The following selected consolidated financial data as of and for each of the five years in the period ended December 31, 1996 have been derived from the audited Consolidated Financial Statements of the Company. The following data should be read in conjunction with the Consolidated Financial Statements and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included herein.
The Company's business segments are: (i) Health Insurance, which includes the businesses of the Self-Employed Health Insurance Division and the Student Health Insurance Division; (ii) Life Insurance and Annuity, (iii) Credit Services, and (iv) Corporate and Other, which includes the businesses of the HealthCare Solutions Division, Real Estate Division, investment income not allocated to the other segments, interest expense and general expenses relating to corporate operations and realized gains or losses on sale of investments. Net investment income is allocated to the Health Insurance segment and the Life Insurance and Annuity segment based on policy liabilities. The interest rate for the allocation is based on a high credit quality investment portfolio with a duration consistent with the duration of the segment's policy liabilities.
Fees and other income. Fees and other income increased to $110.8 million in 1996 from $54.7 million in 1995, an increase of $56.1 million, or 103%. The increase related primarily to the increase in revenue from the Credit Services segment, revenue from the companies acquired by the HealthCare Solutions Division in 1995 and administrative fees from the administrative operation acquired from AEGON on April 1, 1996.
Gains on sale of investments. The Company recognized gains on sale of investments of $652,000 in 1996 compared to $2.2 million in 1995. 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. In addition, due to increasing long term interest rates in 1996, the net unrealized investment gains on securities classified as "available for sale", reported as a separate component of stockholders' equity and net of applicable income taxes and minority interests, was $2.2 million at December 31, 1996 compared to $6.8 million at December 31, 1995.
Underwriting, acquisition and insurance expenses. Underwriting, acquisition and insurance expenses increased to $280.8 million in 1996 from $230.0 million in 1995, an increase of $50.8 million, or 22%. The increase was primarily due to the growth in premium volume, costs associated with the businesses acquired by the HealthCare Solutions Division in 1995 and expenses relating to the administrative operation acquired from AEGON. As a percentage of revenues, these expenses increased to 38.4% in 1996 from 35.9% in 1995.
Corporate and Other. Operating income for Corporate and Other was $13.2 million in 1996 compared to $9.2 million in 1995. HealthCare Solutions Division incurred comparable operating losses in 1996 and 1995. The losses primarily resulted from the losses of certain companies in the development stage which was partially offset by operating income of other businesses. In October 1996, the Company acquired through a stock exchange agreement 100% of Amli Realty Co. ("ARC"). ARC is a full-service real estate organization whose principal investment is a 11% equity interest in Amli Residential Properties Trust, a publicly traded real estate investment trust. The operations of this acquisition are reported as the Real Estate Division. The Company reported operating income from the Real Estate Division of $1.0 million in 1996. Operating income from other corporate activities increased to $16.3 million in 1996 from $13.4 million in 1995, an increase of $2.9 million. The increase was primarily due to the increase in investment income not allocated to the other segments and the decrease in interest expense. The primary reason for the increase in investment income not allocated to the other segments was due to the investment income earned on the net proceeds from the public offering completed by the Company on May 1, 1996. The increase was partially offset by fewer gains realized on sale of investments in 1996 compared to 1995.
Revenues. Revenues increased to $641.1 million in 1995 from $522.9 million in 1994, an increase of $118.2 million, or 22%. The increase was a result of increases in premiums, net investment income, fees and other income and gains on sales of investments.
Health premiums. Health premiums increased to $473.8 million in 1995 from $415.3 million in 1994, an increase of $58.5 million, or 14%. The increase was primarily due to the growth in sales of new health insurance policies and increased premiums from coinsured policies sold by UGA and issued by AEGON. In 1995, the coinsurance percentage on both in force and new health insurance policies issued by AEGON increased to 55% from 52.5% in 1994. During
Fees and other income. Fees and other income increased to $54.7 million in 1995 from $24.9 million in 1994, an increase of $29.8 million, or 120%. The increase relates primarily to the increase in Credit Services segment revenue and revenue from the companies acquired by the HealthCare Solutions Division in 1995.
Gains (losses) on sale of investments. The Company recognized gains on sales of investments of $2.2 million in 1995 compared to losses of $5.8 million in 1994. 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. In addition, due to decreasing interest rates in 1995, the net unrealized investment gains on securities classified as "available for sale" reported as a separate component of stockholders' equity and net of applicable income taxes and minority interests, was $6.8 million at December 31, 1995 compared to net unrealized investment losses of $18.1 million at December 31, 1994.
Benefits, claims, and settlement expenses. Benefits, claims, and settlement expenses increased to $320.5 million in 1995 from $275.9 million in 1994, an increase of $44.6 million, or 16%. The increase was primarily due to the growth in premium volume. As a percentage of revenues, these expenses decreased to 50.0% in 1995 from $52.8 in 1994, as a result of the increased revenues from the Credit Services segment and HealthCare Solutions Division, whose expenses are primarily classified as underwriting, acquisition, and insurance expenses.
Health Insurance. Operating income for the Health Insurance segment increased to $64.5 million in 1995 from $51.9 million in 1994, an increase of $12.6 million, or 24%. This increase was due primarily to a 14% increase in health premiums and a decrease in the combined health ratio to 91% in 1995 from 93% in 1994. Operating income increased $11.8 million for the Self-Employed Health Insurance Division and $785,000 for the Student Health Insurance Division.
Life Insurance and Annuity. Operating income for the Life Insurance and Annuity segment increased to $11.6 million in 1995 from $10.6 million in 1994, an increase of $1.0, or 9%. The increase was due to an increase in premiums, an increase in net investment income allocated to life and annuity products, and a decrease in administrative expenses.
Credit Services. Operating income for the Credit Services segment was $1.4 million in 1995 compared to a loss of $1.1 million in 1994. The change of $2.5 million was due to the growth in new sales of the credit card program and a decrease in expenses, as a percentage of revenues.
Corporate and Other. Operating income for Corporate and Other was $9.2 million in 1995 compared to a loss of $5.4 million in 1994. The HealthCare Solutions Division incurred an operating loss of $4.2 million in 1995 compared to a loss of $2.2 million in 1994. The loss was primarily a result of the losses of certain companies in the development stage which was partially offset by operating income of other businesses. Operating income from other corporate activities was $13.4 million in 1995 compared to a loss of $3.2 million in 1994. The
At the federal level, several competing proposals have been introduced or passed in Congress. One law which was introduced by Senators Nancy Kassebaum and Edward Kennedy (the "Kassebaum-Kennedy legislation") was passed in 1996. The Kassebaum-Kennedy legislation builds upon state initiatives by guaranteeing "group-to-individual" portability. Under the legislation, any person governed by a group insurance plan for at least eighteen months will, on leaving the group plan, have the right to buy an individual policy from any insurance company selling individual health insurance policies in that person's state regardless of whether that person has a pre-existing condition. This provision could result in the Company insuring individuals who under the Company's current underwriting standards would not be insured by the Company, which could have a material adverse effect on the Company.
The Company is unable to predict when or whether any federal or state proposals, or some combination thereof, will be enacted or, if enacted, the likely impact on the Company. It is possible, however, that the enactment of such health care reform legislation could adversely affect the Company's results of operations. The Company has ceased issuing or coinsuring insurance in the self-employed market in two states as a result of legislative developments.
Claims liabilities. The Company records a claims liability for its estimate of the ultimate cost of all reported and unreported claims which are unpaid as of the end of the applicable financial reporting period. Liabilities for medical claims represent the significant majority of claims liability. The Company uses the "incurred date" method to estimate its liability rather than the "service date" method. The "service date" method estimates the liability for all medical services received by the insured prior to the end of the applicable financial reporting period. The "incurred date" method estimates the liability for all medical service related to an accident or illness incurred prior to the end of the period, even though the medical service may not be received by the insured until a later financial reporting period. The "incurred date" method is a more conservative method.
The Company's invested assets increased to $1,082.9 million at December 31, 1996 from $931.3 million at December 31, 1995, an increase of $151.6 million. The primary sources for the asset growth were the investment of the net proceeds from the public offering completed May 1, 1996 and the cash provided by current year operations. The sources were partially offset by the decreases in market values of the fixed maturity securities held as "available for sale", the payment of debt, the purchase of property and equipment, the acquisition of substantially all of the minority interest of an insurance subsidiary, and the withdrawals, net of deposits, from investment products. The decrease in market values was the direct result of increases in long term interest rates.
On June 22, 1994, the Company issued its 8.75% Senior Notes Payable due June 2004 ("8.75% Senior Notes") in the aggregate amount of $27.7 million. The proceeds from the sale
of the 8.75% Senior Notes were used to prepay $9.0 million of bank debt and to repay the then $10.0 million of existing debt on a revolving credit note with AEGON. The balance of the proceeds were used for other general corporate purposes. Interest on the 8.75% Senior Notes is paid semi-annually. The notes do not require principal repayments until June 1, 1998 and on each June 1 thereafter in the amount of $4.0 million each until repaid.
At December 31, 1995, the Company owed $10.7 million to the Company's Chairman of the Board. The note was repaid in full during 1996.
Effective April 25, 1996, the Company commenced a public offering of 5,175,000 shares of common stock at a price of $20.50 per share. The net proceeds to the Company (after deducting underwriting discounts and commissions and offering expenses) from the sale of the shares was approximately $100.1 million. The Company used $10.3 million of the proceeds to repay the AEGON revolving credit note. The Company also intends to use a portion of the proceeds for capital contributions to its insurance subsidiaries. The insurance subsidiaries of the Company are required by state regulation to maintain certain levels of capital and surplus. In addition, in order to maintain the current ratings of the Company's insurance subsidiaries or improve such ratings in the future, higher levels of capital and surplus may be required. The required levels are generally based on the amount of insurance issued and the quality of invested assets. As premiums increase, the Company is generally required to increase the capital and surplus of the insurance companies. The AEGON Transaction is expected to result in increased premiums for the Company. While the Company is not able to project the exact amount of additional capital and surplus which will be required in the insurance subsidiaries, a portion of the proceeds are expected to be used for this purpose. The remainder of the proceeds are being and will be used for general corporate purposes, including acquisitions of complementary businesses and assets. Pending such uses, the remaining proceeds are being invested by the Company in accordance with its current investment policies.
During 1996, the Company securitized $31.6 million of credit card loans. The securitization involved the sale of $29.0 million of asset backed securities in which the Company purchased participating interests totaling $2.9 million. The proceeds received by the Company were used for general corporate purposes including the purchase of investments.
At December 31, 1996, the Company had approximately $765.4 million in student loan commitments outstanding of which the Company expects to fund approximately $110.0 million. These commitments will continue to come due in years 1997 through 2019. The Company estimates that approximately $11.4 million in student loans will be funded in 1997.
The Company may be required by certain minority stockholders to purchase their shares of subsidiaries of the Company at a predetermined formula price which approximates GAAP book value. The formula price based on information available at December 31, 1996 was $5.7 million.
Effective January 1, 1997, the Company acquired the remaining interest of Insurdata and UAI, based on a predetermined formula price of $15.1 million.
The Company has commitments to fund the unused line of credit on the credit card loans. At December 31, 1996, the Company had a $6.0 million letter of credit covering the outstanding commitments.
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 H to the Audited Consolidated Financial Statements."
As of December 31, 1996, $730.6 million or 95.8% of the fixed maturity securities portfolio was rated BBB or better (investment grade) and only $32.3 million or 4.2% of the fixed maturity securities portfolio were invested in below investment grade securities (less than BBB). A quality distribution for fixed maturity securities is as follows:
In June 1996, the FASB issued Statement No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities". This statement provides new accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, for certain secured borrowing and collateral transactions, and for extinguishment of liabilities. The provisions of the statement are to be applied to transactions occurring after December 31, 1996 (regardless of an entity's fiscal year) even for transfers of receivables pursuant to securitization structures that previously were established. The Company will implement this statement on any transactions occurring after December 31, 1996.