The Company currently leases from unaffiliated parties: (i) approximately 9,000 square feet of office space in Rye Brook, New York, under a lease expiring in October, 2004, (ii) 18,000 square feet in Orlando, Florida, under a lease expiring in January, 2002; (iii) 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) 3,000 square feet in Dallas, Texas, under a lease expiring in March, 2002 and (v) 4,000 square feet in Miami, Florida, under a lease expiring in August, 1999. These leases represent the operating offices of American Progressive, American Pioneer, American Exchange and WorldNet, respectively, and carry an aggregate annual rental of approximately $700,000. The Company also leases a smaller office in Andalusia, Alabama, for an aggregate annual rental of approximately $17,000.
Net Investment income 7,974 9,239 8,945 9,850 10,023 Realized gains 676 42 674 240 1,133 Fee income 2,466 4,126 3,137 2,872 2,368 Other income 801 219 244 280 93 Total revenues 33,443 53,950 49,811 53,387 51,331 Total benefits, claims and other deductions 31,818 51,712 47,161 53,014 48,119 Net income after taxes 1,553 2,228 2,642 104 2,119 Net income applicable to common shareholders 1,024 3,173 2,642 104 1,870 (1) Diluted income per share 0.14 0.37 0.25 0.01 0.18
Series B Preferred Stock - 4,000 4,000 4,000 4,000 Stockholders' equity 16,377 15,321 24,114 22,079 25,706 Stockholders' equity per share of Common Stock (3) 1.87 1.83 2.89 2.53 2.96
- ------------------------- (1)After provision for Series A Preferred Stock dividends of $529,000 and $576,000 for the years ended December 31, 1993 and 1994, respectively, and Series C Preferred Stock dividends of $250,000 for the year ended December 31, 1997. (2)See "Management's Discussion and Analysis of Financial Condition and Results of Operations: Effects of Accounting Pronouncements" for a discussion of the impact of changes in accounting principles. (3)Stockholders' equity per share of common stock represents stockholders' equity less the statement value of Series A and Series B Preferred Stock divided by outstanding shares of common stock.
The results of operations for the years ended December 31, 1996 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.
Insurance Company, an inactive insurance company, to an unaffiliated third party, for $3,379,000 and realized a pretax gain of $569,000 ($376,000 after tax or $0.03 per share).
Revenues. Total revenues decreased approximately $2,057,000 to approximately $51,330,000 for the year ended December 31, 1997, compared to total revenues of approximately $53,387,000 in the year ago period, which decrease is primarily attributable to the Company's decision to restructure its operations and exit certain product lines (See "Business - Restructuring Activity").
These increases totaled $44,498,000 and were offset by the net decrease in premiums on the products terminated and not currently marketed by the Company. Effective December 31, 1996, the Company withdrew its participation in the NAIU specialty accident and health insurance pool and also sold its New York State DBL business in force. The decrease in premium from the exit from these lines amounted to $11,239,000 for the year ended December 31, 1997. Effective September 1, 1997, the Company decided to exit the group dental business and executed an agreement with an unaffiliated reinsurer to cede 100% of all business earned after September 1, 1997. The premium will continue to be received by American Pioneer and will be ceded to the reinsurer on a 100% quota share basis. Gross premiums for the group dental business increased $1,145,000 in 1997.
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, 1997 amounted to $62,623,000, a $36,960,000 increase from the 1996 amount of $25,663,000. Of this increase, $30,991,000 relates to the business acquired from First National, while $1,912,000 relates to senior market accident and health and $174,000 relates to senior market life insurance. In addition to these increases, the reinsurance on the international medical insurance discussed above increased $1,058,000 in 1997, while premiums ceded on life insurance increased $2,231,000.
In connection with the restructuring activity previously discussed, reinsurance on the NAIU pool business amounted to $1,119,000 and reinsurance on the group dental business amounted to $2,198,000.
Benefits, Claims and Other Deductions. Total benefits, claims and other deductions decreased approximately $4,895,000 to $48,119,000 for the year ended December 31, 1997, compared to $53,014,000 in the year ago period.
Claims and other benefits decreased $324,000 to $23,719,000 for the year ended December 31, 1997 compared to $24,043,000 in the year ago period. The increase in net claims on the business assumed from First National amounted to $6,454,000, while net claims on the senior market accident and health increased $775,000. As discussed above, the Company is retaining a higher amount of major medical/major hospital business under a new reinsurance agreement and, as a result, the Company's claims on this product increased $1,067,000 to $2,169,000. (This increase corresponds to the $1,137,000 increase in retained premiums.) In addition, claims on the non-marketed accident and health products increased $367,000 in 1997.
The change in reserves for the year ended December 31, 1997 amounted to an increase of $441,000 compared to an increase of $1,855,000 in the year ago period generating a decrease of $1,414,000. Included in the 1996 change in reserves is $256,000 generated by the NAIU accident pool business that the Company has exited. Interest credited to policyholders increased $32,000 to $6,646,000.
The insurance companies' expenses amounted to $16,764,000 for the year ended December 31, 1997 compared to $14,810,000 in the year ago period, an increase of $1,954,000. Expenses incurred administrating the recently acquired business from First National amounted to $4,258,000, while premium taxes increased $768,000. These increases totaled $5,026,000 and were offset by the decrease in new business expenses of $318,000, general overhead of the insurance companies of $1,145,000 and expenses incurred by the NAIU pool of $1,609,000.
The results of operations for the year ended December 31, 1995 and 1996 include the operations of American Progressive, American Pioneer and WorldNet. All references to per share amounts are on a diluted basis.
Operating income before income taxes decreased $2,278,000 from $2,651,000 in 1995 to $373,000 in 1996. Certain individually large items account for a significant amount of this decrease, including (i) a decrease in the operating results of the NAIU accident pool participated in by American Progressive, which decrease was $1,100,000; (ii) a decrease in realized gains on investment of $434,000 and (iii) the $250,000 expense accrual made at December 31, 1996 for the restructuring activity of the Company. These three items represent $1,784,000 of the $2,278,000 decrease.
Revenues. Total revenues increased approximately $3,576,000 from total revenues of approximately $49,811,000 for the year ended December 31, 1995 to approximately $53,387,000 for the year ended December 31, 1996. Net premiums and policyholder fees earned increased approximately $3,334,000. Supplemental health insurance premiums at American Progressive increased approximately $1,258,000 (primarily Medicare supplement, hospital indemnity and home health care) and its life premiums grew approximately $30,000, while American Pioneer's life premiums grew approximately $374,000 and its group dental premiums grew approximately $919,000. The increase in these life and supplemental health premiums of $2,581,000 was offset by the decrease of approximately $547,000 in American Pioneer's major hospital and major medical premiums and the decrease in American Progressive's premiums from its other accident and health products that are no longer being actively marketed by the Company (approximately $754,000). The Company had an increase in premiums from the NAIU pool of $1,798,000 and the NYS DBL business of $256,000. Realized gains on investments decreased approximately $434,000 to approximately $240,000, compared to a gain of approximately $674,000
Commissions decreased $265,000 to $5,076,000 for the year ended December 31, 1996. The increase in gross commissions of $4,967,000 was due to the increase in gross premiums noted above, offset by a corresponding increase in reinsurance allowances of $5,231,000. Other operating costs and expenses decreased approximately $175,000. Expenses incurred by the insurance subsidiaries during 1996 exceeded the 1995 amount by approximately $1,405,000. New business expenses and premium taxes increased approximately $166,000, the expenses incurred on the administration of the acquired First National business amounted to $550,000, while the expense incurred by the NAIU accident pool decreased $397,000. The general overhead expenses of the insurance companies increased approximately $1,086,000, which increase directly relates to the increase in business being administered by the Company. These administrative general expense increases are partially recovered from the increase in these reinsurance allowances noted above. The remaining decrease of $1,580,000 results from a decrease of continuing operation expenses incurred by WorldNet (approximately $1,292,000) and a decrease in the Parent Company expenses ($288,000). Amortization of the present value of future profits was approximately $205,000 for 1995, which amount fully amortized the asset.
The Company's need for capital has historically been 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
In connection with the Unstacking Agreement (see "Business - Unstacking"), the Company has $5,925,000 in debentures outstanding to its American Progressive subsidiary. The debentures pay interest quarterly at the prime rate and are payable on September 30, 2002. Management believes that the current cash position and expected cash flows of the non-insurance companies and the availability of dividends from American Pioneer can support the obligations of Universal noted above for the foreseeable future. Although, there can be no assurance as to the expected future cash flows or to the availability of dividends from American Pioneer.
American Progressive, American Pioneer and American Exchange are required to maintain minimum amounts of capital and surplus as determined by statutory accounting. The minimum statutory capital and surplus requirements of American Progressive, American Pioneer and American Exchange as of December 31, 1997 for the maintenance of authority to do business were $2,500,000, $2,424,000 and $770,000 respectively, but substantially more than such minimum amounts are needed to support the current level of the Company's operations. At December 31, 1997 the adjusted statutory capital and surplus, including asset valuation reserve, of American, American Pioneer and American Exchange was $9,783,000, $10,807,000 and $4,230,000 respectively.
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.
The Company has completed an initial assessment and will have to modify or replace portions of its software so that its computer systems will function properly with respect to dates in the year 2000 and thereafter. Currently, the Company expects the Year 2000 project costs to be limited to the allocation of its data processing department resources and significant external expenses are not expected. Accordingly, no specific budget for such costs has been allocated.
The costs of the project and the date on which the Company believes it will complete the Year 2000 modifications are based on management's best estimates, which were derived utilizing numerous assumptions of future events, including the continued availability of certain resources and other factors. However, there can be no guarantee that these estimates will be will be achieved and actual results could differ materially from those anticipated. Specific factors that might cause such material differences include, but are not limited to, the availability and cost of personnel trained in this area, the ability to locate and correct all relevant computer codes, and similar uncertainties.
In May 1993, the FASB issued Statement No. 115, "Accounting for Certain Debt and Equity Securities" ("Statement No. 115"), which is effective for fiscal years beginning after December 15, 1993, with earlier adoption permitted. Statement No. 115 requires that debt and equity securities be classified into three categories and accounted for as follows:
Debt and equity securities that are held for current resale would be classified as "trading securities" and reported at fair value, with unrealized gains and losses included in earnings.
Debt and equity securities not classified as held to maturity or as trading securities would be classified as "available for sale" and reported at fair value. Unrealized gains and losses would not be reflected in earnings but would be reported as a separate component of stockholders' equity.
The Company adopted Statement No. 115 on January 1, 1994, the effect of which increased its unrealized gains by $494,541. In November, 1995, the FASB issued a Special Report titled "A Guide to Implementation of Statement No. 115 on Accounting for Certain Investments in Debt and Equity Securities", which report allows enterprises to reassess the appropriateness of the classifications of all securities held and account for any resulting reclassifications between the investment accounts. This one-time reassessment had to be made prior to December 31, 1996 and be appropriately disclosed in the financial statements. In December, 1995, the Company did reassess the appropriateness of the classifications of its securities and reclassified all of the securities contained in the held to maturity account to the available for sale account as they may be considered for sale prior to maturity as part of the asset/liability management strategy. The carrying value of the securities reclassed to available for sale amounted to $35,942,303 and the fair value amounted to $36,098,026. This transfer resulted in the Company increasing its unrealized gains by $155,723. As changes in interest rates occur, the carrying value of the
securities classified as available for sale, as well as any securities which may in the future be classified as held for maturity, will be impacted. Typically, as interest rates rise, the carrying value of these securities may decline. Conversely, if interest rates decline, the carrying value of these securities may increase. Management cannot predict the impact that changes in future interest rates will have on the Company's financial statements.
The Company adopted FASB Statement No. 128, "Earnings per Share", ("Statement No. 128") as of December 31, 1997 and restated prior year earnings per share ("EPS") amounts. Statement No. 128 replaces primary EPS with basic EPS. Basic EPS excludes dilution and is computed by dividing income available to common shareholders, (after deducting the redemption accrual on the Series C Preferred Stock), by the weighted average number of shares outstanding for the period. Diluted EPS gives the dilutive effect of the stock options, warrants and Series B and C preferred stock outstanding during the year. See Note 2j in the accompanying financial statements for the computation of basic and diluted EPS and the impact on the reported results.
Also in June, 1997, the FASB issued Statement No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("Statement No. 131"), effective for years beginning after December 15, 1997. Statement No. 131 requires that a public company report financial and descriptive information about its reportable operating segments pursuant to criteria that differ from current accounting practice. Operating segments, as defined, are components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision-maker in deciding how to allocate resources and in assessing performance. The financial information to be reported includes segment profit and loss, certain revenue and expense items and segment assets and reconciliations to corresponding amounts in the general purpose financial statements. Statement No. 131 also requires information about revenues from products or services, countries where the company has operations or assets and major customers. The adoption of Statement No. 131 will not affect