SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
Certain statements set forth herein or incorporated by reference herein from the Company's filings that are not historical facts are forward-looking statements within the meaning of the Private Securities Litigation Reform Act. Actual results may differ materially from those included in the forward-looking statements. These forward-looking statements involve risks and uncertainties including, but not limited to, the following: changes in general economic conditions, including the performance of financial markets, and interest rates; competitive, regulatory or tax changes that affect the cost of or demand for the Company's products; health care reform, ability to predict and effectively manage claims related to health care costs; reliance on key management and adequacy of claim liabilities. The Credit Card segment's future results also could be adversely affected by the possibility of future economic downturns causing an increase in credit losses. Investors are also directed to other risks and uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission, specifically the Company's prospectus filed April 26, 1996.
Health premiums. Health premiums increased to $501.2 million in 1996 from $473.8 million in 1995, an increase of $27.4 million, or 6%. After deducting the health premiums from a 1995 acquired block of health insurance policies, health premiums increased 9% in 1996 compared to 1995. The increase was primarily due to the growth in sales of new health insurance policies and increased premiums from coinsured policies. In 1996, the coinsurance percentage on both in force and new health insurance policies issued by AEGON increased to 57.5% from 55% in 1995.
Life premiums and other considerations. Life premiums and other considerations increased to $46.6 million in 1996 from $45.3 million in 1995, an increase of $1.3 million, or 3%. The increase was a result of the sale of new life policies. The increase was partially offset by the decrease in premiums and other considerations from closed blocks of life and annuity business.
Benefits, claims, and settlement expenses. Benefits, claims, and settlement expenses increased to $335.9 million in 1996 from $320.5 million in 1995, an increase of $15.4 million, or 5%. The increase was primarily due to the growth in premium volume. As a percentage of revenues, these expenses decreased to 46.0% in 1996 from 50.0% in 1995. The decrease in these expenses were the 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.
Interest expense. Interest expense decreased to $2.5 million in 1996 from $3.9 million in 1995, a decrease of $1.4 million. The decrease was due to a lower cost of borrowing and a lower average amount of debt outstanding in 1996 compared to 1995, due to the use of part of the proceeds from the public offering to pay off $10.3 million of debt.
Health Insurance. Operating income for the Health Insurance segment increased to $72.7 million in 1996 from $64.5 million in 1995, an increase of $8.2 million, or 13%. Operating income increased $5.2 million for the Self- Employed Health Insurance Division and $3.0 million for the Student Health Insurance Division. The increase was primarily due to a 6% increase in health premiums, an increase in investment income allocated to the Health Insurance products and profits related to certain lead activities of UGA. The combined health ratio has remained constant at 91% for both years ended December 31, 1996 and 1995.
Life Insurance and Annuity. Operating income was comparable in 1996 and 1995. Operating income for the Life Insurance and Annuity segment decreased to $11.4 million in 1996 from $11.6 million in 1995, a decrease of $200,000, or 2%. The decrease related primarily to higher commission and agency expenses incurred. The decrease was partially offset by a decrease in policyholder benefits.
Credit Services. Operating income for the Credit segment business increased to $14.2 million in 1996 from $1.4 million in 1995, an increase of $12.8 million. This is primarily due to an increase in the profit per card and a 38% increase in the number of cards outstanding at December 31, 1996 compared to December 31, 1995.
Underwriting, acquisition and insurance expenses. Underwriting, acquisition and insurance expenses increased to $230.0 million in 1995 from $189.1 million in 1994, an increase of $40.9 million, or 22%. The increase was primarily due to the growth in premium volume and costs associated with the expanded operations of the Credit Services segment and the operations of businesses acquired by the HealthCare Solutions Division in 1995. As a percentage of revenues, these expenses remained relatively constant at 35.9% in 1995 compared to 36.1% in 1994, as the increased costs associated with the Credit Services segment and the HealthCare Solutions Division were offset by the decrease in the health expense ratio to 33% in 1995 from 36% in 1994.
Income before federal income taxes and minority interests ("operating income"). Operating income increased to $86.7 million in 1995 from $56.0 million in 1994, an increase of $30.7 million, or 55%. Operating income (loss) for each of the Company's segments and divisions were as follow:
cost of insurance acquired accounts for the decrease on this portion. Deferred acquisition costs are reviewed periodically to determine that the unamortized portion does not exceed expected recoverable amounts.
The Company's effective tax rate was 32.5% for 1996 compared to 33.5% for 1995 and 32.9% in 1994. The 1996, 1995, and 1994 effective rate 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.
The primary sources of cash for the Company are premium revenues from policies issued or coinsured, investment income and fees and other income. The primary uses of cash are payments for benefits, claims and commissions under those policies and operating expenses. Net cash provided from operations totaled approximately $125.5 million in 1996, $86.8 million in 1995, and $67.2 million in 1994. The Company's insurance subsidiaries invest a substantial portion of these funds, pending payment of their pro rata share of future benefits and claims.
The Company had no outstanding balance on its revolving credit note with AEGON at December 31, 1996. The note bears interest at prime plus 0.875%. In 1996, the Company amended the note to increase the amount available on the revolving credit note to $12.0 million. Any amount outstanding will be due August 1, 2002.
During 1996, the Company borrowed $10.3 million from its revolving credit note with AEGON. On May 1, 1996, the Company repaid the then outstanding balance of $10.3 million with the proceeds from the public offering commenced on April 25, 1996.
Effective August 1, 1996, the Company acquired an additional 20% interest in its subsidiary, Mid-West, for $9.8 million in cash. This increased the Company's ownership percentage to 99% from 79%. The purchase price was based on a predetermined formula price which approximated GAAP book value.
In September 1996, UICI entered into three separate stock purchase agreements with United Dental Care, Inc. to sell its three dental benefit companies in the HealthCare Solution Division. Total proceeds to be received by the Company on the sale will be approximately $12.0 million. UICI will realize a gain on the sale of the companies of approximately $6.5 million. The Company completed two of the sales, one in October 1996 and one in January 1997, for a realized gain of $2.0 million and $3.2 million, respectively. The completion of the sale of the remaining company is contingent upon certain conditions including approvals from the appropriate state insurance department. The operations of the dental benefit companies were not material to the operations of the Company.
Fixed maturity securities. Fixed maturity securities accounted for 70.5% of the Company's total investments at December 31, 1996. Fixed maturity securities consisted of the following:
Included in the fixed maturity portfolio is a concentration of mortgage-backed securities such as collateralized mortgage obligations and mortgage-backed pass-throughs. To limit its credit risk, the Company invests in mortgage-backed securities which are rated investment grade by the public rating agencies. Also, 37% of the mortgage-backed securities are backed by U.S. Government agencies. The Company's mortgage-backed securities portfolio is a conservatively structured portfolio that is concentrated in the less volatile tranches, in the form of planned amortization classes, sequential payment and commercial mortgage-backed securities. The objectives are to minimize prepayment risk during periods of declining interest rates and minimize duration extension risk during periods of rising interest rates. The Company has approximately 1% invested in the more volatile tranches.
Inflation historically has had a significant impact on the health insurance business. In recent years, inflation in the costs of medical care covered by such insurance has exceeded the general rate of inflation. Under the major hospital insurance coverage, established ceilings for covered expenses limit the impact of inflation on the amount of claims paid. Under the catastrophic hospital expense plans, covered expenses are generally limited only by a maximum lifetime benefit, a maximum lifetime benefit per accident or sickness, and preferred provider contracts. Thus, inflation may have a significantly greater impact on the amount of claims paid under catastrophic hospital expense plans as compared to claims under major hospital coverage. As a result, trends in health care costs must be monitored and rates adjusted accordingly. Under the health insurance policies issued in the self-employed market, the primary insurer generally has the right to increase rates upon 30-60 days written notice.
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" which is an option allowed by FAS 123.