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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- -------------------------------------------------------------------------------
FORM 10K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997
Commission File #0-11321
Universal American Financial Corp.
(Exact name of registrant as specified in its charter)
- -------------------------------------------------------------------------------
New York 11-2580136
------------------------- -------------------------------
(State of Incorporation) (I.R.S. Employer I.D. Number)
Six International Drive, Suite 190, Rye Brook, NY 10573
- ------------------------------------------------- --------
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code (914) 934-5200
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Class on which Registered
- ----------------------------------------------- ------------------------
Common Stock, par value $.01 per share NASDAQ
Common Stock Warrants, expire December 31, 1999 NASDAQ
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [X] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant as of February 27, 1998 was approximately $10,978,212.
The number of shares outstanding of the Registrant's Common Stock and
Common Stock Warrants as of February 27, 1998 were 7,411,680 and 668,481,
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the Part of the Form 10-K (e.g., Part I, Part II, etc.) into which the document
is incorporated:
(1)Proxy Statement for the 1998 Annual Meeting incorporated by reference
into Part III.
(2)Exhibits listed in Item 14(b), Part IV, incorporated by reference to
Form S-1 filed March 30, 1990, Forms 10-K for 1996, 1994, 1993, 1991,
1989 and 1988 and Forms 8-K for July 24, 1992, May 31, 1991 and
December 9, 1987.
PART I
ITEM 1 - BUSINESS
General
Universal American Financial Corp. ("the Company" or "Universal") is a
life and accident & health insurance holding company, whose principal
subsidiaries are American Pioneer Life Insurance Company ("American Pioneer"),
American Progressive Life and Health Insurance Company of New York ("American
Progressive"), and American Exchange Life Insurance Company ("American
Exchange"), (collectively the "Insurance Subsidiaries"), and WorldNet Services
Corp. ("WorldNet"), a third party administrator ("TPA") that provides
communication, managed care and claims adjudication services to the Insurance
Subsidiaries and non-affiliated insurance companies and affinity groups. The
references below to the insurance operations of the Company are to be understood
as references to activities of the Insurance Subsidiaries. Financial items are
reported on a Generally Accepted Accounting Principles basis ("GAAP"), except
where otherwise noted.
Strategic Focus
The Company has implemented, and will continue to pursue, the following
strategies:
Internal Growth
The Company has focused its efforts to reach targeted segments of the
insurance market as defined by product or by geography. These include:
Senior market life insurance, annuity and accident & health insurance
products designed for sale primarily in New York, Florida and Texas;
Life insurance, annuity and accident and health insurance programs
sold through large independent marketing organizations.
External Growth
Since 1991, the Company has successfully acquired and integrated three
insurance companies and six blocks of business, most recently in the fourth
quarter of 1997 with the acquisition of 100% of the outstanding stock of
American Exchange and in the first quarter of 1998 with the acquisition of $12.6
million of premium from Dallas General Life Insurance Company ("Dallas
General"). The Company continues to seek out further acquisitions (See Insurance
Acquisitions Activity).
Insurance Marketing Activity
The Company has placed its emphasis on the sale of a line of products that
particularly appeal to the senior market, largely through marketing
organizations with concentrations in this market. The Company began to sell
senior market life and supplemental health insurance products in 1993 in New
York and expanded its sales effort to Florida in 1996 and Texas in 1997. The
momentum into Florida was accelerated by the acquisition of business from First
National Life Insurance Company ("First National") and into Texas by the
American Exchange and Dallas General acquisitions (See "Insurance Acquisitions
Activity").
2
Business In Force
The Company's growth, in direct and assumed business, is shown in the
following tables as of December 31, 1995, 1996 and 1997.
Annualized Premium In Force As of December 31,
----------------------------------------
1995 (1) 1996 (1) 1997 (1)
------------ ------------ -------------
Senior Market Life Insurance:
Multiple Pay
- -------------------------------------
Asset Enhancer (2) $2,200,835 $3,191,359 $6,107,739
SL 2000 928,995 1,130,690 1,465,727
------------ ------------ -------------
Total Senior Market Life Multiple
Pay 3,129,830 4,322,049 7,573,466
------------ ------------ -------------
Special Markets: Life Insurance
- -------------------------------------
Flex-A-Vest 1,104,544 2,594,493 2,107,169
Group Life 3,477,876 4,150,000 3,888,912
Brokerage (2) 9,883,198 9,031,970 9,346,261
------------ ------------ -------------
Total Special Markets: Life
Insurance 14,465,618 15,776,463 15,342,342
------------ ------------ -------------
Senior Market: Accident & Health
- -------------------------------------
Medicare Supplement
and Select 2,739,649 58,851,455 68,404,225
Long Term Care - 2,277,686 4,546,346
Hospital Indemnity 2,587,584 2,239,207 1,888,069
------------ ------------ -------------
Total Senior Market: Accident &
Health 5,327,233 63,368,348 74,838,640
------------ ------------ -------------
Special Markets: Accident & Health
- -------------------------------------
Individual Medical 12,607,264 10,851,433 17,681,996
Other Accident &
Health (3) 2,151,332 2,144,717 3,475,324
Single Pay Life - - 87,583
------------ ------------ -------------
Total Special Markets: Accident &
Health 14,758,596 12,996,150 21,244,903
------------ ------------ -------------
Grand Total $37,681,277 $96,463,010 $118,999,351
============ ============ =============
- ------------------------------
(1) Does not include lines of business the Company has exited in its
restructuring activity (NYS DBL, NAIU Accident Pool and Group Dental)
which amounted to $18,496,266, $19,439,760 and $7,504,420 at December 31,
1995, 1996 and 1997, respectively (See "Restructuring Activity ", below).
(2) Included in the amounts shown are premiums for interest-sensitive
products. These amounts represent the portion of premium applied to the
cost of insurance (i.e. deposit premiums have been excluded).
(3) Business acquired by the Company that is not actively marketed.
The following table shows all outstanding account values for
interest-sensitive products for 1995, 1996 and 1997. For these products, the
Company earns an income on the spread between investment income on the Company's
invested assets and interest credited to these account balances.
Account Values As of December 31,
----------------------------------------
1995 1996 1997
------------ ------------ ------------
Annuities $82,208,343 $88,445,217 $88,032,040
Universal
Life 33,123,308 34,686,676 35,640,097
Asset
Enhancer 3,277,185 11,407,061 21,413,550
------------ ------------ ------------
Grand Total
$118,608,836 $134,538,954 $145,085,687
============ ============ ============
3
Senior Market
The following are the core products sold to the senior age market.
Medicare Supplement
The Company began to sell Medicare Supplement policies in January, 1994.
American Progressive has entered into Managing General Agency relationships with
three of the largest accident and health sales organizations in upstate New York
that specialize in the Senior Market to focus its marketing effort in geographic
areas in New York State where management believes competition is less formidable
than elsewhere in the State.
Recently, the Insurance Subsidiaries filed Medicare Select products with
the Texas and Florida Insurance Departments, to be sold primarily by Ameri-Life
and Health Services ("Ameri-Life"), a Managing General Agent of the Company.
American Pioneer's new Medicare Select policies have been approved by the
Florida Insurance Department and sales of this product are expected to begin in
April, 1998.
The Medicare Supplement policies offered by the Insurance Subsidiaries are
primarily on plans A, B, C and F and are underwritten on a simplified issue
basis, except that the policies sold in New York are on a guaranteed issue
basis, subject to the community rating laws of that state (See "Regulation -
Health Care Reform"). Sales amounted to $2.0 million, $3.1 million and $4.8
million in 1995, 1996 and 1997, respectively.
Home Health Care and Nursing Home
American Progressive introduced Home Health Care and Nursing Home products
in New York in early 1996. In late 1996, American Pioneer introduced a managed
care home health care product in Florida that uses preferred provider
organization ("PPO") discounts and capitation with a home health care network.
Issued premium for these long-term care products in 1996 (the first year of
sales) and in 1997 amounted to $1.3 million and $2.4 million, respectively.
Hospital Indemnity
American Progressive introduced a Senior Age Hospital Indemnity product in
mid-1993 and has premium in force in excess of $1.8 million as of December,
1997. Benefits under this product are fixed cash payments based upon the length
of hospital stays and are designed to provide money to meet needs ancillary to
hospitalization.
One, Five, Six and Seven Pay Interest Sensitive Whole Life ("Asset
Enhancer")
This program, marketed primarily by National Financial Group of
Scottsdale, Arizona, a national marketing organization under contract with
American Pioneer, and a number of other contracted large national marketing
groups, began in 1994 and is now sold actively in several states. The product is
a simplified issue interest-sensitive whole life product with one, five, six or
seven year payment options. It is designed as an interest-sensitive whole life
vehicle for seniors to facilitate estate planning and transfer assets to heirs
in an income tax-advantaged manner. In many states, the product offers an
optional nursing care and home care rider.
In addition to American Pioneer's own sales of this product, in 1996,
American Pioneer entered into an arrangement with West Coast Life Insurance
Company ("West Coast Life"), an unaffiliated "A+" rated carrier, under which
West Coast issues this product and, through an unaffiliated reinsurer, reinsures
one-third of the risk to American Pioneer. Under its contract with West Coast,
American Pioneer administers the product and the relationships with the
producers on a fee basis.
Statutory premium production of five, six and seven pay life insurance
amounted to $1.0 million, $1.6 million and $3.8 million in 1995, 1996 and 1997,
respectively. Single pay life insurance was introduced in 1995 and statutory
premium production amounted to $2.1 million, $6.2 million and $17.6 million in
1995, 1996 and 1997, respectively. These figures include the entire premium
generated by American Pioneer sales and the portion assumed by American Pioneer
on West Coast Life's sales.
4
Senior Life (SL2000)
This series of low-face value, simplified issue whole life products,
introduced in late 1995, is sold by the Insurance Subsidiaries as part of their
senior market effort. The Company issued $462,000 of premium in 1996, and
$652,000 in 1997.
Special Markets
Modified Premium Term Life Insurance (Flex-A-Vest 88)
This program, sold by American Pioneer and marketed exclusively by
Interstate Specialty Marketing, Inc. of Tustin, California, began in late 1994
and is now being sold actively in several states. In states where American
Pioneer is not licensed, an arrangement has been made with Pennsylvania Life
Insurance Company ("Pennsylvania Life"), a subsidiary of PennCorp Financial,
which issues the product and reinsures a portion of each case to the Company.
American Pioneer also administers the product on a fee-basis, and maintains the
relationship with the national marketing organization.
The product is a ten-year term product with an endowment payable after the
10th year. It is designed for the middle income market as a method to provide
insurance coverage and a vehicle for retirement or college tuition funding.
Including the premium reinsured from Pennsylvania Life, American Pioneer
issued $1.1 million, $2.2 million and $1.3 of premium in 1995, 1996 and 1997,
respectively.
Group Life Insurance
Through an arrangement with Alabama Blue Cross that has persisted since
1989, an American Pioneer group life insurance information package, including a
premium quotation, goes out with most Alabama Blue Cross small group major
medical insurance premium quotation. This program had premium revenue of $3.2
million in both 1996 and 1997.
Annuities
The Company markets Single and Flexible Premium Deferred Annuities
primarily through sales organizations which concentrate in the Tax-Advantaged
Annuity Internal Revenue Code 403(b) market. Annuity products generally focus on
the senior and retirement market. The Company's Tax Shelter Annuities, sold
largely to school teachers, involve people of various ages, some of whom are
senior, but most of whom are purchasing with retirement in mind. The American
Progressive single premium annuity sold in New York, which represents the bulk
of the Company's annuity production, has a seven-year surrender charge, a
one-year rate guarantee and a maximum commission of 6%. Further penetration of
the senior annuity market is also being considered.
All of the Company's annuity products provide minimum interest rate
guarantees. The minimum guaranteed rates on the Company's annuity products
currently range from 4.0% to 5.5% annually and the contracts are designed to
permit the Company to change the credited rates annually subject to the minimum
guaranteed rate. The Company takes into account the current interest
environment, the profitability of its annuity business and its relative
competitive position in determining the frequency and extent of changes to the
interest crediting rates.
Statutory premium production of new annuities amounted to $13.7 million,
$13.6 million and $12.0 million in 1995, 1996, and 1997, respectively.
Individual Medical
The Company has approximately $17.7 million of annual premium in force of
individual medical business as of December 31, 1997. Of this amount, $6.4
million was acquired in connection with the acquisition of American Exchange,
which accounts for the majority of the $6.8 million increase in this line in the
prior table of annual premiums in force. The Company intends to market American
5
Exchange's individual medical product, which product is a limited benefit policy
and is 75% reinsured to an unaffiliated reinsurer.
Recent Insurance Acquisition Activity
First National
In the fourth quarter of 1996, the Company acquired, through an assumption
reinsurance agreement, approximately $56 million of annualized senior market
premium from First National. American Pioneer initially contracted with First
National to assume $4 million of premium on group Medicare Supplement coverage
issued to the members of the Florida Retired Educators Association ("FREA").
Then, after First National was placed into Receivership by the Alabama Insurance
Department in October, 1996, American Pioneer assumed, in addition to the FREA
block, approximately $50 million of Individual Medicare Supplement premium, $1.2
million of Home Health Care premium and $0.8 million of miscellaneous life and
accident and health insurance premiums, under terms negotiated with the
Receiver. All of these assumptions were effective as of October 1, 1996.
Simultaneously with the second assumption by American Pioneer, American
Pioneer entered into a reinsurance agreement with Transamerica Occidental Life
Insurance Company ("Transamerica"), ceding 90% of the $50 million individual
Medicare Supplement premium in force to Transamerica under reinsurance terms
believed to be favorable. American Pioneer performs all the administration on
the reinsured business. In addition to the premium acquired, First National had
active relationships with about 1,000 senior market producers in Florida and
2,000 agents in other states. American Pioneer recruited certain of these
producers, especially in Florida, to sell senior market products for American
Pioneer.
Finally, in order to insure a smooth transition and to take advantage of
the relatively low cost operating environment in Pensacola, the Company acquired
or leased most of the physical operating assets used by First National,
including computer hardware and software, and hired many of First National's
Pensacola administrative employees.
American Exchange Life Insurance Company
On December 4, 1997, the Company acquired American Exchange for $6.6
million in cash, which acquisition was approved by both the Texas and Florida
Insurance Departments. American Exchange, which is licensed in Texas and two
other states, has premium revenues in excess of $16.5 million, primarily in
Medicare Supplement and other limited benefit accident & health products and has
19,800 policies in force and 1,000 insurance agents, all based in Texas.
Dallas General Medicare Supplement Block
On March 19, 1998, the Company acquired a $12.6 million block of Medicare
Supplement business from Dallas General, effective January 1, 1998. The business
was assumed by American Pioneer, which assumption was approved by the Texas and
Florida Departments of Insurance. The Dallas General block has approximately
10,000 policies in force produced by approximately 400 agents, all in Texas. In
addition, the principals of Dallas General have entered into a contract to
continue to produce business for American Pioneer through an agency
relationship.
Previous Acquisition Activity
In 1994, American Progressive acquired, by means of reinsurance, blocks of
supplemental health insurance with annualized premiums of approximately
$1,275,000. In these transactions, American Progressive assumed all liability
under the reinsured policies incurred after January 1, 1994, in exchange for its
receipt from the ceding company of cash equal to the unearned premium and active
lives reserves on the reinsured business, net of a $60,000 ceding commission,
and future premium payments from the insureds.
In May 1993, American Progressive acquired 100% of the outstanding stock
of American Pioneer, based in Orlando, Florida, which sold life and accident and
health insurance in 33 states, primarily in the southeast. American Pioneer's
parent, American Pioneer Savings and Loan Association, had been under the
6
control of the Resolution Trust Company ("RTC") since May 1990. American Pioneer
had an adjusted statutory book value (book value plus asset valuation reserve)
of approximately $7,472,000, and a GAAP stockholder's equity of approximately
$14,367,000 when it was purchased by American Progressive for $6,827,000 in
cash. By December 31, 1997, American Pioneer's adjusted statutory book value had
increased to approximately $10,807,000 and its GAAP stockholder's equity was
$18,671,000.
In May 1991, the Company, through John Adams Life Insurance Company ("John
Adams"), then its only insurance company subsidiary, acquired 100% of the
outstanding common stock of American Progressive, into which John Adams then
merged on June 27, 1991, with American Progressive as the surviving company.
American Progressive was acquired from Midland National Life Insurance Company
("Midland") for (a) a cash payment of $4,197,231, and (b) 510,000 shares ($10
par value) of the Company's Series A cumulative, redeemable, convertible
preferred stock ("Series A Preferred Stock"), for a total purchase price of
$9,297,231. (The Series A Preferred Stock was redeemed by the Company on
December 30, 1994.) American Progressive's statutory book value immediately
prior to acquisition was approximately $9,200,000, its adjusted statutory book
value was approximately $9,290,000, and its GAAP stockholder's equity was
approximately $9,700,000. As of December 31, 1997, the adjusted statutory book
value was approximately $9,783,000 and the GAAP stockholder's equity was
approximately $25,010,000. American Progressive, domiciled in New York and
licensed in 24 other states, historically concentrated on the sale of individual
accident and health insurance products primarily in New York and the
northeastern United States.
Restructuring Activity
Beginning in late 1996 and continuing throughout 1997, the Company
implemented a plan to consolidate the administration of its accident and health
business for all of the Insurance Subsidiaries in Pensacola. Simultaneously, the
Company consolidated the administration if its life and annuity business in
Orlando.
As part of its decision to concentrate its marketing effort on the Senior
Market, the Company decided to discontinue certain lines of business and reduce
its emphasis on others to take advantage of the lower-cost operating environment
of its new location in Pensacola.
Consolidation of Administrative Operations
As part of the First National transaction, the Company acquired in
Pensacola a relatively low cost administrative operation with particular
experience in the senior market. This has given the Company an opportunity to
consolidate many of its administrative functions in Pensacola and reduce a
significant amount of fixed overhead costs.
In December, 1996, the Company formulated a plan to move most of the
policy administrative functions, particularly in its senior market business,
from the American Progressive office in Brewster to Pensacola. This, along with
other cost saving efforts, resulted in a reduction in the work force at the
American Progressive office from 62 as of June 30, 1996 to approximately 25 as
of December 31, 1997, with a modest resultant increase in personnel in
Pensacola, including some personnel employed by American Progressive. These
plans were announced to the employees of the Company on March 14, 1997.
Consequently, American Progressive exercised its right to cancel its lease
for 15,000 square feet in Brewster as of October, 1997 and is currently leasing
a smaller office. The cost of this consolidation, including severance costs,
relocation costs and the cancellation penalty on the Brewster lease, was
approximately $250,000 and was expensed in the fourth quarter of 1996. The
Company estimates that it will save $750,000 annually as a result of this
reorganization.
Sale of DBL Block
Although American Progressive continued to achieve modest success in selling New
York State Statutory Disability Insurance ("DBL"), the Company determined that
the book of business was too small and growing too slowly to become a major
contributor to the profits of the Company. Therefore, American Progressive sold
the block, which had approximately $5 million of annual premium in force, to an
7
unaffiliated New York domiciled carrier as of December 31, 1996. The purchase
price is a minimum of $550,000 and may reach as high as $950,000 depending upon
the persistency of the business over a twelve-month period. Determination of the
final purchase price is expected to be made in the second quarter of 1998.
American Progressive continued to maintain the risk for claims incurred prior to
December 31, 1996, which claims have been fully paid. The purchaser is
responsible for all risks and reserves for 1997 and beyond.
Withdrawal from NAIU Pool
Effective January 1, 1994, American Progressive entered into a pooling
agreement through National Accident Insurance Underwriters ("NAIU"), an
unaffiliated agency, and three unaffiliated insurers to underwrite travel
accident and student accident insurance policies. The results of the pool were
erratic, therefore, in August, 1996, the Company decided to allocate its capital
and efforts in its core business segments. The Company notified the accident
pool of its intention to withdraw effective December 31, 1996. As of December
31, 1996, American Progressive had approximately $8 million of annual premium in
force under this arrangement, all of which had been assumed from the other pool
participants. American Progressive continues to be exposed on business prior to
December 31, 1996 and, as of December 31, 1997, has $250,000 in reserves
remaining for this risk.
Sale of Dental Block
The Company executed an agreement, with an unaffiliated insurer, to 100%
reinsure its group dental block of business effective September 1, 1997. In
1997, the Company received an initial ceding allowance of $200,000 and
anticipates receiving additional allowances totaling $525,000 over a five-year
period. The Company will continue to perform the administration on the business
for a fee. At September 1, 1997, the annual in force premium amounted to $7.8
million.
Major Medical Reinsurance
When American Pioneer was acquired by the Company in 1993, American
Pioneer actively marketed individual major medical and major hospital policies
under strict underwriting guidelines. These policies have deductibles on a per
confinement basis ranging from $300 to $5,000, as to major hospital, and $150 to
$10,000 as to major medical. Over the past years, the Company has reduced its
marketing emphasis on this segment and has reduced its exposure through
reinsurance. In 1994, the Company had $8.7 million of annual premium in force
and carried 100% of the risk up to $60,000 per policy per year. By the beginning
of 1997, the Company had $7.0 million of premium in force and carried 50% of the
risk up to $60,000 per policy per year, or a maximum risk of $30,000 per year
per insured person.
Premium Revenue
Life Insurance and Annuities
The following table sets forth a summary of life premium revenues and
annuity considerations on first year and renewal basis for the three years ended
December 31, 1997, as determined in accordance with statutory accounting
principles ("SAP"). These amounts differ from the premiums reported in the
accompanying consolidated statement of operations, since under GAAP, the annuity
and universal life insurance policies are reported under the retrospective
deposit method prescribed by the Financial Accounting Standards Board ("FASB")
Statement No. 97 "Accounting and Reporting by Insurance Enterprises for Certain
Long-Duration Contracts and for Realized Gains and Losses from the Sales of
Investments" ("Statement No. 97"). (i.e. under GAAP amounts attributable to
asset accumulation, components of interest-sensitive products are excluded from
premiums. See Note 2e of Notes to Consolidated Financial Statements for further
information).
8
Year Ended December 31,
------------------------------------
1995 1996 1997(1),(2)
----------- ----------- -----------
(Amounts in accordance with
statutory accounting principles)
Life Insurance
---------------------------
Premium received,
policies written in
current year $6,141,040 $10,437,377 $11,037,680
Premium received,
policies written in 9,668,592 12,206,343 14,279,692
prior year
----------- ----------- -----------
Total Life Premium 15,809,632 22,643,720 25,317,372
----------- ----------- -----------
Annuities
---------------------------
Consideration received,
policies written in
current year 13,377,924 13,004,354 10,816,588
Consideration received,
policies written in 364,145 618,739 988,552
prior years
----------- ----------- -----------
Total Annuity 13,742,069 13,623,093 11,805,140
Consideration
----------- ----------- -----------
Total Consideration and
Premium $29,551,701 $36,266,813 $37,122,512
=========== =========== ===========
- ---------------------------------
(1)The 1997 figures include the premium revenues of American Exchange
from December 4, 1997, the date of its acquisition, which amounted to
$22,559.
(2)The life insurance amount includes premiums received on asset enhancer
business assumed from West Coast Life, which mounts to $6,370,162.
The following table presents information with respect to the Company's
number of policies in force and experience in terms of numbers of policies
issued, and reduced for surrenders, lapses or deaths for annuity and life
insurance:
1995 1996 1997
-------- -------- --------
Life Insurance Policies
----------------------------
In force, beginning of year
24,820 26,642 27,930
Acquired from First
National - 286 -
Acquired from American
Exchange - - 3,993
Issued during year
4,934 4,407 5,116
Lapsed or surrendered
during year (2,874) (3,193) (4,216)
Deaths during year
(238) (212) (217)
-------- -------- --------
In force, end of year
26,642 27,930 32,606
======== ======== ========
Annuity Policies
----------------------------
In force, beginning of year
4,090 5,437 6,833
Acquired from First
National - 40 -
Issued during year
1,956 2,119 2,856
Deaths and surrenders
during year (609) (763) (2,357)
-------- -------- --------
In force, end of year
5,437 6,833 7,332
======== ======== ========
9
Accident & Health Insurance
The following table sets forth a summary of accident and health premium
revenues for the three years ended December 31, 1997:
Year Ended
December 31,
--------------------------------------
1995 1996 1997 (2)
------------ ----------- -----------
Premium received on
policies
written in current year
$5,982,178 $9,805,305 $12,284,517
Premium received on
policies
written in prior years 22,313,927 35,047,929 62,802,770
(1)
------------ ----------- -----------
Total Accident & Health
Premium $28,296,105 $44,853,234 $75,087,287
============ =========== ===========
- ----------------------------------
(1)The 1996 figures include the premium revenues of First National from
October 1, 1996, the date of its acquisition, which amounted, to
$13,498,122. The 1997 figure includes the full year of premium revenue
of First National's policies which amounted to $51,187,027.
(2)The 1997 figures include the premium revenues of American Exchange
from December 4, 1997, the date of its acquisition, which amounted to
$473,892 and $941,235 current year and renewal year, respectively.
Private Placement Financing
Series C Preferred Stock
During the second and third quarters of 1997, the Company, pursuant to a
stock purchase agreement between the Company and A.A.M. Capital Partners L.P.
("AAM"), issued 43,750 shares (par value $100) of Series C Preferred Stock for
$4,375,000, of which $2.4 million was purchased by UAFC L.P., an investment
partnership affiliated with AAM, $600,000 by Chase Equity Partners, L.P., and
$1,375,000 by Richard A. Barasch (the Chairman and Chief Executive Officer of
the Company), members of his family, and members and associates of the Company's
management. This transaction received the approval of the Florida Insurance
Department.
During the third quarter of 1997, the Company issued an additional 7,930
shares of Series C Preferred Stock for $793,000, which shares were purchased by
owners and employees of Ameri-Life & Health Services, an independent marketing
organization that sells the Company's senior market products.
The following summary of the terms of the Series C Preferred Stock and of
a Shareholders' Agreement affecting such stock, is qualified in its entirety by
reference to the Certificate of Incorporation of the Company and in the
Shareholders' Agreement.
The Series C Preferred Stock is convertible by the holders at any time at a
conversion price of $2.375 per common share (subject to anti-dilution
adjustment).
The Company can require conversion if it executes a public offering of
common stock at over $3.45 per common share (or equivalent equity), with
gross proceeds in excess of $10 million, or if the average bid price of its
common stock, for any 60 day period, exceeds $3.45, $4.25 and $5.15 per
common share in 1999, 2000 and 2001, respectively.
In the event that the Company takes certain action without the consent of
the holders of a majority of the Series C Preferred Stock, those holders who
voted against such action have the right to require its redemption at the
Redemption Price or the Call Price, (which Prices are defined below)
depending on the nature of the action taken.
10
The Company has the right to call all of the Series C Preferred Stock at any
time between January 1, 2000 and December 31, 2002, at a per share call price
(the "Call Price") of $150 in the year 2000 or $175 in the years 2001 and
2002, in each case increased by the redemption accrual at the rate of 8% of
the par value.
Unless converted or called earlier, the Series C Preferred Stock will be
redeemed on December 31, 2002, at a per share redemption price (the
"Redemption Price") equal to par, increased by a redemption accrual at the
rate of 8% per annum. The redemption price will be payable in two equal
installments on December 31, 2002 and December 31, 2003. The redemption
accrual is not payable upon any conversion.
No dividends will be paid on the Series C Preferred Stock, unless dividends
are paid on the common stock, in which case the Series C Preferred Stock will
participate as if converted. As of December 31, 1997, $249,790 of redemption
accruals were accumulated on the Series C Preferred Stock for the period
April 25, 1997 to December 31, 1997.
The holders of the Series C Preferred Stock (excluding a portion of such
series which may be issued without voting rights) will have the right to
elect one director of the Company.
$3 million of the proceeds of this sale were used to begin implementation
of the conversion of American Pioneer from being a direct subsidiary of
American Progressive to being a direct subsidiary of Universal. See
"Unstacking," below.
The Company, AAM, the holders of the Series C Preferred Stock, Barasch
Associates Limited Partnership ("BALP") and Richard A. Barasch entered into a
stockholders' agreement at the closing of the transaction which contained the
following conditions:
The holders of the Series C Preferred Stock were given registration rights
and informational rights.
The Series C Preferred Stockholders agreed to vote their shares for the
election of a person designated by AAM as the director elected by that
Series.
BALP and Mr. Barasch granted the Series C holders a co-sale right should
they sell any shares of the Company's common stock held by them, except to
certain "permitted transferees".
Unstacking
When American Pioneer was acquired in 1993, it became a direct subsidiary
of American Progressive. This ownership structure (the "stacking") significantly
reduced the Risk-Based Capital ratio of American Progressive as computed by the
regulators and the rating agencies and adversely affected the ratings of both
companies and their ability to write new business.
Universal and American Progressive, entered into an agreement with the
consent of the New York Insurance Department on June 27, 1996 (the "Unstacking
Agreement"), in which Universal is obligated to purchase all of the outstanding
stock of American Pioneer from American Progressive over a five-year period for
a total purchase price of $15,800,000. Under the terms of the Unstacking
Agreement, the purchase is to be implemented in segments with the purchase price
of the shares included in each segment being paid one half in cash and one half
in five-year debentures, paying interest at 8.5%. The debentures are payable by
Universal to American Progressive.
11
The Unstacking Agreement is intended to make American Pioneer a direct
subsidiary of Universal, rather than an indirect subsidiary, owned through
American Progressive. This unstacking is expected to have a beneficial effect on
the ratings of both insurers. In addition, the unstacking increases the surplus
of American Progressive, improves its Risk Based Capital Ratio and, to the
extent that American Pioneer is able to pay dividends, permits the payment of
such dividends directly to Universal.
The first segments of the unstacking were consummated in September and
December of 1997. In the aggregate, Universal acquired 75% of American Pioneer
from American Progressive for $11,850,000 consisting of $5,925,000 in cash and
$5,925,000 in debentures payable to American Progressive. It is expected that
Universal will acquire the balance of American Pioneer in 1998.
The cash portion of the unstacking was performed by Universal from the
proceeds of the Series C Preferred Stock transaction with AAM, a dividend from
American Pioneer, and from the proceeds of a loan from Chase Manhattan Bank. See
"Liquidity and Capital Resources - The Company".
Marketing and Distribution
Historically, the Insurance Subsidiaries sold their products through a
traditional general agency system. The Company now, however, seeks to structure
arrangements with independent marketing organizations, licensed as general
agents, that sell particular products and programs meeting particular market
niches or needs. One such arrangement, with an organization that focuses on
individual sales of deposit-term life insurance policies to moderate income
buyers, produced 14% of the Company's individual life insurance sales in 1996.
Another such arrangement with an organization that makes individual sales of
interest sensitive whole life insurance policies through single or multi-year
premium payments to middle age and senior age buyers produced 73% of the
Company's individual life insurance sales in 1996. In 1996, American Pioneer
entered into an agreement with West Coast Life, an A+ life insurance subsidiary
of Nationwide Insurance Company, to be the lead company for the sale of the
Asset Enhancer products. The agreement calls for American Pioneer, West Coast
Life and Reinsurance Company of Hannover ("RCH") to each participate in
one-third of the risk and for American Pioneer to be the administrator of the
product on a fee basis. A similar arrangement was entered into with Pennsylvania
Life with respect to the Flex-A-Vest 88 Term Life Insurance product. An
arrangement with a marketing organization in one state, which primarily sells
Blue Cross/Blue Shield health insurance, accounted for almost all of the
Company's group life sales.
In 1997, no general agent produced as much as 5% of the Company's accident
and health insurance premiums or life insurance premiums and only one general
agent produced more than 5% of the Company's annuity premiums (24%). The agents,
general agents and producers are paid purely on a commission basis and are not
Company employees. In this marketing area, the Company believes that the Company
offers competitive commission rates and seeks to provide innovative products and
quality service to its independent general agents. In particular, the Company
believes that it provides a higher level of agent support and is more responsive
to its agents in the field than many larger organizations with which it
competes. The various State Departments of Insurance regulate compensation that
the Company pays its agents on certain products.
The Company, through the Insurance Subsidiaries, is licensed to market its
products in 45 states and in the District of Columbia. However, approximately
78% of its 1997 premium and annuity considerations came from the states of
Florida (34%), New York (17%), Texas (16%), North Carolina
(5%), Alabama (3%), and Georgia (3%).
Competition
The Company competes with other insurance and financial services
companies, including large multi-line organizations, both in connection with the
sale of insurance and asset accumulation products and in acquiring blocks of
business. Many of these organizations have substantially greater capital and
surplus, larger and more diversified portfolios of life and health insurance
policies, larger agency sales operations and higher ratings. In addition, it has
12
become increasingly difficult for small companies to compete effectively with
their larger competitors for traditional life and annuity sales in part as a
result of heightened consumer and agent awareness of the financial size of
companies.
The Company has met, and seeks to continue to meet, these competitive
pressures by offering a high level of service and accessibility to its field
force and by developing specialized products and marketing approaches.
Ratings
American Pioneer, American Progressive and American Exchange have been
designated "B+ (Very Good)", "B (Adequate)" and "B- (Adequate)", respectively,
by A.M. Best. In evaluating a company's financial and operating performance,
A.M. Best reviews profitability, leverage and liquidity as well as the quality
of the book of business, the adequacy and soundness of reinsurance programs, the
quality and estimated market value of assets, reserve adequacy and the
experience and competence of management. 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. According to A.M. Best's
published material, a "B+", "B" or "B-" rating is assigned to companies which,
in its opinion, have demonstrated very good (B+) or adequate (B), (B-) overall
performance when compared to the standards it has established. Companies rated
(B+) have a good ability to meet their obligations to policyholders. "B" and
"B-" rated companies have an adequate ability to meet their policyholder
obligations, but their financial strength is vulnerable to adverse changes in
underwriting or economic conditions. Standard and Poors rates American Pioneer,
American Progressive and American Exchange as "BBq", "Bq" and "BBBq",
respectively, which means that, based on their publicly available information,
they are currently able to meet policyholder obligations, although, as to "Bq",
that ability is especially vulnerable to adverse economic and underwriting
conditions. The Insurance Subsidiaries are not currently known to be rated by
the Duff and Phelps or Moody's rating organizations. Although a higher rating by
A.M. Best or another insurance rating organization could have a favorable effect
on the Company's business, management believes that its marketing has enabled,
and will continue to enable, the Insurance Subsidiaries to compete effectively.
Underwriting Procedures
Premiums charged on insurance products are based, in part, on assumptions
about the expected mortality and morbidity experience. In that regard, the
Company has adopted and follows detailed uniform underwriting procedures
designed to assess and quantify certain insurance risks before issuing
individual life insurance, certain health insurance policies and certain annuity
policies to individuals. These procedures are generally based on industry
practices, reinsurer underwriting manuals and the Company's prior underwriting
experience. To implement these procedures, each Insurance Subsidiary employs an
experienced professional underwriting staff.
Applications for insurance to be underwritten are reviewed to determine if
any additional information is required to make an underwriting decision, which
depends on the amount of insurance applied for and the applicant's age and
medical history. Such additional information may include medical examinations,
statements from doctors who have treated the applicant in the past and, where
indicated, special medical tests. If deemed necessary, the Company uses
investigative services to supplement and substantiate information. For certain
coverages, the Company may verify information with the applicant by telephone.
After reviewing the information collected, the Company either issues the policy
as applied for, issues the policy with an extra premium charge due to
unfavorable factors, issues the policy excluding benefits for certain conditions
for a period of time or rejects the application. For certain of its coverages,
13
the Company has adopted simplified policy issue procedures in which the
applicant submits a single application for coverage typically containing only a
few health-related questions instead of a complete medical history. In New York
and other states, certain of the Company's products, including Medicare
supplement, are subject to "Community Rating" laws which severely limit or
prevent underwriting of individual applications. See "Regulation - Health Care
Reform".
Acquired Immune Deficiency Syndrome ("AIDS"), which has received wide
publicity because of its serious public health implications, presents special
concerns to the life and health insurance industry. The Company considers AIDS
information in underwriting and pricing decisions in accordance with applicable
laws. Applicants for life insurance coverage equal to or exceeding $100,000 and
for major medical and major hospital coverages must submit to a blood or urine
test, which includes AIDS antibody screening. The Company's own mortality and
morbidity experience to date reflects no unduly adverse impact as a result of
any acceleration of AIDS-related life insurance claims. The Company is
continuing to monitor developments in this area but is necessarily unable to
predict the long-term impact of this problem on the life insurance industry, in
general, or on the Company, in particular.
Investments
The Company's investment policy is to balance the portfolio between
long-term and short-term investments so as to continue to achieve investment
returns consistent with the preservation of capital and maintenance of liquidity
adequate to meet payment of policy benefits and claims. The Company invests in
assets permitted under the insurance laws of the various states in which it
operates, such laws generally prescribe the nature, quality of and limitations
on various types of investments which may be made. The Company currently engages
the services of an unrelated investment advisor, Asset Allocation and Management
Company, to manage the Company's fixed maturity portfolio, under the direction
of the management of the Insurance Subsidiaries and in accordance with
guidelines adopted by their respective Boards of Directors. The Company's policy
is not to invest in derivative programs or other hybrid securities, except for
GNMA's, FNMA's and investment grade corporate collateralized mortgage
obligations. It invests primarily in fixed maturity securities of the U.S.
Government and its agencies and in corporate fixed maturity securities with
investment grade ratings of "Baa3" (Moody's), "BBB-" (Standard & Poor's) or
better. However, the Company does own some investments that are rated "BB" or
below (together 3.2% and 2.1% of total fixed maturities as of both December 31,
1996 and 1997, respectively). As of December 31, 1997 all securities were
current in the payment of principal and interest.
14
The following table summarizes the Company's investment portfolio as of
December 31, 1996 and 1997:
Investment Portfolio
December 31,1996 December 31,1997
---------------------------- ------------------------
Carrying Value Percent of Carrying Percent of
Total Value Total
(Fair Value) Carrying (Fair Carrying
Value Value) Value
--------------- ------------ ----------- -----------
Fixed Maturity
Securities:
U.S. Government and
government agencies $12,177,564 8.42% $11,026,445 6.92%
Mortgage and asset 35,371,543 24.45% 58,725,145 36.83%
backed
Investment grade 70,092,550 48.44% 51,217,648 32.13%
corporates
Non-investment grade 3,850,510 2.66% 2,616,470 1.64%
corporates
--------------- ------------ ----------- -----------
Total fixed maturity 121,492,167 83.97% 123,585,708 77.52%
securities
Cash and cash 15,403,450 10.65% 25,014,019 15.69%
equivalents
Other Investments:
Policy loans 6,421,251 4.44% 7,185,014 4.51%
Mortgage loans 1,199,110 0.83% 2,562,008 1.60%
Real property tax liens 131,729 0.09% 136,713 0.09%
Equity securities 33,562 0.02% 945,116 0.59%
--------------- ------------ ----------- -----------
Total invested assets $144,681,269 100.00% $159,428,578 100.00%
=============== ============ ============ ===========
The following table shows the distribution of the contractual maturities
of the Company's portfolio of fixed maturity securities by carrying value as of
December 31, 1997. Expected maturities will differ from contractual maturities
because borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties:
Contractual Maturities of Fixed Maturity Securities
Percent of
Carrying Total Fixed
Available for Sale Value Maturities
------------ ------------
Due in 1 year or less
$4,305,300 3.48%
Due After 1 year through 5 21,326,267 17.26%
years
Due after 5 years through 19,401,221 15.70%
10 years
Due after 10 years 16,604,110 13.44%
Mortgage and asset backed 61,948,810 50.12%
securities
------------ ------------
$123,585,708 100.00%
============ ============
15
The following table shows the distribution by carrying value of the
Company's fixed maturity securities portfolio according to the ratings assigned
by Standard & Poor's Corporation, along with related estimated fair values, as
of December 31 1996, and 1997:
Distribution of Fixed Maturity Securities by
Rating
December 31, 1996 December 31, 1997
----------------------- -----------------------
Carrying % of Carrying % of
Standard Value Total Value Total
&
Poor's (Estimated Fixed (Estimated Fixed
Rating Fair Value) Investment Fair Value) Investment
---------- ------------ ---------- ------------ ---------
AAA $46,981,664 38.67% $55,914,846 45.23%
AA 7,598,298 6.25% 7,713,721 6.24%
A 21,383,442 17.60% 31,225,481 25.27%
BBB 41,678,253 34.31% 26,115,190 21.13%
BB 3,519,260 2.90% 2,218,232 1.79%
B 398,238 0.32%
- -
D 331,250 0.27%
- -
------------ ---------- ------------ ---------
Total $121,492,167 100.00% $123,585,708 100.00%
============ ========== ============ =========
At December 31, 1996 and 1997, 96.8% and 97.9%, respectively, of the
Company's fixed maturity investments were investment grade corporate fixed
maturity securities (i.e., those rated "BBB-" or higher by Standard & Poor's
Corporation or "Baa3" or higher by Moody's Investors Service). This included
approximately $39,144,400, at December 31, 1996, and $42,837,114, at December
31, 1997, of collateralized mortgage obligations secured by residential
mortgages. These amounts represented approximately 32% and 35% of the Company's
fixed maturity portfolio at December 31, 1996 and 1997, respectively. Certain
classes of mortgage-backed securities are subject to significant prepayment
risk. This is due to the fact that in periods of declining interest rates,
mortgages may be repaid more rapidly than scheduled, as individuals refinance
higher rate mortgages to take advantage of the lower rates then available. As a
result, holders of mortgage-backed securities may receive higher prepayments on
their investments, which they may not be able to reinvest at an interest rate
comparable to the rate paid on such mortgage-backed securities. At December 31,
1996 and 1997, less than investment grade fixed maturity securities had
aggregate carrying values (held at fair value) of $3,850,510 and $2,616,470,
respectively, amounting to 2.7% and 1.6%, respectively, of total investments and
1.6% and 1.0%, respectively, of total invested assets. The Company's holdings of
less than investment grade corporate fixed maturity securities are diversified
and the investment in any one such security at both December 31, 1996 and 1997
was less than $1,000,000, which was approximately 0.4% as of each date. The
Company wrote down the value of certain securities, considered to have been
subject to an-other-than temporary decline in value, by $195,000 in 1995, which
was included in net realized gains on investments in the consolidated statements
of operations. The Company did not write down the value of any securities during
1996 or 1997.
16
Investment Income
Investment income is an important part of the Company's total revenues and
profitability. Management cannot predict the impact that changes in future
interest rates will have on the Company's financial statements. The following
table shows the investment results of the Company's total invested asset
portfolio, for the three years ended December 31, 1997 (excluding the realized
gain on the sale of a non-operating subsidiary in 1997):
Investment Results
Years Ended December 31,
-------------------------------------------
1995 1996 1997
-------------- -------------- -------------
Total invested assets, end of
period $135,602,668 $144,681,269 $159,428,478
Net investment income $8,945,280 $9,850,083 $10,022,658
Yield on average cash and
investments 6.97% 7.08% 6.81%
Net realized investment gains
on the sale of securities $673,868 $240,075 $563,047
Reserves
In accordance with applicable insurance regulations, the Company has
established, and carries as liabilities in its statutory financial statements,
actuarially determined reserves that are calculated to satisfy its policy and
contract obligations. Reserves, together with premiums to be received on
outstanding policies and contracts and interest thereon at certain assumed
rates, are calculated to be sufficient to satisfy policy and contract
obligations. The actuarial factors used in determining such reserves are based
on statutorily prescribed mortality tables and interest rates. Reserves
maintained also include unearned premiums, premium deposits, reserves for claims
that have been reported but are not yet paid, reserves for management's estimate
for claims that have been incurred but have not yet been reported and claims in
the process of settlement.
The reserves reflected in the Company's consolidated financial statements
are calculated in accordance with GAAP. These reserves are based upon the
Company's best estimates of mortality and morbidity, persistency, expenses and
investment income, with appropriate provisions for adverse deviation. The
Company uses the net level premium method for all non-interest-sensitive
products and the retrospective deposit method for interest-sensitive products.
GAAP reserves differ from statutory reserves due to the use of different
assumptions regarding mortality and morbidity, and interest rates and the
introduction of lapse assumptions into the GAAP reserve calculation.
Reinsurance
Assumption of Asset Enhancer from West Coast Life
Beginning in 1997, the Company began to assume asset enhancer business
written by West Coast Life. The agreement calls for West Coast Life to retain
33.3% of the business written and cede the remaining 66.7% to Reassurance
Company of Hannover ("RCH"). RCH, in turn, cedes 50% of this amount to American
Pioneer, so all companies share in one-third of the risk. Under the agreement,
American Pioneer performs all the underwriting and administration of the
business for a fee. The underlying assets, which are maintained in a trust
account, are managed by West Coast Life pursuant to the recommendation of an
investment committee, which committee is comprised of a representative from each
17
company. Total premiums issued on this business in 1997, on a statutory basis,
amounted to $15.6 million for single-pay and $3.4 million for multiple-pay
business.
Assumption from First National Life
In the fourth quarter of 1996, the Company acquired, through an assumption
reinsurance agreement, approximately $56 million of annualized senior market
premium from First National. American Pioneer initially contracted with First
National to assume $4 million of premium on group Medicare Supplement coverage
issued to the members of FREA. Then, after First National was placed into
Receivership by the Alabama Insurance Department in October, 1996, American
Pioneer assumed approximately an additional $50 million of Individual Medicare
Supplement premium, $1.2 million in Home Health Care premium and $0.8 million in
miscellaneous life and accident and health insurance premiums, under terms
negotiated with the Receiver. All of these assumptions were effective as of
October 1, 1996. The Company received approval from the Florida Insurance
Department to report the premiums assumed from First National as direct premium
written.
Simultaneously with the second assumption by American Pioneer, American
Pioneer entered into a reinsurance agreement with Transamerica Occidental Life
Insurance Company ("Transamerica"), ceding 90% of the $50 million Individual
Medicare Supplement to Transamerica under reinsurance terms believed to be
favorable. American Pioneer will perform all the administration on the reinsured
business.
Other Assumed
As part of its strategy of acquiring blocks of business, the Company has
acquired several blocks of business through reinsurance.
American Progressive participates in a modified coinsurance agreement with
an unaffiliated insurer under an agreement entered into in 1986. The business
assumed consists of non-participating premium-paying Whole Life and increasing
premium Whole Life policies. At December 31, 1997, premiums in force ceded to
American Progressive under this arrangement were approximately $350,000, the
amount of insurance in force was approximately $24.2 million and the reserves
assumed were approximately $4.7 million.
In 1994, the Company assumed 100% of the risk and premium on certain
accident and health insurance policies written by three insurers not affiliated
with the Company: North American Company for Life and Health Insurance, North
American Company for Life and Health Insurance of New York and Baptist Life
Insurance Company of New York. At December 31, 1997, the premium in force on
these policies was approximately $720,000 and the associated reserves were
approximately $503,000.
Ceded
Consistent with the general practice of the life insurance industry, the
Company reinsures portions of the coverage provided by its life insurance
products to unaffiliated insurance companies under various reinsurance
agreements. Such agreements allow the Company to write policies in amounts
larger than the risk it is willing to retain on any one life, and to continue
writing a larger volume of new business. The mortality risk retention limit on
each policy varies generally between $25,000 and $75,000. The Company cedes
insurance primarily on an "automatic" basis and receives allowances from its
reinsurers ranging from 100% to 142% of the reinsurers' premium in the first
policy year and at varying rates of up to 40% in renewal years. Reinsurance is
not maintained on any of the annuity policies in force.
The Company has "excess of loss" reinsurance agreements with unaffiliated
insurance companies on its accident and health insurance policies to reduce the
liability on individual risks to $60,000 at American Pioneer, $200,000 at
American Progressive and $50,000 at American Exchange. On December 31, 1996 the
Company effected a "quota share" reinsurance agreement with another unaffiliated
reinsurer (rated A+ by A.M. Best) to cede 50% of the remaining $60,000 of
18
individual accident and health insurance risk at American Pioneer. The limited
benefit medical risks at American Exchange are 75% reinsured to an unaffiliated
reinsurer.
The Company reinsures, on a quota share basis to unaffiliated reinsurers,
certain of its senior accident and health business as follows: American Pioneer
Medicare supplement - 75%; American Progressive Medicare supplement - 50%;
American Progressive hospital indemnity - 25%; and American Exchange Medicare
supplement - 75%. The Company's long term care products (nursing home and home
health care) are 75% reinsured to an unaffiliated reinsurer with stop loss
coverage after the third benefit year. The Company's managed care home health
care product is 30% reinsured with an unaffiliated reinsurer. Under these
various treaties, the Company performs all the underwriting and administration
and receives various allowances for commission and expenses. In addition, the
Company has a quota share agreement on its Accidental Death and Dismemberment
policies under which the reinsurer receives 90% of all premiums and pays 90% of
all losses and the Company receives allowances ranging from 20%-30% of the ceded
premium. American Pioneer also reinsures all of the risk in excess of two years
of benefits on certain disability income policies.
As part of its restructuring, the Company sold all of its New York
Statutory DBL insurance in force and a major part of the risk on its major
medical policies to unaffiliated insurers. (See "Restructuring Activity Sale of
DBL Block" and "Major Medical Reinsurance").
The Company is contingently liable to pay claims in the unlikely event
that a reinsurer fails to meet its obligations under the reinsurance agreement.
The Company's primary reinsurers are currently rated A+ (Superior) and A
(Excellent) by A.M. Best. To the Company's knowledge, no reinsurer of business
ceded by the Company has been unable to pay any policy claims on any reinsured
business. The reinsurance agreements are subject to cancellation on 90 days
notice as to future business, but policies reinsured prior to such cancellation
remain reinsured as long as they remain in force. Management believes that if
its reinsurance agreements were canceled it would be able to obtain other
reinsurance arrangements on satisfactory terms to enable it to continue writing
new business.
WorldNet
Restructuring
WorldNet was formed in 1992 when Universal acquired the assets and client
base of a firm that provided claims administration, managed care and traveler's
medical assistance to insurance companies (foreign and domestic) and affinity
groups including credit card companies. The revenues of WorldNet grew from 1992
through 1995, in part due to acquisition, but WorldNet sustained significant
operating losses. In 1996, Universal imposed a restructuring effort in WorldNet,
which reduced revenues from unprofitable contracts, but also reduced its
operating losses.
As part of the First National transaction, the Company acquired a low-cost
administrative facility in Pensacola, Florida. By incorporating this facility
and much of its employee base into the WorldNet corporate structure, WorldNet
has expanded its capacity to service the Insurance Subsidiaries as well as
unaffiliated third parties. As a result of the addition of the revenues from the
Insurance Subsidiaries, amounting to approximately 74% of WorldNet's revenues,
WorldNet showed a profit of $911,000 in 1997 after incurring losses of $271,000
in 1996 and $665,000 in 1995.
General
WorldNet is a fee-based company whose primary services are to provide
medical managed care and assistance to people traveling away from their homes
and to act as a third party administrator and service provider to the Insurance
Subsidiaries. These, and other related services, are sold by WorldNet to
insurance companies (for their insureds), credit card companies (for their card
members) and associations (for their members).
19
Additionally, WorldNet provides valuable support to the Company's
underwriters, making telephone contact with potential insureds and verifying
potential insureds' information on life and accident & health applications.
Management plans to further incorporate WorldNet's telecommunications
capabilities to gather and verify underwriting data and to assist with
policyholder servicing of its insurance products.
International Managed Care
WorldNet has achieved a significant portion of its revenue from the sale
of managed care, cost containment and claims adjudication services to foreign
(to date, primarily Canadian) insurers for their insureds while they are in the
United States. WorldNet arranges access to appropriate medical care, manages the
care and cost while the case is in process and often arranges evacuation to the
country of origin. WorldNet also provides complete claims adjudication services
including coordination of benefits, subrogation and audits. The clients who use
WorldNet's managed care services include a number of large insurers in Canada
and Europe.
Travel Assistance and Related Claims Adjudication
WorldNet's travel assistance product is sold as an enhancement for its
clients' cardholders, policyholders and members. The service provides 24-hour
telephone access to assistance for medical, legal and other problems that arise
especially while away from home. Related to this function, WorldNet also
provides claims adjudication for travel-related insurance products such as
baggage, collision damage waiver and trip-cancellations.
Operations
WorldNet operates a 24-hour multi-lingual communications center in Miami,
Florida and a third party administrative office in Pensacola, Florida. As of
December 31, 1997, the Miami location had 38 full time employees and the
Pensacola location had 76 full time employees. The company has developed and
acquired proprietary software applications that have been customized for its
market.
Revenues
WorldNet's revenues for years ended December 31, 1995, 1996 and 1997
were as follows:
Year Ended December 31,
---------------------------------------
1995 1996 1997
----------- ------------- ----------
Pensacola administrative
revenue (1) $ - $ - $5,318,242
Managed care and claims
adjudication 2,099,438 1,513,962 1,583,933
Travel and other
assistance 971,103 658,379 355,640
----------- ------------- -----------
$3,070,541 $2,172,341 $7,257,815
=========== ============= ===========
- ----------------------------
(1)Included in the Pensacola revenue amount is $5,230,574 of fees earned
from the Insurance Subsidiaries, which fees were eliminated in the
consolidated financial statements.
20
Regulation
General
The Insurance Subsidiaries, like other insurance companies, are subject to
the laws, regulations and supervision of the states in which they are domiciled
(New York in the case of American Progressive, Florida in the case of American
Pioneer and Texas in the case of American Exchange) and in various other states
in which they are authorized to transact business. The purpose of such laws and
regulations is primarily to provide safeguards for policyholders rather than to
protect the interest of stockholders.
The insurance laws regulate, among other things, capitalization,
permissible investments, premium rates on statutory disability insurance and
other health insurance policy forms, the form and content of policies which may
be offered, specified methods of accounting (statutory accounting or SAP) for
detailed financial statements submitted to the various Insurance Departments and
minimum capital and surplus required to continue in operation.
Most states have enacted legislation or adopted administrative regulations
covering such matters as the acquisition of control of insurance companies and
transactions between insurance companies and the persons controlling them.
Additional requirements are often imposed as a condition of approval of the
acquisition of an insurance company, as occurred in the case of the Company's
acquisition of American Pioneer, American Progressive and American Exchange. The
nature and extent of the legislation and administrative regulations now in
effect vary from state to state and most states require administrative approval
of the acquisition of control of an insurance company incorporated in the state,
whether by tender offer, exchange of securities, merger or otherwise, and
require the filing of detailed information regarding the acquiring parties and
the plan of acquisition. The approval of the domiciliary insurance department is
also required before a controlling interest (10% as to New York and Texas, 5% as
to Florida) of an insurance company, or of a holding company which owns such an
insurance company, can be acquired or transferred. Every insurance company which
is authorized to do business in the state and is a member of an "insurance
holding company system" is generally required to register as such with the
insurance regulatory authorities and file periodic reports concerning its
relationships with the insurance holding company. Material transactions between
registered insurance companies and members of the holding company system are
required to be "fair and reasonable" and in some cases are subject to
administrative approval, and the books, accounts and records of each party are
required to be so maintained as to clearly and accurately disclose the precise
nature and details of the transactions.
Each Insurance Subsidiary is required to file detailed reports with the
insurance department of each state in which it is licensed to conduct business,
and its books and records are subject to examination by each such insurance
department. In accordance with the insurance codes of their domiciliary states
and the rules and practices of the National Association of Insurance
Commissioners ("NAIC"), the Insurance Subsidiaries are examined periodically by
examiners of New York, Florida, Texas and by representatives (on an
"association" or "zone" basis) of the other states in which they are licensed to
do business. American Progressive was examined in 1995 for the three years ended
December 31, 1994 by the New York State Insurance Department. American Pioneer
was examined in 1997 for the year ended December 31, 1995 by the Florida
Insurance Department. American Exchange was examined in 1995 for the year ended
December 31, 1994 by the Texas Insurance Department. The Company has complied
with all recommendations made on such reports, and no issues were raised which
the Company deems to be material.
Many states require deposits of assets for the protection of policyholders
either in those states or for all policyholders. At December 31, 1996 and 1997,
securities totaling $7,779,000 and $7,122,000, respectively (approximately 5.4%
21
and 4.5%, respectively, of the carrying value of the Company's invested assets),
were on deposit with various state treasurers or custodians. Such deposits must
consist of securities that comply with the standards established by the
particular state.
Codification of Statutory Accounting Practices
The NAIC is in the process of codifying statutory accounting practices
("Codification"). Codification will likely change, to some extent, prescribed
statutory accounting practices and may result in changes to the accounting
practices that the Insurance Subsidiaries use to prepare its statutory-basis
financial statements. Codification, which is expected to be approved by the NAIC
in 1998, 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
Insurance Subsidiaries, the Florida, New York and Texas Insurance Departments
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 unclear whether the Florida, New York and Texas Insurance
Departments will adopt Codification. However, based on current draft guidance,
management believes that the impact of Codification will not be material to the
Insurance Subsidiaries' statutory-basis financial statements.
Insurance Regulatory Changes
The NAIC and state insurance regulators have recently become involved in a
process of re-examining existing laws and regulations and their application to
insurance companies. This re-examination has focused on insurance company
investment and solvency issues, risk-based capital guidelines, assumption
reinsurance, interpretations of existing laws, the development of new laws, the
interpretation of nonstatutory guidelines, and the circumstances under which
dividends may be paid. The NAIC has encouraged states to adopt model NAIC laws
on specific topics such as holding company regulations and the definition of
extraordinary dividends. It is not possible to predict the future impact of
changing state regulation on the operations of the Company.
The statutory filings of American Progressive, American Pioneer and
American Exchange require classifications of investments, the maintenance of an
asset valuation reserve ("AVR") and that investment gains and losses resulting
from changes in interest rate levels be deferred and taken into income over a
period of years through the interest maintenance reserve ("IMR"). Similar
requirements are not required under GAAP.
The AVR and IMR of the Insurance Subsidiaries as of December 31, 1996 and
1997 were:
1996 1997
--------- ---------
American
Progressive
AVR
$456,362 $438,371
IMR
$547,436 $752,285
American Pioneer
AVR
$646,040 $316,674
IMR(1) $(94,025) $62,361
American Exchange
AVR
$25,220 $10,877
IMR
$ - $ -
- ------------------------
(1) For statutory accounting purposes, a negative IMR is treated as a
non-admitted asset.
22
New York State enacted legislation in 1992 that requires all health
insurance sold to individuals and groups with less than 50 employees, to be
offered on an open enrollment and community rated basis effective April 1, 1993.
Such insurance may continue to be sold to groups with more than 50 employees on
an underwriting basis, with premiums set to reflect expected or actual results.
The 1992 law prohibits the use of individual underwriting techniques and health
insurers must accept all who apply regardless of medical condition. The
community rating aspect of the law prohibits the use of age, sex, health or
occupational factors in rating and requires that the same average rate be used
for all persons with the same policy residing in the same location. The Medicare
supplement actively marketed by American Progressive in New York State and some
of its in force business is subject to the community rating rules. The extension
of such legislation to Florida and Texas, where significant medically
underwritten health insurance is offered, might cause a reconsideration of the
Company's existing health care coverage offerings.
Dividend and Distribution Restrictions
Under the New York State Insurance Law, the declaration or payment of a
dividend by American Progressive requires the approval of the New York
Superintendent of Insurance, who, as a matter of present policy, would not
approve such payment until American Progressive had generated sufficient
statutory profits to offset its entire negative unassigned surplus, which was
approximately $8,412,000 at December 31, 1997.
Under current Florida State insurance law, a life insurer may pay a
dividend or make a distribution without the prior written approval of the
department when:
a) the dividend is paid from that portion of the accumulated and
available surplus of the Company as is derived from the net
operating profits of its business and its net realized capital
gains;
b) the dividend is no more than the greater of (i) 10% of the
insurer's surplus as to policyholders derived from net operating
profits on its business and net realized capital gains; or (ii)
the insurer's entire net operating profits and realized net
capital gains derived during the immediately preceding calendar
year;
c) the insurer will have surplus as to policyholders equal to or
exceeding 115% of the minimum required statutory surplus as to
policyholders after the dividend or distribution is made; and
d) the insurer has filed notice with the department at least 10
business days prior to the dividend payment or distribution.
American Pioneer has the capacity to pay dividends of approximately
$430,000 during the year ending December 31, 1998. Dividends of $500,000,
$500,000 and $185,455 were paid by American Pioneer to American Progressive in
1995, 1996 and 1997, respectively and a dividend of $425,000 was paid to
Universal in 1997.
Under current Texas insurance law, a life insurer may pay dividends or make
distributions without the prior approval of the Insurance Department as long as
the dividend distributions do not exceed the greater of (i) 10% of the insurer's
surplus as to policyholders as of the preceding December 31st; or (ii) the
insurer's net gain from operations for the immediately preceding calendar year.
23
Risk-Based Capital Requirements
Effective December 31, 1993, the NAIC adopted new risk-based capital
("RBC") requirements, which have also been adopted in New York, Florida and
Texas. These are intended to provide for a measurement of statutory capital and
surplus needs based on the risks in a company's mix of products and investment
portfolio. As of December 31, 1996 and 1997, American Progressive's ratios of
total adjusted capital to RBC, based on the NAIC approved model, were
approximately 261% and 484% of the Authorized Control Level, respectively. As of
December 31, 1996 and 1997, American Pioneer's ratios of total adjusted capital
to RBC, based on the NAIC approved model, were approximately 795% and 495% of
the Authorized Control Level, respectively. As of December 31, 1996 and 1997,
American Exchange's ratios of total adjusted capital to RBC, based on the NAIC
approved model, were approximately 226% and 227% of the Authorized Control
Level, respectively
Guaranty Association Assessments
All states require insurance companies to participate in guaranty
associations designed to cover certain claims against insolvent insurers. The
incurrence and amount of such assessments have increased in recent years and are
generally expected to increase further in future years. American Progressive and
American Pioneer were assessed and paid approximately $9,000 and $77,000,
respectively, in 1996 and $(1,000) (refund) and $31,000, respectively, in 1997.
The likelihood and amount of any other future assessments are now unknown and
are beyond the control of the Company.
Health Care Reform
From time to time, numerous proposals have been introduced in Congress and
the state legislatures to reform the current health care system. Proposals have
included, among other things, employer-based insurance systems, subsidized
premiums for lower income people, "managed competition" among health plans,
programs to regulate policy availability, affordability of public and private
programs and expansion of Medicare to persons under-age 65. Changes in health
care policy could significantly affect the Company's health insurance business.
In 1996, Congress enacted the Kennedy-Kassenbaum Act, which, among other
changes, restricts the ability of insurers to utilize medical underwriting and
pre-existing condition provisions in certain health insurance policies issued to
persons who were previously insured under qualifying policies. These changes,
which will become effective in stages, may have an effect on some of the
Company's policies.
Whether or not Congress passes any further health reform measures in the
foreseeable future, it is likely that health reform will continue to reappear on
the legislative agenda in the future. Such additional healthcare reform
proposals also could require standardization of major medical or long-term care
coverages, impose mandated or target loss ratios or rate regulation, require the
use of community rating or other means that further limit the ability of
insurers to differentiate among risks, or mandate utilization review or other
managed care concepts to determine what benefits would be paid by insurers.
These or other proposals could increase or decrease the level of competition
among health insurers. In addition, changes could be made in Medicare that could
necessitate revisions in the Company's Medicare Supplement products. Other
potential initiatives, designed to tax insurance premiums or shift medical care
costs from government to private insurers, could have effects on the Company's
business, some of them adverse. The Company is unable to predict what changes to
the country's health care system will be enacted, if any, or their effects on
the Company's business. See "Regulation".
24
Other Possible Changes in Legislation
Since insurance is a regulated business, with a high public profile, it is
always possible that legislation may be enacted which would have an adverse
effect on the Company's business.
An important portion of the Company's insurance business is the sale of
deferred annuities and certain life insurance products, which are attractive to
purchasers in part because policyholders generally are not subject to federal
income tax on increases in the value of an annuity or life insurance contract
until some form of distribution is made from the contract. From time to time,
Congress has considered proposals to reduce or eliminate the tax advantages of
annuities and life insurance which, if enacted, might have an adverse effect on
the ability of the Company to sell the affected products in the future. The
Company is not aware that Congress is actively considering any legislation that
would reduce or eliminate the tax advantages of annuities or life insurance;
however, it is possible that the tax treatment of annuities or life insurance
could change by legislation or other means (for example, by Internal Revenue
Service regulations or judicial decisions).
Certain changes in insurance and tax laws and regulations could have a
material adverse effect on the operations of insurance companies. Specific
regulatory developments which could have a material adverse effect on the
operation of the insurance industry include, but are not limited to, the
potential repeal of the McCarran-Ferguson Act (which exempts insurance companies
from a variety of federal regulatory requirements), and adoption of laws, such
as those already in force in New York, limiting an insurer's ability to
medically underwrite and rate health insurance policies or to exclude
pre-existing conditions from coverage. In addition, the administration of such
regulations is vested in state agencies which have broad powers and are
concerned primarily with the protection of policyholders.
Federal Income Taxation of the Company
The Company files a consolidated return for federal income tax purposes,
in which American Pioneer and American Exchange are not currently permitted to
be included. At December 31, 1997 the Company (exclusive of American Pioneer and
American Exchange) had a net operating tax loss carry forwards of approximately
$11,300,000 which expire in the years 1999 to 2011.
American Pioneer and American Exchange file a separate consolidated
federal income tax return. At December 31, 1997 these companies had net
operating tax loss carry forwards, most of them incurred prior to its
acquisition by the Company, of approximately $1,100,000 which expire in the
years 2000 to 2011. As a result of changes in ownership of American Pioneer in
May 1993, use of most of the loss carry forwards of American Pioneer are subject
to annual limitations.
The Insurance Subsidiaries are taxed as life insurance companies as
provided in the Tax Code. The Omnibus Budget Reconciliation Act of 1990 amended
the Tax Code to require a portion of the expenses incurred in selling insurance
products to be capitalized and amortized over a period of years, as opposed to
an immediate deduction in the year incurred. Instead of measuring actual selling
expenses, the amount capitalized for tax purposes is based on a percentage of
premiums. In general, the capitalized amounts are subject to amortization over a
ten-year period. Since this change only affects the timing of the deductions, it
does not, assuming stability of rates, affect the provisions for taxes reflected
in the Company's financial statements prepared in accordance with GAAP. However,
by deferring deductions, the change does have the effect of increasing the
current tax expense, thereby reducing statutory surplus. Because of the
Insurance Subsidiaries' net operating loss carry forwards, there was no increase
in the Company's current income tax provision for the three years ended December
31, 1997 due to this change.
25
Employees
At December 31, 1997, the Company employed approximately 231 employees,
none of whom are represented by a labor union. The Company considers its
relations with its employees to be satisfactory.
MANAGEMENT
Directors and Executive Officers of the Company and Officers of the
Subsidiaries
The following table sets forth certain information concerning the
Directors and Officers of the Company and the Officers of the subsidiaries:
Position with the Company, Present
Principal Occupation or Employment
Name Age and Past Five-Year Employment History
- ----------- --- --------------------------------------------
Richard A. Barasch 44 Director, Chairman of the Board (since
December, 1997), President and Chief
Executive Officer of the Company; Director
and President of American Progressive; and
Chairman of the Board of American Pioneer
and WorldNet. Mr. Barasch has been a
director and executive officer of the
Company since July, 1988, President since
April, 1991 and Chief Executive Officer
since June 15, 1995. He has held his
positions with the Company's subsidiaries
since their acquisition or organization by
the Company. Term as a Director expires in
2000.
Robert A. Waegelein, C.P.A.37 Senior Vice President and Chief Financial
Officer of the Company (since October,
1990) and of the Company's subsidiaries
since they were acquired or organized.
Prior to that, Mr. Waegelein, a certified
public accountant, was employed by KPMG
Peat Marwick LLP, the Company's then
independent public accountants, in
positions of increasing responsibility,
finally serving as Senior Manager.
Gary W. Bryant, C.P.A. 48 President, CEO and Director of American
Pioneer since April, 1983 and Senior Vice
President of the Company since June 15,
1995.
William E. Wehner, C.L.U. 54 Executive Vice President and Chief
Operating Officer of American Progressive
since May, 1991. Mr. Wehner was employed
for over twenty years by Mutual Life
Insurance Company of New York and its
affiliates in positions of increasing
responsibility, finally serving as Vice
President for Group Insurance.
Jerald R. Hoeft, C.P.A., C.L.U.55 Senior Vice President for American
Pioneer since October, 1997. Between 1987
and 1997, Mr. Hoeft served as Senior Vice
President and Chief Financial Officer for
Financial Benefit Group, Inc.
Guy H. Hartman, FALU, C.L.U. 62 Vice President and Chief Underwriter
(since January, 1986) and Secretary (since
January, 1994) of American Pioneer.
26
Brad D. Leonard, F.S.A., M.A.A.A. 53Vice President of the Company and Senior
Vice President and Chief Actuary of
American Progressive and American Pioneer
since January, 1997. From December, 1992
to January 1997, Mr. Leonard was Vice
President & Actuary of The Federal Home
Life Insurance Companies. Prior to December
1992, he was Senior Vice President and
Chief Actuary of American Heritage Life
Insurance Company.
Sam Walden 58 Vice President - Information Systems of
American Pioneer since November, 1986.
Joan M. Ferrarone 58 Secretary of the Company and American
Progressive since June, 1995. Mrs.
Ferrarone has been employed by the Company
since 1991 and by American Progressive
since 1984 in positions of increasing
responsibility.
Marvin Barasch 75 Chairman Emeritus of the Company (since
December, 1997) and Vice-Chairman of
American Progressive (John Adams) since
July, 1988, Chairman of American
Progressive since June, 1996 and a director
of American Pioneer since May, 1993. Mr.
Barasch was Chief Executive Officer of the
Company from July 1988 to June 15, 1995.
He has been in the insurance business as an
agent and broker for over 40 years. Term
as a Director expires in 1998.
Michael A. Barasch 42 Director of the Company since July, 1988
and American Progressive (and its
predecessor, John Adams) from July, 1988 to
June, 1995. Since February 1995, Mr.
Barasch has been a member of the law firm
of Barasch and McGarry. He was a member of
the law firm of Altier and Barasch from
February, 1989 to February, 1995. Term as
a Director expires in 1999.
Stuart Becker, C.P.A. 54 Director of the Company since July, 1990.
A partner in the accounting firm of Becker
& Company, LLC and predecessors, since
1990. Mr. Becker has more than 30 years
experience as a certified public
accountant. Term as a Director expires in
2000.
David F. Bolger 65 Director of the Company since December,
1992. Since 1966, Mr. Bolger has been Chief
Executive Officer of Bolger & Co., Inc., an
investment banking firm. Term as a Director
expires in 1999.
Mark M. Harmeling 45 Director of the Company since July, 1990
and Director of American Progressive since
December, 1992. Mr. Harmeling has been
President of Bay State Realty Advisors
since January, 1994 and previously
President of Intercontinental Real Estate
Corporation, a real estate management and
development company for more than the past
five years. Mr. Harmeling is also a
27
Director of the following companies:
Rochester Shoetree Corporation (since 1988)
and Applied Extrusion Technologies (since
1987). Term as a Director expires in 1998.
Bertram Harnett 74 Elected director of the Company and
American Pioneer in June 1996 and had been
a director of the Company previously (July
29, 1988 to February 9, 1989). Mr. Harnett
is President of the law firm of Harnett
Lesnick & Ripps P.A., Boca Raton, Florida,
and its predecessors since 1988, and a
practicing lawyer since 1948. He is the
author of treatises on insurance law and is
a former Justice of New York State Supreme
Court. Term as a director expires in 1998.
Walter L. Harris 46 Director of the Company since July, 1993
and of American Progressive (and its
predecessor, John Adams) since July, 1988.
Since 1979, Mr. Harris has been President
of Tanenbaum-Harber Company, Inc., a
general insurance brokerage firm. Term as
a Director expires in 1999.
Harry B. Henshel 77 Director of the Company since June, 1992.
Mr. Henshel has been Chairman of the Board
of the Bulova Corporation, a manufacturer
of timepieces located in New York City, for
more than the past five years. Mr. Henshel
is also a Director of Ponce Hotel
Corporation (since 1973) and Ampal
Industries, Inc. (since 1983). Term as a
Director expires in 2000.
Patrick J. McLaughlin 39 Director of the Company since January,
1995. Mr. McLaughlin has been Managing
Director of Emerald Capital Group, Ltd., an
asset management and consulting firm
specializing in the insurance industry,
since April 1993. Prior to that he was an
Executive Vice President and Chief
Investment Officer of Life Partners Group,
Inc. (April, 1990 to April, 1993), Managing
Director of Conning & Company (August, 1989
to April 1990) and Senior Vice President
and Chief Investment Officer of ICH
Corporation (March, 1987 to August, 1989).
Term as a Director expires in 2000.
Richard Veed 46 Director of the Company since April 25,
1997. Mr. Veed has been a Managing Partner
of AAM Investment Banking Group, Ltd. Since
October, 1993. Prior to that, he was
President of Guaranty Reassurance Corp.
from September, 1992 to May, 1993 and a
Partner at Arthur Anderson & Co. from 1987
to August, 1992. He is also a Director of
HomeVest Financial Group, Inc. Term as
Director expires in 1999.
Michael Barasch is Marvin Barasch's son. Richard Barasch is Marvin
Barasch's nephew.
All of the executive officers listed above devote their full business time
to the Company.
28
All of the Company's and its subsidiaries' officers are elected
annually. The Company's directors are elected for three-year terms, classified
into three classes with the Directors in each class serving for three years,
with the terms staggered by class so that one class is elected at each annual
meeting of shareholders for a full three-year term. All officers and directors
hold office until their successors are duly elected and qualified, subject to
early removal by the Board.
The By-laws of the Company provide that the Board of Directors shall set
the number of directors and that the number of directors in each class shall be
equal, or as nearly as practical. The Company's Board of Directors consists of
eleven directors.
The Board of Directors has an Audit Committee, which also acts as a
Transactions Committee, consisting of Messrs. Becker, Bolger, Henshel, and
McLaughlin, a Compensation Committee consisting of Messrs. Becker, Harmeling and
Harris and an Executive Committee consisting of Messrs. Marvin, Richard and
Michael Barasch, Mr. Bolger and Mr. Harnett. The Audit Committee is empowered to
consult with the Company's independent auditors with respect to their audit
plans and to review their audit report and the accompanying management letters
and, as the Transactions Committee, reviews and makes recommendations to the
Board on certain capital transactions entertained by the Company. The
Compensation Committee reviews and recommends compensation, including incentive
stock option grants, of officers of the Company. The Executive Committee has the
authority to act between Board meetings on behalf of the Board, on all matters
allowed by law.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company and Wand Partners L.P., an affiliate of Wand/Universal
Investments L.P., I and II, the holders of all of the outstanding Series B
Preferred Stock, entered into a financial advisory agreement, dated December 30,
1994, under which such Wand affiliate renders advisory services to the Company
and is paid a fee of $100,000 per year for such services reduced by any
director's fees paid to the director designated by Wand. Such services and fees
are to continue as long as Wand owns 500,000 shares of Common Stock or common
stock equivalent.
Bertram Harnett, a director of the Company, is a shareholder in Harnett,
Lesnick & Ripps P.A. of Boca Raton, Florida, which was paid $269,870 in 1997 on
account of its legal services to, as well as reimbursement for disbursements
made on behalf of the Company.
ITEM 2 - PROPERTIES
The Company currently leases from unaffiliated parties: (i) approximately
9,000 square feet of office space in Rye Brook, New York, under a lease expiring
in October, 2004, (ii) 18,000 square feet in Orlando, Florida, under a lease
expiring in January, 2002; (iii) 32,000 square feet in Pensacola, Florida, under
a lease expiring in November, 2002, with two renewals at the Company's option
for a period of five years each; (iv) 3,000 square feet in Dallas, Texas, under
a lease expiring in March, 2002 and (v) 4,000 square feet in Miami, Florida,
under a lease expiring in August, 1999. These leases represent the operating
offices of American Progressive, American Pioneer, American Exchange and
WorldNet, respectively, and carry an aggregate annual rental of approximately
$700,000. The Company also leases a smaller office in Andalusia, Alabama, for an
aggregate annual rental of approximately $17,000.
29
ITEM 3 - LEGAL PROCEEDINGS
No reportable litigation was pending at December 31, 1997. The Company is
party to various lawsuits arising out of the ordinary conduct of its business,
none of which, the Company believes, would have a material adverse effect upon
the business of the Company if it were to be adversely determined.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by the Company to a vote of stockholders,
through the solicitation of proxies or otherwise, during the fourth quarter of
the fiscal year for which this report is filed.
30
PART II
ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Price Range of Publicly Traded Securities
The Company's Common Stock has been traded in the over-the-counter market
and quoted on the Nasdaq National Market under the symbol UHCO since May 12,
1983. The 1999 Warrants have been so traded and so quoted, under the symbol
UHCOW, since September 1990. The following table sets forth the high and low
sales prices per share of Common Stock and 1999 Warrants as reported on the
Nasdaq National Market for the periods indicated.
Common Stock 1999 Warrants
------------------ -----------------
High Low High Low
-------- -------- -----------------
1995
- ----------------------------
First Quarter 3 3/8 2 1/8 1 3/4 1 3/4
Second Quarter 3 3/4 2 5/8 1 3/4 1 3/4
Third Quarter 3 5/8 2 5/8 1 3/4 1 1/4
Fourth Quarter 3 1/8 2 1/8 1 1/4 1 1/4
1996
- ----------------------------
First Quarter 3 1/8 2 1/4 1 1/2 1 1/2
Second Quarter 3 1/8 2 1 1/4 1 1/4
Third Quarter 3 1/8 2 31/32 1 3/4 1 1/4
Fourth Quarter 2 11/16 1 1/2 1 3/8 1 1/4
1997
- ----------------------------
First Quarter 2 31/64 1 3/4 1 9/32 1 1/8
Second Quarter 2 5/8 1 3/4 1 1/8 1 1/8
Third Quarter 2 5/8 1 7/8 1 3/8 1 1/8
Fourth Quarter 3 1/4 2 1 3/8 1 3/8
1998
- ----------------------------
First Quarter (through February 3 2 3/8 1 3/8 1 3/8
28)
As of February 28, 1998, there were approximately 1,700 holders of the
Common Stock and 100 holders of the 1999 Warrants. On February 28, 1998, the bid
and ask sales prices for the Common Stock were $1-7/8 and $2-1/4. On October 10,
1997, the last date on which the 1999 Warrants were traded, the sales price was
$1-3/8.
Dividends
The Company has neither declared nor paid dividends on its Common Stock
and no such dividends are likely in the foreseeable future. Any future decision
to pay dividends will be made by the Board of Directors in light of conditions
then existing, including the Company's results of operations, financial
condition and requirements, loan covenants, insurance regulatory restrictions,
business conditions and other factors. In addition, the ability of t