(1) After provision for Series C Preferred Stock dividends of $180, $433 and $250 for the years ended December 31, 1999, 1998 and 1997, respectively.
(3) Diluted stockholders' equity per share of common stock represents stockholders' equity plus the statement value of the Series C Preferred Stock, redemption accrual on the Series C Preferred Stock, the Series D Preferred Stock, the proceeds from the exercise of outstanding options and warrants divided by outstanding shares of common stock plus the stock issued pursuant to the conversion of the Series B, Series C and Series D Preferred Stock and the exercise of the options and warrants outstanding.
(6) Includes the results of the First National block of business since its acquisition on October 1, 1996.
(7) Includes the results of AIAG since its acquisition on January 6, 2000, and CHCS since its acquisition on August 10, 2000.
The following analysis of the consolidated results of operations and financial condition of the Company should be read in conjunction with the Consolidated Financial Statements and related consolidated footnotes included elsewhere.
SPECIAL MARKETS - Through its own operating history and through prior acquisitions, Universal American has accumulated various lines of business that it manages in its Special Markets segments. These products include traditonal, interest-sensitive and group life insurance, individual medical and other accident and health insurance.
ADMINISTRATIVE SERVICES - In connection with the acquisition of AIAG and CHCS, Universal American has increased its efforts on the development of the Administrative Services segment. The primary services are to act as a third party administrator and service provider on various senior supplemental health insurance products offered by both affiliated and unaffiliated insurance companies. Services performed include policy underwriting, telephone verification, policyholder services, claims adjudication, clinical case management, care assessment and referral to health care facilities.
The Senior Market Brokerage segment improved results by more than 40%, increasing operating income by $1.6 million. This improvement is the result of continued internally generated growth of business in the segment, primarily in the medicare supplement and long term care lines, offset in part by a slight deterioration in overall loss ratios for the segment.
Operating income for the Administrative Services segment nearly doubled in 2000 compared to 1999, primarily as a result of the acquisitions of AIAG in January, 2000 and CHCS in August 2000.
The effective tax rate for the Company was 30.8% for 2000 as compared to 38.9% in 1999. The decrease in the tax rate was primarily due to the release of valuation reserves on certain of the tax loss carryforwards which were not considered necessary as a result of the increased profitability of the Administrative Services segment.
The addition of the Career Agency segment, acquired in July, 1999 added $12.2 million of operating income during 1999.
The Special Market segment improved by over $3.5 million, primarily as the result of the companies acquired during 1999.
The effective tax rate for the Company was 38.9% in 1999 as compared to 33.8% in 1998. The increase in the tax rate was primarily due to the addition of the Canadian operations included in the Career Agency segment. The effective tax rate on the Canadian operations was approximately 45%.
Net investment income increased by approximately 9% over 1999 on an annualized basis. The increase results from the increase in the average invested assets for the comparable periods. Average invested assets increased as a result of earnings for the year, as well as the movement of the proceeds from certain acquisition related transactions from short-term in 1999 to long-term investments in 2000.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits, including the change in reserves, increased by approximately 12% compared to 1999 on an annualized basis. This was due to higher overall loss ratios.
Operating income from the Senior Market Brokerage segment increased by $1.6 million, or 42%, in 2000 compared to 1999.
This increase in gross premium written by the Insurance Subsidiaries was the result of the increase in sales of $48.5 million, or 133%, of the senior market product portfolio from $36.6 million in
The 1999 amount of Medicare Supplement acquired gross premium includes approximately $36.7 million of gross premiums received on the policies acquired in the 1999 Acquisition for the five months ended December 31, 1999. This premium amounts to $88.1 million on an annualized basis and as adjusted, 1999 premiums for the acquired blocks of business decreased by $0.5 million compared to 1998.
The increase of $7.9 million in other supplemental senior health gross premiums is the result of increased sales of long term care products and an increase of $2.8 million due to the inclusion in 2000 of twelve months of long term care premiums acquired in the 1999 Acquisition compared to five months in 1999. Senior life insurance premium increased as a result of more general agents under contract.
Interest credited to policyholders decreased by approximately $0.6 million, or 10%, as a result of the decrease in the effective interest rate credited to the policies in 2000 compared to 1999 and the expected lapses of the policies in force.
The increase in deferred acquisition costs was approximately $1.3 million more in 2000, compared to the increase in 1999. The increase in deferred acquisition costs relates to the increase in premiums issued during 2000 compared to 1999.
Commissions and other operating expenses increased by approximately $4.6 million or 37% in 2000 compared to 1999. The following table details the components of commission and other operating expenses:
The 1999 amount of Medicare Supplement acquired premium includes approximately $36.7 million of gross premiums received relating to the 1999 Acquisition for the five months ended December 31, 1999. Medicare Supplement premiums for the remaining acquired blocks of business decreased by approximately $7.9 million as a result of expected lapses of the in force policies.
95% in 1998 to 84% in 1999. The loss ratios on the Medicare Supplement written business increased slightly from 69% in 1998 to 70% in 1999. Included in the 1999 amount were $1.4 million of net benefits incurred on the business acquired in the 1999 Acquisition.
Commissions and other operating expenses increased by approximately $3.2 million, or 34%, in 1999 compared to 1998. The following table details the components of commission and other operating expenses:
Operating results for the year improved approximately 4% in 2000 compared to 1999.
REVENUES. Net premiums for the year increased by $11.0 million or 40% compared to 1999. Approximately $10.6 million of the increase, including $3.3 million of life and $7.3 million of accident and health, relates to the impact of a full year's results in 2000 for the companies acquired in 1999, compared to five months as reported in 1999.
Net investment income increased by $6.0 million compared to 1999, primarily due to twelve months of the acquired companies compared to five months in 1999.
The increase in interest credited of $0.8 million was due primarily to the inclusion of a full year for the acquired companies.
Operating results for the year increased by $3.5 million in 1999 compared to 1998, primarily as a result of the addition of certain blocks of business from the acquired companies in 1999.
REVENUES. Net premiums for the year increased by $6.6 million or 32% compared to 1999. The Acquired Companies added approximately $11.5 million during 1999. This increase was offset by a decrease in health premiums at the existing companies.
Net investment income increased by $5.5 million compared to 1998. The Acquired Companies added $4.8 million during 1999. The remaining increase relates to an increase in the invested assets of the existing companies.
BENEFITS, CLAIMS AND OTHER DEDUCTIONS. Policyholder benefits increased by $4.8 million in 1999 compared to 1998. Approximately $8.1 million relates the Acquired Companies. Offsetting this was a decrease at the existing companies, directly related to the decrease in premiums noted above.
The increase in interest credited of $0.9 million was due primarily to the addition of the acquired companies.
The amortization of present value of future profits ("PVFP") and goodwill relates primarily to the acquisition of AIAG. Approximately $7.7 million of PVFP was established when AIAG was acquired. It is being amortized in proportion to the expected profits from the contracts in force on the date of acquisition. A large portion of the contracts had a remaining term of three years; accordingly, the amortization is heavily weighted to those periods. During 2000, approximately $2.8 million or 36% of the original balance was amortized. Based on the current schedule, the Company anticipates amortizing approximately 27% and 20% in 2001 and 2002, respectively. The remaining amortization relates to the goodwill established in connection with the acquisition of CHCS.
Operating expenses for the segment increased by $10.2 million. Approximately $8.1 million of the increase relates to the acquisition of AIAG and CHCS. The remaining increase relates to the costs associated with the increase in business administered for the affiliated insurance subsidiaries.
Administrative service revenue increased by $0.6 million, or 7%, in 1999 as compared to 2000. This increase relates to affiliated revenues at WorldNet as a result of the increase in premiums serviced by WorldNet on behalf of the affiliated insurance subsidiaries. During 1999, WorldNet's business was primarily the administration of certain blocks of business on behalf of the affiliated insurance subsidiaries.
The following table presents the primary components comprising the segment's operating loss, exclusive of the above noted eliminations:
The interest cost and the amortization of capitalized loan fees related to the financing of the 1999 Acquisition on July 31, 1999. Accordingly, 1999 includes five months of these costs. The Corporate segment incurred stock-based compensation expenses of approximately $0.9 million related to the issue of stock options and bonuses to employees and members of management.
Accordingly, the Company recorded an $11.1 million restructuring liability in its accounting for the 1999 Acquisition. These restructuring costs were accounted for under EITF No 95-3, "Recognition of Liabilities in Connection with a Purchase Business Combination" ("EITF 95-3").
As of December 31, 2000, the remaining liability consisted of employee separation costs ($1.6 million), employee relocation costs ($1.0 million) and other relocation and exit costs ($0.4 million).
As of December 31, 2000, the Company had outstanding $69.5 million of an $80 million credit facility consisting of a $70 million term loan and a $10 million revolving loan facility. The term loan calls for interest at the London Interbank Offering Rate for one, two, three or six months ("LIBOR") plus 350 basis points (currently 9.38%) with principal repayment over a seven-year period and a final maturity date of July 31, 2006. The term loan is secured by a first priority interest in 100% of the outstanding common stock of American Exchange, American Progressive, PFI, Inc. (an immaterial subsidiary), Quincy Coverage Corp. (an immaterial subsidiary), and WorldNet and 65% of the outstanding common stock of UAFC (Canada) Inc. (the 100% parent of PennCorp Life of Canada). The Company has drawn down $3.0 million of the revolving loan facility in connection with the acquisition of CHCS, Inc. in August 2000 and pays a commitment fee of 50 basis points on the unutilized facility. For the year ended December 31, 2000, the Company paid $7.1 million in interest and $3.4 million in principal.
Management believes that the current cash position, the availability of the revolving loan facility, the expected cash flows of the non-insurance companies, the surplus note interest payments from American Exchange and the availability of dividends from its Insurance Subsidiaries can support the obligations of Universal American noted above for the foreseeable future. However, there can be no assurance as to the expected future cash flows or to the availability of dividends from the Insurance Subsidiaries.
Dividend payments by insurance companies are limited by, or subject to the approval of the insurance regulatory authorities of each insurance company's state of domicile. Such dividend requirements and approval processes vary significantly from state to state. The maximum amount of dividends which can be paid to American Exchange from Pennsylvania Life without the prior approval of the Pennsylvania Department of Insurance is restricted to the greater of 10% of the Pennsylvania Life's surplus as regards policyholders as of the preceding December 31 or the net gain from operations during the preceding year, but such dividends can be paid only out of unassigned surplus. Thus, future earnings of the company would be available for dividends without prior approval, subject to the restrictions noted above. Based upon the current dividend regulations of the respective states, Pennsylvania Life and Union Bankers would be able to pay ordinary dividends of approximately $12.1 million and $1.4 million, respectively, to American Exchange without the prior approval from the respective insurance departments.
Liquidity for the Life Insurance Subsidiaries is measured by their ability to pay scheduled contractual benefits, pay operating expenses, and fund investment commitments. Sources of liquidity include scheduled and unscheduled 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.
penalties for early surrenders. At December 31, 2000 the Company held reserves that exceeded the underlying cash surrender values of its in force life insurance and annuities by $16.0 million. The insurance companies, in management's view, have not experienced any material changes in surrender and withdrawal activity in recent years.
Changes in interest rates may affect the incidence of policy surrenders and withdrawals. In addition to the potential impact on liquidity, unanticipated surrenders and withdrawals in a changed interest rate environment could adversely affect earnings if the Company were required to sell investments at reduced values in order to meet liquidity demands. The Company manages the asset and liability portfolios in order to minimize the adverse earnings impact of changing market rates. The Company seeks to invest in assets that have duration and interest rate characteristics similar to the liabilities that they support.
At December 31, 2000, the Insurance Subsidiaries held cash and cash equivalents totaling $33.2 million, as well as fixed maturity and equity securities that could readily be converted to cash with carrying values (and fair values) of $751.7 million. The fair values of these holdings totaled more than $784.9 million.
In June 1998, the Financial Accounting Standards Board issued Statement No. 133, Accounting for Derivative Instruments and Hedging Activities. Its amendments Statements 137, Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133 and 138, Accounting for Derivative Instruments and Certain Hedging Activities, were issued in June, 1999 and June, 2000, respectively. (Collectively these are referred to as Statement 133). Statement 133 establishes accounting and reporting standards for derivative instruments and is effective for fiscal years beginning after June 15, 2000. Because of the minimal use of derivatives, Management does not anticipate that the adoption will have a significant effect on earnings or the financial position of the Company.