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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 2002
COMMISSION FILE #0-11321
UNIVERSAL AMERICAN FINANCIAL CORP.
(Exact name of registrant as specified in its charter)
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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 this Form 10-K or any
amendment to this Form 10-K. | _|
Indicate by check mark whether the registrant is an accelerated filer (as
defined in the Securities Exchange Act Rule 12b-2): Yes |X| No | |
The aggregate market value of all common equity held by non-affiliates of
the registrant as of March 3, 2003 was approximately $130,000,000.
The number of shares outstanding of the Registrant's Common Stock as of
March 3, 2003 was 53,272,351.
DOCUMENTS INCORPORATED BY REFERENCE
The Proxy Statement for the 2003 Annual Meeting is incorporated by
reference into Part II and Part III of this 10-K.
1
UNIVERSAL AMERICAN FINANCIAL CORP.
FORM 10-K
2002
CONTENTS
ITEM DESCRIPTION PAGE
PART 1 1 Business 3
2 Properties 25
3 Legal Proceedings 26
4 Submission of Matters to a Vote of Security Holders 26
PART II 5 Market for the Registrant's Common Stock and
Related Stockholder Matters 26
6 Selected Financial Data 28
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 30
7A Quantitative and Qualitative Disclosures about Market
Risk 52
8 Financial Statements and Supplementary Data 53
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 53
PART III 10 Directors and Executive Officers of the Registrant 54
11 Executive Compensation 56
12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 56
13 Certain Relationships and Related Transactions 57
14 Controls and Procedures 57
Part IV 15 Exhibits, Financial Statement Schedules and Reports
On Form 8-K 57
Signatures 59
Certifications 61
2
PART I
ITEM 1 - BUSINESS
FORWARD-LOOKING STATEMENTS
Certain statements in this report or incorporated by reference into this
report and oral statements made from time to time by our representatives
constitute "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995. 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 about development and distribution of our products,
investment spreads or yields, the impact of proposed or completed acquisitions,
the adequacy of reserves or the earnings or profitability of our 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 our 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. Whether or not actual results
differ materially from forward-looking statements may depend on numerous
foreseeable and unforeseeable risks and uncertainties, some of which relate
particularly to our business, such as our ability to set adequate premium rates
and maintain adequate reserves, our ability to compete effectively and our
ability to grow our business through internal growth as well as through
acquisitions. Other risks and uncertainties may be related to the insurance
industry generally or the overall economy, such as regulatory developments,
industry consolidation and general economic conditions and interest rates. We
disclaim any obligation to update forward-looking statements.
GENERAL
Universal American Financial Corp. ("the Company" or "Universal American")
was incorporated in the State of New York in 1981 as a life and accident &
health insurance holding company. Collectively, the Company's insurance
subsidiaries are licensed to sell life and accident & health insurance and
annuities in all fifty states, the District of Columbia and all the provinces of
Canada. These products are designed primarily for the senior and self-employed
markets. The principal insurance products are Medicare supplement, fixed benefit
accident and sickness disability insurance, long term care, home health care,
senior life insurance and fixed annuities. We distribute these products through
an independent general agency system and a career agency system. Our
administrative services company acts as a service provider for both affiliated
and unaffiliated insurance companies for senior market insurance and
non-insurance programs.
We have been able to achieve rapid, and profitable, growth as a result of
our focus on our core markets, enhanced by several acquisitions that have been
additive financially and strategically. Since 1999:
- Our net income has increased from $9.6 million to $30.1 million,
- Our gross premium has increased from $252.6 million to $586.7
million,
- Our total assets have grown from $1.2 billion to $1.4 billion, and
- Our stockholders' equity has grown from $133.9 million to $286.8
million.
SENIOR MARKET OPPORTUNITY
We believe that attractive growth opportunities exist in serving the
senior market. The population of persons over age 65 in the United States is
projected to grow from the current level of approximately 35 million to
approximately 70 million by 2030, according to the U.S. Census Bureau. The shift
in population toward individuals over age 65 presents significant opportunities
for us to sell our insurance products, especially supplemental health insurance.
Further, as health and medical technologies increase life expectancy, we believe
that seniors and their adult children will increasingly focus on elder care
needs and the services required, including insurance, to address those needs.
3
OUR OPERATING SEGMENTS
We currently manage our business through three principal business
segments: Senior Market Brokerage, Career Agency and Administrative Services. We
also report the corporate activities of our holding company in a separate
segment. During 2002 we modified the way we report segment information by
combining our previously defined Senior Market Brokerage and Special Markets
segments into a single segment, Senior Market Brokerage. Our decision to combine
the two segments was based on the significant reduction in the insurance in
force in the Special Markets segment as a result of our exit from the major
medical line of business. Information regarding each segment's revenue income or
loss before taxes and total assets is included in Note 21 to the financial
statements included in this Form 10-K.
SENIOR MARKET BROKERAGE
Our Senior Market Brokerage segment focuses on selling insurance products
designed for the senior market, including Medicare supplement, Medicare select,
long term care, senior life insurance and annuities through independent
marketing organizations and general agencies. This segment's operations are
conducted primarily by the following subsidiaries:
- American Pioneer Life Insurance Company ("American Pioneer")
- American Progressive Life & Health Insurance Company of New York
("American Progressive")
- Constitution Life Insurance Company ("Constitution")
CAREER AGENCY
Our career agency segment traditionally concentrated on selling fixed
benefit accident and sickness disability insurance and individual life insurance
products to the middle-income self-employed market. This segment has recently
expanded its focus to include senior market products as well. The producers in
our career agency segment are contracted to sell products only with our
companies; however, they may sell products of other companies through programs
sponsored by us. This segment's operations are conducted by the following
subsidiaries:
- Pennsylvania Life Insurance Company ("Pennsylvania Life")
- Penncorp Life Insurance Company (Canada) ("Penncorp Life (Canada)")
ADMINISTRATIVE SERVICES
Our administrative companies, primarily CHCS Services, Inc., provide
outsourcing services that support insurance and non-insurance products,
primarily for the senior market. CHCS Services, Inc. has emerged as a leading,
full-service administrator of senior insurance products and an innovator in
geriatric care management. We utilize state of the art technology and a national
network of highly trained health care professionals to provide the
administrative platform for these insurance and insurance-related products and
services. Currently, we provide services to more than 45 insurers and generated
fee income of $42.7 million in 2002 from both unaffiliated ($19.2 million) and
affiliated companies ($23.5 million).
CORPORATE
Our corporate segment reflects the activities of our holding company,
including the payment of interest on our debt, certain senior executive
compensation and the expense of being a public company.
4
OUR BUSINESS STRATEGY
The principal components of our business strategy are to:
- Develop and market competitive and innovative insurance products,
with an emphasis on the senior market in the U.S. and the self
employed market in Canada;
- Expand our brokerage and career distribution channels through
additional recruiting and geographic expansion;
- Build our fee-based administrative business in order to complement
our risk-based insurance business;
- Sharpen our focus on core business by exiting lines of business that
do not fit within our strategy or core competencies;
- Employ conservative risk management techniques, including
maintaining a high quality investment portfolio, disciplined pricing
and prudent use of reinsurance;
- Pursue selective acquisitions that fit our strategic and financial
criteria in order to supplement our internal growth; and
- Execute efficiently, especially in regard to integrating the
operations of companies and blocks of business that we acquire.
ACQUISITIONS, DIVESTITURES AND FINANCING ACTIVITY
Pending Acquisition
In December 2002, Pennsylvania Life entered into a definitive contract to
acquire Pyramid Life Insurance Company ("Pyramid Life") from Ceres Group, Inc.
for $56 million in cash. This transaction is subject to regulatory approvals and
other conditions and is scheduled to close by the end of the first quarter of
2003.
Pyramid Life specializes in providing health and life insurance products
to the senior market. These products include Medicare supplement, long term
care, life insurance and annuities. Pyramid Life markets its products in 26
states through a career sales force of over 1,100 career agents operating out of
29 Senior Solutions Sales Centers. As of the end of 2002, Pyramid Life had
approximately $110 million of premium in force and in excess of $114 million of
assets.
During 2002, Pyramid Life agents produced more than $25 million of
annualized new sales. We believe this acquisition will add further scale and
efficiencies to our operations in the rapidly expanding senior market. Following
a transition period, we plan to take advantage of our cost-effective and
efficient service center to administer the business; however, we will preserve
the marketing identity and quality service that has defined Pyramid Life.
Trust Preferred Transaction
In December 2002, a subsidiary trust of the Company issued $15.0 million
of floating rate trust preferred securities. These securities are due in 2032
and are not callable for the first five years. The floating rate is equal to the
three-month LIBOR plus 4.0%, currently 5.4%. Approximately $6.0 million of the
proceeds were used to augment the capital of our insurance subsidiaries and the
balance of approximately $9.0 million was retained at the parent company in
anticipation of funding the acquisition of Pyramid Life. In March 2003, a second
subsidiary trust of the Company issued $10.0 million of floating rate trust
preferred securities under terms similar to the above securities at a rate of
5.29%. The proceeds will be used to pay down a portion of the term loan and for
general corporate purposes.
5
Acquisition of Block of Business
In November 2002 we entered into an agreement with Nationwide Life
Insurance Company ("Nationwide") to acquire, through a 100% quota share
reinsurance agreement, Nationwide's individual Medicare supplement policies
representing approximately $20.0 million of annualized premium in force. In
connection with this transaction, administration of the business was transferred
to CHCS Services, Inc.
Equity Offering
In the third quarter of 2001, we completed a secondary equity offering in
which we sold 5.7 million shares of our common stock, with proceeds to the
Company of $26.0 million, net of expenses. In addition, 2.2 million shares were
sold by some of our shareholders as part of the offering. The primary reason for
the offering was to enhance the capital of our insurance subsidiaries to support
our growth and to improve our risk based capital ratios used by regulators and
rating agencies to evaluate the adequacy of capital of insurance companies. Out
of the proceeds of the offering, $9.3 million was contributed to the capital and
surplus of our insurance subsidiaries, $5.5 million was used to reduce the
intercompany debenture between our parent holding company and American
Progressive and the balance was held for general corporate purposes.
Acquisition of Administrative Service Companies
In November 2001, we acquired assets from Living Strategies, Inc., a
privately held company based in Bala Cynwyd, Pennsylvania, including certain
contracts, trademarks and proprietary web-based technology. Living Strategies is
a recognized provider of employer-sponsored elder care programs, providing
assistance and support to those dealing with the aging of their parents and
family members. As a result of the acquisition of the Living Strategies assets,
we have enhanced our technology infrastructure and expanded the audience for our
elder care management services.
In August 2000, we acquired Capitated HealthCare Services, Inc. ("CHCS") a
privately held administrator of long term care products located in Weston,
Florida. At the time of the acquisition, CHCS performed outsourcing services for
more than 30 insurance companies. This acquisition enhanced our expertise in the
long term care business.
In January 2000, we acquired CHCS Services, Inc., formerly American
Insurance Administration Group, Inc., a privately-held third party administrator
of senior health products located in Clearwater, Florida. At the time of the
acquisition, American Insurance Administration Group administered $125 million
of senior market premium. This acquisition strengthened our expertise and
capacity to administer senior market products.
1999 Acquisition
In July 1999, we acquired six insurance companies, including the insurance
subsidiaries that comprise our Career Agency segment, and other assets from
PennCorp Financial Group. This acquisition enhanced our prospects for internal
growth by increasing our scale, expanding our geographic reach and adding the
career agency marketing channel to supplement our senior market brokerage
marketing channel. We completed the integration of the acquired companies from
Raleigh, North Carolina into our existing locations in Toronto, Pensacola and
Orlando in February 2001.
Cancellation of Major Medical Insurance
In the fourth quarter of 2000, we decided to exit our individual major
medical business to the extent permitted by the policy forms. Of the $31.3
million of premium that was in force on December 31, 2000, approximately $1.6
million remained in force on December 31, 2002, which we are not able to cancel.
6
ADMINISTRATIVE SERVICES
We have built our administrative services capabilities through internal
development and acquisition. Through our wholly owned subsidiary, CHCS Services,
Inc., we provide outsourcing services that support insurance and non-insurance
products, primarily for the senior market. Our administrative services
operations are located in Pensacola and Weston, Florida. During 2002, we closed
our Clearwater office and consolidated its operations into Pensacola.
We perform a full range of administrative services for senior market
insurance products, primarily Medicare supplement and long term care, for both
affiliated and unaffiliated companies. The services include policy underwriting
and issuance, policy billing and collecting, telephone verification,
policyholder services, claims adjudication, clinical case management, care
assessment and referral to health care facilities.
We are also increasingly performing similar services, particularly in the
long term care area, for non-insurance products offered both by insurance and
non-insurance companies. For example, we have begun to market our Nurse
Navigator(SM) product, a non-insurance elder care service product that includes
health related information and referrals and access to nationwide networks of
geriatric care nurses and long term care providers available on a discounted
basis.
We utilize state of the art technology and a national network of highly
trained health care professionals to provide the administrative platform for
these insurance and insurance-related products and services. The information
technology includes imaging and workflow processes to ensure maximum efficiency
in policy issue, policy administration and claims processing. Our proprietary
network of registered nurses and social workers provides personalized support
and care for our senior programs nationwide. In addition, our proprietary
network of discount providers is an integral part of our geriatric care
management services. We have established a customer contact center that provides
around the clock access to our nurses on staff and can handle calls in several
different languages.
The following table shows the sources of our service fee revenue by type
of product:
2002 2001 2000
---- ---- ----
(in thousands)
Affiliated Revenue
Medicare supplement $19,322 $13,268 $ 8,467
Long term care 2,637 1,607 981
Nurse Navigator(TM) 1,089 272 --
Other health insurance 125 358 930
Life insurance 376 388 135
------- ------- -------
Total Affiliated Revenue 23,549 15,893 10,513
------- ------- -------
Unaffiliated Revenue
Medicare supplement 8,809 9,564 9,410
Long term care 8,544 5,577 2,725
Other health insurance 631 554 758
Non-insurance assistance 1,215 1,242 724
------- ------- -------
Total Unaffiliated Revenue 19,199 16,937 13,617
------- ------- -------
Total Administrative Service Revenue $42,748 $32,830 $24,130
======= ======= =======
7
Included in unaffiliated revenue are fees received from a reinsurer of
100% of certain business of our insurance subsidiaries, which amounted to $6.9
million and $7.8 million in 2002 and 2001. These fees, together with the
affiliated revenue, were eliminated in consolidation.
INSURANCE MARKETING AND DISTRIBUTION
We distribute our insurance products through both a traditional general
brokerage agency system and a career agency channel. The following table shows
our new sales (issued annualized premiums) by distribution channel and by major
product line for the three years ended December 31, 2002 on a gross basis
(before reinsurance) and a net basis (after reinsurance):
Gross Net/Retained %
---------------------------------------- -------------------------------------
Product 2002 2001 2000 2002 2001 2000
- ------- ---- ---- ---- ---- ---- ----
(In thousands) (In thousands)
SENIOR MARKET BROKERAGE
Medicare Supplement/Select $ 90,233 $103,044 $ 78,213 $46,019 $29,883 $19,553
Long Term Care 4,146 3,196 4,580 2,073 1,598 2,290
Senior Life 3,858 3,240 2,106 2,315 1,782 1,053
Annuity Premium Equivalents (1) 1,756 714 519 1,756 714 519
-------- -------- -------- ------- ------- -------
TOTAL SENIOR MARKET BROKERAGE 99,993 110,194 85,418 52,163 33,977 23,415
-------- -------- -------- ------- ------- -------
52% 31% 27%
CAREER AGENCY
Accident & Sickness 16,951 16,176 16,897 16,951 16,176 16,897
Medicare Supplement 1,826 276 -- 913 138 --
Long Term Care 3,610 3,702 3,853 1,805 1,851 1,927
Non-insurance Products 825 1,423 -- 825 1,423 --
Life Insurance 2,872 2,043 1,500 2,872 2,043 1,500
Annuity Premium Equivalents (1) 3,302 841 300 3,302 841 300
-------- -------- -------- ------- ------- -------
TOTAL CAREER AGENCY 29,386 24,461 22,550 26,668 22,472 20,624
-------- -------- -------- ------- ------- -------
91% 92% 91%
COMPANY TOTAL
Accident & Health 117,591 127,817 103,543 68,586 51,069 40,667
58% 40% 39%
Life 6,730 5,283 3,606 5,187 3,825 2,553
77% 66% 71%
Annuity Premium Equivalents (1) 5,058 1,555 819 5,058 1,555 819
-------- -------- -------- ------- ------- -------
100% 100% 100%
TOTAL $129,379 $134,655 $107,968 $78,831 $56,449 $44,039
======== ======== ======== ======= ======= =======
61% 42% 41%
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(1) Annuity premium equivalents are equal to $1.00 for every $10.00 of
annuity deposit received.
Beginning in 1998, many HMO's realized that their Medicare programs were
unprofitable and therefore decided to terminate these programs. As a result,
millions of seniors were involuntarily disenrolled from these programs. This
development contributed to our increased new sales of Medicare supplement
products in 2001 and 2000. Under applicable legislation, such dis-enrollees may
have the right to acquire Medicare supplement insurance without medical
underwriting or pre-existing condition limitations. As we expected, during 2002
new sales of our Medicare products have slowed since the HMO's are not
dis-enrolling members as much is as in prior years. We have continued to expand
geographically, and we have stepped up recruiting effort to augment our
production. Additionally, we have increased our retention on new Medicare
supplement business, in order to continue growing our net premium.
In 2002, two agents produced 6.4% and 5.8%, respectively, of our total
annualized new sales. No other agents produced more than 5.0% of our total
annualized new sales.
8
The following table shows our annuity deposits by distribution channel for
the three years ended December 31, 2002:
2002 2001 2000
---- ---- ----
(In thousands)
Senior Market Brokerage $17,561 $ 7,141 $5,188
Career Agency 33,018 8,407 3,000
------- ------- ------
TOTAL ANNUITY DEPOSITS $50,579 $15,548 $8,188
======= ======= ======
SENIOR MARKET BROKERAGE
This segment focuses on the sale of products designed for the senior
market such as Medicare supplement, Medicare select, long term care, senior life
insurance and annuities. We distribute these products through independent
marketing organizations and general agencies. These marketing organizations and
general agencies typically recruit and train their own agents, bearing all of
the costs incurred in connection with developing their organization. We now sell
our products through approximately 22,000 independent licensed agents in 33
states and have plans to recruit more agents and expand into additional states.
In 2002, this segment accounted for $455.7 million, or 78% of our consolidated
gross premiums and $141.2 million, or 53% of our consolidated net premiums
earned. New sales for this segment amounted to $100.0 million in 2002 and $110.2
million in 2001.
CAREER AGENCY
As part of the 1999 acquisition, we acquired a career agency sales force
that historically distributed fixed benefit accident and sickness disability
insurance and individual life insurance products to the self-employed market in
the United States and Canada. In contrast to independent agents, career agents
have an exclusive arrangement with us, and only sell products that we provide or
authorize. In order to maximize this distribution channel, we introduced our
senior market insured and non-insured products to the Career Agency sales force.
As of December 31, 2002, the career field force had 49 branch offices throughout
the United States and 15 branch offices in Canada, with approximately 730 agents
in the United States and 335 agents in Canada. In 2002, this segment accounted
for $125.4 million, or 47% of our net premiums earned. Approximately 39% of net
premiums earned for this segment were generated by our Canadian operations. The
career agency segment issued $29.4 million of new business in 2002, and $24.5
million in 2001.
The acquisition of Pyramid Life, when closed, will add another career
agency sales force, which specializes in providing health and life insurance
products to the senior market. These products include Medicare supplement,
long-term care, life insurance and annuities. Pyramid Life markets its products
in 26 states through a sales force of over 1,100 career agents operating out of
29 Senior Solutions Sales Centers. During 2002, Pyramid Life agents produced
more than $25 million of annualized new sales. We believe this acquisition will
add further scale and efficiencies to our operations in the rapidly expanding
senior market. Following a transition period, we plan to take advantage of our
cost-effective and efficient administrative services operation to administer the
business, however, we will preserve the marketing identity and quality service
that has defined Pyramid Life.
INSURANCE PRODUCTS
Our senior market brokerage segment focuses on our senior market products
(Medicare supplement, Medicare select, long term care, senior life insurance and
annuities). While our career agency segment had historically focused on fixed
benefit disability products, they are now increasing their focus on our senior
market products. We currently market the following products:
9
SENIOR MARKET PRODUCTS -- SUPPLEMENTAL HEALTH AND LONG TERM CARE
Our core supplemental health insurance products include various Medicare
supplement and Medicare select plans. We also offer various long term care plans
consisting of fully integrated plans and nursing home only plans. These products
typically are guaranteed renewable for the lifetime of the policyholder, which
means that we cannot cancel the policy, but can seek to increase premium rates
on existing and future policies issued based upon our actual claims 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
Under Federal and National Association of Insurance Commissioners ("NAIC")
model regulations, adopted in substantially all states, there are 11 standard
Medicare supplement plans (Plans A through J and a High Deductible Plan F).
These policies provide supplemental coverage for many of the medical expenses
that the Medicare program does not cover, such as deductibles, coinsurance and
specified losses that exceed the Federal program's maximum benefits. Plan A
provides the least extensive coverage, while Plan J provides the most extensive
coverage. Under NAIC regulations, Medicare insurers must offer Plan A, but may
offer any of the other plans at their option. Our insurance company subsidiaries
offer Medicare supplement policies primarily on plans A, B, C, D, F, G and High
Deductible F. In some areas, we also sell Medicare select policies in
conjunction with hospitals that contract with us to waive the Medicare Part A
deductible. We monitor the claim experience on our Medicare supplement and
Medicare select products and, when necessary, apply for rate increases in the
states in which we sell the products. Medicare supplement and Medicare select
issued gross premium amounted to $90.2 million in 2002 and $103.0 million in
2001, and were produced through our general agency system. The career agency
segment began to sell Medicare supplement and Medicare select products in 2001
and produced $1.8 million in 2002 and $0.3 million in 2001.
Long Term Care
Our long term care insurance products provide coverage, with limits
selected by the policyholders, for nursing home and assisted living care only
coverage, optional home health care 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. 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 we have developed a new nursing home-assisted living product
with optional home health care riders which we introduced in 2001. Issued
premium for these long term care products amounting to $4.1 million in 2002 and
$3.2 million in 2001, were produced through our general agency system. In
addition, our career agents began to sell these long term care products in 2000
and produced $3.6 million of issued premium in 2002 and $3.7 million of issued
premium in 2001.
SENIOR MARKET PRODUCTS -- SENIOR LIFE INSURANCE AND ANNUITIES
Senior Life
This series of low-face amount, simplified issue whole life products is
sold by both our senior market brokerage segment and our career agency segment.
Issued premium for these products was $3.9 million in 2002 and $3.2 million in
2001, and was produced primarily through the general agency system. In late
2000, our career agency segment began to sell senior life insurance and produced
$1.8 million of issued premium in 2002 and $1.2 million of issued premium in
2001.
10
Annuities
We market single and flexible premium deferred annuities primarily
focusing on the senior and retirement markets. Our currently marketed annuity
products have a minimum guaranteed interest rate of 3%, except for New York
which is 4%, and current credited interest rates that range from 3.75% to 8.05%.
We have the right to change the crediting rates at any time. In exercising our
right to change the interest rate, we take into account the current interest
rate environment and our relative competitive position. Our general agency
system produced $17.6 million of annuity deposits in 2002 and $7.1 million of
annuity deposits in 2001. Additionally, our career agency system produced $33.0
million of annuity deposits in 2002 and $8.4 million of annuity deposits in
2001.
CAREER AGENCY PRODUCTS
Fixed Benefit Accident and Health
Fixed benefit accident and health products provide three principal types
of benefits:
- disability -- fixed periodic payments to an insured who
becomes disabled and unable to work due to an accident or
sickness,
- hospital -- fixed periodic payments to an insured who becomes
hospitalized, and
- surgical -- fixed single payments that vary in amount for
specified surgical or diagnostic procedures.
Because the benefits we provide are fixed in amount at the time of policy
issuance and are not intended to provide full reimbursement for medical and
hospital expenses, payment amounts are not generally 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 our 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, our career agency segment 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 at an
increased premium on any expiration date, except for the final expiration date,
without evidence of insurability. Issued premium amounted to $0.5 million for
2002 and $0.3 million for 2001.
BUSINESS IN FORCE
As of December 31, 2002, the Company had $619.2 million of annualized life
and accident & health premium in force and $271.6 million in account values on
annuities and interest sensitive life products.
11
Our growth in direct, acquired and assumed annualized premium in force,
including only the portion of premiums on interest-sensitive products that is
applied to the cost of insurance, is shown in the following tables.
ANNUALIZED PREMIUM IN FORCE As of December 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Senior Market Brokerage
Medicare Supplement $423,983 $363,470 $264,417
Long Term Care 25,320 21,594 20,395
Other Senior Health 1,283 1,347 1,304
Other Health 10,435 14,547 40,062
Senior Life 12,082 11,363 10,341
Other Life 13,538 14,436 15,931
-------- -------- --------
Total Senior Market 486,641 426,757 352,450
-------- -------- --------
Career Agency
Accident & Sickness Disability 85,076 83,562 88,668
Hospital 14,938 16,229 16,635
Long Term Care 16,643 15,121 13,580
Medicare Supplement 833 -- --
Other Health 1,099 1,067 1,050
Total Life 13,940 13,233 13,234
-------- -------- --------
Total Career Agency 132,529 129,212 133,167
-------- -------- --------
Total Accident & Health 579,610 516,937 446,111
Total Life 39,560 39,032 39,506
-------- -------- --------
Total Consolidated $619,170 $555,969 $485,617
======== ======== ========
ACCOUNT VALUES ON INTEREST-SENSITIVE PRODUCTS
The following table shows all outstanding account values for
interest-sensitive products as of December 31, 2002, 2001 and 2000. For these
products, we earn income on the difference between investment income that we
earn on our invested assets and interest credited to these account balances.
As of December 31,
--------------------------------------
2002 2001 2000
-------- -------- --------
(In thousands)
Annuities $134,860 $ 99,632 $ 98,053
Interest-sensitive Life 136,718 137,110 135,362
-------- -------- --------
Grand Total $271,578 $236,742 $233,415
======== ======== ========
12
GEOGRAPHICAL DISTRIBUTION OF PREMIUM
Through our nine insurance subsidiaries, we are licensed to market our
products in all fifty states, the District of Columbia and in all the provinces
of Canada. The following table shows the geographical distribution of the direct
cash premium and annuity deposits collected, as reported on a statutory basis to
the regulatory authorities for the full year of 2002:
Collected
State/Region Premium % of Total
------------ ------- ----------
(In thousands)
Florida 117,507 19.3%
Texas 62,521 10.3%
New York 48,111 7.9%
Wisconsin 41,665 6.8%
Pennsylvania 34,754 5.7%
Canada 31,372 5.2%
Ohio 29,370 4.8%
Indiana 27,102 4.5%
Connecticut 19,239 3.2%
Mississippi 14,011 2.3%
Missouri 13,027 2.1%
Georgia 12,184 2.0%
North Carolina 11,016 1.8%
Louisiana 10,753 1.8%
Oklahoma 10,191 1.6%
------- -----
Subtotal 482,823 79.3%
All other 125,996 20.7%
------- -----
Total 608,819 100.0%
======= =====
REINSURANCE
We enter into reinsurance arrangements with unaffiliated reinsurance
companies to limit our exposure on individual claims, and to limit or eliminate
risk on our non-core or under-performing blocks of business. The table below
details our gross annualized premium in force, the portion that we ceded to
reinsurers and the net amount that we retained as of December 31, 2002.
ANNUALIZED PREMIUM IN FORCE As of December 31, 2002 2001
------------------------------------------------------ ----------
Gross Ceded Net % Retained % Retained
-------- -------- -------- ---------- ----------
(In thousands)
Senior Market Brokerage
Medicare Supplement $423,983 $322,442 $101,541 24% 20%
Long Term Care 25,320 10,732 14,588 58% 60%
Other Senior Health 1,283 290 993 77% 78%
Other Health 10,435 6,819 3,616 35% 51%
Senior Life 12,082 5,059 7,023 58% 64%
Other Life 13,538 1,086 12,452 92% 92%
-------- -------- --------
Total Senior Market 486,641 346,428 140,213 29% 27%
-------- -------- --------
Career Agency
Accident & Sickness Disability 85,076 -- 85,076 100% 100%
Hospital 14,938 -- 14,938 100% 100%
Long Term Care 16,643 3,000 13,643 82% 86%
Medicare Supplement 833 416 417 50% --%
Other Health 1,099 -- 1,099 100% 100%
Total Life 13,940 -- 13,940 100% 100%
-------- -------- --------
Total Career Agency 132,529 3,416 129,113 97% 98%
-------- -------- --------
Total Accident & Health 579,610 343,699 235,911 41% 40%
Total Life 39,560 6,145 33,415 84% 86%
-------- -------- --------
Total Consolidated $619,170 $349,844 $269,326 43% 43%
======== ======== ========
13
We are obligated to pay claims in the event that any reinsurer to whom we
have ceded an insured claim fails to meet its obligations under the reinsurance
agreement. As of December 31, 2002, all of our primary reinsurers were rated "A"
or better by A.M. Best. We do not know of any instances where any of our
reinsurers has been unable to pay any policy claims on any reinsured business.
In addition to the reinsurance agreements discussed below by segment, we
reinsure portions of the coverage of our life insurance products to unaffiliated
reinsurance companies under various reinsurance agreements, which allows us to
write policies in amounts larger than the risk we are willing to retain on any
one life. Our mortality risk retention limit on each policy varies between
$25,000 and $100,000.
Our reinsurance agreements are generally 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. There is no
assurance that if any of our reinsurance agreements were canceled we would be
able to obtain other reinsurance arrangements on satisfactory terms.
SENIOR MARKET BROKERAGE
We reinsure most of our Senior Market Brokerage products to unaffiliated
reinsurers under various quota share agreements. Under these reinsurance
agreements, we reinsure a portion of the premiums earned, claims incurred and
commissions on a pro rata basis and receive additional expense allowances for
policy issue and administration and premium taxes. Medicare supplement premium
in force is reinsured under quota share reinsurance agreements ranging from 50%
to 75% based upon geographic distribution. Effective January 1, 2003, new
Medicare supplement premium will be reinsured under quota share reinsurance
agreements of 25% or 50% based upon the geographic distribution. We have also
acquired various blocks of Medicare supplement premium, which we reinsure under
quota share reinsurance agreements ranging from 50% to 100%. Our long term care
products currently produced are reinsured at percentages averaging 50%, while
the long term care business acquired in 1999 is 100% retained. Senior life
insurance products currently being issued are reinsured under 50% quota share
reinsurance agreements, except for certain states where our retention is 100%.
We have 50% quota share and excess of loss reinsurance agreements with
unaffiliated reinsurance companies on our medical insurance policies to reduce
the liability on individual risks to amounts ranging between $25,000 and
$325,000 per year. Under these treaties, we perform all the policy
administration and receive various allowances for commission and expenses on the
ceded portion of the premium. Excess of loss reinsurance passes the risk of
losses over a specified amount to the reinsurer, effectively capping our
exposure on any single claim to the specified amount. The major medical business
acquired in 1999 is 100% retained but has an excess of loss reinsurance
agreement limiting the liability on an individual risk to $325,000 per year.
CAREER AGENCY
Currently, we retain 100% of all life and health business issued in our
Career Agency segment other than the long term care and Medicare supplement
products, which we reinsure on a 50% quota share basis. We have excess of loss
reinsurance agreements to reduce our liability on individual risks for home
health care policies to $250,000. For other long term care policies issued in
the U.S. after 1999, we have reinsurance agreements which cover 100% of the
benefits on claims after the third year.
ADMINISTRATION OF REINSURED BLOCKS OF BUSINESS
We generally retain the administration for 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, we also receive allowances from the
reinsurers as compensation for our administration.
14
UNDERWRITING PROCEDURES
Premiums charged on insurance products are based, in part, on assumptions
about expected mortality and morbidity experience. We have adopted and follow
detailed uniform underwriting procedures designed to assess and quantify various
insurance risks before issuing individual life insurance, health insurance
policies and annuity policies to individuals. These procedures are generally
based on industry practices, reinsurer underwriting manuals and our prior
underwriting experience. To implement these procedures, our insurance company
subsidiaries employ an experienced professional underwriting staff.
Applications for insurance are reviewed on the basis of the answers that
the customer provides 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, we use investigative
services to supplement and substantiate information. For certain coverages, we
may verify information with the applicant by telephone. After reviewing the
information collected, we either issue the policy as applied for on a standard
basis, issue the policy with an extra premium charge due to unfavorable factors,
issue the policy excluding benefits for certain conditions, either permanently
or for a period of time, or reject the application. For some of our coverages,
we have 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. Under
regulations promulgated by the NAIC and adopted as a result of the Omnibus
Budget Reconciliation Act of 1990, we are prohibited from using medical
underwriting criteria for our Medicare supplement policies for certain
first-time purchasers and for dis-enrollees from Health Maintenance
Organizations (HMO's). If a person applies for insurance within six months after
becoming eligible by reason of age, or disability in some circumstances, the
application may not be rejected due to medical conditions. For other prospective
Medicare supplement policyholders, such as senior citizens who are purchasing
our products, the underwriting procedures are limited based upon standard
industry practices. In New York and some other states, some of our products,
including Medicare supplement, are subject to guaranteed issue "Community
Rating" laws that severely limit or prevent underwriting of individual
applications. See "Regulation" section of this document.
RESERVES
In accordance with applicable insurance regulations, we have established,
and carry as liabilities in our statutory financial statements, actuarially
determined reserves that are calculated to satisfy our policy and contract
obligations. Reserves, together with premiums to be received on outstanding
policies and contracts and interest at assumed rates on such amounts, are
calculated to be sufficient to satisfy policy and contract obligations. The
actuarial factors used in determining reserves for life insurance policies are
based on statutorily prescribed mortality tables and interest rates. In
addition, reserves for accident and health insurance policies use prescribed or
permitted morbidity tables. 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 our estimate for claims that have been
incurred but have not yet been reported.
The reserves reflected in our consolidated financial statements are
calculated in accordance with GAAP. These reserves are determined based on our
best estimates of mortality and morbidity, persistency, expenses and investment
income. We use 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 Note 2
to our consolidated financial statements.
When we acquire blocks of insurance policies or insurers owning blocks of
policies, our assessment of the adequacy of the transferred policy liabilities
is subject to risks and uncertainties. With acquired and existing businesses, we
may from time to time need to increase our claims reserves significantly in
excess of those estimated. An inadequate estimate in reserves could have a
material adverse impact on our results of operations or financial condition.
15
COMPETITION
The life and accident and health insurance industry in North America is
highly competitive. We compete 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, larger and more diversified
portfolios of life and health insurance policies, larger agency sales operations
and higher ratings than we do. In addition, it has become increasingly difficult
for smaller and 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 ratings and financial size of companies.
We believe we can meet these competitive pressures by offering a high
level of service and accessibility to our field force and by developing
specialized products and marketing approaches. We also believe that our policies
and premium rates are generally competitive with those offered by other
companies selling similar types of products in the same jurisdictions.
RATINGS
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 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. In November
2001, A.M. Best upgraded the ratings for our American Pioneer, American
Progressive, Constitution Life, Pennsylvania Life and Penncorp Life (Canada)
subsidiaries to "B++" from "B+". In addition, A.M. Best reaffirmed the rating
for our Union Bankers subsidiary at "B+". In October 2002, A.M. Best assigned a
positive outlook to these companies. These ratings mean 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 also reaffirmed the rating for our Peninsular
Life subsidiary at "FPR5," which is based primarily on a quantitative evaluation
of Peninsular Life's financial strength and operating performance. Currently,
Peninsular has no business in force and is available for sale. A.M. Best does
not rate our other insurance company subsidiaries.
In March 2002, Standard & Poor's assigned its "BBB+" counterparty credit
and financial strength ratings to our American Pioneer, American Progressive,
Pennsylvania Life and Penncorp Life (Canada) subsidiaries. In December 2002,
Standard and Poor's affirmed these ratings. This rating means that in Standard &
Poor's opinion, these companies have good financial security characteristics,
but are more likely to be affected by adverse business conditions than are
insurers that are rated higher by Standard & Poor's. A plus (+) or minus (-)
shows Standard & Poor's opinion of the relative standing of the insurer within a
rating category.
Our insurance company subsidiaries are not currently rated by Moody's
Investors Service or Duff and Phelps rating organizations. Although a higher
rating by A.M. Best, Standard & Poor's or another insurance rating organization
could have a favorable effect on our business, we believe that our marketing has
enabled, and will continue to enable, our insurance company subsidiaries to
compete effectively.
16
INVESTMENTS
Our investment policy is to balance the portfolio duration to achieve
investment returns consistent with the preservation of capital and maintenance
of liquidity adequate to meet payment of policy benefits and claims. We invest
in assets permitted under the insurance laws of the various jurisdictions in
which we operate. Such laws generally prescribe the nature, quality of and
limitations on various types of investments that may be made. We currently
engage the services of two investment advisors under the direction of the
management of the Company and our insurance company subsidiaries and in
accordance with guidelines adopted by the Investment Committees of their
respective boards of directors. Conning Asset Management Company manages our
fixed maturity portfolio in the United States, and MFC Global Investment
Management manages our Canadian fixed maturity portfolio.
The following table summarizes the composition of our investment portfolio
by carrying value (which is an estimate of fair value) as of December 31, 2002
and 2001:
INVESTMENT PORTFOLIO
December 31, 2002 December 31, 2001
------------------------------------- -------------------------------------
Percent of Percent of
Carrying Value Total Carrying Value Total
(Fair Value) Carrying Value (Fair Value) Carrying Value
-------------- -------------- -------------- --------------
(In thousands)
Fixed Maturity Securities:
U.S. Government and
Government agencies (1) $229,153 22.9% $131,696 15.0%
Mortgage-backed (1) 66,131 6.6% 56,267 6.4%
Asset-backed 60,378 6.0% 88,977 10.1%
Foreign securities (2) 176,450 17.7% 157,752 18.0%
Investment grade corporates 400,309 40.0% 357,292 40.6%
Non-investment grade corporates 2,529 0.3% 7,234 0.8%
-------- ----- -------- -----
Total fixed maturity securities 934,950 93.5% 799,218 90.9%
Cash and cash equivalents 36,754 3.7% 47,990 5.5%
Other Investments:
Policy loans 23,745 2.4% 24,043 2.7%
Equity securities 1,645 0.2% 4,199 0.5%
Other invested assets 2,808 0.3% 3,773 0.4%
-------- ----- -------- -----
Total cash and invested assets $999,902 100.0% $879,223 100.0%
======== ===== ======== =====
- ----------
(1) U.S. Government and government agencies include GNMA and FMNA
mortgage-backed securities.
(2) Primarily Canadian dollar denominated bonds supporting our Canadian
insurance reserves.
17
The following table shows the distribution of the contractual maturities
of our portfolio of fixed maturity securities by carrying value as of December
31, 2002. 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 $ 45,693 4.9%
Due after 1 year through 5 years 139,343 14.9%
Due after 5 years through 10 years 330,086 35.3%
Due after 10 years 156,016 16.7%
Asset-backed securities 60,378 6.5%
Mortgage-backed securities 203,434 21.7%
--------- -----
Total $ 934,950 100.0%
========= =====
The following table shows the distribution of the ratings assigned by
Standard & Poors Corporation to the securities in our portfolio of fixed
maturity securities as of December 31, 2002 and 2001:
DISTRIBUTION OF FIXED MATURITY SECURITIES BY RATING
December 31, 2002 December 31, 2001
----------------------------- ----------------------------
(In thousands)
Carrying % of Carrying % of
Standard & Value Total Value Total
Poor's (Estimated Fixed (Estimated Fixed
Rating Fair Value) Investment Fair Value) Investment
--------------- ----------- ---------- ----------- ----------
AAA $ 389,447 41.6% $ 259,847 32.5%
AA 92,734 9.9% 99,222 12.4%
A 346,538 37.1% 318,899 39.9%
BBB 100,965 10.8% 113,500 14.2%
BB 2,124 0.2% 5,008 0.7%
B 2,747 0.3% 2,603 0.3%
CCC and below 395 0.1% 139 --
--------- ----- --------- -----
Total $ 934,950 100.0% $ 799,218 100.0%
========= ===== ========= =====
At December 31, 2002 99.4% of our fixed maturity investments were
"investment grade". As of December 31, 2001, 99.0% of our fixed maturity
investments were "investment grade". "Investment grade" securities are those
rated "BBB-" or higher by Standard & Poor's Corporation or "Baa3" or higher by
Moody's Investors Service. This included approximately $263.8 million, as of
December 31, 2002 and $239.9 million, as of December 31, 2001, of collateralized
mortgage obligations secured by residential mortgages and asset-backed
securities, representing approximately 28.2% of our fixed maturity portfolio as
of December 31, 2002 and 30% of our fixed maturity portfolio as of December 31,
2001. Some 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.
18
Fixed maturity securities with a less than investment grade rating had
aggregate carrying values of $5.3 million as of December 31, 2002 and $7.8
million as of December 31, 2001, amounting to 0.6% of total investments as of
December 31, 2002 and 1.0% of total investments as of December 31, 2001. These
securities represented 0.4% of total assets as of December 31, 2002 and 0.6% of
total assets as of December 31, 2001. Our holdings of less than investment grade
fixed maturity securities are diversified and the largest investment in any one
such security as of December 31, 2002 was $2.4 million, which was less than 0.2%
of total assets. We wrote down the value of some of our fixed maturity
portfolio's securities, considered to have been subject to an
other-than-temporary decline in value, by $10.6 million in the year ended
December 31, 2002 (primarily as a result of the impairment of our WorldCom
bonds, which were disposed of in the third quarter of 2002 at a price
approximating their carrying value after the other than temporary decline was
recognized) and $4.2 million in the year ended December 31, 2001, which were
included in net realized gains (losses) on investments in our consolidated
statements of operations.
INVESTMENT INCOME
Investment income is an important part of our total revenues and
profitability. We cannot predict the impact that changes in future interest
rates will have on our financial statements.
The following table shows the investment results of our total invested
asset portfolio, for the three years ended December 31, 2002:
Years Ended December 31,
-----------------------------------------
2002 2001 2000
--------- --------- --------
(In thousands)
Total cash and invested assets, end of period $ 999,902 $ 879,223 $824,930
========= ========= ========
Net investment income $ 57,716 $ 57,812 $ 56,945
========= ========= ========
Yield on average cash and investments 6.12% 6.78% 6.88%
========= ========= ========
Net realized investment gains (losses) on the
sale of securities (including other-than-
temporary declines in market value) $ (5,083) $ 3,078 $ 146
========= ========= ========
REGULATION
General
Our insurance company subsidiaries, like other insurance companies, are
subject to the laws, regulations and supervision of the jurisdictions in which
they are domiciled. The purpose of those laws and regulations is primarily to
provide safeguards for policyholders rather than to protect the interest of
shareholders.
The following table sets forth the domiciles of our insurance company
subsidiaries.
NEW YORK
American Progressive Life & Health
Insurance Company of New York
FLORIDA
American Pioneer Life Insurance Company
Peninsular Life Insurance Company
PENNSYLVANIA
Pennsylvania Life Insurance Company
TEXAS
American Exchange Life Insurance Company
Constitution Life Insurance Company
Marquette National Life Insurance Company
Union Bankers Insurance Company
CANADA
Penncorp Life Insurance Company
19
Pennsylvania Life, Constitution Life, Union Bankers, American Pioneer and
American Progressive are subsidiaries of American Exchange. Universal American
contributed the common stock of American Pioneer and American Progressive to
American Exchange during 2002. Marquette is a subsidiary of Constitution Life.
Peninsular Life is a subsidiary of American Pioneer. As part of its change in
ownership from American Exchange to American Pioneer, Peninsular Life
re-domesticated to Florida from North Carolina effective December 31, 2000.
Each of our insurance company subsidiaries is also subject to regulation
and supervision by the insurance department in each of the jurisdictions in
which they are admitted and authorized to transact business. Such regulation and
supervision by the insurance departments covers, among other things, the
declaration and payment of dividends by our insurance company subsidiaries, the
setting of rates to be charged for some types of insurance, the granting and
revocation of licenses to transact business, the licensing of agents, the
regulation and monitoring of market conduct and claims practices, the approval
of forms, the establishment of reserve and minimum surplus requirements, the
regulation of maximum commissions payable, the mandating of some insurance
benefits, and the form and content of financial statements required by statute.
A failure to comply with legal or regulatory restrictions may subject us to a
loss of a right to engage in some businesses or an obligation to pay fines or
make restitution, which may affect our profitability.
Most jurisdictions mandate minimum benefit standards and loss ratios for
accident and health insurance policies. Generally we are required to maintain,
with respect to our individual long term care policies, minimum anticipated loss
ratios over the entire period of coverage. With respect to our Medicare
supplement policies, generally we are required to attain and maintain an actual
loss ratio, after three years, of not less than 65 percent of premium. We
provide, to the insurance departments of all states in which we conduct
business, annual calculations that demonstrate compliance with required loss
ratio standards for both long term care and Medicare supplement insurance. We
prepare these calculations utilizing statutory lapse and interest rate
assumptions. In the event we fail to maintain minimum mandated loss ratios, our
insurance company subsidiaries could be required to provide retrospective
refunds or prospective rate reductions. We believe that our insurance company
subsidiaries currently comply with all applicable mandated minimum loss ratios.
In addition, we actively review the loss ratio experience of our products and
apply to the respective insurance departments for rate increases when we
determine one is needed. We cannot guarantee that we will receive the rate
increases we request.
Under Federal and NAIC model regulations, adopted in substantially all
states, there are 11 standard Medicare supplement plans (Plans A through J and a
High Deductible Plan F). Plan A provides the least extensive coverage, while
Plan J provides the most extensive coverage. Under NAIC regulations, Medicare
insurers must offer Plan A, but may offer any of the other plans at their
option.
Every insurance company that is a member of an "insurance holding company
system" generally is required to register with the insurance regulatory
authorities in its domicile state and file periodic reports concerning its
relationships with its 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 maintained so as to clearly and accurately disclose the precise
nature and details of any such transactions.
Each of our insurance company subsidiaries is required to file detailed
reports with the insurance department of each jurisdiction 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 NAIC, our
insurance company subsidiaries are examined periodically by examiners of each
company's domiciliary state and by representatives (on an "association" or
"zone" basis) of the other states in which they are licensed to do business.
There are no examinations currently in progress.
Many states require deposits of assets by insurance companies for the
protection of policyholders either in those states or for all policyholders.
These deposited assets remain part of the total assets of the company. As of
December 31, 2002, securities totaling $35.3 million, representing approximately
3.7% of the carrying value of our total investments, were on deposit with
various state treasurers or custodians. As of December 31, 2001, securities
totaling $32.4 million, representing approximately 3.9% of total
20
investments, were on deposit. These deposits must consist of securities that
comply with the standards established by the particular state.
Penncorp Life, our Canadian domiciled subsidiary, is subject to provincial
regulation and supervision in each of the provinces of Canada in which it
conducts business. Provincial insurance regulation is concerned primarily with
the form of insurance contracts and the sale and marketing of insurance and
annuity products, including the licensing and supervision of insurance marketing
personnel. Individual annuity products and the underlying segregated funds to
which they relate are subject to guidelines adopted by the Canadian Council of
Insurance Regulators and incorporated by reference into provincial insurance
regulations. These guidelines govern a number of matters relating to the sale of
these products and the administration of the underlying segregated funds. During
the first quarter of 2002, the Canadian Branch of Pennsylvania Life was merged
into Penncorp Life, consolidating our Canadian operations into a single entity.
This transaction was approved by the Office of the Superintendent of Financial
Institutions, in Canada, and the Pennsylvania Department of Insurance.
Codification of Statutory Accounting Practices
In 1998, the NAIC approved a codification of statutory accounting
principles, which became effective January 1, 2001 and serves as a comprehensive
and standardized guide to statutory accounting principles. The adoption of the
codification increased the capital and surplus of our U.S. insurance
subsidiaries by approximately $11.0 million at January 1, 2001, due primarily to
the recognition of certain loss carryforwards and income tax treatment of policy
acquisition costs as deferred tax assets.
Other Insurance Regulatory Changes
The NAIC and state insurance regulators are 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 laws on
specific topics as follows:
- investment reserve requirements;
- risk-based capital standards;
- codification of insurance accounting principles;
- additional investment restrictions;
- restrictions on an insurance company's ability to pay dividends; and
- product illustrations.
The NAIC is currently developing new model laws or regulations, including
product design standards and reserve requirements. While the Federal government
currently does not regulate the insurance business directly, Federal legislation
and administrative policies in a number of areas, such as Medicare, 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 our operations or the operations of our insurance company subsidiaries.
Since 1993, New York State has required that all health insurance sold to
individuals and groups with less than 50 employees be offered on an open
enrollment and community rated basis. 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. 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 Medicare supplement policies actively
marketed by American Progressive in New York State and some of its in force
business are subject to the community rating rules. Similar legislation is in
effect for certain products in other states. The extension of such legislation
to other states where we offer significant medically underwritten health
insurance might cause us to reconsider our health care coverage offerings in any
such state.
21
Long Term Care Rate Stabilization
In 2000, the NAIC adopted a model law intended to address the issue of the
rising cost of long term care insurance and other matters. Rate stabilization
laws have been adopted in a number of states. The Company is complying with the
laws as they are adopted by filing new policy forms. Insurers now have to
certify that rates will not be increased in moderately adverse circumstances.
Dividend Restrictions
American Progressive is a New York insurance company. New York State
Insurance Law provides that the declaration or payment of a dividend by American
Progressive requires the approval of the New York Superintendent of Insurance.
Management expects that no dividend would be approved until American Progressive
had generated sufficient statutory profits to offset its negative unassigned
surplus.
Pennsylvania Life is a Pennsylvania insurance company and American
Exchange, Constitution, Marquette and Union Bankers are Texas insurance
companies. Pennsylvania and Texas insurance law provides that 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 with 30 days advance notification to the
insurance department. Accordingly, Pennsylvania Life would be able to pay
ordinary dividends of up to $10.6 million to American Exchange (its direct
parent) without the prior approval from the Pennsylvania Insurance Department in
2003. American Exchange, Constitution, Marquette and Union Bankers had negative
earned surplus at December 31, 2002 and would not be able to pay dividends in
2003 without special approval.
American Pioneer and Peninsular are Florida insurance companies. Florida
State insurance law provides that 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 and Peninsular had
negative unassigned surplus and would not be able to pay dividends in 2003
without special approval.
Penncorp Life (Canada) is a Canadian insurance company. Canadian law
provides that 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. Accordingly, we anticipate that Penncorp Life (Canada) will be able to
pay dividends of up to $6.6 million to Universal American in 2003.
Dividends Paid
During the year ended December 31, 2002, Pennsylvania Life paid ordinary
dividends to American Exchange totaling $3.0 million. Penncorp Life (Canada)
paid dividends to Universal American totaling $5.9 million during 2002. CHCS
Services, Inc. also paid dividends to Universal American totaling $9.1 million
in 2002.
22
During the year ended December 31, 2001, Union Bankers paid an ordinary
dividend to American Exchange of $1.7 million. Union Bankers also distributed
its investment in the common stock of Marquette to American Exchange in the form
of an extraordinary dividend. Additionally, Peninsular paid an extraordinary
dividend of $1.9 million to American Pioneer in 2001. CHCS Services, Inc. also
paid dividends to Universal American totaling $9.3 million in 2001.
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.
Risk-Based Capital Requirements
The NAIC's risk-based capital requirements for insurance companies adopted
by state regulators 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 risk-based capital
thresholds, with increasing degrees of regulatory scrutiny or intervention
provided for companies in categories of lesser risk-based capital compliance.
Our Canadian domiciled subsidiary, Penncorp Life, is subject to minimum
continuing capital and surplus requirements, which Canadian regulators use to
assess financial strength and to determine when regulatory intervention is
needed. As of December 31, 2002 all of our U.S. insurance company subsidiaries
maintained ratios of total adjusted capital to risk-based capital in excess of
the authorized control level and Penncorp Life maintained minimum continuing
capital and surplus requirement ratios in excess of minimum requirements.
However, should our insurance company subsidiaries' risk-based capital position
decline in the future, their continued ability to pay dividends and the degree
of regulatory supervision or control to which they are subjected might be
affected.
Guaranty Association Assessments
Our insurance company subsidiaries can be required, under solvency or
guaranty laws of most jurisdictions 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 premium
taxes. Our insurance company subsidiaries have not incurred any significant
costs of this nature. The likelihood and amount of any future assessments is
unknown and is beyond our control.
Health Care Reform
From time to time, numerous proposals have been considered, and in some
cases enacted, in Congress and the state legislatures to reform aspects of the
health care financing system.
The Health Insurance Portability and Accountability Act of 1996 ("HIPAA"),
a significant federal health care financing reform, restricted the ability of
insurers to utilize medical underwriting and pre-existing condition provisions
in health insurance policies issued to persons who were previously insured under
qualifying policies. These changes affect only a small part of the coverages we
write, but may have an adverse effect on them. HIPAA also mandates the adoption
of standards for the exchange of electronic health information and contains
privacy requirements that will govern the handling, use and security of
protected customer information, which will become effective in stages in 2002
through 2003. We have implemented some of the changes in our business procedures
needed to comply with these requirements, and are in the process of implementing
others. We have met the requirements effective in 2002 and anticipate that we
will meet the requirements which become effective in 2003.
On the state level in 2000, the NAIC amended its Model Long Term Care
Insurance Regulation to include provisions intended to assure that rates on long
term care insurance policies, under which the insurer reserves the right to
increase premiums, are initially set high enough to make such increases
unlikely. This amendment has thus far been adopted only in a number of some
states where we sell, or intend to sell, such policies, and may become more
widely adopted. Where it is adopted, these rules
23
could increase the cost of policies sold by us and by our competitors. We have
not determined the impact this model regulation could have on our long term care
insurance business.
Some states have enacted, and others states are considering, small group
insurance and rating reforms, which generally limit the ability of insurers and
health plans to use risk selection as a method of controlling costs for small
group businesses. These laws may generally limit or eliminate use of
pre-existing condition exclusions, experience rating, and industry class rating
and limit the amount of rate increases from year to year.
Congress and various states are considering some form of the "Patients'
Bill of Rights." This legislation, if enacted, is designed to provide consumers
more freedom of choice in the selection of doctors, facilities, and treatments.
Although the bill was originally conceived to regulate health maintenance
organizations, it will affect all facets of the nation's health care delivery
system, including insurers. The pending federal legislation, known as the
Bipartisan Patient Protection Act of 2001:
- requires a more stringent timeframe for claims review and
processing, utilization review and internal and external appeals
processes;
- provides that insureds have greater access to non-formulary drugs,
clinical trials, physicians, specialists and emergency care; and
- allows insureds to bring suit after exhaustion of the administrative
appeals process.
These changes, if enacted, are expected to result in higher total medical costs,
which could encourage more partnerships and associations between medical
providers and insurers to control costs, more community-based health
organizations, and greater use of higher deductibles to lower insurance costs
and reduce administrative expenses of smaller claims.
Proposals for further federal reforms have included, among other things,
restricting coverage of deductible and co-payments on Medicare supplement
policies, expansion of Medicare to provide prescription drug benefits, provide
coverage to persons under age 65 and employer-based insurance systems,
subsidizing premiums for lower income people and programs, regulating policy
availability, affordability of public and private programs standardization of
major medical or long term care coverages, imposing mandated or target loss
ratios or rate regulation, and requiring the use of community rating or other
means that further limit the ability of insurers to differentiate among risks,
or mandating utilization review or other managed care concepts to determine what
benefits would be paid by insurers.
In addition to federal regulation, many states have enacted, or are
considering, various health care reform statutes. These proposed reforms relate
to, among other things, managed care practices, such as waiting period
restrictions on pre-existing conditions, credit for certain prior coverage, and
limitations on rate increases and guaranteed renewability for small business
plans and policies for individuals. Most states have also enacted patient
confidentiality laws that prohibit the disclosure of confidential medical
information, some of which, as permitted by HIPAA, are more restrictive than
HIPAA's rules protecting health information privacy.
These or other reform proposals could necessitate revisions in our
Medicare supplement products, and could increase or decrease the level of
competition among health care insurers and could significantly affect our health
insurance business, although it is not possible to predict which proposals will
be adopted and what their effect will be.
Other potential initiatives, designed to tax insurance premiums or shift
medical care costs from government to private insurers, could affect our
business, perhaps adversely.
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 our business.
A portion of our insurance business is the sale of deferred annuities and
life insurance products, which are attractive to purchasers in part because
policyholders generally are not subject to Federal
24
income tax on increases in the value of an annuity or life and health 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 our ability to sell the affected products in the future. We
are not aware that Congress is actively considering any legislation that would
reduce or eliminate the tax advantages of annuities or life or health insurance.
However, it is possible that the tax treatment of annuities or life or health
insurance products could change by legislation or other means, such as Internal
Revenue Service regulations or judicial decisions.
Other potential changes in insurance and tax laws and regulations could
also have a material adverse effect on the operations of insurance companies.
Examples of potential regulatory developments that 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. In addition, the
administration of insurance regulations is typically vested in state agencies
that have broad powers and are concerned primarily with the protection of
policyholders.
EMPLOYEES
As of March 3, 2003, we employed approximately 900 employees, none of whom
is represented by a labor union in such employment. We consider our relations
with our employees to be good.
AVAILABLE INFORMATION
Universal American files annual, quarterly and current reports, proxy
statements and other documents with the Securities and Exchange Commission (the
"SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The SEC
maintains an Internet website that contains reports, proxy and information
statements, and other information regarding issuers, including Universal
American, that file electronically with the SEC. The public can obtain any
documents that Universal American files with the SEC at http://www.sec.gov.
Universal American also makes available free of charge on or through its
Internet website (http://UAFC.com). Universal American's Annual Report on Form
10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and
amendments to those reports filed or furnished pursuant to Section 13(a) or
15(d) of the Exchange Act as soon as reasonably practicable after Universal
American electronically files such material with, or furnishes it to, the SEC.
Shareholders may receive, without charge, a copy of the documents filed
with the Securities and Exchange Commission as exhibits to this report by
submitting a written request to Universal American Financial Corp., Director,
Shareholder Relations, Six International Drive, Rye Brook, NY 10573-1068, by
calling 914-934-5200, or by completing and submitting the information request
form in the Request Info page of our website.
ITEM 2 - PROPERTIES
The executive offices of the Company are in Rye Brook, New York. Marketing
and professional staff for our U.S. insurance subsidiaries occupy space in
Orlando, Florida. Our Canadian operations are located in Mississauga, Ontario,
Canada. Our Administrative Services operations occupy office space in Pensacola
and Weston Florida. The Company leases all of the approximately 175,000 square
feet of office space that it occupies, Management considers its office
facilities suitable and adequate for the current level of operations.
In addition to the above, Pennsylvania Life is the named lessee on
approximately 40 properties occupied by Career Agents for use as field offices.
Rent for these field offices is reimbursed by the agents.
25
ITEM 3 - LEGAL PROCEEDINGS
The Company has litigation in the ordinary course of business, including
claims for medical, disability and life insurance benefits, and in some cases,
seeking punitive damages. Management and counsel believe that after reserves and
liability insurance recoveries, none of these will have a material adverse
effect on the Company.
A lawsuit has been commenced against Universal American, its subsidiary
American Progressive Life & Health Insurance Company, and Richard Barasch, by
Marvin Barasch, the former Chairman of American Progressive. The suit primarily
arises out of Marvin Barasch's employment with American Progressive and includes
unrelated personal claims against Richard Barasch. The Company and Richard
Barasch believe that the allegations are totally without merit and that the
likelihood of material recovery by the plaintiff is remote.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted by us 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
Our common stock is quoted on the Nasdaq National Market under the symbol
UHCO. The following table sets forth the high and low sales prices per share of
our common stock for the periods indicated.
Common Stock
--------------------
High Low
------ ------
2001
First Quarter $5.563 $3.438
Second Quarter 7.000 4.625
Third Quarter 6.310 4.510
Fourth Quarter 7.650 5.270
2002
First Quarter $ 6.99 $ 5.61
Second Quarter 7.89 6.24
Third Quarter 7.10 4.90
Fourth Quarter 7.27 3.84
2003
First Quarter (through March 3) $ 5.95 $ 5.20
As of March 3, 2003, there were approximately 1,774 holders of record of
our common stock. On March 3, 2003, the closing bid and ask sales prices for our
common stock were $5.73 and $5.77.
26
DIVIDENDS
We have neither declared nor paid dividends on our common stock and we are
currently prohibited from paying dividends to stockholders under our current
credit agreement. There are also various legal limitations governing the extent
to which the Company's insurance subsidiaries may extend credit, pay dividends
or otherwise provide funds to Universal American Financial Corp. Any future
decision to pay dividends will be made by our board of directors in light of
conditions then existing, including our results of operations, financial
condition and requirements, loan covenants, insurance regulatory restrictions,
business conditions and other factors. In addition, our ability to pay cash
dividends, if and when we should wish to do so, may depend on the ability of our
subsidiaries to pay dividends to our holding company and on compliance with the
covenants in our credit facility. See "Regulation - Dividend Restrictions".
EQUITY COMPENSATION PLANS
Information regarding our equity compensation plans is incorporated by reference
to our definitive proxy statement to be filed pursuant to Regulation 14A under
the Securities Exchange Act of 1934 within 120 days after the end of our fiscal
year ended December 31, 2002.
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ITEM 6 - SELECTED FINANCIAL DATA
As of or for the year ended December 31,
-------------------------------------------------------------------------
2002 2001 2000 (3) 1999 (2) 1998
--------- --------- --------- --------- ---------
(in thousands, except per share data)
INCOME STATEMENT DATA:
Direct premium and policyholder fees $ 586,686 $ 513,575 $ 451,323 $ 252,553 $ 131,044
Reinsurance premium assumed 5,075 2,549 3,055 1,751 998
Reinsurance premium ceded (325,184) (286,918) (234,625) (138,827) (89,546)
--------- --------- --------- --------- ---------
Net premium and other policyholder fees 266,577 229,206 219,753 115,477 42,496
Net investment income 57,716 57,812 56,945 29,313 10,721
Realized gains (losses) (5,083) 3,078 146 (241) 256
Fee and other income 12,313 10,847 7,247 3,587 2,616
--------- --------- --------- --------- ---------
Total revenues 331,523 300,943 284,091 148,136 56,089
Total benefits, claims and other deductions 287,493 257,580 251,025 132,080 52,157
--------- --------- --------- --------- ---------
Income before taxes 44,030 43,363 33,066 16,056 3,932
Net income after taxes 30,127 28,925 22,885 9,813 2,608
Net income applicable to common
shareholders (1) 30,127 28,925 22,885 9,633 2,174
PER SHARE DATA:
Net income applicable to common shareholders
Basic $ 0.57 $ 0.58 $ 0.49 $ 0.42 $ 0.29
Diluted $ 0.56 $ 0.57 $ 0.49 $ 0.34 $ 0.20
Book value per share $ 5.42 $ 4.38 $ 3.72 $ 2.92 $ 3.18
NON-GAAP FINANCIAL DATA:
Net income applicable to common shareholders(1) $ 30,127 $ 28,925 $ 22,885 $ 9,633 $ 2,174
Adjustments to net operating income(5);
Realized (gains) losses, net of tax(4) 3,304 (2,001) (95) 157 (166)
--------- --------- --------- --------- ---------
Net operating income(5) $ 33,431 $ 26,924 $ 22,790 $ 9,790 $ 2,000
PER SHARE DATA:
Net operating income(5):
Basic $ 0.63 $ 0.54 $ 0.49 $ 0.42 $ 0.27
Diluted $ 0.62 $ 0.53 $ 0.48 $ 0.35 $ 0.19
Diluted book value per share(6) $ 4.77 $ 4.21 $ 3.58 $ 3.06 $ 2.52
Tangible book value per share(7) $ 4.57 $ 4.00 $ 3.33 $ 2.94 $ 2.11
RATIOS
Operating return on average equity(8) 13.90% 13.70% 14.70% 11.60% 8.00%
Ratio of acquired intangibles to equity(9) 3.8% 5.2% 7.2% 4.1% 20.9%
Ratio of deferred policy acquisition costs
to equity(10) 32.1% 28.6% 28.0% 26.1% 85.8%
Debt to total capital ratio(11) 19.50% 21.40% 28.60% 33.20% 14.70%
28
As of December 31,
----------------------------------------------------------------------------
2002 2001 2000 1999 1998
---------- ---------- ---------- ---------- --------
BALANCE SHEET DATA: (In thousands, except for per share data)
Total cash and investments $ 999,902 $ 879,223 $ 824,930 $ 812,297 $164,674
Total assets 1,401,668 1,270,216 1,189,864 1,153,421 283,302
Policyholder related liabilities 993,686 914,073 884,011 877,347 228,958
Outstanding bank debt 50,775 61,475 69,650 70,000 4,750
Trust preferred securities 15,000 -- -- -- --
Series B Preferred Stock -- -- -- -- 4,000
Series C Preferred Stock -- -- -- -- 5,168
Series D Preferred Stock -- -- -- -- 2,250
Total stockholders' equity 286,769 230,770 173,949 133,965 28,318
NON-GAAP FINANCIAL DATA:
Total stockholders' equity excluding
accumulated other comprehensive
income (12) $ 256,881 $ 225,167 $ 169,074 $ 140,852 $ 27,460
DATA REPORTED TO REGULATORS (13):
Statutory capital and surplus $ 129,679 $ 123,285 $ 101,367 $ 105,281 $ 21,076
Asset valuation reserve 858 3,985 5,384 5,585 1,205
---------- ---------- ---------- ---------- --------
Adjusted capital and surplus $ 130,537 $ 127,270 $ 106,751 $ 110,866 $ 22,281
========== ========== ========== ========== ========
- ----------
(1) After provision for Series C Preferred Stock dividends of $180 and $434
for the years ended December 31, 1999 and 1998, respectively.
(2) Includes the results of the companies acquired in the 1999 Acquisition,
since their acquisition on July 30, 1999.
(3) Includes the results of AIAG since its acquisition on January 6, 2000, and
CHCS since its acquisition on August 10, 2000.
(4) Tax on realized gains and losses is computed based on a 35% effective
rate for all periods.
(5) Represents net income applicable to common shareholders, excluding
realized gains, net of tax. Management believes that realized gains and
losses are not indicative of overall operating trends.
(6) Diluted book value per share represents total stockholders' equity,
excluding accumulated other comprehensive income, plus assumed proceeds
from the exercise of vested options, divided by the total shares
outstanding plus the shares assumed issued from the exercise of vested
options.
(7) Tangible book value per share represents total stockholders' equity,
excluding accumulated other comprehensive income, goodwill and present
value of future profits, plus assumed proceeds from the exercise of vested
options, divided by the total shares outstanding plus the shares assumed
issued from the exercise of vested options.
(8) Operating return on average equity represents net operating income divided
by the average of the beginning and the end of year total stockholders'
equity, excluding accumulated other comprehensive income.
(9) The ratio of acquired intangible assets to equity represents the sum of
goodwill and present value of future profits divided by shareholders'
equity.
(10) The ratio of deferred policy acquisition costs to equity represents
deferred policy acquisition costs divided by shareholders' equity.
(11) The debt to total capital ratio is calculated as the ratio of the total
outstanding bank debt plus trust preferred securities to the sum of total
shareholders' equity, excluding accumulated other comprehensive income,
plus total outstanding bank debt plus trust preferred securities.
(12) Accumulated other comprehensive income includes the after tax net
unrealized gain (loss) on available for sale securities and unrealized
foreign exchange gain (loss).
(13) Includes capital and surplus of Penncorp Life (Canada) of C$59,724 as of
December 31, 2002, C$32,314 as of December 31, 2001, C$30,421 as of
December 31, 2000 and C$31,531 as of December 31, 1999, as reported to the
Office of the Superintendent of Financial Institutions Canada, converted
at the related exchange rates of C$0.6377 per U.S. $1.00 as of December
31, 2002, C$0.6261 per U.S. $1.00 as of December 31, 2001, C$0.6671 per
U.S. $1.00 as of December 31, 2000, and C$0.6900 per U.S. $1.00 as of
December 31, 1999.
29
ITEM 7 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
FORWARD-LOOKING STATEME