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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, 2000
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
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 March 1, 2001 was approximately $65,293,000.
The number of shares outstanding of the Registrant's Common Stock as
of March 1, 2001 was 46,925,921.
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 2001 Annual Meeting incorporated
by reference into Part III.
(2) Exhibits listed in Item 14 (b), Part IV, incorporated by
reference to Proxy Statement dated July 12, 1999, Forms
8-K dated August 13, 1999 and March 16, 2001, Form 8-K/A
dated March 16, 2001, Form 10-Q dated November 15, 1999
and Form 10-K for 1996.
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PART I
ITEM 1 - BUSINESS
GENERAL DESCRIPTION
Universal American Financial Corp. (the "Company" or "Universal
American",) is the parent holding company for a group of life and health
insurance companies and administrative services companies with special expertise
in servicing senior market insurance products. The Company develops, markets and
administers its insurance products through the following nine insurance
companies (collective, the "Insurance Subsidiaries"):
Senior Market Brokerage
- American Progressive Life & Health Insurance Company of
New York ("American Progressive")
- American Pioneer Life Insurance Company ("American
Pioneer")
- American Exchange Life Insurance Company ("American
Exchange")
- Constitution Life Insurance Company ("Constitution Life")
- Marquette National Life Insurance Company ("Marquette")
- Peninsular Life Insurance Company ("Peninsular Life")
- Union Bankers Insurance Company ("Union Bankers")
Career Agency
- Pennsylvania Life Insurance Company ("Pennsylvania Life")
- PennCorp Life Insurance Company of Canada ("PennCorp Life
of Canada")
The Senior Market Brokerage segment focuses on products designed for the
senior market, including supplemental health insurance, long-term care, final
expense life insurance and annuities. The Career Agency segment traditionally
concentrated on selling fixed benefit accident and sickness insurance and
individual life insurance products to the self-employed market but recently has
expanded into the senior market. In addition, the Company maintains a Special
Markets segment, which manages the products that are not within the Company's
core focus. Collectively the Insurance Subsidiaries are licensed to do business
in all fifty states and all the provinces of Canada.
Universal American also owns a group of three companies that perform
administrative services for insured and non-insured products, primarily for the
senior market, (collectively, the "Administrative Services Companies"):
- CHCS Services, Inc. ("CHCS")
- WorldNet Services Corp. ("WorldNet")
- American Insurance Administration Group, Inc. ("AIAG")
The Administrative Services Companies, which comprise Universal
American's fourth operating segment, perform underwriting, policy
administration, claims management and administration, and communication services
on behalf of 35 unaffiliated companies and 6 of the Insurance Subsidiaries.
The Company also maintains a corporate segment which comprises
activities of the holding company, including interest on corporate debt.
BUSINESS STRATEGY
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Universal American's strategy has been, and continues to be, growth
through a combination of organic growth, acquisition and execution. The Company
has grown internally through the development of competitive insurance products
particularly geared for the senior market, and the expansion of its distribution
channels and geographical reach. It has expanded beyond its traditional
insurance business to the administration of senior market insured and
non-insured products. Its external growth has been achieved through the
acquisition of nine insurance companies, three blocks of insurance business and
three administrative services companies since 1991.
One of the most important elements of the past and future growth of
Universal American is its commitment to execution. The Company has successfully
integrated the acquisitions into its own operations and has continued to improve
its service and reduce its operating costs.
Further, Universal American has sharpened its focus on its core
businesses. In the past few years, the Company has exited, sold or de-emphasized
a number of lines of businesses that do not fit within its strategy or core
competencies.
RECENT ACQUISITIONS AND DIVESTITURES
Acquisition of American Insurance Administration Group, Inc. ("AIAG")
In January 2000, Universal American acquired AIAG, a privately-held
third party administrator located in Clearwater, Florida, for $5.8 million,
including $2.9 million in cash and 809,860 shares of Universal American common
stock. AIAG is a third party administrator of approximately $125 million of
senior health insurance, for which it received administrative fees of $10.1
million in 2000. In 2000, AIAG generated $4.5 million of cash flow and $1.6
million of pre-tax income. This acquisition strengthened the Company's expertise
and capacity to administer senior market products.
Acquisition of Capitated Healthcare Services, Inc. ("CHCS")
In August 2000, Universal American acquired CHCS, a privately held
administrator of long term care products located in Weston, Florida, for $4.6
million, including $3.3 million in cash, 64,820 shares of Universal American
common stock and future cash payments totaling $1.0 million over 18 months. CHCS
administers long-term care and home health care insured and non-insured products
for 21 unaffiliated insurance companies and three affiliated insurance
companies. As of December 31, 2000, CHCS had contracts in force with expected
annual fees of $6.5 million for 2001. This acquisition enhanced the Company's
expertise in the long term care business.
1999 Acquisition
On July 30, 1999, Universal American acquired six insurance companies
and certain other assets from PennCorp Financial Group (the "1999 Acquisition").
The 1999 Acquisition enhanced the Company's prospects for future organic growth
through geographic expansion and through the addition of a career agency
marketing channel to supplement the brokerage agency marketing channel.
In January 2000, the Company began the integration of the operations
of the acquired companies from Raleigh, North Carolina into existing Universal
American locations in Toronto (Canada), Pensacola (Florida) and Orlando
(Florida). The Company completed this integration in February 2001. For further
information on the 1999 Acquisition, see Note 3 to notes to consolidated
financial statements.
Cancellation of Major Medical Insurance
In the fourth quarter of 2000, the Company decided to exit its
under-performing individual major medical business to the extent possible. The
Company believes it will be able to cancel, by the end of 2002, approximately
$27 million of the $31 million of annualized premium that was in force on
December 31,
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2000. The remaining run-off premium in force will continue to be managed in the
Special Markets Segment.
ADMINISTRATIVE SERVICES COMPANIES
In 2000, Universal American increased its efforts to build its
Administrative Services business by the acquisition of CHCS and AIAG and by the
expansion of its product lines, particularly in the long term care field. The
companies perform the full range of administrative services for senior market
insured products, including policy underwriting, telephone verification,
policyholder services, claims adjudication, clinical case management, care
assessment and referral to health care facilities. Increasingly, these companies
are performing similar services, particularly in the long term care area, for
non-insured products offered both by insurers and non-insurance companies. For
the year ended December 31, 2000, this segment had revenues of $24.1 million,
$12.7 million from 35 unaffiliated companies and $11.4 million from the
Insurance Subsidiaries, and earnings before taxes, depreciation and amortization
of $6.8 million.
INSURANCE MARKETING AND DISTRIBUTION
Historically, Universal American marketed its products through a
traditional general agency system. As a result of the acquisition of
Pennsylvania Life and PennCorp Life of Canada in 1999, the Company now
distributes its products through a career agency system as well. The following
shows table shows the new sales (issued premiums) by distribution channel and by
major product line for the three years ended December 31, 2000:
Product 2000 1999 1998
------- ---- ---- ----
Senior Market Brokerage
Accident and Health
Medicare Supplement $ 78,213 $ 30,771 $ 13,553
Long Term Care 4,580 4,058 3,928
Other Senior Health 244 241 524
Total Senior Health 83,037 35,070 18,005
Senior Life Insurance 2,106 1,495 2,639
Total Senior Market Brokerage 85,143 36,565 20,644
Career Agency
Accident & Health 20,750 20,000 --
Life Insurance 1,500 2,000 --
Total Career Agency 22,250 22,000 --
Special Markets
Accident & Health 6,988 8,175 9,785
Life Insurance 546 555 939
Total Special Markets 7,534 8,730 10,724
TOTAL ISSUED PREMIUM $114,927 $ 67,295 $ 31,368
Senior Market Brokerage
Universal American emphasizes on the sale of products that appeal to
the senior market, largely through independent marketing organizations with
concentrations in this segment. The Company
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currently sells these products primarily in 25 states with particular
concentration in the Southeast, the Southwest and the Northeast. These marketing
organizations typically recruit and train their own agents, bearing all of the
costs incurred in connection with developing their organization. This
distribution channel has approximately 16,000 independently licensed agents. In
2000, this segment accounted for $255.3 million and $52.1 million, respectively,
or 56.6% and 23.7%, respectively, of the Company's gross premiums and net
premiums earned. New sales (issued premium) for this segment amounted to $85.1
million and $36.6 million in 2000 and 1999, respectively.
Career Agency System
As part of the 1999 Acquisition, the Company acquired a viable career
agency force that distributes fixed benefit accident and sickness insurance,
including accidental disability, and life insurance to the self-employed market.
A core part of Universal American's strategy has been to introduce its senior
market products through this marketing channel. The career field force has 50
branch offices throughout the United States and 15 branch offices in Canada,
with approximately 500 agents in the United States and 400 agents in Canada. In
contrast to independent agents, career agents have an exclusive arrangement
with, and only represent, the Company. In 2000, this segment accounted for
$129.4 million, or 58.9%, of the Company's net premiums earned. Approximately
36% of net premiums earned for this segment were generated by the Canadian
operations. The Career Agency system issued $22.3 million of new business in
2000 compared to $22.0 million in 1999.
Special Markets
Through its own operating history and through acquisitions, Universal
American has accumulated various lines of business that are no longer part of
its core focus. These products include traditional and interest-sensitive life
insurance, group life insurance, individual medical and other accident and
health insurance, some of which continue to be sold in limited amounts through
general agency relationships. Management believes that these lines of business
should be actively managed for profit or disposed of through sale or
cancellation. In December 2000, the Company decided to exit the Individual Major
Medical business, which has accounted for the majority of the production of new
business in this segment. In 2000 and 1999 this segment had $38.3 million and
$27.3 million, respectively, or 17.4% and 23.6%, respectively, of net premiums
earned.
PRODUCTS
The Senior Market Brokerage segment focuses on the senior market
products (Medicare Supplement, long term care and final expense life insurance),
while the Career Agency segment focuses on fixed benefit disability income, with
an increased concentration focus on senior market products. The products
described below are these currently marketed by the company.
SENIOR MARKET PRODUCTS - SUPPLEMENTAL HEALTH AND LONG-TERM CARE
Universal American's core supplemental health insurance products
include various Medicare Supplement and Medicare Select plans. Additionally, the
Company offers various long term care plans consisting of fully integrated
plans, nursing home only plans and stand alone home health care plans. Typically
these products are guaranteed renewable for the lifetime of the policyholder,
which means that the Company cannot cancel the policy, but can increase premium
rates on existing and future policies issued based upon the Company's claims
actual experience. These rate increases are applied on a uniform,
nondiscriminatory state by state basis and are subject to state regulatory
approval and federal and state loss-ratio requirements.
Medicare Supplement/Select
The Medicare Supplement policies offered by the Insurance
Subsidiaries are primarily on standardized plans A, B, C, D and F. These
policies provide supplemental coverage for many of the
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medical expenses that the Medicare program does not cover, such as deductibles,
coinsurance and specified losses that exceed the federal program's maximum
benefits. The Company also sells Medicare Select policies in some areas, in
conjunction with hospitals that contract with the insurer to waive the Medicare
Part A deductible. The Company monitors the claim experience on its Medicare
Supplement and Select products and, when necessary, applies for rate increases
in the states in which the products are sold. Medicare Supplement and Medicare
Select issued premium amounted to $78.2 million and $30.8 million in 2000 and
1999, respectively, produced through the general agency system. In 2001, the
career agency system will also begin to sell these products.
Long Term Care
The Company's long term care plans provide coverage, within selected
limits by the policyholders, for nursing home and assisted living care only
coverage, home health care only coverage, or an integrated combination of such
coverage. The nursing home and assisted living care products are subject to
daily fixed dollar maximum limits, have various elimination periods which must
be satisfied by the insureds and have maximum lifetime benefits or benefit
periods. The home health care products cover care needed in the insured's home,
are subject to daily or weekly maximum dollar benefits and an overall lifetime
maximum benefit or maximum benefit period. A new integrated long-term care
product, combining nursing home, assisted living and home health care benefits
was introduced in late 1999 in several states and the Company has developed a
new nursing home-assisted living product with optional home health care riders
which will be introduced in 2001. Issued premium for these long term care
products in 2000 and 1999 amounted to $4.6 million and $4.1 million,
respectively, produced through the general agency system. In 2000, the career
agents began to sell a new generation of long term care products and produced
$3.9 million of new premium.
SENIOR MARKET PRODUCTS - FINAL EXPENSE LIFE INSURANCE AND ANNUITIES
Final Expense Life
This series of low-face amount, simplified issue whole life products
is sold by both the Senior Market Brokerage segment and the Career Agents.
Issued premium of $2.0 million and $1.0 million in 2000 and 1999, respectively,
was produced through the general agency system. Additionally, in late 2000, the
career agents began to sell Final Expense life insurance and produced $0.6
million of new premium.
Annuities
The Company markets Single and Flexible Premium Deferred Annuities
primarily focusing on the senior and retirement markets. The Company's currently
marketed annuity products have a minimum guaranteed interest rate ranging from
3.0% from 4.0% annually and current credited interest rates that range from 3.0%
to 7.3%, with the Company having the right to change the crediting rates. In
exercising its right to change the interest rate, the Company takes into account
the current interest rate environment, the profitability of its annuity business
and its relative competitive position. The general agency system produced $4.4
million and $6.3 million of annuities in 2000 and 1999, respectively.
Additionally, in late 2000, the Career Agency system produced $3.0 million of
annuity premium.
CAREER AGENCY PRODUCTS
Fixed Benefit Accident and Health
Fixed benefit accident and health products provide coverage
for three principal types of benefits: (i) fixed periodic payments to an insured
who becomes disabled and unable to work because of an accident and/or sickness
("disability income"), (ii) fixed periodic payments to an insured who
becomes hospitalized ("hospital income") and (iii) fixed single payments that
vary in amount generally for specified surgical or diagnostic procedures
("surgical"). Because the benefits are fixed in amount at the time of policy
issuance and are not intended to provide full reimbursement for medical and
hospital expenses,
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payment amounts are not affected by inflation or the rising cost of health care
services. The disability income product is typically sold to individuals in
amounts which, when combined with other similar coverages, do not provide
monthly benefits in excess of $2,000, or 50% of the insured's monthly income if
less. The hospital income product is typically sold to individuals to provide
the insured with a means of paying supplemental expenses during a
hospitalization stay and provides benefits of not more than $250 per day ($1,000
if the insured is in intensive care). The surgical product is typically sold as
a rider to an accident policy and the Company's practice is to provide benefits
of not more than $5,000 ($2,500 if the procedure is performed on an out-patient
basis).
Life Insurance
In late 2000, the Career Agents began to sell term life insurance
that provides a minimum coverage of $50,000 for a ten-year period (offered to
individuals ages 18 through 60) or a twenty-year period (offered to individuals
ages 18 through 50) as specified in the policy. Premium rates vary according to
age and sex and these policies are fully underwritten. No cash values are
accumulated in this policy and the policy can be renewed for a new term on any
expiration date, except for the final expiration date, without evidence of
insurability. Issued premium for 2000 amounted to $0.5 million.
BUSINESS IN FORCE
As of December 31, 2000, the Company had $485.6 million of annualized
premium in force and $223.7 million in account values generated by 762,000
policyholders.
The Company's growth in direct, acquired and assumed annualized
premium in force, exclusive of the portion of premiums on interest-sensitive
products, is shown in the following tables as of December 31, 2000, 1999 and
1998.
ANNUALIZED PREMIUM IN FORCE As of December 31,
-------------------------------
2000 1999 (1) 1998
-------------------------------
(In thousands)
SENIOR MARKET BROKERAGE
Accident & Health
Medicare Supplement and Select (written) $115,217 $ 49,962 $ 18,811
Medicare Supplement Acquired 149,200 154,617 66,317
Long Term Care Acquired 20,395 16,167 7,658
Hospital Indemnity 1,304 1,456 1,722
------- ------- ------
TOTAL ACCIDENT & HEALTH 286,116 222,202 94,508
------- ------- ------
Life
Asset Enhancer (3) 6,357 7,248 7,333
Final Expense Life 3,984 2,479 2,051
------- ------- ------
TOTAL LIFE 10,341 9,727 9,384
------- ------- ------
TOTAL SENIOR MARKET BROKERAGE 296,457 231,929 103,892
------- ------- ------
CAREER AGENCY
Accident & Health
Disability Income 71,248 75,080 --
Hospital 16,635 21,614 --
Long Term Care Written 3,900 -- --
Long Term Care Acquired 9,680 12,011 --
Other Accident & Health 13,290 10,440 --
Surgical 5,180 5,600 --
------- ------- ------
TOTAL ACCIDENT & HEALTH 119,933 124,745 --
LIFE (3) 13,234 15,800 --
------- ------- ------
TOTAL CAREER AGENCY 133,167 140,545 --
SPECIAL MARKETS
Accident & Health
Individual Medical (1) (4) 31,422 45,442 18,745
Other Accident & Health (2) 8,640 9,518 8,018
------- ------- ------
TOTAL ACCIDENT & HEALTH 40,062 54,960 26,763
------- ------- ------
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Life
Group Life 3,444 3,542 3,520
Brokerage (3) 12,487 7,311 8,294
------- ------- ------
TOTAL LIFE 15,931 10,853 11,814
------- ------- ------
TOTAL SPECIAL MARKETS 55,993 65,813 38,577
CONSOLIDATED
ACCIDENT & HEALTH 446,111 401,907 121,271
LIFE 39,506 36,380 21,198
------- ------- ------
TOTAL CONSOLIDATED $485,617 $438,287 $142,469
======== ======== ========
(1) 1999 includes $96,739 and $14,234 of Medicare Supplement
and individual medical insurance premium, respectively,
acquired in connection with the 1999 Acquisition.
(2) Business acquired by the Company that is not actively
marketed.
(3) 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).
(4) In the fourth quarter of 2000, the Company decided to exit
its under-performing individual major medical business to
the extent possible. The Company believes it will be able
to cancel, by the end of 2002, approximately $27 million
of the $31 million in annualized premium in force on
December 31, 2000.
ACCOUNT VALUES ON INTEREST-SENSITIVE PRODUCTS
The following table shows all outstanding account values for
interest-sensitive products as of December 31, 2000, 1999 and 1998. For these
products, the Company earns income on the spread between investment income on
the Company's invested assets and interest credited to these account balances.
As of December 31,
---------------------------------------
2000 1999 (1) 1998
---------------------------------------
(In thousands)
Annuities $ 90,951 $107,169 $ 89,262
Universal Life 98,124 97,845 36,543
Asset Enhancer 34,642 33,651 29,081
------ ------ ------
Grand Total $223,717 $238,665 $154,886
======== ======== ========
- -------------------------
(1) 1999 figures include $20.2 million and $60.9 million of Annuity and
Universal Life account values, respectively, acquired in connection
with the 1999 Acquisition.
GEOGRAPHICAL DISTRIBUTION OF PREMIUM
The Company, through its nine Insurance Subsidiaries, is licensed to
market its product in all fifty states and in all the provinces of Canada. The
following table shows (by direct cash premium collected as reported to the
regulatory authorities for the full year of 2000) the geographical distribution
of premiums collected:
State/Region Collected % Total
Premium
(In thousands)
Florida $85,412 18.4%
Texas 55,563 11.9%
Canada 47,861 10.3%
New York 30,389 6.5%
Indiana 26,889 5.8%
Wisconsin 24,529 5.3%
Ohio 19,437 4.2%
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Pennsylvania 17,074 3.7%
North Carolina 11,207 2.4%
Georgia 10,585 2.3%
Missouri 9,696 2.1%
Mississippi 9,530 2.0%
California 8,739 1.9%
------- ----
Subtotal 356,911 76.7%
All other 108,414 23.3%
------- ----
Total $465,325 100.0%
======== =====
In 2000, no agent produced as much as 5% of the Company's accident &
health insurance premiums, life insurance or annuity premiums collected.
REINSURANCE
The Company has entered into reinsurance arrangements with
unaffiliated insurance companies to limit exposure on individual claims, to
support the increased volume of new business generated by the Senior Market
brokerage segment and to limit or eliminate risk on non-core or under-performing
blocks of business. The table below details the annualized premium in force on a
gross, ceded and net basis as of December 31, 2000.
ANNUALIZED PREMIUM IN FORCE As of December 31, 2000
-------------------------------------------------------
Gross Ceded Net % Retained
-------------------------------------------------------
(In thousands)
SENIOR MARKET BROKERAGE
Accident & Health
Medicare Supplement and Select Written $115,217 $ 81,230 $ 33,987 29%
Medicare Supplement Acquired 149,200 141,270 7,930 5%
Long Term Care 20,395 7,617 12,778 63%
Hospital Indemnity 1,304 326 978 75%
------- ------- ------ --
TOTAL ACCIDENT & HEALTH 286,116 230,443 55,673 19%
------- ------- ------ --
Life
Asset Enhancer 6,357 1,817 4,540 71%
Final Expense Life 3,984 1,876 2,108 53%
------- ------- ------ --
TOTAL LIFE 10,341 3,693 6,648 64%
------- ------- ------ --
TOTAL SENIOR MARKET BROKERAGE 296,457 234,136 62,321 21%
------- ------- ------ --
CAREER AGENCY
Accident & Health
Disability Income 71,248 -- 71,248 100%
Hospital 16,635 -- 16,635 100%
Long Term Care 13,580 -- 13,580 100%
Other Accident & Health 13,290 -- 13,290 100%
Surgical 5,180 -- 5,180 100%
------- ------- ------ --
TOTAL ACCIDENT & HEALTH 119,933 -- 119,933 100%
------- ------- ------ --
LIFE (3) 13,234 -- 13,234 100%
------- ------- ------ --
TOTAL CAREER AGENCY 133,167 -- 133,167 100%
------- ------- ------ --
SPECIAL MARKETS
Accident & Health
Individual Medical 31,422 9,551 21,871 70%
Other Accident & Health 8,640 6,372 2,268 26%
------- ------- ------ --
TOTAL ACCIDENT & HEALTH 40,062 15,923 24,139 60%
------- ------- ------ --
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Life
Group Life 3,444 -- 3,444 100%
Traditional 12,487 1,263 11,224 90%
------- ------- ------ --
TOTAL LIFE 15,931 1,263 14,668 92%
------- ------- ------ --
TOTAL SPECIAL MARKETS 55,993 17,186 38,807 69%
------- ------- ------ --
CONSOLIDATED
ACCIDENT & HEALTH 446,111 246,366 199,745 45%
LIFE 39,506 4,956 34,550 87%
------- ------- ------ --
TOTAL CONSOLIDATED $485,617 $251,322 $234,295 48%
======== ======== ======== ==
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, none of the
Company's reinsurers have been unable to pay any policy claims on any reinsured
business.
In addition to the reinsurance agreements discussed below by segment,
the Company reinsures portions of the coverage of its life insurance products to
unaffiliated insurance companies under various reinsurance agreements, which
allows the Company to write policies in amounts larger than the risk it is
willing to retain on any one life. The mortality risk retention limit on each
policy varies generally between $25,000 and $250,000.
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.
Senior Market Brokerage
The Company reinsures most of its senior market brokerage products to
unaffiliated third party reinsurers under various quota share agreements.
Medicare Supplement premium currently being issued is reinsured under quota
share reinsurance agreements ranging between 50% and 75% based upon the
geographic distribution. The Company has also acquired various blocks of
Medicare Supplement premium, which are reinsured under quota share reinsurance
agreements ranging from 75% to 100%. The Company's long term care products
currently produced are reinsured at percentages averaging 50%, while the
long term care acquired with Union Bankers is 100% retained. The Final Expense
Life insurance products currently being issued are reinsured on a 50% quota
share basis. Under these reinsurance agreements, the Company reinsures the
premiums earned, claims incurred and commissions on a pro rata basis and
receives additional expense allowances for policy issue, administration and
premium taxes.
Career Agency
Currently, the Company retains 100% of all life and health business
issued by the career agency distribution other than the long term care and
Medicare Supplement products, which products are reinsured on a 50% quota share
basis.
Special Markets
The Company has 50% quota share and "excess of loss" reinsurance
agreements with unaffiliated insurance companies on its medical insurance
policies to reduce the liability on individual risks to amounts ranging between
$50,000 and $250,000. Under these treaties, the Company performs all the
underwriting and administration and receives various allowances for commission
and expenses on the ceded portion of the premium. The major medical business
acquired with Union Bankers is 100%
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retained but has an excess of loss reinsurance agreement limiting the liability
on an individual risk to $250,000. Most of this business is in the process of
being cancelled (see Cancellation of Major Medical Business above).
In conjunction with the 1999 Acquisition, Peninsular entered into a
coinsurance agreement with Occidental Life Insurance Company of North Carolina
("Occidental"), a former affiliate, to cede 100% of its direct business
(primarily life and annuity business). Currently, A.M. Best rates Occidental
B++. It is anticipated that this coinsurance agreement will be replaced with a
full assumption agreement which will effectively transfer the business to
Occidental. As of December 31, 2000, approximately 52% of the business had been
transferred.
Administration of Reinsured Blocks of Business
The Company generally retains the administration for the reinsured
blocks of business, including underwriting, issue, policy maintenance, rate
management and claims adjudication and payment. In addition to reimbursement for
commissions and premium taxes on the reinsured business, the Company also
receives allowances as compensation for its administration.
COMPETITION
The life and accident and health insurance industry in the United
States is highly competitive. 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 been in business
for a longer period of time and 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 become
increasingly difficult for mid-size companies to compete effectively with their
larger competitors for insurance product sales in part as a result of heightened
consumer and agent awareness of the financial size of companies.
The Company believes it meets these competitive pressures by offering
a high level of service and accessibility to its field force and by developing
specialized products and marketing approaches. The Company also believes its
policies and premium rates are generally competitive with those offered by other
companies selling similar types of products in the same jurisdictions.
Increased public and regulatory concerns regarding the financial
stability of insurance companies have resulted in policyholders placing greater
emphasis upon company ratings and have created some measure of competitive
advantage for insurance carriers with higher ratings. A. M. Best & Co. is
considered to be a leading insurance company rating agency. 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. A. M. Best has assigned a "B+" rating to
American Pioneer, American Progressive, Constitution Life, Pennsylvania Life and
Union Bankers. This rating means that in A. M. Best's opinion, these companies
have demonstrated "very good" overall performance when compared to standards it
has established and have a "good" ability to meet their obligations to
policyholders and are in the "Secure" category of all companies rated by A. M.
Best. A. M. Best has rated Peninsular Life "FPR5", which means the company has a
"good" ability to meet its obligations to policyholders, based primarily on a
quantitative evaluation of Peninsular Life's financial strength and operating
performance. A. M. Best does not rate the other Insurance Subsidiaries.
The Insurance Subsidiaries are not known to be currently rated by the
Standard & Poors, Moody's or Duff and Phelps 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
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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 expected mortality and morbidity experience. 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, the Insurance Subsidiaries employ an experienced
professional underwriting staff.
Applications for insurance are reviewed on the basis of the answers
to the application questions. Where appropriate to the type and amount of
insurance applied for and the applicant's age and medical history, additional
information is required, such as 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 on a
standard basis; issues the policy with an extra premium charge due to
unfavorable factors, issues the policy excluding benefits for certain
conditions, either permanently or for a period of time, or rejects the
application. For certain of its coverages, the Company has adopted simplified
policy issue procedures in which the applicant submits an application for
coverage typically containing only a few health-related questions instead of a
complete medical history. In New York and some other states, certain of the
Company's products, including Medicare Supplement, are subject to "Community
Rating" laws that severely limit or prevent underwriting of individual
applications. See "Regulation - Health Care Reform".
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 are also
maintained for unearned premiums, for premium deposits, for claims that have
been reported and are in the process of being paid or contested and for
management's estimate for claims that have been incurred but have not yet been
reported.
The reserves reflected in the Company's consolidated financial
statements are calculated in accordance with generally accepted accounting
principles ("GAAP"). These reserves are determined based upon the Company's best
estimates of mortality and morbidity, persistency, expenses and investment
income. 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, interest
rates and the introduction of lapse assumptions into the GAAP reserve
calculation. (See Notes 2e and 2f to the Notes to the Consolidated Financial
Statements).
INVESTMENTS
The following table summarizes the Company's investment portfolio as
of December 31, 2000 and 1999:
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INVESTMENT PORTFOLIO
December 31, 2000 December 31,1999
Carrying Percent of Carrying Percent of
Value Total Value Total
(Fair Value) Carrying (Fair Value) Carrying
------------ -------- ------------ --------
(In thousands) Value Value
Fixed Maturity Securities:
U.S. Government and
Government agencies (1) $ 34,734 4.21% $ 63,391 7.80%
Mortgage backed (1) 172,857 20.95% 153,316 18.87%
Asset backed 85,547 10.37% 64,496 7.94%
Investment grade corporates 436,677 52.94% 428,317 52.73%
Non-investment grade corporates 21,923 2.66% 8,040 0.99%
------ ---- ----- ----
Total fixed maturity securities 751,738 91.13% 717,560 88.33%
Cash and cash equivalents 40,250 4.88% 58,753 7.23%
Other Investments:
Policy loans 25,077 3.04% 25,640 3.16%
Equity securities 3,547 .43% 4,838 0.60%
Mortgage loans 2,281 .28% 2,743 0.34%
Other invested assets 2,037 .25% 2,763 0.34%
------ ---- ----- ----
Total invested assets $824,930 100.00% $812,297 100.00%
======== ====== ======== ======
- --------------
(1) US Government and government agencies include GNMA Mortgage backed
securities.
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, 2000. 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
------------------ ------------------ ------------------
(In thousands)
Due in 1 year or less $25,627 3.41%
Due after 1 year through 5 years 148,470 19.75%
Due after 5 years through 10 years 215,840 28.71%
Due after 10 years 100,521 13.37%
Asset backed securities 85,547 11.38%
Mortgage backed securities 175,733 23.38%
------- -----
$751,738 100.00%
======== ======
The following table shows the distribution by carrying value (which
is the estimate of fair value) of the Company's fixed maturity securities
portfolio according to the ratings assigned by Standard & Poor's Corporation, as
of December 31, 2000 and 1999:
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DISTRIBUTION OF FIXED MATURITY SECURITIES BY RATING
December 31, 2000 December 31, 1999
(In thousands)
% of
Carrying % of Carrying
Standard & Value Total Value Total
Poor's (Estimated Fixed (Estimated Fixed
Rating Fair Value) Investment Fair Value) Investment
AAA $285,274 37.95% $260,911 36.36%
AA 105,749 14.07% 94,482 13.17%
A 239,420 31.85% 257,702 35.91%
BBB 99,372 13.22% 96,425 13.44%
BB 7,965 1.06% 5,390 0.75%
B 12,766 1.70% 2,255 0.31%
CCC 799 .11% 395 0.06%
CC 88 .01% 0 0%
D 305 .04% 0 0%
-------- ------ -------- ------
Total $751,738 100.00% $717,560 100.00%
======== ====== ======== ======
At December 31, 2000 and 1999, 97.1% and 98.9%, respectively, of the
Company's fixed maturity investments were investment grade 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
$172.8 million, at December 31, 2000 and $153.3 million, at December 31, 1999,
of collateralized mortgage obligations secured by residential mortgages,
representing approximately 23% and 26% of the Company's fixed maturity portfolio
at December 31, 2000 and 1999, respectively. Certain classes of mortgage-backed
securities are subject to significant prepayment risk, because 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. 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, 2000 and 1999, less than investment grade fixed
maturity securities had aggregate carrying values (held at fair value) of $21.9
million and $8.0 million, respectively, amounting to 2.9% and 1.1%,
respectively, of total investments and 1.8% and 0.7%, respectively, of total
assets. The Company's holdings of less than investment grade corporate fixed
maturity securities are diversified and the largest investment in any one such
security at December 31, 2000 was $5.9 million, which was less than 0.5% of
total assets. The Company wrote down the value of certain securities, considered
to have been subject to an-other-than temporary decline in value, by $0.5
million and $0.6 million in 2000 and 1999, which was included in net realized
gains (losses) on investments in the consolidated statements of operations.
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, 2000:
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INVESTMENT RESULTS
Years Ended December 31,
2000 1999 1998
(In thousands)
Total cash and invested assets, end of period $ 824,930 $ 812,297 $ 164,674
Net investment income $ 56,945 $ 29,313 $ 10,721
Yield on average cash and investments 6.88% 6.79% 6.67%
Net realized investment gains (losses) on the sale
of securities (including other than temporary
declines in market value) $ 146 $ (241) $ 256
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 Peninsular Life, Pennsylvania in the case of Pennsylvania
Life, Texas in the case of American Exchange, Constitution Life, Marquette and
Union Bankers and provincial and federal law of Canada in the case of PennCorp
Life of Canada). Effective December 21, 2000, Peninsular Life was
re-domesticated to Florida from North Carolina. This was done primarily to
reflect the move of its home office to Orlando, Florida, as well as its change
in ownership from American Exchange to American Pioneer. Each company is also
subject to regulation and supervision in the Insurance Department in each of the
other states in which they are admitted and 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 shareholders.
Such regulations and supervision by the Insurance Departments extend,
among other things, to the granting and revocation of licenses to transact
business, the form and content of policies which may be offered, the setting of
premium rates on health insurance policy forms, establishment of reserve and
capitalization requirements, permissible investments, the form and content of
statutorily-mandated financial statements, and the declaration and payment of
dividends.
Every insurance company that is a member of an "insurance holding
company system" is generally required to register as such with the insurance
regulatory authorities in each state in which it is authorized to do business
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 the companies' domiciliary states and by
representatives (on an "association" or "zone" basis) of the other states in
which they are licensed to do business. The status of completed examinations and
examinations in progress is presented below:
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Completed Examinations:
State Year
Conducting Years Exam Report
Company Exam Examined Completed Status
- ------- ---- -------- --------- ------
American Progressive New York 1995-97 1999 Final
America Pioneer Florida 1995 1997 Final
American Exchange Texas 1997 1999 Final
Peninsular North Carolina 1993-95 1997 Final
Pennsylvania Life Pennsylvania 1994-96 1998 Final
Union Bankers Texas 1995-97 1999 Final
Constitution Life Texas 1995-97 1999 Final
Marquette Texas 1995-97 1999 Final
There are no material issues with respect to the completed examinations which
would have an impact on the financial position of the respective companies.
Examinations in Progress:
State Years Expected
Conducting Being Completion
Company Exam Examined Date
America Pioneer Florida 1996-99 June 2001
American Progressive New York 1998-2000 December 2001
Pennsylvania Life Pennsylvania 1997-2000 December 2001
Management does not believe that there are any material issues with respect to
the examinations in progress which would have an impact on the financial
position of the respective companies.
Many states require deposits of assets for the protection of
policyholders either in those states or for all policyholders. At December 31,
2000 and 1999, securities totaling $33.1 million and $32.5 million, respectively
(approximately 4.2% and 4.3%, respectively, of the carrying value of the
Company's total investments), 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
In 1998, the NAIC approved a codification of statutory accounting
principles, effective January 1, 2001, which will serve as a comprehensive and
standardized guide to statutory accounting principles. The adoption of the
codification will change, to some extent, the accounting practices that the
Company's Insurance Subsidiaries use to prepare their statutory financial
statements. The Company does not believe that such changes will have a material
adverse impact on the reported statutory financial condition of any such
subsidiaries.
Other 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. Furthermore, while the Federal government currently
does not directly regulate the insurance business, Federal legislation and
administrative policies in a number of areas, such as employee benefits
regulation, age, sex and disability-based discrimination, financial services
regulation and Federal taxation, can significantly affect the insurance
business. It is not possible to predict the future impact of changing regulation
on the operations of the Company and its Insurance Subsidiaries.
Since 1993 New York State has required that all health insurance sold
to individuals and groups
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with less than 50 employees, be offered on an open enrollment and community
rated basis. Such insurance may continue to be sold to groups with more than 50
employees on an underwritten basis, with premium set to reflect expected or
actual results. 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 policies 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, Texas and other
states 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 $8.2 million at December 31, 2000.
Under Pennsylvania and Texas insurance law, a life insurer may pay
dividends or make distributions from accumulated earning without the prior
approval of the Insurance Department, provided they 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.
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.
Under current Canadian law, a life insurer may pay a dividend after
such dividend declaration has been approved by its board of directors and upon
at least 10 days prior notification to the Superintendent of Financial
Institutions. In considering approval of a dividend, the board of directors must
consider whether the payment of such dividend would be in contravention of the
Insurance Companies Act of Canada.
During the year ended December 31, 2000, Pennsylvania Life and Union
Bankers paid ordinary dividends to American Exchange of $2.9 million and $2.0
million, respectively. Additionally, Peninsular Life paid an extraordinary
dividend of $1.5 million to Universal American in 2000.
Based on the current dividend regulations of the respective states,
Pennsylvania Life and Union Bankers would be able to pay ordinary dividends of
approximately $12.1 million and $1.4 million respectively, to American Exchange
without prior approval from the respective departments. Additionally,
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Peninsular Life would be able to pay ordinary dividends of approximately $1.2
million to American Pioneer without prior approval from the Florida Insurance
Department.
Risk-Based Capital Requirements
The NAIC's risk-based capital ("RBC") requirements for insurance
companies take into account asset risks, interest rate risks, mortality and
morbidity risks and other relevant risks with respect to the insurer's business
and specify varying degrees of regulatory action to occur to the extent that an
insurer does not meet the specified RBC thresholds, with increasing degrees of
regulatory scrutiny or intervention provided for companies in categories of
lesser RBC compliance. The Company believes that its Insurance Subsidiaries are
adequately capitalized under the RBC requirements and that the thresholds will
not have any significant regulatory effect on the Company. However, should the
Insurance Subsidiaries' RBC position decline in the future, the Insurance
Subsidiaries' continued ability to pay dividends and the degree of regulatory
supervision or control to which they are subjected might be affected.
Guaranty Association Assessments
The Company's Insurance Subsidiaries can be required, under solvency
or guaranty laws of most states in which they do business, to pay assessments to
fund policyholder losses or liabilities of unaffiliated insurance companies that
become insolvent. These assessments may be deferred or forgiven under most
solvency or guaranty laws if they would threaten an insurer's financial strength
and, in most instances, may be offset against future state premium taxes. None
of the Insurance Subsidiaries has ever incurred any significant costs of this
nature. 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 provide prescription drug benefits
and coverage 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 became 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 cannot be determined at the present time; however, 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").
Other Possible Changes in Legislation
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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.
A 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 that have broad powers and are concerned
primarily with the protection of policyholders.
EMPLOYEES
At March 1, 2001, the Company employed approximately 790 employees,
none of whom are represented by a labor union. The Company considers its
relations with its employees to be satisfactory.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY
The following table sets forth certain information concerning the
Directors and Officers of the Company:
POSITION WITH THE COMPANY, PRESENT PRINCIPLE
OCCUPATION OR EMPLOYMENT AND PAST FIVE-YEAR
NAME AGE EMPLOYMENT HISTORY
-------------- ------- --------------------------------------------------------------------------
Richard A. Barasch 47 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 all the other subsidiaries. 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.
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Robert A. Waegelein, C.P.A. 40 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. 51 Senior Vice President of the Company since June 15, 1995 and Chief Operating
Officer since June 7, 2000. President, Chief Executive Officer and Director
of American Pioneer since April 1983. President and a director of American
Exchange (since December 1997), Constitution Life, Marquette, Peninsular
Life and Union Bankers (since March 2000) and Chairman of the Board of AIAG
(since January 2000).
William E. Wehner, C.L.U. 57 President and Director of Pennsylvania Life since April 2000, Executive Vice
President and Chief Operating Officer of American Progressive since May
1991 and Senior Vice President and Chief Marketing Officer of American
Pioneer since November 1997. 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.
Bradley E. Cooper 34 Director of the Company since July 1999. Mr. Cooper is a Partner and
co-founder of Capital Z Financial Services Fund II L.P. ("Capital Z") which
owns 55.8% of the Company's outstanding stock. Prior to joining Capital Z,
Mr. Cooper served in similar roles at Insurance Partners, L.P. ("Insurance
Partners") and International Insurance Investors, L.P. Prior to the
formation of Insurance Partners, Mr. Cooper was a Vice President of
International Insurance Advisors, Inc. and was an investment banker in the
Financial Institutions Group at Salomon Brothers, Inc. Mr. Cooper currently
serves on the board of directors of Superior National Insurance Group,
Highlands Insurance Group, CERES Group, Inc., American Capital Access
Holdings, eStellarnet, Inc. and Inlumen, Inc.
Susan S. Fleming 30 Director of the Company since July 1999. Ms. Fleming is a Principal of
Capital Z. Prior to joining Capital Z, Ms. Fleming served as Vice President
of Insurance Partners and was an investment banker in the Mergers and
Acquisitions Financial Institutions Group at Morgan Stanley & Co. Ms.
Fleming currently serves on the Board of Directors of CERES Group, Inc.
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Mark M. Harmeling 48 Director of the Company since July 1990 and Director of American Progressive
since December 1992. Mr. Harmeling is Managing Director of TA Associates
Realty, a pension fund advisory firm. He was previously President of Bay
State Realty Advisors, a real estate management and development company.
Mr. Harmeling is also a Director of Rochester Shoetree Corporation (since
1988) and Applied Extrusion Technologies, Inc. (since 1987).
Bertram Harnett 77 Director of the Company and American Pioneer since June 1996 and from 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.
Patrick J. McLaughlin 42 Director of the Company since January 1995. Mr. McLaughlin has been a
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).
Robert A. Spass 45 Director of the Company since July 1999. Mr. Spass is a Partner and
co-founder of Capital Z. Prior to founding Capital Z, Mr. Spass was the
Managing Partner and co-founder of Insurance Partners. Prior to the
formation of Insurance Partners, Mr. Spass was President and CEO of
International Insurance Advisors Inc. Prior to that, Mr. Spass was a
Director of Investment Banking at Salomon Brothers and a Senior Manager for
Peat Marwick Main & Co. Mr. Spass serves on the board of directors of
Highlands Insurance Group, Superior National Insurance Group, CERES Group,
Inc., Kinexus, Aames Financial Corp. and USI Insurance Services Corp.
Richard Veed 48 Director of the Company since April 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 Andersen & Co. from 1987 to August 1992.
He is also a Director of HomeVest Financial Group, Inc. and Wasatch Crest
Group, Inc.
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Robert F. Wright 75 Director of the Company since June 1998. Mr. Wright has been President of
Robert F. Wright Associates, Inc. since 1988. Prior to that Mr. Wright was
a senior partner of the public accounting firm of Arthur Andersen LLP from
1960 to 1988. Mr. Wright is Director of Hanover Direct, Inc., Reliance
Standard Life Insurance Company (and its affiliates), Deotexis, Inc., GVA
Williams, The Navigators Group, Inc., Quadlogic Controls Corp., and U.S.
Timberlands Company, L.P.
All of the executive officers listed above devote their full business
time to the Company. All of the officers and directors of the Company and its
subsidiaries are elected annually for one-year terms. All officers and directors
hold office until their successors are duly elected and qualified.
The By-laws of the Company provide that the Board of Directors shall
set the number of directors. The Company's Board of Directors currently consists
of nine directors.
The Board of Directors has an Audit Committee, which also acts as a
Transactions Committee, consisting of Messrs. Harmeling, McLaughlin, Veed and
Wright; a Compensation Committee consisting of Ms. Fleming and Messrs. Harmeling
and Veed; and an Executive Committee consisting of Messrs. Barasch, Cooper,
Harnett, McLaughlin and Spass. 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
Information regarding transactions with management, directors and
others with the Registrant is incorporated by reference to Universal American
Financial Corp.'s definitive proxy statement to be filed pursuant to Regulation
14A under the Securities Exchange Act of 1934 within 120 days after the end of
the Company's fiscal year ended December 31, 2000.
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) 2,500 square feet of office space, under a
lease expiring in August 2003; 29,000 square feet of office space, under a lease
expiring in February 2004; and 1,600 square feet of office space, under a lease
expiring in June 2005, in Orlando, Florida; (iii)1,200 square feet of rental
house space, under a lease expiring August 2001, 5,100 square feet of warehouse
space, under a lease expiring June 2005; 32,000 square feet of office space,
under a lease expiring in November 2007, with one renewal at the Company's
option for a period of five years; and 8,200 square feet of office/warehouse
space, under a lease expiring November 2007; 6,000 square feet of warehouse
space, under a lease expiring November 2007 in Pensacola, Florida; (iv) 2,700
square feet in Richardson, Texas, under a lease expiring in March 2001; (v)
67,000 square feet in Raleigh, North Carolina, under a lease expiring January
2001; (vi) 22,000 square feet of office space and 6,000 square feet of warehouse
space, both under a lease expiring November 2001 in Mississauga, Ontario; (vii)
14,300 square feet of office space in Clearwater, Florida, under a lease
expiring December 2002; (viii) 11,500 square feet of office space in Weston,
Florida, under a lease expiring June 2008. These leases represent the operating
offices of American Progressive, American Pioneer Life, WorldNet Services Corp,
American Exchange Life, Pennsylvania Life, PennCorp Life of Canada, AIAG, and
CHCS respectively, and carry an aggregate annual rental of approximately $1.8
million. The company also leases a smaller office in Andalusia, Alabama, for an
aggregate annual rental of approximately $17,000.
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ITEM 3 - LEGAL PROCEEDINGS
No reportable litigation was pending at December 31, 2000. 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.
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 following table sets forth the high and low sales prices per share
of Common Stock as reported on the Nasdaq National Market for the periods
indicated.
Common Stock
High Low
1998
First Quarter 3.000 2.375
Second Quarter 2.938 2.938
Third Quarter 2.875 2.125
Fourth Quarter 2.875 2.000
1999
First Quarter 4.000 3.000
Second Quarter 4.000 3.031
Third Quarter 5.188 3.375
Fourth Quarter 4.813 3.375
2000
First Quarter 4.625 3.500
Second Quarter 4.156 3.250
Third Quarter 5.250 3.688
Fourth Quarter 4.375 3.813
2001
First Quarter (through March 1) 4.188 3.438
As of March 1, 2001, there were approximately 1,900 holders of record
of the Common Stock. On March 1, 2001, the bid and ask sales prices for the
Common Stock were $3.875 and $4.000.
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
the Company to pay cash dividends, if and when it
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should wish to do so, may depend on the ability of its subsidiaries to pay
dividends to the Company. See "Regulation - Dividend and Distribution
Restrictions".
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ITEM 6 - SELECTED CONSOLIDATED FINANCIAL DATA
Year ended December 31,
------------------------------------------------------------------------
INCOME STATEMENT DATA: 2000 (7) 1999 (4) 1998 1997 (5) 1996 (6)
-------- --------- -------- --------- ----------
(In thousands, except for per share data)
Direct premium and policyholder fees $451,323 $252,553 $131,044 $ 99,339 $ 55,287
Reinsurance premium assumed 3,055 1,751 998 998 10,522
Reinsurance premium ceded (234,625) (138,827) (89,546) (62,623) (25,664)
-------- --------- -------- --------- ----------
Net premium and other policyholder fees 219,753 115,477 42,496 37,714 40,145
Net investment income 56,945 29,313 10,721 10,023 9,850
Realized gains 146 (241) 256 1,133 240
Fee and other income 7,247 3,587 2,616 2,460 3,152
Total revenues 284,091 148,136 56,089 51,330 53,387
Total benefits, claims and other
Deductions 251,025 132,080 52,157 48,119 53,014
Operating income before taxes 33,066 16,056 3,932 3,211 373
Net income after taxes 22,885 9,813 2,608 2,119 104
Net income applicable to common
Shareholders (1) 22,885 9,633 2,174 1,870 104
Earnings per share:
Basic $0.49 $0.42 $0.29 $0.26 $0.01
Diluted $0.49 $0.34 $0.20 $0.18 $0.18
December 31,
-------------------------------------------------------------------------
BALANCE SHEET DATA: 2000 1999 1998 1997 1996
-------------------------------------------------------------------------
(In thousands, except for per share data)
Total cash and investments $824,930 $812,297 $164,674 $159,429 $144,681
Total assets 1,189,864 1,153,421 283,302 272,575 242,237
Policyholder account balances 223,681 238,665 154,886 145,085 134,539
Loan payable 69,650 70,000 4,750 3,500 --
Series B Preferred Stock -- -- 4,000 4,000 4,000
Series C Preferred Stock -- -- 5,168 5,168 --
Series D Preferred Stock -- -- 2,250 -- --
Stockholders' equity 173,949 133,965 28,318 25,706 22,079
Stockholders' equity per share of
Common Stock :
Basic (2) $3.72 $2.92 $3.18 $2.96 $2.53
Diluted (3) $3.67 $2.91 $2.59 $2.39 $2.12
(1) After provision for Series C Preferred Stock dividends of $180, $433 and
$250 for the years ended December 31, 1999, 1998 and 1997, respectively.
(2) Basic stockholders' equity per share of common stock represents
stockholders' equity less the statement value of Series B Preferred Stock
divided by outstanding shares of common stock.
(3) Diluted stockholders' equity per share of common stock represents
stockholders' equity plus the statement value of the Series C Preferred
Stock, redemption accrual on the Series C Preferred Stock, the Series D
Preferred Stock, the proceeds from the exercise of outstanding options and
warrants divided by outstanding shares of common stock plus the stock
issued pursuant to the conversion of the Series B, Series C and Series D
Preferred Stock and the exercise of the options and warrants outstanding.
(4) Includes the results of the Penn Union Companies since its acquisition on
July 30, 1999. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
(5) Includes the results of American Exchange since its acquisition on December
1, 1997. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations".
(6) Includes the results of the First National block of business since its
acquisition on October 1, 1996.
(7) Includes the results of AIAG since its acquisition on January 6, 2000, and
CHCS since its acquisition on August 10, 2000.
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ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
FORWARD LOOKING STATEMENTS
The Company cautions readers regarding certain forward-looking
statements contained in the following discussion and elsewhere in this report
and in any other oral or written statements, either made by, or on behalf of the
Company, whether or not in future filings with the Securities and Exchange
Commission ("SEC"). Forward-looking statements are statements not based on
historical information. They relate to future operations, strategies, financial
results or other developments. In particular, statements using verbs such as
"expect," "anticipate," "believe" or similar words generally involve
forward-looking statements. Forward-looking statements include statements that
represent the Company's products, investment spreads or yields, or the earnings
or profitability of the Company's activities.
Forward-looking statements are based upon estimates and assumptions
that are subject to significant business, economic and competitive
uncertainties, many of which are beyond the Company's control and are subject to
change. These uncertainties can affect actual results and could cause actual
results to differ materially from those expressed in any forward-looking
statements made by, or on behalf of the Company. Whether or not actual results
differ materially from forward-looking statements may depend on numerous
foreseeable and unforeseeable events or developments, some of which may be
national in scope, such as general economic conditions and interest rates. Some
of these events may be related to the insurance industry generally, such as
pricing competition, regulatory developments and industry consolidation. Others
may relate to Universal American specifically, such as credit, volatility and
other risks associated with the Company's investment portfolio, and other
factors. Universal American disclaims any obligation to update forward-looking
information.
INTRODUCTION
The following analysis of the consolidated results of operations and
financial condition of the Company should be read in conjunction with the
Consolidated Financial Statements and related consolidated footnotes included
elsewhere.
The Company owns nine insurance companies (collectively, the "Insurance
Subsidiaries"): American Progressive Life & Health Insurance Company of New York
("American Progressive"), American Pioneer Life Insurance Company ("American
Pioneer"), American Exchange Life Insurance Company ("American Exchange"),
Constitution Life Insurance Company ("Constitution Life"), Marquette National
Life Insurance Company ("Marquette"), Peninsular Life Insurance Company
("Peninsular Life"), Pennsylvania Life Insurance Company ("Pennsylvania Life"),
PennCorp Life Insurance Company of Canada ("PennCorp Life of Canada") and Union
Bankers Insurance Company ("Union Bankers"). Six of these companies,
Pennsylvania Life, PennCorp Life of Canada, Peninsular, Union Bankers,
Constitution and Marquette, as well as certain other related assets, were
acquired on July 30, 1999. In addition to the Insurance Subsidiaries, Universal
American owns three third party administrators: American Insurance
Administration Group, Inc. ("AIAG"), which was purchased January 2, 2000,
Capitated Health Care Services, Inc., ("CHCS"), which was purchased August 10,
2000 and WorldNet Services Corp. ("WorldNet") that process the Company's
brokerage senior market policies, as well as business for unaffiliated insurance
companies.
DESCRIPTION OF SEGMENTS
Currently, the Company manages its business, with primary emphasis on
its distribution channels, through four operating segments, Senior Market
Brokerage, Career Agency, Special Markets and Administrative Services and also
maintains a Corporate segment.
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SENIOR MARKET BROKERAGE - This distribution channel consists of a general agency
system and insurance brokerage system that focus on the sale of products in the
senior market segment, including Medicare Supplement, long term Care, Final
Expense Life Insurance and annuities.
CAREER AGENCY SYSTEM - The Career Agency Segment was acquired in the 1999
Acquisition in July 1999 and comprises the operations of Pennsylvania Life and
PennCorp Life of Canada. PennCorp Life of Canada operates exclusively in Canada,
while Pennsylvania Life operates in both the U.S. ("Pennsylvania Life U.S.") and
Canada. The Career Agency segment is comprised of a career agency field force,
which distributes fixed benefit accident and sickness, life insurance and
supplemental senior health insurance in the United States and Canada. The Career
Agents are under exclusive contract with Pennsylvania Life and PennCorp Life of
Canada.
SPECIAL MARKETS - Through its own operating history and through prior
acquisitions, Universal American has accumulated various lines of business that
it manages in its Special Markets segments. These products include traditonal,
interest-sensitive and group life insurance, individual medical and other
accident and health insurance.
ADMINISTRATIVE SERVICES - In connection with the acquisition of AIAG and CHCS,
Universal American has increased its efforts on the development of the
Administrative Services segment. The primary services are to act as a third
party administrator and service provider on various senior supplemental health
insurance products offered by both affiliated and unaffiliated insurance
companies. Services performed include policy underwriting, telephone
verification, policyholder services, claims adjudication, clinical case
management, care assessment and referral to health care facilities.
CORPORATE & ELIMINATIONS - This segment includes the corporate activities of the
holding company, including interest on debt. This segment also includes the
elimination of intersegment revenues and expenses that are reported gross in
each of the operating segments. These eliminations affect the amounts reported
on the individual financial statement line items, but do not change operating
income before taxes. The significant items eliminated include intersegment
revenue and expense relating to services performed by the Administrative
Services segment for the Career Agency, Senior Market Brokerage and Special
Market segments and interest on notes issued by the Corporate segment to the
other operating segments.
RESULTS OF OPERATIONS - CONSOLIDATED OVERVIEW
For the purposes of assessing each segment's contribution to net
income, management evaluates the results of these segments on a pre-tax, and
realized gain (loss) basis. The following table reflects each segment's
contribution to net income and a reconciliation to net income for these items.
For the year ended December 31,
--------------------------------------------
2000 1999 1998
-------- -------- -------
(in thousands)
Career Agency $29,426 $12,198 $ -
Senior Market Brokerage 5,491 3,871 2,084
Special Markets 4,790 4,618 1,115
Administrative Services 3,844 2,036 1,980
-------- -------- -------
Segment operating income 43,551 22,723 5,179
Corporate & Eliminations (10,631) (6,426) (1,503)
-------- -------- -------
Operating income before realized gains and Federal income 32,920 16,297 3,676
taxes
Realized gains (losses) 146 (241) 256
Federal income taxes (10,181) (6,243) (1,324)
Redemption accrual on Series C and Series D Preferred Stock -- (180) (434)
-------- -------- -------
Net Income $22,885 $ 9,633 $ 2,174
======== ======== ========
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YEARS ENDED DECEMBER 31, 2000 AND 1999
Consolidated net income after Federal income taxes increased by $13.3
million to $22.9 million ($0.49 per share) in 2000, compared to $9.6 million
($0.34 per share) in 1999. Operating income before realized gains and Federal
income taxes increased by $16.6 million to $32.9 million in 2000 compared to
$16.3 million in 1999.
Operating income from the Career Agency segment increased by $17.2
million, reflecting the impact of a full year's results in 2000 compared to five
months in 1999. The results for 2000 trend consistently with 1999 on an
annualized basis.
The Senior Market Brokerage segment improved results by more than 40%,
increasing operating income by $1.6 million. This improvement is the result of
continued internally generated growth of business in the segment, primarily in
the medicare supplement and long term care lines, offset in part by a slight
deterioration in overall loss ratios for the segment.
The operating results for the Special Markets segment improved by
approximately 4% over 1999. This reflects the impact of a full year's results in
2000 from the companies acquired in 1999 compared to five months in 1999.
However, underwriting results for the segment were negatively impacted by a
deterioration of the loss ratios in the major medical line of business. Based,
in part by the poor performance of this block of business, and in an effort to
focus more on strategic lines, management decided to exit the major medical
business during 2000 and as a result, wrote off $1.4 million of deferred
acquisition costs relating to that line of business.
Operating income for the Administrative Services segment nearly doubled
in 2000 compared to 1999, primarily as a result of the acquisitions of AIAG in
January, 2000 and CHCS in August 2000.
The increase in the operating loss from the Corporate & Eliminations
segment reflects the inclusion of a full year of costs related to the
acquisition financing in 2000, compared to five months for 1999.
The effective tax rate for the Company was 30.8% for 2000 as compared
to 38.9% in 1999. The decrease in the tax rate was primarily due to the release
of valuation reserves on certain of the tax loss carryforwards which were not
considered necessary as a result of the increased profitability of the
Administrative Services segment.
YEARS ENDED DECEMBER 31, 1999 AND 1998
Consolidated net income after Federal income taxes increased by $7.5
million to $9.6 million ($0.34 per share) in 1999, compared to $2.2 million
($0.20 per share) in 1998. Operating income before realized gains and Federal
income taxes increased by $12.6 million to $16.3 million in 1999 compared to
$3.7 million in 1998.
The addition of the Career Agency segment, acquired in July, 1999 added
$12.2 million of operating income during 1999.
The Senior Market Brokerage segment improved by $1.8 million, compared
to 1998 as a result of internally generated growth combined with improvement in
overall loss ratios.
The Special Market segment improved by over $3.5 million, primarily as
the result of the companies acquired during 1999.
Results for the Administrative Services segment for 1999 were
consistent with 1998.
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The effective tax rate for the Company was 38.9% in 1999 as compared to
33.8% in 1998. The increase in the tax rate was primarily due to the addition of
the Canadian operations included in the Career Agency segment. The effective tax
rate on the Canadian operations was approximately 45%.
SEGMENT RESULTS - CAREER AGENCY
For the year ended December 31,
---------------------------------------
2000 1999 1998
-------- ------- -------
(in thousands)
Net premiums and policyholder fees:
Life and annuity $17,258 $ 7,198 $ --
Accident & Health 112,100 48,365 --
-------- ------- -------
Net premiums 129,358 55,563 --
Net investment income 31,714 12,133 --
Other income 647 228 --
-------- ------- -------
Total revenue 161,719 67,924 --
-------- ------- -------
Policyholder benefits 81,432 30,396 --
Interest credited to policyholders 1,657 437 --
Change in deferred acquisition costs (12,476) (2,919) --
Amortization of present value of future profits and
goodwill (584) (427) --
Commissions and general expenses, net of allowances 62,264 28,239 --
-------- ------- -------
Total benefits, claims and other deductions 132,293 55,726 --
-------- ------- -------
Segment operating income $29,426 $12,198 $ --
-------- ------- -------
YEAR ENDED DECEMBER 31, 2000 AND 1999
Operating income from the Career Agency segment increased by $17.2
million, reflecting the impact of a full year's results in 2000 compared to five
months in 1999.
REVENUES. Net premiums for the year fell by approximately 3% for the
segment compared to 1999 on an annualized basis. Canadian operations accounted
for approximately 36% of the net premiums for both 2000 and 1999. During the
year, the Company began to develop new products for the Career Agency sales
force which are based on the Senior Market Brokerage products. Additionally, the
Company was focused on the recruiting and training of new agents during the
year. Management expects that the impact of these efforts will begin to be
reflected in the Segment's results during the first half of 2001.
Net investment income increased by approximately 9% over 1999 on an
annualized basis. The increase results from the increase in the average invested
assets for the comparable periods. Average invested assets increased as a result
of earnings for the year, as well as the movement of the proceeds from certain
acquisition related transactions from short-term in 1999 to long-term
investments in 2000.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including
the change in reserves, increased by approximately 12% compared to 1999 on an
annualized basis. This was due to higher overall loss ratios.
The increase in deferred acquisition costs was appr