Our executive offices 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. We lease all of the approximately 189,000 square feet of office space that we occupy. Management considers its office facilities suitable and adequate for the current level of operations.
In addition to the above, Pennsylvania Life and Penncorp Life (Canada) is the named lessee on approximately 57 properties occupied by Career Agents for use as field offices. Rent for these field offices is reimbursed by the agents.
- ------------------ (1) After provision for Series C Preferred Stock dividends of $180 for the year ended December 31, 1999.
(2) Includes the results of the companies acquired in the 1999 acquisition, since their acquisition on July 30, 1999.
(5) Includes capital and surplus of Penncorp Life (Canada) of C$82,907 as of December 31, 2003, 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$0.7654 per U.S. $1.00 as of December 31, 2003, 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.
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," "estimate," "plan," "intend" 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.
CAREER AGENCY -- The Career Agency segment is comprised of the operations of Pennsylvania Life, Penncorp Life (Canada), and, beginning March 31, 2003, Pyramid Life. Pennsylvania Life and Pyramid Life operate in the United States, while Penncorp Life (Canada) operates exclusively in Canada. This segment's products include Medicare Supplement/Select, other supplemental senior health insurance, fixed benefit accident and sickness disability insurance, life insurance, and annuities and are distributed by career agents who are under contract with Pennsylvania Life, Pyramid Life or Penncorp Life (Canada).
SENIOR MARKET BROKERAGE -- This segment includes the operations of American Pioneer, American Progressive, Constitution and Union Bankers that distribute senior market products through non-exclusive general agency and brokerage distribution systems. The products include Medicare Supplement/Select, long term care, senior life insurance and annuities.
CORPORATE -- This 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.
Our consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States ("GAAP"). The preparation of our financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the amounts of assets and liabilities and disclosures of assets and liabilities reported by us at the date of the financial statements and the revenues and expenses reported during the reporting period. In developing these estimates, management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the financial statements. As additional information becomes available or actual amounts become determinable, the recorded estimates may be revised and reflected in operating results. Actual results could differ from those estimates. We have identified the following accounts that involve a higher degree of judgment and are subject to a significant degree of variability: include policy related liabilities, deferred policy acquisition costs, present value of future profits and other amortizing intangibles, valuation of certain investments and income taxes.
The determination of expected gross profits for intrest-sensitive products is an inherently uncertain process that relies on assumptions including projected interest rates, the persistency of the policies issued as well as anticipated benefits, commissions and expenses. It is possible that the actual profits from the business will vary materially from the assumptions used in the determination and amortization of deferred acquisition costs. Deferred policy acquisition costs are written off to the extent that it is determined that future policy premiums and investment income or gross profits would not be adequate to cover related losses and expenses.
On a periodic basis, management reviews the unamortized balances of present value of future profits, goodwill and other identified intangibles to determine whether events or circumstances indicate the carrying value of such assets is not recoverable, in which case an impairment charge would be recognized. Management believes that no impairments of present value of future profits, goodwill or other identified intangibles existed as of December 31, 2003.
Beginning July 1, 2003, the Guarantee Reserve field force continued to write this business in Guarantee Reserve, with us administering all new business and assuming 50% of the risk through a quota share reinsurance arrangement. Beginning in the second quarter of 2004 as the products are approved for sale in each state, new business will be written by our subsidiaries, with 50% of the risk ceded to Swiss Re.
Since its acquisition in 2003, this marketing organization produced more than 36,000 applications and more than $15.2 million of issued annualized life insurance premium, which is 50% retained by us.
In March 2004, we signed a definitive contract to acquire Heritage Health Systems, Inc. ("Heritage"), a privately owned managed care company that operates Medicare Advantage plans in Houston and Beaumont Texas, for approximately $98 million in cash. The closing of the acquisition is subject to regulatory approvals and other customary conditions, and is expected to occur in the second quarter of 2004. Founded in 1995, Heritage has approximately 15,700 Medicare members and has annualized revenues of approximately $132 million. As of the closing, Heritage is projected to have approximately $14 million of equity capital and no debt.
We intend to finance this acquisition using approximately $34 million of cash on hand, with the balance coming from the proceeds of a senior credit facility to be arranged by Banc of America Securities, LLC. In connection with this financing, we will incur a non-cash, after-tax expense of approximately $1.1 million relating to the unamortized fees on the current facility that will be replaced.
Beginning in 1998, many HMOs realized that their Medicare programs were unprofitable and, therefore, decided to terminate these programs. As a result, millions of seniors were involuntarily dis-enrolled 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 had the right to acquire Medicare Supplement insurance without medical underwriting or pre-existing condition limitations. As we expected, beginning in 2002 new sales of our Medicare products have slowed since the HMOs are not dis-enrolling members as much as they were in prior years. To offset this impact, 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. As a result, we believe that we will continue to grow our net premiums.
(1) We evaluate the results of operations of our segments based on income before realized gains and income taxes. Management believes that realized gains and losses are not indicative of overall operating trends. This differs from generally accepted accounting principles, which includes the effect of realized gains in the determination of net income. The schedule above reconciles our operating income to net income in accordance with generally accepted accounting principles.
Net income for 2003 increased 43%, to $43.1 million, or $0.78 per share, compared to $30.1 million, or $0.56 per share in 2002.
During 2003, we recognized realized gains, net of tax of $1.3 million, or $0.02 per share, compared to realized losses, net of tax of $3.3 million, or $0.06 per share in 2002. The losses in 2002 were primarily a result of the recognition of an impairment of our WorldCom holdings.
In connection with the acquisition of Pyramid Life on March 31, 2003, we refinanced our credit facility. As a result of the repayment of our existing debt, we were required to write off the unamortized portion of the fees we incurred for that debt. This resulted in a pre-tax, non-cash charge of $1.8 million (the "financing charge"), which is included in the operating loss of the Corporate segment.
Senior Market Brokerage segment 2003 results improved by $2.8 million, or 19%, to $17.7 million compared to 2002. This improvement is the result of the increase in our net retained business and improved loss ratios for our Medicare Supplement/Select business.
The loss from the Corporate segment increased by $3.9 million, or 56%, compared to 2002, due primarily to the charge associated with the refinancing of our debt and the increase in financing costs and other parent company expenses.
Our Career Agency segment income increased by $5.0 million or 18%, compared to 2001. This reflects an increase in new sales and improved loss ratios for our disability business.
Our senior market brokerage segment results improved by $1.2 million, or more than 9%. This improvement is primarily the result of improved loss ratios for our Medicare Supplement/Select business. However, this was partially offset by an increase in claims relating to a block of home health care policies that we stopped selling in 2000.
The operations of Penncorp Life (Canada), which are included in the Career Agency segment results, are transacted using the Canadian dollar as the functional currency. The Canadian dollar has strengthened relative to the U.S. dollar. The average conversion rate increased 12%, to C$0.7141 per US$1.00 for 2003, from C$0.6370 per US$1.00 for 2002. This strengthening added approximately $1.5 million to the Career Agency segment results for 2003, compared to 2002. See