32,000 square feet in Pensacola, Florida, under a lease expiring in November 2002, with two renewals at the Company's option for a period of five years each; (iv) 4,000 square feet in Bay Harbor, Florida, under a lease expiring August 2000; (v) 3,000 square feet in Richardson, Texas, under a lease expiring in March 2004; (vi) 67,000 square feet in Raleigh, North Carolina, under a lease expiring July 2003; (vii) 22,000 square feet in Mississauga, Ontario, Canada, under a lease expiring April 2003. These leases represent the operating offices of American Progressive, American Pioneer, WorldNet, American Exchange, Pennsylvania Life, and PennCorp of Canada, respectively, and carry an aggregate annual rental of approximately $1.8 million. The company also leases a smaller office in Andalusia, Alabama, for an aggregate annual rental of approximately $17,000.
(4) Includes the results of the Penn Union Companies since its acquisition on July 30, 1999. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
(5) Includes the results of American Exchange since its acquisition on December 1, 1997. See "Management's Discussion and Analysis of Financial Condition and Results of Operations".
The consolidated results of operations include the results of the Penn Union Companies from the date of acquisition.
Subsequent to the acquisition of the Penn Union Companies, the Company redefined its operating segments with primary emphasis on its distribution channels. Currently, the Company manages its business through four operating segments, Senior Market Brokerage, Career Agency, Special Markets and Insurance Services and Corporate.
Prior to the Penn Union Transaction, the Company reported its results through four segments, with primary emphasis on major product lines. These segments were Senior Market Accident and Health Insurance, Other Accident and Health Insurance, Life Insurance and Insurance Services and Corporate.
The new Senior Market Brokerage Segment includes substantially all of the Senior Market Accident and Health Insurance business as well as a portion of the business previously included in the Life Insurance segment that was produced by the brokerage agents.
The Senior Market Brokerage Segment focuses on the sale of senior market products through a network of independent agents. The results of operations for the years ended December 31, 1999 and 1998 include the results of the sales of products such as Medicare Supplement, Long Term Care and Senior Life products through this distribution channel.
In the year ended December 31, 1999, the Senior Market Brokerage Segment gross premium and policyholder fees earned (including reinsurance assumed) amounted to $104.0 million, a $17.3 million increase over the $86.7 million amount in 1998. The gross earned premiums on the Company's senior market products increased as follows:
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Total benefits, claims and other deductions in the Brokerage Agent Segment increased approximately $4.4 million to $27.4 million for the year ended December 31, 1999, compared to $23.0 million for the year ended December 31, 1998.
Claims and other benefits increased $5.3 million to $18.6 million for the year ended December 31, 1999 compared to $13.3 million in 1998. The change in reserves for the year ended December 31, 1999 amounted to an increase of $3.6 million compared to an increase of $4.3 million in 1998 generating a variance of $0.7 million. These increases in claims and change in reserves are the result of the $5.7 million increase in net premiums earned for the year ended December 31, 1999 discussed above.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Total benefits, claims and other deductions in the Career Agent Segment totaled $56.4 million for the five months ended December 31, 1999.
Claims and other benefits amounted to $29.2 million for the five months ended December 31, 1999. Of this amount, $23.0 million related to claims incurred at Pennsylvania Life U.S. and $6.2 million related to the Canadian operations. The change in reserves for the five months ended December 31, 1999 amounted to $1.2 million, representing an increase of 0.3% since the date of acquisition.
Other operating costs and expenses totaled $14.7 million for the five months ended December 31, 1999. The ratio of general expenses to gross premium for the period was 26%.
The Special Markets Segment consists of blocks of business that were acquired through the acquisitions of various companies or are not currently produced through the career or brokerage agency distribution systems as well as some specialty life and accidental insurance products. The results of operations for the years ended December 31, 1999 and 1998 include the results of the sales of such products.
REVENUES. Total revenues for the Special Markets Segment increased approximately $17.2 million to approximately $46.5 million for the year ended December 31, 1999, compared to total revenues of approximately $29.3 million in the prior year.
These increases totaled $54.5 million and were offset by the decrease in premiums on the products terminated and not currently marketed by the Company as follows:
Net investment income of the Special Markets Segment increased $6.2 million to $16.2 million for the year ended December 31, 1999, compared to $10.0 million in 1998. This increase is attributable to the increase in invested assets outstanding in this segment during 1999 compared to 1998. Realized gains on investments decreased $0.5 million from the prior year due to the write down of a permanently impaired security of $0.6 million.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Total benefits, claims and other deductions in the Special Markets Segment increased approximately $14.3 million to $42.2 million for the year ended December 31, 1999, compared to $27.9 million for the year ended December 31, 1998.
Claims and other benefits increased $12.8 million to $25.2 million for the year ended December 31, 1999 compared to $12.4 million in 1998. The change in reserves for the year ended December 31, 1999 amounted to a decrease of $4.5 million compared to an increase of $1.1 million in 1998 generating a variance of $5.5 million. These increases in claims and change in reserves are the result of the $11.7 million increase in net premiums earned for the year ended December 31, 1999 discussed above. Interest credited to policyholders increased $1.4 million from $7.2 million in 1998 to $8.6 million in 1999. Approximately $0.8 million of the increase relates to the acquired companies.
The Non Insurance Businesses Segment consists of WorldNet, Quincy, PFI, Inc ("PFI")(an internal servicing company acquired in July, 1999), a minority interest in Security Health and the Parent Company.
The results of operations for the years ended December 31, 1998 and 1997 include the operations of American Progressive, American Pioneer and WorldNet for the year ended December 31, 1997 and the operations of American Exchange for the period December 4, 1997, the date of its acquisition, to December 31, 1997. All references to per share amounts are on a diluted basis.
For the year ended December 31, 1998, the Company earned net income after Federal income taxes of $2.6 million ($0.20 per share) compared to $2.1 million ($0.18 per share) in the prior year. Operating income before Federal income taxes amounted to $3.9 million for the year ended December 31, 1998 compared to $3.2 million in the prior year. During 1997, the Company sold Amerifirst Insurance Company, an inactive insurance company, for $3.4 million and realized a pretax gain of $0.6 million ($0.4 million after tax or $0.03 per share).
REVENUES. Total revenues for the Senior Market Brokerage Segment increased approximately $8.0 million to approximately $24.6 million for the year ended December 31, 1998, compared to total revenues of approximately $16.6 million in the prior year.
While the Company was able to increase its gross premium revenue from its core products, it continues to reinsure a portion of these risks to unaffiliated reinsurers. Reinsurance premiums ceded for the year ended December 31, 1998 for the Senior Market Brokerage Segment amounted to $62.9 million, a $16.3 million increase from the 1997 amount of $46.6 million. Details of the changes in reinsurance premiums ceded is as follows:
Net investment income of the Brokerage Agent Segment increased $0.1 million to $0.7 million for the year ended December 31, 1998, compared to $0.6 million in 1997. This increase is attributable to the increase in invested assets outstanding in this segment during 1999 compared to 1998. Realized gains on investments decreased slightly from the prior year.
The change in deferred acquisition costs increased by $1.2 million for the year ended December 31, 1998 compared to 1997. The amount of acquisition costs capitalized increased $1.5 million from $2.4 million in 1997 to $3.9 million in 1998. The overall increase in capitalized costs is the result of the increase in new premium production in the year ended December 31, 1998 compared to 1997. The amortization of deferred acquisition costs increased $0.4 million from $0.6 million in 1998 to $1.0 million in 1998. This increase is the result of the increase in new premium production.
In the year ended December 31, 1998, the Special Markets Segment gross premium and policyholder fees earned (including reinsurance assumed) amounted to $45.3 million, a $7.6 million increase over the $37.7 million amount in 1997. The gross earned premiums on the Company's senior market products increased as follows:
While the Company was able to increase its gross premium revenue from its core products, it continues to reinsure a portion of these risks to unaffiliated reinsurers. Reinsurance premiums ceded for the year ended December 31, 1998 for the Special Markets Segment amounted to $26.7 million, a $10.7 million increase from the 1997 amount of $16.0 million. Details of the changes in reinsurance premiums ceded is as follows:
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Total benefits, claims and other deductions in the Special Markets Segment decreased approximately $2.6 million to $27.9 million for the year ended December 31, 1998, compared to $30.5 million for the year ended December 31, 1997.
The change in deferred acquisition costs decreased by $0.6 million for the year ended December 31, 1998 compared to 1997. The amount of acquisition costs capitalized increased $45 thousand from the prior year. The small increase in capitalized costs is the result of relatively flat new premium production in the year ended December 31, 1998 compared to 1997 as some of the lines of business in this segment continue to run off. The amortization of deferred acquisition costs increased $0.6 million from $3.4 million in 1997 to $4.0 million in 1998.
Other operating costs and expenses increased $1.2 million in the year ended December 31, 1998 to $8.2 million, compared to $9.4 million in 1997. The ratio of general expenses to gross premium decreased from approximately 25% in 1997 to 18% in 1998.
The Non Insurance Businesses Segment consists of WorldNet, Quincy, a minority interest in Security Health acquired in 1998 and the Parent Company.
The Company's need for capital is primarily to maintain or increase the surplus of its Insurance Subsidiaries and to support the Company as an insurance holding company, including the maintenance of its status as a public company. In addition, the Company requires capital to fund its anticipated growth through acquisitions of other companies and blocks of insurance business.
As of December 31, 1998, the Company had outstanding a loan of $4.8 million pursuant to a credit agreement with Chase Manhattan Bank, which it executed in 1998. During the seven months ended July 30, 1999, the Company repaid $0.5 million in principal and $0.2 million in interest. In connection with the Penn Union Transaction discussed above, the $4.3 million amount outstanding on the 1998 credit agreement was repaid in full on July 30, 1999. At the same time, the Company paid $25 thousand to terminate an interest rate swap agreement and expensed $87 thousand of unamortized loan origination expenses, both related to the 1998 credit agreement.
To help finance the Penn Union Acquisition on July 30, 1999, the Company entered into an $80 million credit facility consisting of a $70 million term loan and a $10 million revolving loan facility. The term loan calls for interest at the London Interbank Offering Rate ("LIBOR") plus 350 basis points (currently 9.38%) with principal repayment over a seven-year period and a final maturity date of July 31, 2006. The term loan is secured by a first priority interest in 100% of the outstanding common stock of American Exchange, American Progressive, PFI, Inc. (an immaterial subsidiary), Quincy Coverage Corp. (an immaterial subsidiary), and WorldNet and 65% of the outstanding common stock of UAFC (Canada) Inc. (the 100% parent of PennCorp Canada). The Company has not drawn down any of the revolving loan facility and pays a commitment fee of 50 basis points on the unutilized facility. For the five months ended December 31, 1999, the Company paid $2.65 million in interest.
Management believes that the current cash position, the availability of the revolving loan facility, the expected cash flows of the non-insurance companies, the surplus note interest payments from American Exchange and the availability of dividends from its Insurance Subsidiaries can support the obligations of Universal noted above for the foreseeable future. However, there can be no assurance as to the expected future cash flows or to the availability of dividends from the Insurance Subsidiaries.
Exercise of Outstanding Common Stock Warrants that Expired on December 31, 1999
which were not registered under the Securities Act of 1933. The warrants had an exercise price to purchase common stock on a one to one basis at $1.00 and expired on December 31, 1999. During the year ended December 31, 1999, 650,410 of the registered common stock warrants and all of the unregistered common stock warrants were exercised for $2,666,170 resulting in the issuance of 2,666,170 shares of the Company's common stock. 7,821 of the registered common stock warrants expired unexercised.
American Progressive, American Pioneer, American Exchange, Constitution Life, Marquette, Peninsular Life, PennCorp Canada, Pennsylvania Life and Union Bankers (collectively, the "Insurance Subsidiaries") are required to maintain minimum amounts of capital and surplus as determined by statutory accounting. Each of the Insurance Subsidiaries' statutory capital and surplus exceeds its respective minimum requirement. At December 31, 1999 the statutory capital and surplus, including asset valuation reserves, of the U.S. Insurance Subsidiaries totaled $89.2 million.
Liquidity for the life Insurance Subsidiaries is measured by their ability to pay scheduled contractual benefits, pay operating expenses, and fund investment commitments. Sources of liquidity include scheduled and unscheduled principal and interest payments on investments, premium payments and deposits and the sale of liquid investments. These sources of liquidity for the Insurance Subsidiaries significantly exceed scheduled uses.
Liquidity is also affected by unscheduled benefit payments including death benefits, benefits under
accident & health policies and interest-sensitive policy surrenders and withdrawals. The amount of surrenders and withdrawals is affected by a variety of factors such as credited interest rates for similar products, general economic conditions and events in the industry that affect policyholders' confidence. Although the contractual terms of substantially all of the Company's in force life insurance policies and annuities give the holders the right to surrender the policies and annuities, the Company imposes penalties for early surrenders. At December 31, 1999 the Company held reserves that exceeded the underlying cash surrender values of its in force life insurance and annuities by more than $22.8 million. The insurance companies, in management's view, have not experienced any material changes in surrender and withdrawal activity in recent years.
The Company files a consolidated return for federal income tax purposes, in which American Exchange and the Penn Union life insurance companies are not currently permitted to be included. At December 31, 1999, the Company (exclusive of American Exchange and the Penn Union life insurance companies) had a net operating tax loss carryforwards of approximately $9.7 million that expire in the years 2001 to 2019. At December 31, 1999, the Company also had an Alternative Minimum Tax (AMT) credit carryforward for Federal income tax purposes of approximately $0.3 million that can be carried forward indefinitely. As a result of the change in ownership of the Company in July 1999, use of most of the loss carryforwards of the Company are subject to annual limitations.
American Exchange and the other U. S. Penn Union life insurance companies file a separate consolidated federal income tax return. At December 31, 1999, these companies had net operating loss carryforwards, most of which were incurred prior to their acquisition by the Company, of approximately $47.1 million that expire in the years 2007 to 2013. As a result of the change in ownership of the Company in July 1999 and the Penn Union Acquisition, use of most of the loss carryforwards are subject to annual limitations.
At December 31, 1999 and 1999, the Company has established valuation allowances of $11.3 million and $1.3 million, respectively, with respect to these net operating loss carryforwards (deferred tax assets). The Company determines a valuation allowance based upon an analysis of projected taxable income and through its ability to implement prudent and feasible tax planning strategies. The tax planning strategies include the expense reductions anticipated from the Company's recent reorganization and from the income generated by its administration companies WorldNet and AIAG. The Company increased the taxable income in the non-life companies by $0.4 million and $1.9 million in 1998 and 1999, respectively. Management believes it is more likely than not that the Company will realize the recorded net deferred tax assets.
The United States Insurance Subsidiaries are taxed as life insurance companies as provided in the Tax Code. The Omnibus Budget Reconciliation Act of 1990 amended the Tax Code to require a portion of the expenses incurred in selling insurance products to be capitalized and amortized over a period of years, as opposed to an immediate deduction in the year incurred. Instead of measuring actual selling expenses, the amount capitalized for tax purposes is based on a percentage of premiums. In general, the capitalized amounts are subject to amortization over a ten-year period. Since this change only affects the timing of the deductions, it does not, assuming stability of rates, affect the provisions for taxes reflected in the Company's financial statements prepared in accordance with GAAP. However, by deferring deductions, the change does have the effect of increasing the current tax expense, thereby reducing statutory surplus. Because of the Insurance Subsidiaries' net operating loss carryforwards, there was no material increase in the Company's current income tax provision for any of the three years in the period ended December 31, 1999 due to this provision.
capitalization percentages. For the 1999 tax year, the Company had $138.8 million of premium receipts subject to proposed modifications to capitalization percentages.
The Year 2000 issue relates to whether computer systems will properly recognize date-sensitive information in years subsequent to 1999. Prior to 2000, the Company underwent a corporate-wide program to address the Year 2000 issue, as it relates to its own computer systems, as well as to instances in which computer systems of third parties may have a significant impact on the Company's operations, such as suppliers, business partners, customers, facilities and telecommunications. In addressing the Year 2000 issue, the Company did not incur any significant expenses other than the allocation of internal resources to test and monitor this issue. The Company has not experienced any significant disruptions of business operations related to the Year 2000 issue to date and believes that the risk of such disruption in the future is low, although no assurance can be given in this regard. It is possible that Year 2000 problems that are not currently apparent may arise in the future. Accordingly, the Company will continue to monitor its systems for the Year 2000 issue.