The following selected consolidated financial data as of and for each of the five years in the period ended December 31, 1995 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.
(1) Share and per share amounts have been restated to reflect the effect of the June 1995 four-for-one stock split and the September 1992 two-for-one stock split. (2) Operating net income represents net income excluding realized gains or losses on sale of investments, net of federal income taxes and minority interests. (3) The health loss ratio represents benefits, claims and settlement expenses related to health insurance policies stated as a percentage of health premiums. Expenses relating to providing administrative services for fees are not included. (4) The health expense ratio represents underwriting, acquisition and insurance expenses related to health insurance policies stated as a percentage of health premiums. (5) Excludes the net unrealized investment gains or losses which is reported as a separate component of stockholders' equity. Return on average equity represents net income as a percentage of average stockholders' equity during the year. (6) Total assets and total policy liabilities prior to 1993 have been restated to reflect the adoption of Financial Accounting Standard (FAS) 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." (7) Includes the Asset Valuation Reserve at December 31, 1995, 1994, 1993, and 1992 and the Mandatory Securities Valuation Reserve at December 31, 1991.
The following table sets forth income statement data as a percentage of revenues for the periods indicated.
Revenues. Revenues increased to $641.1 million in 1995 from $522.9 million in 1994, an increase of $118.2 million, or 23%. The increase was a result of increases in premiums, net investment income, fees and other income and gains on sales of investments.
Corporate and Other. Operating income for Corporate and Other was $10.6 million in 1995 compared to a loss of $6.5 million in 1994. The HealthCare Solutions Division incurred an operating loss of $4.2 million in 1995. The loss primarily resulted from the losses of certain companies in the development stage which was partially offset by operating income of other businesses. Operating income for the Credit Services Division was $1.4 million in 1995 compared to a loss of $1.2 million in 1994. The change of $2.6 million was due to the growth in new sales of the credit card program and a decrease in expenses, as a percentage of revenues. Operating income from other corporate activities was $13.4 million in 1995 compared to a loss of $3.2 million in 1994. The increase was primarily due to the increase in invested income not allocated to the other segments and gains on sale of investments. The increase was partially offset by an increase in interest expense.
Health premiums. Health premiums increased to $415.3 million in 1994 from $343.7 million in 1993, an increase of $71.6 million, or 21%. The increase was primarily due to the growth in sales of new health insurance policies, rate increases and increased premiums from coinsured policies sold by UGA and issued by AEGON. In 1994, the coinsurance percentage on both in force and new health policies issued by AEGON increased to 52.5% from 50% in 1993.
Life premiums. Life premiums increased to $37.0 million in 1994 from $25.0 million in 1993, an increase of $12.0 million, or 48%. The increase was primarily a result of an acquisition of a life insurance company in March 1994.
Net investment income. Net investment income increased to $48.0 million in 1994 from $39.2 million in 1993, an increase of $8.8 million, or 22%. The increase was due to both an increase in invested assets and an increase in the yield on invested assets. Investments increased to $835.2 million at December 31, 1994 from $723.2 million at December 31, 1993, an increase of $112.0 million, or 15%.
Fees and other income. Fees and other income decreased to $28.6 million in 1994 from $35.9 million in 1993, a decrease of $7.3 million, or 20%. The decrease was primarily a result of reduced fees for servicing a block of health insurance policies for an unrelated company.
Gains (losses) on sale of investments. The Company recognized losses on sales of investments of $5.8 million in 1994 compared to gains of $7.9 million in 1993. 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 1994. Gains are more likely during periods of decreasing long term interest rates, as occurred in 1993.
Interest expense. Interest expense increased to $1.9 million in 1994 from $1.4 million in 1993, an increase of $0.5 million. The increase was due to the 8.75% Senior Notes issued June 22, 1994.
The following table sets forth consolidated results of operations for each of the Company's eight fiscal quarters in 1995 and 1994. 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, consisting only of normal recurring 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.
At the federal level, several competing proposals have been introduced in Congress. One bill receiving serious current consideration is the Health Insurance Reform Act of 1995 (S. 1028), which was introduced by Senators Nancy Kassebaum and Edward Kennedy (the "Kassebaum-Kennedy bill"). The bill is scheduled to be debated in the Senate in mid-April. Among other provisions, the Kassebaum-Kennedy bill, if enacted, would build upon state initiatives by guaranteeing "group-to-individual" portability. Under the bill, any person governed by a group insurance plan for at least eighteen months would, 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, if enacted, 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 materially 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 services related to an accident or illness incurred prior to the end of the period, even though the medical services 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 effective tax rate was 33.5% for 1995 compared to 32.9% for 1994 and 33.0% in 1993 which 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.
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 repay $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.
During December 1995, the Company sold $51.6 million of credit card loans in two separate transactions. The sales involved an asset backed securitization in which the Company purchased participating interests totaling $16.0 million. A portion of the proceeds received by the Company was used to repay $12.0 million of promissory notes due January 1996 and for general corporate purposes including the purchase of investments. There was no gain or loss recorded as a result of these transactions.
The Company has the right and may be required by the minority stockholders to purchase certain of the shares of the minority stockholders of the insurance subsidiaries of the Company at a predetermined formula price. The formula price based on information available at December 31, 1995 was $12.5 million. Beginning in December 1996, and in December of each year thereafter, the Company may be required by the minority stockholders to purchase the remaining shares of the minority stockholders of one of the companies acquired by the Company in 1995, for the HealthCare Solutions Division, at a predetermined formula price. The formula price based on information available at December 31, 1995 was $14.5 million.
The AEGON Transaction is to be effective April 1, 1996. There is no cost to the Company other than the purchase of the building and equipment. The purchase price is estimated to be approximately $10.0 million which will be funded by one of the insurance subsidiaries of the Company from existing funds. The increase in premiums resulting from the AEGON Transaction will require additional capital in the insurance subsidiaries to maintain the ratings of the Company's insurance subsidiaries. See "Item 1. Business -- Recent Developments."
The state of domicile of each of the Company's domestic insurance subsidiaries imposes minimum risk-based capital requirements which were developed by the National Association of Insurance Commissioners. The formulas for determining the amount of risk-based capital specify various weighting factors that are applied to financial balances and premium levels based on the perceived degree of risk. Regulatory compliance is determined by a ratio of a company's regulatory total adjusted capital, as defined, to its authorized control level risk-based capital, as defined. Companies' specific trigger points or ratios are classified within certain levels, each of which requires specified corrective action. The risk-based capital ratio of each of the Company's domestic insurance subsidiaries significantly exceeds the ratios in which regulatory corrective action would be required.
At December 31, 1995, the estimated fair value of the Company's fixed maturity securities available for sale was $754.5 million or $10.6 million more than the amortized cost of $743.9 million. The ending balance of
stockholders' equity at December 31, 1995 was increased by $6.8 million (net of applicable deferred income taxes and minority interests) to reflect the net unrealized gain on fixed maturity securities.
In March 1995, the FASB issued Statement No. 121, "Accounting For The Impairment Of Long-Lived Assets And For Long-Lived Assets To Be Disposed Of". Since goodwill and fixed assets represent less than 2.5% of total assets, this new standard will not have a material effect on the Company. In October 1995, the FASB, issued Statement No. 123, "Accounting For Stock-Based Compensation". The Company accounts for its stock compensation arrangements under the provision of APB 25, "Accounting For Stock Issued To Employees" and intends to continue doing so, therefore this new standard will not have a material impact on the Company.