(1) The health loss ratio represents benefits, claims and settlement expenses related to health insurance policies stated as a percentage of health premiums. (2) The health expense ratio represent underwriting, acquisition and insurance expenses related to health insurance policies stated as a percentage of health premiums. Expenses relating to providing administrative services are not included. (3) Excludes the net unrealized investment gains or losses which is reported as a separate component of stockholders' equity.
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. The Company has certain risks associated with the Student Loan business. The changes in the Higher Education Act or other relevant federal or state laws, rules and regulations and the programs implemented thereunder may adversely impact the education credit market. In addition, existing legislation and future measures to reduce the federal budget deficit may adversely affect the amount and nature of federal financial assistance available with respect to loans made through the U.S. Department of Education. Finally the level of competition currently in existence in the secondary market for loans made under the Federal Loan Programs could be reduced, resulting in fewer potential buyers of the Federal Loans and lower prices available in the secondary market for those loans. Investors are also directed to other risks and uncertainties discussed in documents filed by the Company with the Securities and Exchange Commission.
The Company's business segments are: (i) Health Insurance, which includes the businesses of the Self-Employed Agency Division, the Student Health Division; the Special Risk Division and the Motor Club Division; (ii) Life Insurance and Annuity, (iii) Credit Services, and (iv) Corporate and Other, which includes the businesses of the Technology and Outsourcing Division, Real Estate Division, the Student Loan Division, investment income not allocated to the other segments, interest expense, general expenses relating to corporate operations, goodwill amortization 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.
Health premiums. Health premiums increased to $653.9 million in 1997 from $501.2 million in 1996, an increase of $152.7 million, or 30%. The increase in health premiums for the year was the result of increased premiums in the self employed and special risk markets. The increase in the self employed market is due to increased sales of new health policies by CMA and due to discontinuing the coinsurance arrangement in 1996 for new business written by UGA. The increase in special risk premiums is due to the acquisition of a managing general underwriter and the assumption of a block of business in 1997. In 1997, the coinsurance percentage on both in force and new health insurance policies issued by AEGON increased to 60% from 57.5% in 1996.
Fees and other income. Fees and other income increased to $164.3 million in 1997 from $110.8 million in 1996, an increase of $53.5 million, or 48%. The increase related primarily to the increase in revenue from the Credit Services segment, revenue from the Technology and Outsourcing companies acquired in 1995 and administrative fees from the administrative operation acquired from AEGON on April 1, 1996.
Benefits, claims, and settlement expenses. Benefits, claims, and settlement expenses increased to $449.7 million in 1997 from $335.9 million in 1996, an increase of $113.8 million, or 34%. The increase was primarily due to the growth in premium volume and a higher loss ratio in the Health Insurance segment.
Underwriting, acquisition and other expenses. Underwriting, acquisition and other expenses increased to $367.5 million in 1997 from $280.8 million in 1996, an increase of $86.7 million, or 31%. The increase was primarily due to the growth in premium volume, costs
associated with the operations of the Credit Services segment, businesses acquired in the third quarter of 1996 and first quarter of 1997 in the Technology and Outsourcing Division, acquisitions in the Health Insurance segment and the acquisition of EFG in the second quarter of 1997.
Income before federal income taxes and minority interests ("operating income"). Operating income increased to $135.8 million in 1997 from $111.4 million in 1996, an increase of $24.4 million, or 22 %. Operating income (loss) for each of the Company's segments and divisions was as follows:
Health Insurance. Operating income for the Health Insurance segment was $73.9 million in 1997 and 1996. The level profits for the year reflect the continued decrease in margins which have been offset by increased premium volumes in the self employed and special risk markets. The combined ratio for 1997 was 93% compared to 91% in 1996. The combined ratio has been in the range of 91% to 95% during the past six years.
Loan Division, an increase in investment income not allocated to the other segments and realized gains on the sales of investments.
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 1995, the coinsurance percentage on both in force and new health insurance policies issued by AEGON increased to 57.5% from 55% in 1995.
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 Technology and Outsourcing Division, whose expenses are primarily classified as underwriting, acquisition, and other expenses.
Health Insurance. Operating income for the Health Insurance segment increased to $73.9 million in 1996 from $64.5 million in 1995, an increase of $9.4 million, or 15%. 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, Inc.. 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 increased to $15.1 million in 1996 from $14.8 million in 1995, an increase of $300,000, or 2%. The increase related primarily to a decrease in policyholder benefits which was partially offset by higher commission and agency expenses incurred.
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 a public offering commenced on April 25, 1996.
During 1997, the Company acquired four companies and certain assets for $88.2 million in cash. Total fair value of assets acquired were $112.1 million and total fair value of liabilities assumed were $23.8 million.
During October 1995, the Company acquired the majority interest in Insurdata and UAI, both companies related to the Technology and Outsourcing Division. The acquisitions were funded with cash and the issuance of promissory notes to the former stockholders in the amount of $12.0 million, which were repaid in January 1996. 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 securitized $30.0 million and $31.6 million of credit card loans in September 1997 and 1996, respectively. The securitization involved the sale of $30.0 million and $29.0 million in 1997 and 1996, respectively, of asset backed securities in which the Company purchased participating interests totaling $3.0 million and $2.9 million in 1997 and 1996, respectively.
In September 1996, the Company entered into three separate stock purchase agreements to sell its three dental benefit companies. The Company completed one sale in October 1996 and
At December 31, 1997, the Company had a $7.5 million letter of credit related to the credit card loans.
The Company has commitments to fund the unused line of credit on credit card loans. At December 31, 1997, the outstanding commitment was $21.1 million.
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 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.