The selected consolidated financial data presented below should be read in conjunction with the consolidated financial statements of the Company, the related notes thereto and the auditors' report thereon and "Management's Discussion and Analysis of Financial Condition and Results of Operations". The selected consolidated financial data presented below as of, and for each of the years ended December 31, 1993 through 1995 are derived from the consolidated financial statements of the Company, which have been audited and reported upon by KPMG Peat Marwick LLP, independent certified public accountants. The selected consolidated financial data presented below as of and for each of the years ended December 31, 1996 and 1997, have been audited and reported upon by Ernst & Young LLP, independent certified public accountants. See "Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations".
Direct premium and policyholder fees $24,885 $40,652 $46,145 $55,287 $99,339 Reinsurance premium assumed 616 13,564 8,866 10,522 998 Reinsurance premium ceded (3,975) (13,892) (18,200) (25,664) (62,623) --------- --------- --------- --------- --------- Net premium and other policyholderfees 21,526 40,324 36,811 40,145 37,714
December 31, ------------------------------------------------------- Balance Sheet Data: 1993 1994 1995(2) 1996 1997 --------- --------- --------- --------- ---------- (In thousands, except for per share data)
Total investments $123,038 $125,487 $135,603 $144,681 $159,429 Total assets 153,687 164,862 182,994 242,237 272,575 Policyholder account 105,091 108,777 118,609 134,539 145,085 balances Series C Preferred Stock - - - - 5,168 Series A Preferred Stock 6,564 - - - -
The Company is an insurance holding company representing the strategic combination of three life insurance companies, American Progressive, American Pioneer and American Exchange and WorldNet. Management is focused on growth, both internal, through aggressive marketing and product development programs directed at specialty life and accident and health insurance products, and by seeking further acquisitions of insurance companies or blocks of business. It also has embarked on a program to streamline operations through consolidation of administrative and processing facilities.
For the year ended December 31, 1997, the Company earned net income after Federal income taxes of $2,119,000 ($0.18 per share) compared to $104,000 ($0.01 per share) in the prior year. Operating income before Federal income taxes amounted to $3,211,000 for the year ended December 31, 1997 compared to $373,000 in the year ago period. In September, 1997, the Company sold AmeriFirst
In the year ended December 31, 1997, the Company's gross premium and policyholder fees earned (including reinsurance assumed) amounted to $100,337,000, a $34,528,000 increase over the $65,809,000 amount in 1996. This gross premium increase is significantly attributable to the increase of $37,084,000 of premiums received on the policies assumed in the fourth quarter of 1996 from First National Life Insurance Company ("First National"), which premiums amounted to $51,266,000 in 1997 compared to $14,182,000 in 1996. In addition, the gross premiums on the Company's currently marketed programs increased as follows:
Product Premium Premium Increase Earned ---------------------------- --------------- ------------- Senior market supplemental health $4,391,000 $11,366,000 Senior market life insurance 773,000 2,380,000 Group life insurance 116,000 3,407,000 --------------- ------------- Totals $5,280,000 $17,153,000 =============== =============
In addition, other life insurance premium increased $2,134,000 to $8,352,000 in 1997.
Other accident and health insurance premiums increased $124,000 for the year ended December 31, 1997. Premiums on the international medical insurance product (which was 90% and 95% reinsured to unaffiliated reinsurers in 1997 and 1996, respectively) increased $1,264,000 in 1997, while the premiums on the non-marketed accident and health products decreased $1,140,000 in 1997.
Effective January 1, 1997, the Company entered into a new reinsurance agreement on American Pioneer's major medical/major hospital business. Under the new treaty, the Company retains 50% of the first $60,000 in claims risk compared to 25% under the prior agreement. As a result, premiums ceded on this product decreased $1,719,000 in 1997. Accident and health premiums ceded on the policies not currently marketed also decreased $1,004,000.
Net investment income of the Company increased $173,000 to $10,023,000 for the year ended December 31, 1997, compared to $9,850,000 in the year ago period. Realized gains on investments amounted to $1,133,000 for the year ended December 31, 1997 compared to $240,000 in the year ago period. Included in the 1997 amount is the $569,000 gain realized on the sale of AmeriFirst Insurance Company to an unaffiliated third party.
Fee income amounted to $2,368,000 for the year ended December 31, 1997, a decrease of $503,000 from the $2,871,000 amount for the year ago period. This decrease is the result of the cancellation of WorldNet's Ontario Blue Cross contract in 1996. The amortization of deferred revenue amounted to $93,000 for the year ended December 31, 1997, compared to $280,000 in the year ago period. This $187,000 decrease is the result of the full amortization of the deferred revenue generated by the reinsurance of the major medical business on June 30, 1995, which agreement was terminated by the reinsurer on December 31, 1996 (See "Business - Reinsurance Ceded").
These increases of $8,663,000 were offset by decreases in the claims incurred on the terminated businesses (NAIU - $4,219,000; New York State DBL - $3,712,000; group dental - $903,000). The remaining decrease of $154,000 represents a decrease in life insurance claims.
The change in deferred acquisition costs increased $688,000 for the year ended December 31, 1997 compared to 1996. The amount of acquisition costs capitalized increased $1,670,000 from $5,042,000 in 1996 to $6,712,000 in 1997. This increase is the result of the increase in new premium production in the year ended December 31, 1997 compared to the year ago period. The amortization of deferred acquisition costs increased $982,000 from $2,784,000 in 1996 to $3,766,000 in 1997. This increase is the result of the increase in the asset
balance. In the year ended December 31, 1997, the Company amortized $112,000 of the goodwill generated in the First National acquisition.
Commissions increased $5,009,000 in the year ended December 31, 1997 to $21,089,000, compared to $16,080,000 in the year ago period. This increase is the direct result of the $34,528,000 increase in gross premium earned discussed above. Commissions and expense allowances on reinsurance ceded increased $9,296,000 for the year ended December 31, 1997 to $20,300,000, compared to $11,004,000 in the year ago period. This increase is the direct result of the $36,960,000 increase in reinsurance premium ceded discussed above and reduces the amounts of commissions and expenses capitalized for deferred acquisition costs. Other operating costs and expenses increased $1,674,000 in the year ended December 31, 1997 to $19,358,000, compared to $17,684,000 in the year ago period. The non-insurance companies expenses decreased $280,000 to $2,594,000 for the year ended December 31, 1997 as a result of the decrease in expenses incurred at WorldNet - Miami.
for the prior year. Net investment income increased approximately $905,000 from $8,945,000 in 1995 to $9,850,000 in 1996. This increase is attributed to higher invested assets in 1996 compared to 1995.
Benefits, Claims and Other Deductions. Total benefits, claims and other deductions increased approximately $5,754,000 to $53,014,000 for the year ended December 31, 1996. The change in future policy benefits amounted to an increase of approximately $3,192,000. The increase in reserves for the year ended December 31, 1996 was $1,855,000 and primarily relates to the increase in life reserves at American Pioneer of $971,000, the increase in the unearned premium reserve at NAIU of $256,000 and the increase in the senior market supplemental health insurance unearned premium reserves of $628,000. This increase compares to a decrease in 1995 of approximately $1,337,000, which decrease in 1995 primarily relates to the reduction in the 1995 NAIU premium ($491,000), the not actively marketed accident and health business of American Progressive ($827,000) and the major hospital and major medical of American Pioneer ($430,000) offset by an increase in the senior market supplemental health insurance reserves ($559,000). Claims and other benefits increased approximately $1,676,000. This increase is a result of increased mortality of approximately $516,000, increased American Progressive's senior market supplemental health benefits of approximately $1,062,000, the claims incurred on the First National business acquired of $1,077,000 and increased morbidity of $388,000 on the group dental business. The runoff health business at both insurance companies had a reduction in benefits totaling $3,145,000 due to the decision to reinsure 75% of the major hospital and major medical benefits at American Pioneer. The benefits incurred on the NAIU business increased $1,083,000 and NYS DBL benefits increased $695,000. The increase in deferred acquisition costs decreased approximately $1,106,000 and was due to the decrease in capitalized expenses of $228,000 and the increase in amortization of $878,000.
public company. In addition, the Company requires capital to fund its anticipated growth through acquisitions of other companies and blocks of insurance business.
The Company requires cash to pay the operating expenses necessary to support its status as an insurance holding company (which under applicable Insurance Department regulations must bear its own expenses), and to meet the cost involved in being a publicly-owned company. In addition, it will require cash to meet Universal's obligations under the Unstacking Agreement and the debentures outstanding thereunder and to meet the quarterly amortization of the bank loan entered into on December 10, 1997.
On December 10, 1997, the Company entered into an agreement with Chase Manhattan Bank for a $3,500,000 five-year, secured term loan. The loan proceeds were used to finance a segment of the intercompany sale of American Pioneer from American Progressive to Universal and to retire the $800,000 amount outstanding on the term loan agreement with a commercial bank. The loan agreement calls for interest at the London Interbank Offered Rate ("LIBOR") plus 200 basis points. In connection with this loan agreement, the Company entered into a three-year interest rate swap agreement, (the "Swap Agreement") with Chase Securities Corp., effective January 1, 1998, to lock in a fixed rate of 8.19% for the three year period. Upon expiration of the Swap Agreement, the Company's interest rate reverts to the LIBOR plus 200 basis points. The loan will be secured by a first priority interest in all the assets of WorldNet Services Corp. and Quincy Corp., a pledge of 9.9% of the outstanding common shares of American Progressive and 100% of the shares of Quincy Coverage Corp.
The NAIC has adopted risk based capital ("RBC") rules, which became effective December 31, 1993 and have been adopted by New York, Florida and Texas. See "Regulation Risk-Based Capital Requirements." The RBC rules provide for various actions when the ratio of a company's total adjusted surplus to its RBC falls below 200%. At December 31, 1997, American Progressive, American Pioneer and American Exchange had RBC ratios of approximately 484%, 495% and 227% of the Authorized Control Level, respectively.
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
Liquidity is also affected by unscheduled benefit payments including death benefits, benefits under accident and 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, 1997 the Company held reserves that exceeded the underlying cash surrender values of its in force life insurance and annuities by more than $12.9 million. The insurance companies have not experienced any material changes in surrender and withdrawal activity in recent years.
Changes in interest rates may affect the incidence of policy surrenders and withdrawals. In addition to the potential impact on liquidity, unanticipated surrenders and withdrawals in a changed interest rate environment could adversely affect earnings if the Company were required to sell investments at reduced values in order to meet liquidity demands. The Company manages the asset and liability portfolios in order to minimize the adverse earnings impact of changing market rates. The Company seeks to invest in assets which have duration and interest spread characteristics similar to the liabilities that they support.
As a result of the decrease in economic interest rates, the net yield on the Company's cash and invested assets decreased from 7.08% in 1996 to 6.81% in 1997. A significant portion of these securities are held to support the liabilities for policyholder account balances, which liabilities are subject to periodic adjustments to their credited interest rates. The credited interest rates of the interest-sensitive policyholder account balances are determined by management based upon factors such as portfolio rates of return and prevailing market rates and typically follow the pattern of yields on the assets supporting these liabilities.
At December 31, 1997, the investment portfolios of the life insurance subsidiaries included cash and cash equivalents totaling $22,411,000, as well as fixed maturity and equity securities that could readily be converted to cash with carrying values (and fair values) of $124,531,000. The fair values of these liquid investments totaled more than $146,942,000 and constituted approximately 92% of the Company's investments at December 31, 1997. At December 31, 1997, all of the Company investments were income producing and current in interest and principal payments. In addition, the Company has no investment in any derivative instruments or other hybrid securities that contain any off balance sheet risk or investments in other securities whose fair values and principal repayments would be highly volatile to changes in interest rates, except for GNMA's, FNMA's and investment grade corporate collateralized mortgage obligations.
The Company's main operating system utilizes programs that were written using four digit codes to define the applicable year. Some of the Company's older sytem's computer programs were written using two digits rather than four to define the applicable year. As a result, those computer programs have time-sensitive software that recognize a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or
miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send invoices, or engage in similar normal business activities.
The project is estimated to be completed not later than December 31, 1999 which is prior to any anticipated impact on its operating systems. The Company believes that with modifications to existing software and/or conversions of data to existing software, the Year 2000 Issue will not pose significant operational problems for its computer systems. However, if such modifications and conversions are not made, or are not completed timely, the Year 2000 Issue could have a material impact on the operations of the Company. The Company has initiated formal communications with its significant suppliers to determine the extent to which the Company's interface systems are vulnerable to those third parties' failure to remediate their own Year 2000 Issues. There is no guarantee that the systems of other companies on which the Company's systems rely will be timely converted and would not have an adverse effect on the Company's systems.
In June, 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards Statement No. 130, "Reporting Comprehensive Income" ("Statement No. 130"), effective for years beginning after December 15, 1997. Statement No. 130 establishes standards for reporting and display of comprehensive income and its components (revenues, expenses, gains and losses) in a full set of general purpose financial statements. Statement No. 130 requires that all items that are required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements and requires that the accumulated balance of other comprehensive income be displayed separately from retained earnings and additional paid-in capital in the equity section of the balance sheet. The adoption of Statement No. 130 will only affect the presentation of the statement of income and the balance sheet and will not affect results of operations or financial position.
results of operations or financial position. The Company is still evaluating its options as to segment disclosures under Statement No. 131.