The Company's operating segments are: (i) Insurance, which includes the businesses of the Self-Employed Agency Division; the Student Insurance Division; the OKC Division; the Special Risk Division; and the National Motor Club Division (until sold on July 27, 2000); (ii) Financial Services, which includes the businesses of Academic Management Services Corp., the Company's investment in HealthAxis, Inc., the business of the Company's UICI Administrators unit and certain other business units and (iii) Other Key Factors, which includes investment income not allocated to the other segments, interest expense, general
Through the Company's United CreditServ, Inc. subsidiary ("United CreditServ"), prior to 2000 the Company marketed credit support services to individuals with no, or troubled, credit experience and assisted such individuals in obtaining a nationally recognized credit card. The activities of United CreditServ were conducted primarily through its wholly-owned subsidiaries United Credit National Bank ("UCNB") (a special purpose national bank, based in Sioux Falls, South Dakota, chartered solely to hold credit card receivables); Specialized Card Services, Inc. (provider of account management and collections services for all of the Company's credit card programs); United Membership Marketing Group, Inc. ("UMMG") (a Lakewood, Colorado-based provider of marketing, administrative and support services for the Company's credit card programs); and UICI Receivables Funding Corporation ("RFC"), a single-purpose, bankruptcy-remote entity through which certain credit card receivables were securitized.
Several significant developments during 1999 and 2000 at United CreditServ materially and adversely affected the operations of the Company:
In March 2000, the Board of Directors of UICI determined, after a thorough assessment of the unit's prospects, that UICI would exit from its United CreditServ sub-prime credit card business and, as a result, the United CreditServ unit was reflected as a discontinued operation for financial reporting purposes effective December 31, 1999. At December 31, 1999, the Company established a liability for loss on the disposal of the discontinued operation in the amount of $130.0 million (pre-tax), which liability was included in net liabilities of discontinued operations. The liability for loss on disposal established by the Company at December 31, 1999 represented the Company's then-current estimate of all additional losses (including asset write-downs, the estimated loss on the sale of the business and/or the assets and continuing operating losses through the date of sale) that it then believed it would incur as part of any sale of the United CreditServ unit.
UCNB agreed to the issuance of separate Consent Orders issued by the OCC in February and June, 2000, which Orders were subsequently terminated by the OCC in January 2001. In addition, the Company and United CreditServ ("UCS") agreed to the issuance of separate Consent Orders issued by the OCC in June 2000. In January 2001, the UCS Order was terminated by the OCC and the UICI Order was substantially modified. See Notes B and N of Notes to Consolidated Financial Statements.
On September 29, 2000, the Company completed the sale of substantially all of the non-cash assets associated with its United CreditServ credit card unit, including its credit card receivables portfolios and its Sioux Falls, South Dakota servicing operations, for a cash sales price of approximately $124.0 million. In addition to the cash sales price received at closing, the transaction contemplates an incentive cash payment contingent upon the post-closing performance of the ACE credit card portfolio over a one-year period. The Company retained United CreditServ's Texas collections facility, and UICI continues to hold United CreditServ's building and real estate in Sioux Falls, South Dakota. The Company has leased the Sioux Falls facilities to the purchaser of the credit card assets pursuant to a long-term lease. UICI also retained the right to collect approximately $250.0 million face amount of previously written off credit card receivables. In connection with the sale, UICI or certain of its subsidiaries retained substantially all liabilities and contingencies associated with its credit card business, including liability for payment of all certificates of deposit issued by UCNB, loans payable and liabilities associated with pending litigation and other claims.
support services for the Company's credit card programs. In addition, on July 31, 2000, UICI signed a credit agreement with the purchaser, pursuant to which it has agreed to lend to the purchaser up to $1.0 million on a revolving basis. As of December 31, 2000, the Company had advanced to UMMG $1.0 million under the credit agreement.
The 1999 and 2000 operating losses at United CreditServ had a material adverse effect upon the liquidity and cash flows of the Company. Since the Company first announced losses at its United CreditServ unit in December 1999, UICI through United CreditServ contributed to UCNB as capital an aggregate of $176.6 million in cash. UICI at the parent company level funded these cash contributions and other cash needs with the proceeds of sale of investment securities; a borrowing from a third party in the amount of $24.0 million funded in July 2000; approved sales of assets from the parent company to the Company's regulated insurance company subsidiaries completed in June and July 2000 generating cash proceeds in the aggregate amount of approximately $26.2 million; dividends in the amount of $19.0 million paid during the six months ended June 30, 2000 from The Chesapeake Life Insurance Company ("CLICO") (one of its regulated insurance company subsidiaries); the sale to The MEGA Life and Health Insurance Company of CLICO for $19.0 million in July 2000; cash proceeds in the amount of $21.8 million from the disposition of its National Motor Club unit completed in July 2000; and cash on hand. See "Liquidity and Capital Resources."
of providing third party benefits administration, including eligibility and billing reconciliation) and its member interest in Insurdata Marketing Services, LLC (a subsidiary of Insurdata engaged in the business of marketing third party benefits administration services) for cash in the amount of $858,000, representing the aggregate book value of the net assets and member interest so transferred. The Company recognized no gain on the non-monetary exchange of stock in the Insurdata Merger due to uncertainty of realization of the gain.
Following the Insurdata Merger, the Company held approximately 43.6%, and HAI held approximately 28.1%, of the issued and outstanding capital stock of HealthAxis.com, the surviving corporation in the Insurdata Merger. On March 14, 2000, the Company sold in a private sale to an institutional purchaser 2,000,000 shares of HealthAxis.com common stock and, giving effect to such sale, the Company held 39.2% of the issued and outstanding shares of common stock of HealthAxis.com.
On September 29, 2000, UICI purchased from a third party $1.7 million principal amount of HAI 2% convertible subordinated debentures and a warrant to purchase 12,291 shares of HAI common stock at an exercise price of $3.01 per share, for a total purchase price of $1.2 million. The debentures mature in September 2005 and are convertible into 185,185 shares of HAI common stock.
On January 26, 2001, HAI acquired all of the outstanding shares of HealthAxis.com that HAI did not then own in a stock-for-stock merger of HealthAxis.com with a wholly-owned subsidiary of HAI (the "HAI Merger"). In the HAI Merger, HealthAxis.com shareholders (including the Company) received 1.334 shares of HAI common stock for each share of HealthAxis.com common stock outstanding. Following the HAI Merger, the Company beneficially holds 23,944,030 shares of HAI common stock (including the 185,185 shares issuable upon conversion of the HAI convertible subordinated debentures), representing approximately 45.3% of the issued and outstanding shares of HAI. Of such 23,944,030 shares beneficially held by UICI, 8,581,714 shares (representing 16.2% of HAI's total issued and outstanding shares) are subject to the terms of a Voting Trust Agreement, pursuant to which trustees unaffiliated with the Company have the right to vote such shares. Gregory T. Mutz and Patrick J. McLaughlin, President and a director of UICI, respectively, serve on the Board of Directors of HAI.
Included in AMS's operating loss for 2000 was a net decrease in deferred loan origination costs of $13.1 million. In 1999 and 1998, AMS purchased loans in the secondary market at costs which approximated the fair value of the loans, resulting in a reduced yield on the loans while they were held and little or no net gain on a subsequent sale. Premiums paid on loans purchased in the secondary market were $-0- in 2000, $12.4 million in 1999 and $7.5 million in 1998. In addition, deferred costs associated with the origination of PLUS loans at AMS's San Diego operations (which was closed in the fourth quarter of 2000), resulted in loans with reduced yields and lower gains than if such loans had been originated in a lower cost environment. Management believes that AMS will be able to originate PLUS loans at a reduced cost after consolidating its origination activities into AMS's Swansea, Massachusetts operations. Capitalized costs associated with the San Diego facility were $2.2 million in 2000, $7.0 million in 1999, and $7.4 million in 1998. At December 31, 2000, AMS had $17.2 million in remaining deferred loan origination costs that will result in charges to income in future years as such costs are amortized over the life of loans held in the portfolio and/or charged off when loans are sold.
AMS's 2000 operating results also reflected approximately $5.7 million of expenses associated with the management transition effected in January 2000, significant expenses associated with the relocation of AMS's headquarters from South Yarmouth, Massachusetts to Swansea, Massachusetts, the write-off of facilities development costs and the write-off of previously capitalized costs incurred in connection with AMS's Internet strategy and other business initiatives undertaken by prior management. AMS also incurred approximately $1.2 million in consulting expenses in connection with analysis of operating strategies and approximately $900,000 of expenses associated with the transfer of AMS's non-campus based association marketing business to UICI's Student Resources Division.
Earnings from AMS's student loan portfolio in 2000 and 1999 were not sufficient to cover costs associated with the origination and acquisition of such loans. In order to achieve profitability in the future, management believes that the size of the student loan portfolio must be increased and/or associated costs must be decreased. While management believes that the closure of the San Diego facility and transfer of loan origination activities to Swansea is an important step to achieve profitability, additional measures to increase volume or decrease costs are required before AMS's student loan portfolio activities will be profitable.
During the year ended December 31, 2000, approximately 356,000 $5.25 shares were allocated to the accounts of participants in UICI's employee stock ownership plan and 255,000 $5.25 shares were issued for the benefit of participants in its agent stock accumulation plans. In connection therewith, the Company recognized incremental compensation expense in the amount of $296,000, representing the difference between the fair market value of such shares at the time credited and $5.25 per share. In addition, the Company expects to recognize additional incremental compensation expense over the period ending approximately July 31, 2002 if and to the extent the value of $5.25 shares allocated to the accounts of participants in its employee stock ownership plan and/or issued for the benefit of participants in the agent stock accumulation plans exceeds $5.25 per share. See Note O of Notes to Consolidated Financial Statements.
In January 2001, the Board of Directors of the Company adopted certain modifications to the UICI Executive Stock Purchase Program (the "ESPP"), which was initially adopted and implemented in December 1998 to afford directors and key UICI executives the opportunity to purchase UICI common stock. See Note M of Notes to Consolidated Financial Statements.
In connection with the January 2001 modifications to the ESPP, for financial reporting purposes UICI recorded in the quarter ended December 31, 2000 compensation expense in the amount of $4.8 million pre-tax, or $4.1 million net of tax.
At its regular meeting held on February 28, 2001, the Board of Directors of the Company reconfirmed the Company's 1998 share repurchase program, in which it initially authorized the repurchase of up to 4,500,000 shares of its common stock from time to time in open market or private transactions. The Company had previously purchased through early 1999 198,000 shares of common stock pursuant to the program. Following the reconfirmation of the program, through March 13, 2001, the Company had purchased an additional 807,700 shares pursuant to the program. The timing and extent of additional repurchases, if any, will depend on market conditions and the Company's evaluation of its financial resources at the time of purchase.
The Company's Self-Employed Agency ("SEA") Division, which provides health insurance to the self-employed market, reported operating income of $70.9 million in 2000, a 40.6% increase over operating income of $50.4 million in 1999. The significant increase in operating income of the SEA division was primarily attributable to improved loss ratios on the Company's managed care products, continued success in directing a larger portion of new sales to more traditional, higher margin, indemnity products, and increased productivity of the Company's dedicated agent field force. The Company's Insurance Segment as a whole reported operating income in 2000 of $79.0 million, a 17.9% increase over operating income of $67.0 million generated in 1999.
Health premiums. Health premiums decreased to $668.3 million in 2000 from $690.2 million in 1999, a decrease of $21.9 million, or 3%. The decrease in health premiums in 2000 was attributable primarily to decreased premiums in the Special Risk Division, which resulted from the Company's entering into reinsurance and specific retrocession agreements effective January 1, 2000 that effectively permitted the Company to transfer to an unaffiliated insurance carrier the insurance revenue and risk portion of the business. This transfer has continued and will continue to occur monthly as the business renews over the life of the policies.
Investment income. Investment income increased to $92.5 million in 2000 from $85.5 million in 1999, an increase of $7.0 million, or 8%. The increase was due to increased earnings from the Company's investment in AMLI Realty Co., together with an increase in investment income from restricted cash held at AMS for a full year in 2000. AMS Investment Group, Inc. was acquired in July 1999.
Other interest income. Other interest income increased to $111.4 million in 2000 from $65.1 million in 1999, an increase of $46.3 million. The increase was due to the additional interest income earned on student loans at the Company's AMS operations in 2000.
Benefits, claims, and settlement expenses. Benefits, claims and settlement expenses decreased to $464.5 million in 2000 from $514.6 million in 1999, a decrease of $50.1 million, or 10%. The decrease was primarily due to the improvement in loss ratios on the Company's managed care products in the SEA Division.
Special Risk Division. Operating losses for the Special Risk Division increased to a loss of $(5.7) million in 2000 from a loss of $(4.1) million in 1999. The increase in the Special Risk Division's operating loss was due to higher loss ratios on closed blocks of business and a significant strengthening of reserves. Revenue for the Special Risk Division was $30.2 million in 2000 compared to $59.0 million in 1999, a decrease of $28.8 million or 49%. The decrease in revenue in the 2000 period was attributable to (a) the elimination of unprofitable blocks of business and implementation of necessary rate increases on stop-loss accounts and other lines of business causing customers to terminate their policies and (b) the implementation of reinsurance and specific retrocession agreements that effectively permitted the Company to transfer the insurance revenue and risk portion of the Special Risk business managed by Excess, Inc. (one of the Company's managing general underwriters) to a new insurance carrier. This transfer was effective January 1, 2000, and will occur monthly as the business renews over the life of the policies.
Effective July 1, 2000, the Company sold the assets of WinterBrook HealthCare Management, LLC (a company engaged in repricing of insurance claims) to an unrelated party for a sales price of $1.9 million. The Company recognized a pre-tax gain of $1.5 million in the quarter ended September 30, 2000 in connection with this sale. In addition, in the third quarter of 2000 the Company completed the sale of Excess, Inc. to the Excess management team. The Company recognized a gain in the amount of $161,000 (pre-tax) in connection with this sale.
UICI Administrators. The Company has classified the operations of UICI Administrators, Inc. (a company engaged in the business of providing third party benefits administration, including eligibility and billing reconciliation), Insurdata Marketing Services, LLC (a subsidiary of the Company engaged in the business of marketing third party benefits administration services) and Healthcare Management Administrators, Inc. (which the Company acquired on February 3, 2000) as its UICI Administrators business division. UICI Administrators incurred an operating loss of $(1.7) million in 2000 compared to operating income of $2.3 million in 1999. Revenues for UICI Administrators decreased to $18.5 million in 2000 from $46.2 million in 1999.
The decrease in operating income and revenues at the Company's UICI Administrators division was primarily attributable to the timing of the contribution of substantially all of the operations of Insurdata Incorporated (other than the operations of Insurdata Marketing Services, LLC) to HealthAxis.com in connection with the Insurdata-HealthAxis.com merger, which was completed in January 2000. The results of operations of Insurdata Incorporated had previously been included in the results of operations of the UICI Administrators division. Excluding the 1999 results of operations of Insurdata Incorporated transferred to HealthAxis.com, for 2000 and 1999, revenues for the UICI Administrators division were $18.5 million and $4.8 million, respectively, and operating income (loss) for the division was $(1.7) million and $414,000, respectively.
Other Key Factors. Other key factors include investment income not allocated to the other segments, interest expense from corporate borrowings, general expenses relating to corporate operations, realized gains or losses on sale of investments and the AMLI operations. Operating income in 2000 generated by other key factors decreased to $5.8 million from $7.8 million, a $2.0 million decrease or 26%. The decrease is primarily due to additional interest expense associated with a higher level of corporate borrowings outstanding in 2000.
Included in the interest rate spread on student loans are PLUS loans on which the interest rate yield is set annually beginning July 1 by regulation at a fixed rate. At March 31, June 30, September 30 and December 31, 2000, AMS held PLUS loans in the aggregate principal amount of $371.0 million, $270.0 million, $253.0 million and $273.0 million, respectively. The prescribed rate earned on PLUS loans was 7.72% from January 1 to June 30, 2000 and was reset to 8.99% beginning July 1, 2000. If the interest rate yield exceeds the maximum allowable rate chargeable to the borrower, AMS, as the holder of PLUS loans, would be eligible for government subsidized, special allowance payments for the year. The fixed interest rate yield in 2000 was below the maximum rate. For the twelve months beginning July 1, 2000, the fixed rate will be below the maximum rate and AMS will not be entitled to special allowance payments on its PLUS loans. AMS
finances the cost of such loans at floating interest rates which are reset monthly and quarterly through its structured finance facilities.
Gain on sale of student loans included gross gains of $22.5 million in 2000 and $16.0 million in 1999. Deferred loan origination costs associated with sold loans were charged to gain on sale in the amount of $14.7 million and $8.6 million in 2000 and 1999, respectively. While more principal amount of loans was sold in 2000 than in 1999, resulting in a higher gross gain, the lower net gain results from higher deferred loan origination costs associated with sold loans in 2000 compared to 1999. In addition, the sale of loans in the second and third quarters of 2000 resulted in lower interest income in the second half of the year, as the sold loans no longer generated interest income. The reduction in interest earned in the second half of 2000 because of loan sales was offset by gains on sale of $3.8 million in the first six months of 2000 and $3.1 million in the second six months.
Other investment income increased to $8.0 million in 2000 from $4.0 million in 1999. Fee income from tuition payment programs increased to $11.9 million in 2000 from $7.4 million in 1999. Increases in both of these categories resulted primarily from the acquisition of the Academic Management Services Inc. tuition payment program business, effective July 27, 1999. Results from this business were included for a full year in 2000, compared to a period of five months in 1999. Income for the tuition payment program business is seasonal. In 2000, income from tuition payment program fees earned plus investment income on tuition payment program trust funds was $3.6 million in the first quarter, $5.5 million in the second quarter, $7.8 million in the third quarter and $3.8 million in the fourth quarter.
Insurance income of $5.5 million in 1999 relates to AMS's student insurance business. In May 1999, the assets and liabilities associated with AMS's student insurance business were transferred to UICI's Student Insurance Division.
Interest expense on other indebtedness increased to $4.4 million in 2000 from $2.4 million in 1999, reflecting primarily additional borrowings in the amount of $30.0 million incurred to acquire Academic Management Services Inc. on July 27, 1999. Interest expense on this acquisition indebtedness was $2.8 million in 2000. The acquisition debt is scheduled to be repaid on June 30, 2001.
Other operating expenses increased to $66.4 million in 2000 from $61.3 million in 1999. Included in 2000 operating expenses were approximately $5.7 million associated with the management transition effected in January 2000, the relocation of AMS's headquarters from South Yarmouth, Massachusetts to Swansea, Massachusetts, the write-off of facilities development costs and the write-off of previously capitalized costs incurred in connection with AMS's Internet strategy and other business initiatives undertaken by prior management. AMS also incurred $1.2 million in consulting expenses in connection with analysis of operating strategies. Included in AMS's operating expenses for 2000 is $900,000 in expenses associated with the transfer in the fourth quarter of AMS's non-campus based association marketing business to UICI's Student Insurance Division. In addition, operating costs associated with the tuition payment program business are included for a full year in 2000 compared to five months in 1999.
AMS markets loans to parents of dependent students ("PLUS loans") through direct mail and telemarketing programs directly to prospective student and parent borrowers. Until September 2000, these marketing activities were conducted primarily through the Company's San Diego, California marketing unit. On September 17, 2000, AMS announced that the California facility would be closed and the PLUS loan marketing activities would be consolidated into AMS's Swansea, Massachusetts headquarters. Management believes that these changes will result in a more cost-effective marketing effort. In 2000, AMS recorded a charge to income in the amount of $1.5 million, representing expenses incurred in connection with the exit from its San Diego unit. These costs included termination benefits for substantially all of the unit's 90 employees and the cost of certain contractual obligations of the unit.
Certain costs of originating loans are capitalized in accordance with Statement of Financial Accounting Standards No. 91, Nonrefundable Fees & Costs Associated with Originating or Acquiring Loans and Initial Direct Costs of Leases. Capitalized costs for PLUS loans incurred by the San Diego unit were $2.2 million in 2000 as compared to $7.0 million in 1999. The decrease in capitalized costs resulted from a decrease in total expenses incurred ($7.5 million in 2000 compared to $17.0 million in 1999) and a decrease in PLUS loan production ($50.0 million in 2000 compared to $192.0 million in 1999).
Revenues. Revenues decreased to $1,013.2 million in 1999 from $1,056.8 million in 1998, a decrease of $43.6 million, or 4%, primarily as a result of decreases in health premiums.
Investment income. Investment income increased to $85.5 million in 1999 from $74.9 million in 1998, an increase of $10.6 million, or 14%. The increase was due to increased earnings from the Company's investment in AMLI Realty Co., along with an increase in investment yield.
Other fee income. Other fee income increased to $122.9 million in 1999 from $111.1 million in 1998, an increase of $11.8 million. The increase was due to the increase in revenue from AMS as a result of increased originations from higher student loan volume.
Other income. Other income decreased to $3.5 million in 1999 from $37.5 million in 1998, a decrease of $34.0 million. The decrease was primarily attributable to the disposition of the IPN, LLC and HealthCare Automation business units that were sold to a related party in July 1998, which units generated an aggregate of $20.4 million in revenues during 1998. In 1998 the Company also recognized a $9.7 million gain on sale of the ATM transaction processing assets of SunTech Processing Systems, LLC (an 80%-owned subsidiary of the Company).
Loss on sale of investments. The Company recognized losses on sale of investments of $367,000 in 1999 compared to a gain from sale of investments of $4.9 million in 1998. The amount of realized gains or losses on the sale of investments is a function of interest rates, market trends and the timing of sales. Losses are more likely during periods of increasing long-term interest rates, as occurred in 1999. In addition, due to increasing long-term interest rates in 1999, the net unrealized investment loss on securities classified as "available for sale," reported in accumulated other comprehensive income as a separate component of stockholders' equity and net of applicable income taxes, was $30.4 million at December 31, 1999, compared to an unrealized gain of $13.4 million at December 31, 1998.
Other expenses. Other expenses increased to $119.3 million in 1999 from $114.4 million in 1998, an increase of $4.9 million. The increase is primarily due to the increased costs of AMS's student loan originations, which were offset by the disposition of IPN, LLC and HealthCare Automation, Inc. units that were sold in July 1998. In 1998, the Company recognized aggregate operating losses from IPN, LLC and HealthCare Automation, Inc. in the amount of $10.5 million.
Special Risk Division. Operating income for the Special Risk Division decreased to a loss of $(4.1) million in 1999 from a gain of $5.8 million in 1998. The decrease in operating income was due to higher loss ratios on closed blocks of business and a significant strengthening of reserves in the Division's marine medical business. Revenue for the Special Risk Division was $59.0 million in 1999 compared to $66.8 million in 1998, a decrease of 12%. The decrease in revenue was primarily due to elimination of unprofitable blocks of business and implementation of rate increases on stop-loss accounts causing customers to terminate their policies.
Academic Management Services Corp. ("AMS"). AMS incurred an operating loss of $(19.9) million in 1999 compared to an operating loss of $(1.3) million in 1998 (in each case exclusive of goodwill amortization and operating expenses at the parent company level). Revenue for AMS increased to $104.6 million in 1999 from $57.2 million in 1998. The increase in revenue in 1999 was attributable to the increased origination and interest income derived from AMS's higher student loan volume. The increased loss was attributable primarily to increases in interest expense from higher borrowings and interest rates and sustained operating losses at AMS Technologies Inc. and Education Loan Administrators Group. AMS's tuition installment payment plan unit also incurred an operating loss in 1999, due to the timing of the acquisition and the recording of revenues in the tuition installment plan business of AMS, which revenues are recorded primarily in May through August. The acquisition of the Academic Management Services tuition installment plan business was completed on July 26, 1999.
Other Key Factors. Other key factors include investment income not allocated to the other segments, interest expense from corporate borrowings, general expenses relating to corporate operations, amortization of goodwill, realized gains or losses on sale of investments and the AMLI operations. Operating income for other key factors decreased to $1.5 million from $12.2 million in 1998. The decrease is primarily due to an increase in amortization of goodwill (recorded in connection with AMS's acquisition of Academic Management Services in July 1999), additional interest expense associated with a higher level of corporate borrowings outstanding during 1999, general corporate operations and a decrease in realized gains, which was partially offset by an increase in investment income on equity not allocated to the other segments. The amount of
The following table presents the information for each of the Company's fiscal quarters in 2000 and 1999. This information is unaudited and has been prepared on the same basis as the audited Consolidated Financial Statements of the Company included herein and, in management's opinion, reflects all adjustments necessary for a fair presentation of the information for the periods presented. The operating results for any quarter are not necessarily indicative of results for any future period.
information electronically. HIPAA requires health plans to use specific data-content standards, mandates the use of specific identifiers (e.g., national provider identifiers and national employer identifiers) and requires specific privacy and security procedures. HIPAA authorized the Secretary of the federal Department of Health and Human Services ("HHS") to issue standards for the privacy and security of medical records and other individually identifiable patient data.
Sanctions for failing to comply with standards issued pursuant to HIPAA include criminal penalties of up to $250,000 per violation and civil sanctions of up to $25,000 per violation. Due to the complex and controversial nature of the privacy regulations, they may be subject to court challenge, as well as further legislative and regulatory actions that could alter their effect.
In August 2000, HHS published for comment proposed rules related to the security of electronic health data, including individual health information and medical records, for health plans, health care providers, and health care clearinghouses that maintain or transmit health information electronically. The proposed rules would require these businesses to establish and maintain responsible and appropriate safeguards to ensure the integrity and confidentiality of this information. The standards embraced by these rules include the implementation of technical and organization policies, practices and procedures for security and confidentiality of health information and protecting its integrity, education and training programs, authentication of individuals who access this information, system controls, physical security and disaster recovery systems, protection of external communications and use of electronic signatures. These proposed rules have not yet become final.
The Company's effective tax rate from continuing operations was 53.7% for 2000 compared to 34.6% for 1999 and 33.3% for 1998. The 1999 and 1998 effective rate varied from the federal tax rate of 35%, primarily due to the small life insurance company deduction allowed for certain insurance subsidiaries of the Company, the effect of certain tax credits and the change in the valuation allowance related to deferred tax assets. The 2000 effective tax rate varied from the federal tax rate of 35%, primarily due to the significant operating loss at AMS, from which the Company was not able to recognize any tax benefit. AMS is not part of the Company's consolidated group for tax purposes and, as a result, files a separate tax return. As of December 31, 2000, the
Company has recognized a net deferred tax asset of $32.9 million. Realization of the net deferred tax asset is dependent on generating sufficient taxable income. Although realization is not assured, management believes it is more likely than not that the net deferred tax asset will be realized based on anticipated profits and available tax planning strategies. See Note K of Notes to Consolidated Financial Statements.
sharing reimbursements from subsidiaries (which will be partially offset by holding company operating expenses).
Prior approval by insurance regulatory authorities is required for the payment of dividends by a domestic insurance company that exceed certain statutory limitations based on surplus and net income. At December 31, 2000, the domestic insurance companies could pay aggregate dividends to the parent company of approximately $47.4 million without prior approval by statutory authorities.
On March 14, 2000, a limited liability company controlled by the Company's Chairman ("Lender LLC") loaned $70.0 million to a newly-formed subsidiary of the Company (the "Lender LLC Loan"). The proceeds of the Lender LLC Loan, together with $5.0 million of cash on hand, were used to reduce indebtedness outstanding under the Bank Credit Facility from $100.0 million to $25.0 million. The Lender LLC Loan bore interest at the prevailing prime rate, was guaranteed by UICI, was due and payable in July 2001 and was secured by a pledge of investment securities and shares of the Company's National Motor Club unit.
In connection with the March 2000 paydown of indebtedness outstanding under the Bank Credit Facility, the Bank Credit Facility was amended to provide, among other things, that the $25.0 million balance outstanding would be due and payable on July 10, 2000, amounts outstanding under the facility would be secured by a pledge of investment securities and shares of Mid-West National Life Insurance Company of Tennessee ("Mid-West"), and the restrictive covenants formerly applicable to UICI and its restricted subsidiaries (primarily the Company's insurance companies) were made applicable solely to Mid-West. Amounts outstanding under the Bank Credit Facility continued to bear interest at LIBOR plus 100 basis points per annum. On April 11, 2000 and June 28, 2000, the Company made principal payments of $11.0 million and $8.0 million, respectively, under the Bank Credit Facility, and on June 30, 2000, Lender LLC, against payment to the banks of $6.0 million, assumed 100% of the banks' remaining $6.0 million position in the Bank Credit Facility.
Effective July 27, 2000, the Company and Lender LLC completed a restructuring of the terms of the Lender LLC Loan. As part of the restructuring, the Company paid to Lender LLC principal owing on the Lender LLC Loan in the amount of $6.0 million and amended the terms of the Lender LLC Loan to provide that the aggregate principal amount of $70.0 million then owing by the Company would consist of a $32.0 million unsecured tranche and a $38.0 million tranche secured by a pledge of 100% of the capital stock of Mid-West (the "Amended Lender LLC Loan"). The Amended Lender LLC Loan (a) matured on January 1, 2002, (b) continued to bear interest at the prevailing prime rate from time to time, with interest
On January 30, 2001, the Company prepaid in full principal and accrued interest on the secured tranche of the Amended Lender LLC Loan in the amount of $21.1 million, utilizing a portion of the proceeds received in liquidation of UCNB, and Lender LLC's security interest in 100% of the capital stock of Mid-West was released in full.
On July 19, 2000, the Company's offshore-domiciled insurance companies incurred indebtedness with an institutional lender in the amount of $24.0 million. The indebtedness bears interest at the per annum rate of 11.0%, matures on August 1, 2001, is secured by a pledge of all of the assets of the offshore companies, and is guaranteed by the Company. The proceeds of the borrowing were advanced to the parent company to fulfill liquidity needs at the parent company. At December 31, 2000, the outstanding balance on the loan was $18.0 million, and at March 5, 2001, the outstanding balance on the loan was $6.0 million.
Effective June 29, 2000, UICI executed and delivered an unsecured promissory note payable to a systems vendor in the amount of $10.0 million, which note bears interest at LIBOR plus 150 basis points (1.5%) (7.9% at December 31, 2000), and is payable as to principal in equal quarterly installments in the amount of $500,000, commencing October 1, 2000, with a final maturity of June 30, 2005. The note was delivered to discharge an account payable by UCS in the amount of $10.0 million owing to the systems vendor.
At December 31, 1999, UCNB held unsecuritized net credit card receivables in the amount of $190.7 million, and had outstanding time deposits in the amount of $290.0 million. On September 29, 2000, the Company completed the sale of substantially all of the non-cash assets associated with its United CreditServ credit card unit, including its credit card receivables portfolios and its Sioux Falls, South Dakota servicing operations, for a cash sales price of approximately $124.0 million. Following the sale of the Company's United CreditServ unit, UCNB prepaid all of its remaining certificates of deposit then-outstanding in the amount of approximately $79.0 million, and all such deposit liabilities were discharged as of October 23, 2000. Following the prepayment of all deposit liabilities of UCNB, at December 31, 2000 UCNB held cash, cash equivalents and U.S. Treasury securities in the amount of $26.0 million.
The Company securitized $60.0 million, $30.0 million and $29.0 million of credit card receivables in 1998, 1997 and 1996, respectively. The Company did not securitize any credit card receivables in 2000 or 1999. The Company purchased participating interests in such securitizations in the aggregate principal amount
Effective August 6, 1999 AMS completed a closing and funding of $515.0 million of its $650.0 million single seller asset-backed commercial paper conduit, pursuant to which commercial paper may be issued from time to time with maturities from one to 270 days. Approximately $618.4 million of commercial paper bearing interest at a weighted annual composite rate of 6.659% was issued and outstanding under the facility at December 31, 2000. Liquidity support is provided by a separate banking facility. Under the terms of the program, should the support facility be activated, such borrowings thereunder would be repaid using collections of underlying student loans, bear interest at LIBOR plus seventy-five (75) basis points and mature in August 2034. The commercial paper received ratings of A1/P1/F1 from Standard & Poor's, Moody's, and Fitch, respectively.
On October 7, 1999 AMS completed a $344.0 million financing of three classes of notes. The $229.0 million Class A-1 notes were structured as three-month LIBOR floating rate notes and were priced with a spread of 42 basis points with the interest rate to be reset quarterly. The Class A-1 notes with an outstanding balance of $198.1 million at December 31, 2000, have an expected average life of 3.5 years with
In connection with its AMS tuition installment payment plan business, at December 31, 2000 and 1999, the Company had $111.8 million and $113.1 million of restricted cash, respectively, representing amounts collected under the tuition plan program and a corresponding liability due to the various educational institutions.
On July 27, 2000, the Company sold to an investor group consisting of Jensen family members (including Mr. Jensen) (the "NMC Buyer") its 97% interest in NMC Holdings, Inc. ("NMC"), the parent company of its National Motor Club of America unit, for a purchase price of $56.8 million, representing 97% of the value of NMC as determined by independent appraisal. The purchase price was paid at closing in cash in the amount of $21.8 million and by delivery of a promissory note (the "NMC Note") issued by the NMC Buyer in the principal amount of $35.0 million. The NMC Note was an unsecured, full recourse obligation of the NMC Buyer and was unconditionally guaranteed by Mr. Jensen. The NMC Note bore interest at the per annum rate of prime fluctuating from time to time, and was initially payable in three equal installments of principal in the amount of $11.7 million due on each of October 1, November 1 and December 1, 2000, respectively. Effective October 1, 2000, the NMC Note was amended to provide for three equal installments of principal in the amount of $11.7 million due on each of November 1 and December 1, 2000 and January 1, 2001, respectively. In accordance with the terms of the June Consent Orders, the Company pledged the NMC Note to UCNB to secure, in part, the Company's obligations under UCNB's Capital Plan. On October 31, 2000, the OCC consented to the release by UCNB of its security interest in the NMC Note. On November 2, 2000, the NMC Buyer prepaid the NMC Note in its entirety.
Dividends paid by domestic insurance companies out of earned surplus in any year are limited by the law of the state of domicile. See Item 5 -- Market for Registrant's Common Stock and Related Stockholder Matters and Note L to Notes to the Consolidated Financial Statements.
Fixed maturity securities. Fixed maturity securities accounted for 76.3% and 82.9% of the Company's total investments at December 31, 2000 and 1999, respectively. Fixed maturity securities at December 31, 2000 consisted of the following:
adjustments were made to the financial statements for periods prior to July 1, 2000, upon the initial application of the Interpretation. The Company has implemented this guidance.
In September 2000, the FASB issued Statement No. 140, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, replacing Statement No. 125. Statement No. 140 changes certain provisions of Statement No. 125 and could have a significant impact on commercial companies that engage in securitization transactions. The Statement is effective for transfers occurring after March 31, 2001. However, the expanded disclosures about securitizations and collateral are effective for fiscal years ending after December 15, 2000.
In June 2000, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities, which is required to be adopted in years beginning after June 15, 2000. Because of the Company's minimal use of derivatives, the adoption of the new Statement will not have a significant effect on earnings or the financial position of the Company.