Revenues. Revenues increased to $1,179.9 million in 1998 from $955.8 million in 1997, an increase of $224.1 million or 23%. The increase was a result of increases in premiums, other interest income, credit card fees and other fee income.
Health premiums. Health premiums increased to $747.3 million in 1998 from $653.9 million in 1997, an increase of $93.4 million or 14%. The increase in health premiums for the year was primarily the result of increased premiums in the self employed market. The increase in the self employed market is due to increased sales of new health policies by the marketing organizations and due to discontinuing the coinsurance arrangement in 1996 for new business written by UGA.
Life premiums and other considerations. Life premiums and other considerations were comparable in 1998 and 1997. This was a result of the sale of new life policies which was offset by the decrease in premiums and other considerations from closed blocks of life and annuity business.
Other fee income. Other fee income increased to $111.1 million in 1998 from $70.3 million in 1997, an increase of $40.8 million. The increase is due to the increase in revenue from Educational Finance Group and reporting a full year of operations from National Motor Club.
Income before federal income taxes and minority interests ("operating income"). Operating income decreased to $97 million in 1998 from $136 million in 1997, a decrease of $39 million or 29%. Operating income (loss) for each of the Company's segments and divisions was as follows:
Educational Finance Group ("EFG"). EFG reported an operating loss of $1.3 million in 1998 compared to income of $2.0 million in 1997. Revenue for EFG increased to $57.2 million in 1998 from $8.0 million in 1997.
Insurdata. Insurdata reported operating income of $3.3 million in 1998 compared to $2.6 million in 1997. The operating income in 1998 was reduced by approximately $740,000 of expenses incurred in preparation of an initial public offering of equity securities. This offering
Other Business Units. In the past, Other Business Units have primarily been HealthCare Solutions companies. Over the past 18 months most companies in this category have been sold or closed down, with the exception of Insurdata. For 1998, the Company reported net income of $441,000 which included two business units which were sold in 1998, one resulted in a gain of $9.7 million from the sale of the assets of the business, the other had a loss from operations of $10.5 million.
Other interest income. Other interest income decreased to $6.2 million in 1997 from $8.0 million in 1996. The decrease is due to a decrease in net yield from the Credit Services Division assets.
Underwriting, acquisition and insurance expenses. Underwriting, acquisition and insurance expenses increased to $253.4 million in 1997 from $206.9 million in 1996, an increase of $46.5 million, or 23%. The increase was primarily due to the growth in premium volume.
Other expenses. Other expenses increased to $100.5 million in 1997 from $57.6 million in 1996, an increase of $42.9 million or 74%. The increase is due to costs associated with the operations of the Credit Services Division and businesses acquired in the third quarter of 1996 and the first half 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:
Self Employed Agency Division ("SEA"). The SEA Division reported income of $47.6 million in 1997 compared to income of $57.9 million in 1996. Revenue for the SEA Division increased to $538.3 million in 1997 from $429.7 million in 1996, an increase of 25%. The decrease in earnings is the result of the continued decrease in margins which was somewhat offset by increased premium volumes. The combined ratio for 1997 was 93% compared to 91% in 1996.
Student Insurance. The Student Insurance Division reported income of $15.5 million for the year in 1997 compared to $14.4 million in 1996. The $1.1 million increase is attributed to increased premium volumes. Revenue for the Student Insurance Division increased to $97.6 million in 1997 from $94.5 million in 1996, an increase of 3%.
OKC Division. Operating income for the OKC Division increased to $18.9 million for the year ended in 1997 from $16.1 million in 1996, a 17% increase. The increase related primarily to a decrease in agency expenses, the continued growth from the sale of new life policies, and the recognition of the Company's share of the profits on a closed block of business. Revenue for the OKC Division decreased to $100.5 million in 1997 from $102.5 million in 1996, a decrease of 2%. The decrease in revenue is the result of lower revenues on the closed blocks of life policies.
collected premiums on this block were $35.0 million in 1997. Included in 1997 is a $2.7 million gain from the sale of a discontinued HealthCare Solutions company.
Credit Services. Operating income for the Credit Services business increased to $20.5 million in 1997 from $15.2 million in 1996, an increase of $5.3 million or 35%. Revenue for Credit Services increased to $50.3 million in 1997 from $39.7 million in 1996, an increase of 27%. The increase in operating income and revenue is primarily due to the continued growth in new sales which increases revenue and operating income and better performance by the credit card portfolio.
Other Business Units. Other business units consist of the HealthCare Solutions companies most of which were disposed of or merged into other business units with the exception of Insurdata.
The Company's invested assets increased to $1.2 billion at December 31, 1998 from $1.1 billion at December 31, 1997, an increase of $100 million. The primary sources for the asset growth were borrowings, deposits, and the cash provided by current year operations. The sources were partially offset by the withdrawals, net of deposits, from investment products.
The growth in the credit card receivables not securitized from $54 million at December 31, 1997 to $136 million at December 31, 1998 has been funded using time deposits at UCNB which increased from $8 million at December 31, 1997 to $99 million at December 31, 1998. The growth in the student loans from $11 million at December 31, 1997 to $670 million at December 31, 1998 has been funded using the proceeds from the student loan credit facility which had a balance of $669 million at December 31, 1998. The overfunding relates to accrued interest and premium on loans purchased during the year.
In June 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. Interest on the 8.75% Senior Notes is paid semi-annually. The notes require principal repayments starting June 1, 1998 and on each June 1 thereafter in the amount of $4.0 million each until repaid.
The Company has commitments to fund the unused credit limits on credit card loans. At December 31, 1998, the outstanding commitment was $31.0 million.
The state of domicile of each of the Company's domestic insurance subsidiaries imposes minimum risk-based capital requirements which were developed by the NAIC. 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.
Fixed maturity securities. Fixed maturity securities accounted for 74.5% of the Company's total investments at December 31, 1998. 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. 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 less than 1% invested in the more volatile tranches.
As of December 31, 1998, $845.6 million or 95.4% of the fixed maturity securities portfolio was rated BBB or better (investment grade) and only $40.8 million or 4.6% of the fixed
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 and preferred provider contracts, covered expenses are generally limited only by a maximum lifetime benefit, a maximum lifetime benefit per accident or sickness. Thus, inflation may have a significantly greater impact on the amount of claims paid under catastrophic hospital expense and preferred provider 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 and subject to regulatory approval in most cases.
The annuity and universal life-type policies issued directly and assumed by the Company are significantly impacted by inflation. Interest rates affect the amount of interest that existing policyholders expect to have credited to their policies. However, the Company believes that the annuity and universal life-type policies are generally competitive with those offered by other insurance companies of similar size, and the investment portfolio is managed to minimize the effects of inflation.
STATE OF READINESS. Some of the Company's older computer programs were written using two digits rather than four to define the applicable year. As a result, those computers programs have time-sensitive software that recognizes a date using "00" as the year 1900 rather than the year 2000. This could cause a system failure or miscalculations causing disruptions of operations, including, among other things, a temporary inability to process transactions, send premium notices, process credit cards or student loans or engage in similar normal business activities. As a result, the Company has implemented a project intended to ensure that hardware and software systems operated or licensed in the Company's business are designed to operate and properly manage dates beyond December 31, 1999 ("Year 2000 Ready"). The Year 2000 project has assessed the Company's information technology and operating systems ("IT Systems") and is
IT Systems. The Company has completed the first two phases of the Year 2000 project for all of its IT Systems. The Company has completed the analysis, design and remediation phase for substantially all of its IT Systems. The Company plans to complete the remediation of substantially all of its mission critical IT systems by mid-second quarter of 1999 and the testing and validation of all of its IT Systems by mid-third quarter of 1999.
Readiness of Third Parties. The Company relies on hardware and software of third parties as material components of its IT Systems, including network access between the Company's data center and credit card transaction processors. As part of the Year 2000 project, the Company is testing such software, hardware and interfaces for Year 2000 and has determined that some of the software, hardware and interfaces are not Year 2000 ready. In addition, the Company is polling the third parties who provide software, hardware or data to the Company regarding each of such third party's Year 2000 readiness plan and state of readiness. The Company is requesting written responses from such third parties that their software, hardware and data is, or will be on a timely basis, Year 2000 ready.
The Company provides services to third parties. If a Year 2000 problem caused the interruption of such services to those customers, such interruption could have a material adverse effect on the Company's business and the Company could incur liability as a result.
YEAR 2000 COSTS. The Company expects to incur internal labor costs, as well as other expenses, in its Year 2000 project. The Company's total estimated cost of the project is approximately $10.5 million of which approximately $6.2 million, cumulatively, was incurred as of December 31, 1998 and $5.2 million was incurred during 1998. Future costs of the Year 2000 project will primarily result from the re-deployment of information technology resources, although no significant internal IT Systems projects are being deferred to further the Year 2000 Project. Costs associated with the Year 2000 project are expensed as incurred and are paid from operating cash flows.
continue to properly function and interface and will otherwise be Year 2000 Ready. Although the Company is not aware of any threatened claims related to the Year 2000, the Company may be subject to litigation arising from such claims and, depending on the outcome, such litigation could have a material adverse affect on the Company. It is not clear whether the Company's insurance coverage would be adequate to offset these and other business risks related to the Year 2000.
The Company has not had any material processing disruptions to date that were caused by Year 2000 issues. Internal testing provides the Company with a level of confidence that in a most reasonably likely worse case scenario these systems will not cause a material disruption on a forward-looking basis. A most reasonably likely worst case scenario would anticipate that it is possible that potential consequences would include, among other possibilities, the inability to accurately and timely process benefit claims, update customers' accounts, bill customers, calculate financial and actuarial data, and report accurate data to management, shareholders, customers and regulators. The Company cannot guarantee that it will be able to resolve all of its Year 2000 issues. Any critical unresolved Year 2000 issues could have a material adverse effect on the Company's results of operations, liquidity or financial condition. The Company expects to complete the process of identifying contingency plans by June 30, 1999.
The Company is assessed amounts by state guaranty funds to cover losses of policyholders of insolvent or rehabilitated insurance companies, by state insurance oversight agencies to cover the operating expenses of such agencies and by other similar legislative entities. These mandatory assessments may be partially recovered through a reduction in future premium taxes in certain states. Effective January 1, 1999, the Company will be required to adopt the provisions of AICPA Statement of Position 97-3 ("SOP 97-3"), under which these assessments are required to be accrued in the period in which they have been incurred. The effects of initially adopting SOP 97-3 will be recorded as the cumulative effective of a change in accounting principle. The Company has not determined the impact that the adoption of SOP 97-3 will have on its financial condition or results of operations.
management does not anticipate that the adoption of the new Statement will have a significant effect on earnings or the financial position of the Company.