduction allowed for certain insurance subsidiaries of the Company 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, investment income, fees and other income deposits to fund the
credit card receivables, and borrowings to fund the student loans. The primary
uses of cash are payments for benefits, claims and commissions under those
policies, operating expenses and the funding of the credit card receivables and
student loans. Net cash provided from operations totaled approximately $140
million in 1998, $146 in 1997, and $126 million in 1996. 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 $1.2 billion at December
31, 1998 from $1.1 billion at December 31, 1997, an increase of $100 million.
The primary sources for the asset growth were borrowings, deposits, and the
cash provided by current year operations. The sources were partially offset by
the withdrawals, net of deposits, from investment products.
The growth in the credit card receivables not securitized from $54
million at December 31, 1997 to $136 million at December 31, 1998 has been
funded using time deposits at UCNB which increased from $8 million at December
31, 1997 to $99 million at December 31, 1998. The growth in the student loans
from $11 million at December 31, 1997 to $670 million at December 31, 1998 has
been funded using the proceeds from the student loan credit facility which had
a balance of $669 million at December 31, 1998. The overfunding relates to
accrued interest and premium on loans purchased during the year.
31
<PAGE> 32
In June 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.
In December 1998, the Company obtained a $50 million unsecured line of
credit from a bank. The line of credit matures in December 1999 and bears
interest at LIBOR plus 0.75%. At December 31, 1998, the Company had borrowed
$25 million under the line of credit. A portion of the funds were used to repay
the AEGON revolving credit note.
In 1998, the Company borrowed $12.0 million on its AEGON revolving
credit note. The funds were used to fund the student loan credit facility. The
Company had no outstanding balance on its revolving credit note with AEGON at
December 31, 1998. The note has a maximum line of credit of $12.0 million
through August 1, 2002 and bears interest at prime plus 0.875%.
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 $88.3 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 October 1995, the Company acquired the majority interest in
Insurdata. The acquisition was 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 December 31, 1996, the Company acquired the
remaining interest of Insurdata, based on a predetermined formula price of
$15.1 million.
The Company securitized $60.0 million, $30.0 million and $29.0 million
of credit card loans in 1998, 1997 and 1996, respectively of asset backed
securities in which the Company purchased participating interests totaling $6.0
million, $3.0 million and $2.9 million in 1998, 1997 and 1996, respectively.
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.
32
<PAGE> 33
The Company has commitments to fund the unused credit limits on credit
card loans. At December 31, 1998, the outstanding commitment was $31.0 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
K to the Audited Consolidated Financial Statements.
The OCC imposes certain capital adequacy requirements on the Company's
national credit card bank subsidiary. The capital adequacy is measured by the
method prescribed by the OCC in its rules and regulations for maintaining
capital adequacy. The Company has established a conservative capital policy
which exceeds the requirements of the regulatory authorities. Dividends paid by
the national credit card banks are also limited under agreements with the OCC.
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.
33
<PAGE> 34
Shown below are the Company's investments by category:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------- -----------------------
% 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: 1998--$865,589; 1997--$811,757) ... $ 886,406 74.5% $ 831,460 78.4%
Equity securities, at fair value
(cost: 1998--$18,521; 1997--$12,302) ..... 18,764 1.6 14,555 1.4
Mortgage and collateral loans ................. 8,266 0.7 19,523 1.8
Policy loans .................................. 21,332 1.7 22,173 2.1
Investment in unconsolidated subsidiary ....... 45,843 3.9 28,879 2.7
Short-term investments ........................ 209,616 17.6 144,354 13.6
---------- ---------- ---------- ----------
Total investments ........................... $1,190,227 100.0% $1,060,944 100.0%
========== ========== ========== ==========
</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 in accumulated
other comprehensive income 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
74.5% of the Company's total investments at December 31, 1998. Fixed maturity
securities consisted of the following:
<TABLE>
<CAPTION>
December 31, 1998
------------------------
% of Total
Carrying Carrying
Value Value
---------- ----------
(Dollars in thousands)
<S> <C> <C>
U.S. Treasury and U.S. Government agency obligations ....... $ 59,710 6.7%
Corporate bonds ............................................ 558,514 63.0
Mortgage-backed securities issued by U.S. ..................
Government agencies and authorities ...................... 50,026 5.7
Other mortgage and asset backed securities ................. 218,156 24.6
---------- ----------
$ 886,406 100.0%
========== ==========
</TABLE>
Included in the fixed maturity portfolio is a concentration of
mortgage-backed securities such as collateralized mortgage obligations and
mortgage-backed pass-throughs. To limit its credit risk, the Company invests in
mortgage-backed securities which are rated investment grade by the public
rating agencies. The Company's mortgage-backed securities portfolio is a
conservatively structured portfolio that is concentrated in the less volatile
tranches, in the form of planned amortization classes, sequential payment and
commercial mortgage-backed securities. The objectives are to minimize
prepayment risk during periods of declining interest rates and minimize
duration extension risk during periods of rising interest rates. The Company
has less than 1% invested in the more volatile tranches.
As of December 31, 1998, $845.6 million or 95.4% of the fixed maturity
securities portfolio was rated BBB or better (investment grade) and only $40.8
million or 4.6% of the fixed
34
<PAGE> 35
maturity securities portfolio was invested in below investment grade securities
(less than BBB). A quality distribution for fixed maturity securities is as
follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------
% of Total
Carrying Carrying
Value Value
---------- ----------
Rating (Dollars in thousands)
<S> <C> <C>
U.S. Governments and AAA ..... $ 258,706 29.2%
AA ........................... 84,300 9.5
A ............................ 261,757 29.5
BBB .......................... 243,036 27.4
Less than BBB ................ 38,607 4.4
---------- ----------
$ 886,406 100.0%
========== ==========
</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 and preferred provider contracts, covered
expenses are generally limited only by a maximum lifetime benefit, a maximum
lifetime benefit per accident or sickness. Thus, inflation may have a
significantly greater impact on the amount of claims paid under catastrophic
hospital expense and preferred provider 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 and subject to regulatory
approval in most cases.
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.
YEAR 2000 READINESS
STATE OF READINESS. 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 computers programs have time-sensitive software that recognizes 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, process credit cards or student loans or engage in similar normal
business activities. As a result, the Company has implemented a project
intended to ensure that hardware and software systems operated or licensed in
the Company's business are designed to operate and properly manage dates beyond
December 31, 1999 ("Year 2000 Ready"). The Year 2000 project has assessed the
Company's information technology and operating systems ("IT Systems") and is
35
<PAGE> 36
assessing non-information technology systems, including embedded technology,
relating to, among other systems, security systems, elevator systems and
heating, ventilating and air conditioning systems ("Non-IT Systems"). The Year
2000 project consists of five phases: (i) awareness, (ii) assessment, (iii)
analysis, design and remediation, (iv) testing and validation and (v) creation
of contingency plans in the event of Year 2000 failures.
IT Systems. The Company has completed the first two phases of the Year
2000 project for all of its IT Systems. The Company has completed the analysis,
design and remediation phase for substantially all of its IT Systems. The
Company plans to complete the remediation of substantially all of its mission
critical IT systems by mid-second quarter of 1999 and the testing and
validation of all of its IT Systems by mid-third quarter of 1999.
Non-IT Systems. The Company believes that Year 2000 non-readiness of
its own Non-IT Systems would not have a material adverse effect on the
Company's business or operations. Accordingly, the Company has primarily
focused its efforts on its IT Systems.
Readiness of Third Parties. The Company relies on hardware and
software of third parties as material components of its IT Systems, including
network access between the Company's data center and credit card transaction
processors. As part of the Year 2000 project, the Company is testing such
software, hardware and interfaces for Year 2000 and has determined that some of
the software, hardware and interfaces are not Year 2000 ready. In addition, the
Company is polling the third parties who provide software, hardware or data to
the Company regarding each of such third party's Year 2000 readiness plan and
state of readiness. The Company is requesting written responses from such third
parties that their software, hardware and data is, or will be on a timely
basis, Year 2000 ready.
The Company provides services to third parties. If a Year 2000 problem
caused the interruption of such services to those customers, such interruption
could have a material adverse effect on the Company's business and the Company
could incur liability as a result.
YEAR 2000 COSTS. The Company expects to incur internal labor costs, as well as
other expenses, in its Year 2000 project. The Company's total estimated cost of
the project is approximately $10.5 million of which approximately $6.2 million,
cumulatively, was incurred as of December 31, 1998 and $5.2 million was
incurred during 1998. Future costs of the Year 2000 project will primarily
result from the re-deployment of information technology resources, although no
significant internal IT Systems projects are being deferred to further the Year
2000 Project. Costs associated with the Year 2000 project are expensed as
incurred and are paid from operating cash flows.
RISKS OF YEAR 2000 NON-READINESS AND CONTINGENCY PLANS. The economy in general,
and the insurance industry in particular, may be adversely affected by risks
associated with the Year 2000. The Company's business, financial condition, and
results of operations could be materially adversely affected if systems that it
operates or licenses to third parties, or systems that are operated by other
parties (e.g., utilities, telecommunications service providers, data providers,
associates, credit card transaction processors) with which the Company's
systems interface, are not Year 2000 Ready in time. There can be no assurance
that these systems will
36
<PAGE> 37
continue to properly function and interface and will otherwise be Year 2000
Ready. Although the Company is not aware of any threatened claims related to the
Year 2000, the Company may be subject to litigation arising from such claims
and, depending on the outcome, such litigation could have a material adverse
affect on the Company. It is not clear whether the Company's insurance coverage
would be adequate to offset these and other business risks related to the Year
2000.
The Company has not had any material processing disruptions to date
that were caused by Year 2000 issues. Internal testing provides the Company
with a level of confidence that in a most reasonably likely worse case scenario
these systems will not cause a material disruption on a forward-looking basis.
A most reasonably likely worst case scenario would anticipate that it is
possible that potential consequences would include, among other possibilities,
the inability to accurately and timely process benefit claims, update
customers' accounts, bill customers, calculate financial and actuarial data,
and report accurate data to management, shareholders, customers and regulators.
The Company cannot guarantee that it will be able to resolve all of its Year
2000 issues. Any critical unresolved Year 2000 issues could have a material
adverse effect on the Company's results of operations, liquidity or financial
condition. The Company expects to complete the process of identifying
contingency plans by June 30, 1999.
The expected costs of the Year 2000 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, the success in becoming Year 2000 Ready of third parties whose
software and hardware systems interface with the Company, the outcome of
possible Year 2000 litigation involving the Company and similar uncertainties.
RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
The Company is assessed amounts by state guaranty funds to cover
losses of policyholders of insolvent or rehabilitated insurance companies, by
state insurance oversight agencies to cover the operating expenses of such
agencies and by other similar legislative entities. These mandatory assessments
may be partially recovered through a reduction in future premium taxes in
certain states. Effective January 1, 1999, the Company will be required to
adopt the provisions of AICPA Statement of Position 97-3 ("SOP 97-3"), under
which these assessments are required to be accrued in the period in which they
have been incurred. The effects of initially adopting SOP 97-3 will be recorded
as the cumulative effective of a change in accounting principle. The Company
has not determined the impact that the adoption of SOP 97-3 will have on its
financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued
Statement No. 133, Accounting for Derivative Instruments and Hedging
Activities, which is required to be adopted in years beginning after June 15,
1999. Because of the Company's minimal use of derivatives,
37
<PAGE> 38
management does not anticipate that the adoption of the new Statement will have
a significant effect on earnings or the financial position of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk is the risk of loss arising from adverse changes in market
rates and prices, such as interest rates, foreign currency exchange rates, and
other relevant market rate or price changes. Market risk is directly influenced
by the volatility and liquidity in the markets in which the related underlying
assets are traded.
The primary market risk to the Company's investment portfolio is
interest rate risk associated with investments and the amount of interest that
policyholders expect to have credited to their policies. The interest rate risk
taken in the investment portfolio is managed relative to the duration of the
liabilities. The Company's investment portfolio consists mainly of high
quality, liquid securities that provide current investment returns. The Company
believes that the annuity and universal life-type policies are generally
competitive with those offered by other insurance companies of similar size.
The Company does not anticipate significant changes in the primary market risk
exposures or in how those exposures are managed in the future reporting periods
based upon what is known or expected to be in effect in future reporting
periods.
Profitability of the student loans is affected by the spreads between
the interest yield on the student loans and the cost of the funds borrowed
under the various credit facilities. Although the interest rates on the student
loans and the interest rate on the credit facilities are variable, the interest
earned uses the 91-day T-bill as the base rate while the base rate on the
credit facilities is LIBOR.
The Credit Card Division's operations are subject to risk resulting
from interest rate fluctuations to the extent that there is a difference
between the amount of interest earned on the credit cards and the amount of the
interest paid on the time deposits. The maturity of the time deposits is less
than one year. The principal objective of the Company's asset/liability
management activities is to provide maximum levels of net interest income while
maintaining acceptable levels of interest rate and liquidity risk and
facilitating the funding needs of the Company.
Sensitivity analysis is defined as the measurement of potential loss
in future earnings, fair values or cash flows of market sensitive instruments
resulting from one or more selected hypothetical changes in interest rates and
other market rates or prices over a selected time. In the Company's
sensitivity analysis model, a hypothetical change in market rates is selected
that is expected to reflect reasonably possible near-term changes in those
rates. "Near term" is defined as a period of time going forward up to one year
from the date of the consolidated financial statements.
In this sensitivity analysis model, the Company uses fair values to
measure its potential loss. The primary market risk to the Company's market
sensitive instruments is interest rate risk. The sensitivity analysis model
uses a 100 basis point change in interest rates to measure the hypothetical
change in fair value of financial instruments included in the model. For
invested assets, duration modeling is used to calculate changes in fair values.
Duration on invested assets is adjusted to call, put and interest rate reset
features.
The sensitivity analysis model produces a loss in fair value of
market sensitive instruments of $41 million based on a 100 basis point
increase in interest rates as of December 31, 1998. This loss value only
reflects the impact of an interest rate increase on the fair value of the
Company's financial instruments.
The Company has not used derivative financial instruments in managing
its market risk.
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 ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not applicable.
38
<PAGE> 39
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
See the Company's Proxy Statement to be filed in connection with the
1999 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
1999 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
1999 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
1999 Annual Meeting of Stockholders, of which the subsection entitled "Certain
Relationships and Related Transactions" is incorporated herein by reference.
39
<PAGE> 40
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, 1998 and 1997....................................................... F-3
Consolidated Statements of Income--Years ended December 31, 1998, 1997, and 1996.............................. F-4
Consolidated Statements of Stockholders' Equity--Years ended December 31, 1998,
1997, and 1996............................................................................................ F-5
Consolidated Statements of Cash Flows--Years ended December 31, 1998, 1997,
and 1996 ................................................................................................. F-6
Notes to Consolidated Financial Statements.................................................................... F-7
(a) 2. Financial Statement Schedules
Schedule II -- Condensed Financial Information of Registrant
December 31, 1998, 1997, and 1996:
UICI (Parent Company)................................................................. F-37
Schedule III -- Supplementary Insurance Information....................................................... F-40
Schedule IV -- Reinsurance............................................................................... F-42
Schedule V -- Valuation and Qualifying Accounts......................................................... F-43
</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 not 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 42.
(b) Reports on Form 8-K
None.
40
<PAGE> 41
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 30, 1999 By /s/Gregory T. Mutz
-------------- ------------------------------
Gregory T. Mutz, President and
Chief Executive Officer
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.
/s/Ronald L. Jensen Date March 30, 1999
- --------------------------------------- --------------------
Ronald L. Jensen, Chairman of the Board
and Director
/s/Gregory T. Mutz Date March 30, 1999
- --------------------------------------- --------------------
Gregory T. Mutz, President, Chief
Executive Officer and Director
/s/Vernon R. Woelke Date March 30, 1999
- --------------------------------------- --------------------
Vernon R. Woelke, Vice President,
Treasurer, Principal Financial and
Accounting Officer and Director
/s/Richard J. Estell Date March 30, 1999
- --------------------------------------- --------------------
Richard J. Estell, Director and
Executive Vice President
/s/Richard T. Mockler Date March 30, 1999
- --------------------------------------- --------------------
Richard T. Mockler, Director
41
<PAGE> 42
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <C>
2 Plan of Reorganization of United Group Insurance Company, as
subsidiary of United Group Companies, Inc. and Plan and Agreement of
Merger of United Group Companies, Inc. into United Insurance
Companies, Inc., filed as Exhibit 2-1 to the Registration Statement
on form S-1, File No. 33-2998, filed with the Securities and Exchange
Commission on January 30, 1986 and incorporated by reference herein.
3.1(A) Certificate of Incorporation of UICI, as amended, filed as Exhibit
3.1 to the Form 10-Q dated June 30, 1996, filed on August 13, 1996,
File No. 0-14320, and incorporated by reference herein.
3.2(A) Restated By-Laws, as amended, of the Company, filed as Exhibit 3.2
to the Form 10Q dated March 31, 1998, filed on May 14, 1998, File
No. 0-14320, and incorporated by reference herein.
10.1(B) Reinsurance Agreement between AEGON USA Companies and UICI Companies
Effective January 1, 1995, as amended through November 21, 1995 and
incorporated by reference herein.
10.1(C) Amendment No. 3 to Reinsurance Agreement between AEGON USA Companies
and UICI Companies effective April 1, 1996, and filed as Exhibit 10.1
to the Company's Current Report on Form 8-K dated April 1, 1996 (File
No. 0-14320), and incorporated by reference herein. The Amendment No.
3 amends the Reinsurance Agreement between AEGON USA Companies and
UICI Companies effective January 1, 1995, as amended through November
21, 1995, filed as Exhibit 10.1(B) on Annual Report on Form 10-K for
year ended December 31, 1995, (File No. 0-14320), filed on March 29,
1996, and incorporated by reference herein.
10.2 Agreements Relating to United Group Association Inc., filed as
Exhibit 10-2 to the Registration Statement on Form S-18, File No.
2-99229, filed with the Securities and Exchange Commission on July
26, 1985 and incorporated by reference herein.
10.3 Agreement for acquisition of capital stock of Mark Twain Life
Insurance Corporation by Mr. Ronald L. Jensen, filed as Exhibit 10-4
to the Registration Statement on Form S-1, File No. 33-2998, filed
with the Securities and Exchange Commission on January 30, 1986 and
incorporated by reference herein.
10.3(A) Assignment Agreement among Mr. Ronald L. Jensen, the Company and
Onward and Upward, Inc. dated February 12, 1986 filed as Exhibit
10-4(A) to Amendment No. 1 to Registration Statement on Form S-1,
File No. 33-2998, filed with the Securities and Exchange Commission
on February 13, 1986 and incorporated by reference herein.
</TABLE>
42
<PAGE> 43
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <C>
10.4 Agreement for acquisition of capital stock of Mid-West National Life
Insurance Company of Tennessee by the Company filed as Exhibit 2 to
the Report on Form 8-K of the Company, File No. 0-14320, dated August
15, 1986 and incorporated by reference herein.
10.5(A) Stock Purchase Agreement, dated July 1, 1986, among the Company,
Charles E. Stuart and Stuart Holding Company, as amended July 7,
1986, filed as Exhibit 11(c)(1) to Statement on Schedule 14D-1 and
Amendment No. 1 to Schedule 13D, filed with the Securities and
Exchange Commission on July 14, 1986 and incorporated by reference
herein.
10.5(B) Acquisition Agreement, dated July 7, 1986 between Associated
Companies, Inc. and the Company, together with exhibits thereto,
filed as Exhibit (c) (2) to Statement on Schedule 14D-1 and Amendment
No. 1 to Schedule 13D, filed with the Securities and Exchange
Commission on July 14, 1986 and incorporated by reference herein.
10.5(C) Offer to Purchase, filed as Exhibit (a) (1) to Statement on Schedule
14D-1 and Amendment No. 1 to Schedule 13D, filed with the Securities
and Exchange Commission on July 14, 1986 and incorporated by
reference herein.
10.6 Agreement for acquisition of capital stock of Life Insurance Company
of Kansas, filed as Exhibit 10.6 to the 1986 Annual Report on Form
10-K, File No. 0-14320, filed with the Securities and Exchange
Commission on March 27, 1987 and incorporated by reference herein.
10.7 Agreement Among Certain Stockholders of the Company, filed as Exhibit
10-6 to the Registration Statement on Form S-18, File No. 2-99229,
filed with the Securities and Exchange Commission on July 26, 1985
and incorporated by reference herein.
10.8 Form of Subscription Agreement for 1985 Offering, filed as Exhibit
10-7 to the Registration Statement on Form S-1, File No. 33-2998,
filed with the Securities and Exchange Commission on January 30, 1986
and incorporated by reference herein.
10.9 Repurchase Agreement between Life Investors Inc., UGIC, Ronald Jensen
and Keith Wood dated January 6, 1984, filed as Exhibit 10-8 to
Registration Statement on Form S-1, File No. 33-2998, filed with the
Securities and Exchange Commission on January 30, 1986 and
incorporated by reference herein.
</TABLE>
43
<PAGE> 44
<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>
44
<PAGE> 45
<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>
45
<PAGE> 46
<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.
</TABLE>
46
<PAGE> 47
<TABLE>
<CAPTION>
Exhibit Page
Number Description of Exhibit Number
- ------ ---------------------- ------
<S> <C> <C>
10.30 Agreement between United Group Association, Inc. and Cornerstone
Marketing of America effective April 1, 1996, and filed as Exhibit
10.5 to the Company's Current Report on Form 8-K dated April 1, 1996
(File No. 0-14320) and incorporated by reference herein.
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 Auditors
27 Financial Data Schedule
</TABLE>
NOTE FOR READERS OF FORM 10-K
This copy of the Annual Report on Form 10-K only includes a copy of
Exhibit 21. UICI will provide a copy of any exhibit upon written request. All
requests should be mailed to the address on Page 1 or to [email protected]
47
<PAGE> 48
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, 1998
UICI
AND
SUBSIDIARIES
DALLAS, TEXAS
F-1
<PAGE> 49
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, 1998 and 1997, and the related
consolidated statements of income, stockholders' equity and cash flows for each
of the three years in the period ended December 31, 1998. 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, 1998 and 1997, and the consolidated results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, 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 12, 1999
F-2
<PAGE> 50
UICI AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31
-----------------------
ASSETS 1998 1997
---------- ----------
<S> <C> <C>
Investments
Securities available for sale--
Fixed maturities, at fair value
(cost: 1998--$865,589 1997--$811,757) ............. $ 886,406 $ 831,460
Equity securities, at fair value
(cost: 1998--$18,521; 1997--$12,302) .............. 18,764 14,555
Mortgage and collateral loans ........................ 8,266 19,523
Policy loans ......................................... 21,332 22,173
Investment in unconsolidated subsidiary .............. 45,843 28,879
Short-term investments ............................... 209,616 144,354
---------- ----------
Total Investments ................................. 1,190,227 1,060,944
Student loans .......................................... 670,429 11,254
Credit card loans ...................................... 136,280 54,068
Cash ................................................... 16,900 15,932
Agents' receivables .................................... 11,249 13,662
Reinsurance receivables ................................ 89,566 78,696
Receivables from related parties ....................... 14,069 17,105
Due premiums and other receivables ..................... 39,675 49,217
Investment income due and accrued ...................... 41,022 14,063
Deferred acquisition costs ............................. 93,008 99,611
Goodwill ............................................... 108,346 111,067
Property and equipment, net ............................ 51,938 46,634
Other .................................................. 12,346 7,130
---------- ----------
$2,475,055 $1,579,383
========== ==========
LIABILITIES
Policy liabilities:
Future policy and contract benefits .................. $ 468,297 $ 487,024
Claims ............................................... 317,298 258,821
Unearned premiums .................................... 110,569 105,696
Other policy liabilities ............................. 20,590 19,751
Federal income taxes ................................... 34,369 19,891
Other liabilities ...................................... 91,133 78,770
Notes payable to related parties ....................... 497 10,609
Time deposits .......................................... 98,913 7,596
Short-term debt ........................................ 29,778 9,643
Long-term debt ......................................... 21,268 30,018
Student loan credit facility ........................... 669,026 --
---------- ----------
1,861,738 1,027,819
MINORITY INTERESTS ......................................... 18,526 15,274
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Common Stock, par value $0.01 per share--authorized
50,000,000 shares; issued and outstanding 46,428,941
shares in 1998 and 46,229,507 shares in 1997 ......... 464 462
Preferred stock, par value $0.01 per share--authorized
10,000,000 shares; no shares issued and outstanding
in 1998 and 1997 ..................................... -- --
Additional paid-in capital ............................. 166,489 165,891
Accumulated other comprehensive income:
Net unrealized investment gains ...................... 13,412 14,280
Retained earnings ...................................... 414,426 355,657
---------- ----------
594,791 536,290
---------- ----------
$2,475,055 $1,579,383
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-3
<PAGE> 51
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except share amounts)
<TABLE>
<CAPTION>
Year Ended December 31
------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
REVENUE
Premiums:
Health ............................................. $ 747,275 $ 653,906 $ 501,185
Life premiums and other considerations ............. 49,347 49,434 46,570
---------- ---------- ----------
796,622 703,340 547,755
Investment income ..................................... 74,892 77,971 63,352
Other interest income ................................. 41,927 6,203 7,993
Credit card fees ...................................... 112,867 48,070 38,591
Other fee income ...................................... 111,138 70,295 46,870
Other income .......................................... 37,545 45,936 25,380
Gains on sale of investments .......................... 4,912 4,014 652
---------- ---------- ----------
1,179,903 955,829 730,593
BENEFITS AND EXPENSES
Benefits, claims, and settlement expenses ............. 586,035 449,657 335,895
Underwriting, acquisition, and insurance expenses ..... 275,836 253,432 206,914
Other expenses ........................................ 123,284 100,508 57,648
Provision for doubtful accounts ....................... 74,984 13,529 16,240
Interest expense ...................................... 3,059 2,857 2,514
Interest expense--student loan credit facility ........ 19,224 -- --
---------- ---------- ----------
1,082,422 819,983 619,211
---------- ---------- ----------
INCOME BEFORE FEDERAL
INCOME TAXES AND MINORITY
INTERESTS ..................................... 97,481 135,846 111,382
Federal income taxes ....................................... 30,235 43,396 36,190
---------- ---------- ----------
INCOME BEFORE
MINORITY INTERESTS ............................ 67,246 92,450 75,192
Minority Interests ......................................... 8,477 5,946 5,945
---------- ---------- ----------
NET INCOME .................................... $ 58,769 $ 86,504 $ 69,247
========== ========== ==========
Basic Earnings Per Common Share ............... $ 1.27 $ 1.91 $ 1.66
========== ========== ==========
Diluted Earnings Per Common Share ............. $ 1.26 $ 1.91 $ 1.66
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 52
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Dollars in thousands)
<TABLE>
<CAPTION>
Accumulated
Other
Comprehensive Retained Common Paid-In
Income Earnings Stock Capital Total
------------- ----------- ------ --------- ---------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996........................... $ 6,789 $ 191,094 $ 382 $ 50,554 $ 248,819
Comprehensive income
Net income..................................... 69,247 69,247
---------
Other comprehensive income, net of tax
Unrealized gains on securities.............. (7,391) (7,391)
Deferred income taxes....................... 2,197 2,197
Minority interests.......................... 558 558
---------
Other comprehensive income.............. (4,636)
---------
Comprehensive income................................. 64,611
---------
Exercise of stock options and warrants............... 1 170 171
Adjustment for business combinations................. 4,305 16 15,119 19,440
Public sale of common stock at $20.50
per share, net of expenses..................... 52 100,096 100,148
Retirement of treasury stock......................... (271) (271)
--------- ----------- ----- --------- ---------
Balance at December 31, 1996......................... 2,153 264,646 451 165,668 432,918
Comprehensive income
Net income..................................... 86,504 86,504
---------
Other comprehensive income, net of tax
Unrealized gains on securities.............. 18,645 18,645
Deferred income taxes....................... (6,010) (6,010)
Minority interests.......................... (508) (508)
---------
Other comprehensive income.............. 12,127
---------
Comprehensive income................................. 98,631
---------
Exercise of stock options and warrants............... 1 417 418
Adjustment for business combinations................. 4,507 10 4,517
Retirement of treasury stock......................... (194) (194)
--------- ----------- ----- --------- ---------
Balance at December 31, 1997......................... 14,280 355,657 462 165,891 536,290
Comprehensive income
Net income..................................... 58,769 58,769
---------
Other comprehensive income, net of tax
Unrealized gains on securities.............. (1,328) (1,328)
Deferred income taxes....................... 47 47
Minority interests.......................... 413 413
---------
Other comprehensive income.............. (868)
---------
Comprehensive income................................. 57,901
---------
Common stock issued.................................. 2 3,898 3,900
Issuance of common stock to officer for note......... (3,300) (3,300)
--------- ----------- ----- --------- ---------
Balance at December 31, 1998......................... $ 13,412 $ 414,426 $ 464 $ 166,489 $ 594,791
========= =========== ===== ========= =========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 53
UICI AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income ........................................................ $ 58,769 $ 86,504 $ 69,247
Adjustments to reconcile net income to cash
provided by operating activities:
Increase in policy liabilities ................................. 66,935 61,769 40,599
Increase in accrued investment income .......................... (26,959) (1,328) (1,414)
Increase in other liabilities .................................. 17,267 14,942 4,632
Deferred income tax (benefit) payable .......................... (2,004) 6,957 6,425
(Decrease) increase in federal income taxes payable ............ 16,529 (3,298) 4,715
Increase in reinsurance receivables and other receivables ...... (12,593) (7,605) (5,321)
Acquisition costs deferred ..................................... (18,430) (45,263) (20,913)
Amortization of deferred acquisition costs ..................... 24,480 21,001 17,080
Depreciation and amortization .................................. 17,083 11,458 7,209
Net income attributable to minority interests .................. 8,477 5,946 5,945
Gains on sale of investments ................................... (4,912) (4,014) (652)
Other items, net ............................................... (4,178) (1,490) (2,014)
---------- ---------- ----------
Cash Provided by Operating Activities ........................ 140,464 145,579 125,538
---------- ---------- ----------
INVESTING ACTIVITIES
Securities available-for-sale
Purchases ...................................................... (468,889) (686,999) (646,421)
Sales .......................................................... 332,234 516,246 499,717
Maturities, calls and redemptions .............................. 81,537 125,616 121,162
Credit card loans
Fundings ....................................................... (442,300) (172,350) (102,744)
Repayments ..................................................... 300,088 110,770 83,585
Sales .......................................................... 60,000 30,000 33,397
Student loans
Purchases and originations ..................................... (766,180) (10,234) (6,532)
Repayments ..................................................... 34,445 796 648
Sales .......................................................... 72,560 16,227 --
Other investments
Purchases ...................................................... (42,951) (17,453) (14,349)
Sales, repayments and maturities ............................... 39,943 5,244 5,808
Short-term investments-net ........................................ (74,547) 79,262 (111,769)
Purchase of subsidiaries and life and health business
net of cash acquired of $20, $2,137, and $3,996 in
1998, 1997, and 1996, respectively ............................. (3,061) (95,312) (4,291)
Sale of assets and subsidiaries, net of cash of $1,528 ............ 21,270 -- --
Minority interest purchased ....................................... (11,117) (15,062) (9,831)
Additions to property and equipment ............................... (20,680) (19,187) (17,722)
Decrease (increase) in agents' receivables ........................ 2,412 (1,088) (2,202)
---------- ---------- ----------
Cash Used in Investing Activities ................................. (885,236) (133,524) (171,544)
---------- ---------- ----------
FINANCING ACTIVITIES
Net cash provided from time deposits .............................. 91,317 7,596 --
Proceeds from notes payable ....................................... 40,620 11,615 11,264
Repayment of notes payable ........................................ (28,990) (5,931) (22,242)
Proceeds from payable to related party ............................ 100 -- --
Repayment of payable to related party ............................. -- -- (10,735)
Proceeds from student loan credit facility ........................ 684,979 -- --
Repayment of student loan credit facility ......................... (15,953) -- --
Deposits from investment products ................................. 16,490 17,746 17,078
Withdrawals from investment products .............................. (37,963) (44,038) (38,258)
Proceeds from exercise of stock options and warrants .............. -- 418 179
Purchase of treasury stock ........................................ -- (194) (271)
Proceeds from issuance of common stock, net of expenses ........... 3,900 -- 100,148
Contributions (distributions) to minority interests ............... (8,760) 1,245 (1,650)
---------- ---------- ----------
Cash Provided by (Used in) Financing Activities .............. 745,740 (11,543) 55,513
---------- ---------- ----------
Net Increase in Cash ......................................... 968 512 9,507
Cash at Beginning of Period .................................. 15,932 15,420 5,913
---------- ---------- ----------
Cash at End of Period ........................................ $ 16,900 $ 15,932 $ 15,420
========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 54
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 Q to the financial
statements.
The Company's Health Insurance segment issues health insurance
policies, including catastrophic coverages, to niche markets, particularly to
the self-employed and student markets. The OKC Division 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
markets credit support services to persons with no, or troubled, credit
experience and assists them in obtaining a nationally recognized credit card.
Educational Finance Group segment provides financial solutions for college
students and the educational institutions they attend by offering an integrated
package of student loans and student loan servicing. National Motor Club is a
leading provider of motor club benefits to non-metropolitan areas of the United
States. Insurdata is a healthcare payer system development company providing
technology solutions and related outsourcing services to the healthcare
industry. Other Business Units in the past have been primarily HealthCare
Solutions companies. Over the past eighteen months most companies in this
category have been sold or closed down. This unit will cease to exist in 1999.
Other Key Factors include investment income not allocated to the other
segments, interest expenses, general expenses relating to corporate operations,
amortization of goodwill, realized gains or losses on sale of investments and
the AMLI operations.
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-
F-7
<PAGE> 55
admitted assets for statutory purposes. (See Note K for stockholders' equity and
net income as determined using statutory accounting practices.)
Investments: Investments are valued as follows:
Fixed maturities consist of bonds and notes 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.
Mortgage and collateral loans are carried at unpaid balances, less
allowance for losses.
Policy loans are carried at unpaid balances.
Cash and short-term investments are carried at cost which approximates
fair value.
Investment in unconsolidated subsidiary is principally stated at the
Company's cost as adjusted for contributions or distributions and the Company's
share of partnership income or 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 have an other than temporary decline in fair
values. Unrealized investment gains or losses on securities carried at fair
value, net of applicable deferred income tax and minority interests, are
reported in accumulated other comprehensive income 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.
Student loans, consisting of student loans originated and student
loans purchased, are carried at their unpaid principal balances, which are
adjusted for unamortized premiums and loan origination costs.
Credit card loans are carried at unpaid balances less allowance for
losses.
Provision for Possible Credit Losses: The provision for possible credit
losses includes current period credit losses and an amount which, in the
judgment of management, is necessary to maintain the allowance for possible
credit losses at a level that reflects known and inherent risks in the credit
card loan portfolio.
Deferred Student Loan Costs: The costs associated with generating
student loans, principally salaries and related expenses, have been deferred
and are included in student loans. These costs are amortized over the life of
the underlying loans.
Credit Cards Annual Fees: The Company collects various fees at the time
credit cards are issued. These fees are either recognized as earned over a one
year period on a straight line basis or recognized as received.
F-8
<PAGE> 56
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 generally amortized over the effective period for the related
unearned premiums. Anticipated investment income is considered in determining
whether a premium deficiency exists. 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, generally 3 to 7 years for furniture and
equipment and 30 years for buildings, of the assets. The accumulated
depreciation for property and equipment was $32.2 million and $31.7 million at
December 31, 1998 and 1997, respectively. Depreciation expense was $11.4
million, $8.2 million, and $5.5 million for 1998, 1997, and 1996, respectively.
Goodwill: The excess of cost over the underlying value of the net
assets of companies acquired is generally amortized on a straight-line basis
over 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. An impairment loss
would be recorded in the period such determination was made. The Company has
goodwill, net of accumulated amortization, of $108.3 million and $111.1 million
in 1998 and 1997, respectively. Amortization expense recorded totaled $5.7
million, $2.3 million, and $1.8 million in 1998, 1997, and 1996, respectively.
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
F-9
<PAGE> 57
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.
Student loan income: The Company recognizes student loan income as
earned, including adjustments for the amortization of premiums. Marketing fees
for student loans which are sold to third parties are earned when received are
included in the other fee income category.
Credit card income: The Company recognizes credit card interest income
on the balances outstanding according to the terms of the related card member
agreements.
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
ceded 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.
Guaranty Funds and Similar Assessments: The Company is assessed amounts
by state guaranty funds to cover losses of policyholders of insolvent or
rehabilitated insurance companies, by state insurance oversight agencies to
cover the operating expenses of such agencies and by other similar legislative
entities. These mandatory assessments may be partially recovered through a
reduction in future premium taxes in certain states. Effective January 1, 1999,
the Company will be required to adopt the provisions of AICPA Statement of
Position 97-3 ("SOP 97-3"), under which these assessments are required to be
accrued in the period in which they have been incurred. The effects of initially
adopting SOP 97-3 will be recorded as the cumulative effective of a change in
accounting principle. The Company has not determined the impact that the
adoption of SOP 97-3 will have on its financial condition or results of
operations.
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.
New Pronouncements: As of January 1, 1998, the Company adopted
Financial Accounting Standards Board's Statement of Financial Accounting
Standards ("FAS") No. 130, Reporting Comprehensive Income. Statement 130
establishes new rules for the reporting and display of comprehensive income and
its components; however, the adoption of this Statement had no impact on the
Company's net income or shareholders' equity. Statement 130 requires unrealized
gains or losses on the Company's available-for-sale securities, which prior to
adoption were reported separately in shareholders' equity, to be included in
other comprehensive income. Prior year financial statements are presented in
conformity with the requirements of Statement 130. The reclassification
adjustment for 1998 is $1.5 million net of minority interest of $385,000 and tax
of $403,000.
Effective January 1, 1998, the Company adopted FAS No. 131,
Disclosures about Segments of an Enterprise and Related Information. Statement
131 superseded FASB Statement
F-10
<PAGE> 58
No. 14, Financial Reporting of Segments of a Business Enterprise. Statement 131
establishes standards for the way that public business enterprises report
information about operating segments in annual financial statements and requires
that those enterprises report selected information about operating segments in
interim financial reports. Statement 131 also establishes standards for related
disclosures about products and services, geographic areas, and major customers.
The adoption of Statement 131 did not affect results of operations or financial
position, but did affect the disclosure of segment information. See Note Q.
In June 1998, the FASB issued FAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, which is required to be adopted in years
beginning after June 15, 1999. Because of the Company's minimal use of
derivatives, management does not anticipate that the adoption of the new
Statement will have a significant effect on earnings or the financial position
of the Company.
Reclassification: Certain amounts in the 1997 and 1996 financial
statements have been reclassified to conform with the 1998 financial statement
presentation.
NOTE B--Acquisitions and Dispositions
During 1998, the Company acquired certain assets of two marketing
entities for $3.1 million in cash from a related party. Total fair value of
assets acquired was $4.0 million and total fair value of liabilities assumed
was $867,000.
Effective August 31, 1998, the Company acquired from a related party
the remaining interest in its subsidiary, The Chesapeake Life Insurance Company
("CLICO"), for $4.5 million in cash increasing the Company's ownership in CLICO
to 100%. The purchase price was based on a predetermined formula which
approximates GAAP book value.
Effective January 1, 1998, the Company acquired an additional 3%
ownership in United Membership Marketing Group, LLC for a purchase price of
$6.0 million.
During 1998, the Company sold the assets of two healthcare solutions
companies for $5.4 million in cash to a related party, which represented net
book value and included $11.9 million of assets and $6.5 million of
liabilities.
In February 1998, the Company sold its ATM transaction processing
assets of a subsidiary to an unrelated party for $17.5 million. (See Note T).
The Company recognized other income of $9.7 million as a result of this sale.
During 1997, the Company made several acquisitions which were
accounted for under the purchase method as follows: Four companies and certain
assets were acquired for $88.3 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.
F-11
<PAGE> 59
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
Chairman of the Board ("Chairman"). The tangible assets acquired consisted
primarily of agent debit balances, a building, and related furniture and
fixtures having a net book value of $13.1 million.
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 of the acquisition
include the results of operations of each acquired company from their
respective dates of acquisition. 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
two subsidiaries to the Company's Chairman for a price equal to the net book
value of the tangible assets totaling $2.1 million.
Effective December 31, 1996, the Company acquired the remaining
interest of Insurdata Incorporated ("Insurdata") based on a predetermined
formula price of $15.1 million. The Company acquired a majority interest in
Insurdata in October 1995.
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.
During 1996, the Company acquired three companies and an additional
20% interest in its subsidiary, Mid-West National Life Insurance Company of
Tennessee ("Mid-West") for $18.1 million in cash. Total fair value of assets
acquired were $19.4 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.
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.
F-12
<PAGE> 60
Deferred Acquisition Costs
Included in deferred acquisition costs are the unamortized costs of
writing new policies and the costs of policies acquired through acquisitions.
The following is an analysis of the costs of business acquired:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Costs of policies acquired:
Beginning of year ............ $ 24,938 $ 13,978 $ 20,414
Additions ............... -- 15,505 --
Amortization (a) ........ (3,028) (4,545) (6,436)
---------- ---------- ----------
End of year ............... 21,910 24,938 13,978
Costs of policies issued ....... 71,098 74,673 45,977
---------- ---------- ----------
$ 93,008 $ 99,611 $ 59,955
========== ========== ==========
</TABLE>
(a) The discount rate used in the amortization of the costs of policies
acquired ranges from 7% to 8%.
The amortization for the next five years and thereafter for costs of
policies acquired is estimated to be as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1999..................................... $ 4,831
2000..................................... 3,488
2001..................................... 2,617
2002..................................... 1,981
2003..................................... 1,554
2004 and thereafter...................... 7,439
--------
$ 21,910
========
</TABLE>
NOTE C--Investments
A summary of net investment income is as follows:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Fixed maturities .......................... $ 59,321 $ 57,902 $ 51,922
Equity securities ......................... 969 675 748
Mortgage and collateral loans ............. 1,653 2,635 1,704
Policy loans .............................. 1,357 1,398 1,410
Short-term investments .................... 8,010 9,591 7,224
Investment in unconsolidated subsidiary ... 5,038 4,844 293
Other investments ......................... 2,013 3,395 2,487
---------- ---------- ----------
78,361 80,440 65,788
Less investment expenses .................. (3,469) (2,469) (2,436)
---------- ---------- ----------
$ 74,892 $ 77,971 $ 63,352
========== ========== ==========
</TABLE>
F-13
<PAGE> 61
Realized gains and (losses) and the change in unrealized investment
gains and (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)
<S> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31:
1998
Realized ......................... $ 3,311 $ 1,635 $ (34) $ 4,912 $ (1,699) $ (20) $ 3,193
Change in unrealized ............. 1,113 (2,010) (431) (1,328) 47 413 (868)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Combined ......................... $ 4,424 $ (375) $ (465) $ 3,584 $ (1,652) $ 393 $ 2,325
========== ========== ========== ========== ========== ========== ==========
1997
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) ..... (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)
========== ========== ========== ========== ========== ========== ==========
</TABLE>
Gross unrealized investment gains pertaining to equity securities were
$1.9 million and $2.5 million at December 31, 1998 and 1997, respectively.
Gross unrealized investment losses pertaining to equity securities were $1.6
million and $280,000 at December 31, 1998 and 1997, respectively.
The amortized cost and fair value of investments in fixed maturities
are as follows:
<TABLE>
<CAPTION>
December 31, 1998
----------------------------------------------------------
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 .......................... $ 57,952 $ 1,847 $ (89) $ 59,710
Mortgage-backed securities issued
by U.S. Government agencies
and authorities ............................. 49,367 731 (72) 50,026
Other mortgage and asset backed securities ....... 211,288 7,228 (360) 218,156
Other corporate bonds ............................ 546,982 18,820 (7,288) 558,514
------------ ------------ ------------ ------------
Total fixed maturities .................. $ 865,589 $ 28,626 $ (7,809) $ 886,406
============ ============ ============ ============
</TABLE>
F-14
<PAGE> 62
<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) $ 52,000
Mortgage-backed securities issued
by U.S. Government agencies
and authorities ........................ 45,817 2,262 (210) 47,869
Other mortgage and asset backed securities .. 255,337 4,932 (414) 259,855
Other corporate bonds ....................... 459,691 13,760 (1,715) 471,736
---------- ---------- ---------- ----------
Total fixed maturities ............. $ 811,757 $ 22,057 $ (2,354) $ 831,460
========== ========== ========== ==========
</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,
1998, by contractual maturity, are shown below. Fixed maturities subject to
early or unscheduled prepayments have been included 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 ....................... $ 9,647 $ 9,194
Over 1 year through 5 years ............ 146,436 147,826
Over 5 years through 10 years .......... 293,228 298,715
Over 10 years .......................... 155,623 162,489
---------- ----------
604,934 618,224
Mortgage and asset backed securities ... 260,655 268,182
---------- ----------
Total fixed maturities ............... $ 865,589 $ 886,406
========== ==========
</TABLE>
Proceeds from the sale of investments in fixed maturities were $332.2
million, $516.2 million, and $499.7 million for 1998, 1997, and 1996,
respectively. Gross gains of $6.5 million, $4.9 million, and $4.7 million and
gross losses of $3.2 million, $3.1 million, and $6.7 million were realized on
sales of fixed maturity investments during 1998, 1997, 1996, respectively.
Following is a summary of the Company's equity securities:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
--------------------------- ---------------------------
Fair Fair
Cost Value Cost Value
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Common Stocks ..................... $ 573 $ 961 $ 766 $ 2,438
Non-redeemable preferred stocks ... 17,948 17,803 11,536 12,117
------------ ------------ ------------ ------------
$ 18,521 $ 18,764 $ 12,302 $ 14,555
============ ============ ============ ============
</TABLE>
F-15
<PAGE> 63
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 of the Company's investments in mortgage, collateral and
policy loans approximate fair value. 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 carrying values for mortgage and collateral loans is net of
allowance of $650,000 for 1998 and 1997.
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, 1998, the Company had a
carrying amount of $268.2 million of mortgage and asset backed securities, of
which, $50.0 million are government backed, $132.9 million are rated AAA, $38.4
million are rated AA, $40.1 million are rated A, and $6.8 million are rated BBB
by external rating agencies. 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, and $39.7 million are rated A, and $1.3 million are rated
BBB by external rating agencies.
The Company has a 12% investment in AMLI, a real estate investment
trust, which is accounted for under the equity method of accounting. This
investment, which is included in investment in unconsolidated subsidiary, was
recorded at $23.8 million and $18.8 million at December 31, 1998 and 1997,
respectively, and the market value was $65.1 million and $59.2 million in 1998
and 1997, respectively.
The Company has no material non-income producing investments and has
no geographic or other concentration of investment risk which have not been
disclosed.
Under the terms of various reinsurance agreements (see Note G), 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 $238.3 million as of December 31, 1998. In addition, at December
31, 1998, the domestic insurance subsidiaries had securities with a fair value
of $19.0 million on deposit with insurance departments in various states.
NOTE D--Student Loans
The Company markets student loans to students at selected colleges and
have historically targeted universities serving graduate healthcare
professionals. Some of the student loans are funded by an unrelated financial
institution which has agreed that the Company has the right, but not the
obligation, to either purchase the loans at a predetermined price or direct the
sale of the loans to a third party. The net proceeds from loan sales are
received by the Company after certain
F-16
<PAGE> 64
fees due the financial institution are deducted. When the Company purchases
loans, a premium is paid equal to certain fees due the financial institution.
At December 31, 1998 and 1997, the Company had the right to purchase
and/or direct the sale of loans totaling approximately $200.0 million and
$780.0 million, respectively.
Following is a summary of the Company's student loans:
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
----------------------- -----------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Student loans .. $ 670,429 $ 696,000 $ 11,254 $ 11,254
========== ========== ========== ==========
</TABLE>
The fair value of student loans is based on estimated market values on
recent sales of student loans by the Company. The loans are carried at unpaid
principal plus accrued interest.
The carrying value for student loans is net of allowance of $935,000
and $400,000 for 1998 and 1997, respectively.
The Company recognized interest income from the student loans of $29.0
million, $1.5 million and $1.9 million in 1998, 1997 and 1996, respectively.
During 1998, the Company acquired loans with principal and interest
balances of $533.1 million at a total cost of $540.6 million. The difference of
$7.5 million represented a premium on the loans which was paid in accordance
with the terms of purchase agreements. The premium will be amortized over the
life of the loans.
NOTE E--Credit Card Loans
The Company's provision for losses on credit card loans is summarized below:
<TABLE>
<CAPTION>
Year Ended December 31
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Balance at beginning of year ...... $ 4,283 $ 8,728 $ 12,129
Provisions for losses ............. 73,954 12,797 13,527
Charge offs and other ............. (11,426) (17,242) (16,928)
------------ ------------ ------------
Balance at end of year ............ $ 66,811 $ 4,283 $ 8,728
============ ============ ============
</TABLE>
F-17
<PAGE> 65
The Company recognized net investment income from the credit cards of
$12.9 million, $4.8 million, and $6.1 million in 1998, 1997, and 1996,
respectively.
The Company securitized $60.0 million, $30.0 million and $29.0 million
in 1998, 1997 and 1996, respectively, of asset backed securities in which the
Company purchased participating interests totaling $6.0 million, $3.0 million
and $2.9 million in 1998, 1997 and 1996, respectively. No gain was recognized
on these transactions. These transactions have been accounted for as sales.
Receivables Funding Corporation ("RFC), a special purpose finance
subsidiary of the Company, maintains its own books of account and corporate
records separate from the Company. RFC does not pool or co-mingle its funds or
other assets or liabilities with those of the Company.
NOTE F--Policy Liabilities
Liability for future policy and contract benefits consists of the
following:
<TABLE>
<CAPTION>
December 31
---------------------------
1998 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Life ........................... $ 264,102 $ 265,230
Annuity ........................ 204,195 221,794
------------ ------------
$ 468,297 $ 487,024
============ ============
</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 5.5%, 5.8%, and 5.6% during 1998,
1997, and 1996, respectively. Interest rates credited to the liability for
future contract benefits related to annuity contracts generally ranged from
4.5% to 6.0% during 1998 and 4.5% to 6.6% during 1997 and 1996.
As described in Note G, 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 4.8% to 5.5% during 1998, 4.9% to 6.0% during 1997, and
4.9% to 6.8% during 1996.
F-18
<PAGE> 66
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, 1998 December 31, 1997
--------------------------- ---------------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
------------ ------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Direct annuities ....................... $ 98,342 $ 94,014 $ 105,113 $ 100,488
Assumed annuities ...................... 105,853 104,170 116,681 114,356
Supplemental contracts
without life contingencies ........ 2,588 2,588 3,101 3,101
------------ ------------ ------------ ------------
$ 206,783 $ 200,772 $ 224,895 $ 217,945
============ ============ ============ ============
</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,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Claims liability at beginning of year, net
of related reinsurance recoverables ....................................... $ 248,969 $ 192,922 $ 176,330
Add:
Acquired claims liability ................................................... -- 20,273 --
Incurred losses, net of reinsurance, occurring during:
Current year ............................................................. 577,823 478,671 371,260
Prior years .............................................................. (10,151) (49,741) (61,254)
------------ ------------ ------------
567,672 428,930 310,006
------------ ------------ ------------
Deduct payments for claims, net of reinsurance, occurring during:
Current year ............................................................. 332,056 285,450 213,844
Prior years .............................................................. 183,890 107,706 79,570
------------ ------------ ------------
515,946 393,156 293,414
------------ ------------ ------------
Claims liability at end of year, net of related reinsurance recoverables:
1998--$16,603; 1997--$9,852 and 1996--$8,354 .............................. $ 300,695 $ 248,969 $ 192,922
============ ============ ============
</TABLE>
The above reconciliation shows incurred losses related to prior years
developed in amounts less than originally anticipated due to better than
expected experience which was offset, in 1998, by adverse development related
to performance of a PPO product which is a managed care product.
F-19
<PAGE> 67
NOTE G--Reinsurance
In 1998, 1997, and 1996, approximately 21%, 33%, and 48%,
respectively, of the Company's health premiums and 2%, 2%, 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 1998, of the health insurance previously sold by UGA Inc. agents and issued
by AEGON.
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,
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Premiums:
Direct .............................. $ 652,918 $ 474,929 $ 319,689
Assumed ............................. 226,024 270,728 255,436
Ceded ............................... (82,320) (42,317) (27,370)
------------ ------------ ------------
Net Premiums ..................... $ 796,622 $ 703,340 $ 547,755
============ ============ ============
Ceded benefits, claims and
settlement expenses .............. $ 26,874 $ 21,297 $ 17,426
============ ============ ============
Life insurance in force ceded ....... $ 1,291,525 $ 1,526,651 $ 836,957
============ ============ ============
</TABLE>
NOTE H--Debt
The Company's short-term and long-term debt is summarized as follows:
<TABLE>
<CAPTION>
December 31
---------------------------
1998 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Short-term debt:
Notes payable ............................ $ 25,000 $ 4,300
Portion of long-term debt due in 1999 .... 4,778 5,343
------------ ------------
Total short-term debt ................. $ 29,778 $ 9,643
============ ============
Long-term debt:
8.75% senior notes payable ............... $ 23,704 $ 27,655
Other notes payable ...................... 2,342 7,706
------------ ------------
26,046 35,361
Less: amounts due in 1999 ............... 4,778 5,343
------------ ------------
Total long-term debt .................. $ 21,268 $ 30,018
============ ============
</TABLE>
F-20
<PAGE> 68
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
approximately $4.0 million aggregate principal together with accrued interest
thereon to the date of such repayment. The Company made its first scheduled
payment June 1, 1998 leaving a remaining balance of $23.7 million as of
December 31, 1998. 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.
On December 17, 1998 the Company initiated a $50.0 million unsecured
line of credit with a financial institution bearing interest at LIBOR plus
0.75% due December 17, 1999. As of December 31, 1998 the Company had borrowed
$25.0 million on this line of credit with an interest rate of LIBOR (5.064%)
plus 0.75%. The note agreement contains restrictive covenants which include
certain financial ratios and limitations of additional indebtedness as a
percentage of certain defined equity amounts.
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, 1998 or 1997, respectively.
A $9.0 million note payable to a minority interest of one of the
Company's subsidiaries was contributed as equity to the subsidiary along with a
proportionate amount by the Company. This note payable had a balance of $10.5
million at December 31, 1997.
Principal payments required in each of the next five years after
December 31, 1998 are as follows:
<TABLE>
<CAPTION>
(Dollars in thousands)
<S> <C>
1999....................................... $29,778
2000....................................... 4,721
2001....................................... 4,124
2002....................................... 4,129
2003....................................... 4,060
Thereafter................................. 4,234
</TABLE>
The carrying amounts of the Company's short-term debt approximate fair
values.
The fair value of the long-term debt was $52.4 million and $36.2
million at December 31, 1998 and 1997, respectively. The fair value of the
Company's long-term debt is estimated using discounted cash flow analysis,
based on the Company's current incremental borrowing rates for similar types of
borrowing arrangements.
F-21
<PAGE> 69
Total interest paid was $3.1 million, $2.9 million, and $3.1 million,
for 1998, 1997, and 1996, respectively.
NOTE I--Student Loan Credit Facility
Short-Term Borrowings
In March 1998, a subsidiary of the Company entered into a master
repurchase agreement with a financial institution that is partially guaranteed
by the Company. The agreement provides for the purchase of student loans by a
financial institution with a put to the Company in thirty days. The agreement
is currently for $200.0 million and may be increased if the Company has not
fully utilized its long-term facility. The credit facility had an outstanding
balance of $318.8 million at December 31, 1998 and had a variable interest rate
of LIBOR plus 75 basis points which at December 31, 1998 was 6.38%. The credit
facility has a term of one year and is secured by student loans originated under
the Federal Family Education Loan Program ("FFELP") which are guaranteed by the
federal government or alternative loans guaranteed by private guarantors. The
lender may value the loans at any time and require the subsidiary to repay any
amount by which the market value of the loans is less than the amount required
by the loan agreement.
Long-Term Borrowings
In December 1998, EFG-1 LP, which is a special purpose finance
subsidiary of the Company, purchased $357.4 million of loans from the Company
and sold the loans to a trust which issued floating rate student loan
asset-backed securities in a private offering. The Company has partially
guaranteed the performance of the loans. The AAA rated Class A securities were
acquired by a financial institution. The Class A securities have a variable
interest rate of LIBOR plus 75 basis points. The trust can issue up to $550.0
million of securities with a maturity of 30 years. At December 31, 1998, the
trust had issued Class A securities totaling $350.2 million and the interest
rate on the Class A securities was 6.38%. The Company's borrowings vary to
reflect current interest rates and carrying amounts approximate fair value.
The Company has $15.3 million of short-term investments that is held
by EFG-I SPC-I, for the benefit of the holders of the securities issued.
Total interest paid on borrowings was $19.2 million for 1998.
EFG-1 LP, a special purpose finance subsidiary, maintains its own
books of account and corporate records separate from the Company. EFG-1 LP does
not co-mingle or pool its funds or other assets or liabilities with those of
the Company.
F-22
<PAGE> 70
NOTE J--Federal Income Taxes
Deferred income taxes for 1998 and 1997 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, 1998
and 1997 relate to the following:
<TABLE>
<CAPTION>
December 31
----------------------------
1998 1997
------------ ------------
(Dollars in thousands)
<S> <C> <C>
Deferred tax liabilities:
Deferred policy acquisition costs
and costs of business acquired ........................ $ 16,761 $ 26,995
Investment in subsidiaries .............................. 4,536 4,395
Allowances for credit card losses ....................... 3,961 (1,499)
Net unrealized investment gains ......................... 7,102 7,150
Other ................................................... 8,505 3,895
------------ ------------
Total gross deferred tax liabilities ............... 40,865 40,936
------------ ------------
Deferred tax assets:
Policy liabilities ...................................... 16,176 21,220
Allowance for losses on investments ..................... 3,954 871
Operating loss carryforwards ............................ 1,977 2,207
Capital loss carryforwards .............................. -- 955
Annual credit card fees ................................. 6,621 1,950
------------ ------------
Total gross deferred tax assets ..................... 28,728 27,203
Less: Valuation allowance .......................... (1,654) (2,110)
------------ ------------
Net deferred tax assets ............................. 27,074 25,093
------------ ------------
Net deferred tax liability .......................... 13,791 15,843
Net current tax liability ........................... 20,578 4,048
------------ ------------
Federal income tax liability ........................ $ 34,369 $ 19,891
============ ============
</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 $456,000 and $567,000 for 1998 and 1997,
respectively.
The provision for income taxes consisted of the following:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
1998 1997 1996
---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C>
Current tax expense ................. $ 32,239 $ 36,439 $ 29,765
Deferred tax expense (benefit) ...... (2,004) 6,957 6,425
---------- ---------- ----------
$ 30,235 $ 43,396 $ 36,190
========== ========== ==========
</TABLE>
F-23
<PAGE> 71
The Company's effective income tax rates varied from the maximum
statutory federal income tax rate as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Statutory federal income tax rate ..................... 35.0% 35.0% 35.0%
Small life insurance company deduction ................ (1.4) (1.1) (2.2)
Valuation allowance................................... (0.5) (0.5) (1.4)
Other items, net ...................................... (2.1) (1.5) 1.1
---------- ---------- ----------
Effective income tax rate ........................ 31.0% 31.9% 32.5%
========== ========== ==========
</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, 1998. 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, 1998, certain acquired subsidiaries of the Company had
aggregate federal tax loss carryforwards of $5.6 million for use to offset
future taxable income, under certain circumstances, with expiration dates
ranging between 2002 and 2007. The maximum amounts of federal tax loss
carryforwards available are $658,000 per year from 1999 through 2006, and
$385,000 in 2007.
Total federal income taxes paid were $15.7 million, $39.4 million, and
$25.2 million, for 1998, 1997, and 1996, 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.
NOTE K--Stockholders' Equity
During November 1998, the Company's board of directors authorized the
repurchase of up to 4,500,000 shares of its Common Stock. The shares may be
purchased from time to time on the open market or in private transactions; the
timing and extent of the repurchases, if any, will depend on market conditions
and the Company's evaluation of its financial condition at the time. No shares
had been repurchased as of December 31, 1998.
During 1998, the Company loaned the Company's new President and CEO
$3.3 million to purchase shares of the Company's common stock.
F-24
<PAGE> 72
On May 1, 1996, the Company completed a public offering of 5,175,000
shares of common stock at $20.50 per share. 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.
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 J on federal income taxes.
The minimum statutory capital and surplus requirements of domestic insurance
subsidiaries at December 31, 1998 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, 1998,
the domestic insurance companies could pay aggregate dividends to the parent
company of approximately $23.9 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,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Net income ............... $ 4,804 $ 41,801 $ 32,723
Stockholders' equity ..... $ 227,167 $ 223,930 $ 190,917
</TABLE>
In 1998, the NAIC adopted codified statutory accounting principles
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Company uses to prepare its statutory-basis financial
statements. Codification will require adoption by the various states before it
becomes the prescribed statutory basis of accounting for insurance companies
domesticated within those states. Accordingly, before Codification becomes
effective for the Company, the states of domicile must adopt Codification as
the prescribed basis of accounting on which domestic insurers must report their
statutory-basis results to the Insurance Department. At this time it is
anticipated that the states of domicile will adopt Codification. Management has
not yet determined the impact of Codification on the Company's statutory-basis
financial statements.
The OCC imposes certain capital adequacy requirements on the Company's
national credit card bank subsidiary. The capital adequacy is measured by the
method prescribed by the OCC in its rules and regulations for maintaining
capital adequacy. The Company has established a conservative capital policy
which exceeds the requirements of the regulatory authorities. Dividends paid by
the national credit card banks are also limited under agreements with the OCC.
NOTE L--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. Based in part upon the opinion of
counsel as to the ultimate disposition of such lawsuits and claims, management
believes
F-25
<PAGE> 73
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.
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,
1998 amount to $10.9 million in 1999, $9.3 million in 2000, $5.6 million in
2001, $2.3 million in 2002, and $734,000 in 2003. Rent expense amounted to $9.2
million, $8.6 million, and $5.0 million, for 1998, 1997, and 1996,
respectively.
The Company has commitments to fund the unused credit limits on credit
card loans. At December 31, 1998, the outstanding commitment was $31.0 million.
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, 1998, the Company has outstanding student loan commitments
for the years 1999 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 generally 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 utilization rates and lapses are as
follows:
<TABLE>
<CAPTION>
Total Expected
Commitment Funding
------------ ------------
(Dollars in thousands)
<S> <C> <C>
1999 ................ $ 121,940 $ 19,181
2000 ................ 177,605 23,135
2001 ................ 288,407 23,423
2002 ................ 324,868 20,480
2003 ................ 342,009 16,101
Thereafter .......... 575,660 29,123
------------ ------------
$ 1,830,489 $ 131,443
============ ============
</TABLE>
Interest rates on the above commitments are principally variable (prime plus
2%).
F-26
<PAGE> 74
NOTE M-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 1998, 1997, and 1996 totaled $4.1
million, $3.2 million, and $3.1 million, respectively.
NOTE N--Stock Option Plan
Effective August 15, 1998, the Company granted agents and employees of
the Company 8.3 million stock options at an exercise price of $15. The options
vest 20% each year beginning on August 15, 1999 and thereafter through year
2001 and 40% on August 15, 2002. All options that are not vested when an agent
or employee leaves will be forfeited.
The Company has a stock option plan which provides options on 1,600,000
shares of common stock for granting to officers, key employees, and certain
eligible non-employees at fair market value at the date of grant. The options
vest at 20% every twelve months subject to continuing employment, provided that
an option will vest 100% upon death, permanent disability, or change of control
of the Company. All options under the plan are exercisable over a five year
period. Under this plan, in December 1998, the Company issued 200,000 options at
an option price of $19.50 to the Company's new President and CEO. The exercise
price is equal to the market price of the stock at the date the option is
granted.
A summary of stock option transactions are as follows:
<TABLE>
<CAPTION>
Number Average Option
of Shares Price Per Share ($)
--------- -------------------
<S> <C> <C>
Outstanding options at January 1, 1996........................... 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
Granted.......................................................... 8,294,305 15.11
Canceled......................................................... (2,167,346) 15.00
Exercised........................................................ --
---------
Outstanding options at December 31, 1998......................... 6,187,550 15.12
=========
Options exercisable at December 31,
1996......................................................... 84,363 10.82
1997......................................................... 41,693 12.74
1998......................................................... 60,591 15.12
</TABLE>
F-27
<PAGE> 75
The Company has elected to follow Accounting Principles Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting for Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of underlying stock on the date
of grant, no compensation expense is recognized.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following weighted-average
assumptions for 1998: risk-free interest rate of 5.19%; dividend yield of 0.0%;
volatility factor of the expected market price of the Company's common stock of
0.38; and a weighted-average expected life of the option of four and one-half
years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in
the subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The effect on
net income of the stock compensation amortization for the years presented above
is not likely to be representative of the effects on reported net income for
future years. The Company's pro forma information follows (in thousands except
for earnings per share information):
<TABLE>
<CAPTION>
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Pro forma net income .................... $ 57,411 $ 86,504 $ 69,247
Pro forma earnings per common share:
Basic earnings ................. $ 1.24 $ 1.91 $ 1.66
Diluted earnings ............... $ 1.24 $ 1.91 $ 1.66
</TABLE>
NOTE O--Related Party Transactions
The primary purpose for establishing the Company was to provide a
vehicle for agents and employees to accumulate wealth through ownership of the
Company they help build. The first step to accomplish this goal was the
establishment of a coinsurance agreement between AEGON and the Company to
coinsure business written by United Group Association, Inc. ("UGA"), which is
owned by Ronald L. Jensen, the founder and Chairman of the Board of the Company.
UGA had previously entered into a general agency contract with AEGON under which
it received commissions from AEGON and under which it had the right to coinsure
a portion of the insurance policies it sold. The Company has had numerous other
transactions with Mr. Jensen, UGA, and other companies owned or partially owned
by Mr. Jensen, herein collectively referred to as "RJ."
F-28
<PAGE> 76
The Company has also had transactions with the five adult children of
Mr. Jensen and companies they own, primarily Onward and Upward, hereinafter
collectively referred to as "Onward".
From the Company's inception through 1996, RJ sold health insurance
policies that were issued by AEGON and coinsured by the Company or issued
directly by the Company. The commissions paid to RJ on the policies issued by
AEGON were based on commission rates negotiated and agreed to by AEGON and RJ.
The Company expenses its proportionate share of these commissions. The
commission rates on the policies issued directly by the Company are similar to
the rates on the coinsured policies. RJ received insurance commissions of $20.9
million on the coinsured policies and $4.7 million on the direct policies in
1998.
During 1995, the Company and RJ entered into an agreement whereby the
Company received a 20% interest in the profits or losses relating to certain
lead activities of RJ. The Company had profits of $600,000, $1.1 million, and
$2.0 million for 1998, 1997, and 1996, respectively, on these activities.
Effective January 1, 1997, the Company acquired the agency force and
certain assets of RJ 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.
During 1993, the Company entered into an agreement with RJ to
participate in an interest in a company which has developed a paperless claims
system. The Company has written off its investment of $6.1 million over the past
four years. In 1998, the Company did not participate in any additional
investments in the paperless claim system. The Company incurred losses of $1.4
million and $1.2 million in 1997 and 1996, respectively.
During 1998 and 1997, the Company sold its interest in various
subsidiaries of the Company to RJ for a total sales price of $5.4 million and
$1.2 million, respectively, which was approximately the net book value of the
tangible assets as of the sale date. During 1998 while it was still owned by the
Company, RJ loaned one of the Company's subsidiaries $100,000 which was used for
operations.
In connection with an investment the Company made in an ATM processing
company in 1996, RJ provided the Company with an indemnification and granted
the Company a "put" option in connection with a $4.0 million investment made by
the Company. In 1997, the Company sold its interest in a portion of the ATM
business to RJ at net book value of $854,000 as agreed to by all parties to the
agreement. In 1998, certain remaining assets of the ATM business were sold and
the Company and RJ entered into an agreement concerning the distribution of the
proceeds. (See Note T)
In November 1994, the Company extended a $10.0 million line of credit
to RJ. The terms of the line of credit were renegotiated in 1997 so that
additional collateral was added and 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 was collateralized by certain common stock. RJ
repaid $2.5 million in 1997 and the remaining $7.5 million in May 1998.
F-29
<PAGE> 77
\
During the last three years, the Company has acquired all of the
minority interest in Mid-West National Life Insurance Company of Tennessee and
The Chesapeake Life Insurance Company. Onward was a minority interest owner in
each of these companies and received $13.6 million for their interest. The
price paid was based on a predetermined formula which approximated GAAP book
value. Onward is a minority interest owner in one other subsidiary of the
Company in which Onward has granted the Company a right of first refusal to
purchase the interest at a predetermined formula price. Onward also has the
right to require the Company to purchase its ownership interest at the same
formula price.
A $9.0 million note payable to a related party, who is an officer of
one of the Company's subsidiaries, was contributed as equity to the subsidiary
along with a proportionate amount by the Company. This note payable had a
balance of $10.5 million at December 31, 1997.
In 1998, the Company acquired a 90% interest in an entity owned by
Onward for a total price of $236,000, which approximated the net book value of
the assets as of the purchase date.
Prior to July 1, 1998, Onward generated sales leads for agents of the
Company. Prior to January 1, 1997, these leads were provided by RJ. The Company
paid $7.5 million, $17.7 million and $5.0 million for leads in 1998, 1997, and
1996, respectively. In 1998, the Company purchased the assets of the company
that generated the sales leads for a purchase price of $2.8 million.
In 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 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.
RJ and Onward own an interest in Avtel Communications, Inc. ("AVTEL"),
a telephone company. The Company paid $2.4 million, $2.1 million and $1.3
million to AVTEL for services in 1998, 1997, and 1996, respectively, and
received a reimbursement payment of $114,000 in 1998 in connection with such
services.
In January 1999, Gregory T. Mutz was elected President and Chief
Executive Officer of the Company. Mr. Mutz will continue to serve as Chairman of
the Board of AMLI Residential Properties Trust, a REIT traded on the NYSE
("AML"). The Company has a 12% interest in AML. As Chairman of the Board of AML,
Mr. Mutz received certain compensation and has various options and deferred
compensation programs in which he is a participant, all of which are set out in
the AML proxy statement. In addition, as of December 31, 1998, AML had loaned
Mr. Mutz $2.1 million on a recourse and secured basis, to purchase 85,345 shares
of AML. Mr. Mutz is also Chairman of the Board of AMLI Commercial Properties
Trust ("ACPT"), a private REIT in which the Company has a 20% interest. Mr. Mutz
owns stock, directly and indirectly in ("ACPT"), and owes ACPT $200,000 which
was used to purchase stock in ACPT. At December 31, 1998, Mr. Mutz owed the
Company and a subsidiary $3.7 million. The funds were used to purchase shares in
the Company and a subsidiary. The amount outstanding at March 12, 1999 was $ 3.3
million, bears interest at the rate of 5% per annum, payable quarterly, has a 6
year term, and is full recourse and secured by 200,000 shares of UICI stock.
The Company receives a fee for performing marketing and administrative
services from two companies owned by certain officers of a subsidiary of the
Company. The Company received fees of $45.5 million, $20.8 million, and $9.7
million in 1998, 1997, and 1996, respectively.
In 1995, RJ acquired a bank in South Dakota ("Richland") which was
utilized by the Credit Services Division of the Company to issue credit cards
prior to the formation of United Credit National Bank, a credit card bank
wholly-owned by the Company. In 1997, the Company purchased $6.3 million of the
Credit Services Division credit card receivables from Richland and paid Richland
fees of $176,000, $103,000, and $12,000 in 1998, 1997, and 1996, respectively.
The Credit Services
F-30
<PAGE> 78
Division has also borrowed $666,000 from Richland of which $497,000 was
outstanding at December 31, 1998 at an interest rate range of 9% to 9.25%. The
Credit Services Division received $585,000, $885,000 and $476,000 from Richland
for services performed in connection with processing of credit cards for 1998,
1997, and 1996, respectively.
Richland originates student loans for EFG and receives an origination
fee as lender. Richland originated $21.6 million in student loans in 1998 and
received $66,960 in origination fees. During 1998, Richland sold $20.7 million
loans back to EFG at no gain.
The Company provides data processing services and certain
administrative services to a company owned by RJ that administers claims. The
Company received fees of $9.2 million and $4.5 million in 1998 and 1997,
respectively, and paid $68,700 and $28,300 in 1998 and 1997 for certain
processing services performed by this claims administrator. During 1998, the
Company loaned $910,000 to this company and was repaid in 1998 with interest at
prime plus two.
Onward is a minority interest owner in one other subsidiary of the
Company in which Onward has granted the Company a right of first refusal to
purchase the interest at a predetermined formula price. Onward also has the
right to require the Company to purchase its ownership interest at the same
formula price.
Onward owns interests in various entities that provide printing, audio
visual, or processing services. The Company paid $875,000 in 1998 and received
$716,000 reimbursement for certain expenses from such entities.
NOTE P--Investment Annuity Segregated Accounts
The Company has deferred investment annuity policies which have
segregated account assets and liabilities amounting to $229.9 million and
$222.3 million at December 31, 1998 and 1997, 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 Q--Segment Information
The Company's operating segments are: (i) Insurance, which includes
the businesses of the Self Employed Agency Division, the Student Insurance
Division, the OKC Division, the Special Risk Division and the National Motor
Club Division; (ii) Financial Services, which includes the businesses of the
Credit Services Division, the Educational Finance Group Division, the Insurdata
Division and Other Business Units and (iii) Other Key Factors. Other Key
Factors include investment income not allocated to the other segments, interest
and general expenses relating to corporate operations, amortization of goodwill
and realized gains or losses on sale of investments. 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
F-31
<PAGE> 79
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. Operations which do not constitute reportable
operating segments have been combined with Other Key Factors. Depreciation
expense and capital expenditures are not considered material. Management does
not allocate income taxes to segments. Transactions between reportable operating
segments are accounted for under respective agreements which are generally at
cost. Financial information by operating segment for revenues, income before
federal income taxes and minority interests, and identifiable assets is
summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Revenues
Insurance:
Self Employed Agency .......... $ 610,097 $ 538,280 $ 429,684
Student Insurance ............. 111,047 97,561 94,470
OKC Division .................. 98,801 100,455 102,515
Special Risk .................. 66,819 56,104 7,054
National Motor Club ........... 27,257 10,296 --
------------ ------------ ------------
914,021 802,696 633,723
------------ ------------ ------------
Financial Services:
Credit Services ............... 123,152 50,267 39,658
Educational Finance Group ..... 57,233 8,014 --
Insurdata ..................... 41,236 25,088 12,722
Other Business Units .......... 34,773 42,743 22,240
------------ ------------ ------------
256,394 126,112 74,620
------------ ------------ ------------
Other Key Factors .................. 32,993 38,662 22,250
------------ ------------ ------------
Intersegment Eliminations .......... (23,505) (11,641) --
------------ ------------ ------------
Total revenues .......... $ 1,179,903 $ 955,829 $ 730,593
============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Income before federal income
taxes and minority interests
Insurance:
Self Employed Agency ......................... $ (4,765) $ 47,552 $ 57,872
Student Insurance ............................ 6,089 15,540 14,404
OKC Division ................................. 20,436 18,880 16,117
Special Risk ................................. 5,805 7,988 1,205
National Motor Club .......................... 5,099 2,024 --
------------ ------------ ------------
32,664 91,984 89,598
Financial Services:
Credit Services .............................. 46,295 20,543 15,190
Educational Finance Group .................... (1,339) 2,020 --
Insurdata .................................... 3,277 2,637 (483)
Other Business Units ......................... 441 (5,844) (4,301)
------------ ------------ ------------
48,674 19,356 10,406
------------ ------------ ------------
Other Key Factors ................................. 16,143 24,506 11,378
------------ ------------ ------------
Total income before federal income
taxes and minority interests ........... $ 97,481 $ 135,846 $ 111,382
============ ============ ============
</TABLE>
F-32
<PAGE> 80
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Identifiable Assets
Insurance:
Self Employed Agency .......... $ 444,240 $ 353,659 $ 248,692
Student Insurance ............. 87,303 87,423 83,199
OKC Division .................. 585,055 605,803 625,403
Special Risk .................. 51,580 51,456 133
National Motor Club ........... 26,038 20,457 --
------------ ------------ ------------
1,194,216 1,118,798 957,427
------------ ------------ ------------
Financial Services:
Credit Services ............... 195,242 74,424 31,671
Educational Finance Group ..... 773,412 37,681 --
Insurdata ..................... 22,338 16,417 13,748
Other Business Units .......... 19,226 22,572 10,150
------------ ------------ ------------
1,010,218 151,094 55,569
------------ ------------ ------------
Other Key Factors .................. 270,621 309,491 307,992
------------ ------------ ------------
Total assets ............ $ 2,475,055 $ 1,579,383 $ 1,320,988
============ ============ ============
</TABLE>
NOTE R--Earnings Per Share
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Net income available to
common shareholders ................ $ 58,769 $ 86,504 $ 69,247
------------ ------------ ------------
Weighted average shares outstanding--
basic earnings per share ........... 46,244 45,300 41,590
Effect of dilutive securities:
Employee stock options ............. 224 35 50
------------ ------------ ------------
Weighted average shares outstanding--
dilutive earnings per share ........ 46,468 45,335 41,640
------------ ------------ ------------
Basic earnings per share ................ $ 1.27 $ 1.91 $ 1.66
============ ============ ============
Diluted earnings per share .............. $ 1.26 $ 1.91 $ 1.66
============ ============ ============
</TABLE>
NOTE S--Supplemental Financial Statement Data
Details of underwriting, acquisitions, and insurance expenses are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------
1998 1997 1996
------------ ------------ ------------
(Dollars in thousands)
<S> <C> <C> <C>
Amortization of deferred policy acquisition costs ..... $ 24,480 $ 21,001 $ 17,080
Commissions ........................................... 97,614 91,082 91,686
Administrative expenses ............................... 135,228 116,851 83,990
Premium taxes ......................................... 18,514 24,498 14,158
------------ ------------ ------------
$ 275,836 $ 253,432 $ 206,914
============ ============ ============
</TABLE>
F-33
<PAGE> 81
NOTE T--Sale of Sun Tech Processing Systems, LLC
In 1996, the Company invested $4 million in exchange for a 100% Class A
and a 40% Class B membership interest in Cash Delivery Systems, LLC ("CDS"),
formerly known as Sun Network Technologies ("SNT"). The remaining 60% Class B
membership interest was owned by Sun Communications, Inc. ("Sun"). At the time
of the Company's investment, CDS was in the business of owning and placing
automated teller machines ("ATMs") and processing ATM transactions. In
connection with the Company's investment in CDS, the Company's Chairman executed
an agreement in which the Chairman agreed to indemnify the Company for any loss
or reduction in value of the Company's Class A membership contribution and
granted an option to the Company to put the Class A membership interest to the
Chairman for $4 million. CDS and the Company's Chairman then invested $80,000
and $20,000 in Sun Tech Processing Systems, LLC ("STP") in exchange for an 80%
and 20% membership interest, respectively. In addition, the Company's Chairman
agreed to enter into an agreement to loan up to $6 million to STP, secured by
all property acquired with the funds loaned.
Effective December 31, 1996, the Company contemporaneously completed
several transactions involving the Company, its Chairman, Sun, CDS and STP.
First, CDS and the Company's Chairman withdrew their membership contributions
from STP and the debt agreement was canceled. Second, the Company and Sun were
issued new Class B membership interests in STP of 80% and 20%, respectively.
Third, the Company invested an additional $2 million in STP in exchange for a
100% Class A membership interest. Fourth, CDS transferred its ATM transaction
processing business to STP as agreed to by all parties to the agreement. Fifth,
the Company sold its entire Class A and Class B membership interests in CDS to
the Company's Chairman for $854,000 as agreed to by all parties to the
agreement, which represented the net book value of CDS before the transfer of
the ATM transaction processing business to STP. In addition, the Chairman agreed
to return to the Company any return on investment of the Class A membership
interest in CDS in excess of $854,000 that he would receive, after repayment of
his loans to CDS.
The transactions described above are governed by an agreement by and
among the Company, its Chairman, Sun, CDS and STP dated in March 1997 (the
"March 1997 Agreement"), which provides that (i) there will be no distributions
to Class B members of STP or CDS until all Class A preferred interests in both
STP and CDS have been paid or redeemed in full and (ii) should funds be
available to any parties from either STP or CDS, such funds will be loaned to
the other company until the preferred interests are retired. The Regulations of
both STP and CDS further require the payment of all outstanding debt before any
members receive a distribution upon liquidation. In connection with the above
transactions, the Chairman made secured and unsecured loans of approximately
$12 million to CDS. After the sale of CDS's ATMs and use of the proceeds to
repay these loans in part, approximately $6.2 million of the Company Chairman's
loans to CDS remained outstanding as of December 31, 1998. These loans bear
interest at an annual rate of 2.5% plus the prime rate, payable monthly, and
have a maturity date of July 1, 2001.
In February 1998, the assets of STP were sold to an unrelated party
for $17.5 million and the Company has recognized, in 1998, a gain in the total
amount of $9.7 million (see Note U). Consistent with its understanding of the
March 1997 Agreement, the Company recorded a gain of $2.3 million in the first
quarter of 1998, representing the distribution due to its Class A and Class B
interests in STP after funds were advanced to CDS to retire the Company
Chairman's debt and redeem his Class A interest in CDS. In April 1998, Sun
filed certain claims in District Court in Dallas County, Texas concerning the
distribution of the proceeds from the sale of the assets. The core issue was
whether the provisions of the March 1997 Agreement would require that STP make
a loan or advance to CDS out of the proceeds of the sale so that CDS could
repay the loans made by the Chairman to CDS and could redeem the Chairman's
Class A preferred membership interest in CDS. A liquidator was appointed to
rule on the proper distribution based upon the interpretation of the March 1997
Agreement among the Company, its Chairman and the minority shareholder. The
liquidator ruled that the proceeds should be distributed differently than had
previously been determined by the Company in the first quarter of 1998.
The net effect of any loan or advance to CDS would be to reduce the
funds available for STP to distribute to the Company and Sun. In order to
eliminate any possible conflict between the Company and its Chairman, the
Company and its Chairman reached an agreement effective June 30, 1998 in which
the Chairman agreed to decrease the amount of his proceeds from the sale of the
assets of STP, and increase the amount of the Company's proceeds, by an amount
equal to the shortfall, if any, between the amount that would be awarded to the
Company based on Sun's reading of the March 1997 Agreement and the amount
awarded to the Company in the final outcome of the litigation.
F-34
<PAGE> 82
The District Court ruled in December 1998 that, as a matter of law, the
March 1997 Agreement should be read in the manner urged by Sun and consistent
with the liquidator's previous ruling and entered the judgment directing
distribution of the proceeds in the manner urged by Sun which included an
additional $1.7 million in attorney's fees which could be increased to $2.1
million under certain circumstances. The Company's Chairman has filed a notice
of appeal in his personal capacity as a party to the agreement but has not
determined whether or how he will proceed with that appeal. The Company has
filed a notice of appeal and is considering whether to raise as issues the
amount of attorney's fees to be paid to Sun and other issues ruled on by the
court. However, the Company does not intend to directly appeal the District
Court's ruling with regard to the distribution of the proceeds. The Company
believes it is probable that the outcome of the appeal and or potential
settlement, if any, will not materially affect the distribution of the proceeds
to the Company as contained in the final judgment of the District Court.
NOTE U--Quarterly Results (Unaudited)
The unaudited quarterly results for 1998 and 1997 were as follow:
<TABLE>
<CAPTION>
1998
-------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues ............................... $ 277,811 $ 300,771 $ 288,532 $ 312,789
Income before federal income taxes
and minority interests ............... 15,583 22,676 22,362 36,860
Net income ............................. 8,157 14,458 13,531 22,623
Diluted earnings per common share ...... $ 0.18 $ 0.31 $ 0.29 $ 0.48
</TABLE>
<TABLE>
<CAPTION>
1997
-------------------------------------------------
First Second Third Fourth
---------- ---------- ---------- ----------
(Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C>
Revenues ............................... $ 200,253 $ 224,182 $ 230,865 $ 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
Diluted earnings per common share ...... $ 0.45 $ 0.46 $ 0.50 $ 0.50
</TABLE>
F-35
<PAGE> 83
Computation of earnings per share for each quarter are made
independently of earnings per share for the year. The lower earnings of the
first quarter of 1998 are the results of the SEA Division reporting losses on
certain managed care products. Included in the first quarter of 1998 is a $2.3
million gain from the sale of certain assets of an ATM processing company in
February 1998. The $2.3 million gain was reported in the Other Business Units
segment and was partially offset by $2.5 million in operating losses from a
company that was disposed of in the third quarter of 1998. During the second
quarter, a dispute arose among the Company and its Chairman on one side and the
minority shareholder of one of the Company's subsidiaries on the other, as to
the contract interpretation and the distribution of the proceeds from the sale
of the assets of this subsidiary. A liquidator was appointed to rule on the
proper distribution based upon the interpretation of the agreement among the
Company, its Chairman, and the minority shareholder. The liquidator ruled that
the proceeds should be distributed differently than had previously been
determined by the Company. Accordingly, the Company recorded its additional
portion of the gain of $ 7.4 million in the second quarter of 1998 based on that
ruling. Although by interlocutory appeal the court of appeals divested the
liquidator of his authority, the trial court ultimately endorsed the
liquidator's ruling. The additional $7.4 million gain was reported in the Other
Business Units segment. (See Note T) The second quarter included $8.0 million in
operating losses from a company that was disposed of in the third quarter of
1998. The higher earnings of the fourth quarter of 1998 are the result of the
SEA Division returning to profitability and the Credit Services Division
reporting significant growth in sales and profits from a program started in
1997.
F-36
<PAGE> 84
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
UICI (PARENT COMPANY)
BALANCE SHEETS
(Dollars in thousands)
<TABLE>
<CAPTION>
DECEMBER 31
-----------------------
1998 1997
---------- ----------
<S> <C> <C>
ASSETS:
Investments:
Investments in and advances to subsidiaries* .. $ 616,621 $ 506,391
Investment in agents' receivables ............. 10,469 18,666
Guaranteed student loans ...................... 992 1,062
Collateral loans .............................. 2,504 16,520
Credit card loans ............................. -- 21,410
Short-term and other investments .............. 11,403 917
---------- ----------
Total Investments .......................... 641,989 564,966
Cash .............................................. 1,478 3,577
Other ............................................. 11,935 3,819
---------- ----------
$ 655,402 $ 572,362
========== ==========
LIABILITIES:
Accrued expenses and other liabilities ............ $ 6,202 $ 7,925
Short-term debt ................................... 28,950 3,951
Long-term debt .................................... 19,754 23,704
Federal income taxes payable ...................... 5,705 492
---------- ----------
60,611 36,072
STOCKHOLDERS' EQUITY
Common stock ...................................... 464 462
Preferred stock ................................... -- --
Additional paid-in capital ........................ 166,489 165,891
Accumulated other comprehensive income
Net unrealized investment gains
held by subsidiaries ............................ 13,412 14,280
Retained earnings ................................. 414,426 355,657
---------- ----------
594,791 536,290
---------- ----------
$ 655,402 $ 572,362
========== ==========
</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-37
<PAGE> 85
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
UICI (PARENT COMPANY)
STATEMENTS OF INCOME
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
1998 1997 1996
---------- ---------- ----------
<S> <C> <C> <C>
Income:
Dividends from subsidiaries* ................... $ 37,863 $ 39,154 $ 27,198
Interest income ................................ 6,785 10,004 9,578
Interest and other income from subsidiaries* ... 1,043 572 621
Gains (losses) on sale of investments .......... (41) (162) 2,283
Fees and other income .......................... 3,573 13,013 17,114
---------- ---------- ----------
49,223 62,581 56,794
---------- ---------- ----------
Expenses:
General and administrative expenses ............ 4,320 955 7,521
Administrative expenses to subsidiaries* ....... 8,438 9,553 6,462
Interest expense ............................... 2,641 2,449 2,471
---------- ---------- ----------
15,399 12,957 16,454
---------- ---------- ----------
Income before equity in undistributed
earnings of subsidiaries
and federal income taxes ................. 33,824 49,624 40,340
Equity in undistributed earnings of
subsidiaries ................................... 32,048 43,447 35,185
---------- ---------- ----------
Income before federal income taxes ............. 65,872 93,071 75,525
Federal income taxes ............................... 7,103 6,567 6,278
---------- ---------- ----------
Net income ..................................... $ 58,769 $ 86,504 $ 69,247
========== ========== ==========
</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-38
<PAGE> 86
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT--(CONTINUED)
UICI (PARENT COMPANY)
STATEMENTS OF CASH FLOWS
(Dollars in thousands)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income ................................................. $ 58,769 $ 86,504 $ 69,247
Adjustments to reconcile net income
to cash provided by operating activities:
Equity in undistributed earnings of subsidiaries ..... (32,048) (43,447) (35,185)
(Gains) losses on sale of investments ................ 41 162 (2,283)
Decrease in amounts due from related companies ....... -- 547 31
Increase in other receivables ........................ (3,300) -- --
Increase (decrease) in accrued expenses
and other liabilities ................................ (6,560) 2,517 (905)
Deferred income taxes (benefit) ...................... (1,047) 1,914 2,118
Increase (decrease) in federal income taxes payable .. 6,260 (5,035) 1,510
Other items, net ...................................... (3,473) 678 (1,677)
------------ ------------ ------------
Cash Provided by Operations ............................. 18,642 43,840 32,856
------------ ------------ ------------
INVESTING ACTIVITIES
Purchase of subsidiaries ................................... -- (66,948) (275)
Disposal of subsidiaries and assets ........................ 21,270 -- --
Purchase of minority interest .............................. (11,117) (15,062) (9,831)
Increase of investments in and advances to subsidiaries .... (79,525) (35,614) (24,428)
Payments of credit card loans .............................. 143,180 129,206 118,503
Funding of credit card loans ............................... (116,935) (128,127) (104,265)
Purchase of health business ................................ -- (5,218) --
Net decrease (increase) in other investments ............... (10,761) 88,600 (90,127)
Decrease (increase) in agents' investments ................. 8,197 (5,384) (2,706)
------------ ------------ ------------
Cash used in investing activities ........................ (45,691) (38,547) (113,129)
------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds of notes payable .................................. 37,000 -- 10,250
Repayment of notes payable ................................. (15,950) -- (22,242)
Repayment of payable to related party ...................... -- -- (10,735)
Proceeds from exercise of warrants and stock options ....... -- 417 179
Proceeds from issuance of common stock, net of expenses .... 3,900 -- 100,148
Purchase of treasury stock ................................. -- (194) (271)
------------ ------------ ------------
Cash Provided by Financing Activities ................... 24,950 223 77,329
------------ ------------ ------------
Increase (decrease) in Cash ............................. (2,099) 5,516 (2,944)
Cash (overdraft) at Beginning of Period ................. 3,577 (1,939) 1,005
------------ ------------ ------------
Cash (overdraft) at End of Period ....................... $ 1,478 $ 3,577 $ (1,939)
============ ============ ============
</TABLE>
The condensed financial statements should be read in conjunction with
the consolidated financial statements and notes thereto of UICI and
Subsidiaries.
F-39
<PAGE> 87
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, 1998:
Self Employed Agency .... $ 22,856 $ 255,170 $ 37,142 $ 7,972
Student Insurance ....... 3,212 25,621 31,546 --
OKC Division ............ 50,894 465,782 35,957 9,560
Special Risk ............ 910 37,552 1,552 3,058
National Motor Club ..... 1,611 1,470 4,372 --
------------ ------------ ------------ ------------
Total ............... $ 79,483 $ 785,595 $ 110,569 $ 20,590
============ ============ ============ ============
December 31, 1997:
Self Employed Agency .... $ 22,778 $ 205,429 $ 39,085 $ 6,614
Student Insurance ....... 7,469 28,785 29,899 --
OKC Division ............ 54,377 487,380 30,942 8,940
Special Risk ............ 1,170 24,251 957 4,197
National Motor Club ..... 220 -- 4,813 --
------------ ------------ ------------ ------------
Total ............... $ 86,014 $ 745,845 $ 105,696 $ 19,751
============ ============ ============ ============
December 31, 1996:
Self Employed Agency .... $ 7,518 $ 167,212 $ 29,648 $ 5,496
Student Insurance ....... 2,781 32,581 25,325 --
OKC Division ............ 49,656 514,153 24,405 8,504
Special Risk ............ -- -- -- --
National Motor Club ..... -- -- -- --
------------ ------------ ------------ ------------
Total ............... $ 59,955 $ 713,946 $ 79,378 $ 14,000
============ ============ ============ ============
</TABLE>
F-40
<PAGE> 88
UICI
AND SUBSIDIARIES
SCHEDULE III-- SUPPLEMENTARY INSURANCE INFORMATION (continued)
<TABLE>
<CAPTION>
COL. F COL. G COL. H COL. I COL J COL K
---------- ---------- ---------- ---------- ---------- ----------
Benefits, Amortization
Claims of Deferred
Losses, and Policy Other
Premium Investment Settlement Acquisition Operating Premiums
Revenue Income* Expenses Costs Expenses* Written
---------- ---------- ---------- ---------- ---------- ----------
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
1998:
Self Employed Agency ......... $ 572,516 $ 18,467 $ 430,228 $ 3,030 $ 162,490 $ 734,445
Student Insurance ............ 107,029 2,764 76,448 3,393 23,863 ==========
OKC Division ................. 58,915 32,667 38,573 17,797 14,777
Special Risk ................. 55,155 2,455 38,115 260 13,430
National Motor Club .......... 3,007 363 2,671 -- 70
---------- ---------- ---------- ---------- ----------
$ 796,622 $ 56,716 $ 586,035 $ 24,480 $ 214,630
========== ========== ========== ========== ==========
1997:
Self Employed Agency ......... $ 503,167 $ 14,787 $ 317,703 $ 2,667 $ 150,031 $ 648,723
Student Insurance ............ 94,099 2,599 56,026 -- 25,133 ==========
OKC Division ................. 58,411 34,159 43,223 18,204 12,263
Special Risk ................. 44,636 847 30,016 130 7,349
National Motor Club .......... 3,027 104 2,689 -- 55
---------- ---------- ---------- ---------- ----------
$ 703,340 $ 52,496 $ 449,657 $ 21,001 $ 194,831
========== ========== ========== ========== ==========
1996:
Self Employed Agency ......... $ 390,878 $ 12,231 $ 226,661 $ 2,252 $ 116,324 $ 506,699
Student Insurance ............ 91,254 2,713 56,581 326 22,656 ==========
OKC Division ................. 60,970 34,989 52,062 14,502 13,278
Special Risk ................. 4,653 72 591 -- 3,155
---------- ---------- ---------- ---------- ----------
$ 547,755 $ 50,005 $ 335,895 $ 17,080 $ 155,413
========== ========== ========== ========== ==========
</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-41
<PAGE> 89
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, 1998
Life insurance in force ... $ 4,850,858 $ 1,291,525 $ 1,668,440 $ 5,227,773 31.9%
============ ============ ============ ============ ============
Premiums:
Life insurance ............ $ 51,755 $ 13,237 $ 10,829 $ 49,347 21.9%
Health insurance .......... 601,163 69,083 215,195 747,275 28.8%
------------ ------------ ------------ ------------
$ 652,918 $ 82,320 $ 226,024 $ 796,622
============ ============ ============ ============
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 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
============ ============ ============ ============
</TABLE>
F-42
<PAGE> 90
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
--------- -------- -------- --- ------
Allowance for losses
Year ended December 31, 1998
<S> <C> <C> <C> <C> <C>
Credit card receivables ....... $ 4,283 $ 73,954 $ -- $ (11,426) $ 66,811
Agents' receivables ........... 1,491 95 -- (1,103) 483
Mortgage and collateral loans . 650 -- -- -- 650
Student loans ................. 400 535 -- -- 935
Real estate ................... 2,723 400 -- (2,040) 1,083
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
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
Student loans ................. 178 100 -- -- 278
Real estate ................... -- 2,614 -- -- 2,614
</TABLE>
F-43
<PAGE> 91
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
2 Plan of Reorganization of United Group Insurance Company, as
subsidiary of United Group Companies, Inc. and Plan and Agreement of
Merger of United Group Companies, Inc. into United Insurance
Companies, Inc., filed as Exhibit 2-1 to the Registration Statement
on form S-1, File No. 33-2998, filed with the Securities and Exchange
Commission on January 30, 1986 and incorporated by reference herein.
3.1(A) Certificate of Incorporation of UICI, as amended, filed as Exhibit
3.1 to the Form 10-Q dated June 30, 1996, filed on August 13, 1996,
File No. 0-14320, and incorporated by reference herein.
3.2(A) Restated By-Laws, as amended, of the Company, filed as Exhibit 3.2 to
the Form 10Q dated March 31, 1998, filed on May 14, 1998, File No.
0-14320, and incorporated by reference herein.
10.1(B) Reinsurance Agreement between AEGON USA Companies and UICI Companies
Effective January 1, 1995, as amended through November 21, 1995 and
incorporated by reference herein.
10.1(C) Amendment No. 3 to Reinsurance Agreement between AEGON USA Companies
and UICI Companies effective April 1, 1996, and filed as Exhibit 10.1
to the Company's Current Report on Form 8-K dated April 1, 1996 (File
No. 0-14320), and incorporated by reference herein. The Amendment No.
3 amends the Reinsurance Agreement between AEGON USA Companies and
UICI Companies effective January 1, 1995, as amended through November
21, 1995, filed as Exhibit 10.1(B) on Annual Report on Form 10-K for
year ended December 31, 1995, (File No. 0-14320), filed on March 29,
1996, and incorporated by reference herein.
10.2 Agreements Relating to United Group Association Inc., filed as
Exhibit 10-2 to the Registration Statement on Form S-18, File No.
2-99229, filed with the Securities and Exchange Commission on July
26, 1985 and incorporated by reference herein.
10.3 Agreement for acquisition of capital stock of Mark Twain Life
Insurance Corporation by Mr. Ronald L. Jensen, filed as Exhibit 10-4
to the Registration Statement on Form S-1, File No. 33-2998, filed
with the Securities and Exchange Commission on January 30, 1986 and
incorporated by reference herein.
10.3(A) Assignment Agreement among Mr. Ronald L. Jensen, the Company and
Onward and Upward, Inc. dated February 12, 1986 filed as Exhibit
10-4(A) to Amendment No. 1 to Registration Statement on Form S-1,
File No. 33-2998, filed with the Securities and Exchange Commission
on February 13, 1986 and incorporated by reference herein.
</TABLE>
<PAGE> 92
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.4 Agreement for acquisition of capital stock of Mid-West National Life
Insurance Company of Tennessee by the Company filed as Exhibit 2 to
the Report on Form 8-K of the Company, File No. 0-14320, dated August
15, 1986 and incorporated by reference herein.
10.5(A) Stock Purchase Agreement, dated July 1, 1986, among the Company,
Charles E. Stuart and Stuart Holding Company, as amended July 7,
1986, filed as Exhibit 11(c)(1) to Statement on Schedule 14D-1 and
Amendment No. 1 to Schedule 13D, filed with the Securities and
Exchange Commission on July 14, 1986 and incorporated by reference
herein.
10.5(B) Acquisition Agreement, dated July 7, 1986 between Associated
Companies, Inc. and the Company, together with exhibits thereto,
filed as Exhibit (c) (2) to Statement on Schedule 14D-1 and Amendment
No. 1 to Schedule 13D, filed with the Securities and Exchange
Commission on July 14, 1986 and incorporated by reference herein.
10.5(C) Offer to Purchase, filed as Exhibit (a) (1) to Statement on Schedule
14D-1 and Amendment No. 1 to Schedule 13D, filed with the Securities
and Exchange Commission on July 14, 1986 and incorporated by
reference herein.
10.6 Agreement for acquisition of capital stock of Life Insurance Company
of Kansas, filed as Exhibit 10.6 to the 1986 Annual Report on Form
10-K, File No. 0-14320, filed with the Securities and Exchange
Commission on March 27, 1987 and incorporated by reference herein.
10.7 Agreement Among Certain Stockholders of the Company, filed as Exhibit
10-6 to the Registration Statement on Form S-18, File No. 2-99229,
filed with the Securities and Exchange Commission on July 26, 1985
and incorporated by reference herein.
10.8 Form of Subscription Agreement for 1985 Offering, filed as Exhibit
10-7 to the Registration Statement on Form S-1, File No. 33-2998,
filed with the Securities and Exchange Commission on January 30, 1986
and incorporated by reference herein.
10.9 Repurchase Agreement between Life Investors Inc., UGIC, Ronald Jensen
and Keith Wood dated January 6, 1984, filed as Exhibit 10-8 to
Registration Statement on Form S-1, File No. 33-2998, filed with the
Securities and Exchange Commission on January 30, 1986 and
incorporated by reference herein.
</TABLE>
<PAGE> 93
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <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>
<PAGE> 94
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <C>
10.17 Stock Purchase Agreement dated as of August 26, 1991 by and among
Farm and Home Life Insurance Company, First United, Inc. and The MEGA
Life and Health Insurance Company, filed as Exhibit 3 to Schedule
13D, filed with the Securities and Exchange Commission on September
3, 1991 and incorporated by reference herein.
10.18 Stock Purchase Agreement dated as of August 26, 1991 by and among
Farm and Home Life Insurance Company, The Chesapeake Life Insurance
Company and Mid-West National Life Insurance Company of Tennessee,
filed as Exhibit 4 to Schedule 13D, 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>
<PAGE> 95
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <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.
</TABLE>
<PAGE> 96
<TABLE>
<CAPTION>
Exhibit
Number Description
- ------ -----------
<S> <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 Auditors
27 Financial Data Schedule
</TABLE>
NOTE FOR READERS OF FORM 10-K
This copy of the Annual Report on Form 10-K only includes a copy of
Exhibit 21. UICI will provide a copy of any exhibit upon written request. All
requests should be mailed to the address on Page 1 or to [email protected]
<PAGE> 1
UICI
AND SUBSIDIARIES
EXHIBIT 21--SUBSIDIARIES OF UICI
<TABLE>
<CAPTION>
Jurisdiction
------------
<S> <C>
The MEGA Life and Health Insurance Company Oklahoma
Mid-West National Life Insurance Company of Tennessee Tennessee
The Chesapeake Life Insurance Company Oklahoma
National Motor Club of America, Inc. Texas
United Membership Marketing Group, Ltd.
Liability Company Colorado
United Credit National Bank South Dakota
Educational Finance Group, Inc. Delaware
Insurdata Texas
Amli Realty Company Illinois
Financial Services Reinsurance, Ltd. Turks and Caicos Islands
National Managers Life Insurance Company, Inc. Turks and Caicos Islands
</TABLE>
<PAGE> 1
EXHIBIT 23--CONSENT OF INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement (Form
S-8 No. 33-11323) pertaining to the United Insurance Companies, Inc. Employee
Stock Ownership Plan of UICI, in the Registration Statement (Form S-3 No.
333-02043) of United Insurance Companies, Inc. and related Prospectus, in the
Registration Statement (Form S-8 No. 333-14320) 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 12, 1999, 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, 1998.
ERNST & YOUNG LLP
Dallas, Texas
March 29, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 886,406
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 18,764
<MORTGAGE> 8,266
<REAL-ESTATE> 0
<TOTAL-INVEST> 1,190,227
<CASH> 16,900
<RECOVER-REINSURE> 89,566
<DEFERRED-ACQUISITION> 93,008
<TOTAL-ASSETS> 2,475,055
<POLICY-LOSSES> 785,595
<UNEARNED-PREMIUMS> 110,569
<POLICY-OTHER> 20,590
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 720,569
0
0
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796,622
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<OTHER-INCOME> 303,477
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<UNDERWRITING-AMORTIZATION> 24,480
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<INCOME-PRETAX> 97,481
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