e10vk
UNITED STATES SECURITIES AND
EXCHANGE COMMISSION
Washington, D.C.
20549
Form 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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For the Fiscal Year Ended
December 31, 2005.
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or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
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For the transition period
from
to
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Commission file
no. 001-14953
UICI
(Exact name of registrant as
specified in its charter)
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Delaware
(State or other
jurisdiction of
Incorporation or organization)
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75-2044750
(IRS Employer
Identification No.)
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9151 Grapevine Highway
North Richland Hills, Texas
(Address of principal
executive offices)
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76180
(Zip
Code)
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Registrants telephone number, including area code:
(817) 255-5200
Securities registered pursuant to Section 12(b) of the
Act:
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Title of Each Class
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Name of Each Exchange on Which
Registered
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Common Stock, $0.01 par value
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New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the
Act:
None
(Title of class)
Indicate by check mark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities
Act. Yes þ No o
Indicate by check mark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the
Act. Yes o No þ
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been
subject to such filing requirements for the past
90 days. Yes þ No o
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of
Regulation S-K
is not contained herein, and will not be contained, to the best
of Registrants knowledge, in definitive proxy or
information statements incorporated by reference in
Part III of this
Form 10-K
or any amendment to this
Form 10-K þ
Indicate by check mark whether the registrant is a large
accelerated filer, accelerated filer, or a non-accelerated filer
(as defined in
Rule 12b-2
of the Act).
Large accelerated
filer þ
Accelerated
filer o Non-accelerated
filer o
Indicate by check mark whether the registrant is a shell company
(as defined in
Rule 12b-2
of the
Act). Yes o No þ
As of June 30, 2005, the last business day of the
registrants most recently completed second fiscal quarter,
the aggregate market value of shares of common stock held by
non-affiliates was $954.6 million based on the number of
shares held by non-affiliates (32,065,498) and the reported
closing market price of the common stock on the New York Stock
Exchange on such date of $29.77. The number of shares
outstanding of $0.01 par value Common Stock, as of
February 23, 2006 was 46,627,669.
DOCUMENTS
INCORPORATED BY REFERENCE
None
PART I
Introduction
UICI and its subsidiaries are collectively referred to
throughout this Annual Report on
Form 10-K
as the Company or UICI and
may also be referred to as we, us
or our.
We offer insurance (primarily health and life) to niche consumer
and institutional markets. Through our subsidiaries we issue
primarily health insurance policies, covering individuals and
families, to the self-employed, association group, voluntary
employer group and student markets. During 2005, 2004 and 2003,
we generated health insurance premiums in the amount of
approximately $1.856 billion, $1.813 billion and
$1.547 billion, respectively, representing 87%, 88% and
85%, respectively, of our total revenues in such periods.
Through our Self-Employed Agency Division, we offer a broad
range of health insurance products for self-employed individuals
and individuals who work for small businesses. Our basic
hospital-medical and catastrophic hospital expense plans are
designed to accommodate individual needs and include traditional
fee-for-service
indemnity (choice of doctor) plans and preferred provider
organization (PPO) plans, as well as other
supplemental types of coverage. Commencing in 2005, we began to
offer on a selective
state-by-state
basis a new suite of consumer driven health plans for the
individual market, utilizing the consumer driven health plan
features and methodology acquired in October 2004 as part of our
purchase of HealthMarket, Inc. (a Norwalk, Connecticut-based
provider of consumer driven health plans (CDHPs) to the small
business (2 to 50 member) market).
We market these products to the self-employed and individual
markets through independent contractor agents associated with
UGA-Association Field Services (a wholly-owned marketing
division of the Company) and Cornerstone America (a wholly-owned
marketing division of the Company), which are our
dedicated agency sales forces that primarily sell
the Companys products. We believe that we have the largest
direct selling organization in the health insurance field, with
approximately 1,800 independent writing agents selling health
insurance to the self-employed market in 44 states.
Through our Student Insurance Division, we offer tailored health
insurance programs that generally provide single school year
coverage to individual students at colleges and universities. We
also provide an accident policy for students at public and
private schools in pre-kindergarten through grade 12. In the
student market, we sell our products through in-house account
executives that focus on colleges and universities on a national
basis. We believe that we provide student insurance plans to
more universities than any other single insurer. We distribute
these products to the college and university market primarily
through an in-house employee sales force.
Our Star HRG Division specializes in the design, marketing and
administration of limited-benefit health insurance plans for
entry-level, high turnover, part-time and hourly employees. We
market and sell these products directly to our employer clients
through our dedicated sales force of Star HRG employees and
through independent insurance brokers and consultants retained
by the employer client.
Through our Life Insurance Division, we also issue universal
life, whole life and term life insurance products to individuals
in four markets that we believe are underserved: the
self-employed market, the middle income market, the Hispanic
market and the senior market. We distribute these products
directly to individual customers through our UGA and Cornerstone
agents and other independent agents contracted through two key
unaffiliated marketing companies. These two marketing companies,
in turn, distribute our life products through managing general
agent (MGA) networks.
ZON Re USA LLC (an 82.5%-owned subsidiary) underwrites,
administers and issues accidental death, accidental death and
dismemberment (AD&D), accident medical and accident
disability insurance products, both on a primary and on a
reinsurance basis. We distribute these products through
professional reinsurance intermediaries and a network of
independent commercial insurance agents, brokers and third party
administrators (TPAs).
UICI is a holding company, and we conduct our insurance
businesses through our wholly owned insurance company
subsidiaries, The MEGA Life and Health Insurance Company
(MEGA),
Mid-West
National Life
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Insurance Company of Tennessee
(Mid-West)
and The Chesapeake Life Insurance Company
(Chesapeake). MEGA is an insurance company domiciled
in Oklahoma and is licensed to issue health, life and annuity
insurance policies in all states except New York.
Mid-West is
an insurance company domiciled in Texas and is licensed to issue
health, life and annuity insurance policies in Puerto Rico and
all states except Maine, New Hampshire, New York, and Vermont.
Chesapeake is an insurance company domiciled in Oklahoma and is
licensed to issue health and life insurance policies in all
states except New Jersey, New York and Vermont.
Our principal insurance subsidiaries are rated by
A.M. Best, Fitch and Standard & Poors
(S&P). Set forth below are financial strength
ratings of the principal insurance subsidiaries.
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A.M. Best
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Fitch
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S&P
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MEGA
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A− (Excellent)
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A (Strong)
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A− (Strong)
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Mid-West
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A− (Excellent)
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A (Strong)
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A− (Strong)
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Chesapeake
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A− (Excellent)
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Not Rated
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BBB+ (Good)
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In the table above, the A.M. Bests ratings carry a
negative outlook and the Fitch and S&P ratings
carry a watch negative outlook.
In evaluating a company, independent rating agencies review such
factors as the companys capital adequacy, profitability,
leverage and liquidity, book of business, quality and estimated
market value of assets, adequacy of policy liabilities,
experience and competency of management, and operating profile.
A.M. Bests ratings currently range from A++
(Superior) to F (Liquidation).
A.M. Bests ratings are based upon factors relevant to
policyholders, agents, insurance brokers and intermediaries and
are not directed to the protection of investors. Fitchs
ratings provide an overall assessment of an insurance
companys financial strength and security, and the ratings
are used to support insurance carrier selection and placement
decisions. Fitchs ratings range from AAA
(Exceptionally Strong) to D (Distressed).
S&Ps financial strength rating is a current opinion of
the financial security characteristics of an insurance
organization with respect to its ability to pay under its
insurance policies and contracts in accordance with their terms.
Standard & Poors financial strength ratings range
from AAA (Extremely Strong) to CC
(Extremely Weak).
Standard & Poors Rating Services has assigned to
UICI a counterparty credit rating of BBB− with
a watch negative outlook. S&Ps
counterparty credit rating is a current opinion of an
obligors overall financial capacity to pay its financial
obligations. Standard & Poors counterparty credit
ratings range from AAA (Extremely Strong) to
CC (Currently Highly-Vulnerable).
Our operating segments for financial reporting purposes include
(a) the Insurance segment, which includes the businesses of
the Companys Self-Employed Agency Division, the Student
Insurance Division, Star HRG Division, the Life Insurance
Division and Other Insurance and (b) Other Key Factors,
which includes investment income not otherwise allocated to the
Insurance segment, realized gains and losses, interest expense
on corporate debt, general expenses relating to corporate
operations, variable stock compensation and other unallocated
items.
Our principal executive offices are located at 9151 Grapevine
Highway, North Richland Hills, Texas
76180-5605,
and our telephone number is
(817) 255-5200.
Our periodic SEC filings, including our annual reports on
Form 10-K,
quarterly reports on
Form 10-Q,
current reports on
Form 8-K,
and if applicable, amendments to those reports filed or
furnished pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 are available through our web
site at www.uici.net free of charge as soon as reasonably
practicable after such material is electronically filed with, or
furnished to, the SEC.
Recent
Developments Blackstone
Transaction
On September 15, 2005, UICI entered into a merger
agreement, pursuant to which affiliates of The Blackstone Group,
Goldman Sachs Capital Partners and DLJ Merchant Banking Partners
will acquire UICI in a cash merger, with UICI being the
surviving corporation in the merger. In the proposed
transaction, substantially all current stockholders of UICI
(other than certain members of management and UICIs
independent insurance agents holding shares through UICIs
agent stock accumulation plans) will receive $37.00 per
share in cash. Completion of the
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transaction is subject to shareholder approval, receipt of
insurance regulatory approvals, the receipt of certain financing
and other conditions. The parties currently expect the
transaction to close on or about April 3, 2006.
The board of directors has fixed February 13, 2006 as the
record date for a special meeting of stockholders called to be
held on Wednesday, March 29, 2006, at which the holders of
the Companys Common Stock will be asked, among other
things, to approve the merger agreement.
Insurance
Segment
Self-Employed
Agency Division
Through our Self-Employed Agency Division, we offer a broad
range of health insurance products for the self-employed market
(i.e., self-employed individuals and individuals who work
for small businesses) and products for the small (2-15 members)
employer group market.
The Self-Employed Agency Division generated revenues of
$1.526 billion, $1.496 billion and $1.338 billion
(72%, 72% and 73% of our total revenue) in 2005, 2004 and 2003,
respectively.
Products
for the Self-Employed Market
We offer a broad range of health insurance products for
self-employed individuals and individuals who work for small
businesses. According to the Bureau of Labor Statistics, there
were approximately 12 million self-employed individuals in
the United States at the end of 2002. We currently have in force
approximately 350,000 health policies issued or coinsured by the
Company. We believe that there is significant opportunity to
increase our penetration in this market.
Health
Insurance Products
Traditional
Health Products
Our traditional health insurance plan offerings for the
self-employed market have included the following:
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Our Basic Hospital-Medical Expense Plan has a $1.0 million
lifetime maximum benefit for all injuries and sicknesses and
$500,000 lifetime maximum benefit for each injury or sickness.
Covered expenses are subject to a deductible. Covered hospital
room and board charges are reimbursed at 100% up to a
pre-selected daily maximum. Covered expenses for inpatient
hospital miscellaneous charges, same-day surgery facility,
surgery, assistant surgeon, anesthesia, second surgical opinion,
doctor visits, and ambulance services are reimbursed at 80% to
100% up to a scheduled maximum. This type of health insurance
policy is of a scheduled benefit nature, and as
such, provides benefits equal to the lesser of the actual cost
incurred for covered expenses or the maximum benefit stated in
the policy. These limitations allow for more certainty in
predicting future claims experience, and, as a result, we expect
that future premium increases for this policy will be less than
future premium increases on our catastrophic policy.
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Our Preferred Provider Plan incorporates managed care features
of a preferred provider organization, which are
designed to control health care costs through negotiating
discounts with a PPO network. Benefits are structured to
encourage the use of providers with which we have negotiated
lower fees for the services to be provided. The savings from
these negotiated fees reduce the costs to the individual
policyholders. The policies that provide for the use of a PPO
impose greater policyholder cost sharing if the policyholder
uses providers outside of the PPO network.
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Our Catastrophic Hospital Expense Plan provides a
$2.0 million lifetime maximum for all injuries and
sicknesses and a lifetime maximum benefit for each injury or
sickness ranging from $500,000 to $1.0 million. Covered
expenses are subject to a deductible and are then reimbursed at
a benefit payment rate ranging from 50% to 100% as determined by
the policy. After a pre-selected dollar amount of covered
expenses has been reached, the remaining expenses are reimbursed
at 100% for the remainder of the period of confinement per
calendar year. The benefits for this plan tend to increase as
hospital care expenses increase and, as a result, premiums on
these policies are subject to increase as overall hospital care
expenses rise.
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Each of our health insurance products is available with a
menu of various options (including various
deductible levels, coinsurance percentages and limited riders
that cover particular events such as outpatient accidents, and
doctors visits), enabling the insurance product to be
tailored to meet the insurance needs and the budgetary
constraints of the policyholder. We offer as an optional benefit
an Accumulated Covered Expense (ACE) rider that provides for
catastrophic coverage on our Scheduled/Basic plans for covered
expenses under the contract that generally exceed $75,000 or, in
certain cases, $100,000. The ACE rider pays benefits at 100%
after the stop loss is reached up to the aggregate maximum
amount of the contract.
Consumer
Driven Health Plan (CDHP) Products
Commencing in the first quarter of 2005, we began to offer on a
selective
state-by-state
basis a new suite of consumer driven health plans for the
individual market, utilizing the consumer driven health plan
features and methodology acquired in October 2004 as part of our
purchase of substantially all of the operating assets of
HealthMarket Inc. (a Norwalk, Connecticut-based provider of
consumer driven health plans (CDHPs) to the small business (2 to
50 member) market).
Through HealthMarket, we have developed software systems and
support services that enable the complete design and
administration of consumer driven health plans, which
incorporate features that enable consumers to assume a greater
role in making health care decisions. Information is published
on the internet and is available through customer support via
the telephone to assist our customers in obtaining the optimum
benefits from their insurance coverage in terms of both access
and cost.
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Focusing on the cost side of the healthcare equation, our
Consumer Preference Plan CDHP product includes
multiple benefit options for consumers (such as deductibles and
coinsurance), benefits that are based on a Maximum Allowable
Charge (a MAC) (which is the total fee that will be
considered under the terms of the policy for a particular
service), and other powerful information tools, including
advanced websites that provide access to information about
provider cost and quality.
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As of January 1 2006, the Consumer Preference Plan had been
approved for issuance in Alabama, Arizona, Florida, Georgia,
Illinois, Louisiana, Maryland, Michigan, Missouri, Mississippi,
Nebraska, Ohio, Oklahoma, Pennsylvania, Rhode Island, South
Carolina, Texas, Virginia, West Virginia, Wisconsin, Wyoming and
the District of Columbia.
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Focusing as well on healthcare utilization, the Companys
Smart Consumer Plan CDHP product enables consumers
to exert an even higher level of control over healthcare
decisions. The Smart Consumer Plan product focuses
on episodes of care through episode allowances.
There are more than 100 specific medical conditions and
procedures for which we have calculated an episode
allowance, which is a stated dollar limit for treatment of
the condition or procedure from beginning to end. The episode
allowance limits the amount that will be considered a covered
expense under the policy. Episode allowances are only intended
for conditions where the Company believes it is reasonable to
ask consumers to be involved in decisions regarding their care
and to make choices that can impact costs.
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As of January 1 2006, the Smart Consumer Plan had been approved
for issuance in Alabama, Arizona, Florida, Georgia, Illinois,
Louisiana, Maryland, Michigan, Missouri, Mississippi, Nebraska,
Ohio, Oklahoma, Pennsylvania, Rhode Island, South Carolina,
Texas, Virginia, West Virginia, Wisconsin, Wyoming and the
District of Columbia.
These products are issued and sold by our subsidiaries, The MEGA
Life and Health Insurance Company and
Mid-West
National Life Insurance Company of Tennessee, and distributed by
independent agents associated with our
UGA Association Field Services and Cornerstone
America marketing divisions.
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2006 New
Product Introductions
In the first quarter of 2006, we intend to introduce a new
portfolio of health insurance products to the self-employed
market. This new product portfolio includes a new Basic
Medical/Surgical Expense Plan and two versions of a Catastrophic
Expense PPO Plan:
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Our new Basic Medical/Surgical Expense Plan has a
$2.0 million lifetime benefit for all injuries and
sicknesses and $500,000 lifetime maximum benefit for each injury
or sickness. Covered expenses are covered subject to a
deductible and coinsurance. Covered inpatient and outpatient
hospital charges are reimbursed up to pre-selected per-injury or
sickness maximums. Surgeon, assistant surgeon, anesthesia,
second surgical opinion, and ambulance services are also
reimbursed to a scheduled maximum. Additional benefits are
available through riders and include prescription drugs,
emergency services and wellness care, among others. This type of
health insurance policy is of a scheduled benefit
nature, and as such, provides benefits equal to the lesser of
the actual cost incurred for covered expenses or the maximum
benefit stated in the policy. These limitations allow for more
certainty in predicting future claims experience, and, as a
result, we expect that future premium increases for this policy
will be lower than premium increases on our more comprehensive
policies.
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Our new Catastrophic Expense PPO Plan provides a
$5.0 million lifetime maximum for all injuries and
sicknesses and a maximum benefit for each injury or sickness of
$1.0 million. This plan incorporates features of a
preferred provider organization, which are designed
to control health care costs through negotiating provider
discounts with a PPO network. Benefits are structured to
encourage the use of providers with which we have negotiated
lower fees for the services to be provided. Covered expenses are
subject to a deductible and are then reimbursed at a benefit
payment rate as determined by the policy. After a pre-selected
dollar amount of covered expenses has been reached, the
remaining expenses are reimbursed at 100% for the remainder of
the period of confinement per calendar year. As a premium and
cost savings measure, this new plan limits payment for
diagnostic services (X-rays and laboratory) to those diagnostic
services that take place within 21 days of, and are
directly related to, a hospitalization or outpatient surgery.
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Our second new PPO Plan provides a $5.0 million lifetime
maximum for all injuries and sicknesses and a maximum benefit
for each injury or sickness of $1.0 million. This plan also
incorporates features of a preferred provider
organization. Covered expenses are subject to a deductible
and are then reimbursed at a benefit payment rate as determined
by the policy. After a pre-selected dollar amount of covered
expenses has been reached, the remaining expenses are reimbursed
at 100% for the remainder of the period of confinement per
calendar year.
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Subject to receipt of applicable regulatory approvals, these new
products will be issued and sold by our subsidiaries, The MEGA
Life and Health Insurance Company and
Mid-West
National Life Insurance Company of Tennessee, and distributed by
independent agents associated with our
UGA Association Field Services and Cornerstone
America marketing divisions.
Ancillary
Products
We have also developed and offer new ancillary product lines
that provide protection against short-term disability, as well
as a combination product that provides benefits for life,
disability and critical illness. These products have been
designed to further protect against risks to which our core
self-employed customer is typically exposed.
Marketing
and Sales
Our marketing strategy in the self-employed market is to remain
closely aligned with our dedicated agent sales forces.
Substantially all of the health insurance products issued by our
insurance company subsidiaries are sold through independent
contractor agents associated with us. We believe that we have
the largest direct selling organization in the health insurance
field, with approximately 1,800 independent writing agents
selling health insurance to the self-employed market in
44 states.
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Our agents are independent contractors, and all compensation
that agents receive from us for the sale of insurance is based
upon the agents levels of sales production.
UGA Association Field Services
(UGA) and Cornerstone America
(Cornerstone) (the principal marketing divisions of
MEGA and
Mid-West,
respectively) are each organized into geographical regions, with
each geographical region having a regional director, two
additional levels of field leaders and writing agents (i.e.,
the agents that are not involved in leadership of other
agents).
UGA and Cornerstone are each responsible for the recruitment and
training of their field leaders and writing agents. UGA and
Cornerstone generally seek persons with previous sales
experience. The process of recruiting agents is extremely
competitive. We believe that the primary factors in successfully
recruiting and retaining effective agents and field leaders are
our practices regarding advances on commissions, the quality of
the sales leads provided, the availability and accessibility of
equity ownership plans, the quality of the products offered,
proper training, and agent incentives and support. Classroom and
field training with respect to product content is required and
made available to the agents under the direction of our
regulated insurance subsidiaries.
We provide health insurance products to consumers in the
self-employed market in 44 states. As is the case with many
of our competitors in this market, a substantial portion of our
products are issued to members of various independent membership
associations that act as the master policyholder for such
products. The two principal membership associations in the
self-employed market that make available to their members our
health insurance products are the National Association for the
Self-Employed and the Alliance for Affordable Services. The
associations provide their membership access to a number of
benefits and products, including health insurance underwritten
by us. Subject to applicable state law, individuals generally
may not obtain insurance under an associations master
policy unless they are also members of the association. The
agreements with these associations requiring the associations to
continue as the master policyholder for our policies and to make
our products available to their respective members are
terminable by us and the associations upon not less than one
years advance notice to the other party. While we believe
that we are providing association group coverage in full
compliance with applicable law, changes in our relationship with
the membership associations
and/or
changes in the laws and regulations governing so-called
association group insurance (particularly changes
that would subject the issuance of policies to prior premium
rate approval
and/or
require the issuance of policies on a guaranteed
issue basis) could have a material adverse impact on our
financial condition, results of operations
and/or
business.
UGA agents and Cornerstone agents also act as field service
representatives (FSRs) for the associations. In this capacity
the FSRs enroll new association members and provide membership
retention services. For such services, we and the FSRs receive
compensation. Specialized Association Services, Inc. (a company
controlled by the adult children of the late Ronald L. Jensen,
UICIs former Chairman) provides administrative and benefit
procurement services to the associations. One of our
subsidiaries (UICI Marketing, Inc., a wholly-owned subsidiary
and our direct marketing group) generates new membership sales
prospect leads for both UGA and Cornerstone for use by the FSRs
(agents). UICI Marketing also provides video and print services
to the associations and to Specialized Association Services,
Inc. See Note K of Notes to Consolidated Financial
Statements. In addition to health insurance premiums derived
from the sale of health insurance, we receive fee income from
the associations, including fees associated with enrollment and
member retention services, fees for association membership
marketing and administrative services and fees for certain
association member benefits.
UICI Marketing, Inc. generates sales prospect leads for UGA and
Cornerstone for use by their agents. UICI Marketing administers
a call center (located in Oklahoma City, Oklahoma) staffing
approximately 60 tele-service representatives. UICI Marketing
has developed a marketing pool of approximately nine million
prospects from various data sources. Prospects initially
identified by UICI Marketing that are self-employed, small
business owners or individuals may become a qualified
lead by responding through one of UICI Marketings
traditional and internet lead channels and by expressing an
interest in learning more about health insurance. We believe
that UGA and Cornerstone agents, possessing the qualified
leads contact information, are able to achieve a higher
close rate than is the case with unqualified
prospects.
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Policy
Design and Claims Management
Our traditional indemnity health insurance products are
principally designed to limit coverages to the occurrence of
significant events that require hospitalization. This policy
design, which includes high deductibles, reduces the number of
covered claims requiring processing, thereby serving as a
control on administrative expenses. We seek to price our
products in a manner that accurately reflects our underwriting
assumptions and targeted margins, and we rely on the marketing
capabilities of our dedicated agency sales forces to sell these
products at prices consistent with these objectives.
We maintain administrative centers with full underwriting,
claims management and administrative capabilities. We believe
that by processing our own claims we can better assure that
claims are properly processed and can utilize the claims
information to periodically modify the benefits and coverages
afforded under our policies.
We have also developed an actuarial data warehouse, which is a
critical risk management tool that provides our actuaries with
rapid access to detailed exposure, claim and premium data. This
analysis tool enhances the actuaries ability to design,
monitor and adequately price all of the Self-Employed Agency
Divisions insurance products.
Provider
Network Arrangements
The Company enrolls its indemnity customers in selected PPO
networks to obtain discounts on provider services that would
otherwise not be available. In situations where a customer does
not obtain services from a contracted provider, the Company
applies various usual and customary fees, which limit the amount
paid to providers within specific geographic areas.
We believe that access to provider network contracts is a
critical factor in controlling medical costs, since there is
often a significant difference between a network-negotiated rate
and the non-discounted rate. To this end, we access networks of
hospitals and physicians through a variety of relationships with
third party network providers. During 2005, approximately 77% of
submitted claims were adjudicated through provider networks. In
addition, we have retained a pharmacy benefits management
company that has approximately 55,000 participating pharmacies
nationwide. We also utilize co-payments, coinsurance,
deductibles and annual limits to manage prescription drug costs.
Acquisition
of Health Blocks
Historically, the Company from time to time acquired and may
continue to acquire closed (i.e., no new policies) blocks of
health insurance policies or companies that own such blocks.
These opportunities were pursued on a
case-by-case
basis, and revenues from such blocks have generally not
represented a material portion of SEA Division revenue.
Products
for the Small Employer Group Market
During 2004, we announced our intent to enter the small (2-15
members) employer group market with a new suite of products
incorporating our recently-acquired HealthMarket consumer driven
health plan (CDHP) features and methodology. Small
U.S. employers pay approximately $400 billion of
health premiums each year, representing approximately one-half
of the total employer-funded market. As the most price sensitive
segment of the group health insurance market, we believe that
this segment offers significant growth opportunities. Subject to
receipt of applicable regulatory approvals, these products will
be issued and sold by our subsidiary, The MEGA Life and Health
Insurance Company, and distributed by independent agents
associated with our UGA Association Field
Services marketing division. We believe that our agents
existing customer relationships with small business owners may
provide us with a favorable competitive advantage in the market.
In the first quarter of 2005, we began to offer our
Consumer Advantage Plan to small (2-50 members)
employer group consumers in selected urban markets in Texas,
Georgia and Michigan. At January 1, 2006 , the Consumer
Advantage Plan had also been approved for issuance in Alabama,
Arizona, Arkansas, Illinois, Missouri, Nevada, Ohio and
Tennessee.
In addition, we intend to continue to utilize and grow the
existing network of independent brokers to distribute
HealthMarket products to the larger small (2-50 members)
employer group market. Subject to applicable regulatory
approvals, products to be distributed through the brokerage
community will be issued by our subsidiary, The
7
Chesapeake Life Insurance Company. At the time of our
acquisition of substantially all of the operating assets of
HealthMarket Inc. in October 2004, HealthMarkets insurance
subsidiary had utilized brokers to enroll in its consumer driven
health plans over 2,400 companies with an aggregate of
approximately 38,000 members. At February 1, 2006, the
Company had executed agreements with approximately 1,100
independent insurance brokers to represent Chesapeake in
connection with the sale of products to the small (2-50 member)
employer group market.
To date, the Company has generated only nominal revenues from
the sale of health insurance products to the small employer
group market.
Student
Insurance Division
Our Student Insurance Division (based in St. Petersburg,
Florida) offers tailored health insurance programs that
generally provide single school year coverage to individual
students at colleges and universities. We also provide an
accident policy for students at public and private schools in
pre-kindergarten through grade 12.
Market
The student market consists primarily of students attending
colleges and universities in the United States and, to a lesser
extent, students attending public and private schools in grades
pre-kindergarten through grade 12. Generally, our marketing
efforts have been focused on college students whose
circumstances are such that health insurance may not otherwise
be available through their parents. In particular, older
undergraduate, graduate and international students often have a
need to obtain insurance as first-time buyers, as
many schools require proof of insurance as a requirement for
enrollment. According to industry sources, there are
approximately 2,100 four-year universities and colleges in the
United States, which have a combined enrollment of approximately
9.5 million students. Typically, a carrier must be approved
and endorsed by the educational institution as a preferred
vendor of health insurance coverage to the institutions
students. We believe that we have been authorized by more
universities to provide student health insurance plans than any
other single insurer.
Products
Our student insurance programs are designed to meet the
requirements of each individual school. The programs generally
provide coverage for one school year (which typically runs from
September through the succeeding August) and the maximum
benefits available to any individual student enrolled in the
program range from $10,000 to $1.0 million, depending on
the coverage level desired by the school.
Our Student Insurance division underwrites, manages and pays
claims and administers policies for about 75% of all of its
school clients. Selected school clients have elected to
administer and pay claims through independent third party
administrators (TPAs) with respect to student insureds attending
their schools.
Our Student Insurance division had revenues of
$290.4 million, $306.3 million and $249.1 million
in 2005, 2004 and 2003, respectively, representing approximately
14%, 15% and 14% of our consolidated revenues in each such year.
Marketing
and Sales
We market our student insurance products to colleges and
universities on a national basis through in-house account
executives whose compensation is based primarily on commissions.
Account executives make presentations to the appropriate school
officials and if we are selected, we are endorsed as the
provider of health insurance for students attending that school.
The pre-kindergarten through grade 12 business is marketed
nationwide, primarily through third party agents and brokers.
Star
HRG Division
Our Star HRG Division, with principal offices in Phoenix,
Arizona, specializes in the development, marketing, and
administration of limited-benefit plans for entry level, high
turnover, hourly employees. The Star HRG Division
8
reported revenues of $146.6 million, $150.5 million
and $118.2 million in the years ended December 31,
2005, 2004 and 2003, respectively, representing approximately
7%, 7% and 6% of our consolidated revenues in each such year.
Market
Star HRG focuses its marketing efforts on the employer-based
segment within two distinct markets: mid-size companies
employing 100-1,499 eligible employees and larger employers with
1,500 or more eligible employees. Star HRGs primary
product offering is marketed under the trademark name of
Starbridge. It is offered to large and mid-size
companies and constitutes an affordably priced group of
limited-benefit plans designed to meet the needs of entry level,
high turnover, hourly employees. The plans include
consumer-decision tools and are designed to meet the needs of
full or part-time employees who are in non-benefited classes and
for newly hired individuals who are not yet eligible for
full-time benefits. Target industries include national and
regional restaurant chains, retail and convenience stores,
service stations, call centers, and various other outlets of the
service/hospitality industries.
Star HRGs newest product initiative, Fundamental Care, is
an enhanced limited-benefit medical plan designed to fill the
gap between voluntary, limited-benefit plans and comprehensive
major medical plans. The Fundamental Care plan is designed for
employers with a large population of skilled hourly workers who
cannot afford to offer their employees a major medical plan.
With rates as much as 25-40% less than that of a comprehensive
major medical plan, the plan is available for
mid-to-large
groups with a minimum of 100 employees. Fundamental Care
provides insureds up to $50,000 in medical coverage each
coverage year. Some benefits include coverage for
day-to-day
medical needs such as doctor visits, surgery, hospitalization,
maternity, wellness care, lab/x-rays, and prescriptions.
Products
Product offerings under Star HRG programs include affordable
limited-benefit medical, dental, term life, accidental death
benefits, and short-term disability, as well as access to
discounted prescription, vision, and other health care related
networks and services.
Marketing
and Sales
Star HRG markets its products in all 50 states and the
District of Columbia. Star HRG markets directly to potential
employer-group clients through its dedicated sales force of 17
Star HRG employees. Clients often retain independent insurance
agents, brokers, or consultants to facilitate the sales process.
Managing General Agents are also utilized to distribute Star
HRGs products to the insurance agent/broker marketplace.
Star HRGs sales efforts are supplemented by a full-service
enrollment center located in Phoenix, Arizona. To increase plan
participation, the enrollment center utilizes direct mail
pieces, interactive voice response technology and an
in-bound/out-bound call center enrollment team.
Life
Insurance Division
Our Life Insurance Division offers life insurance products to
individuals. At December 31, 2005, the Life Insurance
Division (which is based in Oklahoma City, Oklahoma) had nearly
$5.8 billion of net life insurance in force and over
300,000 individual policyholders. The Life Insurance Division,
which grew historically through acquisitions of closed blocks of
life insurance and annuity policies, has more recently shifted
its focus and has begun to build new distribution channels and
to market and sell newly designed life insurance products. In
2005, 2004 and 2003, the Life Insurance Division generated
revenues of $93.5 million, $76.0 million and
$68.3 million, respectively, representing 4% of our total
revenue in each such year.
Markets
Served
The Life Insurance Division offers its life insurance products
to demographically growing market segments that we have
identified as underserved, including the self-employed market,
the middle-income market, the Hispanic market and the senior
market.
9
Products
The Life Insurance Divisions products are tailored to meet
the specific needs of customers in each of its targeted markets.
We offer universal life insurance and term insurance products to
individuals in the self-employed market. We offer other term
plans, as well as two universal life products, to meet the needs
of individuals in the middle-income market and the Hispanic
market. We also offer a whole life product, a graded whole life
and a modified whole life product to assist seniors in meeting
their needs to cover final expenses.
Distribution
The Life Insurance Division distributes its products primarily
through two distribution channels. Commencing in the second
quarter of 2002, our UGA and Cornerstone agents began to market
our universal life and term products to individuals in the
self-employed market. In 2003, the Life Insurance Division also
entered into new marketing relationships with two independent
marketing companies to distribute our products through networks
of managing general agents (MGAs). One marketing company offers
universal life and term products to middle-income buyers, as
well as through agencies that specialize in sales to Hispanic
buyers. The second marketing company offers our whole life
product line exclusively for seniors. At year-end 2005, these
two marketing organizations had contracted over 13,000
independent agents to distribute our products.
Marketing
and Sales
With the help of agents associated with UGA and Cornerstone, the
Life Insurance Division seeks to leverage our significant health
insurance customer base by positioning itself to offer those
customers (self-employed individuals) universal life and term
life products designed to fit their changing needs. The two
independent marketing companies with which we have contracted
offer their agents product lines to cover the needs of the
middle-income market, the Hispanic market and the senior market.
The Life Insurance Division has also developed a needs analysis
software selling system, Blueprint for
Lifetm.
This selling tool allows the agent to accurately and quickly
identify the amount of insurance that should be carried by an
individual. We believe that the Blueprint for Life
provides a much needed and valuable service to the middle-income
buyer, who has often been overlooked or underserved by other
distributors of life insurance products.
Former
College Fund Life Division
Through our former College Fund Life Insurance Division, we
previously offered an interest-sensitive whole life insurance
product that was generally issued with an annuity rider and a
child term rider. The child term rider included a special
provision under which we committed to provide private student
loans to help fund the named childs higher education if
certain restrictions and qualifications are satisfied. Student
loans were available in amounts up to $30,000 for students
attending undergraduate school and up to $30,000 for students
attending graduate school. Loans made under this rider are not
funded or supported by the federal government.
Effective May 31, 2003, we closed our College
Fund Life Division and discontinued offering the College
Fund Life product, including the child term rider that
committed us to provide private student loans to help fund the
named childs higher education. Despite the close of the
College Fund Life Division, we continue to have outstanding
commitments to fund student loans for the years 2006 through
2026 with respect to policies previously issued. See
Notes H and L of Notes to Consolidated Financial
Statements.
Other
Insurance
Through our 82.5%-owned subsidiary, ZON Re USA LLC (ZON
Re), we underwrite, administer and issue accidental death,
accidental death and dismemberment (AD&D), accident medical
and accident disability insurance products, both on a primary
and on a reinsurance basis. In the year ended December 31,
2005, ZON Re generated revenues of $34.8 million and
operating income of $4.7 million.
ZON Re underwrites and manages accident reinsurance programs on
behalf of MEGA for primary life, accident and health and
property and casualty insurers that wish to transfer risk for
certain types of primary accident programs. Accident reinsurance
provides reimbursement to primary insurance carriers for covered
losses resulting
10
from accidental bodily injury or accidental death. For its
reinsurance programs, ZON Re targets national, regional and
middle market insurers in the United States and Canada. ZON Re
distributes accident reinsurance products through a network of
professional reinsurance intermediaries. ZON Re underwrites on
behalf of MEGA both treaty and facultative accident reinsurance
programs, which may be offered on either a quota share or excess
of loss basis. The Company has determined, as a matter of
policy, that MEGAs exposure on any single reinsurance
contract issued by it and underwritten by ZON Re will not exceed
$1.0 million per person and $10.0 million per event.
ZON Re also underwrites and distributes a limited portfolio of
primary accident insurance products issued by Chesapeake. These
products are designed for direct purchase by banks,
associations, employers and affinity groups and are distributed
through a national network of independent commercial insurance
agents, brokers and third party administrators (TPAs). The
Company has determined, as a matter of policy, that
Chesapeakes maximum exposure on any single primary
insurance contract issued by it and underwritten by ZON Re will
not exceed $1.0 million per person.
Discontinued
Operations
Over the past three years we have actively endeavored to
simplify our business by closing
and/or
disposing of assets and operations not otherwise related to our
core health and life insurance operations, including the
operations of our former Academic Management Services Corp.
(AMS) subsidiary (which we sold in November 2003),
our former Senior Market Division, and our former Special Risk
Division. See
Item 7 Managements Discussion
and Analysis of Financial Condition and Results of Operations.
Ceded
Reinsurance
Our insurance subsidiaries reinsure portions of the coverages
provided by their insurance products with other insurance
companies on both an
excess-of-loss
and coinsurance basis. The maximum retention by us on one
individual in the case of life insurance is $200,000 for MEGA,
Mid-West and
Chesapeake. We use reinsurance for our health insurance business
solely for limited purposes. Reinsurance agreements are intended
to limit an insurers maximum loss.
Competition
In each of our lines of business, we compete with other
insurance companies or service providers, depending on the line
and product, although we have no single competitor who competes
against us in all of the business lines in which we operate.
With respect to the business of our Self-Employed Agency
Division, the market is characterized by many competitors, and
our main competitors include health insurance companies, health
maintenance organizations and the Blue Cross/ Blue Shield plans
in the states in which we write business. With respect to our
Student Insurance and Star HRG businesses, we compete with
subsidiaries and units of larger, national insurance providers.
While we are among the largest competitors in terms of market
share in many of our business lines, in some cases there are one
or more major market players in a particular line of business.
Competition in our businesses is based on many factors,
including quality of service, product features, price, scope of
distribution, scale, financial strength ratings and name
recognition. We compete, and will continue to compete, for
customers and distributors with many insurance companies and
other financial services companies. We compete not only for
business and individual customers, employer and other group
customers, but also for agents and distribution relationships.
Some of our competitors may offer a broader array of products
than our specific subsidiaries with which they compete in
particular markets, may have a greater diversity of distribution
resources, may have better brand recognition, may from time to
time have more competitive pricing, may have lower cost
structures or, with respect to insurers, may have higher
financial strength or claims paying ratings. Organizations with
sizable market share or provider-owned plans may be able to
obtain favorable financial arrangements from health care
providers that are not available to us. Some may also have
greater financial resources with which to compete. In addition,
from time to time, companies enter and exit the markets in which
we operate, thereby increasing competition at times when there
are new entrants. For example, several large insurance companies
have recently entered the market for individual health insurance
products. We may lose business to
11
competitors offering competitive products at lower prices, or
for other reasons, which could materially adversely affect our
future results of operations and financial condition.
Regulatory
and Legislative Matters
Insurance
Regulation
State
Regulation
Our insurance subsidiaries are subject to extensive regulation
in their states of domicile and the other states in which they
do business under statutes that typically delegate broad
regulatory, supervisory and administrative powers to insurance
departments. The method of regulation varies, but the subject
matter of such regulation covers, among other things, the amount
of dividends and other distributions that can be paid by the
insurance subsidiaries without prior approval or notification;
the granting and revoking of licenses to transact business;
trade practices, including with respect to the protection of
consumers; disclosure requirements; privacy standards; minimum
loss ratios; premium rate regulation; underwriting standards;
approval of policy forms; claims payment; licensing of insurance
agents and the regulation of their conduct; the amount and type
of investments that the insurance subsidiaries may hold, minimum
reserve and surplus requirements; risk-based capital
requirements; and compelled participation in, and assessments in
connection with, risk sharing pools and guaranty funds. Such
regulation is intended to protect policyholders rather than
investors.
Our insurance subsidiaries are required to file detailed annual
statements with the state insurance regulatory departments and
are subject to periodic financial and market conduct
examinations by such departments. The most recently completed
financial examination for MEGA in Oklahoma (MEGAs domicile
state) was completed as of and for the two-year period ended
December 31, 2003. The most recently completed financial
examination for
Mid-West in
Tennessee
(Mid-Wests
state of domicile until 2005) was completed as of and for
the four-year period ended December 31, 2003. The most
recently completed financial examination for Chesapeake in
Oklahoma (Chesapeakes domicile state) was completed as of
and for the three-year period ended December 31, 2003.
State insurance departments have also periodically conducted and
continue to conduct market conduct examinations of UICIs
insurance subsidiaries. As of December 31, 2005, either or
both of MEGA and
Mid-West
were subject to ongoing market conduct examinations
and/or open
inquiries with respect to marketing practices in 13 states.
State insurance regulatory agencies have authority to levy
monetary fines and penalties resulting from findings made during
the course of such market conduct examinations. Historically,
our insurance subsidiaries have from time to time been subject
to such fines and penalties, none of which individually or in
the aggregate have had a material adverse effect on our results
of operations or financial condition.
In March 2005, UICI received notification that the Market
Analysis Working Group of the National Association of Insurance
Commissioners had chosen the states of Washington and Alaska to
lead a multi-state market conduct examination of UICIs
principal insurance subsidiaries, The MEGA Life and Health
Insurance Company,
Mid-West
National Life Insurance Company of Tennessee and The Chesapeake
Life Insurance Company. That examination commenced in May 2005
and is ongoing. While we do not currently believe that the
multi-state market conduct examination will have a material
adverse effect upon our consolidated financial position or
results of operations, state insurance regulatory agencies have
authority to levy monetary fines and penalties resulting from
findings made during the course of such examinations.
On March 8, 2005, the Office of the Insurance Commissioner
of the State of Washington issued a cease and desist order that
prohibits MEGA from selling a previously approved health
insurance product to consumers in the State of Washington. On
April 27, 2005, the Washington Department of Insurance
granted MEGAs and
Mid-Wests
request for approval of a policy form and rates associated with
a new health insurance product to be offered to consumers in the
State of Washington. The Company commenced offering the new
product in the second quarter of 2005. UICI does not believe
that the issuance of the cease and desist order by the
Washington Insurance Commissioner had a material adverse effect
upon its consolidated results of operations or financial
condition.
State regulation of health insurance products varies from state
to state, although all states regulate premium rates, policy
forms and underwriting and claims practices to one degree or
another. Most states have special rules for health insurance
sold to individuals and small groups. For example, a number of
states have passed or are
12
considering legislation that would limit the differentials in
rates that insurers could charge for health care coverage
between new business and renewal business for small groups with
similar demographics. Every state has also adopted legislation
that would make health insurance available to all small employer
groups by requiring coverage of all employees and their
dependents, by limiting the applicability of pre-existing
conditions exclusions, by requiring insurers to offer a basic
plan exempt from certain benefits as well as a standard plan, or
by establishing a mechanism to spread the risk of high risk
employees to all small group insurers. The U.S. Congress
and various state legislators have from time to time proposed
changes to the health care system that could affect the
relationship between health insurers and their customers,
including external review. In addition, various states are
considering the adoption of play or pay laws
requiring that employers either offer health insurance or pay a
tax to cover the costs of public health care insurance. We
cannot predict with certainty the effect that any proposals, if
adopted, or legislative developments could have on our insurance
businesses and operations.
A number of states have enacted new health insurance legislation
over the past several years. These laws, among other things,
mandate benefits with respect to certain diseases or medical
procedures, require health insurers to offer an independent
external review of certain coverage decisions and establish
health insurer liability. There has also been an increase in
legislation regarding, among other things, prompt payment of
claims, privacy of personal health information, health insurer
liability, prohibition against insurers including discretionary
clauses in their policy forms and relationships between health
insurers and providers. We expect that this trend of increased
legislation will continue. These laws may have the effect of
increasing our costs and expenses.
We provide health insurance products to consumers in the
self-employed market in 44 states. As is the case with many
of our competitors in this market, a substantial portion of our
products is issued to members of various independent membership
associations that act as the master policyholder for such
products. During 2004, we and our insurance company subsidiaries
resolved a nationwide class action lawsuit challenging the
nature of the relationship between our insurance companies and
the membership associations that make available to their members
our insurance companies health insurance products. See
Note L of Notes to Consolidated Financial Statements.
While we believe that we are providing association group
coverage in full compliance with applicable law, changes in our
relationship with the membership associations
and/or
changes in the laws and regulations governing association group
insurance (particularly changes that would subject the issuance
of policies to prior premium rate approval
and/or
require the issuance of policies on a guaranteed
issue basis) could have a material adverse impact on our
financial condition, results of operations
and/or
business.
Many states have also enacted insurance holding company laws
that require registration and periodic reporting by insurance
companies controlled by other corporations. Such laws vary from
state to state, but typically require periodic disclosure
concerning the corporation that controls the controlled insurer
and prior notice to, or approval by, the applicable regulator of
inter-corporate transfers of assets and other transactions
(including payments of dividends in excess of specified amounts
by the controlled insurer) within the holding company system.
Such laws often also require the prior approval for the
acquisition of a significant ownership interest (i.e., 10% or
more) in the insurance holding company. UICI (the holding
company) and our insurance subsidiaries are subject to such
laws, and we believe that we and such subsidiaries are in
compliance in all material respects with all applicable
insurance holding company laws and regulations.
Under the risk-based capital initiatives adopted in 1992 by the
National Association of Insurance Commissioners
(NAIC), insurance companies must calculate and
report information under a risk-based capital formula.
Risk-based capital formulas are intended to evaluate risks
associated with asset quality, adverse insurance experience,
losses from asset and liability mismatching, and general
business hazards. This information is intended to permit
regulators to identify and require remedial action for
inadequately capitalized insurance companies, but it is not
designed to rank adequately capitalized companies. At
December 31, 2005, the risk-based capital ratio of each of
our domestic insurance subsidiaries significantly exceeded the
ratio for which regulatory corrective action would be required.
The states in which our insurance subsidiaries are licensed have
the authority to change the minimum mandated statutory loss
ratios to which they are subject, the manner in which these
ratios are computed and the manner in which compliance with
these ratios is measured and enforced. Loss ratios are commonly
defined as incurred claims divided by earned premiums. Most
states in which our insurance subsidiaries write insurance have
13
adopted the loss ratios recommended by the NAIC, but frequently
the loss ratio regulations do not apply to the types of health
insurance issued by our subsidiaries. We are unable to predict
the impact of (i) any changes in the mandatory statutory
loss ratios for individual or group policies to which we may
become subject, or (ii) any change in the manner in which
these minimums are computed or enforced in the future. Such
changes could result in a narrowing of profit margins and
adversely affect our business and results of operations. We have
not been informed by any state that our insurance subsidiaries
do not meet mandated minimum ratios, and we believe that we are
in compliance with all such minimum ratios. In the event that we
are not in compliance with minimum statutory loss ratios
mandated by regulatory authorities with respect to certain
policies, we may be required to reduce or refund premiums, which
could have a material adverse effect upon our business and
results of operations.
The NAIC and state insurance departments are continually
reexamining existing laws and regulations, including those
related to reducing the risk of insolvency and related
accreditation standards. To date, the increase in
solvency-related oversight has not had a significant impact on
our insurance business.
Federal
Regulation
In 1945, the U.S. Congress enacted the McCarran-Ferguson
Act, which declared the regulation of insurance to be primarily
the responsibility of the individual states. Although repeal of
McCarran-Ferguson is debated in the U.S. Congress from time
to time, the federal government generally does not directly
regulate the insurance business. However, federal legislation
and administrative policies in several areas, including
healthcare, pension regulation, age and sex discrimination,
financial services regulation, securities regulation, privacy
laws, terrorism and federal taxation, do affect the insurance
business.
The
Health Insurance Portability and Accountability Act of 1996
(HIPAA)
As with other lines of insurance, the regulation of health
insurance historically has been within the domain of the states.
However, HIPAA and the implementing regulations promulgated
thereunder by the Department of Health and Human Services impose
obligations for issuers of health and dental insurance coverage
and health and dental benefit plan sponsors. HIPAA requires
certain guaranteed issuance and renewability of health insurance
coverage for individuals and small employer groups (generally 50
or fewer employees) and limits exclusions based on pre-existing
conditions. Most of the insurance reform provisions of HIPAA
became effective for plan years beginning on or after
July 1, 1997.
HIPAA also establishes requirements for maintaining the
confidentiality and security of individually identifiable health
information and new standards for electronic health care
transactions. The Department of Health and Human Services
promulgated final HIPAA regulations in 2002. The privacy
regulations required compliance by April 2003, the electronic
transactions regulations by October 2003 and the security
regulations by April 2005. As have other entities in the health
care industry, we have incurred substantial costs in meeting the
requirements of these HIPAA regulations and expect to continue
to incur costs to maintain compliance. We have worked diligently
to comply with these regulations within the time periods
required and believe that we have complied.
HIPAA is a far-reaching and complex issue and proper
interpretation and practice under the law continue to evolve.
Consequently, our efforts to measure, monitor and adjust our
business practices to comply with HIPAA are ongoing. Failure to
comply could result in regulatory fines and civil lawsuits.
Knowing and intentional violations of these rules may also
result in federal criminal penalties.
UICI is continuously reviewing the potential impact of the HIPAA
privacy and security regulations on its operations, including
its information technology and security systems. There can be no
assurance that the restrictions and duties imposed by the final
rules on the privacy and security of individually-identifiable
health information will not have a material adverse effect on
UICIs business and future results of operations.
USA
PATRIOT Act
On October 26, 2001, the International Money Laundering
Abatement and Anti-Terrorist Financing Act of 2001 was enacted
into law as part of the USA PATRIOT Act. The law requires, among
other things, that financial institutions adopt anti-money
laundering programs that include policies, procedures and
controls to detect and
14
prevent money laundering, designate a compliance officer to
oversee the program and provide for employee training, and
periodic audits in accordance with regulations proposed by the
U.S. Treasury Department. Proposed Treasury regulations
governing portions of our life insurance business would require
us to develop and implement procedures designed to detect and
prevent money laundering and terrorist financing. We remain
subject to U.S. regulations that prohibit business dealings
with entities identified as threats to national security. We
have licensed software to enable us to detect and prevent such
activities in compliance with existing regulations and we are
developing policies and procedures designed to comply with the
proposed regulations should they come into effect.
There are significant criminal and civil penalties that can be
imposed for violation of Treasury regulations. We believe that
the steps we are taking to comply with the current regulations
and to prepare for compliance with the proposed regulations
should be sufficient to minimize the risks of such penalties.
CAN
SPAM Act
From time to time the Company utilizes, either directly or
through third party vendors,
e-mail to
identify prospective sales leads for use by its agents. The
federal CAN SPAM Act, which became effective January 1,
2004 and is administered and enforced by the Federal Trade
Commission, establishes national standards for sending bulk,
unsolicited commercial
e-mail.
While targeting and prohibiting
e-marketers
to send unsolicited commercial
e-mail with
falsified headers, the CAN SPAM Act permits the use of
unsolicited commercial
e-mail if
and as long as the message contains an opt-out mechanism, a
functioning return
e-mail
address, a valid subject line indicating the
e-mail is an
advertisement and the legitimate physical address of the mailer.
While the Company has taken what it believes are reasonable
steps to ensure that it, and the various third party vendors
with which it does business, are in full compliance with the CAN
SPAM Act, failure to comply with the provisions of the CAN SPAM
Act could result in regulatory fines and civil lawsuits.
Gramm-Leach-Bliley
Act
The Financial Services Modernization Act of 1999 (the so-called
Gramm-Leach-Bliley Act, or GLBA) includes several
privacy provisions and introduced new controls over the transfer
and use of individuals nonpublic personal data by
financial institutions, including insurance companies, insurance
agents and brokers and certain other entities licensed by state
insurance regulatory authorities.
GLBA provides that there is no federal preemption of a
states insurance related privacy laws if the state law is
more stringent than the privacy rules imposed under GLBA.
Accordingly, selected state insurance regulators or state
legislatures have adopted rules that limit the ability of
insurance companies, insurance agents and brokers and certain
other entities licensed by state insurance regulatory
authorities to disclose and use non-public information about
consumers to third parties. These limitations require the
disclosure by these entities of their privacy policies to
consumers and, in some circumstances, will allow consumers to
prevent the disclosure or use of certain personal information to
an unaffiliated third party. Pursuant to the authority granted
under GLBA to state insurance regulatory authorities to regulate
the privacy of nonpublic personal information provided to
consumers and customers of insurance companies, insurance agents
and brokers and certain other entities licensed by state
insurance regulatory authorities, the National Association of
Insurance Commissioners has recently promulgated a new model
regulation called Privacy of Consumer Financial and Health
Information Regulation. Some states issued this model regulation
before July 1, 2001, while other states must pass certain
legislative reforms to implement new state privacy rules
pursuant to GLBA. In addition, GLBA requires state insurance
regulators to establish standards for administrative, technical
and physical safeguards pertaining to customer records and
information to (a) ensure their security and
confidentiality, (b) protect against anticipated threats
and hazards to their security and integrity, and
(c) protect against unauthorized access to and use of these
records and information. The privacy and security provisions of
GLBA have significantly affected how a consumers nonpublic
personal information is transmitted through and used by
diversified financial services companies and conveyed to and
used by outside vendors and other unaffiliated third parties.
15
Legislative
Developments
Legislation has been introduced in the U.S. Congress that
would allow state-chartered and regulated insurance companies,
such as our insurance subsidiaries, to choose instead to be
regulated exclusively by a federal insurance regulator. We do
not believe that such legislation will be enacted during the
current Congressional term.
Numerous proposals to reform the current health care system have
been introduced in the U.S. Congress and in various state
legislatures. Proposals have included, among other things,
modifications to the existing employer-based insurance system, a
quasi-regulated system of managed competition
among health insurers, and a single-payer, public program.
Changes in health care policy could significantly affect our
business. For example, federally mandated, comprehensive major
medical insurance, if proposed and implemented, could partially
or fully replace some of our current products. Furthermore,
legislation has been introduced from time to time in the
U.S. Congress that could result in the federal government
assuming a more direct role in regulating insurance companies.
There is also legislation pending in the U.S. Congress and
in various states designed to provide additional privacy
protections to consumer customers of financial institutions.
These statutes and similar legislation and regulations in the
United States or other jurisdictions could affect our ability to
market our products or otherwise limit the nature or scope of
our insurance operations.
The NAIC and individual states have been studying small face
amount life insurance for the past three years. Some initiatives
that have been raised at the NAIC include further disclosure for
small face amount policies and restrictions on premium to
benefit ratios. The NAIC is also studying other issues such as
suitability of insurance products for certain
customers. This may have an effect on our pre-funded funeral
insurance business. Suitability requirements such as a customer
assets and needs worksheet could extend and complicate the sale
of pre-funded funeral insurance products.
We are unable to evaluate new legislation that may be proposed
and when or whether any such legislation will be enacted and
implemented. However, many of the proposals, if adopted, could
have a material adverse effect on our financial condition, cash
flows or results of operations, while others, if adopted, could
potentially benefit our business.
Recently, the insurance industry has experienced substantial
volatility as a result of current litigation, investigations and
regulatory activity by various insurance, governmental and
enforcement authorities concerning certain practices within the
insurance industry. These practices include the payment of
contingent commissions by insurance companies to insurance
brokers and agents and the extent to which such compensation has
been disclosed, the solicitation and provision of fictitious or
inflated quotes, the use of inducements to brokers or companies
in the sale of group insurance products, and the accounting
treatment for finite reinsurance or other non-traditional or
loss mitigation insurance products. We have received inquiries
and informational requests from insurance departments in certain
states in which our insurance subsidiaries operate. We cannot
predict at this time the effect that current litigation,
investigations and regulatory activity will have on the
insurance industry or our business.
The NAIC and several states have recently proposed regulations
and/or laws
that would that would prohibit agent/broker practices that have
been the focus of recent investigations of broker compensation
in the State of New York. The NAIC has adopted a Compensation
Disclosure Amendment to its Producers Licensing Model Act which,
if adopted by the states, would require disclosure by
agents/brokers to customers that insurers will compensate such
agents/brokers for the placement of insurance and documented
acknowledgement of this arrangement in cases where the customer
also compensates the agent/broker. Some larger states, including
California and New York, are considering additional provisions
that would require the disclosure of the amount of compensation
and/or
require (where an agent/broker represents more than one insurer)
placement of the best coverage. We cannot predict
how many states, if any, may promulgate the NAIC amendment or
similar regulations or the extent to which these regulations may
have an adverse impact on our business.
Employees
We had approximately 2,700 employees at February 14, 2006.
We consider our employee relations to be good. Agents associated
with our UGA and Cornerstone field forces constitute independent
contractors and are not employees of the Company.
16
The following factors could impact the Companys business
and financial prospects:
|
|
|
UICI may
lose business to competitors offering competitive products at
lower prices.
|
We compete, and will continue to compete, for customers and
distributors with many insurance companies and other financial
services companies. We compete not only for business and
individual customers, employer and other group customers, but
also for agents and distribution relationships. Our competitors
may offer a broader array of products than we do, have a greater
diversity of distribution resources, have better brand
recognition, have more competitive pricing or, have higher
financial strength or claims paying ratings. Competitors with
sizable market share or provider-owned plans may be able to
obtain favorable financial arrangements from health care
providers that are not available to us.
|
|
|
Failure
to accurately estimate medical claims and health care costs may
have a significant impact on the Companys business and
results of operation.
|
If we are unable to accurately estimate medical claims and
control health care costs, our results of operations may be
materially and adversely affected. We estimate the cost of
future medical claims and other expenses using actuarial methods
based upon historical data, medical inflation, product mix,
seasonality, utilization of health care services and other
relevant factors. We establish premiums based on these methods.
The premiums we charge our customers generally are fixed for
one-year periods, and costs we incur in excess of our medical
claim projections generally are not recovered in the contract
year through higher premiums.
|
|
|
Failure
of our insurance subsidiaries to maintain their current
insurance ratings could materially adversely affect UICIs
business and results of operations.
|
Our principal insurance subsidiaries are currently rated by
A.M. Best Company, Fitch and Standard &
Poors. If our insurance subsidiaries are not able to
maintain their current rating by A.M. Best Company, Fitch
and/or
Standard & Poors, our results of operations could
be materially adversely affected. Decreases in operating
performance and other financial measures may result in a
downward adjustment of the rating of our insurance subsidiaries
assigned by A.M. Best Company, Fitch or Standard &
Poors. Other factors beyond our control, such as general
downward economic cycles and changes implemented by the rating
agencies, including changes in the criteria for the underwriting
or the capital adequacy model, may also result in a decrease in
the rating. A downward adjustment in rating by A.M. Best
Company, Fitch
and/or
Standard & Poors of our insurance subsidiaries
could have a material adverse effect on our business and results
of operations.
|
|
|
Changes
in our relationship with membership associations that make
available to their members our health insurance products
and/or
changes in the laws and regulations governing so-called
association group insurance could materially
adversely affect UICIs business and results of
operations.
|
As is the case with many of our competitors in the self-employed
market, a substantial portion of our health insurance products
is issued to members of various independent membership
associations that act as the master policyholder for such
products. The two principal membership associations in the
self-employed market that make available to their members our
health insurance products are the National Association for the
Self-Employed and the Alliance for Affordable Services. The
associations provide their members access to a number of
benefits and products, including health insurance underwritten
by us. Subject to applicable state law, individuals generally
may not obtain insurance under an associations master
policy unless they are also members of the association. The
agreements with these associations requiring the associations to
continue as the master policyholder for our policies and to make
our products available to their respective members are
terminable by us or the association upon not less than one
years advance notice to the other party.
Our UGA agents and Cornerstone America agents also act as field
service representatives (FSRs) for the associations, in which
capacity the FSRs enroll new association members and provide
membership retention services. For such services, we and the
FSRs receive compensation. Specialized Association Services,
Inc. (a company controlled by the adult children of the late
Ronald L. Jensen (UICIs former Chairman)) provides
17
administrative and benefit procurement services to the
associations. One of our subsidiaries (UICI Marketing, Inc., a
wholly-owned subsidiary and our direct marketing group)
generates new membership sales prospect leads for both UGA and
Cornerstone for use by the FSRs (agents). UICI Marketing also
provides video and print services to the associations and to
Specialized Association Services, Inc. In addition to health
insurance premiums derived from the sale of health insurance, we
receive fee income from the associations, including fees
associated with enrollment and member retention services, fees
for association membership marketing and administrative services
and fees for certain association member benefits.
While we believe that we are providing association group
coverage in full compliance with applicable law, changes in our
relationship with the membership associations
and/or
changes in the laws and regulations governing so-called
association group insurance, particularly changes
that would subject the issuance of policies to prior premium
rate approval
and/or
require the issuance of policies on a guaranteed
issue basis, could have a material adverse impact on our
financial condition, results of operations
and/or
business.
|
|
|
Our
domestic insurance subsidiaries are currently the subject of a
multi-state market conduct examination, and an adverse finding
or outcome from that examination could adversely affect our
results of operations and financial condition.
|
In March 2005, UICI received notification that the Market
Analysis Working Group of the National Association of Insurance
Commissioners had chosen the states of Washington and Alaska to
lead a multi-state market conduct examination of UICIs
principal insurance subsidiaries, The MEGA Life and Health
Insurance Company,
Mid-West
National Life Insurance Company of Tennessee and The Chesapeake
Life Insurance Company. That examination commenced in May 2005
and is ongoing. While we do not currently believe that the
multi-state market conduct examination will have a material
adverse effect upon our consolidated financial position or
results of operations, state insurance regulatory agencies have
authority to levy monetary fines and penalties resulting from
findings made during the course of such examinations.
|
|
|
Negative
publicity regarding our business practices and about the health
insurance industry in general may harm our business and
adversely affect our results of operations and financial
condition.
|
The health and life insurance industry and related products and
services we provide attracts negative publicity from consumer
advocate groups and the media. Negative publicity may result in
increased regulation and legislative scrutiny of industry
practices as well as increased litigation, which may further
increase our costs of doing business and adversely affect our
profitability by impeding our ability to market our products and
services, requiring us to change our products or services or
increasing the regulatory burdens under which we operate.
|
|
|
UICIs
failure to secure and enhance cost-effective health care
provider network contracts may result in a loss of insureds
and/or
higher medical costs and adversely affect UICIs results of
operations.
|
Our results of operations and competitive position could be
adversely affected by our inability to enter into or maintain
satisfactory relationships with networks of hospitals,
physicians, dentists, pharmacies and other health care
providers. The failure to secure cost-effective health care
provider network contracts may result in a loss of insureds or
higher medical costs. In addition, the inability to contract
with provider networks, the inability to terminate contracts
with existing provider networks and enter into arrangements with
new provider networks to serve the same market,
and/or the
inability of providers to provide adequate care, could adversely
affect our results of operations.
|
|
|
UICIs
inability to obtain funds from its insurance subsidiaries may
cause it to experience reduced cash flow, which could affect the
Companys ability to pay its obligations to creditors as
they become due.
|
We are a holding company, the principal assets of which are our
investments in our separate operating subsidiaries, including
our regulated insurance subsidiaries. Our ability to fund our
cash requirements is largely dependent upon our ability to
access cash from our subsidiaries. Our insurance subsidiaries
are subject to regulations that limit their ability to transfer
funds to us. If we are unable to obtain funds from our insurance
18
subsidiaries, we will experience reduced cash flow, which could
affect our ability to pay our obligations to creditors as they
become due.
|
|
|
A failure
of our information systems to provide timely and accurate
information could adversely affect our business and results of
operations.
|
Information processing is critical to our business, and a
failure of our information systems to provide timely and
accurate information could adversely affect our business and
results of operations. The failure to maintain an effective and
efficient information system or disruptions in our information
system could cause disruptions in our business operations,
including (a) failure to comply with prompt pay laws;
(b) loss of existing insureds; (c) difficulty in
attracting new insureds; (d) disputes with insureds,
providers and agents; (e) regulatory problems;
(f) increases in administrative expenses; and
(g) other adverse consequences.
|
|
|
Changes
in government regulation could increase the costs of compliance
or cause us to discontinue marketing our products in certain
states.
|
We conduct business in a heavily regulated industry, and changes
in government regulation could increase the costs of compliance
or cause us to discontinue marketing our products in certain
states. Some of the new federal and state regulations
promulgated under the Health Insurance Portability and
Accountability Act of 1996, or HIPAA, relating to health care
reform require us to implement changes in our programs and
systems in order to maintain compliance. We have incurred
significant expenditures as a result of HIPAA regulations and
expect to continue to incur expenditures as various regulations
become effective.
|
|
|
We may
not have enough statutory capital and surplus to continue to
write business.
|
Our continued ability to write business is dependent on
maintaining adequate levels of statutory capital and surplus to
support the policies we write. Our new business writing
typically results in net losses on a statutory basis during the
early years of a policy. The resulting reduction in statutory
surplus, or surplus strain, limits our ability to seek new
business due to statutory restrictions on premium to surplus
ratios and statutory surplus requirements. If we cannot generate
sufficient statutory surplus to maintain minimum statutory
requirements through increased statutory profitability,
reinsurance or other capital generating alternatives, we will be
limited in our ability to realize additional premium revenue
from new business writing, which could have a material adverse
effect on our financial condition and results of operations or,
in the event that our statutory surplus is not sufficient to
meet minimum premium to surplus and risk-based capital ratios in
any state, we could be prohibited from writing new policies in
such state.
|
|
|
Our
reserves for current and future claims may be inadequate and any
increase to such reserves could have a material adverse effect
on our financial condition and results of operations.
|
We calculate and maintain reserves for current and future claims
using assumptions about numerous variables, including our
estimate of the probability of a policyholder making a claim,
the severity and duration of such claim, the mortality rate of
our policyholders, the persistency or renewal of our policies in
force and the amount of interest we expect to earn from the
investment of premiums. The adequacy of our reserves depends on
the accuracy of our assumptions. We cannot assure you that our
actual experience will not differ from the assumptions used in
the establishment of reserves. Any variance from these
assumptions could have a material adverse effect on our
financial condition and results of operations.
|
|
|
Litigation
may result in financial losses or harm our reputation and may
divert management resources.
|
Current and future litigation may result in financial losses,
harm our reputation and require the dedication of significant
management resources. We are regularly involved in litigation.
The litigation naming us as a defendant ordinarily involves our
activities as an insurer. In recent years, many insurance
companies, including us, have been named as defendants in class
actions relating to market conduct or sales practices.
19
For our general claim litigation, we maintain reserves based on
experience to satisfy judgments and settlements in the normal
course. Management expects that the ultimate liability, if any,
with respect to general claim litigation, after consideration of
the reserves maintained, will not be material to the
consolidated financial condition of the Company. Nevertheless,
given the inherent unpredictability of litigation, it is
possible that an adverse outcome in certain claim litigation
involving punitive damages could, from time to time, have a
material adverse effect on our consolidated results of
operations in a period, depending on the results of our
operations for the particular period.
|
|
|
If we
fail to comply with extensive state and federal regulations, we
will be subject to penalties, which may include fines and
suspension and which may adversely affect our results of
operations and financial condition.
|
We are subject to extensive governmental regulation and
supervision. Most insurance regulations are designed to protect
the interests of policyholders rather than stockholders and
other investors. This regulation, generally administered by a
department of insurance in each state in which we do business,
relates to, among other things:
|
|
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|
|
approval of policy forms and premium rates;
|
|
|
|
standards of solvency, including risk-based capital
measurements, which are a measure developed by the National
Association of Insurance Commissioners and used by state
insurance regulators to identify insurance companies that
potentially are inadequately capitalized;
|
|
|
|
licensing of insurers and their agents;
|
|
|
|
restrictions on the nature, quality and concentration of
investments;
|
|
|
|
restrictions on transactions between insurance companies and
their affiliates;
|
|
|
|
restrictions on the size of risks insurable under a single
policy;
|
|
|
|
requiring deposits for the benefit of policyholders;
|
|
|
|
requiring certain methods of accounting;
|
|
|
|
prescribing the form and content of records of financial
condition required to be filed; and
|
|
|
|
requiring reserves for losses and other purposes.
|
State insurance departments also conduct periodic examinations
of the affairs of insurance companies and require the filing of
annual and other reports relating to the financial condition of
insurance companies, holding company issues and other matters.
Our business depends on compliance with applicable laws and
regulations and our ability to maintain valid licenses and
approvals for our operations. Regulatory authorities have broad
discretion to grant, renew, or revoke licenses and approvals.
Regulatory authorities may deny or revoke licenses for various
reasons, including the violation of regulations. In some
instances, we follow practices based on our interpretations of
regulations, or those that we believe to be generally followed
by the industry, which may be different from the requirements or
interpretations of regulatory authorities. If we do not have the
requisite licenses and approvals and do not comply with
applicable regulatory requirements, the insurance regulatory
authorities could preclude or temporarily suspend us from
carrying on some or all of our activities or otherwise penalize
us. That type of action could have a material adverse effect on
our business. Our failure to comply with new or existing
government regulation could subject us to significant fines and
penalties. Our efforts to measure, monitor and adjust our
business practices to comply with current laws are ongoing.
Failure to comply with enacted regulations could result in
significant fines, penalties, or the loss of one or more of our
licenses. As governmental regulation changes, the costs of
compliance may cause us to change our operations significantly,
or adversely impact the health care provider networks with which
we do business, which may adversely affect our business and
results of operations. Also, changes in the level of regulation
of the insurance industry (whether federal, state or foreign),
or changes in laws or regulations themselves or interpretations
by regulatory authorities, could have a material adverse effect
on our business.
20
|
|
|
Applicable
insurance laws may make it difficult to effect a change of
control of UICI.
|
Under the insurance laws of most states, before a person can
acquire control of a U.S. insurance company, prior written
approval must be obtained from the insurance commissioner of the
state where the domestic insurer is domiciled. Generally, state
statutes provide that control over a domestic insurer is
presumed to exist if any person, directly or indirectly, owns,
controls, holds with the power to vote, or holds proxies
representing, 10% or more of the voting securities of the
domestic insurer. Before granting approval of an application to
acquire control of a domestic insurer, a state insurance
commissioner will typically consider such factors as the
financial strength of the applicant, the integrity of the
applicants board of directors and executive officers, the
applicants plans for the future operations of the domestic
insurer and any anti-competitive results that may arise from the
completion of the acquisition of control. This requirement may
make it difficult to effect a change of control of the surviving
corporation in the future.
|
|
Item 1B.
|
Unresolved
Staff Comments
|
None
We currently own and occupy our executive offices located at
9151 Grapevine Highway, North Richland Hills, Texas
76180-5605
comprising in the aggregate approximately 281,000 square
feet of office and warehouse space. In addition, we lease office
space at various locations.
|
|
Item 3.
|
Legal
Proceedings
|
See Note L of Notes to Consolidated Financial Statements,
the terms of which are incorporated by reference herein.
|
|
Item 4.
|
Submissions
of Matters to a Vote of Security Holders
|
None.
PART II
|
|
Item 5.
|
Market
for Registrants Common Stock and Related Stockholder
Matters
|
The Companys shares are traded on the New York Stock
Exchange (NYSE) under the symbol UCI.
The table below sets forth on a per share basis, for the period
indicated, the high and low closing sales prices of the Common
Stock on the NYSE.
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High
|
|
|
Low
|
|
|
Fiscal Year Ended
December 31, 2004
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
15.00
|
|
|
$
|
12.70
|
|
2nd Quarter
|
|
|
23.81
|
|
|
|
14.56
|
|
3rd Quarter
|
|
|
33.05
|
|
|
|
21.93
|
|
4th Quarter
|
|
|
35.84
|
|
|
|
24.00
|
|
Fiscal Year Ended
December 31, 2005
|
|
|
|
|
|
|
|
|
1st Quarter
|
|
$
|
33.25
|
|
|
$
|
24.10
|
|
2nd Quarter
|
|
|
30.56
|
|
|
|
21.90
|
|
3rd Quarter
|
|
|
36.17
|
|
|
|
29.35
|
|
4th Quarter
|
|
|
36.40
|
|
|
|
35.47
|
|
As of February 13, 2006, there were approximately 10,600
holders of record of Common Stock.
21
On August 18, 2004, the Companys Board of Directors
adopted a policy of issuing a regular semi-annual cash dividend
on shares of its common stock. In accordance with the dividend
policy, on August 18, 2004, the Companys Board of
Directors declared a regular semi-annual cash dividend of $0.25
on each share of Common Stock, which dividend was paid on
September 15, 2004 to shareholders of record at the close
of business on September 1, 2004. On February 9, 2005,
the Companys Board of Directors declared a regular
semi-annual cash dividend of $0.25 per share and a special
cash dividend of $0.25 per share. The regular and special
dividend were paid on March 15, 2005 to shareholders of
record at the close of business on February 21, 2005. On
July 28, 2005, the Companys Board of Directors
declared a regular semi-annual cash dividend of $0.25 on each
share of Common Stock. The cash dividend was paid on
September 15, 2005 to shareholders of record at the close
of business on August 22, 2005.
Following execution on September 15, 2005, of a definitive
agreement contemplating the acquisition of the Company in a cash
merger by a group of private equity firms, the Company does not
anticipate declaring or paying additional dividends on shares of
its common stock.
In addition, dividends paid by the Companys domestic
insurance subsidiaries to the Company out of earned surplus in
any year that are in excess of limits set by the laws of the
state of domicile require prior approval of state regulatory
authorities in that state. See Note J of the Notes
to Consolidated Financial Statements included herein.
During the year ended December 31, 2005, the Company did
not issue any shares of unregistered common stock.
Issuer
Purchases of Equity Securities
Set forth in the table below is certain information with respect
to purchases of shares of the Companys common stock in the
open market during each of the months in the year ended
December 31, 2005 (a) pursuant to the authority
granted under the Companys previously announced share
repurchase program (see discussion below under the
caption Managements Discussion and Analysis of
Financial Condition and Results of
Operations Share Repurchase Program),
(b) to facilitate agent-participants contributions
to, and to satisfy the Companys commitment to issue its
shares upon vesting of matching credits under, the stock
accumulation plans established for the benefit of the
Companys agents (see Note M of Notes to
Consolidated Financial Statements), and (c) by the trustee
for the Companys Employee Stock Ownership and Retirement
Savings Plan (which reflects shares purchased with employee
contributions as well as the portion attributable to the
Companys matching contributions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Number of
|
|
|
Maximum Number
|
|
|
|
|
|
|
|
|
|
Shares Purchased as
|
|
|
of Shares That May
|
|
|
|
Total Number
|
|
|
|
|
|
Part of Publicly
|
|
|
yet be Purchased
|
|
|
|
of Shares
|
|
|
Average Price
|
|
|
Announced Plans or
|
|
|
Under the Plans or
|
|
Period
|
|
Purchased
|
|
|
Paid per Share
|
|
|
Programs
|
|
|
Programs
|
|
|
01/01/05-01/31/05
|
|
|
82,570
|
|
|
$
|
32.67
|
|
|
|
|
|
|
|
929,000
|
|
02/01/05-02/28/05
|
|
|
116,479
|
|
|
|
30.07
|
|
|
|
|
|
|
|
929,000
|
|
03/01/05-03/31/05
|
|
|
123,573
|
|
|
|
27.37
|
|
|
|
|
|
|
|
929,000
|
|
04/01/05-04/30/05
|
|
|
385,755
|
|
|
|
22.88
|
|
|
|
310,900
|
|
|
|
618,100
|
|
05/01/05-05/31/05
|
|
|
96,696
|
|
|
|
24.42
|
|
|
|
|
|
|
|
618,100
|
|
06/01/05-06/30/05
|
|
|
62,879
|
|
|
|
27.34
|
|
|
|
|
|
|
|
618,100
|
|
07/01/05-07/31/05
|
|
|
53,046
|
|
|
|
30.60
|
|
|
|
|
|
|
|
618,100
|
|
08/01/05-08/31/05
|
|
|
49,196
|
|
|
|
32.18
|
|
|
|
|
|
|
|
618,100
|
|
09/01/05-09/30/05
|
|
|
52,036
|
|
|
|
31.78
|
|
|
|
|
|
|
|
618,100
|
|
10/01/05-10/31/05
|
|
|
46,926
|
|
|
|
35.92
|
|
|
|
|
|
|
|
618,100
|
|
11/01/05-11/30/05
|
|
|
42,278
|
|
|
|
36.08
|
|
|
|
|
|
|
|
618,100
|
|
12/01/05-12/31/05
|
|
|
33,921
|
|
|
|
36.01
|
|
|
|
|
|
|
|
618,100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
1,145,355
|
(1)
|
|
$
|
27.75
|
|
|
|
310,900
|
(2)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22
|
|
|
(1) |
|
The number of shares purchased other than through a publicly
announced plan or program includes 335,542 shares purchased
with respect to the UICI Employee Stock Ownership and Savings
Plan; 483,594 shares purchased with respect to the stock
accumulation plans established for the benefit of the
Companys agents and 15,319 shares purchased with
respect to UICI restricted stock plans. |
|
(2) |
|
In November 1998 the Company announced the authorization to
repurchase 4,500,000 shares, and the Company reconfirmed
the repurchase program on February 28, 2001 and
February 11, 2004. The Company announced the authorization
to repurchase an additional 1,000,000 shares under the
program on April 28, 2004. The repurchase program has no
expiration date. |
Securities
Authorized for Issuance under Equity Compensation
Plans
The following table sets forth certain information with respect
to common stock that may be issued under UICIs equity
compensation plans as of December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities
|
|
|
|
|
|
|
|
|
|
Remaining Available for
Future
|
|
|
|
Number of Securities to
|
|
|
Weighted-Average Exercise
|
|
|
Issuance Under Equity
|
|
|
|
Be Issued upon Exercise
|
|
|
Price of Outstanding
|
|
|
Compensation Plans
|
|
|
|
of Outstanding Options,
|
|
|
Options, Warrants and
|
|
|
(Excluding Securities Reflected
in
|
|
|
|
Warrants and Rights
|
|
|
Rights
|
|
|
Column (a))
|
|
Plan Category
|
|
(a)
|
|
|
(b)
|
|
|
(c)
|
|
|
Equity compensation plans approved
by security holders
|
|
|
2,360,706
|
(1)
|
|
$
|
6.31
|
|
|
|
4,921,384
|
(2)
|
Equity compensation plans not
approved by security holders
|
|
|
-0-
|
|
|
$
|
0.00
|
|
|
|
-0-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
2,360,706
|
|
|
|
|
|
|
|
4,921,384
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Includes 624,481 stock options exercisable at a weighted average
exercise price of $23.86 under the UICI 1987 Stock Option Plan.
Also includes 1,100,915 shares issuable upon vesting of
matching credits granted to participants under the Agency
Matching Total Ownership Plan II (AMTOP II),
628,004 shares issuable upon vesting of matching credits
granted to participants under the Matching Agency Contribution
Plan I (MAC I) and 7,306 shares issuable upon
vesting of matching credits granted to participants under the
Matching Agency Contribution Plan II (MAC II) in each
case at a deemed exercise price of $-0-. |
|
(2) |
|
Includes securities available for future issuance as follows:
UICI 1987 Stock Option Plan, 2,071,414 shares; 2000
Restricted Stock Plan, 44,941 shares; 2001 Restricted Stock
Plan, 123,755 shares; 2005 Restricted Stock Plan,
100,000 shares; Agency Matching Total Ownership Plan I
(AMTOP I), 20,398 shares; Agency Matching Total
Ownership Plan II (AMTOP II), 1,455,304 shares;
Matching Agency Contribution Plan I (MAC I),
762,878 shares; Matching Agency Contribution Plan II
(MAC II), 342,694 shares. |
23
|
|
Item 6.
|
Selected
Financial Data
|
The following selected consolidated financial data as of and for
each of the five years in the period ended December 31,
2005 has 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 Managements Discussion and Analysis
of Financial Condition and Results of Operations included
herein.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
2002
|
|
|
2001
|
|
|
|
(In thousands, except per share
amounts and operating ratios)
|
|
|
Income Statement
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
2,121,218
|
|
|
$
|
2,069,109
|
|
|
$
|
1,825,162
|
|
|
$
|
1,380,033
|
|
|
$
|
973,095
|
|
Income from continuing operations
before income taxes
|
|
|
313,150
|
|
|
|
221,149
|
|
|
|
131,916
|
|
|
|
76,759
|
|
|
|
73,163
|
|
Income from continuing operations
|
|
|
202,970
|
|
|
|
145,881
|
|
|
|
87,324
|
|
|
|
51,054
|
|
|
|
49,484
|
|
Income (loss) from discontinued
operations
|
|
|
531
|
|
|
|
15,677
|
|
|
|
(72,990
|
)
|
|
|
953
|
|
|
|
(6,592
|
)
|
Net income
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
|
$
|
14,334
|
|
|
$
|
46,863
|
|
|
$
|
42,892
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share from continuing
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
4.40
|
|
|
$
|
3.16
|
|
|
$
|
1.88
|
|
|
$
|
1.08
|
|
|
$
|
1.06
|
|
Diluted earnings per common share
|
|
$
|
4.31
|
|
|
$
|
3.07
|
|
|
$
|
1.82
|
|
|
$
|
1.05
|
|
|
$
|
1.03
|
|
Earnings (loss) per share from
discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common
share
|
|
$
|
0.01
|
|
|
$
|
0.34
|
|
|
$
|
(1.57
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.14
|
)
|
Diluted earnings (loss) per common
share
|
|
$
|
0.01
|
|
|
$
|
0.33
|
|
|
$
|
(1.52
|
)
|
|
$
|
0.02
|
|
|
$
|
(0.13
|
)
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share
|
|
$
|
4.41
|
|
|
$
|
3.50
|
|
|
$
|
0.31
|
|
|
$
|
0.99
|
|
|
$
|
0.92
|
|
Diluted earnings per common share
|
|
$
|
4.32
|
|
|
$
|
3.40
|
|
|
$
|
0.30
|
|
|
$
|
0.96
|
|
|
$
|
0.90
|
|
Operating Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(1)
|
|
|
57
|
%
|
|
|
61
|
%
|
|
|
65
|
%
|
|
|
63
|
%
|
|
|
64
|
%
|
Expense ratio(1)
|
|
|
31
|
%
|
|
|
33
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
34
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined health ratio
|
|
|
88
|
%
|
|
|
94
|
%
|
|
|
99
|
%
|
|
|
97
|
%
|
|
|
98
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments, cash and cash
overdraft(2)
|
|
$
|
1,774,188
|
|
|
$
|
1,710,589
|
|
|
$
|
1,579,131
|
|
|
$
|
1,355,918
|
|
|
$
|
1,231,860
|
|
Total assets
|
|
|
2,371,530
|
|
|
|
2,345,658
|
|
|
|
2,126,959
|
|
|
|
1,915,188
|
|
|
|
1,676,711
|
|
Total policy liabilities
|
|
|
1,174,264
|
|
|
|
1,258,671
|
|
|
|
1,184,984
|
|
|
|
1,028,969
|
|
|
|
891,361
|
|
Total debt
|
|
|
15,470
|
|
|
|
15,470
|
|
|
|
18,951
|
|
|
|
7,922
|
|
|
|
23,511
|
|
Student loan credit facilities
|
|
|
130,900
|
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
150,000
|
|
|
|
100,000
|
|
Stockholders equity
|
|
|
871,081
|
|
|
|
714,145
|
|
|
|
587,568
|
|
|
|
585,050
|
|
|
|
534,572
|
|
Stockholders equity per
share(3)
|
|
$
|
19.05
|
|
|
$
|
15.18
|
|
|
$
|
12.15
|
|
|
$
|
11.76
|
|
|
$
|
10.81
|
|
|
|
|
(1) |
|
The health loss ratio represents benefits, claims and settlement
expenses related to health insurance policies stated as a
percentage of earned health premiums. The health expense ratio
represents underwriting, policy acquisition costs and insurance
expenses related to health insurance policies stated as a
percentage of earned health premiums. |
|
(2) |
|
Does not include restricted cash. See Note A of
Notes to Consolidated Financial Statements. |
|
(3) |
|
Excludes the unrealized gains (losses) on securities available
for sale, which gains are reported in accumulated other
comprehensive income (loss) as a separate component of
stockholders equity. |
24
|
|
Item 7.
|
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
|
The following discussion of our historical results of operations
and of our liquidity and capital resources should be read in
conjunction with the Selected Financial Data and the
Consolidated Financial Statements of the Company and related
notes thereto included herein.
Overview
We offer insurance (primarily health and life) to niche consumer
and institutional markets. Through our subsidiaries we issue
primarily health insurance policies, covering individuals and
families, to the self-employed, association group, voluntary
employer group and student markets, and life insurance policies
to markets that we believe are underserved. We believe that we
have the largest direct selling organization in the health
insurance field, with approximately 1,800 independent writing
agents selling health insurance to the self-employed market in
44 states.
The Companys revenues consist primarily of premiums
derived from sales of its indemnity, PPO, student group and
voluntary employer group health plans and from life insurance
policies. Revenues also include investment income derived from
our investment portfolio and other income, which consists
primarily of income derived by the Self-Employed Agency Division
from ancillary services and membership marketing and
administrative services provided to the membership associations
that make available to their members the Companys health
insurance products.
Premiums on health insurance contracts are recognized as earned
over the period of coverage on a pro rata basis. Premiums on
traditional life insurance are recognized as revenue when due.
Set forth in the table below is premium by insurance division
for each of the past three fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Premium:
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,394,644
|
|
|
$
|
1,355,328
|
|
|
$
|
1,192,688
|
|
Student Insurance Division
|
|
|
282,486
|
|
|
|
297,036
|
|
|
|
239,574
|
|
Star HRG Division
|
|
|
144,612
|
|
|
|
145,749
|
|
|
|
114,428
|
|
Life Insurance Division
|
|
|
61,936
|
|
|
|
46,503
|
|
|
|
36,413
|
|
Other Insurance
|
|
|
33,856
|
|
|
|
14,127
|
|
|
|
150
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium
|
|
$
|
1,917,534
|
|
|
$
|
1,858,743
|
|
|
$
|
1,583,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Companys expenses consist primarily of insurance
claims expense and expenses associated with the underwriting and
acquisition of insurance policies. Claims expenses consist
primarily of payments to physicians, hospitals and other health
care providers under health policies and include an estimated
amount for incurred but not reported or paid claims.
Underwriting, policy acquisition costs and insurance expenses
consist of direct expenses incurred across all insurance lines
in connection with issuance, maintenance and administration of
in-force insurance policies, including amortization of deferred
policy acquisition costs, commissions paid to agents,
administrative expenses and premium taxes. The Company also
incurs other direct expenses in connection with generating
income derived by the Self-Employed Agency Division from
ancillary services and membership marketing and administrative
services provided to the membership associations that make
available to their members the Companys health insurance
products.
The Company establishes liabilities for benefit claims that have
been reported but not paid and claims that have been incurred
but not reported under health and life insurance contracts.
These claim liabilities are developed using actuarial principles
and assumptions that consider a number of items, including
historical and current claim payment patterns, product
variations, the timely implementation of appropriate rate
increases and seasonality. See discussion below,
Critical Accounting Policies and
Estimates Claims Liabilities and
Note F of Notes to Consolidated Financial Statements.
25
In connection with various stock-based compensation plans that
we maintain for the benefit of our employees and independent
agents, we record non-cash variable stock-based compensation
expense in amounts that depend and fluctuate based upon the
market performance of the Companys common stock. See
discussion below under the caption Variable
Stock-Based Compensation and Note M of Notes to
Consolidated Financial Statements. The accounting treatment of
the Companys agent plans has resulted and will continue to
result in unpredictable stock-based compensation charges,
primarily dependent upon future fluctuations in the quoted price
of UICI common stock.
Our business segments for financial reporting purposes include
(a) the Insurance segment, which includes the businesses of
the Companys Self-Employed Agency Division, the Student
Insurance Division, the Star HRG Division, the Life Insurance
Division and Other Insurance (consisting of the Companys
ZON Re, USA LLC accident insurance/reinsurance business, which
commenced operations in the third quarter of 2003); and
(b) Other Key Factors, which includes investment income not
allocated to the Insurance segment, realized gains or losses on
sale of investments, interest expense on corporate debt, general
expenses relating to corporate operations, minority interest,
variable stock-based compensation and operations that do not
constitute reportable operating segments (including the
Companys investment in Healthaxis, Inc. until sold on
September 30, 2003). In 2005, the incremental costs
associated with the pending acquisition of the Company by a
group of private equity investors were also reflected in the
results of the Other Key Factors segment.
On September 15, 2005, UICI entered into a merger
agreement, pursuant to which affiliates of The Blackstone Group,
Goldman Sachs Capital Partners and DLJ Merchant Banking Partners
will acquire UICI in a cash merger, with UICI being the
surviving corporation in the merger. The Board of Directors of
the Company has established February 13, 2006 as the record
date for determining stockholders entitled to notice of or to
vote at a special meeting of stockholders to be held on
March 29, 2006 for the purpose of adopting the merger
agreement. Completion of the transaction is subject to insurance
regulatory approvals, the receipt of certain financing and other
conditions. The parties currently expect the transaction to
close on or about April 3, 2006.
Results
of Operations Overview
During 2005, the Companys financial condition, cash flow
and results from operations were impacted by the following key
factors and developments:
Favorable
Results at SEA Division
The Companys 2005 results from continuing operations
benefited from the strong performance of its SEA Division, which
reported record operating income in 2005 of $310.5 million,
compared to operating income of $260.7 million in 2004.
Results at the Companys SEA Division in 2005 reflected a
favorable loss ratio and increased renewal premium revenue, with
which is associated a lower commission rate compared to the
commission rate on first year premium revenue.
Improved
Results at Student Insurance Division
The Companys 2005 results from continuing operations
benefited from improved results at its Student Insurance
Division (which offers tailored health insurance programs that
generally provide single school year coverage to individual
students at colleges and universities). The Companys
Student Insurance Division reported operating losses of
$(8.9) million in 2005, compared to operating losses of
$(49.5) million in 2004, reflecting a significant
improvement in loss experience on the Student Insurance book of
business, lower administrative expenses as a percentage of
earned premium and better utilization of network service
agreements with healthcare providers.
26
Results
of Operations
The table below sets forth certain summary information about our
operating results for each of the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
(Decrease)
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Health
|
|
$
|
1,855,969
|
|
|
|
2
|
%
|
|
$
|
1,812,892
|
|
|
|
17
|
%
|
|
$
|
1,547,233
|
|
Life premiums and other
considerations
|
|
|
61,565
|
|
|
|
34
|
%
|
|
|
45,851
|
|
|
|
27
|
%
|
|
|
36,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total premium
|
|
|
1,917,534
|
|
|
|
3
|
%
|
|
|
1,858,743
|
|
|
|
17
|
%
|
|
|
1,583,253
|
|
Investment income
|
|
|
97,788
|
|
|
|
14
|
%
|
|
|
85,868
|
|
|
|
11
|
%
|
|
|
77,661
|
|
Other income
|
|
|
106,656
|
|
|
|
(9
|
)%
|
|
|
117,827
|
|
|
|
(4
|
)%
|
|
|
124,537
|
|
Gains (losses) on sale of
investments
|
|
|
(760
|
)
|
|
|
NM
|
|
|
|
6,671
|
|
|
|
NM
|
|
|
|
39,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
2,121,218
|
|
|
|
3
|
%
|
|
|
2,069,109
|
|
|
|
13
|
%
|
|
|
1,825,162
|
|
Benefits and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims, and settlement
expenses
|
|
|
1,092,136
|
|
|
|
(4
|
)%
|
|
|
1,134,901
|
|
|
|
9
|
%
|
|
|
1,045,640
|
|
Underwriting, policy acquisition
costs, and insurance expenses
|
|
|
625,633
|
|
|
|
(1
|
)%
|
|
|
632,132
|
|
|
|
12
|
%
|
|
|
563,574
|
|
Variable stock compensation
expense (benefit)
|
|
|
7,214
|
|
|
|
(50
|
)%
|
|
|
14,307
|
|
|
|
NM
|
|
|
|
(459
|
)
|
Other expenses
|
|
|
77,076
|
|
|
|
22
|
%
|
|
|
63,203
|
|
|
|
(20
|
)%
|
|
|
79,264
|
|
Interest expense
|
|
|
6,009
|
|
|
|
76
|
%
|
|
|
3,417
|
|
|
|
13
|
%
|
|
|
3,016
|
|
Losses in Healthaxis, Inc.
investment
|
|
|
|
|
|
|
NM
|
|
|
|
|
|
|
|
NM
|
|
|
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits and expenses
|
|
|
1,808,068
|
|
|
|
(2
|
)%
|
|
|
1,847,960
|
|
|
|
9
|
%
|
|
|
1,693,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
before income taxes
|
|
|
313,150
|
|
|
|
42
|
%
|
|
|
221,149
|
|
|
|
68
|
%
|
|
|
131,916
|
|
Federal income taxes
|
|
|
110,180
|
|
|
|
46
|
%
|
|
|
75,268
|
|
|
|
69
|
%
|
|
|
44,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
202,970
|
|
|
|
39
|
%
|
|
|
145,881
|
|
|
|
67
|
%
|
|
|
87,324
|
|
Income (loss) from discontinued
operations (net of income tax benefit)
|
|
|
531
|
|
|
|
NM
|
|
|
|
15,677
|
|
|
|
NM
|
|
|
|
(72,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
203,501
|
|
|
|
NM
|
|
|
$
|
161,558
|
|
|
|
NM
|
|
|
$
|
14,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM: not meaningful
27
Income from continuing operations before federal income taxes
(operating income) for each of the Companys
business segments and divisions in 2005, 2004 and 2003 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Operating income
(loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
310,466
|
|
|
$
|
260,745
|
|
|
$
|
109,079
|
|
Student Insurance Division
|
|
|
(8,870
|
)
|
|
|
(49,482
|
)
|
|
|
(9,783
|
)
|
Star HRG Division
|
|
|
1,434
|
|
|
|
3,320
|
|
|
|
1,910
|
|
Life Insurance Division
|
|
|
8,580
|
|
|
|
4,362
|
|
|
|
(2,350
|
)
|
Other Insurance(1)
|
|
|
4,658
|
|
|
|
1,415
|
|
|
|
(705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Insurance
|
|
|
316,268
|
|
|
|
220,360
|
|
|
|
98,151
|
|
Other Key
Factors Investment income on equity, realized
gains and losses, general corporate expenses and other
(including interest on corporate debt)
|
|
|
13,153
|
|
|
|
15,096
|
|
|
|
33,306
|
|
Merger transaction costs(2)
|
|
|
(9,057
|
)
|
|
|
|
|
|
|
|
|
Variable stock-based compensation
|
|
|
(7,214
|
)
|
|
|
(14,307
|
)
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Other Key Factors
|
|
|
(3,118
|
)
|
|
|
789
|
|
|
|
33,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating income
|
|
$
|
313,150
|
|
|
$
|
221,149
|
|
|
$
|
131,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects results of a subsidiary (ZON Re USA
LLC) established in the third quarter of 2003 to
underwrite, administer and issue accidental death, accidental
death and dismemberment (AD&D), accident medical and
accident disability insurance products, both on a primary and on
a reinsurance basis. |
|
(2) |
|
Includes the incremental costs associated with the pending
acquisition of the Company by a group of private equity
investors. |
2005
Compared to 2004
UICI reported revenues and income from continuing operations in
2005 of $2.121 billion and $203.0 million
($4.31 per diluted share), respectively, compared to 2004
revenues and income from continuing operations of
$2.069 billion and $145.9 million ($3.07 per
diluted share), respectively. Reflecting results from
discontinued operations, the Company reported overall
2005 net income of $203.5 million ($4.32 per
diluted share), compared to 2004 net income of
$161.6 million ($3.40 per diluted share).
Continuing
Operations
Revenues. UICIs revenues increased to
$2.121 billion in 2005 from $2.069 billion in 2004, an
increase of $52.1 million, or 3%. The Companys
revenues were particularly impacted by the following factors:
|
|
|
|
|
The Company generated a 2% increase in health premium revenue
(to $1.856 billion in 2005 from $1.813 billion in
2004), which increase was primarily attributable to the
assumption of existing health policies acquired in October 2004
as part of the HealthMarket acquisition.
|
|
|
|
Life premiums and other considerations increased by 34%, to
$61.6 million in 2005 from $45.9 million in 2004. This
increase was attributable primarily to sales of newly-designed
life products through its relationships with its two independent
marketing companies.
|
|
|
|
Due to a 6% year over year increase in the book value of
invested assets and an increase in the yield on short-term and
other investments, investment income increased to
$97.8 million in 2005 compared to $85.9 million in
2004.
|
28
|
|
|
|
|
Other income (consisting primarily of income derived by the SEA
Division from ancillary services and membership marketing and
administrative services provided to the membership associations
that make available to their members the Companys health
insurance products) decreased by 9% to $106.7 million in
2005 from $117.8 million in 2004. The decrease was
primarily related to a year over year decrease in new business
for which the Company receives membership marketing and
administrative fees.
|
|
|
|
The Company recognized losses on sale of investments of
$(760,000) in 2005 compared to gains on sales of investments of
$6.7 million in 2004. The 2005 losses were primarily
attributable to the impairment of certain fixed maturities
written down in the fourth quarter of 2005.
|
Expenses. UICIs total expenses decreased
to $1.808 billion in 2005 from $1.848 billion in 2004,
a decrease of $39.9 million, or 2%. The Companys
expenses were particularly impacted by the following factors:
|
|
|
|
|
Benefits, claims and settlement expenses decreased by 4% to
$1.092 billion in 2005 from $1.135 billion in 2004.
Benefits, claims and settlement expenses decreased primarily as
a result of a significant improvement in the loss experience at
the Student Insurance Division and a decrease in loss ratio at
its Self-Employed Agency Division. The actual claim payment
experience during 2005 with respect to prior periods at the its
Self-Employed Agency Division was more favorable than originally
estimated when the claim liabilities were established in 2004.
|
|
|
|
Underwriting costs, policy acquisition costs and insurance
expenses decreased by 1% to $625.6 million in 2005 from
$632.1 million in 2004. The decrease is primarily due to
the expenses incurred at the Student Insurance Division in 2004
related to the inefficiencies in its previous claims system
including an impairment charge in the amount of $(6.6) million
principally associated with the abandonment of computer hardware
and software assets associated with its claims processing system.
|
|
|
|
The Company maintains for the benefit of its employees and
independent agents various stock-based compensation plans, in
connection with which it records non-cash variable stock-based
compensation expense (benefit) in amounts that depend and
fluctuate based upon the market performance of the
Companys common stock. In 2005, the Company recognized a
non-cash stock based compensation expense in the amount of
$(7.2) million, compared to non-cash stock based
compensation expense of $(14.3) million in 2004. The
decrease is principally due to the smaller change in share price
during 2005 (from $33.90 to $35.51) compared to 2004 (from
$13.28 to $33.90) and a decrease in the amount of unvested
credits to 1,571,952 from 1,904,526.
|
|
|
|
Other expenses (consisting primarily of direct expenses incurred
by the Company in connection with providing ancillary services
and membership marketing and administrative services provided to
the membership associations that make available to their members
the Companys health insurance products and general
expenses relating to corporate operations) increased by 22%, to
$77.1 million in 2005 from $63.2 million in 2004. The
majority of the increase is attributed to incremental costs in
the amount of $(9.1) million associated with the pending
acquisition of the Company by a group of private equity
investors.
|
|
|
|
Total interest expense increased by 76%, to $6.0 million in
2005 from $3.4 million in 2004, primarily due to an
increase in the interest rates associated with student loan
indebtedness (consisting of borrowings incurred to fund student
loan obligations under the Companys College Fund Life
Division program see Note H of
Notes to Consolidated Financial Statements).
|
Operating Income. Operating income increased
by 42%, to $313.2 million in 2005 from $221.1 million
in 2004. As discussed more fully below, the Companys 2005
results from continuing operations benefited from a significant
year-over-year
increase in operating income at its SEA Division (from
$260.7 million in 2004 to $310.5 million in 2005).
The Companys business segments for financial reporting
purposes include (a) the Insurance segment, which includes
the businesses of the Companys Self-Employed Agency
Division, the Student Insurance Division, the Star HRG Division,
the Life Insurance Division and Other Insurance; and
(b) Other Key Factors, which includes investment income not
allocated to the Insurance segment, realized gains or losses on
sale of investments, interest
29
expense on corporate debt, general expenses relating to
corporate operations, minority interest, variable stock-based
compensation and operations that do not constitute reportable
operating segments (including the Companys investment in
Healthaxis, Inc. until sold on September 30, 2003). In
2005, the incremental costs associated with the pending
acquisition of the Company by a group of private equity
investors were also reflected in the results of the Other Key
Factors segment.
Self-Employed
Agency Division
Set forth below is certain summary financial and operating data
for the Companys Self-Employed Agency (SEA)
Division for each of the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
(Decrease)
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium revenues
|
|
$
|
1,394,644
|
|
|
|
3
|
%
|
|
$
|
1,355,328
|
|
|
|
14
|
%
|
|
$
|
1,192,688
|
|
Investment income(1)
|
|
|
32,725
|
|
|
|
(3
|
)%
|
|
|
33,640
|
|
|
|
8
|
%
|
|
|
31,230
|
|
Other income
|
|
|
98,599
|
|
|
|
(8
|
)%
|
|
|
107,231
|
|
|
|
(6
|
)%
|
|
|
114,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,525,968
|
|
|
|
2
|
%
|
|
|
1,496,199
|
|
|
|
12
|
%
|
|
|
1,338,347
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits expenses
|
|
|
718,502
|
|
|
|
(2
|
)%
|
|
|
736,678
|
|
|
|
0
|
%
|
|
|
736,101
|
|
Underwriting and acquisition
expenses
|
|
|
445,411
|
|
|
|
0
|
%
|
|
|
445,737
|
|
|
|
4
|
%
|
|
|
428,403
|
|
Other expenses(1)
|
|
|
51,589
|
|
|
|
(3
|
)%
|
|
|
53,039
|
|
|
|
(18
|
)%
|
|
|
64,764
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
1,215,502
|
|
|
|
(2
|
)%
|
|
|
1,235,454
|
|
|
|
1
|
%
|
|
|
1,229,268
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income
|
|
$
|
310,466
|
|
|
|
19
|
%
|
|
$
|
260,745
|
|
|
|
139
|
%
|
|
$
|
109,079
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(2)
|
|
|
51.5
|
%
|
|
|
(5
|
)%
|
|
|
54.4
|
%
|
|
|
(12
|
)%
|
|
|
61.7
|
%
|
Expense ratio(2)
|
|
|
32.0
|
%
|
|
|
(3
|
)%
|
|
|
32.9
|
%
|
|
|
(8
|
)%
|
|
|
35.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined health ratio
|
|
|
83.5
|
%
|
|
|
(4
|
)%
|
|
|
87.3
|
%
|
|
|
(11
|
)%
|
|
|
97.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin(3)
|
|
|
22.3
|
%
|
|
|
16
|
%
|
|
|
19.2
|
%
|
|
|
111
|
%
|
|
|
9.1
|
%
|
Average number of writing agents
in period
|
|
|
2,045
|
|
|
|
(12
|
)%
|
|
|
2,329
|
|
|
|
(9
|
)%
|
|
|
2,551
|
|
Submitted annualized volume(4)
|
|
$
|
727,522
|
|
|
|
(15
|
)%
|
|
$
|
860,377
|
|
|
|
(4
|
)%
|
|
$
|
895,159
|
|
|
|
|
(1) |
|
Allocations of investment income and certain general expenses
are based on a number of assumptions and estimates, and the
business divisions reported operating results would change
if different methods were applied. |
|
(2) |
|
The health loss ratio represents benefits, claims and settlement
expenses related to health insurance policies stated as a
percentage of earned health premiums. The health expense ratio
represents underwriting, policy acquisition costs and insurance
expenses related to health insurance policies stated as a
percentage of earned health premiums. |
|
(3) |
|
Operating margin is defined as operating income as a percentage
of earned premium revenue. |
|
(4) |
|
Submitted annualized premium volume in any period is the
aggregate annualized premium amount associated with health
insurance applications submitted by the Companys agents in
such period for underwriting by the Company. |
For 2005, the SEA Division reported operating income of
$310.5 million compared to operating income of
$260.7 million in 2004. Operating income at the SEA
Division as a percentage of earned premium revenue (i.e.,
operating margin) in 2005 was 22.3% compared to 19.2% in
2004.
30
Operating income at the SEA Division in 2005 was positively
impacted by an increase in earned premium revenue, a lower loss
ratio (from 54.4% in 2004 to 51.5% in 2005) resulting from
favorable claims experience, and a decrease in commission
expenses as a percentage of earned premium. Earned premium
revenue at the SEA Division increased to $1.395 billion in
2005, compared to earned premium revenue of $1.355 billion
in 2004. However, the increase in premium is primarily
attributable to the assumption during the fourth quarter of 2004
of small group policies originally issued by HealthMarkets
wholly owned insurance subsidiary during the fourth quarter of
2004. During 2005, the premium from the traditional health
products issued by the SEA Division decreased approximately 1%
due to the decline in submitted annualized premium volume.
Results at the SEA Division in 2005 reflected a benefit in the
amount of $33.3 million recorded in the third quarter of
2005 attributable to a refinement of the Companys estimate
for its claim liability on its health insurance products. The
largest portion of the adjustment (approximately
$21.0 million) was attributable to a refinement of the
estimate of the unpaid claim liability for the most recent
incurral months. The Company utilizes anticipated loss ratios to
calculate the estimated claim liability for the most recent
incurral months. Despite negligible premium rate increases
implemented on its most popular scheduled health insurance
products, the SEA Division has continued to observe favorable
claims experience and, as a result, loss ratios have not
increased as rapidly as anticipated. This favorable claims
experience has been reflected in the refinement of the
anticipated loss ratios used in estimating the unpaid claim
liability for the most recent incurral months. The remaining
portion of the adjustment to the claim liability (approximately
$12.3 million) was attributable to an update of the
completion factors used in the developmental method of
estimating the unpaid claim liability to reflect more current
claims administration practices. The SEA Divisions results
for the year ended December 31, 2005 also reflected a
favorable claim liability adjustment in the amount of
$7.6 million recorded in the first quarter of 2005
attributable to a refinement of an estimate for the
Companys claim liability established with respect to a
product rider that provides for catastrophic coverage on the SEA
Divisions scheduled health insurance products. Results at
the SEA Division in 2004 reflected the reduction in the amount
of $47.8 million of claim liabilities established in 2003
in response to a rapid pay down in 2003 of an excess pending
claims inventory.
As a result of the favorable claims experience associated with
the SEA Divisions health insurance products, during the
fourth quarter of 2005 the Company implemented reduced premium
rates (average 15% reduction) on new business in a number
of markets.
The increase in operating margin in 2005 compared to 2004 was
attributable primarily to the
year-over-year
increase in earned premium, lower loss ratio and a decrease in
the effective commission rate (due to a decrease in the amount
of first year premium relative to renewal premium, which carries
a lower commission rate compared to commissions on first year
premium). These factors favorably impacting operating margin in
2005 were offset by higher administrative expenses as a
percentage of premium (which resulted from certain
administrative costs associated with the previously announced
multi-state market conduct review) and incremental
administrative costs associated with the Companys small
group business acquired in November 2004.
In 2005, total SEA Division submitted annualized premium volume
decreased by 15.4%, to $727.5 million in 2005 from
$860.4 million in 2004. The decrease in submitted
annualized premium volume can be attributed primarily to a
reduction in the average number of writing agents per week in
the field (from 2,329 in 2004 to 2,045 in 2005).
In response to the decline in submitted annualized premium
volume experienced in 2005, at the end of 2005 the SEA Division
commenced several new initiatives designed to increase the
average number of writing agents and agent productivity. These
initiatives included the creation of commission incentives
designed to recognize outstanding sales performance and a
significant redesign of the units health insurance
products. For the first six weeks of 2006, the average number of
writing agents per week has increased approximately 20% over the
average number of writing agents per week for the fourth quarter
of 2005. In addition, through the first six weeks of 2006, the
productivity of our writing agents (measured as the number of
submitted health applications per writing agent) has increased
approximately 5.3% over productivity in the corresponding period
of 2005. As a result of these factors, submitted annualized
premium volume in the first six weeks of 2006 has increased over
submitted annualized premium volume in the corresponding period
of 2005.
31
Student
Insurance Division
Set forth below is certain summary financial and operating data
for the Companys Student Insurance Division for each of
the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
(Decrease)
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium revenues
|
|
$
|
282,486
|
|
|
|
(5
|
)%
|
|
$
|
297,036
|
|
|
|
24
|
%
|
|
$
|
239,574
|
|
Investment income(1)
|
|
|
6,121
|
|
|
|
1
|
%
|
|
|
6,089
|
|
|
|
22
|
%
|
|
|
5,008
|
|
Other income
|
|
|
1,771
|
|
|
|
(45
|
)%
|
|
|
3,200
|
|
|
|
(29
|
)%
|
|
|
4,489
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
290,378
|
|
|
|
(5
|
)%
|
|
|
306,325
|
|
|
|
23
|
%
|
|
|
249,071
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits expenses
|
|
|
222,306
|
|
|
|
(16
|
)%
|
|
|
265,698
|
|
|
|
33
|
%
|
|
|
200,510
|
|
Underwriting and acquisition
expenses(1)
|
|
|
76,942
|
|
|
|
(15
|
)%
|
|
|
90,109
|
|
|
|
54
|
%
|
|
|
58,344
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
299,248
|
|
|
|
(16
|
)%
|
|
|
355,807
|
|
|
|
37
|
%
|
|
|
258,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
(8,870
|
)
|
|
|
NM
|
|
|
$
|
(49,482
|
)
|
|
|
NM
|
|
|
$
|
(9,783
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(2)
|
|
|
78.7
|
%
|
|
|
(12
|
)%
|
|
|
89.4
|
%
|
|
|
7
|
%
|
|
|
83.7
|
%
|
Expense ratio(2)
|
|
|
27.2
|
%
|
|
|
(11
|
)%
|
|
|
30.4
|
%
|
|
|
25
|
%
|
|
|
24.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined health ratio
|
|
|
105.9
|
%
|
|
|
(12
|
)%
|
|
|
119.8
|
%
|
|
|
11
|
%
|
|
|
108.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin(3)
|
|
|
(3.1
|
)%
|
|
|
NM
|
|
|
|
(16.7
|
)%
|
|
|
NM
|
|
|
|
(4.1
|
)%
|
|
|
|
(1) |
|
Allocations of investment income and certain general expenses
are based on a number of assumptions and estimates, and the
business divisions reported operating results would change
if different methods were applied. |
|
(2) |
|
The health loss ratio represents benefits, claims and settlement
expenses related to health insurance policies stated as a
percentage of earned health premiums. The health expense ratio
represents underwriting, policy acquisition costs and insurance
expenses related to health insurance policies stated as a
percentage of earned health premiums. |
|
(3) |
|
Operating margin is defined as operating income as a percentage
of earned premium revenue. |
NM: not meaningful
The Companys Student Insurance Division (which offers
tailored health insurance programs that generally provide single
school year coverage to individual students at colleges and
universities) reported operating losses of $(8.9) million
in 2005 compared to operating losses of $(49.5) million in
2004.
Results for 2005 at the Student Insurance Division reflected a
significant improvement in loss experience on the Student
Insurance book of business. The loss ratio decreased to 78.7% in
2005, from 89.4% in 2004. For 2005, operating results also
benefited from lower administrative expenses as a percentage of
earned premium and from better utilization of network service
agreements with healthcare providers. Results in 2004 also
reflected a second quarter impairment charge in the amount of
$(6.3) million, which was principally associated with the
abandonment of computer hardware and software assets associated
with a claims processing system.
Earned premium revenue at the Student Insurance Division
decreased to $282.5 million in 2005, from
$297.0 million in 2004. The decrease in premium reflected,
in part, the non-renewal in the
2005-2006
school year of certain accounts that had performed poorly in the
2004-2005
school year.
32
Star HRG
Division
Set forth below is certain summary financial and operating data
for the Companys Star HRG Division (which designs, markets
and administers limited benefit health insurance plans for entry
level, high turnover, and hourly employees) for each of the
three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
(Decrease)
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium revenues
|
|
$
|
144,612
|
|
|
|
(1
|
)%
|
|
$
|
145,749
|
|
|
|
27
|
%
|
|
$
|
114,428
|
|
Investment income(1)
|
|
|
703
|
|
|
|
(14
|
)%
|
|
|
817
|
|
|
|
18
|
%
|
|
|
695
|
|
Other income
|
|
|
1,323
|
|
|
|
(66
|
)%
|
|
|
3,897
|
|
|
|
26
|
%
|
|
|
3,090
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
146,638
|
|
|
|
(3
|
)%
|
|
|
150,463
|
|
|
|
27
|
%
|
|
|
118,213
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits expenses
|
|
|
92,135
|
|
|
|
(1
|
)%
|
|
|
92,754
|
|
|
|
22
|
%
|
|
|
75,951
|
|
Underwriting and acquisition
expenses(1)
|
|
|
53,069
|
|
|
|
(2
|
)%
|
|
|
54,389
|
|
|
|
35
|
%
|
|
|
40,352
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
145,204
|
|
|
|
(1
|
)%
|
|
|
147,143
|
|
|
|
27
|
%
|
|
|
116,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
1,434
|
|
|
|
(57
|
)%
|
|
$
|
3,320
|
|
|
|
74
|
%
|
|
$
|
1,910
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other operating data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss ratio(2)
|
|
|
63.7
|
%
|
|
|
0
|
%
|
|
|
63.6
|
%
|
|
|
(4
|
)%
|
|
|
66.4
|
%
|
Expense ratio(2)
|
|
|
36.7
|
%
|
|
|
(2
|
)%
|
|
|
37.4
|
%
|
|
|
6
|
%
|
|
|
35.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined health ratio
|
|
|
100.4
|
%
|
|
|
(1
|
)%
|
|
|
101.0
|
%
|
|
|
(1
|
)%
|
|
|
101.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating margin(3)
|
|
|
1.0
|
%
|
|
|
(57
|
)%
|
|
|
2.3
|
%
|
|
|
35
|
%
|
|
|
1.7
|
%
|
|
|
|
(1) |
|
Allocations of investment income and certain general expenses
are based on a number of assumptions and estimates, and the
business divisions reported operating results would change
if different methods were applied. |
|
(2) |
|
The health loss ratio represents benefits, claims and settlement
expenses related to health insurance policies stated as a
percentage of earned health premiums. The health expense ratio
represents underwriting expenses, policy acquisition costs and
insurance expenses related to health insurance policies stated
as a percentage of earned health premiums. |
|
(3) |
|
Operating margin is defined as operating income as a percentage
of earned premium revenue. |
The Companys Star HRG Division reported operating income
in 2005 in the amount of $1.4 million, compared to
operating income of $3.3 million in 2004. The loss ratio
associated with the Star HRG business increased slightly to
63.7% in 2005 from 63.6% in 2004, and the underwriting and
acquisition expense ratio decreased slightly to 36.7% in 2005
from 37.4% in 2004. The decrease in Other income
from 2004 to 2005 was associated with the decrease in
administrative fees on business underwritten by a third party
insurance carrier and a decrease in fees received on ancillary
products.
Earned premium revenue at the Star HRG Division was
$144.6 million in 2005, compared to $145.7 million in
2004.
33
Life
Insurance Division
Set forth below is certain summary financial and operating data
for the Companys Life Insurance Division for each of the
three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
|
|
|
Increase
|
|
|
|
|
|
|
2005
|
|
|
(Decrease)
|
|
|
2004
|
|
|
(Decrease)
|
|
|
2003
|
|
|
|
(Dollars in thousands)
|
|
|
Revenues:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earned premium revenues
|
|
$
|
61,936
|
|
|
|
33
|
%
|
|
$
|
46,503
|
|
|
|
28
|
%
|
|
$
|
36,413
|
|
Investment income(1)
|
|
|
30,157
|
|
|
|
9
|
%
|
|
|
27,625
|
|
|
|
(10
|
)%
|
|
|
30,610
|
|
Other income
|
|
|
1,433
|
|
|
|
(23
|
)%
|
|
|
1,861
|
|
|
|
51
|
%
|
|
|
1,236
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
93,526
|
|
|
|
23
|
%
|
|
|
75,989
|
|
|
|
11
|
%
|
|
|
68,259
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits expenses
|
|
|
39,684
|
|
|
|
18
|
%
|
|
|
33,613
|
|
|
|
2
|
%
|
|
|
33,018
|
|
Underwriting and acquisition
expenses(1)
|
|
|
40,401
|
|
|
|
13
|
%
|
|
|
35,680
|
|
|
|
0
|
%
|
|
|
35,678
|
|
Interest expense
|
|
|
4,861
|
|
|
|
108
|
%
|
|
|
2,334
|
|
|
|
22
|
%
|
|
|
1,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
84,946
|
|
|
|
19
|
%
|
|
|
71,627
|
|
|
|
1
|
%
|
|
|
70,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating income (loss)
|
|
$
|
8,580
|
|
|
|
97
|
%
|
|
$
|
4,362
|
|
|
|
286
|
%
|
|
$
|
(2,350
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Allocations of investment income and certain general expenses
are based on a number of assumptions and estimates, and the
business divisions reported operating results would change
if different methods were applied. |
The Companys Life Insurance Division reported operating
income in 2005 of $8.6 million compared to operating income
of $4.4 million in 2004. The
year-over-year
increase in operating income was attributable to an increase in
revenue and a decrease in fixed administrative costs as a
percentage of earned premium revenue.
For the year ended December 31, 2005, the Companys
Life Insurance Division generated annualized paid premium volume
(i.e., the aggregate annualized life premium amount
associated with new life insurance policies issued by the
Company) in the amount of $32.9 million compared to
$32.7 million in the corresponding 2004 period. Annualized
paid premium volume for the fourth quarter of 2005 was
negatively impacted by a slowdown in agent recruitment by the
two independent marketing companies that distribute our products
through networks of managing general agents (MGAs), who were
waiting for the 2006 introduction of new life products.
Other
Insurance
During 2003, through a newly formed company, ZON Re USA LLC (an
82.5%-owned subsidiary), we began to underwrite, administer and
issue accidental death, accidental death and dismemberment
(AD&D), accident medical and accident disability insurance
products, both on a primary and on a reinsurance basis. In 2005,
ZON Re generated revenues and operating income of
$34.8 million and $4.7 million, respectively, compared
to revenues and operating income of $14.4 million and
$1.4 million, respectively, in 2004.
Other Key
Factors
The Companys Other Key Factors segment includes investment
income not otherwise allocated to the Insurance segment,
realized gains and losses, interest expense on corporate debt,
variable stock compensation and other unallocated items and
general expenses relating to corporate operations. In 2005, the
incremental costs associated with the pending acquisition of the
Company by a group of private equity investors were also
reflected in the results of the Other Key Factors segment.
The Companys Other Key Factors segment reported operating
losses of $(3.1) million in 2005, compared to operating
income of $789,000 in 2004. The increase in operating losses in
2005 in the Other Key Factors segment was primarily attributable
to a decrease in net realized gains associated with the
Companys investment portfolio
34
(from $7.6 million in net realized gains in 2004 to
$(760,000) in net realized losses in 2005), an increase in
general corporate expenses of $(6.3) million and
incremental costs in the amount of $(9.1) million associated
with the pending acquisition of the Company by a group of
private equity investors. These unfavorable factors were
partially offset by a $12.8 million increase in investment
income on equity and a $7.1 million
year-over-year
decrease in variable stock-based compensation expense associated
with the various stock accumulation plans established by the
Company for the benefit of its independent agents (from
$14.3 million in 2004 to $7.2 million in 2005).
Discontinued
Operations
The Company reported income from discontinued operations in 2005
the amount of $531,000, net of tax ($0.01 per diluted
share) compared to income from discontinued operations of
$15.7 million, net of tax ($0.33 per diluted share) in
2004.
Results from discontinued operations for 2004 reflected a
pre-tax gain in the amount of $7.7 million generated from
the sale of the remaining uninsured student loan assets held by
the Companys former Academic Management Services Corp.
subsidiary (which the Company disposed of in November 2003), and
a favorable resolution of a dispute related to the
Companys former Special Risk Division that resulted in
pre-tax income in the amount of $10.7 million.
2004
Compared to 2003
UICI reported revenues and income from continuing operations in
2004 of $2.069 billion and $145.9 million
($3.07 per diluted share), respectively, compared to 2003
revenues and income from continuing operations of
$1.825 billion and $87.3 million ($1.82 per diluted
share), respectively. Reflecting results from discontinued
operations, the Company reported overall 2004 net income of
$161.6 million ($3.40 per diluted share), compared to
2003 net income of $14.3 million ($0.30 per diluted
share).
Continuing
Operations
Revenues. UICIs revenues increased to
$2.069 billion in 2004 from $1.825 billion in 2003, an
increase of $243.9 million, or 13.4%. The Companys
revenues were particularly impacted by the following factors:
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The Company generated a 17% increase in health premium revenue
(to $1.813 billion in 2004 from $1.547 billion in
2003), which increase resulted from new business, as well as
increased renewal business derived from new health business
originally written in 2001 and 2002.
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Life premiums and other considerations increased by 27%, to
$45.9 million in 2004 from $36.0 million in 2003. This
increase was attributable primarily to sales of newly-designed
life products through its relationships with its two independent
marketing companies.
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Due to a 10% year over year increase in invested assets,
investment income increased to $85.9 million in 2004
compared to $77.7 million in 2003.
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Other income (consisting primarily of income derived by the SEA
Division from ancillary services and membership marketing and
administrative services provided to the membership associations
that make available to their members the Companys health
insurance products) decreased by 4%, to $117.8 million in
2004 from $124.6 million in 2003. The decrease was
primarily related to a year over year decrease in new business
for which the Company receives membership marketing and
administrative fees.
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The Company recognized gains on sale of investments of
$6.7 million in 2004 compared to $39.7 million in
2003. The realized gains in 2003 resulted primarily from a
$40.4 million (pre-tax) gain generated in the fourth
quarter of 2003 on the sale of a substantial portion of the
Companys stake in AMLI Residential.
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Expenses. UICIs total expenses increased
to $1.848 billion in 2004 from $1.693 billion in 2003,
an increase of $154.7 million, or 9%. The Companys
expenses were particularly impacted by the following factors:
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Benefits, claims and settlement expenses increased by 9% to
$1.135 billion in 2004 from $1.046 billion in 2003.
Benefits, claims and settlement expenses grew at a rate lower
than premium revenues primarily as a result of a decrease in
loss ratio due in significant part to the reduction of claim
liabilities established in 2003 at the Companys SEA
Division in response to a rapid pay down of an excess pending
claims inventory. The actual claim payment experience during
2004 with respect to prior periods at the SEA Division was lower
than originally estimated when the claim liabilities were
established in 2003.
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Underwriting costs, policy acquisition costs and insurance
expenses increased by 12% to $632.1 million in 2004 from
$563.6 million in 2003, reflecting the increase in premium
revenue, offset by the establishment in 2003 of significant
accruals associated with then-pending litigation.
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The Company maintains for the benefit of its employees and
independent agents various stock-based compensation plans, in
connection with which it records non-cash variable stock-based
compensation expense (benefit) in amounts that depend and
fluctuate based upon the market performance of the
Companys common stock. In 2004, the Company recognized a
non-cash stock based compensation expense in the amount of
$(14.3) million, compared to non-cash stock based
compensation benefit of $459,000 in 2003, principally due to the
higher average price of UICI shares in 2004 compared to the
average share price in 2003.
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Other expenses (consisting primarily of direct expenses incurred
by the Company in connection with providing ancillary services
and membership marketing and administrative services provided to
the membership associations that make available to their members
the Companys health insurance products) decreased by 20%,
to $63.2 million in 2004 from $79.3 million in 2003.
The decrease is attributed to the decrease in enrollment of new
association memberships relative to existing memberships; the
direct expenses related to new ancillary services are higher
than the costs of maintaining these ancillary services for
existing business.
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Total interest expense increased by 13%, to $3.4 million in
2004 from $3.0 million in 2003, primarily due to an
increase in the borrowing rates associated with student loan
borrowings (consisting of borrowings incurred to fund student
loan obligations under the Companys College Fund Life
Division program see Note H of
Notes to Consolidated Financial Statements).
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Operating Income. Operating income increased
by 68%, to $221.1 million in 2004 from $131.9 million
in 2003. As discussed more fully below, the Companys 2004
results from continuing operations benefited from a significant
year-over-year
increase in operating income at its SEA Division (from
$109.1 million in 2003 to $260.7 million in 2004).
Operating income generated by the SEA Division was offset in
part by significant operating losses in 2004 at the
Companys Student Insurance Division and an increase in
non-cash variable stock-based compensation expense.
Self-Employed
Agency Division
The SEA Division reported operating income of
$260.7 million in 2004, compared to operating income of
$109.1 million in 2003. Operating income at the SEA
Division in 2004 was positively impacted by an increase in
earned premium revenue, reduced administration and commission
expenses as a percentage of earned premium, and a decrease in
loss ratio resulting from favorable claims experience. Earned
premium revenue at the SEA Division increased to
$1.355 billion in 2004 from $1.193 billion in 2003.
The SEA Divisions operating margin in 2004 was 19.2%,
compared to 9.1% in 2003. The significant
year-over-year
increase in operating margin was attributable primarily to a
decrease in the loss ratio, a decrease in general administrative
expenses as a percentage of earned premium revenue and a
decrease in the effective commission rate (due to a decrease in
the amount of first year premium relative to renewal premium,
which carries a lower commission rate compared to commissions on
first year premium). In addition, 2003 results included a
$(25.0) million charge associated with a reassessment of
loss accrual established for certain then-pending litigation.
36
The decrease in loss ratio (from 61.7% in 2003 to 54.4% in
2004) was due in significant part to the reduction in the
amount of $47.8 million during 2004 of claim liabilities
established in 2003 in response to a rapid pay down in 2003 of
an excess pending claims inventory. The actual claim payment
experience during 2004 with respect to prior periods was lower
than originally estimated when the claim liabilities were
established in 2003. See discussion below under the
caption Critical Accounting Policies and
Estimates Claims
Liabilities Claims Liability Development
Experience. The decrease in loss ratio was also due in
part to lower levels of incurred claims in 2004 compared to the
prior year.
Submitted annualized premium volume (i.e., the aggregate
annualized premium amount associated with health insurance
applications submitted by the Companys agents for
underwriting by the Company) decreased by 4% (to
$860.4 million in 2004 from $895.2 million in the
2003) compared to submitted annualized premium volume in
the corresponding period in 2003. The decrease in submitted
annualized premium volume in 2004 can be attributed to reduced
production at the Companys agencies, resulting primarily
from an 8.7% reduction in the average number of writing agents
in the field during 2004 compared to the prior year. The
Companys agencies took steps in the fourth quarter of 2004
to increase recruitment of new agents.
Results in 2004 at SEA include results at the Companys
HealthMarket unit, which was acquired by the Company in October
2004 and provides consumer driven health plans to the small
employer group market. Results at HealthMarket during 2004 were
not material to overall operating results at SEA.
Student
Insurance Division
The Companys Student Insurance Division (which offers
tailored health insurance programs that generally provide single
school year coverage to individual students at colleges and
universities) reported operating losses of $(49.5) million
in 2004, compared to operating losses of $(9.8) million in
2003. Results for 2004 at Student Insurance reflected an
increase in the loss ratio, which was primarily attributable to
a
higher-than-expected
amount of paid claims (which resulted from the reduction of the
Student Insurance units claims inventory to levels more
closely approximating historical levels), the failure of the
Companys claim system to effectively utilize discounts
afforded by the Companys network provider contracts and to
an impairment charge in the amount of $(6.6) million
principally associated with the abandonment of computer hardware
and software assets associated with its claims processing
system. The Company has taken steps to modify its claims
processing system to better utilize network provider discounts.
Earned premium revenue at the Student Insurance unit increased
to $297.0 million in 2004 from $239.6 million in 2003
(a 24% increase). The Companys Student Insurance unit
imposed significant rate increases for its
2004-2005
school year during 2004, however, the impact of such rate
increases were not be fully realized until 2005.
Star HRG
Division
The Companys Star HRG Division (which designs, markets and
administers limited benefit health insurance plans for entry
level, high turnover, and hourly employees) reported operating
income for 2004 of $3.3 million, compared to operating
income of $1.9 million in 2003. Profitability in 2004 was
positively impacted by a decrease (to 63.6% in 2004 from 66.4%
in 2003) in the loss ratio associated with the Star HRG
book of business, which decreases can be attributed to rate
increases implemented during 2004. The decrease in loss ratio in
2004 was partially offset by
higher-than-expected
administrative expenses (which were associated with certain
technology initiatives) and increased marketing costs associated
with new market initiatives.
Earned premium revenue at Star HRG increased to
$145.7 million in 2004 from $114.4 million in 2003 (a
27% increase).
Life
Insurance Division
The Companys Life Insurance Division reported operating
income in 2004 of $4.4 million, compared to an operating
loss of $(2.4) million in 2003. The operating loss at the
Companys Life Insurance Division in 2003 was primarily
attributable to a claim accrual increase associated with the
Companys former workers compensation business, a charge
associated with the final resolution of litigation arising out
of the closedown in 2001 of the
37
Companys former workers compensation business and costs
associated with the closedown of the Companys College
Fund Life Division operations.
The Company determined that, effective May 31, 2003, it
would no longer issue new life insurance policies under the
College Fund Life Division program and, effective
June 30, 2003, it ceased all operations at the
Companys Norcross, Georgia facility. In connection with
such closedown and relocation to the Oklahoma City office, the
Company incurred exit costs (consisting primarily of employee
severance and relocation expenses and lease termination costs)
in the amount of approximately $1.1 million which costs
were expensed as incurred in 2003.
During 2004, the Companys Life Insurance Division
generated annualized paid premium volume (i.e., the
aggregate annualized life premium amount associated with new
life insurance policies issued by the Company) in the amount of
$32.7 million, compared to $9.8 million in 2003,
reflecting the ramping up of sales of the Companys new
life products that were introduced to the market in the second
half of 2003.
Other
Insurance
During 2003, through a newly formed company, ZON Re USA LLC (an
82.5%-owned subsidiary), we began to underwrite, administer and
issue accidental death, accidental death and dismemberment
(AD&D), accident medical and accident disability insurance
products, both on a primary and on a reinsurance basis. In 2004,
ZON Re generated revenues and operating income of
$14.4 million and $1.4 million, respectively.
Other Key
Factors
The Other Key Factors segment includes investment income not
allocated to the Insurance segment, realized gains or losses on
sale of investments, interest expense on corporate debt, general
expenses relating to corporate operations, minority interest,
variable stock-based compensation and operations that do not
constitute reportable operating segments (including the
Companys investment in Healthaxis, Inc. until sold on
September 30, 2003).
The Companys Other Key Factors segment reported operating
income of $789,000 in 2004, compared to operating income of
$33.8 million in 2003. The decrease in operating income in
the Other Key Factors segment in 2004 was primarily attributable
to a $32.1 million decrease in net realized gains (from
$39.7 million in net realized gains in 2003 to
$7.6 million in net realized gains in 2004) and a
$(14.8) million
year-over-year
increase (from a benefit in 2003 of $459,000 to an expense in
2004 of $(14.3) million, or $(0.20) per diluted share, net
of tax) in the expense related to variable stock-based
compensation associated with the various stock accumulation
plans established by the Company for the benefit of its
independent agents. See Note M of Notes to
Consolidated Financial Statements Agent
Stock Accumulation Plans. In connection with these plans,
the Company records non-cash variable stock-based compensation
expense (or records a benefit) in amounts that depend and
fluctuate based upon the market performance of the
Companys common stock. These unfavorable factors were
offset by an $8.2 million increase in 2004 in investment
income on equity and a reduction of general corporate expenses
of $3.4 million. Results in 2003 reflected the recognition
of realized gains in the amount of $40.4 million (pre-tax)
relating to the sale of a substantial portion of the
Companys stake in AMLI Residential and a loss of $(2.2)
million, representing the Companys share of operating
losses attributable to its investment in Healthaxis, Inc. (which
the Company sold in the third quarter of 2003).
Discontinued
Operations
The Companys reported results in 2004 and 2003 reflected
income (loss) (net of tax) from discontinued operations
(consisting of the Companys AMS unit, its Senior Market
Division and its Special Risk Division) in the amount of
$15.7 million ($0.33 per diluted share) and
$(73.0) million ($(1.52) per diluted share), respectively.
Results from discontinued operations for the full year 2004
reflected a favorable resolution of a dispute relating to its
former Special Risk Division (which resulted in pre-tax income
in the amount of $10.7 million recorded in the second
quarter of 2004), a tax benefit associated with the reduction of
a tax accrual and the release of a portion of the valuation
allowance on the capital loss carryover due to the realization
of capital gains during 2004, and a pre-tax gain recorded in the
first quarter of 2004 in the amount of $7.7 million
generated from the sale of the remaining
38
uninsured student loan assets formerly held by the
Companys former Academic Management Services Corp
subsidiary (which the Company disposed of in November 2003).
These favorable factors were offset in part by the recording in
the second quarter of 2004 of a loss accrual with respect to
multiple lawsuits that were filed arising out of UICIs
announcement in July 2003 of a shortfall in the type and amount
of collateral supporting securitized student loan financing
facilities of the Companys former AMS subsidiary.
Results from discontinued operations in 2003 included losses
(net of tax) from AMS in the amount of $(64.2) million
(which included a $(61.2) million expense reflecting the
estimated loss on disposal recorded in the third quarter of
2004) and the costs associated with the close down of the
Companys former Senior Market Division.
Variable
Stock-Based Compensation
The Company sponsors a series of stock accumulation plans
established for the benefit of the independent insurance agents
and independent sales representatives associated with its
independent agent field forces, including
UGA Association Field Services and Cornerstone
America. In connection with these plans, the Company has from
time to time recorded and will continue to record non-cash
variable stock-based compensation expense in amounts that depend
and fluctuate based upon the market performance of the
Companys common stock. For financial reporting purposes,
the Company reflects all non-cash variable stock based
compensation associated with its agent stock plans in its
Other Key Factors business segment. See
Note M of Notes to Consolidated Financial Statements.
The accounting treatment of the Companys agent plans has
resulted and will continue to result in unpredictable non-cash
stock-based compensation charges, primarily dependent upon
future fluctuations in the quoted price of UICI common stock.
These unpredictable fluctuations in stock based compensation
charges may result in material non-cash fluctuations in the
Companys results of operations. Unvested benefits under
the agent plans vest in January of each year; accordingly, in
periods of general appreciation in the quoted price of UICI
common stock, the Companys cumulative liability, and
corresponding charge to income, for unvested stock-based
compensation is expected to be greater in each successive
quarter during any given year.
Change in
Claims and Future Benefit Liability
Estimates Self-Employed Agency
Division
2005
Change in Claim Liability Estimates
Results at the SEA Division for the year ended December 31,
2005 reflected benefits attributable to refinements of the
Companys estimate for its claim liability on its health
insurance products. For financial reporting purposes, each of
these refinements is considered to be a change in estimate,
resulting from additional information and subsequent
developments from prior periods. Accordingly, the financial
impact of the refinements was accounted for in the respective
periods that the refinements occurred.
Results at the SEA Division for the year ended December 31,
2005 reflected a benefit in the amount of $33.3 million
recorded in the third quarter of 2005 attributable to a
refinement of the Companys estimate for its claim
liability on its health insurance products. The largest portion
of the adjustment (approximately $21.0 million) was
attributable to a refinement of the estimate of the unpaid claim
liability for the most recent incurral months. The Company
utilizes anticipated loss ratios to calculate the estimated
claim liability for the most recent incurral months. Despite
negligible premium rate increases implemented on its most
popular scheduled health insurance products, the SEA Division
has continued to observe favorable claims experience and, as a
result, loss ratios have not increased as rapidly as
anticipated. This favorable claims experience has been reflected
in the refinement of the anticipated loss ratios used in
estimating the unpaid claim liability for the most recent
incurral months. The remaining portion of the adjustment to the
claim liability (approximately $12.3 million) was
attributable to an update of the completion factors used in the
developmental method of estimating the unpaid claim liability to
reflect more current claims administration practices.
In addition, effective January 1, 2005, the Companys
SEA Division made certain refinements to its claim liability
calculations, the effect of which decreased claim liabilities
and correspondingly increased operating income in the amount of
$7.6 million in the first quarter of 2005. Since 2000 the
SEA Division has offered as an
39
optional benefit to its scheduled/basic health insurance
products a rider that provides for catastrophic coverage for
covered expenses under the base insurance contract that exceed
$100,000 or $75,000, depending on the benefit level chosen. This
rider pays benefits at 100% after the stop loss is reached, up
to the aggregate maximum amount of the contract. Prior to
January 1, 2005, the SEA Division utilized a technique that
is commonly used to estimate claims liabilities with respect to
developing blocks of business, until sufficient experience is
obtained to allow more precise estimates. The Company believed
that the technique produced appropriate reserve estimates in all
prior periods. During the first quarter of 2005, the Company
believed that there were sufficient claims paid on this benefit
to produce a reserve estimate utilizing the completion factor
technique. As a result, effective January 1, 2005, the SEA
Division refined its technique used to estimate claim
liabilities to utilize completion factors for older incurral
dates. The technique continues to utilize anticipated loss
ratios in the most recent incurral months. This completion
factor technique is currently utilized with respect to all other
blocks of the SEA Divisions health insurance business.
2003
Change in Claims and Future Benefit Liability
Estimates
Effective January 1, 2003, the Companys SEA Division
made certain refinements to its claim and future benefit
liability estimates, the net effect of which decreased claim and
future policy benefit liabilities and correspondingly increased
operating income reported by the SEA Division in the amount of
$4.8 million in the first quarter of 2003. Set forth below
is a summary of the adjustments and changes in accounting
estimates made by the Company.
ROP
Liability
The Company has issued certain health policies with a
return-of-premium
(ROP) rider, pursuant to which the Company undertakes to return
to the policyholder on or after age 65 all premiums paid
less claims reimbursed under the policy. The ROP rider also
provides that the policyholder may receive a portion of the
benefit prior to age 65. Prior to January 1, 2003, the
Company established a liability for future ROP benefits, which
liability was calculated by applying mid-terminal reserve
factors (calculated on two-year preliminary term basis, using 5%
interest, 1958 CSO mortality terminations, and level future
gross premiums) to the current premium on a
contract-by-contract
basis. A claim offset was applied, on a
contract-by-contract
basis, solely with respect to an older closed block of policies,
utilizing only claims paid to date, with no assumption of future
claims.
The Company records an ROP liability to fund longer-term
obligations associated with the ROP rider. This liability is
impacted both by the techniques utilized to calculate the
liability and the many assumptions underlying the calculation,
including interest rates, policy lapse rates, premium rate
increases on policies and assumptions with regard to claims
paid. The Company had previously utilized a simplified
estimation technique (described above) that it believed
generated an appropriate ROP liability in the aggregate.
However, the Company reviewed its ROP estimation technique in
order to determine if refinements to the technique were
appropriate. As a result of such review, and as more
particularly described in the paragraph below, effective
January 1, 2003, the ROP estimation technique was refined
to utilize new mid-terminal reserve factors (calculated on a net
level basis, using 4.5% interest, 1958 CSO mortality and
assuming 10% annual increases in future gross premiums) and to
apply these factors to the historical premium payments on a
contract-by-contract
basis.
The net premium assumption was revised from two-year preliminary
term to net level in order to produce a more appropriate accrual
for the liability of the ROP benefits in relation to the
premiums. The interest rate assumption was reduced from 5% to
4.5% to reflect current investment yields. Since the ROP rider
is primarily attached to attained-age rated health insurance
products that are subject to periodic rate adjustment, the
Company has determined as part of its ongoing review of the ROP
estimation technique to increase its ROP liability to cover
reasonably foreseeable changes to the future gross premium.
Based on Company experience, the revised reserve factors
incorporate an assumption of a 10% average annual increase in
future gross premiums on such products. The estimation technique
was also refined to use historical premiums and anticipated
future premium increases in the calculation of future benefits
rather than calculating the liability only from the current
gross premium. Finally, a claim offset for actual benefits paid
through the reporting date is applied to the ROP liability for
all policies on a
contract-by-contract
basis. In the original simplified estimation technique, the
intent was to balance the offsetting effects of applying the
two-year preliminary term factors to the current gross premiums,
since the historical premium information was not available.
Changes to the technique were made in 2003 when sufficient
historical
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premium information was available to refine the estimation
calculation. Substantially all of the effect of this change in
estimating the liability for future ROP benefits was
attributable to the refinement of adding the assumption of a 10%
average annual increase in the level of future gross premiums
for attained-age rated health insurance products.
As a result of these changes, the liability for future ROP
benefits increased, and operating income correspondingly
decreased, by $12.9 million during the first quarter of
2003.
Assumptions used in the estimation of the Companys ROP
liability, such as interest or the annual increases in future
gross premiums, will continue to be used in subsequent
accounting periods for those benefits already issued, including
the future gross premiums anticipated by the reserve factors.
Changes in assumptions may be applied to newly issued policies
as well as for adjustments in the level of premium for existing
policies other than those already anticipated. The new
assumptions used will be those appropriate at the time the
change is made.
The ROP liabilities in the amount of $88.1 million and
$86.0 million at December 31, 2005 and 2004,
respectively, are reflected in future policy and contract
benefits on the Companys consolidated balance sheet.
Claims
Liability Changes
The SEA Division utilizes the developmental method to estimate
claims liabilities. Under the developmental method, completion
factors are applied to claim payments in order to estimate the
ultimate claim payments. These completion factors are derived
from historical experience and are dependent on the incurred
dates of the claim payments.
Prior to January 1, 2003, the Company utilized the original
incurred date coding definition to establish the date a policy
claim is incurred under the developmental method. Under the
original incurred date coding definition, prior to the end of
the period in which a health policy claim was made, the Company
estimated and recorded a liability for the cost of all medical
services related to the accident or sickness relating to the
claim, even though the medical services associated with such
accident or sickness might not be rendered to the insured until
a later financial reporting period.
Due to the anticipation of a future increase in the level of
favorable development associated with the growth in business,
the SEA Division undertook an analysis of the liability
estimation process. The Company believes that the developmental
method is the standard methodology within the health insurance
industry and therefore re-evaluated the key assumptions utilized
under this method. As the Company gained more experience with
the older blocks of business, the original incurred date coding
assumption was re-examined. This re-examination resulted in the
decision to utilize a new incurred date definition instead of
the original incurred date definition for purposes of estimating
claim liabilities for the SEA Division.
Effective January 1, 2003, the Company implemented a new
incurred date coding definition to establish incurred dates
under the developmental method in the SEA Division. Under this
new incurred date coding definition, a break in service of more
than six months will result in the establishment of a new
incurred date for subsequent services. In addition, under this
new incurred date coding definition, claim payments continuing
more than thirty-six months without a six month break in service
will result in the establishment of a new incurred date. This
change in the incurred date definition assumption resulted in a
reduction in the estimated claim liabilities at the SEA
Division, and a corresponding increase in operating income, in
the amount of $12.3 million during the first quarter of
2003.
Other
Changes in Estimate
Several refinements in the claims liability calculation, all of
which were treated as changes in accounting estimates, resulted
in a further reduction of the claims liability, and
corresponding increase in operating income, in the amount of
$5.4 million during the first quarter of 2003. This
reduction in the claims liability was attributable primarily to
the effects of a change in estimate of the liability for excess
pending claims. This change was necessary to maintain
consistency with the historical data underlying the calculation
of the new completion factors used in the claim development
calculation. These completion factors are based on more recent
experience with claims payments than the previous factors. This
more recent experience has a greater number of pending claims.
As a result, the new completion factors have built in a higher
level of liabilities for pending claims. The release of a
41
portion of the excess pending claims liability reflects the
additional pending claims included in the completion factors.
Quarterly
Results
The following table presents the information for each of the
Companys fiscal quarters in 2005 and 2004. 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 managements opinion, reflects all
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.
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Quarter Ended
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December 31,
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September 30,
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June 30,
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March 31,
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December 31,
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September 30,
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June 30,
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March 31,
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2005
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2005
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2005
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2005
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2004
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2004
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2004
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2004
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(In thousands except per share
amounts)
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Income Statement Data:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from continuing operations
|
|
$
|
515,744
|
|
|
$
|
520,174
|
|
|
$
|
545,908
|
|
|
$
|
539,392
|
|
|
$
|
540,531
|
|
|
$
|
516,674
|
|
|
$
|
514,687
|
|
|
$
|
497,217
|
|
Income from continuing operations
before federal income taxes
|
|
|
59,802
|
|
|
|
92,755
|
|
|
|
79,514
|
|
|
|
81,079
|
|
|
|
66,890
|
|
|
|
49,131
|
|
|
|
55,115
|
|
|
|
50,013
|
|
Income from continuing operations
|
|
|
37,498
|
|
|
|
60,672
|
|
|
|
52,142
|
|
|
|
52,658
|
|
|
|
43,967
|
|
|
|
33,269
|
|
|
|
35,947
|
|
|
|
32,698
|
|
Income (loss) from discontinued
operations
|
|
|
971
|
|
|
|
373
|
|
|
|
173
|
|
|
|
(986
|
)
|
|
|
1,904
|
|
|
|
1,623
|
|
|
|
6,457
|
|
|
|
5,693
|
|
Net income (loss)
|
|
$
|
38,469
|
|
|
$
|
61,045
|
|
|
$
|
52,315
|
|
|
$
|
51,672
|
|
|
$
|
45,871
|
|
|
$
|
34,892
|
|
|
$
|
42,404
|
|
|
$
|
38,391
|
|
Per Share Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.81
|
|
|
$
|
1.31
|
|
|
$
|
1.13
|
|
|
$
|
1.14
|
|
|
$
|
0.96
|
|
|
$
|
0.72
|
|
|
$
|
0.78
|
|
|
$
|
0.70
|
|
Income (loss) from discontinued
operations
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.00
|
|
|
|
(0.02
|
)
|
|
|
0.04
|
|
|
|
0.04
|
|
|
|
0.14
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.83
|
|
|
$
|
1.32
|
|
|
$
|
1.13
|
|
|
$
|
1.12
|
|
|
$
|
1.00
|
|
|
$
|
0.76
|
|
|
$
|
0.92
|
|
|
$
|
0.82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per
common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
0.80
|
|
|
$
|
1.29
|
|
|
$
|
1.11
|
|
|
$
|
1.11
|
|
|
$
|
0.93
|
|
|
$
|
0.71
|
|
|
$
|
0.76
|
|
|
$
|
0.68
|
|
Income (loss) from discontinued
operations
|
|
|
0.02
|
|
|
|
0.01
|
|
|
|
0.00
|
|
|
|
(0.02
|
)
|
|
|
0.04
|
|
|
|
0.03
|
|
|
|
0.13
|
|
|
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
0.82
|
|
|
$
|
1.30
|
|
|
$
|
1.11
|
|
|
$
|
1.09
|
|
|
$
|
0.97
|
|
|
$
|
0.74
|
|
|
$
|
0.89
|
|
|
$
|
0.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Computation of earnings (loss) per share for each quarter is
made independently of earnings (loss) per share for the year.
Liquidity
and Capital Resources
Consolidated
On a consolidated level, the Companys primary sources of
liquidity have been premium revenues from policies issued,
investment income, fees and other income, proceeds from
corporate borrowings and borrowings to fund student loans. The
primary uses of cash have been payments for benefits, claims and
commissions under those policies, operating expenses, cash
dividends to shareholders, stock repurchases and the funding of
student loans. During 2005, the Company generated net cash from
operations on a consolidated basis in the amount of
$185.4 million, compared to $254.2 million in 2004 and
$300.6 million in 2003.
42
The Companys consolidated short and long-term indebtedness
(all of which constituted indebtedness of the holding company)
(exclusive of indebtedness secured by student loans) was
$15.5 million at December 31, 2005 and 2004.
At December 31, 2005 and 2004, the Company had an aggregate
of $130.9 million and $150.0 million, respectively, of
indebtedness outstanding under a secured student loan credit
facility, which indebtedness is represented by Student
Loan Asset-Backed Notes (the SPE Notes) issued
by a bankruptcy-remote special purpose entity (the
SPE). At December 31, 2005 and 2004,
indebtedness outstanding under the secured student loan credit
facility was secured by alternative (i.e., non-federally
guaranteed) student loans and accrued interest in the carrying
amount of $115.3 million and $114.9 million,
respectively, and by a pledge of cash, cash equivalents and
other qualified investments in the amount of $20.5 million
and $37.4 million, respectively. At December 31, 2005,
$12.2 million of such cash, cash equivalents and other
qualified investments was available to fund the purchase from
the Company of additional student loans generated under the
Companys College First Alternative Loan program, which
purchases may be made in accordance with the terms of the
agreements governing the securitization until February 2007.
All indebtedness issued under the secured student loan credit
facility is reflected as student loan indebtedness on the
Companys consolidated balance sheet; all such student
loans and accrued investment income pledged to secure such
facility are reflected as student loan assets and accrued
investment income, respectively, on the Companys
consolidated balance sheet; and all such cash, cash equivalents
and qualified investments specifically pledged under the student
loan credit facility are reflected as restricted cash on the
Companys consolidated balance sheet. The SPE Notes
represent obligations solely of the SPE and not of the Company
or any other subsidiary of the Company. For financial reporting
and accounting purposes the student loan credit facility has
been classified as a financing. Accordingly, in connection with
the financing the Company has recorded and will in the future
record no gain on sale of the assets transferred to the SPE.
The SPE Notes were issued by the SPE in three tranches
($50.0 million of
Series 2001A-1
Notes and $50.0 million of
Series 2001A-2
Notes issued on April 27, 2001, and $50.0 million of
Series 2002A Notes issued on April 10, 2002). The
Series 2001A-1
Notes and
Series 2001A-2
Notes have a final stated maturity of July 1, 2036; the
Series 2002A Notes have a final stated maturity of
July 1, 2037. However, the SPE Notes are subject to
mandatory redemption in whole or in part (a) on the first
interest payment date which is at least 45 days after
February 1, 2007, from any monies then remaining on deposit
in the acquisition fund not used to purchase additional student
loans and (b) on the first interest payment date which is
at least 45 days after July 1, 2005, from any monies
then remaining on deposit in the acquisition fund received as a
recovery of the principal amount of any student loan securing
payment of the SPE Notes, including scheduled, delinquent and
advance payments, payouts or prepayments. After July 1,
2005, the SPE Notes are also subject to mandatory redemption in
whole or in part on each interest payment date from any monies
received as a recovery of the principal amount of any student
loan securing payment of the SPE Notes, including scheduled,
delinquent and advance payments, payouts or prepayments. During
2005 the Company made principal payments in the aggregate amount
of $19.1 million on the Notes.
The SPE and the secured student loan facility were structured
with an expectation that interest and recoveries of principal to
be received with respect to the underlying student loans
securing payment of the SPE Notes would be sufficient to pay
principal of and interest on the SPE Notes when due, together
with operating expenses of the SPE. This expectation was based
upon analysis of cash flow projections, and assumptions
regarding the timing of the financing of the underlying student
loans to be held by the SPE, the future composition of and yield
on the financed student loan portfolio, the rate of return on
monies to be invested by the SPE in various funds and accounts
established under the indenture governing the SPE Notes, and the
occurrence of future events and conditions. There can be no
assurance, however, that the student loans will be financed as
anticipated, that interest and principal payments from the
financed student loans will be received as anticipated, that the
reinvestment rates assumed on the amounts in various funds and
accounts will be realized, or other payments will be received in
the amounts and at the times anticipated.
43
Holding
Company
UICI is a holding company, the principal assets of which are its
investments in its separate operating subsidiaries, including
its regulated insurance subsidiaries. The holding companys
ability to fund its cash requirements is largely dependent upon
its ability to access cash, by means of dividends or other
means, from its subsidiaries. The laws governing the
Companys insurance subsidiaries restrict dividends paid by
the Companys domestic insurance subsidiaries in any year.
Inability to access cash from its subsidiaries could have a
material adverse effect upon the Companys liquidity and
capital resources.
Set forth below is a summary statement of cash flows for UICI at
the holding company level for each of the three most recent
years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Position Holding Company
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Cash and Cash Equivalents on hand
at beginning of year
|
|
$
|
39,573
|
|
|
$
|
37,840
|
|
|
$
|
22,429
|
|
Sources of Cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from domestic insurance
subsidiaries(1)
|
|
|
146,000
|
|
|
|
23,000
|
|
|
|
5,000
|
|
Dividends from offshore insurance
subsidiaries
|
|
|
9,000
|
|
|
|
5,290
|
|
|
|
23,385
|
|
Dividends from non-insurance
subsidiaries(2)
|
|
|
9,037
|
|
|
|
27,630
|
|
|
|
14,475
|
|
Proceeds from Trust Securities
|
|
|
|
|
|
|
14,570
|
|
|
|
|
|
Proceeds from financing
activities(3)
|
|
|
12,253
|
|
|
|
26,587
|
|
|
|
20,744
|
|
Proceeds from sale of AMS
|
|
|
|
|
|
|
|
|
|
|
27,773
|
|
Proceeds from stock option
activities
|
|
|
2,582
|
|
|
|
7,524
|
|
|
|
10,966
|
|
Net tax treaty payments from
subsidiaries
|
|
|
5,536
|
|
|
|
|
|
|
|
18,535
|
|
Net investment activities
|
|
|
1,773
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total sources of cash
|
|
|
186,181
|
|
|
|
104,601
|
|
|
|
120,878
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Uses of Cash:
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash to operations
|
|
|
(15,790
|
)
|
|
|
(18,941
|
)
|
|
|
(14,974
|
)
|
Contributions/investment in
subsidiaries(4)
|
|
|
(1,690
|
)
|
|
|
(2,506
|
)
|
|
|
(2,278
|
)
|
Contribution to AMS
|
|
|
|
|
|
|
|
|
|
|
(48,250
|
)
|
Financing activities(5)
|
|
|
(370
|
)
|
|
|
(21,807
|
)
|
|
|
(17,369
|
)
|
Dividends paid to shareholders
|
|
|
(34,705
|
)
|
|
|
(11,477
|
)
|
|
|
|
|
Purchases of UICI common stock(6)
|
|
|
(13,359
|
)
|
|
|
(36,220
|
)
|
|
|
(19,596
|
)
|
Net investment activities
|
|
|
|
|
|
|
(10,387
|
)
|
|
|
|
|
Net tax treaty net payments from
subsidiaries
|
|
|
|
|
|
|
(1,530
|
)
|
|
|
|
|
Merger transaction costs(7)
|
|
|
(8,417
|
)
|
|
|
|
|
|
|
|
|
Other investment activities
|
|
|
|
|
|
|
|
|
|
|
(3,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total uses of cash
|
|
|
(74,331
|
)
|
|
|
(102,868
|
)
|
|
|
(105,467
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents on hand
at end of year
|
|
$
|
151,423
|
|
|
$
|
39,573
|
|
|
$
|
37,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Consists of dividends paid to the parent by The MEGA Life and
Health Insurance Company and
Mid-West
National Life Insurance Company of Tennessee. |
|
(2) |
|
2004 includes $25.0 million dividends from a non-insurance
subsidiary related to the sale of the remaining uninsured
student loans retained by the Company at the sale of AMS. |
|
(3) |
|
Includes borrowings from
and/or
repayments on loans from subsidiaries in the amount of $358,000,
$3.9 million and $8.3 million in 2005, 2004 and 2003,
respectively, and proceeds from subsidiaries related to agent
stock plans in the amount of $11.1 million,
$19.7 million and $10.5 million in 2005, 2004 and
2003, respectively. |
44
|
|
|
(4) |
|
Includes purchase of and investment in non-insurance
subsidiaries and funding of discontinued operations. |
|
(5) |
|
Includes in 2005 $370,000 of advances to subsidiaries. Includes
in 2004 repayment of senior notes at final maturity in the
amount of $4.0 million, $15.0 million retirement of
convertible debentures and $2.8 million of advances to
subsidiaries. Includes in 2003 repayments of senior notes in the
amount of $4.0 million, and loans payable and advances to
subsidiaries in the amount of $13.4 million. |
|
(6) |
|
Includes repurchase of UICI common stock under the
Companys stock repurchase program in the amount of
$7.0 million (310,900 shares), $16.3 million
(1,043,400 shares) and $5.1 million
(349,200 shares) in 2005, 2004 and 2003, respectively. Also
includes in 2005, 2004 and 2003 the amounts of
$6.4 million, $19.9 million and $14.5 million,
respectively, representing repurchases of UICI common stock for
agent stock accumulation plans and purchases from an officer of
the Company. |
|
(7) |
|
Includes the incremental costs associated with the pending
acquisition of the Company by a group of private equity
investors. |
See Schedule II following Note R of Notes to
Consolidated Financial Statements for additional information
regarding the holding companys cash flow.
At December 31, 2005 and 2004, UICI at the holding company
level held cash and cash equivalents in the amount of
$151.4 million and $39.6 million, respectively. The
Company currently anticipates that the cash requirements at the
holding company level for the coming year will be funded by cash
on hand and dividends to be paid from insurance and
non-insurance subsidiaries.
Prior approval by insurance regulatory authorities is required
for the payment by a domestic insurance company of dividends
that exceed certain limitations based on statutory surplus and
net income. During the 2005 year, Mega and
Mid-West
paid dividends in the amount of $82.0 million and
$64.0 million, respectively, to the holding company.
During 2006, the Companys domestic insurance companies
could pay, without prior approval of the regulatory authorities,
aggregate dividends in the ordinary course of business to the
holding company of approximately $213.3 million. However,
as it has done in the past, the Company will assess the results
of operations of the regulated domestic insurance companies to
determine the prudent dividend capability of the subsidiaries,
consistent with UICIs practice of maintaining risk-based
capital ratios at each of the Companys domestic insurance
subsidiaries significantly in excess of minimum requirements.
Sources
and Uses of Cash and Liquidity
During 2005, 2004 and 2003, the Companys cash and
liquidity at the holding company were positively impacted by the
following significant factors and developments:
|
|
|
|
|
During 2005, the Company received an aggregate of
$146.0 million in dividends from its domestic insurance
subsidiaries, compared to $23.0 million of dividends in
2004.
|
|
|
|
During 2005, the Company received $1.8 million on
investment income on short-term investments and other invested
assets held at the holding company.
|
|
|
|
On March 31, 2004, the Company completed the sale of all of
the remaining uninsured student loan assets formerly held by the
Companys former Academic Management Services Corp.
subsidiary. These assets had been retained by the Company at the
November 18, 2003 sale of Academic Management Services
Corp. and reflected as
held-for-sale
assets on the Companys consolidated balance sheet. The
sale of the uninsured student loans generated gross cash
proceeds in the amount of approximately $25.0 million.
|
|
|
|
In April 2004, the Company, through a newly formed Delaware
statutory business trust, generated net proceeds of
$14.6 million from the issuance in a private placement of
$15.0 million aggregate issuance amount of floating rate
trust preferred securities. See Note H of Notes to
Consolidated Financial Statements.
|
|
|
|
Effective November 1, 2004, the Company terminated a
$30.0 million bank credit facility that was otherwise
scheduled to mature in January 2005. At the time the facility
was terminated, the Company had no borrowings outstanding under
the facility.
|
45
|
|
|
|
|
On November 18, 2003, the Company sold its AMS unit,
generating net cash proceeds to UICI of approximately
$27.8 million (which amount is reflected as Proceeds
from sale of AMS in the table above). At closing, UICI
also received uninsured student loan assets formerly held by
AMS special purpose financing subsidiaries with a face
amount of approximately $44.3 million (including accrued
interest). In 2004, the Company completed the sale of the
portfolio of uninsured loans.
|
During 2005, 2004 and 2003, the Companys principal uses of
cash and liquidity at the holding company were as follows:
|
|
|
|
|
During the fourth quarter of 2005 the holding company incurred
and paid approximately $8.4 million of expenses related to
the pending merger by a group of private equity firms.
|
|
|
|
In April 2005, UICI utilized approximately $7.0 million to
repurchase 310,900 shares of its common stock pursuant to
its share repurchase program. During 2004 and 2003, UICI
utilized approximately $16.3 million and $5.1 million,
respectively, to repurchase 1,043,400 and 349,200 shares,
respectively, of its common stock pursuant to its share
repurchase program. Such amounts are reflected as
Purchases of UICI common stock in the table above.
|
|
|
|
During 2005, the Company paid an aggregate of $34.7 million
of dividends to holders of its common stock, compared to
dividends in the amount of $11.5 million paid in 2004. On
August 18, 2004, the Companys Board of Directors
adopted a policy of issuing a regular semi-annual cash dividend
on shares of its common stock. Dividends paid in 2005 also
included a $0.25 per share special dividend
($11.6 million in the aggregate) paid in March 2005.
Following execution on September 15, 2005, of a definitive
agreement contemplating the acquisition of the Company in a cash
merger by a group of private equity firms, the Company does not
anticipate declaring or paying additional dividends on shares of
its common stock.
|
|
|
|
In April 2004, the Company paid in full its outstanding 6%
convertible subordinated notes in the aggregate amount of
$15.0 million and accrued interest thereon to the date of
prepayment. The notes had been issued by the Company in November
2003 in full payment of all contingent consideration payable in
connection with UICIs February 2002 acquisition of Star
HRG.
|
|
|
|
In June 2004, the Company paid in full the final payment due in
the amount of $4.0 million on its 8.75% Senior Notes
due June 2004, which the Company had issued in 1994 in the
original aggregate issuance amount of $27.7 million. In
accordance with the agreement, the Company repaid approximately
$4.0 million aggregate principal together with accrued
interest in June 2003.
|
|
|
|
In July 2003, we announced that we had uncovered collateral
shortfalls in the type and amount of collateral supporting two
of the securitized student loan financing facilities of our AMS
unit and the failure to comply with reporting obligations under
the financing documents at seven of those facilities. We
subsequently entered into waiver and release agreements with all
of the financial institutions that were parties to the
securitized student loan financing facilities, which agreements
required us in July 2003 to contribute $48.25 million in
cash to the capital of AMS (which amount is reflected as
Contribution to AMS in the table above). See
Note Q of Notes to Consolidated Financial Statements.
|
46
Contractual
Obligations and Off Balance Sheet Arrangements
Set forth below is a summary of the Companys contractual
obligations (on a consolidated basis) at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment Due by Period
|
|
|
|
|
|
|
Less Than
|
|
|
|
|
|
|
|
|
More Than
|
|
|
|
Total
|
|
|
1 Year
|
|
|
1-3 Years
|
|
|
3-5 Years
|
|
|
5 Years
|
|
|
|
(In thousands)
|
|
|
Corporate debt
|
|
$
|
15,470
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
15,470
|
|
Student loan credit facility
|
|
|
130,900
|
|
|
|
8,850
|
|
|
|
25,600
|
|
|
|
28,300
|
|
|
|
68,150
|
|
Future policy benefits
|
|
|
447,992
|
|
|
|
19,421
|
|
|
|
41,033
|
|
|
|
33,831
|
|
|
|
353,707
|
|
Claim liabilities
|
|
|
558,106
|
|
|
|
454,357
|
|
|
|
103,749
|
|
|
|
|
|
|
|
|
|
Capital lease obligations
|
|
|
3,490
|
|
|
|
1,354
|
|
|
|
1,962
|
|
|
|
174
|
|
|
|
|
|
Operating lease obligations
|
|
|
37,249
|
|
|
|
7,101
|
|
|
|
12,452
|
|
|
|
10,165
|
|
|
|
7,531
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,193,207
|
|
|
$
|
491,083
|
|
|
$
|
184,796
|
|
|
$
|
72,470
|
|
|
$
|
444,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All indebtedness issued under the secured student loan credit
facility represent obligations solely of the SPE and not of the
Company or any other subsidiary and is secured by student loans,
accrued investment income, cash, cash equivalents and qualified
investments.
The payments related to the future policy benefits and claim
liabilities reflected in the table above have been projected
utilizing assumptions based on the Companys historical
experience and anticipated future experience.
The Companys off balance sheet arrangements consist of
commitments to fund student loans generated by its former
College Fund Life Division and letters of credit.
Through the Companys former College Fund Life
Division, the Company previously offered an interest-sensitive
whole life insurance product issued with a child term rider,
under which the Company committed to provide private student
loans to help fund the named childs higher education if
certain restrictions and qualifications are satisfied. At
December 31, 2005, the Company had outstanding commitments
to fund student loans under the College Fund Life Division
program for the years 2006 through 2025. Loans are limited to
the cost of school or prescribed maximums. These loans are
generally guaranteed as to principal and interest by a private
guarantee agency and are also collateralized by either the
related insurance policy or the co-signature of a parent or
guardian. The total student loan funding commitments for each of
the next five school years and thereafter, as well as the amount
the Company expects to be required to fund based on historical
utilization rates and policy lapse rates, are as follows as of
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Expected
|
|
|
|
Commitment
|
|
|
Funding
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
54,075
|
|
|
$
|
6,420
|
|
2007
|
|
|
50,659
|
|
|
|
5,096
|
|
2008
|
|
|
47,191
|
|
|
|
3,833
|
|
2009
|
|
|
44,426
|
|
|
|
3,004
|
|
2010
|
|
|
47,611
|
|
|
|
2,440
|
|
2011 and thereafter
|
|
|
165,075
|
|
|
|
4,597
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
409,037
|
|
|
$
|
25,390
|
|
|
|
|
|
|
|
|
|
|
Interest rates on the above commitments are principally variable
(prime plus 2%).
The Company has historically funded its College Fund Life
Division student loan commitments with the proceeds of
indebtedness issued by a bankruptcy-remote special purpose
entity (the SPE Notes). At December 31, 2005,
$12.2 million of cash, cash equivalents and other qualified
investments was available to fund the purchase by the
bankruptcy-remote special purpose entity from the Company of
additional student loans generated under the
47
Companys College First Alternative Loan program. The
indenture governing the terms of the SPE Notes provides,
however, that the proceeds of such SPE Notes may be used to fund
student loan commitments only until February 1, 2007, after
which any monies then remaining on deposit in the acquisition
fund created by the indenture not used to purchase additional
student loans must be used to redeem the SPE Notes. See
discussion above under the caption Liquidity and
Capital Resources Consolidated and
Note H of Notes to Consolidated Financial Statements.
At each of December 31, 2005 and 2004, the Company had
$5.2 million and $5.0 million, respectively, of
letters of credit outstanding relating to its insurance
operations.
Investments
General. The Companys Investment
Committee monitors the investment portfolio of the Company and
its subsidiaries. The Investment Committee receives investment
management services from external professionals and from the
Companys in-house investment management team. The internal
investment management team monitors the performance of the
external managers as well as directly managing approximately 65%
of the investment portfolio.
Investments are selected based upon the parameters established
in the Companys investment policies. Emphasis is given to
the selection of high quality, liquid securities that provide
current investment returns. Maturities or liquidity
characteristics of the securities are managed by continually
structuring the duration of the investment portfolio to be
consistent with the duration of the policy liabilities.
Consistent with regulatory requirements and internal guidelines,
the Company invests in a range of assets, but limits its
investments in certain classes of assets, and limits its
exposure to certain industries and to single issuers.
Investments are reviewed quarterly (or more frequently if
certain indicators arise) to determine if they have suffered an
impairment of value that is considered other than temporary.
Managements review considers the following indicators of
impairment: fair value significantly below cost; decline in fair
value attributable to specific adverse conditions affecting a
particular investment; decline in fair value attributable to
specific conditions, such as conditions in an industry or in a
geographic area; decline in fair value for an extended period of
time; downgrades by rating agencies from investment grade to
non-investment grade; financial condition deterioration of the
issuer and situations where dividends have been reduced or
eliminated or scheduled interest payments have not been made.
Management monitors investments where two or more of the above
indicators exist. The Company also identifies investments in
economically challenged industries. If investments are
determined to be impaired, a loss is recognized at the date of
determination.
Set forth below is a summary of the Companys investments
by category at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Securities available for
sale
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value
(cost: 2005 $1,496,340;
2004 $1,500,204)
|
|
$
|
1,484,465
|
|
|
|
83.5
|
%
|
|
$
|
1,531,231
|
|
|
|
89.1
|
%
|
Equity securities, at fair
value
(cost: 2005 $1,508;
2004 $1,508)
|
|
|
1,347
|
|
|
|
0.1
|
%
|
|
|
1,461
|
|
|
|
0.1
|
%
|
Mortgage loans
|
|
|
751
|
|
|
|
0.0
|
%
|
|
|
3,884
|
|
|
|
0.2
|
%
|
Policy loans
|
|
|
16,325
|
|
|
|
0.9
|
%
|
|
|
17,101
|
|
|
|
1.0
|
%
|
Short-term and other investments
|
|
|
275,036
|
|
|
|
15.5
|
%
|
|
|
165,661
|
|
|
|
9.6
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total investments
|
|
$
|
1,777,924
|
|
|
|
100.0
|
%
|
|
$
|
1,719,338
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
48
Fixed maturity securities. Fixed maturity
securities accounted for 83.5% and 89.1% of the Companys
total investments at December 31, 2005 and 2004,
respectively. Fixed maturity securities at December 31,
2005 consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
% of Total
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Treasury and
U.S. Government agency obligations
|
|
$
|
85,928
|
|
|
|
5.8
|
%
|
Corporate bonds
|
|
|
968,520
|
|
|
|
65.2
|
%
|
Mortgage-backed securities issued
by U.S. Government agencies and authorities
|
|
|
247,851
|
|
|
|
16.7
|
%
|
Other mortgage and asset backed
securities
|
|
|
182,166
|
|
|
|
12.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,484,465
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Included in the fixed maturity portfolio is an allocation of
corporate bonds consisting primarily of short term and medium
term investment grade corporate bonds. The Companys
investment policy with respect to concentration risk limits
individual investment grade bonds to 3% of assets and
non-investment grade bonds to 2% of assets. The policy also
limits the investments in any one industry to 20% of assets. As
of December 31, 2005, the largest concentration in any one
investment grade corporate bond was $25.4 million which
represented less than 1.5% of total invested assets. The largest
concentration in any one non-investment grade corporate bond was
$4.5 million, which represented less than 1% of total
invested assets. The largest concentration to any one industry
was less than 9%.
Included in the fixed maturity portfolio is an allocation of
mortgage-backed securities, including collateralized mortgage
obligations and mortgage-backed pass-through certificates, and
commercial mortgage-backed securities. To limit its credit risk,
the Company invests in mortgage-backed securities that are rated
investment grade by the public rating agencies. The
Companys mortgage-backed securities portfolio is a
conservatively structured portfolio that is concentrated in the
less volatile tranches, such as planned amortization classes and
sequential classes. The Company seeks 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% of its investment portfolio
invested in the more volatile tranches.
As of December 31, 2005 and 2004, $1.457 billion (or
98.1%) and $1.495 billion (or 97.6%), respectively, of the
fixed maturity securities portfolio was rated BBB or better
(investment grade) and $27.6 million (or 1.9%) and
$36.7 million (or 2.4%) , respectively, of the fixed
maturity securities portfolio was invested in below investment
grade securities (rated less than BBB).
A quality distribution for fixed maturity securities at
December 31, 2005 is set forth below:
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
% of Total
|
|
|
|
Carrying
|
|
|
Carrying
|
|
Rating
|
|
Value
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
U.S. Government and AAA
|
|
$
|
612,314
|
|
|
|
41.2
|
%
|
AA
|
|
|
93,907
|
|
|
|
6.3
|
%
|
A
|
|
|
476,618
|
|
|
|
32.1
|
%
|
BBB
|
|
|
274,015
|
|
|
|
18.5
|
%
|
Less than BBB
|
|
|
27,611
|
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,484,465
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
Investment accounting policies. The Company
has classified its entire fixed maturity portfolio as
available for sale. This classification requires the
portfolio to be carried at fair value with the resulting
unrealized gains or losses, net of applicable income taxes,
reported in accumulated other comprehensive income as a separate
49
component of stockholders equity. As a result,
fluctuations in fair value, which is affected by changes in
interest rates, will result in increases or decreases to the
Companys stockholders equity.
During 2005, 2004 and 2003, the Company recorded impairment
charges for certain fixed and equity securities in the amount of
$4.1 million, $3.6 million and $5.1 million,
respectively.
Set forth below is a summary of the Companys gross
unrealized losses in its fixed maturities as of
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss
|
|
|
Unrealized Loss
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of
Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
U.S. Treasury obligations and
direct obligations of U.S. Government agencies
|
|
$
|
61,872
|
|
|
$
|
747
|
|
|
$
|
13,632
|
|
|
$
|
390
|
|
|
$
|
75,504
|
|
|
$
|
1,137
|
|
Mortgage backed securities issued
by U.S. Government agencies and authorities
|
|
|
145,168
|
|
|
|
2,077
|
|
|
|
68,632
|
|
|
|
2,124
|
|
|
|
213,800
|
|
|
|
4,201
|
|
Other mortgage and asset backed
securities
|
|
|
67,635
|
|
|
|
947
|
|
|
|
78,020
|
|
|
|
2,618
|
|
|
|
145,655
|
|
|
|
3,565
|
|
Corporate bonds
|
|
|
380,079
|
|
|
|
7,642
|
|
|
|
260,044
|
|
|
|
10,180
|
|
|
|
640,123
|
|
|
|
17,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
654,754
|
|
|
$
|
11,413
|
|
|
$
|
420,328
|
|
|
$
|
15,312
|
|
|
$
|
1,075,082
|
|
|
$
|
26,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company had $26.7 million of
unrealized losses in its fixed maturities portfolio. Of the
$11.4 million in unrealized losses that have existed for
less than twelve months, only three securities had an unrealized
loss in excess of 10% of the securitys cost. The aggregate
amount of unrealized loss attributed to the securities in excess
of 10% of the securities cost was $893,000 at
December 31, 2005. Of the $15.3 million in unrealized
losses that have existed for twelve months or longer, only one
security had an unrealized loss in excess of 10% of the
securitys cost. The amount of unrealized loss with respect
to that security was $122,000 at December 31, 2005. The
Company continually monitors these investments and believes
that, as of December 31, 2005, the unrealized loss in these
investments is temporary.
Set forth below is a summary of the Companys gross
unrealized losses in its fixed maturities as of
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss
|
|
|
Unrealized Loss
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or Longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of
Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
US Treasury obligations and direct
obligations of US Government agencies
|
|
$
|
10,889
|
|
|
$
|
182
|
|
|
$
|
2,887
|
|
|
$
|
153
|
|
|
$
|
13,776
|
|
|
$
|
335
|
|
Mortgage backed securities issued
by U.S. Government agencies and authorities
|
|
|
66,191
|
|
|
|
319
|
|
|
|
37,621
|
|
|
|
365
|
|
|
|
103,812
|
|
|
|
684
|
|
Other mortgage and asset backed
securities
|
|
|
44,138
|
|
|
|
480
|
|
|
|
56,802
|
|
|
|
994
|
|
|
|
100,940
|
|
|
|
1,474
|
|
Corporate bonds
|
|
|
144,427
|
|
|
|
1,533
|
|
|
|
151,190
|
|
|
|
4,394
|
|
|
|
295,617
|
|
|
|
5,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
265,645
|
|
|
$
|
2,514
|
|
|
$
|
248,500
|
|
|
$
|
5,906
|
|
|
$
|
514,145
|
|
|
$
|
8,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company regularly monitors its investment portfolio to
attempt to minimize its concentration of credit risk in any
single issuer. Set forth in the table below is a schedule of all
investments representing greater than 1% of the
50
Companys aggregate investment portfolio at
December 31, 2005 and 2004, excluding investments in
U.S. Government securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage
Corporation
|
|
$
|
25,370
|
|
|
|
1.4
|
%
|
|
$
|
18,038
|
|
|
|
1.0
|
%
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity Institutional Money
Market Fund
|
|
$
|
200,900
|
|
|
|
11.3
|
%
|
|
$
|
122,793
|
|
|
|
7.1
|
%
|
The Fidelity Institutional Money Market Fund is a diversified
institutional money market fund that invests solely in the
highest quality United States dollar denominated money market
securities of domestic and foreign issuers.
Share
Repurchase Program
At its April 28, 2004 regular quarterly meeting, the UICI
Board of Directors reconfirmed the Companys
1998 share repurchase program, in which it initially
authorized the repurchase of up to 4,500,000 shares of UICI
common stock from time to time in open market or private
transactions, and granted management authority to repurchase up
to an additional 1,000,000 shares. Through
December 31, 2005, the Company had purchased under the
program an aggregate of 4,881,900 shares (at an aggregate
cost of $71.2 million; average cost per share of $14.58),
of which 310,900 shares (at an aggregate cost of
$7.0 million; average cost per share of $22.66) were
purchased during 2005. The Company now has remaining authority
pursuant to the program as reauthorized to repurchase up to an
additional 618,100 shares. Following execution on
September 15, 2005, of a definitive agreement contemplating
the acquisition of the Company in a cash merger by a group of
private equity firms, the Company will not repurchase any
additional shares of common stock pursuant to this program.
Critical
Accounting Policies and Estimates
The Companys discussion and analysis of its financial
condition and results of operations are based upon the
Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States of America. The preparation of
these financial statements requires the Company to make
estimates and judgments that affect the reported amounts of
assets, liabilities, revenues and expenses, and related
disclosure of contingent assets and liabilities. On an on-going
basis, the Company evaluates its estimates, including those
related to health and life insurance claims, bad debts,
investments, intangible assets, income taxes, financing
operations and contingencies and litigation. The Company bases
its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. Actual results
may differ from these estimates under different assumptions or
conditions.
The Company believes the following critical accounting policies
affect its more significant judgments and estimates used in the
preparation of its consolidated financial statements.
Claims
Liabilities
The Company establishes liabilities for benefit claims that have
been reported but not paid and claims that have been incurred
but not reported under health and life insurance contracts.
Consistent with overall company philosophy, a single best
estimate claim liability is determined which is expected to be
adequate under most circumstances. This estimate is developed
using actuarial principles and assumptions that consider a
number of items as appropriate, including but not limited to
historical and current claim payment patterns, product
variations, the timely implementation of appropriate rate
increases and seasonality. The Company does not develop ranges
in
51
the setting of the claims liability reported in the financial
statements. However, to the extent not already reflected in the
actuarial analyses, management also considers qualitative
factors that may affect the ultimate benefit levels to determine
its best estimate of the claims liability. These qualitative
considerations include, among others, the impact of medical
inflation, utilization of health services, exposure levels,
product mix, pending claim levels and other relevant factors.
The Company uses the developmental method to estimate claim
liabilities. This method applies completion factors to claim
payments in order to estimate the ultimate amount of the claim.
These completion factors are derived from historical experience
and are dependent on the incurred dates of the claim payments.
An extensive degree of judgment is used in this estimation
process. For health care costs payable, the claim liability
balances and the related benefit expenses are highly sensitive
to changes in the assumptions used in the claims liability
calculations. With respect to health claims, the items that have
the greatest impact on the Companys financial results are
the medical cost trend, which is the rate of increase in health
care costs, and the unpredictable variability in actual
experience. Any adjustments to prior period claim liabilities
are included in the benefit expense of the period in which
adjustments are identified. Due to the considerable variability
of health care costs and actual experience, adjustments to
health claim liabilities usually occur each quarter and are
sometimes significant.
The Company believes that its recorded claim liabilities are
reasonable and adequate to satisfy its ultimate claims
liability. Each of the Companys major operating units has
an actuarial staff that has primary responsibility for assessing
the claim liabilities. The Companys Corporate Risk
Management staff has an oversight process in place to provide
final review of the establishment of the claim liabilities. The
Company uses its own experience as appropriate and relies on
industry loss experience as necessary in areas where the
Companys data is limited. Our estimate of claim
liabilities represents managements best estimate of the
Companys liability as of December 31, 2005. Assuming
a hypothetical 1% difference in the loss ratio (i.e.,
benefits, claims and settlement expenses stated as a percentage
of earned premiums) for the year ended December 31, 2005,
net income would increase or decrease by approximately
$12.5 million and diluted net earnings per common share
would increase or decrease by approximately $0.26 per share.
Prior to January 1, 2003, the SEA Division utilized the
original incurred date coding definition to establish the date a
policy claim is incurred under the developmental method. Under
the original incurred date coding definition, prior to the end
of the period in which a health policy claim was made, the
Company estimated and recorded a liability for the cost of all
medical services related to the accident or sickness relating to
the claim, even though the medical services associated with such
accident or sickness might not be rendered to the insured until
a later financial reporting period.
Due to the anticipation of a future increase in the level of
favorable development associated with the growth in business,
the SEA Division undertook an analysis of the liability
estimation process. The Company believes that the developmental
method is the standard methodology within the health insurance
industry and therefore re-evaluated the key assumptions utilized
under this method. With the aging of the older blocks of
business, the original incurred date coding assumption was
re-examined. This re-examination resulted in the decision to
utilize a new incurred date definition instead of the original
incurred date definition for purposes of estimating claim
liabilities for the SEA Division.
Effective January 1, 2003, the Company implemented a new
incurred date coding definition to establish incurred dates
under the developmental method in the SEA Division. Under this
new incurred date coding definition, a break in service of more
than six months will result in the establishment of a new
incurred date for subsequent services. In addition, under this
new incurred date coding definition, claim payments continuing
more than thirty-six months without a six month break in service
will result in the establishment of a new incurred date. This
change in the incurred date definition assumption resulted in a
reduction in the estimated claim liabilities, and a
corresponding increase in operating income, at the SEA Division
in the amount of $12.3 million during the first quarter of
2003.
The SEA Division also makes various refinements to the claim
liabilities as appropriate. These refinements estimate
liabilities for circumstances, such as an excess pending claims
inventory (i.e., inventories of pending claims in excess
of historical levels) and disputed claims. For example, the
Company closely monitors the level of
52
claims that are pending. When the level of pending claims
appears to be in excess of normal levels, the
Company typically establishes a liability for excess pending
claims. The Company believes that such an excess pending
claims liability is appropriate under such circumstances
because of the operation of the developmental method used by the
Company to calculate the principal claim liability, which method
develops or completes paid claims to
estimate the claim liability. When the pending claims inventory
is higher than would ordinarily be expected, the level of paid
claims is correspondingly lower than would ordinarily be
expected. This lower level of paid claims, in turn, results in
the developmental method yielding a smaller claim liability than
would have been yielded with a normal level of paid claims,
resulting in the need for an augmented claim liability.
With respect to business at its Student Insurance and Star HRG
Divisions, the Company assigns incurred dates based on the date
of service. This definition estimates the liability for all
medical services received by the insured prior to the end of the
applicable financial period. Appropriate adjustments are made in
the completion factors to account for pending claim inventory
changes and contractual continuation of coverage beyond the end
of the financial period.
Set forth below is a summary of claim liabilities by business
unit at each of December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Self-Employed Agency Division
|
|
$
|
438,857
|
|
|
$
|
493,406
|
|
|
$
|
455,140
|
|
Student Insurance Division
|
|
|
63,105
|
|
|
|
83,954
|
|
|
|
77,357
|
|
Star HRG Division
|
|
|
16,803
|
|
|
|
16,203
|
|
|
|
16,622
|
|
Life Insurance Division
|
|
|
10,989
|
|
|
|
12,072
|
|
|
|
13,866
|
|
Other Insurance
|
|
|
16,247
|
|
|
|
5,144
|
|
|
|
60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal
|
|
|
546,001
|
|
|
|
610,779
|
|
|
|
563,045
|
|
Reinsurance recoverable
|
|
|
12,105
|
|
|
|
11,808
|
|
|
|
12,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total claim liability
|
|
$
|
558,106
|
|
|
$
|
622,587
|
|
|
$
|
575,473
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity in the claims liability is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Claims liability at beginning of
year, net of related reinsurance recoverable
|
|
$
|
610,779
|
|
|
$
|
563,045
|
|
|
$
|
440,895
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims liability on acquired
business
|
|
|
|
|
|
|
|
|
|
|
12,783
|
|
Incurred losses, net of
reinsurance, occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1,191,723
|
|
|
|
1,196,421
|
|
|
|
1,067,951
|
|
Prior years
|
|
|
(124,996
|
)
|
|
|
(90,914
|
)
|
|
|
(54,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,066,727
|
|
|
|
1,105,507
|
|
|
|
1,013,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct payments for claims, net of
reinsurance, occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
765,767
|
|
|
|
714,361
|
|
|
|
616,939
|
|
Prior years
|
|
|
365,738
|
|
|
|
343,412
|
|
|
|
287,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,131,505
|
|
|
|
1,057,773
|
|
|
|
904,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims liability at end of year,
net of related reinsurance recoverable
(2005 $12,105; 2004 $11,808;
2003 $12,428)
|
|
$
|
546,001
|
|
|
$
|
610,779
|
|
|
$
|
563,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
Claims
Liability Development Experience
Inherent in the Companys claim liability estimation
practices is the desire to establish liabilities that are more
likely to be redundant than deficient. Furthermore, the
Companys philosophy is to price its insurance products to
make an underwriting profit, not to increase written premiums.
While management continually attempts to improve its loss
estimation process by refining its ability to analyze loss
development patterns, claim payments and other information,
uncertainty remains regarding the potential for adverse
development of estimated ultimate liabilities.
Set forth in the table below is a summary of the claims
liability development experience (favorable) unfavorable by
business unit in the Companys Insurance segment for each
of the years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Self-Employed Agency Division
|
|
$
|
(121,362
|
)
|
|
$
|
(91,720
|
)
|
|
$
|
(54,009
|
)
|
Student Insurance Division
|
|
|
(5,186
|
)
|
|
|
4,733
|
|
|
|
(581
|
)
|
Star HRG Division
|
|
|
410
|
|
|
|
(3,002
|
)
|
|
|
(1,753
|
)
|
Life Insurance Division
|
|
|
337
|
|
|
|
(926
|
)
|
|
|
1,951
|
|
Other Insurance
|
|
|
805
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total favorable
|
|
$
|
(124,996
|
)
|
|
$
|
(90,914
|
)
|
|
$
|
(54,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on SEA Division. As indicated in the
table above, incurred losses developed at the SEA Division in
amounts less than originally anticipated due to
better-than-expected
experience on the health business in the SEA Division in each of
2005, 2004 and 2003.
The total favorable claims liability development experience for
2005 in the amount of $121.4 million represented 24.6% of
total claim liabilities established for the SEA Division at
December 31, 2004. The favorable claims liability
development experience in 2005 reflected a benefit of
$33.3 million recorded in the third quarter of 2005
attributable to a refinement of the Companys estimate for
its claim liability on its health insurance products, which
adjustment resulted from a refinement of the estimate of the
unpaid claim liability for the most recent incurral months and
an update of the completion factors used in the developmental
method of estimating the unpaid claim liability to reflect more
current claims administration practices. The favorable claims
liability development experience at the SEA Division in 2005
also reflected the effects of a favorable adjustment in the
amount of $7.6 million recorded in the first quarter of
2005 attributable to a refinement of an estimate for the
Companys claim liability established with respect to a
product rider that provides for catastrophic coverage on the SEA
Divisions scheduled health insurance products. Excluding
the impact of the refinements discussed above, the remaining
favorable experience in 2005 in the claims liability was
$80.5 million, or 16.3% of total claim liabilities
established for the SEA Division at December 31, 2004.
The total favorable claims liability development experience for
2004 in the amount of $91.7 million represented 20.2% of
total claim liabilities established for the SEA Division at
December 31, 2003. The favorable claims liability
development experience at the SEA Division in 2004 reflected the
effect of $47.8 million in claim liabilities established
during 2003 in response to a rapid pay down during 2003 of an
excess pending claims inventory. In particular, during 2003 the
Company observed a change in the distribution of paid claims by
incurred date; more paid claims were assigned to recent incurred
dates than had been the case on paid claims in prior years.
Assignment of paid claims with more recent incurred dates
typically results in an understatement of the claim development
liability, resulting in the need for augmented claim
liabilities. The Company believes that the deviation from
historical experience in incurred date assignment was a natural
consequence of the effort required to reduce a claims backlog,
which the Company was experiencing at the SEA Division during
the course of 2003. However, as the actual claims experience
developed in 2004, these augmented claim liabilities in the
amount of $47.8 million proved to be redundant. These claim
liabilities were released during 2004 and, as a result, did not
influence the level of claim liabilities redundancies in 2005
and will not influence the level of claim liabilities
redundancies in future periods. Excluding the impact of the
augmented claim liabilities established at December 31,
2003 in response to the rapid pay down during 2003 of an excess
pending claims inventory, the favorable experience in 2004 in
the
54
claims liability was $43.9 million, or 9.6% of total claim
liabilities established for the SEA Division at
December 31, 2003.
The total favorable claims liability development experience for
2003 in the amount of $54.0 million represented 14.9% of
total claim liabilities established for the SEA Division at
December 31, 2002. The favorable experience in the SEA
Division for 2003 included the effect of the $17.7 million
decrease in claims liability due to the refinements made
effective January 1, 2003 to the claims liability
calculation ($12.3 million) and changes in estimate
($5.4 million). See the discussion above under the
caption 2003 Change in Claims and Future Benefit Liability
Estimates. Excluding the impact of these refinements and
changes in estimate, the favorable experience in 2003 in the
claims liability was $36.3 million, or 10.0% of the total
claim liabilities established for the SEA Division at
December 31, 2002.
Over time, the developmental method replaces anticipated
experience with actual experience, resulting in an ongoing
re-estimation of the claims liability. Since the greatest degree
of estimation is used for more recent periods, the most recent
prior year is subject to the greatest change. Recent actual
experience has produced lower levels of claims payment
experience than originally expected.
Impact on Student Insurance Division and Star HRG
Division. The products of the Student Insurance
and Star HRG Divisions consist principally of medical insurance.
In general, medical insurance business, for which incurred dates
are assigned based on date of service, has a short
tail, which means that a favorable development or
unfavorable development shown for prior years relates primarily
to actual experience in the most recent prior year.
The favorable claim liability development experience at the
Student Insurance Division in 2005 in the amount of
$5.2 million is due to claims in 2005 developing more
favorably than indicated by the loss trends used to determine
the claim liability at December 31, 2004. The unfavorable
claims liability development experience in 2004 in the amount of
$4.7 million reflects the effects of a delay in processing
of prior-year claims and
higher-than-expected
claim experience associated with the business written for the
2003-2004
school year. The Student Insurance Division experienced
favorable claims liability development for 2003.
The unfavorable claim liability development at the Star HRG
Division in 2005 of $410,000 is within the normal statistical
variation in the model used to develop the reserve. The actual
development of prior years claims exceeded the expected
development of the claims liability. The favorable claims
liability development experience of $3.0 million in 2004
includes the effects of claims in 2004 developing more favorably
than indicated by the loss trends in 2003 used to determine the
claim liability at December 31, 2003. The Star HRG Division
also experienced favorable claims liability development for
2003. Since the Star HRG business was new to the Company
(acquired in 2002), an expected loss ratio was used to set the
claims liability at December 31, 2002.
Impact on Life Insurance Division. The varied
claim liability development experience at the Life Insurance
Division for each of the years presented is due to the
development of a closed block of workers compensation
business. The Life Insurance Division previously wrote
workers compensation insurance and similar group accident
coverage for employers in a limited geographical market. In May
2001, the Company made the decision to terminate this operation,
and all existing policies were terminated as the policies came
up for renewal over the succeeding twelve months. The closing of
new and renewal business starting in July of 2001 had the effect
of concentrating the claims experience into existing policies
and eliminating any benefits that might accrue from improved
underwriting of new business or liabilities released on newer
claims that might settle more quickly. The effect of closing a
block of this type of business is difficult to estimate at the
date of closing, due to the longer claims tail usually
experienced with workers compensation coverage, the tendency of
claims to concentrate in severity but without an associated
degree of predictability as the number of cases decreases, and
the unpredictable costs of protracted litigation often
associated with the adjudication of claims under workers
compensation policies.
Impact on Other Insurance. Through our
82.5%-owned subsidiary, ZON Re USA LLC (ZON Re), we
underwrite, administer and issue accidental death, accidental
death and dismemberment (AD&D), accident medical and
accident disability insurance products, both on a primary and on
a reinsurance basis. The unfavorable claim liability development
experience at ZON Re in 2005 in the amount of $805,000 was due
to certain large claims reported in 2005 associated with claims
incurred in the prior year.
55
Accounting
for Policy Acquisition Costs
Health
Policy Acquisition Costs
The Company incurs various costs in connection with the
origination and initial issuance of its health insurance
policies, including underwriting and policy issuance costs,
costs associated with lead generation activities and
distribution costs (i.e., sales commissions paid to
agents). The Company defers those costs that vary with
production. The Company defers commissions paid to agents and
premium taxes with respect to the portion of health premium
collected but not yet earned, and the Company amortizes the
deferred expense over the period as and when the premium is
earned. Costs associated with generating sales leads with
respect to the health business issued through the SEA Division
are capitalized and amortized over a two-year period, which
approximates the average life of a policy. For financial
reporting purposes, underwriting and policy issuance costs
(which the Company estimates are more fixed than variable) with
respect to health policies issued through the Companys
SEA, Student Insurance, Star HRG Divisions and the Other
Insurance division are expensed as incurred.
With respect to health policies sold through the Companys
SEA Division, commissions paid to agents with respect to first
year policies are higher than commissions paid to agents with
respect to policies in renewal years. Accordingly, during
periods of increasing first year premium revenue (such as
occurred during 2002), the SEA Divisions overall operating
profit margin will be negatively impacted by the higher
commission expense associated with first year premium revenue.
Life
Policy Acquisition Costs
The Company incurs various costs in connection with the
origination and initial issuance of its life insurance policies,
including underwriting and policy issuance costs. The Company
defers those costs that vary with production. The Company
capitalizes commission and issue costs primarily associated with
the new business of its Life Insurance Division. Deferred
acquisition costs consist primarily of sales commissions and
other underwriting costs of new life insurance sales. Policy
acquisition costs associated with traditional life business are
capitalized and amortized over the estimated premium-paying
period of the related policies, in proportion to the ratio of
the annual premium revenue to the total premium revenue
anticipated. Such anticipated premium revenue, which is modified
to reflect actual lapse experience, is estimated using the same
assumptions as are used for computing policy benefits. For
universal life-type and annuity contracts, capitalized costs are
amortized at a constant rate based on the present value of the
estimated gross profits expected to be realized on the book of
contracts.
Other
The cost of business acquired through acquisition of
subsidiaries or blocks of business is determined based upon
estimates of the future profits inherent in the business
acquired. Such costs are capitalized and amortized over the
estimated premium-paying period. Anticipated investment income
is considered in determining whether a premium deficiency
exists. The amortization period is adjusted when estimates of
current or future gross profits to be realized from a group of
products are revised.
The Company monitors and assesses the recoverability of deferred
health and life policy acquisition costs on a quarterly basis.
Goodwill
and Other Identifiable Intangible Assets
The Company accounts for goodwill and other intangible assets
under Financial Accounting Standards Board Statement 142,
Goodwill and Other Intangible Assets. Statement 142
requires that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. Statement 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values and reviewed for impairment. The
Company has determined that it will review goodwill and other
intangible assets for impairment as of November 1 of each
year or more frequently if certain indicators arise. An
impairment loss would be recorded in the period such
determination was made. Following the Companys annual
review in 2005 for impairment of the goodwill and other
intangible assets
56
related to continuing operations, the Company recorded an
impairment charge in the amount of $1.7 million related to
the HealthMarket customer list acquired in October 2004. See
Note E of Notes to Consolidated Financial Statements.
Accounting
for Agent Stock Accumulation Plans
The Company sponsors a series of stock accumulation plans (the
Agent Plans) established for the benefit of the
independent insurance agents and independent sales
representatives associated with UGA Association
Field Services, New United Agency and Cornerstone America. The
Company has established a liability for future unvested benefits
under the Agent Plans and adjusts the liability based on the
market value of the Companys Common Stock. The accounting
treatment of the Companys Agent Plans has resulted and
will continue to result in unpredictable stock-based
compensation charges, dependent upon fluctuations in the quoted
price of UICI common stock. These unpredictable fluctuations in
stock based compensation charges may result in material non-cash
fluctuations in the Companys results of operations. See
discussion above under the caption Variable
Stock-Based Compensation and Note M of Notes to
Consolidated Financial Statements.
Investments
The Company has classified its investments in securities with
fixed maturities as available for sale. Investments in equity
securities and securities with fixed maturities have been
recorded at fair value, and unrealized investment gains and
losses are reflected in stockholders equity. Investment
income is recorded when earned, and capital gains and losses are
recognized when investments are sold. Investments are reviewed
quarterly to determine if they have suffered an impairment of
value that is considered other than temporary. If investments
are determined to be impaired, a loss is recognized at the date
of determination.
Testing for impairment of investments also requires significant
management judgment. The identification of potentially impaired
investments, the determination of their fair value and the
assessment of whether any decline in value is other than
temporary are the key judgment elements. The discovery of new
information and the passage of time can significantly change
these judgments. Revisions of impairment judgments are made when
new information becomes known, and any resulting impairments are
made at that time. The current economic environment and recent
volatility of securities markets increase the difficulty of
determining fair value and assessing investment impairment. The
same influences tend to increase the risk of potentially
impaired assets.
Investments are reviewed quarterly (or more frequently if
certain indicators arise) to determine if they have suffered an
impairment of value that is considered other than temporary.
Managements review considers the following indicators of
impairment: fair value significantly below cost; decline in fair
value attributable to specific adverse conditions affecting a
particular investment; decline in fair value attributable to
specific conditions, such as conditions in an industry or in a
geographic area; decline in fair value for an extended period of
time; downgrades by rating agencies from investment grade to
non-investment grade; financial condition of the issuer
deterioration and situations where dividends have been reduced
or eliminated or scheduled interest payments have not been made.
Management monitors investments where two or more of the above
indicators exist. The Company also identifies investments in
economically challenged industries. If investments are
determined to be impaired, a loss is recognized at the date of
determination.
The Company seeks to match the maturities of invested assets
with the payment of expected liabilities. By doing this, the
Company attempts to make cash available as payments become due.
If a significant mismatch of the maturities of assets and
liabilities were to occur, the impact on the Companys
results of operations could be significant.
Deferred
Taxes
The Company records deferred tax assets to reflect the impact of
temporary differences between the financial statement carrying
amounts and tax bases of assets. The Company establishes a
valuation allowance when management believes, based on the
weight of the available evidence, that it is more likely than
not that some portion of the deferred tax asset will not be
realized. Realization of the net deferred tax asset is dependent
on generating sufficient future taxable income. However, the
amount of the deferred tax asset considered realizable,
57
however, could be reduced in the near term if estimates of
future taxable income during the carryforward period are reduced.
During 2003, the Company realized $59.3 million of net
capital losses for federal tax purposes. The capital losses were
generated in 2003 primarily from the sale of AMS, the sale of
its interest in Healthaxis and the sale of an agency
specializing in the sale of long-term care and Medicare
supplement insurance products and were partially offset by the
gain from the sale of a substantial portion of the
Companys equity stake in AMLI Residential. During 2005,
the Company realized an additional capital loss of
$2.3 million from sales of investments. To the extent not
utilized to offset capital gains generated in prior years, the
net capital losses generated in 2003 and 2005 will be carried
forward to future years, with the ability to utilize the
remaining capital losses generated in 2003 and 2005 expiring in
2008 and 2010, respectively.
During 2003 the Company determined that it was more likely than
not that it would not be able to realize its deferred tax assets
related to a portion of the capital loss carryforwards generated
in 2003 and certain investment impairments that would likely
result in capital losses in the short term. Accordingly, the
Company established a valuation allowance associated with the
carryforwards and certain investment impairments at
December 31, 2003. As of December 31, 2004, the
balance of the valuation allowance was $17.0 million, a
reduction of $2.8 million from the valuation allowance at
December 31, 2003 which is attributable primarily to
realization of tax capital gains during 2004. The balance of the
valuation allowance as of December 31, 2005 is
$18.2 million; the increase of $1.2 million is
attributable primarily to the 2005 capital loss.
At this time management does not anticipate selling appreciated
assets to generate capital gains (and impair future investment
return) solely for the purpose of utilizing the capital loss
carryover. However, the Company will consider future taxable
income and ongoing prudent and feasible tax planning strategies
in assessing the need to change the valuation allowance. In the
event that the Company were to determine that it would be able
to realize all or part of its net deferred tax asset in the
future, the valuation allowance would be adjusted to reflect its
deferred tax assets at the amount that the Company believes is
more likely than not to be realized. Increasing the valuation
allowance would result in a charge to income in the period such
determination was made. In the event the Company were to
determine that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in
the period such determination was made.
Loss
Contingencies
The Company is subject to proceedings and lawsuits related to
insurance claims and other matters. See Note L of
Notes to Consolidated Financial Statements. The Company is
required to assess the likelihood of any adverse judgments or
outcomes to these matters, as well as potential ranges of
probable losses. A determination of the amount of accruals
required, if any, for these contingencies is made after careful
analysis of each individual issue. The required accruals may
change in the future due to new developments in each matter or
changes in approach, such as a change in settlement strategy in
dealing with these matters.
Privacy
Initiatives
The business of insurance is primarily regulated by the states
and is also affected by a range of legislative developments at
the state and federal levels. Recently-adopted legislation and
regulations governing the use and security of individuals
nonpublic personal data by financial institutions, including
insurance companies, may have a significant impact on the
Companys business and future results of operations. See
Business Regulatory and Legislative
Matters.
Other
Matters
The state of domicile of each of the Companys domestic
insurance subsidiaries imposes minimum risk-based capital
requirements that 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 companys
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. At
December 31,
58
2005, the risk-based capital ratio of each of the Companys
domestic insurance subsidiaries significantly exceeded the
ratios for which regulatory corrective action would be required.
Dividends paid by domestic insurance companies out of earned
surplus in any year are limited by the law of the state of
domicile. See Item 5 Market for
Registrants Common Stock and Related Stockholder Matters
and Note J of Notes to Consolidated Financial
Statements.
Inflation
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 basic hospital medical
insurance coverage, established ceilings for covered expenses
limit the impact of inflation on the amount of claims paid.
Under catastrophic hospital expense plans and preferred provider
contracts, covered expenses are generally limited only by a
maximum lifetime benefit and 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 basic hospital medical 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 some 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.
Recently
Issued Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board
(FASB) issued Statement 154 Accounting
Changes and Error Corrections which changes the requirements
for the accounting and reporting of a change in accounting
principle. Statement 154 applies to all voluntary changes
in accounting principle as well as to changes required by an
accounting pronouncement that does not include specific
transition provisions. Statement 154 requires that changes
in accounting principle be retrospectively applied. Under
retrospective application, the new accounting principle is
applied as of the beginning of the first period presented as if
that principle had always been used. The cumulative effect of
the change is reflected in the carrying value of assets and
liabilities as of the first period presented and the offsetting
adjustments would be recorded to opening retained earnings.
Statement 154 replaces APB Opinion No. 20 and FASB
Statement 3. Statement 154 is effective for the
Company beginning in fiscal year 2006. The Company does not
contemplate any accounting changes or error corrections and
accordingly, does not believe the adoption of this statement
will have a material effect upon its financial condition or
results of operations.
In December 2004, the FASB issued Statement 123R (revised
2004), Share-Based Payment, which requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their fair values. The pro forma disclosures previously
permitted under Statement 123 no longer will be an
alternative to financial statement recognition. Under
Statement 123R, the Company must determine the appropriate
fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods
include prospective and retroactive adoption options. The
prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at
the beginning of the first quarter of adoption of
Statement 123R. The retroactive methods would record
compensation expense for all unvested stock options and
restricted stock beginning with the first period restated. Prior
periods may be restated either as of the beginning of the year
of adoption or for all periods presented.
In April 2005, the U.S. Securities and Exchange Commission
announced that the effective date of Statement 123R will be
suspended until January 1, 2006, for companies whose fiscal
year is the calendar year. The Company anticipates adopting the
prospective method of Statement 123R in 2006 and believes
the adoption of this pronouncement will not have a material
effect upon the financial condition or results of operations.
59
Safe
Harbor Statement under the Private Securities Litigation Reform
Act of 1995
This report and other documents or oral presentations prepared
or delivered by and on behalf of the Company contain or may
contain forward-looking statements within the
meaning of the safe harbor provisions of the United States
Private Securities Litigation Reform Act of 1995.
Forward-looking statements are statements based upon
managements expectations at the time such statements are
made. The Company undertakes no obligation to publicly update or
revise any forward-looking statements, whether as a result of
new information, future events or otherwise. Forward-looking
statements are subject to risks and uncertainties that could
cause the Companys actual results to differ materially
from those contemplated in the statements. Readers are cautioned
not to place undue reliance on the forward-looking statements.
When used in written documents or oral presentations, the terms
anticipate, believe,
estimate, expect, may,
objective, plan, possible,
potential, project, will
and similar expressions are intended to identify
forward-looking statements. In addition to the assumptions and
other factors referred to specifically in connection with such
statements, factors that could impact the Companys
business and financial prospects include, but are not limited
to, those discussed under the caption Item 1A.
Risk Factors and those discussed from time to time in the
Companys various filings with the Securities and Exchange
Commission or in other publicly disseminated written documents.
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Item 7A.
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Quantitative
and Qualitative Disclosures about Market Risk
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Market risk is the risk of loss arising from adverse changes in
market rates and prices, such as interest rates, foreign
currency exchange rates, and other relevant market rate or price
changes. Market risk is directly influenced by the volatility
and liquidity in the markets in which the related underlying
assets are traded.
The primary market risk to the Companys investment
portfolio is interest rate risk associated with investments and
the amount of interest that policyholders expect to have
credited to their policies. The interest rate risk taken in the
investment portfolio is managed relative to the duration of the
liabilities. The Companys investment portfolio consists
mainly of high quality, liquid securities that provide current
investment returns. The Company believes that the annuity and
universal life-type policies are generally competitive with
those offered by other insurance companies of similar size. The
Company does not anticipate significant changes in the primary
market risk exposures or in how those exposures are managed in
the future reporting periods based upon what is known or
expected to be in effect in future reporting periods.
Sensitivity analysis is defined as the measurement of potential
loss in future earnings, fair values or cash flows of market
sensitive instruments resulting from one or more selected
hypothetical changes in interest rates and other market rates or
prices over a selected time. In the Companys sensitivity
analysis model, a hypothetical change in market rates is
selected that is expected to reflect reasonably possible
near-term changes in those rates. Near term is
defined as a period of time going forward up to one year from
the date of the consolidated financial statements.
In this sensitivity analysis model, the Company uses fair values
to measure its potential loss. The primary market risk to the
Companys market sensitive instruments is interest rate
risk. The sensitivity analysis model uses a 100 basis point
change in interest rates to measure the hypothetical change in
fair value of financial instruments included in the model. For
invested assets, duration modeling is used to calculate changes
in fair values. Duration on invested assets is adjusted to call,
put and interest rate reset features.
The sensitivity analysis model produces a loss in fair value of
market sensitive instruments of $64.3 million based on a
100 basis point increase in interest rates as of
December 31, 2005. This loss value only reflects the impact
of an interest rate increase on the fair value of the
Companys financial instruments.
The Company has not used derivative financial instruments in
managing its market risk.
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Item 8.
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Financial
Statements and Supplementary Data
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The audited consolidated financial statements of the Company and
other information required by this Item 8 are included in
this
Form 10-K
beginning on
page F-1.
60
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Item 9.
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Changes
in and Disagreements with Accountants on Accounting and
Financial Disclosure
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None.
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Item 9A.
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Disclosure
Controls and Procedures
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Conclusion
Regarding the Effectiveness of Disclosure Controls and
Procedures
Under the supervision and with the participation of our
management, including our principal executive officer and
principal financial officer, we conducted an evaluation of our
disclosure controls and procedures, as such term is defined
under
Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as
amended (the Exchange Act). Based on this evaluation, our
principal executive officer and our principal financial officer
concluded that our disclosure controls and procedures were
effective as of the end of the period covered by this annual
report.
Managements
Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting, as such term
is defined in Exchange Act
Rules 13a-15(f).
The Companys internal control system was designed to
provide reasonable assurance to the Companys management
and its Board of Directors regarding the preparation and fair
presentation of published financial statements. However, all
internal control systems, no matter how well designed, have
inherent limitations. Therefore, even those systems determined
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation.
The Companys management assessed the effectiveness of the
Companys internal control over financial reporting as of
December 31, 2005. Under the supervision and with the
participation of our management, including our principal
executive officer and principal financial officer, we conducted
an evaluation of the effectiveness of our internal control over
financial reporting based on the framework contained in
Internal Control Integrated Framework
issued by the Committee of Sponsoring Organizations of the
Treadway Commission (the COSO Report).
Based on our evaluation under the framework in the COSO Report
our management concluded that our internal control over
financial reporting was effective as of December 31, 2005.
The Companys independent Registered Public Accounting
Firm, KPMG LLP, has issued an audit report on our assessment of
the Companys internal control over financial reporting,
which report appears on
Page F-3
of this Annual Report on
Form 10-K.
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Item 9B.
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Other
Information
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None
PART III
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Item 10.
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Directors
and Executive Officers of the Registrant
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Board of
Directors General Information
The UICI Board of Directors consists of six directors. The Board
has responsibility for establishing broad corporate policies and
for the overall performance of the Company, although it is not
involved in
day-to-day
operations. Members of the Board are kept informed of our
businesses by various reports and documents sent to them, as
well as by operating and financial reports made at Board and
committee meetings. Regular meetings of the Board are held each
quarter, and special meetings are held as necessary.
61
UICI
Directors
Set forth below is a biographical summary, including names, ages
as of March 1, 2006, and principal occupations for at least
the past five years, of each director of UICI:
William J. Gedwed (age 50) has served as a
director of the Company since June 2000 and as President and
Chief Executive Officer since July 1, 2003. He was named
Chairman of the Board in September 2005. He serves on the
Executive, Investment and Privacy Committees of the Board of
Directors. Mr. Gedwed also currently serves as Chairman and
Director of The MEGA Life and Health Insurance Company,
Mid-West
National Life Insurance Company of Tennessee, The Chesapeake
Life Insurance Company and Fidelity First Insurance Company
(subsidiaries of the Company). Mr. Gedwed currently serves
as a Director of NMC Holdings, Inc. and Motor Club Investors,
Inc., the ultimate parent company of National Motor Club of
America, Inc. He also served as a director
and/or
executive officer of other subsidiaries of NMC Holdings, Inc.
until June 2003.
Glenn W. Reed (age 53) has served as a director
of the Company since May 2001 and as Executive Vice President
and General Counsel of the Company since July 1999.
Mr. Reed serves on the Executive, Investment and Privacy
Committees of the Board. Mr. Reed also serves as a director
and Vice President of The MEGA Life and Health Insurance
Company,
Mid-West
National Life Insurance Company of Tennessee, The Chesapeake
Life Insurance Company and Fidelity First Insurance Company.
Prior to joining the Company, Mr. Reed was a partner in the
Chicago, Illinois law firm of Gardner, Carton &
Douglas. He has served as a director of The Pepper Companies,
Inc. (a Chicago-based general contractor) since 1990, as a
director of Peoples Bancorp, Inc. (a bank holding company
located in Arlington Heights, Illinois) since 1999 and as a
director of Assistive Technology Group, Inc. (a provider of
assistive and rehabilitative systems, medical products and
supplies) since 2002.
Richard T. Mockler (age 68) has served as a
director of the Company since 1991. Mr. Mockler is a member
of the Audit and Nominating & Governance Committees of
the Board of Directors. Mr. Mockler retired as a partner
with Ernst & Young LLP in 1989 after 27 years with
the firm. Mr. Mockler has served as a member of the Board
of Directors of Georgetown Rail Equipment Company since 1994 and
as its Treasurer since October 1996.
Mural R. Josephson (age 57) has been a director
since May 2003 and is a member of the Audit and Executive
Compensation Committees of the Board. Following his retirement
in October 2002 as Senior Vice President and Chief Financial
Officer of Lumbermens Mutual Casualty Company (the lead company
of Kemper Insurance Companies), Mr. Josephson has served as
a consultant to various financial institutions. In July 1998,
Mr. Josephson retired as a partner with KPMG LLP after
28 years with the firm. Mr. Josephson is a licensed
Certified Public Accountant in the State of Illinois, and is a
member of the American Institute of Certified Public
Accountants. He has served as a director and Treasurer of Omni
Youth Services (Buffalo Grove, Illinois) since October 2003, as
a director of SeaBright Insurance Holdings, Inc. (a
publicly-traded company providing multi-jurisdictional
workers compensation insurance) since February 2004, as a
director of PXRE Group Ltd. (a publicly-traded company providing
primarily catastrophe and risk excess reinsurance products and
services) since August 2004 and as a director of
ALPS Corporation and its wholly-owned subsidiary, Attorneys
Liability Protection Society, Inc. (a privately-held insurance
company that writes attorney errors and omissions coverage)
since January 1, 2006.
R.H. Mick Thompson (age 59) has been a director
of the Company since November 2003. Mr. Thompson is a
member of the Audit, Executive Compensation and
Nominating & Governance Committees of the Board.
Mr. Thompson has served as the Oklahoma Bank Commissioner
since September 1, 1992. In May 2003, Mr. Thompson was
elected Chairman of the Conference of State Bank Supervisors
(CSBS), and currently serves on the CSBS Legislative Committee.
Mr. Thompson also serves as an Advisor to the Board of
Trustees of the Graduate School of Banking, University of
Colorado in Boulder.
Dennis C. McCuistion (age 63), has served as a
director of the Company since May 2004. Mr. McCuistion is
President of McCuistion & Associates, Inc. (a Denison,
Texas-based firm providing management consulting services to
financial institutions and other businesses).
Mr. McCuistion, a former bank CEO, has written
62
extensively on business topics and is the host and executive
producer of McCuistion, a television program regularly
airing on PBS affiliates since 1989. Since September 2003,
Mr. McCuistion has served as a director of Affiliated
Computer Services, Inc. (a publicly held company that provides
business process outsourcing and information technology
outsourcing solutions to commercial and government clients).
Mr. McCuistion has been appointed to serve as Lead
Independent Director on the Board of Directors (see
discussion below), and is a member of the Audit, Executive
Compensation and Nominating & Governance Committees of
the Board.
Certain affiliations exist between us and certain directors.
See Note K of Notes to Consolidated Financial
Statements.
Board
Meetings, Attendance, Executive Sessions and Presiding
Director
During the fiscal year ended December 31, 2005, the Board
of Directors met 12 times and took action on other occasions by
unanimous consent of its members. Each member of the Board of
Directors who held such position in 2005 attended at least 75%
in the aggregate of all meetings of the Board and any committee
on which such Board Member served. The Board met in executive
session during all regularly scheduled meetings, without
management present, and plans to continue that practice going
forward. In May 2004, Mr. Dennis McCuistion, in his
capacity as Lead Independent Director, was appointed presiding
director for these sessions.
Stockholder
Communication
The Board of Directors has adopted a written policy with respect
to stockholder communications to the Board of Directors. All
current members of the Companys Board are listed on the
Corporate Governance page of the Companys website.
Stockholders may communicate directly with the UICI Board of
Directors, including the Chairman of the Audit Committee,
Chairman of the Nominating & Governance Committee
and/or the
non-management directors individually or as a group. All
communications should be directed to our Corporate Secretary,
c/o UICI,
9151 Grapevine Highway, North Richland Hills, TX 76180 and
should prominently indicate on the outside of the envelope that
it is intended for the Board of Directors as a group, or, as
appropriate, for the Chairman of the Audit Committee, the
Chairman of the Nominating & Governance Committee
and/or for
the non-management directors,
c/o the
Lead Independent Director. Each communication intended for the
Board of Directors, Chairman of the Audit Committee, Chairman of
the Nominating & Governance Committee
and/or the
Lead Independent Director will be promptly forwarded to the
specified party following its clearance through normal security
procedures. If addressed to a specified individual director, the
communication will not be opened but will be forwarded unopened
to the intended recipient. If the communication is directed to
all members or all non-management members of the Board, the
Corporate Secretary will make copies of all such letters and
circulate them to the appropriate director or directors.
In addition, we maintain contact information, both telephone and
email, on our website (www.uici.net) under the heading
Info Request Contact Us. By
following the contact information link, a stockholder will be
provided access to our telephone number and mailing address as
well as a link for providing email correspondence to UICIs
Investor Relations Department. Communications sent to Investor
Relations and specifically marked as a communication for the
Board will be forwarded to the Board or specific members of the
Board as directed in the stockholder communication.
Independence
of Directors
For purposes of determining director independence, the Company
has applied the following standards in compliance with the New
York Stock Exchange director independence standards as currently
in effect. No director qualifies as independent
unless the Board affirmatively determines that the director has
no material relationship with the Company or any of its
subsidiaries (directly or as a partner, shareholder or officer
of an organization that has a relationship with the Company or
any of its subsidiaries). In addition, a director is not
independent if:
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The director is, or has been within the last three years, an
employee of the Company, or an immediate family member is, or
has been within the last three years, an executive officer, of
the Company;
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63
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The director has received, or has an immediate family member who
has received, during any twelve-month period within the last
three years, more than $100,000 in direct compensation from the
Company, other than director and committee fees and pension or
other forms of deferred compensation for prior service (provided
such compensation is not contingent in any way on continued
service);
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The director or an immediate family member is a current partner
of a firm that is the Companys internal or external
auditor; the director is a current employee of such a firm; the
director has an immediate family member who is a current
employee of such a firm and who participates in the firms
audit, assurance or tax compliance (but not tax planning)
practice; or the director or an immediate family member was
within the last three years (but is no longer) a partner or
employee of such a firm and personally worked on the
Companys audit within that time;
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The director or an immediate family member is, or has been
within the last three years, employed as an executive officer of
another company where any of the Companys present
executive officers at the same time serves or served on its
compensation committee; or
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The director is a current employee, or an immediate family
member is a current executive officer, of a company that has
made payments to, or received payments from, the Company for
property or services in an amount which, in any of the last
three fiscal years, exceeds the greater of $1 million, or
2% of such other companys consolidated gross revenues
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The Board of Directors has considered transactions and
relationships between each non-employee director and any members
of his immediate family and the Company and its executive
management. Based on that review, the Board of Directors has
affirmatively determined that, with respect to each of
Mr. McCuistion, Mr. Josephson, Mr. Mockler and
Mr. Thompson, (i) none of such individuals is
precluded from being an independent director under the New York
Stock Exchange listing standards described above and
(ii) none of such individuals has a material relationship
with the Company (either directly or as a partner, shareholder
or officer of an organization that has a relationship with the
Company), and that, accordingly, each such individual is
considered an independent director for
purposes of the applicable listing standards of the New York
Stock Exchange and rules and regulations adopted by the
Securities and Exchange Commission. The Board made its
determination based on information furnished by all Directors
regarding their relationships with the Company. There are no
interlocking directorships and none of our independent directors
receive any consulting, advisory or other non-director
compensatory fees from the Company.
Lead
Independent Director
The independent members of the Board of Directors have selected
Mr. McCuistion to serve as the Lead Independent Director.
As Lead Independent Director, Mr. McCuistion, among other
duties, (a) presides over, coordinates and develops the
agenda for executive sessions of the independent directors and
sessions of the non-management directors, (b) presides at
all meetings of the Board of Directors at which the Chairman of
the Board is not present, (c) serves as a liaison between
the Chairman of the Board and the independent directors,
(d) approves information sent to the Board of Directors,
(e) approves the meeting agenda for the Board of Directors,
and (f) approves meeting schedules to assure that there is
sufficient time for discussion of all items. In addition, as
Lead Independent Director, Mr. McCuistion has authority to
call meetings of the independent directors.
To promote open discussion and foster better communication among
the non-management directors (i.e., directors who are not
officers of UICI but who do not otherwise have to qualify as
independent), regular executive sessions are held
after each quarterly Board meeting in which the non-management
directors meet without management participation. Our By-laws
provide that the Lead Independent Director shall serve as the
presiding director at all meetings of non-management
directors as and when required in accordance with the applicable
provisions of the Securities Exchange Act of 1934, as amended
(the Exchange Act), and the rules promulgated
thereunder and the applicable rules of the New York Stock
Exchange. In addition, at least one executive session per year
will be limited solely to independent directors. Each meeting of
the independent directors is scheduled and chaired by the Lead
Independent Director.
64
Board
Committees
To assist the Board in the discharge of its responsibilities,
the Company has established a standing Audit Committee,
Executive Compensation Committee, Investment Committee,
Nominating & Governance Committee, Executive Committee
and Privacy Committee. The functions and composition of these
Board committees are described below:
Audit
Committee
The Audit Committee (of which Mural R. Josephson (Chairman),
Richard T. Mockler, Dennis McCuistion and R.H. Mick Thompson
serve as members) assists the Board of Directors in fulfilling
its oversight responsibilities by assessing the processes
related to the Companys risks and control environment,
overseeing the integrity of the Companys financial
statements and financial reporting and compliance with legal and
regulatory requirements and evaluating the Companys audit
processes. The Audit Committee confers with the Companys
independent auditors and internal auditors regarding audit
procedures, including proposed scope of examination, audit
results and related management letters. The Audit Committee
reviews the services performed by the independent auditors in
connection with determining their independence, reviews the
reports of the independent auditors and internal auditors, and
reviews recommendations about internal controls. The Committee
selects and appoints the Companys independent auditors and
approves any significant non-audit relationship with the
independent auditors. The Audit Committee held 11 meetings
during 2005.
KPMG LLP, the Companys independent registered public
accounting firm, has direct access to the Audit Committee and
may discuss any matters that arise in connection with their
audits, the maintenance of internal controls, and any other
matters relating to the Companys financial affairs. The
Audit Committee may authorize the independent registered public
accounting firm to investigate any matters that the Audit
Committee deems appropriate and may present its recommendations
and conclusions to the Board.
The Board has determined that each of the members of the Audit
Committee meets the current independence requirements as set
forth in the applicable listing standards of the New York Stock
Exchange described above and provisions of the Sarbanes-Oxley
Act of 2002. In addition, all members of the Audit Committee are
financially literate in accordance with the audit committee
requirements of the New York Stock Exchange. The Board of
Directors has further determined that Mr. Josephson, who is
independent of management of the Company, is an audit
committee financial expert, as that term is used in
Item 401(h) of
Regulation S-K
promulgated under the Exchange Act and as defined by the
applicable listing standards of the New York Stock Exchange. No
member of the Audit Committee serves on the audit committee of
more than three public companies.
The Audit Committee operates under a written charter adopted by
the Board of Directors. The charter is available for review on
the Corporate Governance page of the Companys website
(www.uici.net). A copy of the charter is available in print to
any stockholder who requests it. Requests for a copy of the
charter should be directed to the Corporate Secretary,
c/o UICI,
9151 Grapevine Highway, North Richland Hills, TX 76180. The
Committee reviews and assesses the adequacy of its charter on an
annual basis. The composition of the Audit Committee, the
attributes of its members and the responsibilities of the
Committee, as reflected in its charter, are intended to be in
accordance with applicable requirements for corporate audit
committees.
The Audit Committee has adopted procedures governing the
receipt, retention and handling of concerns regarding
accounting, internal accounting controls or auditing matters
that are reported by employees, stockholders and other persons.
Employees may report such concerns confidentially and
anonymously by utilizing a toll free hot line number [(877)
778-5463] or
by accessing Report-It [www.reportit.net], a third party
reporting service. All others may direct such concerns in
writing to the Board of Directors, Audit Committee
and/or the
non-management directors
c/o our
Corporate Secretary, UICI, 9151 Grapevine Highway, North
Richland Hills, TX 76180 as described above under the caption
Stockholder Communications with the Board of
Directors.
Executive
Committee
The Executive Committee (of which William J. Gedwed and Glenn W.
Reed serve as members) has the authority of the full Board of
Directors in the management and affairs of the Company, except
that the Committee
65
may not effect certain fundamental corporate actions,
including (a) declaring a dividend, (b) amending the
Certificate of Incorporation or By-Laws, (c) adopting an
agreement of merger or consolidation, or (d) imposing a
lien on substantially all of the assets of the Company. In
practice, the Executive Committee meets infrequently and does
not act except on matters that are not sufficiently important to
require action by the full Board of Directors. During 2005 the
Executive Committee did not meet, but the Committee took action
on selected occasions by unanimous consent of its members.
Investment
Committee
The Investment Committee (of which Mural R. Josephson, William
J. Gedwed and Glenn W. Reed currently serve as members)
coordinates with the Investment/Finance Committees of the
Companys insurance subsidiaries in supervising and
implementing the investments of the funds of the Company and its
insurance subsidiaries. The Investment Committee did not meet
during 2005.
Nominating &
Governance Committee
The Nominating & Governance Committee (of which Richard
T. Mockler (Chairman), Dennis C. McCuistion and R.H. Mick
Thompson serve as members) identifies individuals qualified to
become Board members consistent with criteria approved by the
Board and recommends that the Board select the director nominees
to be voted on at the next annual meeting of stockholders. The
Committee also makes recommendations concerning the structure,
size and membership of the various committees of the Board of
Directors. The Nominating & Governance Committee
develops and recommends to the Board the Corporate Governance
Guidelines applicable to the Company, oversees the evaluation of
the Board and management, and reviews the succession plan of the
Chief Executive Officer and other key officer positions.
The Nominating & Governance Committee seeks to identify
prospective directors for nomination to the Board that combine
diverse business experience, skill and intellect in order to
better enable the Company to pursue its strategic objectives.
The Committee has not reduced the qualifications for service on
the Companys Board to a checklist of specific standards or
specific, minimum qualifications, skills or qualities. Rather,
the Company seeks, consistent with the vacancies existing on the
Companys Board that may exist at any particular time, to
select individuals who exhibit core traits of judgment, skill,
integrity, experience with businesses and other organizations of
comparable size and the ability to work well with complex
organizations. In assessing Board candidates, the
Nominating & Governance Committee seeks individuals
with specific expertise with respect to the industry in which
the Company conducts its business, the ability to evaluate the
impact of technology on the Company, an understanding of and
appreciation for the Companys corporate culture, and skill
in communicating effectively with other Board members and senior
management. In addition, the Company under the direction of the
Nominating & Governance Committee conducted a
self-evaluation and a review of individual Board members in
order to help the Company continue to formulate a governance
strategy that complements the Companys business and its
strategic vision.
The Nominating & Governance Committees process
for identifying and evaluating nominees for directors includes
recommendations by stockholders, non-management directors and
executive officers, a review and background check of specific
candidates, an assessment of the candidates independence
and interviews of director candidates by members of the
Nominating & Governance Committee. The
Nominating & Governance Committee may also, from time
to time, engage firms that specialize in identifying director
candidates.
In carrying out its responsibilities to nominate directors, the
Nominating & Governance Committee will consider
candidates recommended by the Board of Directors and by
stockholders of the Company. All suggestions by stockholders for
nominees for director for 2007 must be made in writing and
received by the Corporate Secretary of the Company, 9151
Grapevine Highway, North Richland Hills, Texas 76180 not later
than December 13, 2006. The mailing envelope must contain a
clear notation indicating that the enclosed letter is a
Director Nominee Recommendation. The letter must
identify the author as a stockholder and provide a brief summary
of the candidates qualifications, as well as contact
information for both the candidate and the stockholder. At a
minimum, candidates for election to the Board must meet the
independence requirements of the applicable listing standards of
the New York Stock Exchange and
Rule 10A-3
under the Securities Exchange Act of 1934, as amended.
Candidates
66
should also have relevant business and financial experience, and
must be able to read and understand fundamental financial
statements. The Committee has not historically received director
candidate recommendations from the Companys stockholders
but will consider all relevant qualifications as well as the
needs of the Company in terms of compliance with the listing
standards of the New York Stock Exchange and Securities and
Exchange Commission rules. In evaluating a nominee recommended
by a stockholder, the Nominating & Governance
Committees evaluation of a nominee would consider the
factors described above.
The Nominating & Governance Committee operates under a
written charter adopted by the Board of Directors, which is
available for review on the Corporate Governance page of the
Companys website (www.uici.net). A copy of the
charter is available in print to any stockholder who requests
it. Requests for a copy of the charter should be directed to the
Corporate Secretary,
c/o UICI,
9151 Grapevine Highway, North Richland Hills, TX 76180.
Each of the members of the Committee meets the independence
requirements as set forth in the applicable listing standards of
the New York Stock Exchange described above and provisions of
the Sarbanes-Oxley Act of 2002. The Nominating &
Governance Committee met two times during 2005.
Executive
Compensation Committee
The Executive Compensation Committee (of which R.H. Mick
Thompson (Chairman), Dennis C. McCuistion and Mural R. Josephson
serve as members) administers the Companys compensation
programs and remuneration arrangements for its highest-paid
executives. The Committee reviews and approves corporate goals
and objectives relative to CEO compensation, evaluates the
CEOs performance in light of those goals and objectives
and sets the CEOs compensation level based on this
evaluation. The Committee also makes recommendations to the
Board with respect to incentive-compensation plans and
equity-based plans, evaluates, from time to time, the
compensation to be paid to directors for their service on the
Board or any committee thereof, and prepares a report on
executive compensation as required by the Securities and
Exchange Commission.
The Executive Compensation Committee operates under a written
charter adopted by the Board of Directors, which is available
for review on the Corporate Governance page of the
Companys website (www.uici.net). Requests for a
copy of the charter should be directed to the Corporate
Secretary,
c/o UICI,
9151 Grapevine Highway, North Richland Hills, TX 76180.
Each of the members of the Committee meets the current
independence requirements as set forth in the applicable listing
standards of the New York Stock Exchange described above and
provisions of the Sarbanes-Oxley Act of 2002. The Executive
Compensation Committee met eight times during 2005.
The Executive Compensation Committees Report on Executive
Compensation appears under the caption Item 11.
Executive Compensation.
Privacy
Committee
The Privacy Committee (of which Glenn W. Reed (Chairman) and
William J. Gedwed serve as members) was created to oversee the
implementation and administration of the privacy, security,
transaction codes set and other requirements imposed under the
federal Gramm-Leach-Bliley Act and Health Insurance Portability
and Accountability Act. The Privacy Committee did not meet
during 2005.
Executive
Officers of the Company
The Chairman of the Company is elected, and all other executive
officers listed below are appointed, by the Board of Directors
of the Company at its Annual Meeting each year or by the
Executive Committee of the Board of
67
Directors to hold office until the next Annual Meeting or until
their successors are elected or appointed. None of these
officers have family relationships with any other executive
officer or director.
|
|
|
|
|
|
|
|
|
Name of Officer
|
|
Principal Position
|
|
Age
|
|
Business Experience During Past
Five Years
|
|
William J. Gedwed
|
|
Chairman of the Board, President
and Chief Executive Officer
|
|
|
50
|
|
|
Mr. Gedwed has served as a
director of the Company since June 2000 and as its President and
Chief Executive Officer of the Company since July 1, 2003.
He was named Chairman of the Board in September 2005. He has
served as a Director
and/or
executive officer of NMC Holdings, Inc.
and/or its
subsidiaries since August 1993. Mr. Gedwed currently serves
as Chairman and Director of the Companys insurance
subsidiaries.
|
Troy A. McQuagge
|
|
President of the Companys
Agency Marketing Group
|
|
|
44
|
|
|
Mr. McQuagge served as President
of UGA Association Field Services from 1997
until May 2004. Currently serves as President of Agency
Marketing Group. Mr. McQuagge has served as Senior Vice
President of the Companys insurance subsidiaries since
June 2004.
|
Glenn W. Reed
|
|
Executive Vice President and
General Counsel
|
|
|
53
|
|
|
Mr. Reed has served in his current
position since July 1999. Prior to joining UICI, Mr. Reed
was a partner with the Chicago, Illinois law firm of Gardner,
Carton & Douglas. He also serves as Director and Vice
President of the Companys insurance subsidiaries.
|
Phillip J. Myhra
|
|
Executive Vice
President Insurance Group
|
|
|
53
|
|
|
Mr. Myhra has served as an
executive officer of the Insurance Group since December 1999 and
as Executive Vice President Insurance Group of
the Company since February 2001. He serves as a Director,
President and Chief Executive Officer of the Companys
insurance subsidiaries. Prior to joining the Company,
Mr. Myhra served as Senior Vice President of Mutual of
Omaha.
|
William J. Truxal
|
|
President of the Companys
Student Insurance Division
|
|
|
49
|
|
|
Mr. Truxal was appointed President
of Student Insurance Division in September 2003. He joined the
predecessor of the Companys Student Insurance Division in
1983 as an account executive. He also serves As Vice President
of the Companys insurance subsidiaries.
|
Timothy L. Cook
|
|
President of the Companys
Star HRG Division
|
|
|
57
|
|
|
Mr. Cook has served as President
of Star HRG Division since February 2002. Mr. Cook joined
the Company upon its acquisition of Star HRG in February 2002,
where he served as Vice President since March 1990. He also
serves as Vice President of MEGA.
|
Mark D. Hauptman
|
|
Vice President and Chief Financial
Officer and Chief Accounting Officer
|
|
|
48
|
|
|
Mr. Hauptman joined the Company in
1988 as Controller of the Companys former OKC Division. He
has served as the Companys Chief Accounting Officer since
June 2001 and has served as Chief Financial Officer since May
2002. He also serves as Director and Vice President of the
Companys insurance subsidiaries.
|
James N. Plato
|
|
President Life
Insurance Division
|
|
|
57
|
|
|
Mr. Plato was appointed President
of the Life Insurance Division and has served as an executive
officer and director of the Companys insurance
subsidiaries since June 2001. From 2000 to 2001, Mr. Plato
served as an executive officer
and/or
director of Ilona Financial Group and its subsidiaries.
|
68
Code of
Ethics
The Company has adopted a Code of Business Conduct and Ethics
(the Code of Ethics), which contains general principles
and policies that govern the activities of the Company and to
which our directors, officers, employees and agents and others
who represent us directly or indirectly must adhere. The Code of
Ethics applies to all directors, officers, agents, consultants
and employees, including the Chief Executive Officer and the
Chief Financial Officer and any other employee with any
responsibility for the preparation and filing of documents with
the Securities and Exchange Commission. The Code of Ethics
covers several topics, including conflicts of interest,
confidentiality of information and compliance with laws and
regulations.
A copy of the Code of Ethics is available on the Corporate
Governance page of the Companys website at
www.uici.net. The Company may post amendments to or
waivers of the provisions of the Code of Ethics, if any, made
with respect to any of our directors and employees on that
website. Stockholders of the Company may also request a copy of
the Code of Ethics by writing to UICI,
c/o Corporate
Secretary, 9151 Grapevine Highway, North Richland Hills, Texas
76180.
Section 16(b)
Beneficial Ownership Reporting Compliance
Under the securities laws of the United States, the
Companys directors, executive and certain other officers,
and any persons holding more than ten percent of the
Companys common stock, are required to report their
ownership of the Companys common stock and any changes in
that ownership to the Securities and Exchange Commission (the
Commission) and, in the Companys case, the New
York Stock Exchange. Specific due dates for these reports have
been established and the Company is required to report in this
Proxy Statement any failure to file by these dates during 2005.
Based solely upon a review of Reports on Forms 3, 4 and 5
and any amendments thereto furnished to the Company pursuant to
Section 16 of the Securities Exchange Act of 1934, as
amended, and written representations from the executive officers
and directors that no other reports were required, and except as
otherwise stated in the next sentence, the Company believes that
all of such reports were filed on a timely basis by executive
officers and directors during 2005. During 2005, one stock
purchase transaction made by Mr. Dennis McCuistion was
reported late.
|
|
Item 11.
|
Executive
Compensation
|
Executive
Compensation Committee Report on Executive
Compensation
The Companys compensation objectives include attracting
and retaining the best possible executive talent, motivating
executive officers to achieve the Companys performance
objectives, rewarding individual performance and contributions,
and linking to the extent possible executive and stockholder
interests through equity-based (stock option and restricted
stock) plans. The Companys executive compensation consists
of four components: annual base salary, annual cash incentive
bonus compensation, stock option grants and restricted stock
grants. Each component of compensation is designed to complement
the other components and, when considered together, to meet the
Companys overall compensation objectives.
Historically, the Executive Compensation Committee of the Board
of Directors (the Committee) has approved base
compensation for senior executives (including Mr. Gedwed)
based on reference to base salaries of comparable executive
positions at a peer group of comparably sized insurance and
insurance holding companies. Consistent with past practice, in
December 2004 and January 2005 the Committee reviewed and
approved base compensation to be paid to executives in 2005. In
establishing base compensation for 2005 with respect to officers
other than the President and CEO, the Committee considered the
recommendations of Mr. Gedwed (the Companys President
and Chief Executive Officer) and approved, subject to any
modifications it deemed appropriate, base compensation to be
paid to such executive officers.
During 2005, the Committee also engaged the services of an
independent compensation consultant to assess the Companys
compensation program and to obtain additional information
relative to administering executive compensation decisions for
2005 and 2006.
Mr. Gedwed was named President and Chief Executive Officer
effective July 1, 2003, and his annual base salary was then
set at $425,000. On September 15, 2004, the Committee
determined to assess Mr. Gedweds
69
incentive compensation on an annual basis on the anniversary of
his July 1 hiring. At a meeting of the Committee held on
July 27, 2005, the Committee approved a bonus for
Mr. Gedwed for performance in the year ended July 1,
2005 in the amount of $1,000,000. Mr. Gedweds bonus
granted in July 2005 was based on the returns earned by the
Companys stockholders, the Companys return
performance compared to that of its peers, and
Mr. Gedweds overall performance during the preceding
year. At its November 1, 2005 meeting, the Committee also
determined to thereafter assess Mr. Gedweds incentive
compensation on an annual basis as of December 31 of each
year. At a meeting of the Committee held on February 15,
2006, the Committee approved a bonus for Mr. Gedwed for
performance in the six months ended December 31, 2005 in
the amount of $550,000. Mr. Gedweds bonus granted in
February 2006 was based on the returns earned by the
Companys stockholders, the Companys return
performance compared to that of its peers, and
Mr. Gedweds overall performance during the period.
The Committee has assessed and intends to continue to assess
Mr. Gedweds annual salary on an annual basis
corresponding to the Companys December 31 fiscal
year. At a meeting of the Committee held on February 15,
2006, the Committee set and approved Mr. Gedweds
annual salary for 2006 at $600,000.
The Company has established and implemented an incentive
compensation plan for senior executives, pursuant to which the
Company has set a maximum bonus potential for each executive as
a percentage of base compensation and established quantitative
and qualitative bonus criteria. For 2005, the quantitative
performance goals included, among other things, UICI
consolidated financial results, business unit profitability and
attainment of specific revenue (annualized premium volume)
goals. The final determination of incentive compensation awards
with respect to 2005 performance was made at a meeting of the
Committee held on February 15, 2006, at which the Committee
reviewed and approved 2005 incentive bonus compensation for
Messrs. Reed, McQuagge and Myhra and four other officers
and key employees of the Company.
The Companys executive officers are also entitled to
participate in the Companys 1987 Amended and Restated
Stock Option Plan. Under the 1987 Plan, nonqualified options to
purchase Common Stock of the Company may be granted at exercise
prices not less than the fair market value of the Common Stock
at the date of grant. Options granted under the 1987 Plan become
exercisable generally in annual cumulative installments of 20%
of the number of options granted over a five-year period, or
sooner at the discretion of the Committee. No options were
awarded during 2005.
To provide an additional equity-based vehicle to incentivize
officers and other key employees, in February 2000 and January
2001, the Board of Directors of the Company approved and adopted
the UICI 2000 Restricted Stock Plan and 2001 Restricted Stock
Plan, respectively, pursuant to which the Company may from time
to time and subject to the terms thereof make awards of
restricted shares of the Companys Common Stock to eligible
participants in the Plan. Shares of Common Stock granted to
eligible participants generally vest on the second anniversary
of the date of grant and are otherwise forfeitable if the
participant ceases to provide material services to the Company
as an employee, independent contractor, consultant, advisor,
director or otherwise for any reason other than death prior to
vesting. Shares of restricted stock also vest upon a Change of
Control (as defined) or upon the death of the participant. The
Committee determined not to award restricted stock to any
eligible participant with respect to 2005 performance. At
December 31, 2005, an aggregate of 268,696 shares of
UICI common stock were available to be granted under the terms
of the 2000, 2001 and 2005 Restricted Stock Plans to eligible
employees.
Section 162(m) of the U.S. Internal Revenue Code
limits the deductibility of compensation in excess of
$1.0 million paid to the Companys Chairman, chief
executive officer and president or to any of the Companys
four highest-paid other executive officers unless certain
specific and detailed criteria are satisfied. The Committee
considers the anticipated tax treatment to the Company and its
executive officers in its review and establishment of
compensation programs and payments, but has determined that it
will not necessarily seek to limit compensation to that amount
otherwise deductible under Section 162(m).
EXECUTIVE COMPENSATION COMMITTEE
R.H. Mick Thompson, Chairman
Mural R. Josephson
Dennis C. McCuistion
70
Compensation
of Directors
UICI does not compensate directors who are also officers of the
Company for their service as directors. The following chart
reflects the compensation for the non-employee directors of the
Company as approved by the Executive Compensation Committee and
the Board of Directors of the Company:
|
|
|
|
|
|
|
As Effective
|
|
Feature
|
|
April 27, 2005
|
|
|
Annual Retainer
|
|
$
|
25,000
|
|
Per Quarterly Meeting Attendance
Fee:
|
|
$
|
7,500
|
|
Per Special Meeting of Board
Requiring In-Person Attendance (as determined by Chairman or
President and CEO)
|
|
$
|
6,000
|
|
Audit Committee Chairman:
|
|
|
|
|
Annual Retainer:
|
|
$
|
15,000
|
|
Per Meeting Attendance Fee:
|
|
$
|
500
|
|
Lead Independent Director:
|
|
|
|
|
Quarterly Retainer:
|
|
$
|
16,250
|
|
Chairman of Nominating &
Governance Committee and Chairman of Executive Compensation
Committee:
|
|
|
|
|
Annual Retainer:
|
|
$
|
7,500
|
|
Per Meeting Attendance Fee:
|
|
$
|
500
|
|
Annual Retainer for Other
Non-Employee Members of Audit Committee, Nominating &
Governance Committee, Compensation Committee and the Privacy
Committee:
|
|
$
|
6,000
|
|
Per Meeting Attendance Fee:
|
|
$
|
500
|
|
Directors may elect to receive an equivalent value of UICI stock
in lieu of cash for fees otherwise payable in cash. During 2005,
Messrs. Josephson, Mockler and Thompson elected to receive
their director compensation solely in cash, and
Mr. McCuistion received a portion of his director
compensation in stock. In accordance with the guidelines set
forth above, during 2005 Mr. Josephson,
Mr. McCuistion, Mr. Mockler and Mr. Thompson
received in the aggregate $120,500, $182,750, $111,000 and
$120,500, respectively, in director compensation from the
Company.
71
Summary
Compensation Table
The following table summarizes all compensation for services to
us and our subsidiaries for the fiscal years ended
December 31, 2005, 2004 and 2003, earned by or awarded or
paid to the persons who were the Chairman of the Board, the
chief executive officer, and the four other most highly
compensated executive officers of the Company serving as such at
December 31, 2005 (the Named Executive
Officers).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term
|
|
|
|
|
|
|
|
|
|
|
|
|
Annual Compensation
|
|
|
Compensation Awards
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Annual
|
|
|
Restricted
|
|
|
Securities
|
|
|
All Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Compensation
|
|
|
Stock Awards
|
|
|
Underlying
|
|
|
Compensation
|
|
|
|
|
Name and Principal
Position
|
|
Year
|
|
|
Salary ($)
|
|
|
Bonus ($)(a)
|
|
|
($)(b)
|
|
|
($)(c)
|
|
|
Options (#)(d)
|
|
|
($)(e)
|
|
|
|
|
|
Ronald L. Jensen
|
|
|
2005
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Chairman of the
|
|
|
2004
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Board(f)
|
|
|
2003
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Gedwed
|
|
|
2005
|
|
|
|
600,000
|
|
|
|
1,550,000
|
(h)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,242
|
|
|
|
|
|
CEO and Chairman of the
|
|
|
2004
|
|
|
|
425,000
|
|
|
|
500,000
|
|
|
|
|
|
|
|
|
|
|
|
100,000
|
|
|
|
12,531
|
|
|
|
|
|
Board(g)
|
|
|
2003
|
|
|
|
202,692
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,816
|
|
|
|
|
|
Glenn W. Reed
|
|
|
2005
|
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
59,488
|
|
|
|
|
|
|
|
|
|
|
|
13,342
|
|
|
|
|
|
Executive Vice President
|
|
|
2004
|
|
|
|
400,000
|
|
|
|
250,000
|
|
|
|
|
|
|
|
|
|
|
|
20,000
|
|
|
|
13,447
|
|
|
|
|
|
& General Counsel
|
|
|
2003
|
|
|
|
400,000
|
|
|
|
300,000
|
|
|
|
9,672
|
|
|
|
|
|
|
|
|
|
|
|
13,122
|
|
|
|
|
|
Phillip J. Myhra
|
|
|
2005
|
|
|
|
375,000
|
|
|
|
650,000
|
|
|
|
41,242
|
|
|
|
|
|
|
|
|
|
|
|
14,242
|
|
|
|
|
|
Executive Vice President
|
|
|
2004
|
|
|
|
361,923
|
(i)
|
|
|
425,000
|
|
|
|
|
|
|
|
|
|
|
|
40,000
|
|
|
|
13,447
|
|
|
|
|
|
Insurance Group
|
|
|
2003
|
|
|
|
325,000
|
|
|
|
520,000
|
|
|
|
8,117
|
|
|
|
|
|
|
|
|
|
|
|
13,122
|
|
|
|
|
|
Troy A. McQuagge
|
|
|
2005
|
|
|
|
400,000
|
|
|
|
900,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,440
|
|
|
|
|
|
President Agency
|
|
|
2004
|
|
|
|
346,635
|
(j)
|
|
|
600,000
|
|
|
|
|
|
|
|
|
|
|
|
60,000
|
|
|
|
11,347
|
|
|
|
|
|
Marketing Group
|
|
|
2003
|
|
|
|
275,000
|
|
|
|
704,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,122
|
|
|
|
|
|
William J. Truxal
|
|
|
2005
|
|
|
|
231,539
|
(k)
|
|
|
657,832
|
(k)
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
13,510
|
|
|
|
|
|
President, Student
|
|
|
2004
|
|
|
|
75,000
|
|
|
|
1,743,473
|
(k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,018
|
|
|
|
|
|
Insurance Division
|
|
|
2003
|
|
|
|
75,000
|
|
|
|
1,500,862
|
(k)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,122
|
|
|
|
|
|
|
|
|
(a) |
|
Reflects cash bonuses accrued for the year presented. |
|
(b) |
|
2005 amount represents travel expenses and tax
gross-up on
the travel expenses. 2003 amount represents housing expenses.
There was no other annual compensation in the nature of
perquisites paid to any Named Executive Officers in any of the
years shown. |
|
(c) |
|
At December 31, 2005, no Named Executive Officers held
unvested restricted stock awards. |
|
(d) |
|
With respect to 2005, includes options granted on June 24,
2005. With respect to 2004, includes options granted on
March 16, 2005. |
|
(e) |
|
Includes all other compensation paid to each Named Executive
Officer, consisting of Company contributions to the Named
Executive Officers 401(k) account, cash payments made
under a Company-wide phantom stock plan and term life insurance
premiums paid with respect to the Named Executive Officer. All
401(k) contributions made on behalf of the Named Executive
Officers were calculated using the same formula as is used for
all other eligible employees. Cash bonus payments under the
Company-wide phantom stock plan were made in the same amount as
paid to all other eligible employees. Term life insurance
premiums represent the Companys contribution to a life
insurance program that is available to all eligible employees
with benefits proportional to annual compensation and bonuses.
All such other compensation paid to each Named Executive Officer
with respect to each of the three prior years is specifically
set forth in the table below: |
72
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Term Life
|
|
|
|
|
|
|
|
|
|
401(k)
|
|
|
Phantom Stock
|
|
|
Insurance
|
|
|
Total Other
|
|
|
|
|
|
|
Contributions
|
|
|
Plan Bonus
|
|
|
Premiums
|
|
|
Compensation
|
|
Named Executive
Officer
|
|
Year
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
($)
|
|
|
William J. Gedwed
|
|
|
2005
|
|
|
|
12,600
|
|
|
|
400
|
|
|
|
1,242
|
|
|
|
14,242
|
|
|
|
|
2004
|
|
|
|
11,721
|
|
|
|
|
|
|
|
810
|
|
|
|
12,531
|
|
|
|
|
2003
|
|
|
|
8,636
|
|
|
|
|
|
|
|
180
|
|
|
|
8,816
|
|
Glenn W. Reed
|
|
|
2005
|
|
|
|
11,700
|
|
|
|
400
|
|
|
|
1,242
|
|
|
|
13,342
|
|
|
|
|
2004
|
|
|
|
12,150
|
|
|
|
487
|
|
|
|
810
|
|
|
|
13,447
|
|
|
|
|
2003
|
|
|
|
12,000
|
|
|
|
402
|
|
|
|
720
|
|
|
|
13,122
|
|
Phillip J. Myhra
|
|
|
2005
|
|
|
|
12,600
|
|
|
|
400
|
|
|
|
1,242
|
|
|
|
14,242
|
|
|
|
|
2004
|
|
|
|
12,150
|
|
|
|
487
|
|
|
|
810
|
|
|
|
13,447
|
|
|
|
|
2003
|
|
|
|
12,000
|
|
|
|
402
|
|
|
|
720
|
|
|
|
13,122
|
|
Troy A. McQuagge
|
|
|
2005
|
|
|
|
10,500
|
|
|
|
400
|
|
|
|
540
|
|
|
|
11,440
|
|
|
|
|
2004
|
|
|
|
10,050
|
|
|
|
487
|
|
|
|
810
|
|
|
|
11,347
|
|
|
|
|
2003
|
|
|
|
12,000
|
|
|
|
402
|
|
|
|
720
|
|
|
|
13,122
|
|
William J. Truxal
|
|
|
2005
|
|
|
|
12,300
|
|
|
|
400
|
|
|
|
810
|
|
|
|
13,510
|
|
|
|
|
2004
|
|
|
|
11,721
|
|
|
|
487
|
|
|
|
810
|
|
|
|
13,018
|
|
|
|
|
2003
|
|
|
|
12,000
|
|
|
|
402
|
|
|
|
720
|
|
|
|
13,122
|
|
|
|
|
(f) |
|
Mr. Jensen served as Chairman of the Board until his death
on September 2, 2005. |
|
(g) |
|
Mr. Gedwed has served as a director of the Company since
June 2000 and as President and Chief Executive Officer since
July 1, 2003. Mr. Gedwed was appointed as Chairman of
the Board on September 7, 2005. |
|
(h) |
|
Represents bonus paid for the period of July 1, 2004
through December 31, 2005. |
|
(i) |
|
Represents base compensation actually paid during 2004.
Effective July 1, 2004, the Executive Compensation
Committee authorized an increase in Mr. Myhras annual
base compensation from $325,000 to $375,000. |
|
(j) |
|
Represents base compensation actually paid during 2004.
Effective July 1, 2004, the Executive Compensation
Committee authorized an increase in Mr. McQuagges
annual base compensation from $275,000 to $400,000. |
|
(k) |
|
In each of 2005, 2004 and 2003, Mr. Truxals bonus was
determined by reference to annual premium written with respect
to selected clients of the Student Insurance Division. Effective
June 1, 2005, the Executive Compensation Committee
authorized the change in the annual base compensation from
$75,000 to $350,000 with future bonuses being awarded as a
percentage of base pay. |
2005
Stock Options
The following table summarizes options granted to the Named
Executive Officers for 2005, along with the present value of
such options on the date they were granted, calculated as
described in the footnote to the table.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
|
|
|
Percent of Total
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
Underlying
|
|
|
Options Granted to
|
|
|
or Base
|
|
|
|
|
|
Grant Date
|
|
|
|
Options
|
|
|
Employees in
|
|
|
Price
|
|
|
|
|
|
Present
|
|
Name
|
|
Granted(1)
|
|
|
Fiscal Year
|
|
|
($/Sh)
|
|
|
Expiration Date
|
|
|
Value(2)($)
|
|
|
Ronald L. Jensen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Gedwed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Glenn W. Reed
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Phillip J. Myhra
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Troy A. McQuagge
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Truxal
|
|
|
50,000
|
|
|
|
43.48
|
%
|
|
|
31.68
|
|
|
|
09/22/2010
|
|
|
|
423,100
|
|
|
|
|
(1) |
|
Reflects options that were granted on June 24, 2005.
Excludes options granted on March 16, 2005 that were
included in the prior year table. |
|
(2) |
|
Grant date present value is determined using the Black-Scholes
Model. The Black-Scholes Model is a mathematical formula widely
used to value exchange-traded options. The Black-Scholes Model
relies on |
73
|
|
|
|
|
several key assumptions to estimate the present value of
options, including the volatility of, and dividend yield on, the
security underlying the option, the risk-free rate of return on
the date of grant and the estimated time period until exercise
of the option. However, stock options granted by the Company are
long-term, non-transferable and subject to vesting in equal
annual increments over a five-year period, while exchange-traded
options are short-term and can be exercised or sold immediately
in the liquid market. Based on the Black-Scholes option
valuation model with the actual option price, the key weighted
average input variables used in valuing the options granted on
June 24, 2005 were as follows: risk-free interest rate
3.59%; dividend yield 1.74%; stock price volatility 0.503;
option term 3 years; option exercise price $31.68; and
stock price on date of grant $28.80. The volatility variable
reflects actual daily stock price trading data for the period
equal to the expected life of the options immediately preceding
the grant date. The actual value, if any, that a grantee may
realize will depend on the excess of the stock price over the
exercise price on the date the option is exercised, so there is
no assurance the value realized will be at or near the value
estimated by the Black-Scholes Model. |
Aggregate
Stock Option Exercises in 2005 and Year-End Values
The following table summarizes for each of the Named Executive
Officers the total number of unexercised stock options held at
December 31, 2005, and the aggregate dollar value of
in-the-money,
unexercised stock options held at December 31, 2005.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value of
|
|
|
|
|
|
|
|
|
|
Number of
|
|
|
Unexercised
|
|
|
|
Shares
|
|
|
|
|
|
Unexercised Stock
|
|
|
In-the-Money
Stock
|
|
|
|
Acquired
|
|
|
|
|
|
Options at Year
|
|
|
Options at Year
|
|
|
|
on
|
|
|
Value
|
|
|
End (#)
|
|
|
End ($)(a)
|
|
Name
|
|
Exercise (#)
|
|
|
Realized ($)
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Exercisable
|
|
|
Unexercisable
|
|
|
Ronald L. Jensen
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William J. Gedwed
|
|
|
49,950
|
|
|
|
988,351
|
|
|
|
767
|
|
|
|
100,263
|
|
|
|
17,607
|
|
|
|
481,752
|
|
Glenn W. Reed
|
|
|
6,500
|
|
|
|
118,398
|
|
|
|
22,800
|
|
|
|
34,200
|
|
|
|
549,028
|
|
|
|
436,542
|
|
Phillip J. Myhra
|
|
|
3,600
|
|
|
|
65,323
|
|
|
|
35,000
|
|
|
|
72,000
|
|
|
|
847,513
|
|
|
|
964,683
|
|
Troy A. McQuagge
|
|
|
12,800
|
|
|
|
246,048
|
|
|
|
2,000
|
|
|
|
92,000
|
|
|
|
48,220
|
|
|
|
1,054,120
|
|
William J. Truxal
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
50,000
|
|
|
|
|
|
|
|
191,500
|
|
|
|
|
(a) |
|
The closing stock price per share at December 31, 2005 was
$35.51. |
During 2005 the Company did not adjust or amend the exercise
price of stock options previously awarded to any of the Named
Executive Officers, whether through amendment, cancellation or
replacement grants or any other means.
Blackstone
Transaction Special Compensation
Arrangements
On September 15, 2005, UICI entered into a merger
agreement, pursuant to which affiliates of The Blackstone Group,
Goldman Sachs Capital Partners and DLJ Merchant Banking Partners
will acquire UICI in a cash merger, with UICI being the
surviving corporation in the merger. Completion of the
transaction is subject to insurance regulatory approvals, the
receipt of certain financing and other conditions. The parties
currently expect the transaction to close on or about
April 3, 2006. In connection with the proposed transaction,
the Company has entered into special arrangements with certain
members of management, as more particularly described herein.
Employment
Agreements
Under the terms of employment commitment agreements requested by
and negotiated with The Blackstone Group after the key terms of
the merger were agreed upon, if the merger is completed, Timothy
L. Cook, William J.
74
Gedwed, Mark D. Hauptman, Troy A. McQuagge, Phillip J. Myhra,
James N. Plato and William J. Truxal (the Continuing
Executives) will continue to serve in each of their
respective positions and will receive an annual base salary in
an amount not less than their respective base salary immediately
before the merger. The Continuing Executives will also be
eligible for an annual bonus ranging from a target of 50% to
100% of annual base salary and a maximum of 75% to 200% of
annual base salary, as the case may be. Each of the Continuing
Executives will also be entitled to new equity award grants and
participation in employee benefit plans and (other than
Mr. Cook) has agreed to retain all or a portion of their
respective UICI equity and equity-based awards.
In addition, under the terms of their employment commitment
agreements, the Continuing Executives are entitled to severance
payments in the event of their termination in certain specified
circumstances. The Continuing Executives would be entitled to
receive severance equal to two times the executives base
salary plus target bonus payable in monthly installments,
continuation of welfare benefits for two years, as well as a
pro-rata bonus, based on the executives target bonus, if
such termination occurs after the last day of the first quarter
of the applicable fiscal year. The parties are finalizing
employment agreements providing for the foregoing, as well as
full
change-of-control
parachute excise tax gross up protection on all payments and
benefits due to the executive, including such payments and
benefits due to the executive in connection with the merger;
provided, however, that following a change of control of UICI
(other than the merger), the surviving corporation will be
entitled to reduce the executives payments (but not by
more than 10%) if the reduction would allow the avoidance of the
imposition of any excise tax associated with the change of
control. In addition, each of the executive officers has agreed
to two-year post-termination non-competition and
non-solicitation covenants.
Glenn W. Reed (UICIs Executive Vice President and General
Counsel and a Named Executive Officer) is in discussions with
the Company with respect to his employment with the surviving
corporation following completion of the merger. Based on these
discussions, Mr. Reed may invest all or a portion of the
cash payment (subject to any applicable withholding taxes) he
receives in connection with the vesting and cancellation of his
outstanding options to purchase shares of UICI granted under our
benefit plans.
Certain
Other Employees
Under the terms of their employment commitment agreements, if
the merger is completed, certain UICI employees other than
Messrs. Cook, Gedwed, Hauptman, McQuagge, Myhra, Plato and
Truxal, including members of our senior management team, will
continue to serve in their respective positions and will receive
an annual base salary, which will not be less than the
employees base salary immediately before the merger. These
employees will be eligible for an annual bonus ranging from a
target of 35% to 50% of annual base salary and a maximum of 65%
to 100% of annual base salary, as the case may be. Furthermore,
these employees will also be entitled to receive new equity
award grants and participate in employee benefit plans.
Upon termination of employment in certain specified
circumstances, these employees are entitled to receive severance
payments equal to one or two times the employees base
salary plus target bonus payable in monthly installments,
depending upon the employees particular position with the
surviving corporation; continuation of welfare benefits for one
or two years, depending upon the employees particular
position with the surviving corporation; as well as a pro-rata
bonus, based on his or her target bonus, if such termination
occurs after the last day of the first quarter of the applicable
fiscal year; and full change of control parachute excise tax
gross up protection on all payments and benefits due to the
employee; provided, that the surviving corporation will be
entitled to reduce the executives payments (but not by
more than 10%) if the reduction would allow the avoidance of the
imposition of any excise tax associated with the change of
control. Further, each of these employees has agreed to one or
two-year post-termination non-competition and non-solicitation
covenants, the duration of which coincides with the term during
which they will be entitled to receive severance payments.
UICI
Success Bonus Award Plan
On September 14, 2005, our board of directors adopted the
UICI Success Bonus Award Plan as an employee incentive and
retention program to help retain and provide an incentive to
employees (including executive officers) who are key to a
successful completion of the merger.
75
Under the terms of the UICI Success Bonus Award Plan, a
participant will be entitled to receive his or her award if the
participant continues to be employed by us or any of our
subsidiaries through the date of completion of any transaction
resulting in a change of control of UICI (including the merger).
If a participant ceases to be employed before that date, he or
she will not be entitled to an award, unless the Executive
Compensation Committee determines otherwise. If the merger (or
another transaction that would qualify as a change of control
under the plan) is not completed before June 30, 2006,
participants will not be entitled to receive awards under the
plan.
Awards under the UICI Success Bonus Award Plan will be payable
60% on the date of completion of any transaction resulting in a
change of control of UICI (including the merger) and the
remaining 40% will be payable on a date that is not later than
180 days following completion of any transaction resulting
in a change of control of UICI (including the merger). If a
participants employment is terminated as a result of his
or her death or disability, the participant or his or her
designated beneficiary will be entitled to receive 75% of the
amounts to which the participant otherwise would have been
entitled. The Continuing Executives (i.e.,
Messrs. Cook, Gedwed, Hauptman, McQuagge, Myhra, Plato and
Truxal) collectively are eligible to receive 73% of the bonus
pool, or approximately $14.7 million.
The total pool available for award to participants under the
plan is estimated to be $20.3 million. In accordance with
the terms of the plan, on November 1, 2005 the Committee
designated participants in the plan and awarded success bonuses
to be paid to such participants at the times and in the manner
as prescribed by the plan. Designated participants under the
plan included William J. Gedwed, Glenn W. Reed, Phillip J.
Myhra, Troy A. McQuagge and William J. Truxal, who were
allocated success bonuses in the amounts of $2,026,490,
$2,533,113, $3,378,160, $3,378,160 and $1,126,728, respectively.
The remaining portion of the pool ($7,822,256) was allocated
among seven additional designated participants.
UICI
Director and Employee Stock Options and Restricted
Shares
Immediately before the completion of the merger, each
outstanding option to purchase shares of UICI common stock
granted under our benefit plans will become fully vested, and
except with respect to those options that will be retained by
certain executive officers, each option will be cancelled and
converted into a right to receive a payment from the surviving
corporation (subject to any applicable withholding taxes) equal
to the difference between $37.00 and the exercise price for the
option multiplied by the number of shares subject to such
option, to the extent the difference is a positive number. As of
February 13, 2006 (the record date for the special
meeting), the aggregate number of shares of stock subject to
unvested stock options held by the continuing executives as a
group and our non-employee directors as a group is 447,030 and
5,351, respectively, and the number of such shares of stock
subject to unvested stock options that will be
in-the-money
(i.e., the merger consideration will exceed the applicable
exercise price per share of the stock option) is 447,030 and
5,351. The weighted average exercise prices of these 447,030 and
5,351 options are $26.43 and $14.05, respectively.
Immediately before the completion of the merger, the forfeiture
provisions of each then outstanding restricted share issued
under our employee benefit plans will lapse. At the completion
of the merger, each holder of restricted shares will be treated
as a holder of the corresponding number of shares of common
stock and in the same manner as other outstanding common shares
issued and outstanding immediately before the merger was
completed, except with respect to those shares that will be
retained by certain members of senior management described
above. As of the record date for the special meeting, the
aggregate number of restricted shares held by our continuing
executives and our non-employee directors as a group is
approximately 12,000 and -0-, respectively.
76
Comparison
of Total Stockholder Return
The following graph compares the cumulative total stockholder
return on UICI Common Stock for the last five years with the
cumulative return for the same period of the S&P 600 Small
Cap Market Index and the S&P Insurance Index. The graph
assumes the investment of $100 at the beginning of the period in
the Companys Common Stock.
Employee
Stock Ownership and Savings Plan
The Company maintains for the benefit of its and its
subsidiaries employees the UICI Employee Stock Ownership
and Savings Plan (the Employee Plan). The Employee
Plan through its 401(k) feature enables eligible employees to
make pre-tax contributions to the Employee Plan (subject to
overall salary limitations) and to direct the investment of such
contributions among several investment options, including UICI
common stock. A second feature of the Employee Plan constitutes
an employee stock ownership plan (the ESOP),
contributions to which are invested primarily in shares of UICI
common stock. The ESOP feature allows participants to receive
from UICI and its subsidiaries discretionary matching
contributions and to share in certain supplemental contributions
made by UICI and its subsidiaries. Shares contributed to the
ESOP or purchased with the Companys contributions are
allocated to the participants account on a monthly basis,
and forfeitures are allocated to employees who are participants
on the last day of the plan year based upon the ratio of each
participants annual credited compensation (up to $75,000)
to the total annual credited compensation of all participants
entitled to share in such contributions for such Plan Year.
Contributions by UICI and its subsidiaries to the Employee Plan
under the ESOP feature currently vest in prescribed increments
over a six-year period.
77
|
|
Item 12.
|
Security
Ownership of Certain Beneficial Owners and
Management
|
As of February 13, 2006, 46,626,369 shares of our
common stock were outstanding and, as of such date, these
stockholders have reported the following ownership of shares of
our common stock, which represents the following percent of
outstanding shares of our common stock on that date:
|
|
|
|
|
|
|
|
|
|
|
Common Shares
|
|
|
|
|
|
|
Beneficially
|
|
|
Percent of
|
|
Name & Address of
Beneficial Owner
|
|
Owned(1)
|
|
|
Common Stock
|
|
|
Comerica Bank, as Trustee
|
|
|
2,856,921
|
(2)
|
|
|
6.13
|
%
|
One Detroit Center
Detroit, MI 48275
|
|
|
|
|
|
|
|
|
Barclays Global Investors, NA
|
|
|
3,011,700
|
|
|
|
6.46
|
%
|
45 Fremont Street
San Francisco, CA 94105
|
|
|
|
|
|
|
|
|
Paulson & Company
|
|
|
2,982,500
|
|
|
|
6.40
|
%
|
590 Madison Avenue
New York, NY 10022
|
|
|
|
|
|
|
|
|
Gladys M. Jensen
|
|
|
7,946,528
|
(3)
|
|
|
17.04
|
%
|
6500 Beltline Road
Suite 170
Irving, TX 75063
|
|
|
|
|
|
|
|
|
OUI, Inc.
|
|
|
2,734,483
|
(4)
|
|
|
5.86
|
%
|
6500 N. Beltline Road
Irving, TX 75063
|
|
|
|
|
|
|
|
|
William J. Gedwed
|
|
|
46,178
|
|
|
|
*
|
|
Glenn W. Reed
|
|
|
80,710
|
|
|
|
*
|
|
Phillip J. Myhra
|
|
|
61,367
|
|
|
|
*
|
|
Troy A. McQuagge
|
|
|
82,623
|
|
|
|
*
|
|
William J. Truxal
|
|
|
55,844
|
|
|
|
*
|
|
Richard T. Mockler
|
|
|
11,425
|
|
|
|
*
|
|
Mural R. Josephson
|
|
|
5,315
|
|
|
|
*
|
|
R.H. Mick Thompson
|
|
|
-0-
|
|
|
|
*
|
|
Dennis C. McCuistion
|
|
|
832
|
|
|
|
*
|
|
All executive officers and
directors (13) individuals) as a group
|
|
|
433,741
|
|
|
|
*
|
|
|
|
|
* |
|
The amount shown is less than 1% of the outstanding shares of
Common Stock. |
|
(1) |
|
Shares beneficially owned by any holder include (a) shares
(if any) held by the Trustee for the benefit of the holder under
the Companys Employee Stock Ownership and Savings Plan and
(b) shares (if any) issuable upon the exercise of stock
options held by such holder that are exercisable within
60 days of February 13, 2006. The shares of Common
Stock held by the Trustee under the Companys Employee
Stock Ownership and Savings Plan that are purchased with
contributions made by the Company are subject to the vesting
requirements of the Plan. |
|
(2) |
|
Represents shares held by Comerica Bank, as Trustee under the
Companys Employee Stock Ownership and Savings Plan. |
|
(3) |
|
According to the Schedule 13D filed on October 5, 2005
by Gladys M. Jensen, includes 3,846,528 shares owned by the
estate of Ronald L. Jensen (of which Gladys M. Jensen is the
independent executor) and 4,100,000 shares owned by Gladys
M. Jensen outright. |
|
(4) |
|
According to the Schedule 13D/A filed on October 11,
2005 by OUI, Inc. |
|
|
Item 13.
|
Certain
Relationships and Related Transactions
|
See Note K of Notes to Consolidated Financial
Statements.
78
|
|
Item 14.
|
Principal
Accountant Fees and Services
|
In addition to retaining KPMG LLP to audit UICIs
consolidated financial statements for 2005, UICI and its
affiliates retained KPMG LLP and other accounting and consulting
firms to provide advisory, auditing and consulting services in
2005. The Company understands the need for KPMG LLP to maintain
objectivity and independence in its audit of the Companys
consolidated financial statements. To minimize relationships
that could appear to impair the objectivity of KPMG LLP, the
UICI Audit Committee has restricted the non-audit services that
KPMG LLP may provide to UICI primarily to tax services and
merger and acquisition due diligence and audit services, and the
Audit Committee has determined that UICI will obtain non-audit
services from KPMG LLP only when the services offered by KPMG
LLP are more effective or economical than comparable services
available from other service providers.
The Audit Committee Charter provides that the Committee shall
approve all non-audit engagement fees and terms with the
independent accountants and all other compensation to be paid to
the independent accountants. The Committee has the authority to
delegate pre-approvals of non-audit services to a single member
of the Audit Committee, and the Chairman of the Committee has
been authorized to pre-approve non-audit services up to $50,000,
not to exceed an aggregate of $100,000 in any one year. Fees for
non-audit services exceeding these amounts must be approved by
the full Committee.
In determining the appropriateness of a particular non-audit
service to be performed by the audit firm, the Audit Committee
shall consider whether the service facilitates the performance
of the audit, improves the Companys financial reporting
process or is otherwise in the public interest.
The aggregate fees billed for professional services by KPMG LLP
in 2005 and 2004 were as follows:
|
|
|
|
|
|
|
|
|
Type of Fees
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Audit Fees(a)
|
|
$
|
3,845
|
|
|
$
|
3,852
|
|
Audit-Related Fees(b)
|
|
|
143
|
|
|
|
414
|
|
Tax Fees
|
|
|
57
|
|
|
|
100
|
|
All Other Fees(c)
|
|
|
30
|
|
|
|
14
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,075
|
|
|
$
|
4,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
|
Includes fees in the amount of $2.7 million in each of 2005
and 2004 relating to the audit of internal controls required by
the Sarbanes-Oxley Act. |
|
(b) |
|
In 2005 includes fees in the amount of $143,000 for professional
services associated with the contemplated acquisition of the
Company in a cash merger by a group of private equity firms. In
2004 includes fees in the amount of $409,000 for professional
services associated with assistance in the process of
documenting UICIs internal controls over processes
contributing to financial reporting. |
|
(c) |
|
Includes in 2005 fees in the amount of $24,000 for professional
services associated with the contemplated acquisition of the
Company in a cash merger by a group of private equity firms. |
For purposes of the table above, audit fees are fees
that the Company paid to KPMG LLP for the audit of the
Companys consolidated financial statements included in
UICIs Annual Report on
Form 10-K
and review of financial statements included in Quarterly Reports
on
Form 10-Q,
and for services that are normally provided by the accounting
firm in connection with statutory and regulatory filings or
engagements; audit-related fees represent fees
billed by KPMG LLP for assurance and related services that are
reasonably related to the performance of the audit or review of
the Companys financial statements; tax fees
are fees for tax compliance, tax advice and tax planning; and
all other fees are fees billed by the accounting
firm to the Company for any services not included in the first
three categories (which other fees consist primarily of online
research subscription fees, seminar attendance fees). All fees
in each fee category were approved by the Companys Audit
Committee.
79
PART IV
|
|
Item 15.
|
Exhibits,
Financial Statement Schedules, and Reports on
Form 8-K
|
(a) Financial Statements
The following consolidated financial statements of UICI and
subsidiaries are included in Item 8:
|
|
|
|
|
|
|
Page
|
|
Report of Independent Registered
Public Accounting Firm
|
|
|
F-2
|
|
Report of Independent Registered
Public Accounting Firm on Internal Control over Financial
Reporting
|
|
|
F-3
|
|
Consolidated Balance
Sheets December 31, 2005 and 2004
|
|
|
F-4
|
|
Consolidated Statements of
Operations Years ended December 31, 2005,
2004 and 2003
|
|
|
F-5
|
|
Consolidated Statements of
Stockholders Equity and Other Comprehensive Income
(Loss) Years ended December 31, 2005, 2004
and 2003
|
|
|
F-6
|
|
Consolidated Statements of Cash
Flows Years ended December 31, 2005, 2004
and 2003
|
|
|
F-7
|
|
Notes to Consolidated Financial
Statements
|
|
|
F-8
|
|
Financial Statement Schedules
|
|
|
|
|
|
|
|
|
Schedule II Condensed
Financial Information of Registrant December 31, 2005, 2004
and 2003: UICI (Holding Company)
|
|
|
F-67
|
|
Schedule III Supplementary
Insurance Information
|
|
|
F-70
|
|
Schedule IV Reinsurance
|
|
|
F-72
|
|
Schedule V Valuation
and Qualifying Accounts
|
|
|
F-73
|
|
All other schedules for which provision is made in the
applicable accounting regulations of the Securities and Exchange
Commission are not required under the related instructions or
are not applicable and therefore have been omitted.
Exhibits:
The response to this portion of Item 15 is submitted as a
separate section of this report entitled
Exhibit Index.
80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
UICI
|
|
|
|
By:
|
/s/ WILLIAM
J. GEDWED
|
William J. Gedwed,
President, Chief Executive Officer and
Chairman of the Board
Date: March 13, 2006
Pursuant to the requirements of Securities Exchange Act of 1934,
this report has been signed below by the following persons on
behalf of the registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
|
|
Signature
|
|
Title
|
|
Date
|
|
/s/ WILLIAM
J. GEDWED*
William
J. Gedwed
|
|
President, Chief Executive Officer
and Chairman of the Board
|
|
March 13, 2006
|
|
|
|
|
|
/s/ MARK
D. HAUPTMAN*
Mark
D. Hauptman
|
|
Vice President, Chief Financial
Officer, and Chief Accounting Officer
|
|
March 13, 2006
|
|
|
|
|
|
/s/ GLENN
W. REED
Glenn
W. Reed
|
|
Executive Vice President, General
Counsel, and Director
|
|
March 13, 2006
|
|
|
|
|
|
/s/ DENNIS
C. MCCUISTION*
Dennis
C. McCuistion
|
|
Director
|
|
March 13, 2006
|
|
|
|
|
|
/s/ MURAL
R. JOSEPHSON*
Mural
R. Josephson
|
|
Director
|
|
March 13, 2006
|
|
|
|
|
|
/s/ R.
H. MICK THOMPSON*
R.
H. Mick Thompson
|
|
Director
|
|
March 13, 2006
|
|
|
|
|
|
/s/ RICHARD
T. MOCKLER*
Richard
T. Mockler
|
|
Director
|
|
March 13, 2006
|
|
|
|
|
|
|
|
*By:
|
|
/s/ GLENN
W. REED
Glenn
W. Reed
(Attorney-in-fact)
|
|
(Attorney-in-fact)
|
|
March 13, 2006
|
81
ANNUAL
REPORT ON
FORM 10-K
ITEM 8, ITEM 15(A)(1) and (2), (C), and (D)
FINANCIAL STATEMENTS and SUPPLEMENTAL DATA
FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
YEAR ENDED DECEMBER 31, 2005
UICI
and
SUBSIDIARIES
NORTH RICHLAND HILLS, TEXAS
F-1
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
UICI:
We have audited the accompanying consolidated balance sheets of
UICI and subsidiaries (the Company) as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss) and cash flows for each of the years
in the three-year period ended December 31, 2005. In
connection with our audits of the consolidated financial
statements, we also have audited the financial statement
schedules as listed in the Index at Item 15(a). These
consolidated financial statements and financial statement
schedules are the responsibility of the Companys
management. Our responsibility is to express an opinion on these
consolidated financial statements and financial statement
schedules based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by
management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred
to above present fairly, in all material respects, the
consolidated financial position of UICI and subsidiaries as of
December 31, 2005 and 2004, and the results of their
operations and their cash flows for each of the years in the
three-year period ended December 31, 2005, in conformity
with U.S. generally accepted accounting principles. Also,
in our opinion, the related financial statement schedules, when
considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material
respects, the information set forth therein.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
effectiveness of UICIs internal control over financial
reporting as of December 31, 2005, based on criteria
established in Internal Control Integrated
Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), and our report
dated March 13, 2006 expressed an unqualified opinion on
managements assessment of, and the effective operation of,
internal control over financial reporting.
/s/ KPMG LLP
Dallas, Texas
March 13, 2006
F-2
REPORT OF
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
UICI:
We have audited managements assessment, included in the
accompanying Managements Report on Internal Control Over
Financial Reporting, that UICI maintained effective internal
control over financial reporting as of December 31, 2005,
based on criteria established in Internal
Control Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission
(COSO). UICIs management is responsible for maintaining
effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over
financial reporting. Our responsibility is to express an opinion
on managements assessment and an opinion on the
effectiveness of the Companys internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control
over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of
internal control over financial reporting, evaluating
managements assessment, testing and evaluating the design
and operating effectiveness of internal control, and performing
such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (1) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions
are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting
principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of
management and directors of the company; and (3) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
In our opinion, managements assessment that UICI
maintained effective internal control over financial reporting
as of December 31, 2005, is fairly stated, in all material
respects, based on criteria established in Internal
Control Integrated Framework issued by
COSO. Also, in our opinion, UICI maintained, in all material
respects, effective internal control over financial reporting as
of December 31, 2005, based on criteria established in
Internal Control Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the
Public Company Accounting Oversight Board (United States), the
consolidated balance sheets of UICI and subsidiaries as of
December 31, 2005 and 2004, and the related consolidated
statements of operations, stockholders equity and
comprehensive income (loss) and cash flows for each of the years
in the three-year period ended December 31, 2005, and our
report dated March 13, 2006 expressed an unqualified
opinion on those consolidated financial statements.
/s/ KPMG LLP
Dallas, Texas
March 13, 2006
F-3
UICI AND
SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(Dollars in thousands, except
share amounts)
|
|
|
ASSETS
|
Investments
|
|
|
|
|
|
|
|
|
Securities available for
sale
|
|
|
|
|
|
|
|
|
Fixed maturities, at fair value
(cost: 2005 $1,496,340;
2004 $1,500,204)
|
|
$
|
1,484,465
|
|
|
$
|
1,531,231
|
|
Equity securities, at fair value
(cost: 2005 $1,508;
2004 $1,508)
|
|
|
1,347
|
|
|
|
1,461
|
|
Mortgage loans
|
|
|
751
|
|
|
|
3,884
|
|
Policy loans
|
|
|
16,325
|
|
|
|
17,101
|
|
Short-term and other investments
|
|
|
275,036
|
|
|
|
165,661
|
|
|
|
|
|
|
|
|
|
|
Total Investments
|
|
|
1,777,924
|
|
|
|
1,719,338
|
|
Cash and cash equivalents
|
|
|
|
|
|
|
|
|
Student loans
|
|
|
109,808
|
|
|
|
109,288
|
|
Restricted cash
|
|
|
22,517
|
|
|
|
39,455
|
|
Investment income due and accrued
|
|
|
24,263
|
|
|
|
22,706
|
|
Due premiums
|
|
|
52,259
|
|
|
|
86,051
|
|
Reinsurance receivable
|
|
|
24,002
|
|
|
|
24,537
|
|
Agents and other receivables
|
|
|
30,417
|
|
|
|
34,762
|
|
Deferred acquisition costs
|
|
|
131,120
|
|
|
|
110,502
|
|
Property and equipment, net
|
|
|
81,880
|
|
|
|
97,863
|
|
Goodwill and other intangible assets
|
|
|
79,004
|
|
|
|
75,625
|
|
Recoverable federal income taxes
|
|
|
13,148
|
|
|
|
|
|
Deferred income tax
|
|
|
12,102
|
|
|
|
16,569
|
|
Other assets
|
|
|
13,086
|
|
|
|
8,962
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,371,530
|
|
|
$
|
2,345,658
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND
STOCKHOLDERS EQUITY
|
Policy liabilities:
|
|
|
|
|
|
|
|
|
Future policy and contract benefits
|
|
$
|
447,992
|
|
|
$
|
444,228
|
|
Claims
|
|
|
558,106
|
|
|
|
622,587
|
|
Unearned premiums
|
|
|
155,285
|
|
|
|
177,406
|
|
Other policy liabilities
|
|
|
12,881
|
|
|
|
14,450
|
|
Accounts payable and accrued
expenses
|
|
|
54,170
|
|
|
|
60,035
|
|
Cash overdraft.
|
|
|
3,736
|
|
|
|
8,749
|
|
Other liabilities
|
|
|
115,624
|
|
|
|
126,040
|
|
Federal income taxes payable
|
|
|
|
|
|
|
3,355
|
|
Debt
|
|
|
15,470
|
|
|
|
15,470
|
|
Student Loan Credit Facility
|
|
|
130,900
|
|
|
|
150,000
|
|
Net liabilities of discontinued
operations
|
|
|
6,285
|
|
|
|
9,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,500,449
|
|
|
|
1,631,513
|
|
Commitments and Contingencies
(Note L)
|
|
|
|
|
|
|
|
|
Stockholders Equity
|
|
|
|
|
|
|
|
|
Preferred stock, par value
$0.01 per share authorized
10,000,000 shares, no shares issued and outstanding in 2005
and 2004
|
|
|
|
|
|
|
|
|
Common Stock, par value
$0.01 per share authorized
100,000,000 shares in 2005 and 2004; 47,543,590 issued and
46,134,199 outstanding in 2005; 47,623,102 issued and 45,715,144
outstanding in 2004
|
|
|
476
|
|
|
|
476
|
|
Additional paid-in capital
|
|
|
212,331
|
|
|
|
202,139
|
|
Accumulated other comprehensive
income (loss)
|
|
|
(7,823
|
)
|
|
|
20,137
|
|
Retained earnings
|
|
|
697,243
|
|
|
|
528,447
|
|
Treasury stock, at cost (1,409,391
common shares in 2005 and 1,907,958 common shares in 2004)
|
|
|
(31,146
|
)
|
|
|
(37,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
871,081
|
|
|
|
714,145
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2,371,530
|
|
|
$
|
2,345,658
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-4
UICI AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(Dollars in thousands, except
per share amounts)
|
|
|
Revenue
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Health (includes amounts received
from related parties of $957, $2,085 and $1,308 in 2005, 2004
and 2003, respectively)
|
|
$
|
1,855,969
|
|
|
$
|
1,812,892
|
|
|
$
|
1,547,233
|
|
Life premiums and other
considerations
|
|
|
61,565
|
|
|
|
45,851
|
|
|
|
36,020
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,917,534
|
|
|
|
1,858,743
|
|
|
|
1,583,253
|
|
Investment income (includes
amounts received from related parties of $16, $9 and $35 in
2005, 2004 and 2003, respectively)
|
|
|
97,788
|
|
|
|
85,868
|
|
|
|
77,661
|
|
Other income (includes amounts
received from related parties of $1,103, $2,488 and $2,263 in
2005, 2004 and 2003, respectively)
|
|
|
106,656
|
|
|
|
117,827
|
|
|
|
124,537
|
|
Gains (losses) on sale of
investments
|
|
|
(760
|
)
|
|
|
6,671
|
|
|
|
39,711
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,121,218
|
|
|
|
2,069,109
|
|
|
|
1,825,162
|
|
Benefits and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims, and settlement
expenses
|
|
|
1,092,136
|
|
|
|
1,134,901
|
|
|
|
1,045,640
|
|
Underwriting, policy acquisition
costs, and insurance expenses (includes amounts paid to related
parties of $6,670, $7,294 and $9,145 in 2005, 2004 and 2003,
respectively)
|
|
|
625,633
|
|
|
|
632,132
|
|
|
|
563,574
|
|
Variable stock compensation
expense (benefit)
|
|
|
7,214
|
|
|
|
14,307
|
|
|
|
(459
|
)
|
Other expenses, (includes amounts
paid to related parties of $1,676, $1,320 and $3,021 in 2005,
2004 and 2003, respectively)
|
|
|
77,076
|
|
|
|
63,203
|
|
|
|
79,264
|
|
Interest expense
|
|
|
6,009
|
|
|
|
3,417
|
|
|
|
3,016
|
|
Losses in Healthaxis, Inc.
investment
|
|
|
|
|
|
|
|
|
|
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,808,068
|
|
|
|
1,847,960
|
|
|
|
1,693,246
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
BEFORE INCOME TAXES
|
|
|
313,150
|
|
|
|
221,149
|
|
|
|
131,916
|
|
Federal income taxes
|
|
|
110,180
|
|
|
|
75,268
|
|
|
|
44,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM CONTINUING OPERATIONS
|
|
|
202,970
|
|
|
|
145,881
|
|
|
|
87,324
|
|
DISCONTINUED OPERATIONS:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations,
(net of income tax benefit (expense) of $(2,614), $1,084 and
$16,522 in 2005, 2004 and 2003, respectively)
|
|
|
531
|
|
|
|
15,677
|
|
|
|
(72,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
|
$
|
14,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
4.40
|
|
|
$
|
3.16
|
|
|
$
|
1.88
|
|
Income (loss) from discontinued
operations
|
|
|
0.01
|
|
|
|
0.34
|
|
|
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
4.41
|
|
|
$
|
3.50
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
4.31
|
|
|
$
|
3.07
|
|
|
$
|
1.82
|
|
Income (loss) from discontinued
operations
|
|
|
0.01
|
|
|
|
0.33
|
|
|
|
(1.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
$
|
4.32
|
|
|
$
|
3.40
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-5
UICI AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY AND
COMPREHENSIVE INCOME (LOSS)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional
|
|
|
Comprehensive
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Paid-In
|
|
|
Income
|
|
|
Retained
|
|
|
Treasury
|
|
|
|
|
|
|
Stock
|
|
|
Capital
|
|
|
(Loss)
|
|
|
Earnings
|
|
|
Stock
|
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Balance at January 1, 2003
|
|
$
|
509
|
|
|
$
|
236,082
|
|
|
$
|
42,337
|
|
|
$
|
364,032
|
|
|
$
|
(57,910
|
)
|
|
$
|
585,050
|
|
Comprehensive income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,334
|
|
|
|
|
|
|
|
14,334
|
|
Other comprehensive income, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses)
on securities
|
|
|
|
|
|
|
|
|
|
|
(27,273
|
)
|
|
|
|
|
|
|
|
|
|
|
(27,273
|
)
|
Deferred income tax expense
|
|
|
|
|
|
|
|
|
|
|
9,481
|
|
|
|
|
|
|
|
|
|
|
|
9,481
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
62
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(17,730
|
)
|
|
|
|
|
|
|
|
|
|
|
(17,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(17,730
|
)
|
|
|
14,334
|
|
|
|
|
|
|
|
(3,396
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vesting of Agent Plan credits
|
|
|
|
|
|
|
7,932
|
|
|
|
|
|
|
|
|
|
|
|
4,294
|
|
|
|
12,226
|
|
Common stock issued
|
|
|
1
|
|
|
|
358
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
359
|
|
Exercise stock options
|
|
|
7
|
|
|
|
10,341
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,348
|
|
Retirement of treasury stock
|
|
|
(36
|
)
|
|
|
(46,970
|
)
|
|
|
|
|
|
|
|
|
|
|
47,006
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19,596
|
)
|
|
|
(19,596
|
)
|
Stock-based compensation tax benefit
|
|
|
|
|
|
|
618
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
618
|
|
Other
|
|
|
|
|
|
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003
|
|
|
481
|
|
|
|
210,320
|
|
|
|
24,607
|
|
|
|
378,366
|
|
|
|
(26,206
|
)
|
|
|
587,568
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
161,558
|
|
|
|
|
|
|
|
161,558
|
|
Other comprehensive loss, net of
tax:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in unrealized gains (losses)
on securities
|
|
|
|
|
|
|
|
|
|
|
(6,877
|
)
|
|
|
|
|
|
|
|
|
|
|
(6,877
|
)
|
Deferred income tax expense
|
|
|
|
|
|
|
|
|
|
|
2,407
|
|
|
|
|
|
|
|
|
|
|
|
2,407
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(4,470
|
)
|
|
|
|
|
|
|
|
|
|
|
(4,470
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(4,470
|
)
|
|
|
161,558
|
|
|
|
|
|
|
|
157,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,477
|
)
|
|
|
|
|
|
|
(11,477
|
)
|
Vesting of Agent Plan credits
|
|
|
|
|
|
|
249
|
|
|
|
|
|
|
|
|
|
|
|
10,358
|
|
|
|
10,607
|
|
Exercise stock options
|
|
|
6
|
|
|
|
5,546
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,552
|
|
Stock-based compensation tax benefit
|
|
|
|
|
|
|
1,972
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,972
|
|
Retirement of treasury stock
|
|
|
(11
|
)
|
|
|
(16,729
|
)
|
|
|
|
|
|
|
|
|
|
|
16,740
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(37,946
|
)
|
|
|
(37,946
|
)
|
Other
|
|
|
|
|
|
|
781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
781
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004
|
|
|
476
|
|
|
|
202,139
|
|
|
|
20,137
|
|
|
|
528,447
|
|
|
|
(37,054
|
)
|
|
|
714,145
|
|
Comprehensive income (loss):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,501
|
|
|
|
|
|
|
|
203,501
|
|
Change in unrealized gains (losses)
on securities
|
|
|
|
|
|
|
|
|
|
|
(43,016
|
)
|
|
|
|
|
|
|
|
|
|
|
(43,016
|
)
|
Deferred income tax expense
|
|
|
|
|
|
|
|
|
|
|
15,056
|
|
|
|
|
|
|
|
|
|
|
|
15,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
(27,960
|
)
|
|
|
|
|
|
|
|
|
|
|
(27,960
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
|
|
|
|
|
|
|
|
|
(27,960
|
)
|
|
|
203,501
|
|
|
|
|
|
|
|
175,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends paid
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34,705
|
)
|
|
|
|
|
|
|
(34,705
|
)
|
Vesting of Agent Plan credits
|
|
|
|
|
|
|
11,245
|
|
|
|
|
|
|
|
|
|
|
|
9,990
|
|
|
|
21,235
|
|
Exercise stock options
|
|
|
3
|
|
|
|
2,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,582
|
|
Stock-based compensation tax benefit
|
|
|
|
|
|
|
1,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,861
|
|
Retirement of treasury stock
|
|
|
(3
|
)
|
|
|
(7,519
|
)
|
|
|
|
|
|
|
|
|
|
|
7,522
|
|
|
|
|
|
Purchase of treasury stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(11,514
|
)
|
|
|
(11,514
|
)
|
Other
|
|
|
|
|
|
|
2,026
|
|
|
|
|
|
|
|
|
|
|
|
(90
|
)
|
|
|
1,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2005
|
|
$
|
476
|
|
|
$
|
212,331
|
|
|
$
|
(7,823
|
)
|
|
$
|
697,243
|
|
|
$
|
(31,146
|
)
|
|
$
|
871,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-6
UICI AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
|
$
|
14,334
|
|
(Income) loss from discontinued
operations
|
|
|
(531
|
)
|
|
|
(15,677
|
)
|
|
|
72,990
|
|
Adjustments to reconcile net income
to cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) loss on sale of investments
|
|
|
760
|
|
|
|
(6,671
|
)
|
|
|
(39,711
|
)
|
Operating loss of Healthaxis,
Inc.
|
|
|
|
|
|
|
|
|
|
|
2,211
|
|
Change in accrued investment income
|
|
|
(5,951
|
)
|
|
|
(4,538
|
)
|
|
|
(2,040
|
)
|
Change in due premiums
|
|
|
33,792
|
|
|
|
(31,383
|
)
|
|
|
(29,442
|
)
|
Change in reinsurance receivables
|
|
|
535
|
|
|
|
32,710
|
|
|
|
6,516
|
|
Change in other receivables
|
|
|
6,606
|
|
|
|
80
|
|
|
|
(4,679
|
)
|
Change in current federal income
taxes payable (recoverable)
|
|
|
(16,503
|
)
|
|
|
(15,275
|
)
|
|
|
19,862
|
|
Acquisition costs deferred
|
|
|
(103,185
|
)
|
|
|
(93,383
|
)
|
|
|
(65,733
|
)
|
Amortization of deferred
acquisition costs
|
|
|
82,567
|
|
|
|
73,532
|
|
|
|
69,343
|
|
Depreciation and amortization
|
|
|
31,154
|
|
|
|
29,392
|
|
|
|
18,404
|
|
Deferred income tax (benefit) change
|
|
|
19,523
|
|
|
|
(153
|
)
|
|
|
121
|
|
Change in policy liabilities
|
|
|
(72,162
|
)
|
|
|
90,349
|
|
|
|
168,195
|
|
Change in other liabilities and
accrued expenses
|
|
|
(952
|
)
|
|
|
30,898
|
|
|
|
41,466
|
|
Variable stock compensation
(benefit)
|
|
|
7,214
|
|
|
|
14,307
|
|
|
|
(459
|
)
|
Other items, net
|
|
|
1,398
|
|
|
|
6,274
|
|
|
|
(4,065
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by Continuing
Operations
|
|
|
187,766
|
|
|
|
272,020
|
|
|
|
267,313
|
|
Cash Provided by (Used in)
Discontinued Operations
|
|
|
(2,377
|
)
|
|
|
(17,815
|
)
|
|
|
33,238
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Provided by Operating
Activities
|
|
|
185,389
|
|
|
|
254,205
|
|
|
|
300,551
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Securities
available-for-sale
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases
|
|
|
(295,919
|
)
|
|
|
(425,209
|
)
|
|
|
(664,905
|
)
|
Sales
|
|
|
166,901
|
|
|
|
181,103
|
|
|
|
249,316
|
|
Maturities, calls and redemptions
|
|
|
131,701
|
|
|
|
130,543
|
|
|
|
178,847
|
|
Student loans
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases and originations
|
|
|
(7,065
|
)
|
|
|
(11,279
|
)
|
|
|
(19,384
|
)
|
Maturities
|
|
|
10,244
|
|
|
|
8,798
|
|
|
|
7,579
|
|
Short-term and other
investments net
|
|
|
(105,320
|
)
|
|
|
(43,256
|
)
|
|
|
40,632
|
|
Purchase of subsidiaries and life
and health business
|
|
|
|
|
|
|
(53,100
|
)
|
|
|
(4,951
|
)
|
Additional cost of purchase of
subsidiary
|
|
|
(7,110
|
)
|
|
|
|
|
|
|
|
|
Change in restricted cash
|
|
|
16,938
|
|
|
|
3,022
|
|
|
|
13,270
|
|
Additions to property and equipment
|
|
|
(11,440
|
)
|
|
|
(25,424
|
)
|
|
|
(33,316
|
)
|
Minority interest purchased
|
|
|
|
|
|
|
|
|
|
|
(863
|
)
|
Change in agents receivables
|
|
|
(5,141
|
)
|
|
|
(4,882
|
)
|
|
|
10,556
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used in Continuing Operations
|
|
|
(106,211
|
)
|
|
|
(239,684
|
)
|
|
|
(223,219
|
)
|
Cash Provided by (Used in)
Discontinued Operations
|
|
|
|
|
|
|
25,365
|
|
|
|
(116,653
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Investing
Activities
|
|
|
(106,211
|
)
|
|
|
(214,319
|
)
|
|
|
(339,872
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of notes payable
|
|
|
|
|
|
|
(18,951
|
)
|
|
|
(3,971
|
)
|
Repayment of student loan credit
facilities
|
|
|
(19,100
|
)
|
|
|
|
|
|
|
|
|
Change in cash overdraft.
|
|
|
(5,013
|
)
|
|
|
8,749
|
|
|
|
|
|
Net proceeds from issuance of trust
securities
|
|
|
|
|
|
|
14,570
|
|
|
|
|
|
Deposits from investment products
|
|
|
10,602
|
|
|
|
9,965
|
|
|
|
8,928
|
|
Withdrawals from investment products
|
|
|
(22,847
|
)
|
|
|
(26,627
|
)
|
|
|
(25,768
|
)
|
Exercising of stock options
|
|
|
4,443
|
|
|
|
7,524
|
|
|
|
10,966
|
|
Purchase of treasury stock
|
|
|
(13,359
|
)
|
|
|
(36,220
|
)
|
|
|
(19,596
|
)
|
Dividends paid
|
|
|
(34,705
|
)
|
|
|
(11,477
|
)
|
|
|
|
|
Other
|
|
|
801
|
|
|
|
(1,433
|
)
|
|
|
2,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Used in Continuing Operations
|
|
|
(79,178
|
)
|
|
|
(53,900
|
)
|
|
|
(27,123
|
)
|
Cash Provided by Discontinued
Operations
|
|
|
|
|
|
|
|
|
|
|
25,542
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Cash Used in Financing
Activities
|
|
|
(79,178
|
)
|
|
|
(53,900
|
)
|
|
|
(1,581
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Decrease in Cash
|
|
|
|
|
|
|
(14,014
|
)
|
|
|
(40,902
|
)
|
Cash and Cash Equivalents at
beginning of period
|
|
|
|
|
|
|
14,014
|
|
|
|
54,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at end of
period
|
|
$
|
|
|
|
$
|
|
|
|
$
|
14,014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
F-7
UICI AND
SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A Significant
Accounting Policies
Principles
of Consolidation
The consolidated financial statements include the accounts of
UICI and its subsidiaries (the Company). All
significant intercompany accounts and transactions have been
eliminated in consolidation.
UICI is a holding company, and the Company conducts its
insurance businesses through its wholly owned insurance company
subsidiaries, The MEGA Life and Health Insurance Company
(MEGA),
Mid-West
National Life Insurance Company of Tennessee
(Mid-West)
and The Chesapeake Life Insurance Company
(Chesapeake). MEGA is an insurance company domiciled
in Oklahoma and is licensed to issue health, life and annuity
insurance policies in all states except New York.
Mid-West is
an insurance company domiciled in Texas and is licensed to issue
health, life and annuity insurance policies in Puerto Rico and
all states except Maine, New Hampshire, New York, and Vermont.
Chesapeake is an insurance company domiciled in Oklahoma and is
licensed to issue health and life insurance policies in all
states except New Jersey, New York and Vermont.
Nature
of Operations
The Company offers insurance (primarily health and life) to
niche consumer and institutional markets. The Company issues
primarily health insurance policies, covering individuals and
families, to the self-employed, association group, voluntary
employer group and student markets. Information on the
Companys operations by segment is included in Note O.
Through its Self-Employed Agency Division (SEA
Division), the Company offers a broad range of health
insurance products for self-employed individuals and individuals
who work for small businesses and products for the small (2-15
members) employer group market. The Companys basic
hospital-medical and catastrophic hospital expense plans are
designed to accommodate individual needs and include both
traditional
fee-for-service
indemnity (choice of doctor) plans and preferred provider
organization plans, as well as other supplemental types of
coverage. The Company markets these higher deductible products
to the self-employed and individual markets through independent
contractor agents associated with UGA-Association Field Services
and Cornerstone America, the Companys
dedicated agency sales forces that primarily sell
the Companys products.
Commencing in the first quarter of 2005, the SEA Division began
to offer on a selective
state-by-state
basis a new suite of consumer driven health plans (CDHPs) for
the individual market, utilizing the consumer driven health plan
features and methodology acquired in October 2004 as part of our
purchase of substantially all of the operating assets of
HealthMarket Inc. (a Norwalk, Connecticut-based provider of
consumer driven health plans (CDHPs) to the small business (2 to
50 member) market).
Through its Student Insurance Division, UICI offers tailored
health insurance programs that generally provide single school
year coverage to individual students at colleges and
universities. The Company also provides an accident policy for
students at public and private schools in pre-kindergarten
through grade 12. In the student market, the Company sells its
products through in-house account executives that focus on
colleges and universities on a national basis.
The Companys Star HRG Division specializes in the design,
marketing and administration of limited benefit health insurance
plans for entry level, high turnover, and hourly employees. The
Company markets and sells these products directly to its
employer clients through a sales force consisting of Company
employees.
Through its Life Insurance Division, the Company also issues
universal life, whole life and term life insurance products to
individuals in the self-employed market, the middle income
market; the Hispanic market and the senior market. The Company
distributes its life insurance products directly to individuals
in the self-employed market through agents associated with
UGA-Association Field Services and Cornerstone America and
through marketing relationships with two independent managing
general agents (MGAs).
F-8
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2003, through a newly formed company, ZON Re USA LLC (an
82.5%-owned subsidiary), the Company began to underwrite,
administer and issue accidental death, accidental death and
dismemberment (AD&D), accident medical and accident
disability insurance products, both on a primary and on a
reinsurance basis. The Company distributes these products
through professional reinsurance intermediaries and a network of
independent commercial insurance agents, brokers and third party
administrators. To date, the results of this business have not
been material to our consolidated results of operations.
The Companys business segments for financial reporting
purposes include (a) the Insurance segment, which includes
the businesses of the Companys Self-Employed Agency
Division, Student Insurance Division, Star HRG Division, Life
Insurance Division and Other Insurance (consisting of the
Companys accident insurance/reinsurance business, which
commenced operations in the third quarter of 2003); and
(b) its Other Key Factors segment, which includes
investment income not allocated to the Insurance segment,
realized gains or losses on sale of investments, interest
expense on corporate debt, general expenses relating to
corporate operations, minority interest, variable stock-based
compensation and operations that do not constitute reportable
operating segments (including the Companys investment in
Healthaxis, Inc. until sold on September 30, 2003). In
2005, the incremental costs associated with the pending
acquisition of the Company by a group of private equity
investors were also reflected in the results of the Other Key
Factors segment.
On September 15, 2005, UICI entered into a merger
agreement, pursuant to which affiliates of The Blackstone Group,
Goldman Sachs Capital Partners and DLJ Merchant Banking Partners
will acquire UICI in a cash merger, with UICI being the
surviving corporation in the merger. In the proposed
transaction, substantially all current stockholders of UICI
(other than certain members of management and UICIs
independent insurance agents holding shares through UICIs
agent stock accumulation plans) will receive $37.00 per
share in cash. Completion of the transaction is subject to
shareholder approval, receipt of insurance regulatory approvals,
the receipt of certain financing and other conditions. The
parties currently expect the transaction to close on or about
April 3, 2006.
The board of directors has fixed February 13, 2006 as the
record date for a special meeting of stockholders called to be
held on Wednesday, March 29, 2006, at which the holders of
the Companys Common Stock will be asked, among other
things, to approve the merger agreement.
Discontinued
Operations
The Company has reflected as discontinued operations for
financial reporting purposes the results of its former AMS
subsidiary, its former Senior Market division and its Special
Risk Division operations. See Note Q.
Basis
of Presentation
The consolidated financial statements have been prepared on the
basis of accounting principles generally accepted in the United
States of America (GAAP). The more significant
variances between GAAP and statutory accounting practices
prescribed or permitted by regulatory authorities for insurance
companies are: fixed maturities are carried at fair value for
investments classified as available for sale for GAAP rather
than generally at amortized cost; the deferral of new business
acquisition costs, rather than expensing them as incurred; the
determination of the liability for future policyholder benefits
based on realistic assumptions, rather than on statutory rates
for mortality and interest; the recording of reinsurance
receivables as assets for GAAP rather than as reductions of
liabilities; and the exclusion of non-admitted assets for
statutory purposes. See Note J for
stockholders equity and net income from insurance
subsidiaries as determined using statutory accounting practices.
Use of
Estimates
The preparation of the consolidated financial statements in
accordance with GAAP requires management to make estimates and
assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities
at the date of the consolidated financial statements and the
reported amounts of
F-9
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
revenues and expenses during the reporting period. Management
periodically reviews its estimates and assumptions. Actual
results may differ from the estimates and assumptions used in
preparing the consolidated financial statements.
Investments
Fixed maturities consist of bonds and notes issued by
governments, businesses, or other entities, mortgage and asset
backed securities and similar securitized loans. All fixed
maturity investments classified as available for
sale are reported at fair value. Equity securities consist
of common stocks and are carried at fair value. Mortgage loans
are carried at unpaid balances, less allowance for losses.
Policy loans are carried at the aggregate unpaid balance.
Short-term investments are generally carried at cost which
approximates fair value. Premiums and discounts on
mortgage-backed securities are amortized over a period based on
estimated future principal payments, including prepayments.
Prepayment assumptions are reviewed periodically and adjusted to
reflect actual prepayments and changes in expectations. The most
significant determinant of prepayments are the differences
between interest rates of the underlying mortgages and current
mortgage loan rates and the structure of the security. Other
factors affecting prepayments include the size, type and age of
underlying mortgages, the geographic location of the mortgaged
properties and the creditworthiness of the borrowers. Variations
from anticipated prepayments will affect the life and yield of
these securities.
Prior to its disposition in September 2003, the Company
accounted for its investment in Healthaxis, Inc. on the equity
method, and, accordingly, the Companys investment in
Healthaxis, Inc. was stated at the Companys cost, as
adjusted for contributions or distributions and the
Companys share of Healthaxis, Inc.s income or loss.
Realized gains and losses on sales of investments are recognized
in net income on the specific identification basis and include
write downs on those investments deemed to have an
other-than-temporary
decline in fair values. Unrealized investment gains or losses on
securities carried at fair value, net of applicable deferred
income tax, are reported in accumulated other comprehensive
income (loss) as a separate component of stockholders
equity and accordingly have no effect on net income (loss).
Purchases and sales of short-term financial instruments are part
of investing activities and not necessarily a part of the cash
management program. Short-term financial instruments are
classified as investments in the Consolidated Balance Sheets and
are included as investing activities in the Consolidated
Statements of Cash Flows.
Investments are reviewed quarterly (or more frequently if
certain indicators arise) to determine if they have suffered an
impairment of value that is considered other than temporary. In
its review, management considers the following indicators of
impairment: fair value significantly below cost; decline in fair
value attributable to specific adverse conditions affecting a
particular investment; decline in fair value attributable to
specific conditions, such as conditions in an industry or in a
geographic area; decline in fair value for an extended period of
time; downgrades by rating agencies from investment grade to
non-investment grade; financial condition deterioration of the
issuer and situations where dividends have been reduced or
eliminated or scheduled interest payments have not been made.
Management monitors investments where two or more of the above
indicators exist and investments are identified by the Company
in economically challenged industries. If investments are
determined to be impaired, a loss is recognized at the date of
determination.
Cash
and Cash Equivalents
The Company classifies as cash and cash equivalents unrestricted
cash on deposit in banks and invested temporarily in various
instruments with maturities of three months or less at the time
of purchase.
Student
Loans
Student loans (consisting of student loans originated under the
Companys former College First Alternative Loan program)
are carried at their unpaid principal balances (less any
applicable allowance for losses).
F-10
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Deferred
Acquisition Costs
Health
Policy Acquisition Costs
The Company incurs various costs in connection with the
origination and initial issuance of its health insurance
policies, including underwriting and policy issuance costs,
costs associated with lead generation activities and
distribution costs (i.e., sales commissions paid to
agents). The Company defers those costs that vary with
production. The Company defers commissions paid to agents and
premium taxes with respect to the portion of health premium
collected but not yet earned, and the Company amortizes the
deferred expense over the period as and when the premium is
earned. Costs associated with generating sales leads with
respect to the health business issued through the SEA Division
are capitalized and amortized over a two-year period, which
approximates the average life of a policy. For financial
reporting purposes, other underwriting and policy issuance costs
(which the Company estimates are more fixed than variable) with
respect to health policies issued through the Companys
SEA, Student Insurance, Star HRG Divisions and the Other
Insurance division are expensed as incurred.
With respect to health policies sold through the Companys
SEA Division, commissions paid to agents with respect to first
year policies are higher than commissions paid to agents with
respect to policies in renewal years. Accordingly, during
periods of increasing first year premium revenue, the SEA
Divisions overall operating profit margin will be
negatively impacted by the higher commission expense associated
with first year premium revenue.
Life
Policy Acquisition Costs
The Company incurs various costs in connection with the
origination and initial issuance of its life insurance policies,
including underwriting and policy issuance costs. The Company
defers those costs that vary with production. The Company
capitalizes commission and issue costs primarily associated with
the new business of its Life Insurance Division. Deferred
acquisition costs consist primarily of sales commissions and
other underwriting costs of new life insurance sales. Policy
acquisition costs associated with traditional life business are
capitalized and amortized over the estimated premium-paying
period of the related policies, in proportion to the ratio of
the annual premium revenue to the total premium revenue
anticipated. Such anticipated premium revenue, which is modified
to reflect actual lapse experience, is estimated using the same
assumptions as are used for computing policy benefits. For
universal life-type and annuity contracts, capitalized costs are
amortized at a constant rate based on the present value of the
estimated gross profits expected to be realized on the book of
contracts.
Other
The cost of business acquired through acquisition of
subsidiaries or blocks of business is determined based upon
estimates of the future profits inherent in the business
acquired. Such costs are capitalized and amortized over the
estimated premium-paying period. Anticipated investment income
is considered in determining whether a premium deficiency
exists. The amortization period is adjusted when estimates of
current or future gross profits to be realized from a group of
products are revised.
The Company monitors and assesses the recoverability of deferred
health and life policy acquisition costs on a quarterly basis.
F-11
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth below is an analysis of cost of policies acquired and
deferred acquisition costs of policies issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Costs of policies acquired:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
4,991
|
|
|
$
|
7,563
|
|
|
$
|
3,376
|
|
Additions(1)
|
|
|
|
|
|
|
|
|
|
|
4,951
|
|
Amortization(2)
|
|
|
(1,785
|
)
|
|
|
(2,572
|
)
|
|
|
(764
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
3,206
|
|
|
|
4,991
|
|
|
|
7,563
|
|
Deferred costs of policies issued
|
|
|
127,914
|
|
|
|
105,511
|
|
|
|
83,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,120
|
|
|
$
|
110,502
|
|
|
$
|
90,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Effective December 31, 2003, the Company terminated a
coinsurance arrangement (see
Note G Reinsurance), and the Company
settled the purchase price for the novation of the remaining
coinsured policies to the Company. The net effect of the
transaction resulted in cost of policies acquired in the amount
of $5.0 million. |
|
(2) |
|
The discount rate used in the amortization of the costs of
policies acquired ranges from 7% to 20% based on a variety of
assumptions including the type of policies acquired. |
Set forth below is an analysis of deferred costs of policies
issued at each of December 31, 2005, 2004 and 2003 and the
related deferral and amortization in each of the years then
ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Deferred costs of policies issued:
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
$
|
105,511
|
|
|
$
|
83,088
|
|
|
$
|
85,934
|
|
Additions
|
|
|
103,185
|
|
|
|
93,383
|
|
|
|
65,733
|
|
Amortization
|
|
|
(80,782
|
)
|
|
|
(70,960
|
)
|
|
|
(68,579
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
$
|
127,914
|
|
|
$
|
105,511
|
|
|
$
|
83,088
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The amortization for the next five years and thereafter of
capitalized costs of policies acquired at December 31, 2005
is estimated to be as follows:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
1,365
|
|
2007
|
|
|
1,082
|
|
2008
|
|
|
350
|
|
2009
|
|
|
250
|
|
2010
|
|
|
159
|
|
2011 and thereafter
|
|
|
|
|
|
|
|
|
|
|
|
$
|
3,206
|
|
|
|
|
|
|
Restricted
Cash
At December 31, 2005 and 2004, the Company held restricted
cash in the amount of $22.5 million and $39.5 million,
respectively. Restricted cash consisted primarily of cash and
cash equivalents securing student loan credit facilities held by
a bankruptcy-remote, special purpose entity in the amount of
$20.5 million and $37.4 million
F-12
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
as of December 31, 2005 and 2004, respectively, which cash
may be used only for repayment of associated borrowings
and/or
acquisitions of additional student loans. See Note H.
Allowance
for Doubtful Accounts
The Company establishes an allowance for potential losses that
could result from defaults or write-downs on various assets. The
allowance is maintained at a level that the Company believes is
adequate to absorb estimated losses.
The Companys allowance for losses is as follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Agents receivables
|
|
$
|
3,710
|
|
|
$
|
2,967
|
|
Other receivables
|
|
|
3,699
|
|
|
|
3,699
|
|
Mortgage loans
|
|
|
55
|
|
|
|
324
|
|
Student loans
|
|
|
2,722
|
|
|
|
3,608
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
10,186
|
|
|
$
|
10,598
|
|
|
|
|
|
|
|
|
|
|
Property
and Equipment
Property and equipment includes buildings, leasehold
improvements, furniture, software and equipment, all of which
are reported at depreciated cost that is computed using straight
line and accelerated methods based upon the estimated useful
lives of the assets (generally 3 to 7 years for furniture,
software and equipment and 30 to 39 years for buildings).
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Land and improvements
|
|
$
|
2,431
|
|
|
$
|
2,731
|
|
Buildings and leasehold
improvements
|
|
|
31,737
|
|
|
|
31,015
|
|
Construction in progress
|
|
|
2,469
|
|
|
|
|
|
Software
|
|
|
85,677
|
|
|
|
80,714
|
|
Furniture and equipment
|
|
|
51,044
|
|
|
|
49,068
|
|
|
|
|
|
|
|
|
|
|
|
|
|
173,358
|
|
|
|
163,528
|
|
Less accumulated depreciation
|
|
|
91,478
|
|
|
|
65,665
|
|
|
|
|
|
|
|
|
|
|
Property and equipment (net)
|
|
$
|
81,880
|
|
|
$
|
97,863
|
|
|
|
|
|
|
|
|
|
|
Construction in progress in the amount of $2.5 million
relates to a new facility that was placed in service in January
2006.
Goodwill
and Other Intangibles
The Company accounts for goodwill and other intangibles using
Financial Accounting Standards Board Statement 142,
Goodwill and Other Intangible Assets. Statement 142
requires that goodwill and other intangible assets with
indefinite useful lives no longer be amortized, but instead be
tested for impairment at least annually. Statement 142 also
requires that intangible assets with estimable useful lives be
amortized over their respective estimated useful lives to their
estimated residual values and reviewed for impairment. The
Company amortizes its intangible assets with estimable useful
lives over a period ranging from one to ten years. The Company
has
F-13
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
determined that it will review goodwill and other intangible
assets for impairment as of November 1 of each year or more
frequently if certain indicators arise. An impairment loss would
be recorded in the period such determination was made. Following
the Companys annual review in 2005 for impairment of
goodwill and other intangible assets related to continuing
operations, the Company recorded an impairment charge at the SEA
Division in the amount of $1.7 million related to the
HealthMarket customer list acquired in October 2004. For
financial reporting purposes the impairment charge was recorded
in Underwriting, policy acquisition costs, and insurance
expenses on the Companys Consolidated Statements of
Operations.
Future
Policy and Contract Benefits and Claim Liabilities
With respect to accident and health insurance, future policy
benefits are primarily attributable to a
return-of-premium
(ROP) rider that the Company has issued with certain health
policies. Pursuant to this rider, the Company undertakes to
return to the policyholder on or after age 65 all premiums
paid less claims reimbursed under the policy. The ROP rider also
provides that the policyholder may receive a portion of the
benefit prior to age 65. The Company records an ROP
liability to fund longer-term obligations associated with the
ROP rider. The future policy benefits for the ROP are computed
using the net level premium method using assumptions with
respect to current investment yield, mortality and withdrawal
rates, and annual increases in future gross premiums determined
to be appropriate at the time the business was first acquired by
the Company, with an implicit margin for adverse deviations. A
claim offset for actual benefits paid through the reporting date
is applied to the ROP liability for all policies on a
contract-by-contract
basis.
The remainder of the future policy benefits for accident and
health are principally contract reserves on issue-age rated
policies, reserves for other riders providing future benefits,
and reserves for the refund of a portion of premium as required
by state law. These liabilities are typically calculated as the
present value of future benefits less the present value of
future net premiums, computed on a net level premium basis using
assumptions determined to be appropriate as of the date the
business was acquired by the Company. These assumptions may
include current investment yield, mortality, withdrawal rates,
or other assumptions determined to be appropriate.
Traditional life insurance future policy benefit liabilities are
computed on a net level premium method using assumptions with
respect to current investment yield, mortality, withdrawal
rates, and other assumptions determined to be appropriate as of
the date the business was issued or purchased by the Company.
Future contract benefits related to universal life-type and
annuity contracts are generally based on policy account values.
Claim liabilities represent the estimated liabilities for claims
reported plus claims incurred but not yet reported. The
liabilities are subject to the impact of actual payments and
future changes in claim factors; as adjustments become necessary
they are reflected in current operations.
The Company uses the developmental method to estimate its health
claim liabilities. This method applies completion factors to
claim payments in order to estimate the ultimate amount of the
claim. These completion factors are derived from historical
experience and are dependent on the incurred dates of the claim
payments. See Note F Policy
Liabilities for a discussion of claim liabilities.
Recognition
of Premium Revenues and Costs
Premiums on traditional life insurance are recognized as revenue
when due. Benefits and expenses are matched with premiums so as
to result in recognition of income over the term of the
contract. This matching is accomplished by means of the
provision for future policyholder benefits and expenses and the
deferral and amortization of acquisition costs. Revenues for
universal life-type and annuity contracts consist of charges for
the cost of insurance, policy administration and surrender
charges assessed during the year. Contract benefits that are
charged to expense include benefit claims incurred in the period
in excess of related contract balances, and interest credited to
contract balances.
F-14
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Unearned
Premiums
Premiums on health insurance contracts are recognized as earned
over the period of coverage on a pro rata basis. The Company
records as a liability the portion of premiums unearned.
Other
Income
Other income consists primarily of income derived by the SEA
Division from ancillary services and membership marketing and
administrative services provided to the membership associations
that make available to their members the Companys health
insurance products and fee income derived by the Company from
its AMLI Realty Co. subsidiary. Income is recognized as services
are provided.
Underwriting,
Policy Acquisition Costs and Insurance Expenses
Underwriting, policy acquisition costs and insurance expenses
consist of direct expenses incurred across all insurance lines
in connection with issuance, maintenance and administration of
in-force insurance policies, including amortization of deferred
policy acquisition costs, commissions paid to agents,
administrative expenses and premium taxes.
Other
Expenses
Other expenses consist primarily of direct expenses incurred by
the Company in connection with generating other income at the
SEA Division. Also included in 2005 are the incremental costs
associated with the pending acquisition of the Company by a
group of private equity investors.
Variable
stock compensation expense (benefit)
The Company sponsors a series of stock accumulation plans
established for the benefit of the independent insurance agents
and independent sales representatives associated with its
independent agent field forces, including
UGA Association Field Services and Cornerstone
America. In connection with these plans, the Company has from
time to time recorded and will continue to record non-cash
variable stock-based compensation expense (benefit) in amounts
that depend and fluctuate based upon the market performance of
the Companys common stock. See Note M.
Reinsurance
Insurance liabilities are reported before the effects of ceded
reinsurance. Reinsurance receivables and prepaid reinsurance
premiums are reported as assets. The cost of reinsurance is
accounted for over the terms of the underlying reinsured
policies using assumptions consistent with those used to account
for the policies.
Advertising
Expense
The Company incurred advertising costs not included in deferred
acquisition costs of $1.8 million, $1.9 million and
$3.4 million in 2005, 2004 and 2003, respectively.
Advertising costs not included in deferred acquisition costs are
expensed as incurred. These amounts are reflected in the
Companys consolidated statement of operations under the
caption Underwriting, policy acquisition costs and
insurance expenses.
Federal
Income Taxes
Deferred income taxes are recorded to reflect the tax
consequences of differences between the tax bases of assets and
liabilities and their financial reporting amounts at each
year-end. In the event that the Company were to determine that
it would not be able to realize all or part of its net deferred
tax asset in the future, a valuation allowance would be recorded
to reduce its deferred tax assets to the amount that it believes
is more likely than not to
F-15
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
be realized. Recording a valuation allowance would result in a
charge to income in the period such determination was made. The
Company considers future taxable income and ongoing prudent and
feasible tax planning strategies in assessing the continued need
for the recorded valuation allowance. In the event the Company
determines that it would be able to realize its deferred tax
assets in the future in excess of its net recorded amount, an
adjustment to the deferred tax asset would increase income in
the period such determination was made.
Comprehensive
Income
Included in comprehensive income is the reclassification
adjustments for realized gain (losses) included in net income of
$(1.2) million, ($(768,000) net of tax), $4.3 million
($2.8 million net of tax) and $42.8 million,
($27.8 million net of tax) in 2005, 2004 and 2003,
respectively.
Guaranty
Funds and Similar Assessments
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. The Company is also assessed for other
health related expenses of high-risk and health reinsurance
pools maintained in the various states. These mandatory
assessments may be partially recovered through a reduction in
future premium taxes in certain states. At December 31,
2005 and 2004, the Company had accrued (reflected in Other
liabilities on the Companys consolidated balance
sheet) $5.5 million and $3.7 million, respectively, to
cover the cost of these assessments. The Company expects to pay
these assessments over a period of up to five years, and the
Company expects to realize the allowable portion of the premium
tax offsets
and/or
policy surcharges over a period of up to 10 years. The
Company incurred guaranty fund and other health related
assessments in the amount of $6.6 million,
$4.2 million and $1.7 million in 2005, 2004 and 2003,
respectively, recorded in Underwriting, policy acquisition
costs and insurance expenses on the Companys
consolidated income statement.
New
Accounting Pronouncements
In May 2005, the Financial Accounting Standards Board
(FASB) issued Statement 154 Accounting
Changes and Error Corrections which changes the requirements
for the accounting and reporting of a change in accounting
principle. Statement 154 applies to all voluntary changes
in accounting principle as well as to changes required by an
accounting pronouncement that does not include specific
transition provisions. Statement 154 requires that changes
in accounting principle be retrospectively applied. Under
retrospective application, the new accounting principle is
applied as of the beginning of the first period presented as if
that principle had always been used. The cumulative effect of
the change is reflected in the carrying value of assets and
liabilities as of the first period presented and the offsetting
adjustments would be recorded to opening retained earnings.
Statement 154 replaces APB Opinion No. 20 and FASB
Statement 3. Statement 154 is effective for the
Company beginning in fiscal year 2006. The Company does not
contemplate any accounting changes or error corrections and
accordingly, does not believe the adoption of this statement
will have a material effect upon its financial condition or
results of operations.
In December 2004, the FASB issued Statement 123R (revised
2004), Share-Based Payment, which requires all
share-based payments to employees, including grants of employee
stock options, to be recognized in the financial statements
based on their fair values. The pro forma disclosures previously
permitted under Statement 123 no longer will be an
alternative to financial statement recognition. Under
Statement 123R, the Company must determine the appropriate
fair value model to be used for valuing share-based payments,
the amortization method for compensation cost and the transition
method to be used at date of adoption. The transition methods
include prospective and retroactive adoption options. The
prospective method requires that compensation expense be
recorded for all unvested stock options and restricted stock at
the beginning of the first quarter of adoption of
Statement 123R. The retroactive methods would record
compensation expense for all unvested stock options and
restricted stock
F-16
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
beginning with the first period restated. Prior periods may be
restated either as of the beginning of the year of adoption or
for all periods presented.
In April 2005, the U.S. Securities and Exchange Commission
announced that the effective date of Statement 123R will be
suspended until January 1, 2006, for companies whose fiscal
year is the calendar year. The Company anticipates adopting the
prospective method of Statement 123R in 2006 and believes
the adoption of this pronouncement will not have a material
effect upon the financial condition or results of operations.
The following table illustrates the effect on net income as if
the
fair-value-based
method had been applied to all outstanding and unvested option
awards in each period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands, except
|
|
|
|
per share amounts)
|
|
|
Net income, as reported
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
|
$
|
14,334
|
|
Add: stock-based employee
compensation expense included in reported net income, net of tax
|
|
|
654
|
|
|
|
93
|
|
|
|
6
|
|
(Deduct)/Add total stock-based
employee compensation (expense) benefit determined under
fair-value-based
method for all awards, net of tax
|
|
|
(682
|
)
|
|
|
160
|
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
203,473
|
|
|
$
|
161,811
|
|
|
$
|
13,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
4.41
|
|
|
$
|
3.50
|
|
|
$
|
0.31
|
|
Basic-pro forma
|
|
$
|
4.41
|
|
|
$
|
3.51
|
|
|
$
|
0.30
|
|
Diluted as reported
|
|
$
|
4.32
|
|
|
$
|
3.40
|
|
|
$
|
0.30
|
|
Diluted-pro forma
|
|
$
|
4.32
|
|
|
$
|
3.41
|
|
|
$
|
0.29
|
|
Reclassification
Certain amounts in the 2004 and 2003 financial statements have
been reclassified to conform to the 2005 financial statement
presentation. In particular, the Company has for financial
reporting purposes reclassified for all periods presented
certain revenue and expenses related to the Life Insurance
Division.
Note B Acquisitions
and Dispositions
Acquisitions
On October 8, 2004, the Company completed an acquisition,
for a cash purchase price of $53.1 million, of
substantially all of the operating assets of HealthMarket, Inc.,
a Norwalk, Connecticut-based provider of consumer driven health
plans (CDHPs) to the small business (2 to 200 employees)
marketplace. In the acquisition, MEGA acquired
HealthMarkets administrative platform and substantially
all of HealthMarkets CDHP technology, fixed assets and
personnel. In the transaction, HealthMarket retained ownership
of American Travelers Assurance Company (ATAC), a
wholly owned insurance subsidiary of HealthMarket. As part of
the acquisition, Chesapeake entered into an assumption
reinsurance agreement with HealthMarket and ATAC, pursuant to
which Chesapeake agreed to pay a contingent renewal fee to
HealthMarket. This renewal fee has been and will be reflected as
goodwill
and/or other
intangible assets, as and when Chesapeake issues a renewal
policy to a former ATAC policyholder.
For financial reporting purposes, the HealthMarket transaction
was accounted for using the purchase method of accounting, and,
as a result, the assets and liabilities acquired were recorded
at fair value on the dates acquired, and the Consolidated
Statement of Operations includes the results of operations of
HealthMarket from the date of acquisition. The effect of this
acquisition on the Companys results of operations was not
material, and, accordingly,
F-17
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
pro forma financial information has not been presented. In
connection with the HealthMarket acquisition agreement and
assumption reinsurance agreement, the Company had recorded
goodwill and other intangible assets in the aggregate amount of
$31.3 million at December 31, 2004. During 2005, the
Company recorded an additional $7.1 million in goodwill and
other intangible assets related to the assumption reinsurance
agreement.
Effective December 31, 2003, the Company terminated a
coinsurance arrangement and the Company settled the purchase
price for the novation of certain coinsured policies to the
Company. The net effect of the transaction resulted in cost of
policies acquired in the amount of $5.0 million.
Dispositions
On November 18, 2003, the Company completed the sale of its
former Academic Management Services Corp. (AMS)
unit. The sale of AMS generated net cash proceeds to UICI of
approximately $27.8 million. At closing, UICI also received
uninsured student loan assets formerly held by AMS special
purpose financing subsidiaries with a face amount of
approximately $44.3 million (including accrued interest).
In anticipation of the sale of AMS, in the third quarter of
2003, the Company wrote down the carrying value of these loans
to fair value, which was significantly less than the face amount
of the loans. As part of the transaction, the purchaser agreed
to assume responsibility for liquidating and terminating the
remaining special purpose financing facilities through which AMS
previously securitized student loans.
On March 31, 2004, the Company completed the sale of all of
the remaining uninsured student loan assets that had been
retained by the Company at the November 18, 2003 sale of
AMS and reflected as
held-for-sale
assets on the Companys consolidated balance sheet at
December 31, 2003. The sale in 2004 of the uninsured
student loans generated gross cash proceeds in the amount of
approximately $25.0 million.
At December 31, 2002, the Company beneficially held
approximately 45% of the issued and outstanding shares of
Healthaxis, Inc. (HAXS: Nasdaq) (HAI). Effective
September 30, 2003, the Company sold to HAI its entire
equity interest in HAI for a total sale price of
$3.9 million, of which $500,000 was paid in cash at
closing, and the balance was paid by delivery of a promissory
note payable to the Company in the amount of $3.4 million.
The Company recognized a nominal loss for financial reporting
purposes in connection with the sale. Prior to the disposition
in September 2003 of its equity stake in HAI, the Company
accounted for its investment in HAI utilizing the equity method
and recognized its ratable share of HAI income and loss.
Note C Investments
A summary of net investment income is set forth below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Fixed maturities
|
|
$
|
76,418
|
|
|
$
|
73,453
|
|
|
$
|
60,479
|
|
Equity securities
|
|
|
89
|
|
|
|
535
|
|
|
|
2,310
|
|
Mortgage loans
|
|
|
227
|
|
|
|
367
|
|
|
|
503
|
|
Policy loans
|
|
|
1,051
|
|
|
|
1,184
|
|
|
|
1,190
|
|
Short-term and other investments
|
|
|
9,778
|
|
|
|
1,797
|
|
|
|
4,785
|
|
Agents receivables
|
|
|
3,692
|
|
|
|
3,583
|
|
|
|
3,799
|
|
Student loans
|
|
|
8,692
|
|
|
|
6,689
|
|
|
|
6,174
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
99,947
|
|
|
|
87,608
|
|
|
|
79,240
|
|
Less investment expenses
|
|
|
2,159
|
|
|
|
1,740
|
|
|
|
1,579
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
97,788
|
|
|
$
|
85,868
|
|
|
$
|
77,661
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-18
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Realized gains and (losses) and the change in unrealized
investment gains and (losses) on fixed maturity and equity
security investments are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gains
|
|
|
|
Fixed
|
|
|
Equity
|
|
|
Other
|
|
|
(Losses) on
|
|
|
|
Maturities
|
|
|
Securities
|
|
|
Investments
|
|
|
Investments
|
|
|
|
(In thousands)
|
|
|
Year Ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
$
|
(1,192
|
)
|
|
$
|
10
|
|
|
$
|
422
|
|
|
$
|
(760
|
)
|
Change in unrealized
|
|
|
(42,902
|
)
|
|
|
(114
|
)
|
|
|
|
|
|
|
(43,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
$
|
(44,094
|
)
|
|
$
|
(104
|
)
|
|
$
|
422
|
|
|
$
|
(43,776
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
$
|
731
|
|
|
$
|
3,570
|
|
|
$
|
2,370
|
|
|
$
|
6,671
|
|
Change in unrealized
|
|
|
(3,972
|
)
|
|
|
(2,905
|
)
|
|
|
|
|
|
|
(6,877
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
$
|
(3,241
|
)
|
|
$
|
665
|
|
|
$
|
2,370
|
|
|
$
|
(206
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Realized
|
|
$
|
1,033
|
|
|
$
|
41,783
|
|
|
$
|
(3,105
|
)
|
|
$
|
39,711
|
|
Change in unrealized
|
|
|
(1,417
|
)
|
|
|
(25,856
|
)
|
|
|
|
|
|
|
(27,273
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined
|
|
$
|
(384
|
)
|
|
$
|
15,927
|
|
|
$
|
(3,105
|
)
|
|
$
|
12,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross unrealized investment gains pertaining to equity
securities were $28,000, $28,000 and $2.9 million, at
December 31, 2005, 2004 and 2003, respectively. Gross
unrealized investment losses pertaining to equity securities
were $189,000, $75,000 and $-0- at December 31, 2005, 2004
and 2003, respectively.
The amortized cost and fair value of investments in fixed
maturities are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. Treasury and
U.S. Government agency obligations
|
|
$
|
87,003
|
|
|
$
|
62
|
|
|
$
|
(1,137
|
)
|
|
$
|
85,928
|
|
Mortgage-backed securities issued
by U.S. Government agencies and authorities
|
|
|
251,418
|
|
|
|
634
|
|
|
|
(4,201
|
)
|
|
|
247,851
|
|
Other mortgage and asset backed
securities
|
|
|
184,557
|
|
|
|
1,174
|
|
|
|
(3,565
|
)
|
|
|
182,166
|
|
Other corporate bonds
|
|
|
973,362
|
|
|
|
12,980
|
|
|
|
(17,822
|
)
|
|
|
968,520
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
1,496,340
|
|
|
$
|
14,850
|
|
|
$
|
(26,725
|
)
|
|
$
|
1,484,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-19
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
|
Amortized
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
|
|
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
U.S. Treasury and
U.S. Government agency obligations
|
|
$
|
59,067
|
|
|
$
|
618
|
|
|
$
|
(335
|
)
|
|
$
|
59,350
|
|
Mortgage-backed securities issued
by U.S. Government agencies and authorities
|
|
|
328,416
|
|
|
|
3,985
|
|
|
|
(684
|
)
|
|
|
331,717
|
|
Other mortgage and asset backed
securities
|
|
|
196,678
|
|
|
|
3,618
|
|
|
|
(1,474
|
)
|
|
|
198,822
|
|
Other corporate bonds
|
|
|
916,043
|
|
|
|
31,226
|
|
|
|
(5,927
|
)
|
|
|
941,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
1,500,204
|
|
|
$
|
39,447
|
|
|
$
|
(8,420
|
)
|
|
$
|
1,531,231
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values for fixed maturity securities are based on quoted
market prices, where available. For fixed maturity securities
not actively traded, fair values are estimated using values
obtained from quotation services.
The amortized cost and fair value of fixed maturities at
December 31, 2005, by contractual maturity, are shown
below. Fixed maturities subject to early or unscheduled
prepayments have been included based upon their contractual
maturity dates. Actual maturities will differ from contractual
maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
Amortized
|
|
|
|
|
|
|
Cost
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Maturity
|
|
|
|
|
|
|
|
|
One year or less
|
|
$
|
115,136
|
|
|
$
|
114,675
|
|
Over 1 year through
5 years
|
|
|
398,970
|
|
|
|
395,118
|
|
Over 5 years through
10 years
|
|
|
344,149
|
|
|
|
341,056
|
|
Over 10 years
|
|
|
202,110
|
|
|
|
203,599
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,060,365
|
|
|
|
1,054,448
|
|
Mortgage and asset backed
securities
|
|
|
435,975
|
|
|
|
430,017
|
|
|
|
|
|
|
|
|
|
|
Total fixed maturities
|
|
$
|
1,496,340
|
|
|
$
|
1,484,465
|
|
|
|
|
|
|
|
|
|
|
Proceeds from the sale and call of investments in fixed
maturities were $181.8 million, $177.4 million and
$200.3 million for 2005, 2004 and 2003, respectively. Gross
gains of $4.6 million, $5.4 million and
$9.3 million, and gross losses of $1.7 million,
$1.1 million and $4.3 million were realized on the
sale and call of fixed maturity investments during 2005, 2004
and 2003, respectively.
Proceeds from the sale of equity investments were $10,000,
$17.3 million and $81.3 million for 2005, 2004 and
2003, respectively. Gross gains of $10,000, $3.6 million
and $43.7 million and gross losses of $-0-, $-0- and
$803,000 were realized on sales of equity investments during
2005, 2004 and 2003, respectively.
Set forth below is a summary of the Companys equity
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
(In thousands)
|
|
|
Common
stocks non-affiliate
|
|
$
|
1,508
|
|
|
$
|
1,347
|
|
|
$
|
1,508
|
|
|
$
|
1,461
|
|
The fair value, which represents carrying amounts of equity
securities, is based on quoted market prices.
F-20
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The carrying amounts of the Companys investments in
mortgage loans approximate fair value, which is estimated using
a discounted cash flow analysis, utilizing a discount rate equal
to the rate currently being offered for similar loans to
borrowers with similar credit ratings. The carrying values for
mortgage loans are net of allowance of $55,000 and $324,000 at
December 31, 2005 and 2004, respectively.
The carrying amounts of the Companys investment in policy
loans approximate fair value which is estimated using discounted
cash flow analysis at a rate for similar loans at contractual
rates for policy loans from currently marketed policies.
The Company minimizes its credit risk associated with its fixed
maturities portfolio by investing primarily in investment grade
securities. Included in fixed maturities is a concentration of
mortgage and asset backed securities. At December 31, 2005,
the Company had a carrying amount of $430.0 million of
mortgage and asset backed securities, of which
$247.9 million were government backed, $158.1 million
were rated AAA, $2.7 million were rated AA,
$14.2 million were rated A, $4.8 million were rated
BBB, and $2.3 million were rated below investment grade by
external rating agencies. At December 31, 2004, the Company
had a carrying amount of $530.5 million of mortgage and
asset backed securities, of which $331.7 million were
government backed, $172.6 million were rated AAA,
$11.6 million were rated A, $5.6 million were rated
BBB, and $9.0 million were rated below investment grade by
external rating agencies.
During 2005, 2004 and 2003, the Company recorded impairment
charges for certain fixed maturities and equity securities in
the amount of $4.1 million related to fixed maturities,
$3.6 million related to fixed maturities and
$5.1 million ($4.0 million for fixed maturities and
$1.1 million for equity securities), respectively. The
impairment charges are reflected in the Companys
consolidated statement of operations under the caption
Gains (losses) on sale of investments.
Set forth below is a summary of the Companys gross
unrealized losses in its fixed maturities as of
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss
|
|
|
Unrealized Loss
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of
Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
U.S. Treasury obligations and
direct obligations of U.S. Government agencies
|
|
$
|
61,872
|
|
|
$
|
747
|
|
|
$
|
13,632
|
|
|
$
|
390
|
|
|
$
|
75,504
|
|
|
$
|
1,137
|
|
Mortgage backed securities issued
by U.S. Government agencies and authorities
|
|
|
145,168
|
|
|
|
2,077
|
|
|
|
68,632
|
|
|
|
2,124
|
|
|
|
213,800
|
|
|
|
4,201
|
|
Other mortgage and asset backed
securities
|
|
|
67,635
|
|
|
|
947
|
|
|
|
78,020
|
|
|
|
2,618
|
|
|
|
145,655
|
|
|
|
3,565
|
|
Corporate bonds
|
|
|
380,079
|
|
|
|
7,642
|
|
|
|
260,044
|
|
|
|
10,180
|
|
|
|
640,123
|
|
|
|
17,822
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
654,754
|
|
|
$
|
11,413
|
|
|
$
|
420,328
|
|
|
$
|
15,312
|
|
|
$
|
1,075,082
|
|
|
$
|
26,725
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At December 31, 2005, the Company had $26.7 million of
unrealized losses in its fixed maturities portfolio. Of the
$11.4 million in unrealized losses that have existed for
less than twelve months, only three securities had an unrealized
loss in excess of 10% of the securitys cost. The aggregate
amount of unrealized loss attributed to the securities in excess
of 10% of the securities cost was $893,000 at
December 31, 2005. Of the $15.3 million in unrealized
losses that have existed for twelve months or longer, only one
security had an unrealized loss in excess of 10% of the
securitys cost. The amount of unrealized loss with respect
to that security was $122,000 at December 31,
F-21
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
2005. The Company continually monitors these investments and
believes that, as of December 31, 2005, the unrealized loss
in these investments is temporary.
Set forth below is a summary of the Companys gross
unrealized losses in its fixed maturities as of
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized Loss
|
|
|
Unrealized Loss
|
|
|
|
|
|
|
Less Than 12 Months
|
|
|
12 Months or longer
|
|
|
Total
|
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Unrealized
|
|
Description of
Securities
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
Value
|
|
|
Losses
|
|
|
|
(In thousands)
|
|
|
US Treasury obligations and direct
obligations of US Government agencies
|
|
$
|
10,889
|
|
|
$
|
182
|
|
|
$
|
2,887
|
|
|
$
|
153
|
|
|
$
|
13,776
|
|
|
$
|
335
|
|
Mortgage backed securities issued
by U.S. Government agencies and authorities
|
|
|
66,191
|
|
|
|
319
|
|
|
|
37,621
|
|
|
|
365
|
|
|
|
103,812
|
|
|
|
684
|
|
Other mortgage and asset backed
securities
|
|
|
44,138
|
|
|
|
480
|
|
|
|
56,802
|
|
|
|
994
|
|
|
|
100,940
|
|
|
|
1,474
|
|
Corporate bonds
|
|
|
144,427
|
|
|
|
1,533
|
|
|
|
151,190
|
|
|
|
4,394
|
|
|
|
295,617
|
|
|
|
5,927
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total securities
|
|
$
|
265,645
|
|
|
$
|
2,514
|
|
|
$
|
248,500
|
|
|
$
|
5,906
|
|
|
$
|
514,145
|
|
|
$
|
8,420
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company regularly monitors its investment portfolio to
attempt to minimize its concentration of credit risk in any
single issuer. Set forth in the table below is a schedule of all
investments representing greater than 1% of the Companys
aggregate investment portfolio at December 31, 2005 and
2004, excluding U.S. Government securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
|
|
|
% of Total
|
|
|
|
|
|
% of Total
|
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Carrying
|
|
|
|
Amount
|
|
|
Value
|
|
|
Amount
|
|
|
Value
|
|
|
|
(Dollars in thousands)
|
|
|
Fixed Maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal National Mortgage
Corporation
|
|
$
|
25,370
|
|
|
|
1.4
|
%
|
|
$
|
18,038
|
|
|
|
1.0
|
%
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fidelity Institutional Money
Market Fund
|
|
$
|
200,900
|
|
|
|
11.3
|
%
|
|
$
|
122,793
|
|
|
|
7.1
|
%
|
The Fidelity Institutional Money Market Fund is a diversified
institutional money market fund that invests solely in the
highest quality United States dollar denominated money market
securities of domestic and foreign issuers.
At December 31, 2002, the Company beneficially held
approximately 45% of the issued and outstanding shares of
Healthaxis, Inc. (HAI). Effective September 30,
2003, the Company sold to HAI its entire 48.27% equity interest
in HAI for a total sale price of $3.9 million, of which
$500,000 was paid in cash at closing and the balance was paid by
delivery of a promissory note payable to the Company in the
amount of $3.4 million. The Company recognized a nominal
loss for financial reporting purposes in connection with the
sale. See Note K for a discussion of various
transactions between the Company and HAI prior to its
disposition in September 2003.
Under the terms of various reinsurance agreements (see
Note G), the Company is required to maintain assets in
escrow with a fair value equal to the statutory reserves assumed
under the reinsurance agreements. Under these agreements, the
Company had on deposit, securities with a fair value of
approximately $57.3 million and $64.4 million as of
December 31, 2005 and 2004, respectively. In addition,
domestic insurance subsidiaries had securities with a fair value
of $17.1 million and $17.0 million on deposit with
insurance departments in various states at December 31,
2005 and 2004, respectively.
F-22
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In 2005, the Company started a securities lending program, under
which the Company lends fixed-maturity securities to financial
institutions in short-term lending transactions. The Company
maintains effective control over the loaned securities by virtue
of the ability to unilaterally cause the holder to return the
loaned security on demand. These securities continue to be
carried as investment assets on the Companys balance sheet
during the term of the loans and are not reported as sales. The
Companys security lending policy requires that the fair
value of the cash and securities received as collateral be 102%
or more of the fair value of the loaned securities. The
collateral received is restricted and cannot be used by the
Company unless the borrower defaults under the terms of the
agreement. These short-term security lending arrangements
increase investment income with minimal risk. At
December 31, 2005, securities on loan to various borrowers
totaled $45.4 million.
Note D Student
Loans
The Company holds alternative (i.e., non-federally
guaranteed) student loans extended to students at selected
colleges and universities. These loans were initially generated
under the Companys College First Alternative Loan program.
The student loans guaranteed by private insurers are guaranteed
100% as to principal and accrued interest.
At the closing of the sale of Academic Management Services Corp.
in November 2003, UICI received uninsured student loan assets
formerly held by AMS special purpose financing
subsidiaries, which were subsequently sold in the first quarter
of 2004. See Note Q for the discussion of AMS
discontinued operations.
Set forth below is a summary of the student loans held by the
Company at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Carrying
|
|
|
Estimated
|
|
|
Carrying
|
|
|
Estimated
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Student
loans guaranteed by private insurers
|
|
$
|
83,179
|
|
|
$
|
83,179
|
|
|
$
|
83,437
|
|
|
$
|
83,437
|
|
Student
loans non-guaranteed
|
|
|
29,351
|
|
|
|
28,178
|
|
|
|
29,459
|
|
|
|
28,281
|
|
Allowance for losses
|
|
|
(2,722
|
)
|
|
|
|
|
|
|
(3,608
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total student loans
|
|
$
|
109,808
|
|
|
$
|
111,357
|
|
|
$
|
109,288
|
|
|
$
|
111,718
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Of the aggregate $109.8 million and $109.3 million
carrying amount of student loans held by the Company at
December 31, 2005 and 2004, $109.6 million and
$109.1 million, respectively, were pledged to secure
payment of secured student loan indebtedness. See
Note H.
The Company estimates the fair value of student loans based on
values of recent sales of student loans from the Company into
the secured student loan credit facility. See Note H.
The Companys provision for losses on student loans is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Balance at beginning of year
|
|
$
|
3,608
|
|
|
$
|
1,676
|
|
|
$
|
941
|
|
Change in provision for losses
|
|
|
(886
|
)
|
|
|
1,932
|
|
|
|
735
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
2,722
|
|
|
$
|
3,608
|
|
|
$
|
1,676
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company recognized interest income from continuing
operations from the student loans of $8.7 million,
$6.7 million and $6.2 million in 2005, 2004 and 2003,
respectively, which is included in the investment income
category on the Companys consolidated statements of
operations.
F-23
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note E Goodwill
and Other Intangible Assets
Set forth in the tables below is a summary of the goodwill and
other intangible assets by operating division as of
December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
Accumulated
|
|
|
|
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(In thousands)
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
44,049
|
|
|
$
|
3,788
|
|
|
$
|
(6,673
|
)
|
|
$
|
41,164
|
|
Star HRG Division
|
|
|
33,640
|
|
|
|
8,858
|
|
|
|
(5,242
|
)
|
|
|
37,256
|
|
Life Insurance Division
|
|
|
552
|
|
|
|
|
|
|
|
(193
|
)
|
|
|
359
|
|
Other Key Factors
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
78,466
|
|
|
$
|
12,646
|
|
|
$
|
(12,108
|
)
|
|
$
|
79,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004
|
|
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible
|
|
|
Accumulated
|
|
|
|
|
|
|
Goodwill
|
|
|
Assets
|
|
|
Amortization
|
|
|
Net
|
|
|
|
(In thousands)
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
39,489
|
|
|
$
|
1,238
|
|
|
$
|
(4,024
|
)
|
|
$
|
36,703
|
|
Star HRG Division
|
|
|
33,640
|
|
|
|
8,858
|
|
|
|
(4,160
|
)
|
|
|
38,338
|
|
Life Insurance Division
|
|
|
552
|
|
|
|
|
|
|
|
(193
|
)
|
|
|
359
|
|
Other Key Factors
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
225
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
73,906
|
|
|
$
|
10,096
|
|
|
$
|
(8,377
|
)
|
|
$
|
75,625
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other intangible assets consist of customer lists, trademark and
non-compete agreements related to the acquisitions of
HealthMarket (completed in October 2004) and of Star HRG
(completed February 28, 2002). See Note B.
The Company recorded amortization expense associated with other
intangibles in continuing operations in the amount of
$3.7 million, $1.3 million and $1.5 million in
2005, 2004 and 2003, respectively. Amortization expense in 2005
includes an impairment charge in the amount of $1.7 million
related to the HealthMarket customer list acquired in October
2004.
Set forth in the table below is a summary of the estimated
amortization expense for the next five years and thereafter for
other intangible assets:
|
|
|
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
1,394
|
|
2007
|
|
|
1,021
|
|
2008
|
|
|
801
|
|
2009
|
|
|
641
|
|
2010
|
|
|
429
|
|
2011 and thereafter
|
|
|
417
|
|
|
|
|
|
|
|
|
$
|
4,703
|
|
|
|
|
|
|
F-24
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note F Policy
Liabilities
As more fully described below, policy liabilities consist of
future policy and contract benefits, claim liabilities, unearned
premiums and other policy liabilities.
Future
Policy and Contract Benefits
Liability for future policy and contract benefits consisted of
the following at December 31, 2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Accident & Health
|
|
$
|
94,124
|
|
|
$
|
93,252
|
|
Life
|
|
|
241,800
|
|
|
|
232,189
|
|
Annuity
|
|
|
112,068
|
|
|
|
118,787
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
447,992
|
|
|
$
|
444,228
|
|
|
|
|
|
|
|
|
|
|
Set forth below is a detailed summary of benefits, claims and
settlement expenses net of reinsurance for the each of the years
ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Future liability and contract
benefits
|
|
$
|
25,409
|
|
|
$
|
29,394
|
|
|
$
|
32,081
|
|
Claims benefits
|
|
|
1,066,727
|
|
|
|
1,105,507
|
|
|
|
1,013,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total benefits, claims and
settlement expenses
|
|
$
|
1,092,136
|
|
|
$
|
1,134,901
|
|
|
$
|
1,045,640
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident
and Health Policies
With respect to accident and health insurance, future policy
benefits are primarily attributable to a
return-of-premium
(ROP) rider that the Company has issued with certain health
policies. Pursuant to this rider, the Company undertakes to
return to the policyholder on or after age 65 all premiums
paid less claims reimbursed under the policy. The ROP rider also
provides that the policyholder may receive a portion of the
benefit prior to age 65. The Company records an ROP
liability to fund longer-term obligations associated with the
ROP rider. The future policy benefits for the ROP are computed
using the net level premium method using assumptions with
respect to current investment yield, mortality and withdrawal
rates, and annual increases in future gross premiums determined
to be appropriate at the time the business was first acquired by
the Company, with an implicit margin for adverse deviations. A
claim offset for actual benefits paid through the reporting date
is applied to the ROP liability for all policies on a
contract-by-contract
basis. The ROP liabilities reflected in future policy and
contract benefits on the Companys consolidated balance
sheet were $88.1 million and $86.0 million at
December 31, 2005 and 2004, respectively.
The remainder of the future policy benefits for accident and
health are principally contract reserves on issue-age rated
policies, reserves for other riders providing future benefits,
and reserves for the refund of a portion of premium as required
by state law. These liabilities are typically calculated as the
present value of future benefits less the present value of
future net premiums, computed on a net level premium basis using
assumptions determined to be appropriate as of the date the
business was acquired by the Company. These assumptions may
include current investment yield, mortality, withdrawal rates,
or other assumptions determined to be appropriate. Substantially
all accident and health insurance future policy benefit
liability interest assumptions range from 4.0% to 5.0%.
F-25
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Life
Policies and Annuity Contracts
With respect to traditional life insurance, future policy
benefits are computed on a net level premium method using
assumptions with respect to current investment yield, mortality
and withdrawal rates determined to be appropriate as of the date
the business was acquired by the Company. Substantially all
liability interest assumptions range from 3.0% to 5.5%. Such
liabilities are graded to equal statutory values or cash values
prior to maturity.
Interest rates credited to future contract benefits related to
universal life-type contracts approximated 4.6% during each of
2005, 2004 and 2003. Interest rates credited to the liability
for future contract benefits related to direct annuity contracts
generally ranged from 3.0% to 5.5% during 2005, 2004 and 2003.
The Company has assumed certain life and annuity business from a
company, utilizing the same actuarial assumptions as the ceding
company. The liability for future policy benefits related to
life business has been calculated using an interest rate of 9%
graded to 5% over twenty years for life policies. Mortality and
withdrawal rates are based on published industry tables or
experience of the ceding company and include margins for adverse
deviation. Interest rates credited to the liability for future
contract benefits related to these annuity contracts generally
ranged from 3.0% to 4.5% during 2005 and 2004 and 3.0% to 5.5%
during 2003.
Annuities
The carrying amounts and fair values of the Companys
liabilities for investment-type contracts (included in future
policy and contract benefits and other policy liabilities in the
consolidated balance sheets) at December 31, 2005 and 2004
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2005
|
|
|
December 31, 2004
|
|
|
|
Carrying
|
|
|
|
|
|
Carrying
|
|
|
|
|
|
|
Amount
|
|
|
Fair Value
|
|
|
Amount
|
|
|
Fair Value
|
|
|
|
(In thousands)
|
|
|
Direct annuities
|
|
$
|
61,584
|
|
|
$
|
59,737
|
|
|
$
|
64,389
|
|
|
$
|
62,837
|
|
Assumed annuities
|
|
|
49,037
|
|
|
|
49,034
|
|
|
|
53,056
|
|
|
|
53,053
|
|
Supplemental contracts without
life contingencies
|
|
|
1,447
|
|
|
|
1,447
|
|
|
|
1,342
|
|
|
|
1,342
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
112,068
|
|
|
$
|
110,218
|
|
|
$
|
118,787
|
|
|
$
|
117,232
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair values under investment-type contracts consisting of direct
annuities and supplemental contracts without life contingencies
are estimated using the assumption-reinsurance pricing method,
based on estimating the amount of profits or losses an assuming
company would realize, and then discounting those amounts at a
current market interest rate. Fair values for the Companys
liabilities under assumed annuity investment-type contracts are
estimated using the cash surrender value of the annuity.
Claims
Liabilities
The Company establishes liabilities for benefit claims that have
been reported but not paid and claims that have been incurred
but not reported under health and life insurance contracts.
Consistent with overall company philosophy, a single best
estimate claim liability is determined which is expected to be
adequate under most circumstances. This estimate is developed
using actuarial principles and assumptions that consider a
number of items as appropriate, including but not limited to
historical and current claim payment patterns, product
variations, the timely implementation of appropriate rate
increases and seasonality. The Company does not develop ranges
in the setting of the claims liability reported in the financial
statements. However, to the extent not already reflected in the
actuarial analyses, management also considers qualitative
factors that may affect the ultimate benefit levels to determine
its best estimate of the claims liability. These qualitative
considerations include, among others, the
F-26
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
impact of medical inflation, utilization of health services,
exposure levels, product mix, pending claim levels and other
relevant factors.
Effective January 1, 2003, the Company implemented a new
incurred date coding definition to establish incurred dates
under the developmental method in the SEA Division. See
discussion below under the caption 2003 Change in Claims
and Future Benefit Liability Estimates Self-Employed Agency
Division Claims Liability Changes.
The SEA Division also makes various refinements to the claim
liabilities as appropriate. These refinements estimate
liabilities for circumstances, such as an excess pending claims
inventory (i.e., inventories of pending claims in excess
of historical levels) and disputed claims. For example, the
Company closely monitors the level of claims that are pending.
When the level of pending claims appears to be in excess of
normal levels, the Company typically establishes a
liability for excess pending claims. The Company believes that
such an excess pending claims liability is
appropriate under such circumstances because of the operation of
the developmental method used by the Company to calculate the
principal claim liability, which method develops or
completes paid claims to estimate the claim
liability. When the pending claims inventory is higher than
would ordinarily be expected, the level of paid claims is
correspondingly lower than would ordinarily be expected. This
lower level of paid claims, in turn, results in the
developmental method yielding a smaller claim liability than
would have been yielded with a normal level of paid claims,
resulting in the need for augmented claim liabilities.
With respect to its Student Insurance and Star HRG businesses,
the Company assigns incurred dates based on the date of service.
This definition estimates the liability for all medical services
received by the insured prior to the end of the applicable
financial period. Appropriate adjustments are made in the
completion factors to account for pending claim inventory
changes and contractual continuation of coverage beyond the end
of the financial period.
2005
Change in Claim Liability
Estimates Self-Employed Agency
Division
As more particularly described below, results at the SEA
Division for the year ended December 31, 2005 reflected
benefits attributable to refinements of the Companys
estimate for its claim liability on its health insurance
products. For financial reporting purposes, each of these
refinements is considered to be a change in estimate, resulting
from additional information and subsequent developments from
prior periods. Accordingly, the financial impact of the
refinements was accounted for in the respective periods that the
refinements occurred.
Results at the SEA Division for the year ended December 31,
2005 reflected a benefit in the amount of $33.3 million
recorded in the third quarter of 2005 attributable to a
refinement of the Companys estimate for its claim
liability on its health insurance products. The largest portion
of the adjustment (approximately $21.0 million) was
attributable to a refinement of the estimate of the unpaid claim
liability for the most recent incurral months. The Company
utilizes anticipated loss ratios to calculate the estimated
claim liability for the most recent incurral months. Despite
negligible premium rate increases implemented on its most
popular scheduled health insurance products, the SEA Division
has continued to observe favorable claims experience and, as a
result, loss ratios have not increased as rapidly as
anticipated. This favorable claims experience has been reflected
in the refinement of the anticipated loss ratios used in
estimating the unpaid claim liability for the most recent
incurral months. The remaining portion of the adjustment to the
claim liability (approximately $12.3 million) was
attributable to an update of the completion factors used in the
developmental method of estimating the unpaid claim liability to
reflect more current claims administration practices.
In addition, effective January 1, 2005, the Companys
SEA Division made certain refinements to its claim liability
calculations, the effect of which decreased claim liabilities
and correspondingly increased operating income in the amount of
$7.6 million in the first quarter of 2005. Since 2000 the
SEA Division has offered as an optional benefit to its
scheduled/basic health insurance products a rider that provides
for catastrophic coverage for covered expenses under the base
insurance contract that exceed $100,000 or $75,000, depending on
the benefit level chosen. This rider pays benefits at 100% after
the stop loss is reached, up to the aggregate maximum amount of
the
F-27
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
contract. Prior to January 1, 2005, the SEA Division
utilized a technique that is commonly used to estimate claims
liabilities with respect to developing blocks of business, until
sufficient experience is obtained to allow more precise
estimates. The Company believed that the technique produced
appropriate reserve estimates in all prior periods. During the
first quarter of 2005, the Company believed that there were
sufficient claims paid on this benefit to produce a reserve
estimate utilizing the completion factor technique. As a result,
effective January 1, 2005, the SEA Division refined its
technique used to estimate claim liabilities to utilize
completion factors for older incurral dates. The technique
continues to utilize anticipated loss ratios in the most recent
incurral months. This completion factor technique is currently
utilized with respect to all other blocks of the SEA
Divisions health insurance business.
2003
Change in Claims and Future Benefit Liability
Estimates Self-Employed Agency
Division
Effective January 1, 2003, the Companys SEA Division
made certain refinements to its claim and future policy benefit
liability calculations, the net effect of which decreased claim
and future policy benefit liabilities and correspondingly
increased operating income reported by the SEA Division in the
amount of $4.8 million in the first quarter of 2003. Set
forth below is a summary of the adjustments and changes in
accounting estimates made in 2003 by the Company.
ROP
Liability Changes
The Company has issued certain health policies with a
return-of-premium
(ROP) rider, pursuant to which the Company undertakes to return
to the policyholder on or after age 65 all premiums paid
less claims reimbursed under the policy. The ROP rider also
provides that the policyholder may receive a portion of the
benefit prior to age 65. Prior to January 1, 2003, the
Company established a liability for future ROP benefits, which
liability was calculated by applying mid-terminal reserve
factors (calculated on two-year preliminary term basis, using 5%
interest, 1958 CSO mortality terminations, and level future
gross premiums) to the current premium on a
contract-by-contract
basis. A claim offset was applied, on a
contract-by-contract
basis, solely with respect to an older closed block of policies,
utilizing only claims paid to date, with no assumption of future
claims.
The Company records an ROP liability to fund longer-term
obligations associated with the ROP rider. This liability is
impacted both by the techniques utilized to calculate the
liability and the many assumptions underlying the calculation,
including interest rates, policy lapse rates, premium rate
increases on policies and assumptions with regard to claims
paid. The Company had previously utilized a simplified
estimation technique (described above) that it believed
generated an appropriate ROP liability in the aggregate.
However, the Company reviewed its ROP estimation technique in
order to determine if refinements to the technique were
appropriate. As a result of such review, and as more
particularly described below, effective January 1, 2003,
the ROP estimation technique was refined to utilize new
mid-terminal reserve factors (calculated on a net level basis,
using 4.5% interest, 1958 CSO mortality, and primarily 10%
annual increases in future gross premiums) and to apply these
factors to the historical premium payments on a
contract-by-contract
basis.
The net premium assumption was revised from two-year preliminary
term to net level in order to produce a more appropriate accrual
for the liability of the ROP benefits in relation to the
premiums. The interest rate assumption was reduced from 5% to
4.5% to reflect current investment yields. Since the ROP rider
is primarily attached to attained-age rated health insurance
products that are subject to periodic rate adjustment, the
Company has determined as part of its ongoing review of the ROP
estimation technique to increase its ROP liability to cover
reasonably foreseeable changes to the future gross premium.
Based on Company experience, the revised reserve factors
incorporate an assumption of a 10% average annual increase in
future gross premiums on such products. The estimation technique
was also refined to use historical premiums and anticipated
future premium increases in the calculation of future benefits
rather than calculating the liability only from the current
gross premium. Finally, a claim offset for actual benefits paid
through the reporting date is applied to the ROP liability for
all policies on a
contract-by-contract
basis. In the original simplified estimation technique, the
intent was to balance the offsetting effects of applying the
two-year preliminary term factors to the current gross premiums
since the historical premium
F-28
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
information was not available. Changes to the technique were
made in 2003 when sufficient historical premium information was
available to refine the estimation calculation. Substantially
all of the effect of this change in estimating the liability for
future ROP benefits was attributable to the refinement of adding
the assumption of a 10% average annual increase in the level of
future gross premiums for attained-age rated health insurance
products.
As a result of these changes, the liability for future ROP
benefits increased, and operating income correspondingly
decreased, by $12.9 million during the first quarter of
2003.
Assumptions used in the estimation of the Companys ROP
liability, such as interest or the annual increases in future
gross premiums, will continue to be used in subsequent
accounting periods for those benefits already issued, including
the future gross premiums anticipated by the reserve factors.
Changes in assumptions may be applied to newly issued policies
as well as for adjustments in the level of premium for existing
policies other than those already anticipated. The new
assumptions used will be those appropriate at the time the
change is made.
The ROP liabilities in the amount of $88.1 million and
$86.0 million at December 31, 2005 and 2004,
respectively, are reflected in future policy and contract
benefits on the Companys consolidated balance sheet.
Claims
Liability Changes
The SEA Division utilizes the developmental method to estimate
claims liabilities. Under the developmental method, completion
factors are applied to claim payments in order to estimate the
ultimate claim payments. These completion factors are derived
from historical experience and are dependent on the
incurred dates of the claim payments.
Prior to January 1, 2003, the Company utilized the original
incurred date coding definition to establish the date a policy
claim is incurred under the developmental method. Under the
original incurred date coding definition, prior to the end of
the period in which a health policy claim was made, the Company
estimated and recorded a liability for the cost of all medical
services related to the accident or sickness relating to the
claim, even though the medical services associated with such
accident or sickness might not be rendered to the insured until
a later financial reporting period.
Due to the anticipation of a future increase in the level of
favorable development associated with the growth in business,
the SEA Division undertook an analysis of the liability
estimation process. The Company believes that the developmental
method is the standard methodology within the health insurance
industry and therefore re-evaluated the key assumptions utilized
under this method. As the Company gained more experience with
the older blocks of business, the original incurred date coding
assumption was re-examined. This re-examination resulted in the
decision to utilize a new incurred date definition instead of
the original incurred date definition for purposes of
establishing claim liabilities at the SEA Division.
Effective January 1, 2003, the Company implemented a new
incurred date coding definition to establish incurred dates
under the developmental method in the SEA Division. Under this
new incurred date coding definition, a break in service of more
than six months will result in the establishment of a new
incurred date for subsequent services. In addition, under this
new incurred date coding definition, claim payments continuing
more than thirty-six months without a six month break in service
will result in the establishment of a new incurred date. This
change in the incurred date definition assumption resulted in a
reduction in the estimated claim liabilities at the SEA
Division, and a corresponding increase in operating income, in
the amount of $12.3 million during the first quarter of
2003.
Other
Changes in Estimate
Several refinements in the claims liability calculation, all of
which were treated as changes in accounting estimates, resulted
in a further reduction of the claims liability, and
corresponding increase in operating income, in the amount of
$5.4 million during the first quarter of 2003. This
reduction in the claims liability was attributable
F-29
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
primarily to the effects of a change in estimate of the
liability for excess pending claims. This change was necessary
to maintain consistency with the historical data underlying the
calculation of the new completion factors used in the claim
development calculation. These completion factors are based on
more recent experience with claims payments than the previous
factors. This more recent experience has a greater number of
pending claims. As a result, the new completion factors have
built in a higher level of liability for pending claims. The
release of a portion of the excess pending claims liability
reflects the additional pending claims included in the
completion factors.
Activity in the claims liability is summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Claims liability at beginning of
year, net of related reinsurance recoverable
|
|
$
|
610,779
|
|
|
$
|
563,045
|
|
|
$
|
440,895
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims liability on acquired
business
|
|
|
|
|
|
|
|
|
|
|
12,783
|
|
Incurred losses, net of
reinsurance, occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
1,191,723
|
|
|
|
1,196,421
|
|
|
|
1,067,951
|
|
Prior years
|
|
|
(124,996
|
)
|
|
|
(90,914
|
)
|
|
|
(54,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,066,727
|
|
|
|
1,105,507
|
|
|
|
1,013,559
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct payments for claims, net of
reinsurance, occurring during:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
765,767
|
|
|
|
714,361
|
|
|
|
616,939
|
|
Prior years
|
|
|
365,738
|
|
|
|
343,412
|
|
|
|
287,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,131,505
|
|
|
|
1,057,773
|
|
|
|
904,192
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims liability at end of year,
net of related reinsurance recoverable
(2005 $12,105; 2004 $11,808;
2003 $12,428
|
|
$
|
546,001
|
|
|
$
|
610,779
|
|
|
$
|
563,045
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
Liability Development Experience
Inherent in the Companys claim liability estimation
practices is the desire to establish liabilities that are more
likely to be redundant than deficient. Furthermore, the
Companys philosophy is to price its insurance products to
make an underwriting profit, not to increase written premiums.
While management continually attempts to improve its loss
estimation process by refining its ability to analyze loss
development patterns, claim payments and other information,
uncertainty remains regarding the potential for adverse
development of estimated ultimate liabilities.
F-30
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth in the table below is a summary of the claims
liability development experience (favorable) unfavorable by
business unit in the Companys Insurance segment for each
of the years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Self-Employed Agency Division
|
|
$
|
(121,362
|
)
|
|
$
|
(91,720
|
)
|
|
$
|
(54,009
|
)
|
Student Insurance Division
|
|
|
(5,186
|
)
|
|
|
4,733
|
|
|
|
(581
|
)
|
Star HRG Division
|
|
|
410
|
|
|
|
(3,002
|
)
|
|
|
(1,753
|
)
|
Life Insurance Division
|
|
|
337
|
|
|
|
(926
|
)
|
|
|
1,951
|
|
Other Insurance
|
|
|
805
|
|
|
|
1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total favorable
|
|
$
|
(124,996
|
)
|
|
$
|
(90,914
|
)
|
|
$
|
(54,392
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Impact on SEA Division. As indicated in the
table above, incurred losses developed at the SEA Division in
amounts less than originally anticipated due to
better-than-expected
experience on the health business in the SEA Division in each of
2005, 2004 and 2003.
The total favorable claims liability development experience for
2005 in the amount of $121.4 million represented 24.6% of
total claim liabilities established for the SEA Division at
December 31, 2004. The favorable claims liability
development experience in 2005 reflected a benefit of
$33.3 million recorded in the third quarter of 2005
attributable to a refinement of the Companys estimate for
its claim liability on its health insurance products, which
adjustment resulted from a refinement of the estimate of the
unpaid claim liability for the most recent incurral months and
an update of the completion factors used in the developmental
method of estimating the unpaid claim liability to reflect more
current claims administration practices. The favorable claims
liability development experience at the SEA Division in 2005
also reflected the effects of a favorable adjustment in the
amount of $7.6 million recorded in the first quarter of
2005 attributable to a refinement of an estimate for the
Companys claim liability established with respect to a
product rider that provides for catastrophic coverage on the SEA
Divisions scheduled health insurance products. Excluding
the impact of the refinements discussed above, the remaining
favorable experience in 2005 in the claims liability was
$80.5 million, or 16.3% of total claim liabilities
established for the SEA Division at December 31, 2004,
which indicates that the actual claim payment experience during
2005 with respect to prior periods was more favorable than
originally estimated when the claim liabilities were established
in 2004.
The total favorable claims liability development experience for
2004 in the amount of $91.7 million represented 20.2% of
total claim liabilities established for the SEA Division at
December 31, 2003. The favorable claims liability
development experience at the SEA Division in 2004 reflected the
effect of $47.8 million in claim liabilities established
during 2003 in response to a rapid pay down during 2003 of an
excess pending claims inventory. In particular, during 2003 the
Company observed a change in the distribution of paid claims by
incurred date; more paid claims were assigned to recent incurred
dates than had been the case on paid claims in prior years.
Assignment of paid claims with more recent incurred dates
typically results in an understatement of the claim development
liability, resulting in the need for augmented claim
liabilities. The Company believes that the deviation from
historical experience in incurred date assignment was a natural
consequence of the effort required to reduce a claims backlog,
which the Company was experiencing at the SEA Division during
the course of 2003. However, as the actual claims experience
developed in 2004, these augmented claim liabilities in the
amount of $47.8 million proved to be redundant. These claim
liabilities were released during 2004 and, as a result, did not
influence the level of claim liabilities redundancies in 2005
and will not influence the level of claim liabilities
redundancies in future periods. Excluding the impact of the
augmented claim liabilities established at December 31,
2003 in response to the rapid pay down during 2003 of an excess
pending claims inventory, the favorable experience in 2004 in
the
F-31
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
claims liability was $43.9 million, or 9.6% of total claim
liabilities established for the SEA Division at
December 31, 2003.
The total favorable claims liability development experience for
2003 in the amount of $54.0 million represented 14.9% of
total claim liabilities established for the SEA Division at
December 31, 2002. The favorable experience in the SEA
Division for 2003 included the effect of the $17.7 million
decrease in claims liability due to the refinements made
effective January 1, 2003 to the claims liability
calculation ($12.3 million) and changes in estimate
($5.4 million). See the discussion above under the
caption 2003 Change in Claims and Future Benefit Liability
Estimates Self-Employed Agency Division.
Excluding the impact of these refinements and changes in
estimate, the favorable experience in 2003 in the claims
liability was $36.3 million, or 10.0% of the total claim
liabilities established for the SEA Division at
December 31, 2002.
Over time, the developmental method replaces anticipated
experience with actual experience, resulting in an ongoing
re-estimation of the claims liability. Since the greatest degree
of estimation is used for more recent periods, the most recent
prior year is subject to the greatest change. Recent actual
experience has produced lower levels of claims payment
experience than originally expected.
Impact on Student Insurance Division and Star HRG
Division. The products of the Student Insurance
and Star HRG Divisions consist principally of medical insurance.
In general, medical insurance business, for which incurred dates
are assigned based on date of service, has a short
tail, which means that a favorable development or
unfavorable development shown for prior years relates primarily
to actual experience in the most recent prior year.
The favorable claim liability development experience at the
Student Insurance Division in 2005 in the amount of
$5.2 million is due to claims in 2005 developing more
favorably than indicated by the loss trends used to determine
the claim liability at December 31, 2004. The unfavorable
claims liability development experience in 2004 in the amount of
$4.7 million reflects the effects of a delay in processing
of prior-year claims and
higher-than-expected
claim experience associated with the business written for the
2003-2004
school year. The Student Insurance Division experienced
favorable claims liability development for 2003.
The unfavorable claim liability development at the Star HRG
Division in 2005 of $410,000 is within the normal statistical
variation in the model used to develop the reserve. The actual
development of prior years claims exceeded the expected
development of the claims liability. The favorable claims
liability development experience of $3.0 million in 2004
includes the effects of claims in 2004 developing more favorably
than indicated by the loss trends in 2003 used to determine the
claim liability at December 31, 2003. The Star HRG Division
also experienced favorable claims liability development for
2003. Since the Star HRG business was new to the Company
(acquired in 2002), an expected loss ratio was used to set the
claims liability at December 31, 2002.
Impact on Life Insurance Division. The varied
claim liability development experience at the Life Insurance
Division for each of the years presented is due to the
development of a closed block of workers compensation
business. The Life Insurance Division previously wrote
workers compensation insurance and similar group accident
coverage for employers in a limited geographical market. In May
2001, the Company made the decision to terminate this operation,
and all existing policies were terminated as the policies came
up for renewal over the succeeding twelve months. The closing of
new and renewal business starting in July of 2001 had the effect
of concentrating the claims experience into existing policies
and eliminating any benefits that might accrue from improved
underwriting of new business or liabilities released on newer
claims that might settle more quickly. The effect of closing a
block of this type of business is difficult to estimate at the
date of closing, due to the longer claims tail usually
experienced with workers compensation coverage, the tendency of
claims to concentrate in severity but without an associated
degree of predictability as the number of cases decreases, and
the unpredictable costs of protracted litigation often
associated with the adjudication of claims under workers
compensation policies.
Impact on Other Insurance. Through our
82.5%-owned subsidiary, ZON Re USA LLC (ZON Re), we
underwrite, administer and issue accidental death, accidental
death and dismemberment (AD&D), accident medical and
accident disability insurance products, both on a primary and on
a reinsurance basis. The unfavorable claim
F-32
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
liability development experience at ZON Re in 2005 in the amount
of $805,000 was due to certain large claims reported in 2005
associated with claims incurred in the prior year.
Note G Reinsurance
The Companys insurance subsidiaries, in the ordinary
course of business, reinsure certain risks with other insurance
companies. These arrangements provide greater diversification of
risk and limit the maximum net loss potential to the Company
arising from large risks. To the extent that reinsurance
companies are unable to meet their obligations under the
reinsurance agreements, the Company remains liable.
The reinsurance receivable included in the consolidated
financial statements at December 31, 2005 and 2004 was as
follows:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Paid losses recoverable
|
|
$
|
2,097
|
|
|
$
|
1,250
|
|
Unpaid losses recoverable
|
|
|
21,619
|
|
|
|
22,396
|
|
Other net
|
|
|
286
|
|
|
|
891
|
|
|
|
|
|
|
|
|
|
|
Total reinsurance receivable
|
|
$
|
24,002
|
|
|
$
|
24,537
|
|
|
|
|
|
|
|
|
|
|
The effects of reinsurance transactions reflected in the
consolidated financial statements are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Written:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
1,871,102
|
|
|
$
|
1,869,885
|
|
|
$
|
1,622,417
|
|
Assumed
|
|
|
40,310
|
|
|
|
25,277
|
|
|
|
30,904
|
|
Ceded
|
|
|
(15,999
|
)
|
|
|
(12,712
|
)
|
|
|
(39,062
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Written
|
|
$
|
1,895,413
|
|
|
$
|
1,882,450
|
|
|
$
|
1,614,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums Earned:
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct
|
|
$
|
1,892,519
|
|
|
$
|
1,840,738
|
|
|
$
|
1,593,824
|
|
Assumed
|
|
|
39,072
|
|
|
|
31,364
|
|
|
|
31,470
|
|
Ceded
|
|
|
(14,057
|
)
|
|
|
(13,359
|
)
|
|
|
(42,041
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Earned
|
|
$
|
1,917,534
|
|
|
$
|
1,858,743
|
|
|
$
|
1,583,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ceded benefits and settlement
expenses
|
|
$
|
29,259
|
|
|
$
|
10,321
|
|
|
$
|
29,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Coinsurance
Arrangement
Prior to 1996, a substantial portion of the health insurance
policies sold by UGA agents were issued by AEGON USA, Inc.
(AEGON) and coinsured by the Company. Under the
terms of the coinsurance agreement, AEGON agreed to cede (i.e.,
transfer), and the Company agreed to coinsure, 60% of the risk
associated with health insurance policies sold by UGA agents and
issued by AEGON.
Commencing in May 2001, and in accordance with an Assumption
Reinsurance Agreement with AEGON, the Company began novating the
remaining policies (i.e., canceling the AEGON policies and
rewriting as Company policies) as approvals were received from
state regulatory authorities. On the policies that had been
novated, the
F-33
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Company ceded 40% of the health insurance business back to AEGON
in accordance with the terms of the Assumption Reinsurance
Agreement.
Effective December 31, 2003, (a) the Company cancelled
the 40% coinsurance agreement with AEGON on the policies that
had been previously novated and (b) the Company assumed
from AEGON all of the risk previously borne by AEGON associated
with the in-force policies that had not been novated. As a
result of this transaction, UICI has reflected on its books 100%
of the business originally issued by AEGON.
Note H Debt
and Student Loan Credit Facility
Set forth below is a summary of the Companys long-term
indebtedness outstanding at December 31, 2005 and 2004
(including outstanding indebtedness that is secured by student
loans generated by the College Fund Life Division):
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Long-term debt:
|
|
|
|
|
|
|
|
|
Trust preferred securities
|
|
$
|
15,470
|
|
|
$
|
15,470
|
|
CFLD student loan credit facility
|
|
|
130,900
|
|
|
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
146,370
|
|
|
|
165,470
|
|
Less: current portion of long-term
debt
|
|
|
8,850
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt
|
|
|
137,520
|
|
|
|
165,470
|
|
|
|
|
|
|
|
|
|
|
Total short and long term debt
|
|
$
|
146,370
|
|
|
$
|
165,470
|
|
|
|
|
|
|
|
|
|
|
Student
Loan Credit Facility
At each of December 31, 2005 and 2004, the Company had an
aggregate of $130.9 million and $150.0 million,
respectively, of indebtedness outstanding under a secured
student loan credit facility, which indebtedness is represented
by Student Loan Asset-Backed Notes (the SPE
Notes) issued by a bankruptcy-remote special purpose
entity (the SPE). At December 31, 2005 and
2004, indebtedness outstanding under the secured student loan
credit facility was secured by alternative (i.e.,
non-federally guaranteed) student loans and accrued interest
in the carrying amount of $115.3 million and
$114.9 million, respectively, and by a pledge of cash, cash
equivalents and other qualified investments in the amount of
$20.5 million and $37.4 million, respectively. At
December 31, 2005, $12.2 million of such cash, cash
equivalents and other qualified investments was available to
fund the purchase from the Company of additional student loans
generated under the Companys College First Alternative
Loan program, which purchases may be made in accordance with the
terms of the agreements governing the securitization until
February 1, 2007.
All indebtedness issued under the secured student loan credit
facility is reflected as student loan indebtedness on the
Companys consolidated balance sheet; all such student
loans and accrued investment income pledged to secure such
facility are reflected as student loan assets and accrued
investment income, respectively, on the Companys
consolidated balance sheet; and all such cash, cash equivalents
and qualified investments specifically pledged under the student
loan credit facility are reflected as restricted cash on the
Companys consolidated balance sheet. The SPE Notes
represent obligations solely of the SPE and not of the Company
or any other subsidiary of the Company. For financial reporting
and accounting purposes the student loan credit facility has
been classified as a financing. Accordingly, in connection with
the financing the Company has recorded and will in the future
record no gain on sale of the assets transferred to the SPE.
The SPE Notes were issued by the SPE in three tranches
($50.0 million of
Series 2001A-1
Notes and $50.0 million of
Series 2001A-2
Notes issued on April 27, 2001, and $50.0 million of
Series 2002A Notes issued on
F-34
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
April 10, 2002). The interest rate on each series of SPE
Notes resets monthly in a Dutch auction process. At
December 31, 2005, the
Series 2001A-1
Notes, the
Series 2001A-2
Notes and the Series 2002A Notes bore interest at the per
annum rate of 4.44%, 4.40% and 4.40%, respectively.
The
Series 2001A-1
Notes and
Series 2001A-2
Notes have a final stated maturity of July 1, 2036; the
Series 2002A Notes have a final stated maturity of
July 1, 2037. However, the SPE Notes are subject to
mandatory redemption in whole or in part (a) on the first
interest payment date which is at least 45 days after
February 1, 2007, from any monies then remaining on deposit
in the acquisition fund not used to purchase additional student
loans and (b) on the first interest payment date which is
at least 45 days after July 1, 2005, from any monies
then remaining on deposit in the acquisition fund received as a
recovery of the principal amount of any student loan securing
payment of the SPE Notes, including scheduled, delinquent and
advance payments, payouts or prepayments. Beginning July 1,
2005, the SPE Notes were also subject to mandatory redemption in
whole or in part on each interest payment date from any monies
received as a recovery of the principal amount of any student
loan securing payment of the SPE Notes, including scheduled,
delinquent and advance payments, payouts or prepayments. During
2005, the Company made principal payments in the aggregate of
$19.1 million on these Notes.
The SPE and the secured student loan credit facility were
structured with an expectation that interest and recoveries of
principal to be received with respect to the underlying student
loans securing payment of the SPE Notes would be sufficient to
pay principal of and interest on the SPE Notes when due,
together with operating expenses of the SPE. This expectation
was based upon analysis of cash flow projections, and
assumptions regarding the timing of the financing of the
underlying student loans to be held by the SPE, the future
composition of and yield on the financed student loan portfolio,
the rate of return on monies to be invested by the SPE in
various funds and accounts established under the indenture
governing the SPE Notes, and the occurrence of future events and
conditions. There can be no assurance, however, that the student
loans will be financed as anticipated, that interest and
principal payments from the financed student loans will be
received as anticipated, that the reinvestment rates assumed on
the amounts in various funds and accounts will be realized, or
other payments will be received in the amounts and at the times
anticipated.
Trust Preferred
Securities
On April 29, 2004, the Company through a newly formed
Delaware statutory business trust (the Trust)
completed the private placement of $15.0 million aggregate
issuance amount of floating rate trust preferred securities with
an aggregate liquidation value of $15.0 million (the
Trust Preferred Securities). The Trust invested
the $15.0 million proceeds from the sale of the
Trust Preferred Securities, together with the proceeds from
the issuance to the Company by the Trust of its floating rate
common securities in the amount of $470,000 (the Common
Securities and, collectively with the Trust Preferred
Securities, the Trust Securities), in an
equivalent face amount of the Companys Floating Rate
Junior Subordinated Notes due 2034 (the Notes). The
Notes will mature on April 29, 2034, which date may be
accelerated to a date not earlier than April 29, 2009. The
Notes may be prepaid prior to April 29, 2009, at 107.5% of
the principal amount thereof, upon the occurrence of certain
events, and thereafter at 100.0% of the principal amount
thereof. The Notes, which constitute the sole assets of the
Trust, are subordinate and junior in right of payment to all
senior indebtedness (as defined in the Indenture, dated
April 29, 2004, governing the terms of the Notes) of the
Company. The Notes accrue interest at a floating rate equal to
three-month LIBOR plus 3.50%, payable quarterly on
February 15, May 15, August 15, and November 15
of each year. At December 31, 2005, the Notes bore interest
at an annual rate of 7.83%. The quarterly distributions on the
Trust Securities are paid at the same interest rate paid on
the Notes.
The Company has fully and unconditionally guaranteed the payment
by the Trust of distributions and other amounts payable under
the Trust Preferred Securities. The Trust must redeem the
Trust Securities when the Notes are paid at maturity or
upon any earlier prepayment of the Notes. Under the provisions
of the Notes, the Company has the right to defer payment of the
interest on the Notes at any time, or from time to time, for up
to twenty
F-35
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
consecutive quarterly periods. If interest payments on the Notes
are deferred, the distributions on the Trust Securities
will also be deferred.
On April 29, 2004, the Company received proceeds from the
transaction in the amount of $14.6 million, net of issuance
costs in the amount of $423,500, which cost is carried in
other assets on the Companys consolidated
balance sheet and is being amortized over five years as interest
expense.
In accordance with FASB Interpretation No. 46R,
Consolidation of Variable Interest Entities, the accounts
of the Trust have not been consolidated with those of the
Company and its consolidated subsidiaries. The Companys
$470,000 investment in the common equity of the Trust has been
reflected on the Companys consolidated balance sheet as
short term and other investments, and the income
paid to the Company by the Trust with respect to the Common
Securities, and interest received by the Trust from the Company
with respect to the $15.5 million principal amount of the
Notes, has been reflected in the Companys consolidated
statement of income as interest income and interest expense,
respectively. The Company recorded interest income and interest
expense of $32,000 and $1.1 million, respectively, for the
year ending December 31, 2005. The amount of interest
income and interest expense was $16,000 and $594,000,
respectively, for the 2004 period April 29, 2004 through
December 31, 2004.
Other
Effective November 1, 2004, the Company terminated a
$30.0 million bank credit facility that was otherwise
scheduled to mature in January 2005. At the time the facility
was terminated, the Company had no borrowings outstanding under
the facility.
In full payment of all contingent consideration payable in
connection with UICIs February 2002 acquisition of Star
HRG, on November 10, 2003 UICI delivered to the sellers
UICIs 6% convertible subordinated notes in the
aggregate principal amount of $15.0 million, together with
cash interest in the aggregate amount of approximately
$1.5 million. The subordinated notes were scheduled to
mature in February 2012. The subordinated notes were convertible
into UICI Common Stock at a conversion price of $20.06 per
common share. On April 19, 2004, the Company paid off in
full the outstanding convertible subordinated notes in the
aggregate amount of $15.0 million and accrued interest
thereon to the date of prepayment.
On June 1, 2004, the Company paid in full the final payment
due in the amount of $4.0 million plus interest of
$173,000, on its 8.75% Senior Notes due June 2004, which
the Company had issued on June 22, 1994, in the original
aggregate issuance amount of $27.7 million. The Company
incurred interest expense on the Senior Notes of $144,000 in
2004 through date of repayment. At December 31, 2003, the
Senior Notes were outstanding in the aggregate principal amount
of $4.0 million.
Principal payments required for the Companys corporate
debt and indebtedness outstanding under the Companys
secured student loan funding facility in each of the next five
years and thereafter are as follows:
|
|
|
|
|
|
|
|
|
|
|
Corporate
|
|
|
Student Loan
|
|
|
|
Debt
|
|
|
Credit Facility
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
|
|
|
$
|
8,850
|
|
2007
|
|
|
|
|
|
|
11,550
|
|
2008
|
|
|
|
|
|
|
14,050
|
|
2009
|
|
|
|
|
|
|
14,500
|
|
2010
|
|
|
|
|
|
|
13,800
|
|
2011 and thereafter
|
|
|
15,470
|
|
|
|
68,150
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
15,470
|
|
|
$
|
130,900
|
|
|
|
|
|
|
|
|
|
|
F-36
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The fair value of the Companys long-term debt (exclusive
of outstanding indebtedness that is secured by student loans
generated by the College Fund Life Division) was
$15.5 million at each of December 31, 2005 and 2004.
The fair value of such long-term debt is estimated using
discounted cash flow analyses, based on the Companys
current incremental borrowing rates for similar types of
borrowing arrangements.
The carrying amount of the outstanding indebtedness that is
secured by student loans generated by the College Fund Life
Division approximates fair value, since interest rates on such
indebtedness reset monthly.
Total interest paid was $5.8 million, $3.4 million and
$2.9 million in the years ended December 31, 2005,
2004 and 2003, respectively, including $4.8 million,
$2.3 million and $1.9 million, respectively, payable
with respect to outstanding indebtedness under the
Companys secured student loan credit facility.
Note I Federal
Income Taxes
Deferred income taxes for 2005 and 2004 reflect the impact of
temporary differences between the financial statement carrying
amounts and tax bases of assets and liabilities. Deferred tax
liabilities and assets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred policy acquisition and
loan origination
|
|
$
|
39,477
|
|
|
$
|
31,542
|
|
Unrealized gain on securities
|
|
|
|
|
|
|
10,843
|
|
Difference between financial and
tax bases
|
|
|
10,494
|
|
|
|
6,380
|
|
Other
|
|
|
|
|
|
|
2,004
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax
liabilities
|
|
|
49,971
|
|
|
|
50,769
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Litigation accruals
|
|
|
6,806
|
|
|
|
8,156
|
|
Policy liabilities
|
|
|
30,455
|
|
|
|
41,574
|
|
Operating loss carryforwards
|
|
|
366
|
|
|
|
596
|
|
Capital losses
|
|
|
16,710
|
|
|
|
14,013
|
|
Unrealized losses on securities
|
|
|
4,213
|
|
|
|
|
|
Invested assets
|
|
|
3,418
|
|
|
|
5,528
|
|
Stock compensation accrual
|
|
|
12,895
|
|
|
|
14,513
|
|
Other
|
|
|
5,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
80,255
|
|
|
|
84,380
|
|
Less: valuation allowance
|
|
|
18,182
|
|
|
|
17,042
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets
|
|
|
62,073
|
|
|
|
67,338
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
12,102
|
|
|
$
|
16,569
|
|
|
|
|
|
|
|
|
|
|
The Company establishes a valuation allowance when management
believes, based on the weight of the available evidence, that it
is more likely than not that some portion of the deferred tax
asset will not be realized. Realization of the net deferred tax
asset is dependent on generating sufficient future taxable
income. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if
estimates of future taxable income during the carryforward
period are reduced.
F-37
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
During 2003, the Company realized $59.3 million of net
capital losses for federal tax purposes. The capital losses were
generated in 2003 primarily from the sale of AMS, the sale of
its interest in Healthaxis and the sale of an agency
specializing in the sale of long-term care and Medicare
supplement insurance products and were partially offset by the
gain from the sale of a substantial portion of the
Companys equity stake in AMLI Residential. During 2005,
the Company realized an additional capital loss of
$2.3 million from sales of investments. To the extent not
utilized to offset capital gains generated in prior years, the
net capital losses generated in 2003 and 2005 will be carried
forward to future years, with the ability to utilize the
remaining capital losses generated in 2003 and 2005 expiring in
2008 and 2010, respectively.
During 2003 the Company determined that it was more likely than
not that it would not be able to realize its deferred tax assets
related to a portion of the capital loss carryforwards generated
in 2003 and certain investment impairments that would likely
result in capital losses in the short term. Accordingly, the
Company established a valuation allowance associated with the
carryforwards and certain investment impairments at
December 31, 2003. As of December 31, 2004, the
balance of the valuation allowance was $17.0 million, a
reduction of $2.8 million from the valuation allowance at
December 31, 2003 which is attributable primarily to
realization of tax capital gains during 2004. The balance of the
valuation allowance as of December 31, 2005 is
$18.2 million; the increase of $1.2 million is
attributable primarily to the 2005 capital losses. At this time,
the Company does not anticipate selling appreciated assets and
reinvesting the proceeds at lower interest rates solely for the
purpose of generating capital gains to utilize the capital loss
carryover before its expiration.
The provision for income tax expense (benefit) consisted of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
From operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense
|
|
$
|
92,372
|
|
|
$
|
69,987
|
|
|
$
|
53,495
|
|
Deferred tax expense (benefit)
|
|
|
17,808
|
|
|
|
5,281
|
|
|
|
(8,903
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from continuing operations
|
|
|
110,180
|
|
|
|
75,268
|
|
|
|
44,592
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense (benefit)
|
|
|
899
|
|
|
|
4,350
|
|
|
|
(18,715
|
)
|
Deferred tax expense (benefit)
|
|
|
1,715
|
|
|
|
(5,434
|
)
|
|
|
2,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total from discontinued operations
|
|
|
2,614
|
|
|
|
(1,084
|
)
|
|
|
(16,522
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
112,794
|
|
|
$
|
74,184
|
|
|
$
|
28,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The Companys effective income tax rates applicable to
continuing operations varied from the maximum statutory federal
income tax rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Statutory federal income tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
Small life insurance company
deduction
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
(0.1
|
)
|
Low income housing credit
|
|
|
(0.3
|
)
|
|
|
(0.5
|
)
|
|
|
(0.8
|
)
|
Tax on policyholder surplus account
|
|
|
|
|
|
|
|
|
|
|
0.5
|
|
Nondeductible expenses
|
|
|
0.2
|
|
|
|
0.5
|
|
|
|
0.2
|
|
Merger transaction costs
|
|
|
1.0
|
|
|
|
|
|
|
|
|
|
Tax exempt income
|
|
|
(0.4
|
)
|
|
|
|
|
|
|
|
|
Reduction of tax accrual
|
|
|
|
|
|
|
(0.7
|
)
|
|
|
(0.9
|
)
|
Other items, net
|
|
|
(0.2
|
)
|
|
|
(0.3
|
)
|
|
|
(0.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective income tax rate
applicable to continuing operations
|
|
|
35.2
|
%
|
|
|
34.0
|
%
|
|
|
33.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Under
pre-1984
federal income tax laws, a portion of a life insurance
companys gain from operations was not subject
to current income taxation but was accumulated for tax purposes
in a memorandum account designated as policyholders
surplus account (PSA). However, these accumulated amounts
are generally taxable if (a) the life insurance company
fails to qualify as a life insurance company for federal income
tax purposes for two consecutive years, (b) these amounts
are distributed or (c) these amounts exceed certain
statutory limitations. The aggregate accumulation in the PSA
account for the Companys life insurance subsidiaries was
approximately $1.6 million at December 31, 2005. The
American Jobs Creation Act of 2004 (the 2004 Act)
suspended the taxation of distributions paid during 2005 and
2006 from the PSA account and changed the order of accounts
affected by distributions. Distributions during the suspension
period are deemed to reduce the PSA account before reducing the
amounts distributed from shareholder accounts. The Company plans
to distribute the PSA account balance during 2006 to capture
this tax-free distribution opportunity provided by the 2004 Act.
At December 31, 2005, MEGA had an aggregate federal tax
loss carryforward from certain acquired subsidiaries of
$1.0 million for use to offset future taxable income, under
certain circumstances, with expiration dates in 2006 and 2007.
The maximum amounts of federal tax loss carryforwards available
are $658,000 in 2006 and $388,000 in 2007.
Total federal income taxes paid were $107.2 million,
$87.6 million and $15.9 million for 2005, 2004 and
2003, respectively.
The Company and all of its corporate subsidiaries (other than
two offshore life insurance companies that have not met the
ownership requirements to join a tax consolidation) file a
consolidated federal income tax return.
Note J Stockholders
Equity
On August 18, 2004, the Companys Board of Directors
adopted a policy of issuing a regular semi-annual cash dividend
on shares of its common stock. In accordance with the dividend
policy, on August 18, 2004, the Companys Board of
Directors declared a regular semi-annual cash dividend of $0.25
on each share of Common Stock, which dividend was paid on
September 15, 2004 to shareholders of record at the close
of business on September 1, 2004. On February 9, 2005,
the Companys Board of Directors declared a regular
semi-annual cash dividend of $0.25 per share and a special
cash dividend of $0.25 per share. The regular and special
dividend were paid on March 15, 2005 to shareholders of
record at the close of business on February 21, 2005. On
July 28, 2005, the Companys Board of Directors
declared a regular semi-annual cash dividend of $0.25 on each
share of Common Stock. The cash dividend was paid on
September 15, 2005 to shareholders of record at the close
of business on August 22, 2005.
F-39
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
In accordance with the terms of the definitive agreement
contemplating the acquisition of the Company in a cash merger by
a group of private equity firms, the Company is prohibited from
declaring or paying additional dividends on shares of its common
stock. Accordingly, the Companys Board of Directors has
terminated its previously announced policy of issuing a regular
semi-annual cash dividend on shares of its common stock.
At its April 28, 2004 quarterly meeting, the UICI Board of
Directors reconfirmed the Companys 1998 share
repurchase program, in which it initially authorized the
repurchase of up to 4,500,000 shares of UICI common stock
from time to time in open market or private transactions, and
granted management authority to repurchase up to an additional
1,000,000 shares. Through December 31, 2005, the
Company had purchased under the program an aggregate of
4,881,900 shares (at an aggregate cost of
$71.2 million; average cost per share of $14.58), of which
310,900 shares (at an aggregate cost of $7.0 million;
average cost per share of $22.66) were purchased during 2005.
The Company now has remaining authority pursuant to the program
as reauthorized to repurchase up to an additional
618,100 shares. Following execution on September 15,
2005, of a definitive agreement contemplating the acquisition of
the Company in a cash merger by a group of private equity firms,
the Company does not anticipate repurchasing any additional
shares of common stock pursuant to the program.
The Company sponsors a series of stock accumulation plans (the
Agent Plans) established for the benefit of the
independent insurance agents and independent sales
representatives associated with the Company. The Agent Plans
generally combine an agent-contribution feature and a
Company-match feature. For financial reporting purposes, the
Company accounts for the Company-match feature of its Agent
Plans by recognizing compensation expense over the vesting
period in an amount equal to the fair market value of vested
shares at the date of their vesting and distribution to the
participants. The Company estimates its current liability for
unvested matching credits by reference to the number of unvested
credits, the current market price of the Companys common
stock, and the Companys estimate of the percentage of the
vesting period that has elapsed up to the current quarter end.
Changes in the liability from one quarter to the next are
accounted for as an increase in, or decrease to, compensation
expense, as the case may be. Upon vesting, the Company reduces
the accrued liability (equal to the market value of the vested
shares at date of vesting) with a corresponding increase to
equity. See Note M.
Generally, the total stockholders equity of domestic
insurance subsidiaries (as determined in accordance with
statutory accounting practices) in excess of minimum statutory
capital requirements is available for transfer to the parent
company, subject to the tax effects of distribution from the
policyholders surplus account described in
Note I. The minimum aggregate statutory capital and surplus
requirements of the Companys principal domestic insurance
subsidiaries was $88.2 million at December 31, 2005,
of which minimum surplus requirements for MEGA,
Mid-West and
Chesapeake were $61.6 million, $18.6 million and
$8.0 million, respectively.
Prior approval by insurance regulatory authorities is required
for the payment by a domestic insurance company of dividends
that exceed certain limitations based on statutory surplus and
net income. During 2005 and 2004, the domestic insurance
companies paid dividends in the amount of $146.0 million
and $23.0 million, respectively, to the holding company.
During 2006, the Companys domestic insurance companies
could pay aggregate dividends to the parent company of
approximately $213.3 million without prior approval by
statutory authorities.
Combined net income and stockholders equity for the
Companys domestic insurance subsidiaries determined in
accordance with statutory accounting practices and as reported
in regulatory filings are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Net income
|
|
$
|
200,222
|
|
|
$
|
142,292
|
|
|
$
|
37,028
|
|
Statutory surplus
|
|
$
|
521,224
|
|
|
$
|
448,468
|
|
|
$
|
364,816
|
|
F-40
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note K Related
Party Transactions
Introduction
Historically, the Company and its subsidiaries have engaged from
time to time in transactions and joint investments with
executive officers and entities controlled by executive
officers, particularly the late Mr. Jensen (the
Companys former Chairman) and entities in which
Mr. Jensen had, and his adult children have, an interest
(Jensen Affiliates).
Under the Companys by-laws, any contract or other
transaction between the Company and any director (or company in
which a director is interested) is valid for all purposes if the
interest of such director is disclosed or known and such
transaction is authorized by a majority of directors not
interested in the transaction. The Board of Directors has
adopted a policy requiring the prospective review and approval
by a majority of the Disinterested Outside Directors
of any contract or transaction with a related party involving
payments of $250,000 or more in any twelve-month period or
$1.0 million over the life of the contract. For purposes of
the policy, a related-party is a person or entity
that is an affiliate of the Company or any entity in
which any officer or director of the Company has a 5% or greater
equity interest, and a Disinterested Outside
Director is any director of UICI who is an employee of
neither the Company nor any affiliate of the Company and
otherwise holds no interest in any person or entity with which
the Company proposes to enter into a transaction in question.
The Company believes that the terms of all such transactions
with all related parties, including all Jensen Affiliates, are
and have been on terms no less favorable to the Company than
could have been obtained in arms length transactions with
unrelated third parties.
Transactions
with Mr. Jensen and Jensen Affiliates
Special
Investment Risks, Ltd.
Special Investment Risks, Ltd. (SIR) (formerly
United Group Association, Inc. (UGA)) is owned by
the estate of Mr. Jensen, of which Gladys J. Jensen
(Mr. Jensens surviving spouse) serves as independent
executor. Mrs. Jensen, individually and in her capacity as
executor of the estate of Mr. Jensen, beneficially holds
approximately 17.04% of the outstanding shares of UICI.
From the Companys inception through 1996, SIR sold health
insurance policies that were issued by AEGON USA and coinsured
by the Company or policies issued directly by the Company.
Effective January 1, 1997, the Company acquired the agency
force of SIR. In accordance with the terms of the asset sale to
the Company, SIR retained the right to receive all commissions
on policies written prior to January 1, 1997, including the
policies previously issued by AEGON and coinsured by the Company
and the policies previously issued directly by the Company. The
commissions paid to SIR on the coinsured policies issued by
AEGON are based on commission rates negotiated and agreed to by
AEGON and SIR at the time the policies were issued prior to
1997, and the commission rates paid on policies issued directly
by the Company are commensurate with the AEGON renewal
commission rates. The Company expenses its proportionate share
of commissions payable to SIR on co-insured policies issued by
AEGON. During 2005, 2004 and 2003, SIR received insurance
commissions of $134,000, $176,000, and $559,000, respectively,
on the policies issued by AEGON prior to January 1, 1997
and coinsured by the Company. During 2005, 2004 and 2003, SIR
received commissions of $2.5 million, $3.1 million and
$2.7 million, respectively, on policies issued prior to
January 1, 1997 and issued directly by the Company.
In accordance with the terms of an amendment, dated
July 22, 1998, to the terms of the sale of the UGA assets
to the Company, SIR was granted the right to retain 10% of net
renewal commissions (computed at the
UGA Association Field Services agency level) on
any new business written by the UGA agency force after
January 1, 1997. In an effort to simplify the calculation
of the payments to be made to Mr. Jensen and to clarify
with specificity the business subject to this override
arrangement, effective October 1, 2003 the Company and SIR
entered into an amendment to the asset sale agreement, the
principal effect of which is to change the basis of the override
F-41
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
calculation from a multiple of renewal commissions received by
UGA Association Field Services to a multiple of
commissionable renewal premium received. Based on
managements projections of future business, the Company
estimated that the absolute amount of future override commission
to be paid to SIR pursuant to the amendment will not vary in any
material respect from that expected to be paid in accordance
with the prior arrangement. During the years ended
December 31, 2005, 2004 and 2003, the Company paid to SIR
the amount of $4.4 million, $3.9 million and
$3.7 million, respectively, pursuant to this arrangement.
In 2005, 2004 and 2003, the late Mr. Jensen (through SIR)
paid to the Company $91,000, $66,000 and $303,000, respectively,
to fund obligations of SIR owing to the Companys agent
stock accumulation plans. Mr. Jensen incurred this
obligation prior to the Companys purchase of the UGA
agency in 1997. See Note M.
Richland
State Bank
Richland State Bank (RSB) is a state-chartered bank
in which the estate of Mr. Jensen holds a 100% equity
interest. In accordance with the terms of a loan origination
agreement with Academic Management Services Corp. (the
Companys former student finance subsidiary), RSB
historically provided to AMS certain loan origination and
underwriting services with respect to an AMS student loan
program for students in post-secondary education (primarily
graduate health curricula). In accordance with the origination
agreement, RSB originated the student loans and resold such
loans to AMS at par plus an origination fee of 31 basis
points (0.31%). In addition, the agreement provided that AMS was
required to prefund all loans originated by RSB by depositing on
account at RSB cash sufficient to fund the loans.
Following announcement of collateral deficiencies at AMS in July
2003, AMS terminated the uninsured alternative student loan
program for which RSB acted as originator. However, loans and
loan commitments in process prior to July 16, 2003
continued to be funded. In an effort to free up cash to be used
for operations at AMS, on September 25, 2003, AMS and RSB
entered into an amendment to the loan origination agreement,
pursuant to which RSB agreed to release to AMS restricted cash
on deposit (approximately $2.0 million) and hold the
student loans until December 31, 2003 (in the case of fully
funded loans) and May 20, 2004 (in the case of second
disbursements).
All obligations of AMS under the loan origination agreement with
RSB, as amended by the agreement dated September 25, 2003,
were guaranteed by UICI. On November 18, 2003, UICI sold
all of its equity interest in AMS to an unaffiliated third party
and, in connection with such sale, the purchaser agreed to
indemnify and hold UICI harmless from any future liability
associated with UICIs guaranty.
During 2003, RSB originated $26.3 million aggregate
principal amount of student loans for AMS, for which it received
$82,000 in origination fees.
RSB also provides student loan origination services for the
Companys former College Fund Life Insurance Division
of MEGA and
Mid-West.
Pursuant to a Loan Origination and Purchase Agreement, dated
June 12, 1999 and as amended, RSB originates student loans
and resells such loans to UICI Funding Corp. 2
(Funding) (a wholly owned subsidiary of UICI) at par
(plus accrued interest). During 2005, 2004 and 2003, RSB
originated for the College Fund Life Division
$7.6 million, $11.6 million and $15.7 million
aggregate principal amount plus accrued interest, respectively,
of student loans.
At its regular quarterly meeting held on July 28, 2005, the
UICI Board of Directors approved the execution and delivery of a
new Loan Origination and Purchase Agreement among UICI, UICI
Funding Corp. 2, RSB and Richland Loan Processing Center,
Inc. ( a wholly owned subsidiary of RSB), pursuant to which RSB
originates and funds, and Richland Loan Processing Center, Inc.
provides underwriting, application review, approval and
disbursement services, in connection with private student loans
generated under the Companys College Fund Life
Division Program. For such services, RSB earns a fee in the
amount of 150 basis points (1.5%) of the original principal
amount of each disbursed student loan. The agreement further
provides that UICI Funding Corp. 2 will
F-42
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
continue to purchase (at par) the private loans funded and
originated by Richland State Bank. During 2005, RSB generated
origination fees in the amount of $78,000 pursuant to the terms
of this agreement.
During 2005, 2004 and 2003, RSB collected on behalf of, and paid
to, Funding $696,000, $1.1 million and $1.4 million,
respectively, in guarantee fees paid by student borrowers in
connection with the origination of student loans. During 2005,
2004 and 2003, RSB collected on behalf of and collectively paid
to the College Fund Life Division $59,000, $289,000 and
$390,000, respectively, representing origination fees paid by
student borrowers in connection with the origination of student
loans.
During 2005, 2004 and 2003, Funding received from RSB interest
income in the amount of $16,000, $2,000 and $3,000,
respectively, on money market accounts maintained by the Company
at, and on certificates of deposit issued by, RSB.
Specialized
Association Services, Inc.
Pursuant to an agreement entered into in July 1998 and
terminated effective December 31, 2002 (the July 1998
Agreement), Specialized Association Services, Inc.
(SAS) (which is controlled by the late
Mr. Jensens adult children) paid UICI Marketing for
certain benefits provided to association members. UICI
Marketing, in turn, purchased such benefits from third parties
(including National Motor Club of America, which is controlled
by the estate of Mr. Jensen).
Upon termination of the July 1998 Agreement effective
December 31, 2002, SAS and Benefit Administration for the
Self-Employed, LLC (BASE 105) (an 80% owned
subsidiary of the Company) entered into a new agreement
effective January 1, 2003 (the January 2003
Agreement), pursuant to which SAS purchased from BASE 105
a benefit provided to association members. In 2005, 2004 and
2003 SAS paid BASE 105 the amount of $2.0 million,
$3.1 million and $2.8 million, respectively, in
accordance with this arrangement. Effective January 1,
2006, the January 2003 Agreement was terminated, and BASE 105
will thereafter provide the benefit directly to the membership
associations.
During 2002, SAS began purchasing directly from MEGA certain
ancillary benefit products (including accidental death, hospital
confinement and emergency room benefits) for the benefit of the
membership associations that make available to their members the
Companys health insurance products. The aggregate amount
paid by SAS to MEGA for these benefit products was
$11.3 million, $12.5 million and $10.9 million in
2005, 2004 and 2003, respectively. Effective January 1,
2006, this arrangement with SAS was terminated, and MEGA will
provide the ancillary benefit products directly to the
membership associations.
SAS reimburses MEGA for certain billing and collection services
that MEGA provides to membership associations members per an
agreement entered into in January 1, 1998. The aggregate
amount paid by SAS to MEGA for this reimbursement of services
was $211,000, $274,000 and $267,000 in 2005, 2004 and 2003,
respectively.
UICI Marketing provides various printing and video services.
During 2005, 2004 and 2003, SAS paid UICI Marketing $55,000,
$95,000 and $221,000, respectively, for various printing and
video services.
During 2005, 2004 and 2003, the Company paid to SAS $0, $8,000
and $24,000, respectively, for various services and
reimbursement of expenses. The Company received from SAS $4,000,
$4,000 and $2,000 during 2005, 2004 and 2003, respectively, for
reimbursement of expenses. During 2003, SAS paid to MEGA
$246,000 for leased office facilities.
In 2005, 2004 and 2003, the Company paid $58,000, $248,000 and
$259,000, respectively, to Small Business Ink (a division of
Specialized Association Services) for printing services. Small
Business Ink was closed down in April 2005.
F-43
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
NetLojix
Communications, Inc.
Until June 2003, the late Mr. Jensen and his adult children
beneficially held in the aggregate approximately 59% of the
issued capital stock of NetLojix Communications, Inc., formerly
a provider of telecommunications services
(NetLojix). The Company was formerly a party to an
agreement with NetLojix, in accordance with which NetLojix
provided long distance voice telecommunications services to the
Company. That agreement (which expired on October 31,
2002) required UICI to purchase a minimum of $86,000 in
service per month at a rate of $0.0299 per minute for
interstate calls and $0.070 per minute, or $0.075 per
minute, depending on the state, for intrastate calls. The
Company paid NetLojix $161,000 in 2003 for long distance
telecommunications and transition services pursuant to the terms
of the agreement.
On August 23, 2002, UICI and NetLojix entered into a
one-year master services agreement, pursuant to which NetLojix
provided to UICI and its subsidiaries certain technical support
services. During the six months ended June 30, 2003, the
Company paid to NetLojix $16,000 pursuant to this agreement.
Onward
and Upward, Inc. and Other Entities Owned by the Jensen Adult
Children
The five adult children of the late Mr. Jensen hold in the
aggregate 100% of the equity interest in Onward &
Upward, Inc. (OUI), the holder of approximately 5.9%
of the Companys outstanding Common Stock.
OUI formerly held a 21% equity interest in U.S. Managers
Life Insurance Company, Ltd. (merged into United Group
Reinsurance Company effective December 31, 2003), a Turks
and Caicos Islands domiciled insurer
(U.S. Managers). UICI held the remaining 79%
majority interest in U.S. Managers. The shares held by OUI
were subject to the terms of a Stock Agreement, dated as of
January 3, 1992, as amended (the Stock
Agreement), between UICI and OUI, pursuant to which OUI
had a put, and UICI had a corresponding obligation to purchase,
the minority interest in U.S. Managers at a formula price
generally equal to the cost of such minority interest plus (or
minus) cumulative earnings (losses) of U.S. Managers.
OUI notified UICI of its intent to exercise its put and sell its
21% minority interest in U.S. Managers at the formula price
calculated as of July 31, 2003, and UICI and OUI entered
into a Purchase Agreement governing the terms of the exercise of
the put and sale to UICI of the minority interest. In accordance
with the terms of the Purchase Agreement, on August 26,
2003, UICI purchased the 21% minority interest in
U.S. Managers from OUI for a purchase price of $863,000,
representing the formula price at July 31, 2003.
In 2005 and 2004, the Company received $14,000 and $17,000,
respectively, for printing services provided to a charitable
foundation, of which an adult child of the late Mr. Jensen
served as grantor and currently serves as sole trustee.
Transfer
of Interest in SunTech Processing Systems, LLC
On May 13, 2003, the Company, the late Mr. Jensen and
the plaintiffs reached agreement on a full and final settlement
of certain litigation concerning the distribution of the cash
proceeds from the sale and liquidation of SunTech Processing
Systems, LLC (STP) assets in February 1998.
Following settlement of the litigation, and pursuant to the
terms of an agreement dated as of June 17, 2003, by and
between UICI and Mr. Jensen, Mr. Jensen exercised his
option to purchase UICIs membership interests in STP, and
UICI assigned and transferred to Mr. Jensen all of the
Companys right, title and interest in and to such STP
membership interests. For financial reporting purposes the
Company recognized no gain or loss in connection with this
transaction.
Transactions
with National Motor Club
Members of the family of Mr. Jensen (including the estate
of Mr. Jensen) and William J. Gedwed (a director and the
President and Chief Executive of the Company) currently hold a
94.7% and 5.3% equity interest,
F-44
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
respectively, in NMC Holdings, Inc. (NMC), the
ultimate parent company of National Motor Club of America
(NMCA).
Effective January 1, 2003, MEGA and NMCA entered into an
administrative services agreement for a term ending on
December 31, 2004, pursuant to which NMCA paid to MEGA in
2004 and 2003 the amount of $2.1 million and
$1.3 million, respectively. Effective January 1, 2005,
MEGA and NMCA entered into a new three-year administrative
agreement for a term ending on December 31, 2007 on terms
similar to those contained in the agreement that terminated on
December 31, 2004. During 2005, NMCA paid to MEGA the
amount of $957,000 pursuant to the terms of this agreement.
During 2005, 2004 and 2003, NMCA paid the Company $209,000,
$202,000 and $236,000, respectively, for printing and various
other services. During 2005 and 2004, subsidiaries of NMCA paid
the Company an aggregate of $135,000 and $123,000 for printing
and other services.
Transactions
with Healthaxis, Inc.
At December 31, 2002, the Company held
24,224,904 shares of common stock of Healthaxis, Inc.
(HAXS: Nasdaq) (HAI), which at such date represented
approximately 45% of the issued and outstanding shares of HAI.
The Company also held (a) a warrant to purchase
12,291 shares of HAI common stock at an exercise price of
$3.01 per HAI share; (b) a warrant to purchase
200,100 shares of HAI common stock at an exercise price of
$4.40 per HAI share; (c) a warrant to purchase
10,005 shares of HAI common stock at an exercise price of
$12.00 per share; and (d) 1,424 shares of HAI
2% convertible preferred stock, which preferred stock has a
stated liquidation value of $1,000 per share and is
convertible into 542,476 shares of HAI common stock at a
conversion price per HAI share of $2.625. On July 31, 2002,
UICI acquired the shares of HAI 2% convertible preferred stock
and cash in the amount of $243,000 in exchange for
$1.67 million principal amount of HAI 2% convertible
debentures (which were convertible into an aggregate of
185,185 shares of HAI common stock). In 2003, the Company
received dividends totaling $43,000 from HAI.
Effective September 30, 2003, the Company sold to HAI its
entire equity interest in HAI (including all common and
preferred stock and warrants) for a sale price of
$3.9 million, of which $500,000 was paid in cash at
closing, and the balance was paid by an unsecured promissory
note issued by HAI to the Company in the principal amount of
$3.4 million. The note is amortized by credits against
amounts otherwise payable by UICI for data and imaging services
provided from time to time by Healthaxis Imaging Services (a
subsidiary of HAI), to MEGA, in accordance with an existing
service agreement. The note has a three year term and is payable
monthly in the amount of 50% of the service fees due pursuant to
the service agreement or $65,000 per month, whichever is
greater. At December 31, 2005, HAI had outstanding
$2.0 million of principal and accrued interest under the
note. The Company recognized a nominal loss for financial
reporting purposes in connection with the sale.
HAI formerly provided to the Company and its affiliates certain
information technology services, including claims imaging and
software-related services, for which UICI paid to HAI
$1.3 million in 2003 (through September 30, 2003).
The aggregate amounts paid by UICI to HAI in the nine months
ended September 30, 2003 represented 8% of HAIs total
gross revenues of $16.2 million in that period.
F-45
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Other
Transactions with Certain Members of Management
Transactions
with Former Chief Executive Officer
Set forth below is a summary of certain transactions between
Mr. Gregory T. Mutz (who until December 31, 2003,
served as a director of the Company, and until July 1,
2003, served as the president and chief executive officer of the
Company) and certain parties related to the Company:
AMLI Residential Properties Trust. At
December 31, 2005, 2004 and 2003, the Company held a -0-%,
-0-% and 2.3% fully diluted interest, respectively, in AMLI
Residential Properties Trust, a publicly-traded real estate
investment trust (AMLI Residential). During 2003,
Mr. Mutz also served as Chairman of the Board and,
effective February 2, 2004, as chief executive officer, of
AMLI Residential. As Chairman of the Board of AMLI Residential,
Mr. Mutz received certain compensation and participated in
various option and deferred compensation programs, all of which
were described in the AMLI Residential proxy statement. In
addition, as of December 31, 2003, AMLI had outstanding
secured and unsecured loans owing from Mr. Mutz in the
aggregate amount of $270,000, the proceeds of which had been
used to purchase shares of AMLI Residential beneficial interest.
Sale of Shares by Mr. Mutz. On
May 6, 2003, the Company completed the purchase of
207,104 shares of UICI common stock from Mr. Mutz. The
shares were purchased for a total purchase price of
$2.8 million, or $13.67 per share, which was the
closing price of UICI shares on the New York Stock Exchange on
May 5, 2003. A portion of the proceeds from the sale was
used to repay in full loans owing by Mr. Mutz to the
Company in the amount of $1.3 million.
In a separate transaction, on May 8, 2003, Mr. Mutz
sold 265,507 shares of UICI common stock to
Mr. Jensen. All of the proceeds of such sale were used by
Mr. Mutz to pay in full indebtedness owing to
Mr. Jensen, which indebtedness had initially been incurred
to acquire shares of UICI stock in 1998.
Separation Agreement. Pursuant to the terms of
an agreement, dated as of February 11, 2004, Mr. Mutz
agreed to resign from the Board of Directors of the Company
effective December 31, 2003 and the Company agreed, among
other things, to pay to Mr. Mutz the amount of $510,000,
payable in equal monthly installments of $42,500 over the twelve
month period ended December 31, 2004.
Other
Loans to Management
At December 31, 2003, Mr. Gedwed had a loan payable to
the Company in the outstanding principal amount of $139,000. The
loan bore interest at 5.37% per annum, was scheduled to
mature on May 26, 2005, was full recourse to the borrower
and was payable in full upon the occurrence of certain events,
including the termination of employment. On November 8,
2004, Mr. Gedwed repaid in full the note payable to the
Company in the amount of $139,000.
Other
Transactions
On April 1, 2002, the Company through a subsidiary entered
into a Loan Servicing Agreement (as amended, the Servicing
Agreement) with Affiliated Computer Services (formerly
known as AFSA Data Corporation) (ACS), pursuant to
which ACS provides computerized origination, billing, record
keeping, accounting, reporting and loan management services with
respect to a portion of the Companys CFLD-I student loan
portfolio. Mr. Dennis McCuistion, who became a director of
UICI effective May 19, 2004, is also a director of ACS.
During 2005 and 2004 (for the period from May 19, 2004
through December 31, 2004), the Company paid ACS $725,000
and $397,000, respectively, pursuant to the terms of the
Servicing Agreement.
The Company formerly received investment management services
from investment advisory firms affiliated with former directors
of the Company. During 2004 (until January 27,
2004) and 2003, the Company paid advisory fees in the
amount of $-0-, and $199,000, respectively, to Emerald Capital
Group, Ltd., for which Mr. Patrick J. McLaughlin (who
resigned as a director of the Company effective January 27,
2004) serves as a managing director
F-46
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
and owner. The Company terminated its agreement with Emerald
Capital Group, Ltd. with respect to the provision of investment
advisory services effective September 1, 2004. During 2004
(until May 19, 2004) and 2003, the Company also paid
investment advisory fees in the amount of $268,000 and $440,000,
respectively, to The Chicago Trust Company. Mr. Stuart D.
Bilton (a director of the Company until May 19,
2004) serves as Vice Chairman of ABN AMRO Asset Management
Holdings, Inc., which in 2001 acquired The Chicago Trust Company.
In accordance with the terms of a Consulting Agreement, dated
September 14, 1999, as amended, the Company formerly
retained Emerald Capital Group, Ltd. to provide investment
banking and insurance advisory services for an annual fee of
$400,000 plus expenses. During 2004 (until January 27,
2004) and 2003, the Company paid an aggregate of $103,000
and $458,000, respectively, in fees and expenses to Emerald
Capital Group, Ltd. for such services. Effective
December 31, 2004, the Company terminated its agreement
with Emerald Capital Group, Ltd. with respect to the provision
of investment banking and insurance advisory services.
In May 2002, the Company entered into an agreement with a former
executive officer, pursuant to which the former officer resigned
as an officer of the Company and various UICI affiliates
effective June 1, 2002. In accordance with the agreement,
the former officer received a one-time severance payment of
$15,000, and the former officer agreed to provide consulting
services to UICI for a term that expired on May 31, 2003
for an aggregate fee of $151,000.
In September 2003, the Company entered into an agreement with a
former executive officer, pursuant to which the former officer
resigned as an executive officer of the Company and as an
officer of various UICI affiliates effective September 26,
2003. In accordance with the agreement, the Company agreed,
among other things, to pay to the executive severance in the
amount of $419,000, of which $109,000 was paid in a lump sum and
$310,000 was payable in twelve equal monthly installments over
the period ended on September 1, 2004.
In June 2000, Mr. Mockler (a director of the Company)
purchased 2,000 shares of UICI common stock in exchange for
cash in the amount of $6,000 and a promissory note in the amount
of $8,000. At each of December 31, 2004 and 2003, the
amount outstanding on Mr. Mocklers note was $8,000.
This note was repaid in full on February 1, 2005.
Note L Commitments
and Contingencies
The Company is a party to the following material legal
proceedings:
Blackstone
Litigation
As previously disclosed, the Company and individual members of
its Board of Directors were named as defendants in five
purported class action suits challenging the proposed
acquisition of the Company by a group of private equity firms
(Green Meadows Partners L.P. v. UICI, William J. Gedwed,
Glenn W. Reed, Richard T. Mockler, Mural R. Josephson, R.H. Mick
Thompson, Dennis C. McCuistion, Morgan Stanley & Co.
Incorporated and The Blackstone Group, filed on
September 15, 2005 in the District Court of Dallas County,
Texas,
E-101st Judicial
District, Case
No. 05-09693;
Ruediger v. UICI, Ronald L. Jensen, William J. Gedwed,
Glenn W. Reed, Richard T. Mockler, Mural R. Josephson, R.H. Mick
Thompson, Dennis C. McCuistion, and The Blackstone Group,
filed on September 28, 2005 in the District Court of Dallas
County, Texas, D-95th Judicial District, Case
No. 05-10033;
Scott v. UICI, William J. Gedwed, Glenn W. Reed, Richard
T. Mockler, Mural R. Josephson, R. H. Mick Thompson and
Dennis C. McCuistion, filed on September 30, 2005 in
the District Court of Oklahoma County, State of Oklahoma, Case
No. CJ-2005-7731;
Pepper v. UICI, et al., filed on
October 11, 2005 in the District Court of Oklahoma County,
State of Oklahoma, Case
No. CJ-2005-7967;
and Bauer v. William J. Gedwed, Glenn W. Reed,
Richard T. Mockler, Mural R. Josephson, R.H. Mick Thompson and
Dennis C. McCuistion, filed on October 6, 2005 in the
District Court of Tarrant County, Texas, Case
No. 236-214443-05).
F-47
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The petitions generally challenge the price to be paid in the
proposed transaction and the process leading up to the
transaction. The petitions generally seek unspecified
compensatory monetary damages and injunctive relief to enjoin
the transaction.
The Green Meadows Partners, Ruediger and Bauer
cases were transferred to the District Court of Dallas
County, Texas,
E-101st Judicial
District and consolidated as In Re: UICI Shareholder
Litigation, Consolidated Cause No.
05-09693.
The Scott and Pepper cases were consolidated as
Scott v. UICI, et al. in the District Court of Oklahoma
County, State of Oklahoma, Case No.
CJ-2005-7731.
UICI believes that the cases are without merit and intends to
mount a vigorous defense. UICI has agreed to advance the
expenses of the individual defendants incurred in connection
with the defense of the cases, subject to the defendants
undertaking to repay such advances unless it is ultimately
determined that they are or would have been entitled to
indemnification by UICI under the terms of the Companys
bylaws.
Delaware
Books and Records Litigation
As previously disclosed, UICI was named a defendant in an action
filed on November 23, 2004 (Amalgamated Bank, as
Trustee, v. UICI, pending in the Court of Chancery of
the State of Delaware, New Castle County, C.A.
No. 884-N),
in which plaintiff seeks to enforce its right to inspect certain
corporate books and records of UICI pursuant to Section 220
of the Delaware General Corporation Act. UICI initially produced
certain initial documents pursuant to a confidentiality
agreement and answered the complaint. Following a hearing held
on February 22, 2005, Delaware Vice Chancellor Noble
rendered a written opinion dated June 2, 2005, in which he
broadly construed stockholders ability to access and
inspect books, records and documents of the Company under
Section 220 of the Delaware General Corporation Act. The
Company has compiled and produced all additional documents
responsive to the Courts ruling.
Academic
Management Services Corp. Related
Litigation
As previously disclosed, UICI and certain of its current and
former directors and officers have been named as defendants in
multiple lawsuits arising out of UICIs announcement in
July 2003 of a shortfall in the type and amount of collateral
supporting securitized student loan financing facilities of
Academic Management Services Corp., formerly a wholly owned
subsidiary of UICI until its disposition in November 2003.
As previously disclosed, in May and June 2004, UICI and certain
officers and current and former directors of UICI were named as
defendants in four separate class action suits filed in federal
court in Texas, and on October 18, 2004, the four separate
cases were consolidated as a single action (In re UICI
Securities Litigation, Case
No. 3-04-CV-1149-P,
pending in the United States District Court for the Northern
District of Texas, Dallas Division). On May 27, 2005,
plaintiffs on behalf of the purported class of similarly
situated individuals who purchased UICI common stock during the
period commencing February 7, 2002 and ending on
July 21, 2003, filed a First Amended Consolidated Complaint
alleging among other things that UICI, AMS, the Companys
current chief financial officer, the Companys former chief
executive officer and AMS former president failed to
disclose all material facts relating to the condition of AMS, in
violation of Section 10(b) of the Securities Exchange Act
of 1934 and
Rule 10b-5
thereunder. On July 11, 2005, defendants filed a motion to
dismiss the consolidated complaint. That motion has been fully
briefed by the parties and the Court has yet to rule thereon.
UICI was also named as a nominal defendant in two shareholder
derivative suits arising out of the July 2003 AMS
announcement (Bodenhorn v. Gregory T. Mutz, Ronald L.
Jensen, J. Tim Clark, Glenn W. Reed, David W. Keeler, Mark
D. Hauptman, Richard T. Mockler, Patrick J. McLaughlin, Stuart
D. Bilton, William J. Gedwed, Mural R. Josephson, and George H.
Lane, filed June 15, 2004 in the District Court of
Tarrant County, Texas, Case
No. 048-206108-04;
and Suprina v. Gregory T. Mutz, Ronald L. Jensen, J.
Tim Clark, Glenn W. Reed, David W. Keeler, Mark D.
Hauptman, Richard T. Mockler, Patrick J. McLaughlin, Stuart D.
Bilton, William J. Gedwed, Mural R. Josephson, and George H.
Lane, filed June 15, 2004 in the District Court of
Tarrant County, Texas, Case
F-48
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
No. 352-206106-04).
On April 5, 2005, the Court appointed lead plaintiffs
counsel and consolidated the two cases in a single action (In
re UICI Derivative Litigation, pending in the District Court
of Tarrant County, Texas, Lead Cause
No. 352-206106-04).
On July 22, 2005, plaintiffs filed a consolidated
derivative petition, in which they have alleged that the
individual defendants (which include current and former officers
and directors of UICI and AMS) violated Texas state law by
concealing the true condition of AMS before the July 2003
announcement.
On September 16, 2005, plaintiffs filed an amended
consolidated petition, in which they added class action
allegations challenging the proposed acquisition of the Company
by a group of private equity firms. On November 1, 2005,
the Court severed and abated the class action portion of the
litigation, pending disposition of the previously filed class
action suits filed in Texas state court challenging the proposed
acquisition of the Company by a group of private equity firms.
The Court further ruled that the plaintiffs had not pleaded with
specificity the elements necessary to show that a demand of the
UICI Board of Directors to investigate possible derivative
claims was futile under Delaware law.
On November 5, 2005, plaintiffs submitted to the Company a
formal written demand, in which they requested that the Company
undertake an investigation of certain purported derivative
claims summarized in the letter. At a meeting of the Board of
Directors of the Company held on November 22, 2005, the
Board of Directors of UICI appointed Dennis McCuistion and Mick
Thompson to serve on a special committee to investigate the
facts and allegations upon which the litigation is based, and to
determine whether, in accordance with Texas and Delaware law,
continuation of the litigation is in the best interests of the
Company and to report its conclusions to the Board of Directors.
The special committee subsequently engaged counsel to assist it
in its investigation.
In February 2006, the Company and the derivative plaintiffs
agreed on a preliminary basis to finally and fully settle the
litigation, without admitting liability on the part of the
individual defendants, on terms that would not have a material
adverse effect upon the Companys consolidated financial
condition or results of operations. The terms of the proposed
settlement include, among other things, the adoption by the
Company of certain modifications to its corporate governance
policies and procedures, the payment of attorneys fees and
the full release of the individual defendants by the Company and
the derivative plaintiffs from any and all claims and
liabilities associated with the litigation. On February 16,
2006, the Companys Board of Directors, upon the
recommendation of the Special Litigation Committee, approved the
terms of the proposed settlement. Completion of the settlement
is subject to execution and delivery of definitive settlement
documentation and approval of the Court. The Company believes
that the terms of the settlement as proposed will not have a
material adverse effect upon the financial condition or results
of operations of the Company.
UICI has agreed to advance the expenses of the individual
defendants incurred in connection with the defense of the cases,
subject to the defendants undertaking to repay such
advances unless it is ultimately determined that they are or
would have been entitled to indemnification by UICI under the
terms of the Companys bylaws.
F-49
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Association
Group Litigation
Introduction
The health insurance products issued by the Companys
insurance subsidiaries in the self-employed market are primarily
issued to members of various membership associations that make
available to their members the health insurance and other
insurance products issued by the Companys insurance
subsidiaries. The associations provide their membership with a
number of benefits and products, including the opportunity to
apply for health insurance underwritten by the Companys
health insurance subsidiaries. The Company
and/or its
insurance company subsidiaries have been a party to several
lawsuits that, among other things, challenge the nature of the
relationship between the Companys insurance companies and
the associations that have made available to their members the
insurance companies health insurance products.
Class Action
Opt Out Litigation
As previously disclosed, during 2004 the Company effected a
settlement of nationwide class action litigation (Eugene A.
Golebiowski, individually and on behalf of others similarly
situated, v. MEGA, UICI, the National Association for the
Self-Employed et al., initially filed in the United
States District Court for the Northern District of Mississippi,
Eastern Division; and Lacy v. The MEGA Life and Health
Insurance Company et al., initially filed in the
Superior Court of California, County of Alameda, Case
No. RG03-092881,
which cases were subsequently transferred to the United States
District Court for the Northern District of Texas, Dallas
Division (In re UICI Association-Group Insurance
Litigation, MDL Docket No. 1578)). As part of the
nationwide class action settlement process, on August 2,
2004 formal notice of the settlement terms was sent to 1,162,845
prospective class members, of which approximately 2,400
prospective class members (representing less than 0.2% of the
class) elected to opt out of the settlement. By
electing to opt out of the settlement, potential class members
(a) elected not to receive the class relief to which class
member are otherwise entitled under the terms of the settlement
and (b) retained the right to assert claims otherwise
released by the class members.
The Company and MEGA have been named as a party defendant in 15
lawsuits brought by plaintiffs represented by a single counsel
who have purportedly opted out of the class action settlement.
Generally, plaintiffs in the cases have asserted several causes
of action, including breach of contract, breach of fiduciary and
trust duties, fraudulent suppression, civil conspiracy, unjust
enrichment, fraud, negligence, breach of implied contract to
procure insurance, negligence per se, wantonness, conversion,
bad faith refusal to pay, and bad faith refusal to investigate.
The Company does not believe that these cases, if decided
adversely either individually or in the aggregate, would have a
material adverse effect upon the Companys financial
condition or results of operations.
California
Litigation
As previously disclosed, UICI and MEGA were named as defendants
in a purported class action suit filed on May 6, 2004
(Diaz v. The MEGA Life and Health Insurance Company,
UICI et al.) in the Superior Court for the State of
California, County of San Bernardino, Rancho, Case
No. RCV-080379.
Plaintiffs alleged, on behalf of themselves and as
representatives of all other policyholders of MEGA in
California, that the defendants are engaged in an illegal and
fraudulent marketing scheme in violation of California common
law and the California Business and Professions Code §
17200. Plaintiffs also have alleged that defendants
(i) maintain NASE to illegally avoid premium rate
regulation, (ii) fail to issue insurance coverage to
members of the NASE on a guaranteed issue basis in violation of
California law, (iii) and rescind certificates in violation
of California law. Plaintiffs seek injunctive relief and
monetary damages in an unspecified amount. On December 10,
2004, the Judicial Panel on Multidistrict Litigation issued an
order transferring the Diaz matter to the United States
District Court for the Northern District of Texas for
coordinated pretrial proceedings (In re UICI
Association-Group Insurance Litigation, MDL
Docket No. 1578). The United States District Court for the
Northern District of Texas has scheduled a status conference for
April 7, 2006, in the case and all other cases pending
before the Court in In re UICI Association-Group
Insurance Litigation, MDL Docket No. 1578.
F-50
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
As previously disclosed, UICI and MEGA were named as defendants
in a purported class action filed on May 14, 2004 (Joyce
et al. v. UICI, MEGA, National Association for the
Self-Employed et al.) in the Superior Court for the
State of California, County of Los Angeles, Case
No. BC315580. Plaintiffs have alleged that defendants
breached the implied covenant of good faith and fair dealing and
committed fraud, professional negligence, and negligent
misrepresentation. In addition, plaintiffs have alleged, on
behalf of themselves and persons similarly situated in the state
of California, that defendants violated the unfair competition
restrictions of California Business and Professions Code §
17200. Plaintiffs seek injunctive relief and monetary damages in
an unspecified amount. On June 21, 2004, defendants removed
the Joyce case to the United States District Court for
the Central District of California. On December 10, 2004,
the Judicial Panel on Multidistrict Litigation issued a transfer
order transferring the Joyce matter to the United States
District Court for the Northern District of Texas for
coordinated pretrial proceedings (In re UICI
Association-Group Insurance Litigation, MDL
Docket No. 1578). The United States District Court for the
Northern District of Texas has scheduled a status conference for
April 7, 2006, in the case and all other cases pending
before the Court in In re UICI Association-Group
Insurance Litigation, MDL Docket No. 1578.
As previously disclosed, on September 26, 2003, UICI and
MEGA were named as cross-defendants in a lawsuit initially filed
on July 30, 2003 (Retailers Credit Association of
Grass Valley, Inc. v. Henderson et al. v. UICI
et al.) in the Superior Court of the State of
California for the County of Nevada, Case No. L69072. In
the suit, cross-plaintiffs have asserted several causes of
action, including breach of the implied covenant of good faith
and fair dealing, fraud, violation of California Business and
Professions Code §17200, and negligent misrepresentation.
Cross-plaintiffs seek injunctive relief and monetary damages in
an unspecified amount. On September 2, 2004, the Court
issued an order dismissing plaintiff Darlene Hendersons
claim for breach of the implied covenant of good faith and fair
dealing. On October 15, 2004, MEGA and UICI filed an answer
to the complaint, in which they denied all allegations. The
Court has set trial for May 2, 2006, with a settlement
conference and pre-trial conference set for April 3 and
April 21, 2006, respectively.
As previously disclosed, UICI and
Mid-West
were named as defendants in an action filed on December 30,
2003 (Montgomery v. UICI et al.) in the
Superior Court of the State of California, County of Los
Angeles, Case No. BC308471. Plaintiff asserted statutory
and common law causes of action for both monetary and injunctive
relief based on a series of allegations concerning marketing and
claims handling practices. On March 1, 2004, UICI and
Mid-West
removed the matter to the United States District Court for the
Central District of California, Western Division. On
May 11, 2004, the Judicial Panel on Multidistrict
Litigation issued a transfer order transferring the
Montgomery matter to the United States District Court for
the Northern District of Texas for coordinated pretrial
proceedings (In re UICI Association-Group
Insurance Litigation, MDL Docket No. 1578). The United
States District Court for the Northern District of Texas has
scheduled a status conference for April 7, 2006, in the
case and all other cases pending before the Court in In re
UICI Association-Group Insurance Litigation, MDL
Docket No. 1578.
As previously disclosed, UICI and MEGA were named as defendants
in an action filed on January 2, 2004 (Orallo v.
UICI et al.) in the Superior Court of the State of
California, County of Los Angeles, Case No. BC308683.
Plaintiff alleged that the undisclosed relationship between MEGA
and the NASE constituted fraudulent and deceptive sales
and advertising practices and asserted several causes of
action, including breach of contract, breach of the duty of good
faith and fair dealing, violation of California Business and
Professions Code § 17200, fraud, and negligent and
intentional misrepresentation. Plaintiff sought injunctive
relief and monetary damages in an unspecified amount. In January
2006, the parties agreed to finally and fully settle the
litigation, on terms that would not have a material adverse
effect upon the Companys consolidated results of
operations or financial condition.
As previously disclosed, UICI and MEGA were named as defendants
in an action filed on January 20, 2004 (Springer
et al. v. UICI et al.) in the Superior Court
of the State of California, County of Monterey, Case
No. M68493. Plaintiff has alleged that the undisclosed
relationship between MEGA and the NASE constituted
F-51
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
fraudulent and deceptive sales and advertising
practices and asserted several causes of action, including
breach of contract, breach of the duty of good faith and fair
dealing, violation of California Business and Professions
Code § 17200, fraud, and negligent
misrepresentation. Plaintiff seeks injunctive relief and
monetary damages in an unspecified amount. The Springer
matter was removed to the United States District Court for
the Northern District of California, San Jose Division, on
May 12, 2004. On July 1, 2004, the Judicial Panel on
Multidistrict Litigation issued an order transferring the
Springer matter to the United States District Court for
the Northern District of Texas for coordinated pretrial
proceedings (In re UICI Association-Group
Insurance Litigation, MDL Docket No. 1578). The United
States District Court for the Northern District of Texas has
scheduled a status conference for April 7, 2006, in the
case and all other cases pending before the Court in In re
UICI Association-Group Insurance Litigation, MDL
Docket No. 1578.
As previously disclosed, UICI and MEGA were named as defendants
in an action filed on December 5, 2003
(Valenzuela v. UICI, MEGA, the National Association for
the Self-Employed et al.) in the Superior Court for the
State of California, County of San Diego, Case
No. GINO34307. Plaintiff has alleged breach of contract,
breach of implied covenant of good faith and fair dealing,
fraud, violation of California Business and Professions
Code § 17200, professional negligence, and
negligent misrepresentation. Plaintiff seeks injunctive relief
and monetary damages in an unspecified amount. On August 5,
2004, the Judicial Panel on Multidistrict Litigation issued an
order transferring the matter to the United States District
Court for the Northern District of Texas for coordinated
pretrial purposes (In re UICI Association-Group
Insurance Litigation, MDL Docket No. 1578). The United
States District Court for the Northern District of Texas has
scheduled a status conference for April 7, 2006, in the
case and all other cases pending before the Court in In re
UICI Association-Group Insurance Litigation, MDL
Docket No. 1578.
Other
Association Group Litigation
As previously disclosed, UICI and MEGA were named as defendants
in an action filed on February 11, 2002 (Martha R.
Powell and Keith P. Powell v. UICI, MEGA, the National
Association for the Self-Employed et al.) pending in
the Second Judicial District Court for the County of Bernalillo,
New Mexico, Cause
No. CV-2
002-1156.
Plaintiffs have alleged breach of contract, fraud, negligent
misrepresentation, civil conspiracy breach of third-party
beneficiary contract, breach of the duty of good faith and fair
dealing, breach of fiduciary duty, negligence, and violations of
the New Mexico Insurance Practices Act, the New Mexico Insurance
Code, and the New Mexico Unfair Practices Act. Plaintiff seeks
injunctive relief and monetary damages in an unspecified amount.
As previously disclosed,
Mid-West has
been named as a defendant in a suit filed on October 5,
2004 (Tanner v.
Mid-West
et al.) in the State Court of Fulton County, Georgia,
Case No. 04ES073111D. Plaintiff has asserted several causes
of action, including breach of fiduciary duties, fraudulent
suppression, unjust enrichment, civil conspiracy, fraud, breach
of an implied contract to procure insurance, negligence,
negligence per se, wantonness, conversion, and breach of
contract. Plaintiff seeks monetary damages in an unspecified
amount.
The Company currently believes that resolution of the above
proceedings will not have a material adverse effect on the
Companys financial condition or results of operations.
Other
Litigation Matters
The Company and its subsidiaries are parties to various other
pending legal proceedings arising in the ordinary course of
business, including some asserting significant damages arising
from claims under insurance policies, disputes with agents, and
other matters. Based in part upon the opinion of counsel as to
the ultimate disposition of such lawsuits and claims, management
believes that the liability, if any, resulting from the
disposition of such proceedings will not be material to the
Companys financial condition or results of operations.
F-52
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Regulatory
Matters
On March 22, 2005, UICI received notification that the
Market Analysis Working Group of the National Association of
Insurance Commissioners had chosen the states of Washington and
Alaska to lead a multi-state market conduct examination of
UICIs principal insurance subsidiaries, MEGA,
Mid-West and
The Chesapeake Life Insurance Company. The examination commenced
in May 2005 and is ongoing. UICI believes that approximately
32 states have elected to participate in the examination.
The Company believes that the multi-state market conduct
examination is in its final phases, and that a final examination
report will be delivered to the Market Analysis Working Group of
the National Association of Insurance Commissioners at the June
2006 NAIC meeting. State insurance regulatory agencies have
authority to levy monetary fines and penalties resulting from
findings made during the course of such multi-state market
conduct examinations. UICI does not currently believe that the
multi-state market conduct examination will have a material
adverse effect upon its consolidated financial position or
results of operations.
On March 8, 2005, the Office of the Insurance Commissioner
of the State of Washington issued a cease and desist order that
prohibits MEGA from selling a previously approved health
insurance product to consumers in the State of Washington. On
April 27, 2005, the Washington Department of Insurance
granted MEGAs and
Mid-Wests
request for approval of a policy form and rates associated with
a new health insurance product to be offered to consumers in the
State of Washington. The Company commenced offering the new
product in the second quarter of 2005. UICI does not believe
that the issuance of the cease and desist order by the
Washington Insurance Commissioner had a material adverse effect
upon its consolidated results of operations or financial
condition.
Other
Commitments and Contingencies
The Company and its subsidiaries lease office space and data
processing equipment under various lease agreements with initial
lease periods of three to ten and one-half years. Minimum lease
commitments at December 31, 2005 were $8.5 million in
2006, $8.3 million in 2007, $6.1 million in 2008,
$5.6 million in 2009, $4.8 million in 2010 and
$7.5 million thereafter. Rent expense was
$9.2 million, $8.1 million and $7.5 million for
the years ended December 31, 2005, 2004 and 2003,
respectively.
In conjunction with its former College Fund Life Division
life insurance operations, the Company has committed to assist
in funding the higher education of its insureds with student
loans. As of December 31, 2005, the Company through its
College Fund Life Insurance Division had outstanding
commitments to fund student loans for the years 2006 through
2025. The Company has historically funded its College
Fund Life Division student loan commitments with the
proceeds of indebtedness issued by a bankruptcy-remote special
purpose entity (the SPE). At December 31, 2005,
$12.2 million of cash, cash equivalents and other qualified
investments held by the SPE were available to fund the purchase
from the Company of additional student loans generated under the
Companys College First Alternative Loan program. The
indenture governing the terms of the SPE Notes provides,
however, that the proceeds of such SPE Notes may be used to fund
the student loan commitments only until February 1, 2007,
after which monies then remaining on deposit in the acquisition
fund created by the indenture not used to purchase additional
student loans must be used to redeem the SPE Notes. See
Note H.
Loans issued to students under the College Fund Life
Division program are limited to the cost of school or prescribed
maximums. These loans are generally guaranteed as to principal
and interest by an appropriate guarantee agency and are also
collateralized by either the related insurance policy or the
co-signature of a parent or guardian.
F-53
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
The total commitment for the next five school years and
thereafter as well as the amount the Company expects to fund
considering utilization rates and lapses are as follows:
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Expected
|
|
|
|
Commitment
|
|
|
Funding
|
|
|
|
(In thousands)
|
|
|
2006
|
|
$
|
54,075
|
|
|
$
|
6,420
|
|
2007
|
|
|
50,659
|
|
|
|
5,096
|
|
2008
|
|
|
47,191
|
|
|
|
3,833
|
|
2009
|
|
|
44,426
|
|
|
|
3,004
|
|
2010
|
|
|
47,611
|
|
|
|
2,440
|
|
2011 and thereafter
|
|
|
165,075
|
|
|
|
4,597
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
409,037
|
|
|
$
|
25,390
|
|
|
|
|
|
|
|
|
|
|
Interest rates on the above commitments are principally variable
(prime plus 2%).
At each of December 31, 2005 and 2004, the Company had
$5.2 million and $5.0 million, respectively, of
letters of credit outstanding relating to its insurance
operations.
Note M Employee
and Agent Stock Plans
UICI
Employee Stock Ownership and Savings Plan
The Company maintains for the benefit of its and its
subsidiaries employees the UICI Employee Stock Ownership
and Savings Plan (the Employee Plan). The Employee
Plan through its 401(k) feature enables eligible employees to
make pre-tax contributions to the Employee Plan (subject to
overall limitations) and to direct the investment of such
contributions among several investment options, including UICI
common stock. A second feature of the Employee Plan constitutes
an employee stock ownership plan (the ESOP),
contributions to which are invested primarily in shares of UICI
common stock. The ESOP feature allows participants to receive
from UICI and its subsidiaries discretionary matching
contributions and to share in certain supplemental contributions
made by UICI and its subsidiaries. Contributions by UICI and its
subsidiaries to the Employee Plan under the ESOP feature
currently vest in prescribed increments over a six year period.
The ESOP shares are considered outstanding for purposes of the
computation of earnings per share.
In 2005, 2004 and 2003, the Company made supplemental
contributions to the Employee Plan in accordance with its terms
in the amount of $4.0 million, $3.5 million and
$3.5 million, respectively. In 2005, 2004 and 2003, the
Company made matching contributions to the Employee Plan in
accordance with its terms in the amount of $2.7 million,
$2.2 million and $2.1 million, respectively.
Agent
Stock Accumulation Plans
The Company sponsors a series of stock accumulation plans (the
Agent Plans) established for the benefit of the
independent insurance agents and independent sales
representatives associated with UGA Association
Field Services, New United Agency and Cornerstone America.
The Agent Plans generally combine an agent-contribution feature
and a Company-match feature. The agent-contribution feature
generally provides that eligible participants are permitted to
allocate a portion (subject to prescribed limits) of their
commissions or other compensation earned on a monthly basis to
purchase shares of UICI common stock at the fair market value of
such shares at the time of purchase. Under the Company-match
feature of the Agent Plans, participants are eligible to have
posted to their respective Agent Plan accounts book credits in
the form of equivalent shares based on the number of shares of
UICI common stock purchased by the participant under the
agent-contribution feature of the Agent Plans. The
matching credits vest over time (generally in
prescribed
F-54
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
increments over a ten-year period, commencing the plan year
following the plan year during which contributions are first
made under the agent-contribution feature), and vested matching
credits in a participants plan account in January of each
year are converted from book credits to an equivalent number of
shares of UICI common stock. Matching credits forfeited by
participants no longer eligible to participate in the Agent
Plans are reallocated each year among eligible participants and
credited to eligible participants Agent Plan accounts.
The Agent Plans do not constitute qualified plans under
Section 401(a) of the Internal Revenue Code of 1986 or
employee benefit plans under the Employee Retirement Income
Security Act of 1974, and the Agent Plans are not subject to the
vesting, funding, nondiscrimination and other requirements
imposed on such plans by the Internal Revenue Code and ERISA.
For financial reporting purposes, the Company accounts for the
Company-match feature of its Agent Plans by recognizing
compensation expense over the vesting period in an amount equal
to the fair market value of vested shares at the date of their
vesting and distribution to the participants. The Company
estimates its current liability for unvested matching credits by
reference to the number of unvested credits, the current market
price of the Companys common stock, and the Companys
estimate of the percentage of the vesting period that has
elapsed up to the current quarter end. Changes in the liability
from one quarter to the next are accounted for as an increase
in, or decrease to, compensation expense, as the case may be.
Upon vesting, the Company reduces the accrued liability (equal
to the market value of the vested shares at date of vesting)
with a corresponding increase to equity. Unvested matching
credits are considered share equivalents outstanding for
purposes of the computation of earnings per share. At
December 31, 2005 and 2004, the Companys liability
for future unvested benefits payable under the Agent Plans was
$36.8 million and $41.5 million, respectively.
The portion of compensation expense associated with the Agent
Plans reflected in the results of the SEA Division is based on
the share price in the open market on or about the time the
unvested matching credits are granted to participants. The
remaining portion of the compensation expense associated with
the Agent Plans (consisting of variable stock-based compensation
expense) is reflected in the results of the Companys
Other Key Factors business segment.
It has been the policy of the Company to purchase UICI shares
from time to time in the open market on or about the time that
unvested matching credits are granted under the Agent Plans. The
Company accounts for the shares purchased in the open market as
treasury shares. During 2005, the Company temporarily ceased
purchasing shares in the open market as the Company engaged in
discussions with potential investor groups. Currently, the
Company anticipates purchasing additional shares of its common
stock only as required at the time that matching credits vest.
Set forth in the table below is the total compensation expense
associated with the Companys Agent Plans for each of the
years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December
31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
SEA Division stock-based
compensation expense(1)
|
|
$
|
9,397
|
|
|
$
|
21,206
|
|
|
$
|
10,409
|
|
Other Key Factors variable
non-cash stock-based compensation expense (benefit)(2)
|
|
|
7,214
|
|
|
|
14,307
|
|
|
|
(459
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Agent Plan compensation
expense
|
|
$
|
16,611
|
|
|
$
|
35,513
|
|
|
$
|
9,950
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Represents the cost of shares in the open market on or about the
time that unvested matching credits are granted to participants
in the Agent Plan. |
|
(2) |
|
Represents the total stock-based compensation expense (benefit)
associated with the Agent Plans less the expense incurred by the
Company on or about the time that unvested matching credits are
granted to participants in the Agent Plan. |
F-55
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
At December 31, 2005, the Company had recorded 1,571,952
unvested matching credits associated with the Agent Plans, of
which 479,163 vested in January 2006.
The accounting treatment of the Companys Agent Plans have
resulted and will continue to result in unpredictable
stock-based compensation charges, dependent upon fluctuations in
the quoted price of UICI common stock. These unpredictable
fluctuations in stock based compensation charges may result in
material fluctuations in the Companys results of
operations. In periods of general decline in the quoted price of
UICI common stock, if any, the Company will recognize less stock
based compensation expense than in periods of general
appreciation in the quoted price of UICI common stock. In
addition, in circumstances where increases in the quoted price
of UICI common stock are followed by declines in the quoted
price of UICI common stock, negative stock based compensation
expense may result as the Company adjusts the cumulative
liability for unvested stock-based compensation expense.
Stock
Option Plans
In accordance with the terms of the Companys 1987 Stock
Option Plan, as amended (the 1987 Plan),
4,000,000 shares of common stock of the Company have been
reserved for issuance upon exercise of options that may be
granted to officers, key employees, and certain eligible
non-employees at an exercise price equal to the fair market
value at the date of grant. The options generally vest in 20%
annual increments every twelve months, subject to continuing
employment, provided that an option will vest 100% upon death,
permanent disability, or change of control of the Company. All
options under the 1987 Plan are exercisable over a five-year
period. For the years ended December 31, 2005, 2004 and
2003, the Company recognized compensation expense in connection
with options granted under the 1987 Plan in the amount of
$1.0 million, $143,000 and $262,000, respectively.
In connection with the proposed merger with affiliates of
private equity groups (see Item 1.
Business Introduction Recent
Developments Blackstone
Transaction), each outstanding option to purchase
shares of UICI common stock granted under the 1987 Plan will
become fully vested, and (except with respect to those options
granted under the 1987 Plan that will be rolled over by certain
executive officers into options to be issued under a new plan to
be adopted by the Company post-transaction) each option granted
under the 1987 Plan will be cancelled and converted into a right
to receive a payment (subject to any applicable withholding
taxes) equal to the difference between $37.00 and the exercise
price for the option multiplied by the number of shares subject
to such option, to the extent the difference is a positive
number. The 1987 Plan will thereafter be terminated effective
upon the completion of the transaction.
In accordance with the terms of the Companys 1998 Employee
Stock Option Plan and the Companys 1998 Agent Stock Option
Plan, each effective August 15, 1998, the Company granted
agents and employees of the Company options to purchase an
aggregate of 8,100,000 shares of Company common stock at an
exercise price of $15 per share. The options vested in 20%
increments in each year, commencing on August 15, 1999 and
ended August 15, 2001, and the remaining 40% vested on
August 15, 2002. For the year ended December 31, 2003,
the Company recognized no compensation expense in connection
with the 1998 Plans. All unexercised options granted under the
1998 Plans lapsed in January 2003 and the 1998 Plans have
expired.
In connection with the Companys acquisition of AMLI Realty
Co. (ARC) in 1996, options previously outstanding
under the ARC employee stock option plan (the 1996 Special
Stock Option Plan) were converted into the right to
receive shares of the Companys common stock. In January
2004, all then-outstanding options under the plan were exercised
and the plan expired. The Company recognized no compensation
expense in connection with the ARC plan in 2004 and 2003.
Prior to January 1, 2003, the Company accounted for the
stock-based compensation plans under Accounting Principles Board
(APB) Opinion No. 25, Accounting for Stock Issued to
Employees. On January 1, 2003, the Company adopted
Statement No. 123 for all employee awards granted or
modified on or after January 1, 2003, and began measuring
the compensation cost of stock-based awards under the fair value
method. The Company adopted
F-56
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Statement No. 148, Accounting for Stock-Based
Compensation Transition and Disclosure, on
January 1, 2003 and has adopted the transition provisions
that require expensing options prospectively in the year of
adoption. Existing awards continue to follow the intrinsic value
method prescribed by APB 25.
Set forth below is a summary of stock option transactions:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1987 Stock Option Plan
|
|
|
1998 Stock Option
Plans
|
|
|
1996 Special Stock Option
Plan
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Option
|
|
|
|
|
|
Option
|
|
|
|
|
|
Option
|
|
|
|
Number of
|
|
|
Price per
|
|
|
Number of
|
|
|
Price per
|
|
|
Number
|
|
|
Price per
|
|
|
|
Shares
|
|
|
Share ($)
|
|
|
Shares
|
|
|
Share ($)
|
|
|
of Shares
|
|
|
Share ($)
|
|
|
Outstanding options at
January 1, 2003
|
|
|
1,269,215
|
|
|
|
9.76
|
|
|
|
736,975
|
|
|
|
15.00
|
|
|
|
58,526
|
|
|
|
12.43
|
|
Granted
|
|
|
204,748
|
|
|
|
11.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(69,196
|
)
|
|
|
10.49
|
|
|
|
(146,512
|
)
|
|
|
15.00
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(121,346
|
)
|
|
|
6.70
|
|
|
|
(590,463
|
)
|
|
|
15.00
|
|
|
|
(32,778
|
)
|
|
|
12.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at
December 31, 2003
|
|
|
1,283,421
|
|
|
|
10.30
|
|
|
|
|
|
|
|
|
|
|
|
25,748
|
|
|
|
12.43
|
|
Granted
|
|
|
12,716
|
|
|
|
17.14
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(264,949
|
)
|
|
|
10.15
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(538,700
|
)
|
|
|
9.71
|
|
|
|
|
|
|
|
|
|
|
|
(25,748
|
)
|
|
|
12.43
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at
December 31, 2004
|
|
|
492,488
|
|
|
|
11.21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
390,000
|
|
|
|
31.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Canceled
|
|
|
(11,300
|
)
|
|
|
14.95
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(246,707
|
)
|
|
|
11.70
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding options at
December 31, 2005
|
|
|
624,481
|
|
|
|
23.86
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options exercisable at
December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
680,236
|
|
|
|
10.64
|
|
|
|
|
|
|
|
|
|
|
|
25,748
|
|
|
|
12.43
|
|
2004
|
|
|
238,481
|
|
|
|
11.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
98,071
|
|
|
|
11.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Set forth below is a summary of stock options outstanding and
exercisable at December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
Outstanding
|
|
|
Weighted-
|
|
|
Weighted-
|
|
|
Exercisable
|
|
|
Weighted-
|
|
|
|
Options
|
|
|
Average
|
|
|
Average
|
|
|
Options
|
|
|
Average
|
|
Range of
|
|
December 31,
|
|
|
Remaining
|
|
|
Exercise
|
|
|
December 31,
|
|
|
Exercise
|
|
Exercise Prices
|
|
2005
|
|
|
Contractual Life
|
|
|
Price
|
|
|
2005
|
|
|
Price
|
|
|
$ 5.00-$10.00
|
|
|
17,445
|
|
|
|
0.3
|
|
|
$
|
7.20
|
|
|
|
9,375
|
|
|
$
|
7.24
|
|
$10.01-$15.00
|
|
|
202,772
|
|
|
|
1.7
|
|
|
$
|
11.81
|
|
|
|
85,310
|
|
|
$
|
11.76
|
|
$15.01-$20.00
|
|
|
13,612
|
|
|
|
3.0
|
|
|
$
|
17.22
|
|
|
|
3,212
|
|
|
$
|
17.10
|
|
$20.01-$30.00
|
|
|
652
|
|
|
|
3.3
|
|
|
$
|
24.20
|
|
|
|
174
|
|
|
$
|
23.13
|
|
$30.01-$31.00
|
|
|
275,000
|
|
|
|
4.5
|
|
|
$
|
30.75
|
|
|
|
0
|
|
|
$
|
0.00
|
|
$31.01-$32.00
|
|
|
100,000
|
|
|
|
4.7
|
|
|
$
|
31.68
|
|
|
|
0
|
|
|
$
|
0.00
|
|
$32.01-$33.57
|
|
|
15,000
|
|
|
|
4.8
|
|
|
$
|
33.57
|
|
|
|
0
|
|
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
624,481
|
|
|
|
3.5
|
|
|
$
|
23.86
|
|
|
|
98,071
|
|
|
$
|
11.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-57
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Pro forma information regarding net income and earnings per
share, as required by Statement No. 123, has been
determined as if the Company had accounted for its employee
stock options under the fair value method of that Statement. The
fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following
weighted-average assumptions for 2005, 2004 and 2003: risk-free
interest rate of 3.77%, 2.66% and 2.09%, respectively; dividend
yield of 1.78%, 0.09% and -0-%, respectively; volatility factor
of the expected market price of the Companys common stock
of 0.51, 0.55 and 0.58, respectively; and a weighted-average
expected life of the option of 3.0 years for 2005, 2004 and
2003. The weighted average grant date fair value per share of
stock options issued in 2005, 2004 and 2003 was $8.43, $6.48 and
$4.55, respectively.
The following table illustrates the effect on net income as if
the
fair-value-based
method had been applied to all outstanding and unvested option
awards in each period.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands,
|
|
|
|
except per share
amounts)
|
|
|
Net income, as reported
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
|
$
|
14,334
|
|
Add: stock-based employee
compensation expense included in reported net income, net of tax
|
|
|
654
|
|
|
|
93
|
|
|
|
6
|
|
(Deduct)/Add total stock-based
employee compensation (expense) benefit determined under
fair-value-based
method for all awards, net of tax
|
|
|
(682
|
)
|
|
|
160
|
|
|
|
(367
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
203,473
|
|
|
$
|
161,811
|
|
|
$
|
13,973
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic as reported
|
|
$
|
4.41
|
|
|
$
|
3.50
|
|
|
$
|
0.31
|
|
Basic-pro forma
|
|
$
|
4.41
|
|
|
$
|
3.51
|
|
|
$
|
0.30
|
|
Diluted as reported
|
|
$
|
4.32
|
|
|
$
|
3.40
|
|
|
$
|
0.30
|
|
Diluted-pro forma
|
|
$
|
4.32
|
|
|
$
|
3.41
|
|
|
$
|
0.29
|
|
Restricted
Stock Grants
In 2004 and 2003, the Company issued an aggregate of 16,000 and
61,182 shares of restricted stock, respectively, to
selected officers and key employees with a weighted average
price per share on the date of issuance of $17.40 and $11.50,
respectively. Until the lapse of certain restrictions generally
extending over a two-year period, all of such shares are subject
to forfeiture if a grantee ceases to provide material services
to the Company as an employee for any reason other than death.
Upon death or a Change in Control (as defined) of the Company,
the shares of restricted stock are no longer subject to
forfeiture. For the years ended December 31, 2005, 2004 and
2003, the Company recorded compensation expense associated with
these awards in the amount of $130,000, $346,000 and $359,000,
respectively.
In connection with the proposed merger with affiliates of
private equity groups (see Item 1.
Business Introduction Recent
Developments Blackstone Transaction), all
applicable forfeiture provisions of restricted shares will
lapse, to the extent not already lapsed, and each holder of
restricted shares will be entitled to receive the
$37.00 per share cash merger consideration for each
restricted share as if the share was not restricted.
Other
Compensation Plans
In August 2002, the Company established an incentive program
(the BOB II Program), pursuant to which the
Company agreed to distribute to eligible
participants on August 15, 2006, in cash an aggregate
of the dollar equivalent value of 200,000 UICI shares. Eligible
participants in the BOB II Program consisted of full-time
F-58
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
employees of UICI and its subsidiaries and independent agents
associated with UICIs insurance subsidiaries who were
employed by or contracted with UICI, as the case may be, at the
close of business on August 15, 2002 and who remain
employed by or contracted with UICI at the close of business on
August 15, 2006. In accordance with the BOB II
Program, each eligible participant is entitled to receive his or
her portion of the aggregate cash payment determined by
reference to a formula based on, among other things, such
eligible participants tenure with UICI and level of
compensation.
For financial reporting purposes, UICI will incur compensation
expense associated with the BOB II Program over the
four-year vesting period, which expense included adjustments due
to periodic changes in the value of UICI common stock. The
Company has established a corresponding liability associated
with the future benefits payable under the BOB II Program.
At December 31, 2005 and 2004, the Companys liability
for future benefits payable under this plan was
$6.2 million and $4.1 million, respectively. For the
years ended December 31, 2005, 2004 and 2003, the Company
recorded compensation expense associated with the BOB II
Program in the amount of $2.1 million, $3.2 million
and $621,000, respectively.
In connection with the proposed merger with affiliates of
private equity groups (see Item 1.
Business Introduction Recent
Developments Blackstone Transaction), each
eligible participant in the BOB II Program will receive at
the time the share equivalent credit would have otherwise become
fully vested and nonforfeitable in accordance with the terms of
the BOB II Plan, an amount (subject to any applicable
withholding tax) in cash equal to the number of shares subject
to such awards held by such participant multiplied by
$37.00 per share.
During 2004, the Company established incentive plans for the
benefit of certain employees, pursuant to which 25% of the cash
equivalent value of 250,000 shares of UICI common stock
will be distributed to eligible employees in each of 2005, 2006,
2007 and 2008. At December 31, 2005 and 2004, the
Companys liability for future benefits payable under these
plans was $4.1 million and $3.3 million, respectively.
For the years ended December 31, 2005 and 2004, the Company
recorded compensation expense associated with these plans in the
amount of $2.5 million and $3.3 million, respectively.
During 2005, payments were made to participants under the plan
in the amount of $1.7 million.
During 2005, the Company established incentive plans for the
benefit of certain employees, pursuant to which 25% of the cash
equivalent value of 30,000 shares of UICI common stock will
be distributed to eligible employees in 2005, 2006, 2007 and
2008. At December 31, 2005, the Companys liability
for future benefits payable under these plans was $300,000. For
the year ended December 31, 2005, the Company recorded
compensation expense associated with these plans in the amount
of $570,000. During 2005, payments were made to participants
under the plan in the amount of $270,000.
In January 2000, the Company established a plan, pursuant to
which 25% of the cash equivalent value of 100,000 shares of
UICI common stock was distributed to eligible employees in each
of January 2001, 2002, 2003 and 2004. For the years ended
December 31, 2004 and 2003 the Company recorded
compensation expense (income) associated with this plan in the
amount of $(11,000) and $38,000, respectively.
Note N Investment
Annuity Segregated Accounts
The Company had deferred investment annuity policies which have
segregated account assets and liabilities amounting to
$227.4 million and $222.9 million at December 31,
2005 and 2004, respectively, which are funded by specific assets
held in segregated custodian accounts for the purposes of
providing policy benefits and paying applicable premiums, taxes
and other charges as due. Because investment decisions with
respect to these segregated accounts are made by the
policyholders, these assets and liabilities are not presented in
these financial statements. The assets are held in individual
custodian accounts, from which the Company has received hold
harmless agreements and indemnification.
F-59
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note O Segment
Information
The Companys business segments for financial reporting
purposes include (a) the Insurance segment, which includes
the businesses of the Companys Self-Employed Agency
Division, the Student Insurance Division, the Star HRG Division,
the Life Insurance Division and Other Insurance; and
(b) Other Key Factors, which includes investment income not
allocated to the Insurance segment, realized gains or losses on
sale of investments, interest expense on corporate debt, general
expenses relating to corporate operations, minority interest,
variable stock-based compensation and operations that do not
constitute reportable operating segments (including the
Companys investment in Healthaxis, Inc. until sold on
September 30, 2003). In 2005, the incremental costs
associated with the pending acquisition of the Company by a
group of private equity investors were also reflected in the
results of the Other Key Factors segment.
Allocations among segments of investment income and certain
general expenses are based on a number of assumptions and
estimates, and the business segments reported operating results
would change if different allocation methods were applied.
Certain assets are not individually identifiable by segment and,
accordingly, have been allocated by formulas. Segment revenues
include premiums and other policy charges and considerations,
net investment income, and fees and other income. Operations
that do not constitute reportable operating segments have been
combined with Other Key Factors. Depreciation expense and
capital expenditures are not considered material. Management
does not allocate income taxes to segments. Transactions between
reportable operating segments are accounted for under respective
agreements, which provide for such transactions generally at
cost.
Revenues from continuing operations and income from continuing
operations before federal income taxes for each of the years
ended December 31, 2003, 2004 and 2005 are set forth in the
table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,525,968
|
|
|
$
|
1,496,199
|
|
|
$
|
1,338,347
|
|
Student Insurance Division
|
|
|
290,378
|
|
|
|
306,325
|
|
|
|
249,071
|
|
Star HRG Division
|
|
|
146,638
|
|
|
|
150,463
|
|
|
|
118,213
|
|
Life Insurance Division
|
|
|
93,526
|
|
|
|
75,989
|
|
|
|
68,259
|
|
Other Insurance (1)
|
|
|
34,799
|
|
|
|
14,388
|
|
|
|
172
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,091,309
|
|
|
|
2,043,364
|
|
|
|
1,774,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Key Factors
|
|
|
30,615
|
|
|
|
26,343
|
|
|
|
51,660
|
|
Intersegment Eliminations
|
|
|
(706
|
)
|
|
|
(598
|
)
|
|
|
(560
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
2,121,218
|
|
|
$
|
2,069,109
|
|
|
$
|
1,825,162
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing
operations before federal income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
310,466
|
|
|
$
|
260,745
|
|
|
$
|
109,079
|
|
Student Insurance Division
|
|
|
(8,870
|
)
|
|
|
(49,482
|
)
|
|
|
(9,783
|
)
|
Star HRG Division
|
|
|
1,434
|
|
|
|
3,320
|
|
|
|
1,910
|
|
Life Insurance Division
|
|
|
8,580
|
|
|
|
4,362
|
|
|
|
(2,350
|
)
|
Other Insurance(1)
|
|
|
4,658
|
|
|
|
1,415
|
|
|
|
(705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
316,268
|
|
|
|
220,360
|
|
|
|
98,151
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-60
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other Key Factors:
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment income on equity,
realized gains and losses, general corporate expenses and other
(including interest on corporate debt)
|
|
|
13,153
|
|
|
|
15,096
|
|
|
|
33,306
|
|
Merger transaction costs(2)
|
|
|
(9,057
|
)
|
|
|
|
|
|
|
|
|
Variable stock-based compensation
|
|
|
(7,214
|
)
|
|
|
(14,307
|
)
|
|
|
459
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,118
|
)
|
|
|
789
|
|
|
|
33,765
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income from continuing
operations before federal income taxes
|
|
$
|
313,150
|
|
|
$
|
221,149
|
|
|
$
|
131,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects results of a subsidiary (ZON Re USA
LLC) established in the third quarter of 2003 to
underwrite, administer and issue accidental death, accidental
death and dismemberment (AD&D), accident medical and
accident disability insurance products, both on a primary and on
a reinsurance basis. |
|
(2) |
|
Includes the incremental costs associated with the pending
acquisition of the Company by a group of private equity
investors. |
Assets by operating segment at December 31, 2004 and 2005
are set forth in the table below:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Insurance:
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
842,273
|
|
|
$
|
891,054
|
|
Student Insurance Division
|
|
|
183,890
|
|
|
|
265,695
|
|
Star HRG Division
|
|
|
76,848
|
|
|
|
78,341
|
|
Life Insurance Division
|
|
|
650,791
|
|
|
|
642,530
|
|
Other Insurance
|
|
|
24,064
|
|
|
|
8,854
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,777,866
|
|
|
|
1,886,474
|
|
Other Key Factors:
|
|
|
|
|
|
|
|
|
General corporate and other
|
|
|
593,664
|
|
|
|
459,184
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
2,371,530
|
|
|
$
|
2,345,658
|
|
|
|
|
|
|
|
|
|
|
F-61
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note P Earnings
(loss) per Share
The following table sets forth the computation of basic and
diluted earnings (loss) per share for each of the years ended
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands except per share
amounts)
|
|
|
Income (loss) available to common
shareholders:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
available to common shareholders
|
|
$
|
202,970
|
|
|
$
|
145,881
|
|
|
$
|
87,324
|
|
Income (loss) from discontinued
operations
|
|
|
531
|
|
|
|
15,677
|
|
|
|
(72,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for basic earnings per
share
|
|
|
203,501
|
|
|
|
161,558
|
|
|
|
14,334
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
6% Convertible Note
interest(1)
|
|
|
|
|
|
|
176
|
|
|
|
82
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income for diluted earnings
per share
|
|
$
|
203,501
|
|
|
$
|
161,734
|
|
|
$
|
14,416
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding (thousands) basic earnings (loss)
per share
|
|
|
46,119
|
|
|
|
46,131
|
|
|
|
46,438
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee stock options and other
(see Note M)
|
|
|
1,019
|
|
|
|
1,379
|
|
|
|
1,497
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares
outstanding dilutive earnings (loss) per share
|
|
|
47,138
|
|
|
|
47,510
|
|
|
|
47,935
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
4.40
|
|
|
$
|
3.16
|
|
|
$
|
1.88
|
|
Income (loss) from discontinued
operations
|
|
|
0.01
|
|
|
|
0.34
|
|
|
|
(1.57
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4.41
|
|
|
$
|
3.50
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
4.31
|
|
|
$
|
3.07
|
|
|
$
|
1.82
|
|
Income (loss) from discontinued
operations
|
|
|
0.01
|
|
|
|
0.33
|
|
|
|
(1.52
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4.32
|
|
|
$
|
3.40
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Applied to continuing operations |
Note Q Discontinued
Operations
In years prior to 2004, the Company closed
and/or
disposed of assets and operations not otherwise related to its
core health and life insurance operations, including the
operations of the Companys former Academic Management
Services Corp. (AMS) subsidiary (which was engaged
in the student loan origination and funding business, student
loan servicing business, and tuition installment payment plan
business and which UICI sold in November 2003), the
Companys former Senior Market Division, and the
Companys former Special Risk Division.
F-62
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Set forth below is a summary of the Companys reported
results from discontinued operations for each of the years ended
December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
Income (loss) by business unit:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AMS
|
|
$
|
(461
|
)
|
|
$
|
9,872
|
|
|
$
|
(64,191
|
)
|
|
|
|
|
Senior Market
|
|
|
|
|
|
|
|
|
|
|
(9,150
|
)
|
|
|
|
|
Special Risk
|
|
|
992
|
|
|
|
5,805
|
|
|
|
(4,037
|
)
|
|
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
|
4,388
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations net of tax
|
|
$
|
531
|
|
|
$
|
15,677
|
|
|
$
|
(72,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Set forth below is a summary of the Companys net
liabilities from discontinued operations at December 31,
2005 and 2004:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
Net liabilities by business unit:
|
|
|
|
|
|
|
|
|
AMS
|
|
$
|
3,623
|
|
|
$
|
5,540
|
|
Special Risk
|
|
|
2,662
|
|
|
|
3,653
|
|
|
|
|
|
|
|
|
|
|
Net liabilities from discontinued
operations
|
|
$
|
6,285
|
|
|
$
|
9,193
|
|
|
|
|
|
|
|
|
|
|
Academic
Management Services Corp.
The Companys reported results from discontinued operations
for the year ended December 31, 2005 reflected a partial
release of the deferred gain recorded on the sale of AMS
remaining uninsured student loan assets in the first quarter of
2004 and a decrease in the accrual originally established in
2004 in connection with litigation arising out of the
Companys announcement that it had uncovered collateral
shortfalls in the type and amount of collateral supporting two
of the securitized student loan financing facilities of AMS. The
federal income tax expense for the year ended December 31,
2005 for the AMS discontinued operations reflected an increase
in the valuation allowance on deferred tax assets related to an
increase in the capital loss carryover in excess of the amount
previously estimated that is likely to expire before it can be
utilized to offset future capital gains.
Results from discontinued operations for the full year 2004
reflected a pre-tax gain recorded in the first quarter of 2004
in the amount of $7.7 million generated from the sale of
the remaining uninsured student loan assets formerly held by AMS
(which the Company disposed of in November 2003), a tax benefit
associated with the reduction of a tax accrual and the release
of a portion of the valuation allowance on the capital loss
carryover due to the realization of capital gains during 2004.
These favorable factors were offset in part by the recording in
the second quarter of 2004 of a loss accrual with respect to
multiple lawsuits that were filed arising out of UICIs
announcement in July 2003 of a shortfall in the type and amount
of collateral supporting securitized student loan financing
facilities of the Companys former AMS subsidiary. The sale
of the uninsured student loans generated gross cash proceeds in
the amount of approximately $25.0 million.
In July 2003, the Company announced that it had uncovered
collateral shortfalls in the type and amount of collateral
supporting two of the securitized student loan financing
facilities of AMS and the failure to comply with reporting
obligations under the financing documents at seven of those
facilities. The Company subsequently entered into waiver and
release agreements requiring it in July 2003 to contribute
$48.25 million in cash to the capital of AMS.
F-63
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Following the collateral issues at AMS, the Company determined
to dispose of its interest in AMS, and on November 18, 2003
the Company completed the sale of its entire equity interest in
AMS. The sale of AMS generated net cash proceeds to UICI of
approximately $27.8 million. At closing, UICI also received
uninsured student loan assets formerly held by AMS special
purpose financing subsidiaries with a face amount of
approximately $44.3 million (including accrued interest).
In anticipation of the sale of AMS, in the third quarter of 2003
the Company wrote down the carrying value of these loans to fair
value, which was significantly less than the face amount of the
loans. As part of the transaction, the purchaser agreed to
assume responsibility for liquidating and terminating the
remaining special purpose financing facilities through which AMS
previously securitized student loans.
AMS results in 2003 included a $68.5 million pre-tax
expense reflecting the estimated loss on disposal.
Set forth below is a summary of the operating results of AMS as
reflected in the consolidated financial statements of the
Company for each of the three most recent fiscal years:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004(2)
|
|
|
2003(1)
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income
|
|
$
|
|
|
|
$
|
|
|
|
$
|
47,422
|
|
Investment income
|
|
|
|
|
|
|
|
|
|
|
2,003
|
|
Other income
|
|
|
1,417
|
|
|
|
8,820
|
|
|
|
57,320
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
1,417
|
|
|
|
8,820
|
|
|
|
106,745
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
|
|
|
|
|
|
|
|
32,593
|
|
Other operating expenses
|
|
|
(201
|
)
|
|
|
3,158
|
|
|
|
81,609
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
(201
|
)
|
|
|
3,158
|
|
|
|
114,202
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations
before income taxes and loss on disposal
|
|
|
1,618
|
|
|
|
5,662
|
|
|
|
(7,457
|
)
|
Loss from disposal
|
|
|
|
|
|
|
|
|
|
|
(68,518
|
)
|
Federal income tax expense
(benefit)
|
|
|
2,079
|
|
|
|
(4,210
|
)
|
|
|
(11,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from AMS
discontinued operations
|
|
$
|
(461
|
)
|
|
$
|
9,872
|
|
|
$
|
(64,191
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Reflects operations for the period ended on the date of sale
(November 18, 2003). |
|
(2) |
|
Reflects sale of uninsured loan portfolio in March 2004 and
recording of loss accrual related to litigation. |
Senior
Market Division
On May 30, 2003, UICI announced that its Board of
Directors, at a meeting held on May 29, 2003, adopted a
plan to close by sale or wind-down the Senior Market Division,
which the Company established in 2001 to develop long-term care
and Medicare supplement insurance products for the senior
market. For the year ended December 31, 2003, the
Companys Senior Market Division reported a loss (net of
tax) in the amount of $(9.2) million. Losses in 2003
includes a write off of impaired assets, operating losses
incurred at the Senior Market Division through the close-down
date and costs associated with the wind down and closing of the
operations, including a loss in the amount of $(5.5) million
(net of tax) recognized upon transfer, effective June 30,
2003, of the Companys interest in Seniors First LLC (an
agency through which the Company formerly marketed and
distributed insurance products to the senior market). The
Company completed its closedown of its Senior Market Division
during 2003.
F-64
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Special
Risk Division
In December 2001, the Company determined to exit the businesses
of its Special Risk Division by sale, abandonment or wind-down
and the Company designated and classified its Special Risk
Division as a discontinued operation for financial reporting
purposes. The Companys Special Risk Division formerly
specialized in certain niche health-related products (including
stop loss, marine crew accident, organ transplant
and international travel accident products), various insurance
intermediary services and certain managed care services.
Special Risk results for the year ended December 31, 2005
reflected a favorable claims experience and resolution of a
dispute, which resulted in pre-tax operating income in the
amount of $1.5 million. The Company will continue the
wind-down of its former Special Risk Division.
Set forth below is a summary of the operating results of the
Special Risk Division for each of the years ended
December 31, 2005, 2004 and 2003, respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Revenue:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums
|
|
$
|
|
|
|
$
|
(3,954
|
)
|
|
$
|
36
|
|
Investment and other income
|
|
|
540
|
|
|
|
1,507
|
|
|
|
2,040
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
|
540
|
|
|
|
(2,447
|
)
|
|
|
2,076
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits, claims and settlement
expenses
|
|
|
(182
|
)
|
|
|
(13,788
|
)
|
|
|
6,633
|
|
Underwriting, acquisition and
insurance expenses
|
|
|
(804
|
)
|
|
|
2,410
|
|
|
|
1,633
|
|
Other expenses
|
|
|
|
|
|
|
|
|
|
|
21
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total expenses
|
|
|
(986
|
)
|
|
|
(11,378
|
)
|
|
|
8,287
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from operations before
income taxes
|
|
|
1,526
|
|
|
|
8,931
|
|
|
|
(6,211
|
)
|
Federal income tax expense
(benefit)
|
|
|
534
|
|
|
|
3,126
|
|
|
|
(2,174
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from Special Risk
discontinued operations
|
|
$
|
992
|
|
|
$
|
5,805
|
|
|
$
|
(4,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other
The Companys former sub-prime credit card business was
designated as a discontinued operation for financial reporting
purposes effective December 31, 1999. In 2003 the sub-prime
credit card business reported income after tax of
$4.4 million which income has been reflected in results
from discontinued operations. The sub-prime credit card
business results in 2003 reflected the release of accruals
resulting from the Companys assessment of certain
favorable events related to credit card litigation matters and
ultimate resolution and settlement of ongoing litigation. At
December 31, 2003, there were no remaining assets or
liabilities associated with the Companys former sub-prime
credit card business.
F-65
UICI AND
SUBSIDIARIES
NOTES TO
CONSOLIDATED FINANCIAL
STATEMENTS (Continued)
Note R Supplemental
Financial Statement Data
Set forth below is certain supplemental information concerning
underwriting, policy acquisition costs and insurance expenses
for the years ended December 31, 2005, 2004 and 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Amortization of deferred policy
acquisition costs
|
|
$
|
82,567
|
|
|
$
|
73,532
|
|
|
$
|
69,343
|
|
Commissions
|
|
|
136,810
|
|
|
|
138,949
|
|
|
|
136,483
|
|
Administrative expenses
|
|
|
352,879
|
|
|
|
368,997
|
|
|
|
318,180
|
|
Premium taxes
|
|
|
49,646
|
|
|
|
49,333
|
|
|
|
38,105
|
|
Intangible asset amortization
|
|
|
3,731
|
|
|
|
1,321
|
|
|
|
1,463
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
625,633
|
|
|
$
|
632,132
|
|
|
$
|
563,574
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-66
SCHEDULE II
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
UICI (HOLDING COMPANY)
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
|
(In thousands)
|
|
|
ASSETS
|
Investments in and advances to
subsidiaries*
|
|
$
|
734,802
|
|
|
$
|
701,319
|
|
Investments in bonds, stocks and
other
|
|
|
8,303
|
|
|
|
10,612
|
|
Cash and cash equivalents
|
|
|
151,423
|
|
|
|
39,573
|
|
Goodwill
|
|
|
16,352
|
|
|
|
16,352
|
|
Refundable income taxes
|
|
|
13,253
|
|
|
|
2,115
|
|
Deferred income tax
|
|
|
14,332
|
|
|
|
16,143
|
|
Other
|
|
|
2,958
|
|
|
|
2,678
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
941,423
|
|
|
$
|
788,792
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
|
Accrued expenses and other
liabilities
|
|
$
|
12,362
|
|
|
$
|
8,517
|
|
Agent plan liability
|
|
|
36,225
|
|
|
|
41,467
|
|
Long-term debt
|
|
|
15,470
|
|
|
|
15,470
|
|
Net liabilities of discontinued
operations
|
|
|
6,285
|
|
|
|
9,193
|
|
|
|
|
|
|
|
|
|
|
|
|
|
70,342
|
|
|
|
74,647
|
|
STOCKHOLDERS
EQUITY
|
Common stock
|
|
|
476
|
|
|
|
476
|
|
Additional paid-in capital
|
|
|
212,331
|
|
|
|
202,139
|
|
Accumulated other comprehensive
income
|
|
|
(7,823
|
)
|
|
|
20,137
|
|
Retained earnings
|
|
|
697,243
|
|
|
|
528,447
|
|
Treasury stock
|
|
|
(31,146
|
)
|
|
|
(37,054
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
871,081
|
|
|
|
714,145
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
941,423
|
|
|
$
|
788,792
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminated in consolidation. |
The condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of
UICI and Subsidiaries.
See report of Independent Registered Public Accounting Firm.
F-67
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
UICI (HOLDING COMPANY)
CONDENSED STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Income:
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends from continuing
operations*
|
|
$
|
171,876
|
|
|
$
|
30,690
|
|
|
$
|
52,394
|
|
Interest and other income
(includes amounts received from related parties of $0, $7 and
$32 in 2005, 2004 and 2003, respectively)
|
|
|
3,892
|
|
|
|
3,437
|
|
|
|
5,185
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
175,768
|
|
|
|
34,127
|
|
|
|
57,579
|
|
Expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
expenses (includes amounts paid to related parties of $565, $462
and $692 in 2005, 2004 and 2003, respectively)
|
|
|
32,806
|
|
|
|
17,017
|
|
|
|
14,029
|
|
Variable stock compensation
expense (benefit)
|
|
|
7,214
|
|
|
|
14,307
|
|
|
|
(459
|
)
|
Losses in Healthaxis, Inc.
investment
|
|
|
|
|
|
|
|
|
|
|
2,211
|
|
Interest expense
|
|
|
1,148
|
|
|
|
1,083
|
|
|
|
1,103
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
41,168
|
|
|
|
32,407
|
|
|
|
16,884
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in
undistributed earnings of subsidiaries and federal income tax
expense
|
|
|
134,600
|
|
|
|
1,720
|
|
|
|
40,695
|
|
Federal income tax benefit
(expense)
|
|
|
12,087
|
|
|
|
13,551
|
|
|
|
(143
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before equity in
undistributed earnings of subsidiaries
|
|
|
146,687
|
|
|
|
15,271
|
|
|
|
40,552
|
|
Equity in undistributed earnings
of continuing operations*
|
|
|
56,283
|
|
|
|
130,610
|
|
|
|
46,772
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
|
|
202,970
|
|
|
|
145,881
|
|
|
|
87,324
|
|
Dividends from discontinued
operations*
|
|
|
72
|
|
|
|
25,230
|
|
|
|
17,289
|
|
Equity in undistributed earnings
(losses) from discontinued operations*
|
|
|
459
|
|
|
|
(9,553
|
)
|
|
|
(90,279
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued
operations
|
|
|
531
|
|
|
|
15,677
|
|
|
|
(72,990
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
|
$
|
14,334
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminated in consolidation. |
The condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of
UICI and Subsidiaries.
See report of Independent Registered Public Accounting Firm.
F-68
CONDENSED
FINANCIAL INFORMATION OF REGISTRANT
UICI (HOLDING COMPANY)
CONDENSED STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
(In thousands)
|
|
|
Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
203,501
|
|
|
$
|
161,558
|
|
|
$
|
14,334
|
|
Adjustments to reconcile net
income to net cash (used in) provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity in undistributed loss of
subsidiaries of discontinued operations*
|
|
|
(459
|
)
|
|
|
9,553
|
|
|
|
90,279
|
|
Equity in undistributed earnings
of continuing operations*
|
|
|
(56,283
|
)
|
|
|
(130,610
|
)
|
|
|
(46,772
|
)
|
Gains on sale of investments
|
|
|
|
|
|
|
(2,169
|
)
|
|
|
(3,976
|
)
|
Change in other receivables
|
|
|
(880
|
)
|
|
|
5,574
|
|
|
|
(2,171
|
)
|
Variable stock compensation
(benefit)
|
|
|
7,214
|
|
|
|
14,307
|
|
|
|
(459
|
)
|
Change in accrued expenses and
other liabilities
|
|
|
14,469
|
|
|
|
19,811
|
|
|
|
14,433
|
|
Change in SunTech liability
|
|
|
|
|
|
|
|
|
|
|
(15,600
|
)
|
Deferred income tax (benefit)
change
|
|
|
1,811
|
|
|
|
(15,644
|
)
|
|
|
9,961
|
|
Change in federal income tax
payable
|
|
|
(11,138
|
)
|
|
|
(19,445
|
)
|
|
|
13,127
|
|
Operating loss of Healthaxis,
Inc.
|
|
|
|
|
|
|
|
|
|
|
2,211
|
|
Other items, net
|
|
|
1,780
|
|
|
|
660
|
|
|
|
8,730
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by continuing
operations
|
|
|
160,015
|
|
|
|
43,595
|
|
|
|
84,097
|
|
Cash Provided by (Used in)
discontinued operations
|
|
|
831
|
|
|
|
2,796
|
|
|
|
(16,016
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash Provided by Operating
Activities
|
|
|
160,846
|
|
|
|
46,391
|
|
|
|
68,081
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of securities available
for sale
|
|
|
|
|
|
|
(10,490
|
)
|
|
|
|
|
Sales, maturities, calls and
redemptions of securities available for sale
|
|
|
2,190
|
|
|
|
327
|
|
|
|
|
|
Purchase of minority interest
|
|
|
|
|
|
|
|
|
|
|
(863
|
)
|
(Increase) decrease in investments
in and advances to subsidiaries
|
|
|
(8,321
|
)
|
|
|
11,717
|
|
|
|
(19,403
|
)
|
Increase in other investments
|
|
|
|
|
|
|
(225
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Provided by (Used in)
continuing operations
|
|
|
(6,131
|
)
|
|
|
1,329
|
|
|
|
(20,266
|
)
|
Cash Used in discontinued
operations
|
|
|
|
|
|
|
|
|
|
|
(20,485
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash Provided by (Used in)
Investing Activities
|
|
|
(6,131
|
)
|
|
|
1,329
|
|
|
|
(40,751
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayment of notes payable
|
|
|
|
|
|
|
(18,951
|
)
|
|
|
(3,951
|
)
|
Proceeds of notes payable
|
|
|
|
|
|
|
14,570
|
|
|
|
|
|
Exercise of stock options
|
|
|
4,443
|
|
|
|
7,524
|
|
|
|
10,966
|
|
Purchase of treasury stock
|
|
|
(13,359
|
)
|
|
|
(36,220
|
)
|
|
|
(19,596
|
)
|
Payments of dividends to
shareholders
|
|
|
(34,705
|
)
|
|
|
(11,477
|
)
|
|
|
|
|
Other changes in equity
|
|
|
756
|
|
|
|
(1,433
|
)
|
|
|
662
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash Used in Financing
Activities
|
|
|
(42,865
|
)
|
|
|
(45,987
|
)
|
|
|
(11,919
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase in Cash
|
|
|
111,850
|
|
|
|
1,733
|
|
|
|
15,411
|
|
Cash and Cash Equivalents at
beginning of period
|
|
|
39,573
|
|
|
|
37,840
|
|
|
|
22,429
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents at end
of period
|
|
$
|
151,423
|
|
|
$
|
39,573
|
|
|
$
|
37,840
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Eliminated in consolidation. |
The condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of
UICI and Subsidiaries.
See report of Independent Registered Public Accounting Firm.
F-69
SCHEDULE III
UICI
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Col. A
|
|
Col. B
|
|
|
Col. C
|
|
|
Col. D
|
|
|
Col. E
|
|
|
|
|
|
|
Future Policy
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
Benefits
|
|
|
|
|
|
|
|
|
|
Policy
|
|
|
Losses, Claims,
|
|
|
|
|
|
|
|
|
|
Acquisition
|
|
|
and Loss
|
|
|
Unearned
|
|
|
Policyholder
|
|
|
|
Costs
|
|
|
Expenses
|
|
|
Premiums
|
|
|
Funds
|
|
|
|
(In thousands)
|
|
|
December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
44,979
|
|
|
$
|
537,293
|
|
|
$
|
75,221
|
|
|
$
|
4,999
|
|
Student Insurance Division
|
|
|
7,185
|
|
|
|
65,794
|
|
|
|
70,225
|
|
|
|
|
|
Star HRG Division
|
|
|
|
|
|
|
16,803
|
|
|
|
|
|
|
|
|
|
Life Insurance Division
|
|
|
78,175
|
|
|
|
369,961
|
|
|
|
7,223
|
|
|
|
7,882
|
|
Other Insurance
|
|
|
781
|
|
|
|
16,247
|
|
|
|
2,616
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
131,120
|
|
|
$
|
1,006,098
|
|
|
$
|
155,285
|
|
|
$
|
12,881
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
47,950
|
|
|
$
|
589,564
|
|
|
$
|
76,850
|
|
|
$
|
6,390
|
|
Student Insurance Division
|
|
|
10,505
|
|
|
|
88,584
|
|
|
|
91,706
|
|
|
|
|
|
Star HRG Division
|
|
|
|
|
|
|
16,203
|
|
|
|
|
|
|
|
|
|
Life Insurance Division
|
|
|
51,960
|
|
|
|
367,320
|
|
|
|
8,175
|
|
|
|
8,060
|
|
Other Insurance
|
|
|
87
|
|
|
|
5,144
|
|
|
|
675
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
110,502
|
|
|
$
|
1,066,815
|
|
|
$
|
177,406
|
|
|
$
|
14,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See report of Independent Registered Public Accounting Firm.
F-70
SCHEDULE III
UICI
AND SUBSIDIARIES
SUPPLEMENTARY INSURANCE INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Col. H
|
|
|
Col. I
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits,
|
|
|
Amortization
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Claims
|
|
|
of Deferred
|
|
|
Col. J
|
|
|
|
|
|
|
Col. F
|
|
|
Col. G
|
|
|
Losses, and
|
|
|
Policy
|
|
|
Other
|
|
|
Col. K
|
|
|
|
Premium
|
|
|
Investment
|
|
|
Settlement
|
|
|
Acquisition
|
|
|
Operating
|
|
|
Premiums
|
|
|
|
Revenue
|
|
|
Income*
|
|
|
Expenses
|
|
|
Costs
|
|
|
Expenses*(1)
|
|
|
Written
|
|
|
|
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
|
|
|
|
2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,394,644
|
|
|
$
|
32,725
|
|
|
$
|
718,502
|
|
|
$
|
53,304
|
|
|
$
|
345,097
|
|
|
|
|
|
Student Insurance Division
|
|
|
282,486
|
|
|
|
6,121
|
|
|
|
222,306
|
|
|
|
10,505
|
|
|
|
64,666
|
|
|
|
|
|
Star HRG Division
|
|
|
144,612
|
|
|
|
703
|
|
|
|
92,135
|
|
|
|
|
|
|
|
51,746
|
|
|
|
|
|
Life Insurance Division
|
|
|
61,936
|
|
|
|
30,157
|
|
|
|
39,684
|
|
|
|
18,671
|
|
|
|
25,158
|
|
|
|
|
|
Other Insurance
|
|
|
33,856
|
|
|
|
594
|
|
|
|
19,509
|
|
|
|
87
|
|
|
|
10,196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,917,534
|
|
|
$
|
70,300
|
|
|
$
|
1,092,136
|
|
|
$
|
82,567
|
|
|
$
|
496,863
|
|
|
$
|
1,895,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,355,328
|
|
|
$
|
33,640
|
|
|
$
|
736,678
|
|
|
$
|
52,655
|
|
|
$
|
338,890
|
|
|
|
|
|
Student Insurance Division
|
|
|
297,036
|
|
|
|
6,089
|
|
|
|
265,698
|
|
|
|
6,971
|
|
|
|
79,938
|
|
|
|
|
|
Star HRG Division
|
|
|
145,749
|
|
|
|
817
|
|
|
|
92,754
|
|
|
|
|
|
|
|
50,492
|
|
|
|
|
|
Life Insurance Division
|
|
|
46,503
|
|
|
|
27,625
|
|
|
|
33,613
|
|
|
|
13,906
|
|
|
|
22,247
|
|
|
|
|
|
Other Insurance
|
|
|
14,127
|
|
|
|
114
|
|
|
|
6,158
|
|
|
|
|
|
|
|
6,668
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,858,743
|
|
|
$
|
68,285
|
|
|
$
|
1,134,901
|
|
|
$
|
73,532
|
|
|
$
|
498,235
|
|
|
$
|
1,882,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Self-Employed Agency Division
|
|
$
|
1,192,688
|
|
|
$
|
31,230
|
|
|
$
|
736,101
|
|
|
$
|
52,944
|
|
|
$
|
325,794
|
|
|
|
|
|
Student Insurance Division
|
|
|
239,574
|
|
|
|
5,008
|
|
|
|
200,510
|
|
|
|
5,897
|
|
|
|
47,958
|
|
|
|
|
|
Star HRG Division
|
|
|
114,428
|
|
|
|
695
|
|
|
|
75,951
|
|
|
|
|
|
|
|
37,262
|
|
|
|
|
|
Life Insurance Division
|
|
|
36,413
|
|
|
|
30,610
|
|
|
|
33,018
|
|
|
|
10,502
|
|
|
|
25,854
|
|
|
|
|
|
Other Insurance
|
|
|
150
|
|
|
|
|
|
|
|
60
|
|
|
|
|
|
|
|
795
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,583,253
|
|
|
$
|
67,543
|
|
|
$
|
1,045,640
|
|
|
$
|
69,343
|
|
|
$
|
437,663
|
|
|
$
|
1,614,259
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
* |
|
Allocations of Net Investment Income and Other Operating
Expenses are based on a number of assumptions and estimates, and
the results would change if different methods were applied. |
|
(1) |
|
Other operating expenses include underwriting, policy
acquisition costs, and insurance expenses and other income and
expenses allocable to the respective division. |
See report of Independent Registered Public Accounting Firm.
F-71
SCHEDULE IV
UICI
AND SUBSIDIARIES
REINSURANCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Percentage
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of Amount
|
|
|
|
Gross
|
|
|
|
|
|
|
|
|
|
|
|
Assumed
|
|
|
|
Amount
|
|
|
Ceded
|
|
|
Assumed
|
|
|
Net Amount
|
|
|
to Net
|
|
|
|
(Dollars in thousands)
|
|
|
Year Ended December 31, 2005
Life insurance in force
|
|
$
|
8,480,598
|
|
|
$
|
2,119,688
|
|
|
$
|
94,549
|
|
|
$
|
6,455,459
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$
|
69,581
|
|
|
$
|
9,967
|
|
|
$
|
1,951
|
|
|
$
|
61,565
|
|
|
|
3.2
|
%
|
Health insurance
|
|
|
1,822,938
|
|
|
|
4,090
|
|
|
|
37,121
|
|
|
|
1,855,969
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,892,519
|
|
|
$
|
14,057
|
|
|
$
|
39,072
|
|
|
$
|
1,917,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2004
Life insurance in force
|
|
$
|
7,194,680
|
|
|
$
|
1,757,889
|
|
|
$
|
111,488
|
|
|
$
|
5,548,279
|
|
|
|
2.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$
|
51,713
|
|
|
$
|
9,306
|
|
|
$
|
3,444
|
|
|
$
|
45,851
|
|
|
|
7.5
|
%
|
Health insurance
|
|
|
1,789,025
|
|
|
|
4,053
|
|
|
|
27,920
|
|
|
|
1,812,892
|
|
|
|
1.5
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,840,738
|
|
|
$
|
13,359
|
|
|
$
|
31,364
|
|
|
$
|
1,858,743
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2003
Life insurance in force
|
|
$
|
4,267,521
|
|
|
$
|
1,074,569
|
|
|
$
|
139,889
|
|
|
$
|
3,332,841
|
|
|
|
4.2
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Life insurance
|
|
$
|
39,688
|
|
|
$
|
7,159
|
|
|
$
|
3,491
|
|
|
$
|
36,020
|
|
|
|
9.7
|
%
|
Health insurance
|
|
|
1,554,136
|
|
|
|
34,882
|
|
|
|
27,979
|
|
|
|
1,547,233
|
|
|
|
1.8
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,593,824
|
|
|
$
|
42,041
|
|
|
$
|
31,470
|
|
|
$
|
1,583,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See report of Independent Registered Public Accounting Firm.
F-72
SCHEDULE V
UICI
AND SUBSIDIARIES
VALUATION AND QUALIFYING ACCOUNTS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
|
|
|
Recoveries/
|
|
|
Deductions/
|
|
|
|
Balance at
|
|
|
Additions
|
|
|
in
|
|
|
Amounts
|
|
|
Balance at
|
|
|
|
Beginning
|
|
|
Cost and
|
|
|
Carrying
|
|
|
Charged
|
|
|
End of
|
|
|
|
of Period
|
|
|
Expenses
|
|
|
Value
|
|
|
Off
|
|
|
Period
|
|
|
|
(In thousands)
|
|
|
Allowance for losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2005:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agents receivables
|
|
$
|
2,967
|
|
|
$
|
3,194
|
|
|
$
|
|
|
|
$
|
(2,451
|
)
|
|
$
|
3,710
|
|
Other receivables
|
|
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,699
|
|
Mortgage loans
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
(269
|
)
|
|
|
55
|
|
Student loans
|
|
|
3,608
|
|
|
|
696
|
|
|
|
|
|
|
|
(1,582
|
)
|
|
|
2,722
|
|
Real estate
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agents receivables
|
|
$
|
3,143
|
|
|
$
|
2,759
|
|
|
$
|
|
|
|
$
|
(2,935
|
)
|
|
$
|
2,967
|
|
Other receivables
|
|
|
3,699
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,699
|
|
Mortgage loans
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
Student loans
|
|
|
1,676
|
|
|
|
3,163
|
|
|
|
|
|
|
|
(1,231
|
)
|
|
|
3,608
|
|
Real estate
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
(2,434
|
)
|
|
|
|
|
Year ended December 31, 2003:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agents receivables
|
|
$
|
3,557
|
|
|
$
|
1,944
|
|
|
$
|
|
|
|
$
|
(2,358
|
)
|
|
$
|
3,143
|
|
Other receivables
|
|
|
2,187
|
|
|
|
1,512
|
|
|
|
|
|
|
|
|
|
|
|
3,699
|
|
Mortgage
|
|
|
324
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
324
|
|
Student loans
|
|
|
941
|
|
|
|
1,912
|
|
|
|
|
|
|
|
(1,177
|
)
|
|
|
1,676
|
|
Real estate
|
|
|
2,434
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,434
|
|
See report of Independent Registered Public Accounting Firm.
F-73
EXHIBIT INDEX
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
2
|
|
|
|
|
Plan of Reorganization of United
Group Insurance Company, as subsidiary of United Group
Companies, Inc. and Plan and Agreement of Merger of United Group
Companies, Inc. into United Insurance Companies, Inc., filed as
Exhibit 2-1
to the Registration Statement on
Form S-1,
File
No. 33-2998,
filed with the Securities and Exchange Commission on
January 30, 1986 and incorporated by reference herein.
|
|
2
|
.1
|
|
|
|
Agreement and Plan of Merger,
dated as of September 15, 2005, between UICI and Premium
Finance LLC, Mulberry Finance Co., Inc., DLJMB IV First Merger
LLC, Premium Acquisition, Inc., Mulberry Acquisition, Inc., and
DLJMB IV First Merger Co. Acquisition Inc., filed as
Exhibit 2.1 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
3
|
.1(A)
|
|
|
|
Certificate of Incorporation of
UICI, as amended, filed as Exhibit 4.1 (a) to
Registration Statement on
Form S-8,
File
No. 333-85113,
filed with the Securities and Exchange Commission on
August 13, 1999 and incorporated by reference herein.
|
|
3
|
.2(A)
|
|
|
|
Restated By-Laws, as amended, of
the Company, filed as Exhibit 3.2 to the
Form 10-Q
dated June 30, 2003, File No.
001-14953
and incorporated by reference herein.
|
|
10
|
.1(B)
|
|
|
|
Reinsurance Agreement between
AEGON USA Companies and UICI Companies effective January 1,
1995, as amended through November 21, 1995 and incorporated
by reference herein.
|
|
10
|
.1(C)
|
|
|
|
Amendment No. 3 to
Reinsurance Agreement between AEGON USA Companies and UICI
Companies effective April 1, 1996, and filed as
Exhibit 10.1 to the Companys Current Report on
Form 8-K
dated April 1, 1996 (File
No. 0-14320),
and incorporated by reference herein. The Amendment No. 3
amends the Reinsurance Agreement between AEGON USA Companies and
UICI Companies effective January 1, 1995, as amended
through November 21, 1995, filed as Exhibit 10.1(B) on
Annual Report on
Form 10-K
for year ended December 31, 1995, (File No.
0-14320),
filed on March 29, 1996, and incorporated by reference
herein.
|
|
10
|
.2
|
|
|
|
Agreements Relating to United
Group Association Inc., filed as
Exhibit 10-2
to the Registration Statement on
Form S-18,
File
No. 2-99229,
filed with the Securities and Exchange Commission on
July 26, 1985 and incorporated by reference herein.
|
|
10
|
.3
|
|
|
|
Agreement for acquisition of
capital stock of Mark Twain Life Insurance Corporation by
Mr. Ronald L. Jensen, filed as
Exhibit 10-4
to the Registration Statement on
Form S-1,
File
No. 33-2998,
filed with the Securities and Exchange Commission on
January 30, 1986 and incorporated by reference herein.
|
|
10
|
.3(A)
|
|
|
|
Assignment Agreement among
Mr. Ronald L. Jensen, the Company and Onward and Upward,
Inc. dated February 12, 1986 filed as
Exhibit 10-4(A)
to Amendment No. 1 to Registration Statement on
Form S-1,
File
No. 33-2998,
filed with the Securities and Exchange Commission on
February 13, 1986 and incorporated by reference herein.
|
|
10
|
.4
|
|
|
|
Agreement for acquisition of
capital stock of
Mid-West
National Life Insurance Company of Tennessee by the Company
filed as Exhibit 2 to the Report on
Form 8-K
of the Company, File
No. 0-14320,
dated August 15, 1986 and incorporated by reference herein.
|
|
10
|
.5(A)
|
|
|
|
Stock Purchase Agreement, dated
July 1, 1986, among the Company, Charles E. Stuart and
Stuart Holding Company, as amended July 7, 1986, filed as
Exhibit 11(c) (1) to Statement on
Schedule 14D-1
and Amendment No. 1 to Schedule 13D, filed with the
Securities and Exchange Commission on July 14, 1986 and
incorporated by reference herein.
|
|
10
|
.5(B)
|
|
|
|
Acquisition Agreement, dated
July 7, 1986 between Associated Companies, Inc. and the
Company, together with exhibits thereto, filed as
Exhibit (c) (2) to Statement on
Schedule 14D-1
and Amendment No. 1 to Schedule 13D, filed with the
Securities and Exchange Commission on July 14, 1986 and
incorporated by reference herein.
|
|
10
|
.5(C)
|
|
|
|
Offer to Purchase, filed as
Exhibit (a) (1) to Statement on
Schedule 14D-1
and Amendment No. 1 to Schedule 13D, filed with the
Securities and Exchange Commission on July 14, 1986 and
incorporated by reference herein.
|
|
10
|
.6
|
|
|
|
Agreement for acquisition of
capital stock of Life Insurance Company of Kansas, filed as
Exhibit 10.6 to the 1986 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 27, 1987 and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.7
|
|
|
|
Agreement Among Certain
Stockholders of the Company, filed as
Exhibit 10-6
to the Registration Statement on
Form S-18,
File
No. 2-99229,
filed with the Securities and Exchange Commission on
July 26, 1985 and incorporated by reference herein.
|
|
10
|
.8
|
|
|
|
Form of Subscription Agreement for
1985 Offering, filed as
Exhibit 10-7
to the Registration Statement on
Form S-1,
File
No. 33-2998,
filed with the Securities and Exchange Commission on
January 30, 1986 and incorporated by reference herein.
|
|
10
|
.9
|
|
|
|
Repurchase Agreement between Life
Investors Inc., UGIC, Ronald Jensen and Keith Wood dated
January 6, 1984, filed as
Exhibit 10-8
to Registration Statement on
Form S-1,
File
No. 33-2998,
filed with the Securities and Exchange Commission on
January 30, 1986 and incorporated by reference herein.
|
|
10
|
.10
|
|
|
|
Treaty of Assumption and Bulk
Reinsurance Agreement for acquisition of certain assets and
liabilities of Keystone Life Insurance Company, filed as
Exhibit 10.10 to the 1987 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 28, 1988 and incorporated by reference herein.
|
|
10
|
.11
|
|
|
|
Acquisition and Sale-Purchase
Agreements for the acquisition of Orange State Life and Health
Insurance Company and certain other assets, filed as
Exhibit 10.11 to the 1987 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 28, 1988 and incorporated by reference herein.
|
|
10
|
.12*
|
|
|
|
United Insurance Companies, Inc.
1987 Stock Option Plan, included with the 1988 Proxy Statement
filed with the Securities and Exchange Commission on
April 25, 1988 and incorporated by reference herein, filed
as Exhibit 10.12 to the 1988 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 30, 1989 and incorporated by reference herein.
|
|
10
|
.13*
|
|
|
|
Amendment to the United Insurance
Companies, Inc. 1987 Stock Option Plan, filed as
Exhibit 10.13 to the 1988 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 30, 1989 and incorporated by reference herein.
|
|
10
|
.14*
|
|
|
|
UICI Restated and Amended 1987
Stock Option Plan as amended and restated March 16, 1999
filed as Exhibit 10.1 to
Form 10-Q
dated March 31, 1999, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.15
|
|
|
|
Amendment to Stock Purchase
Agreement between American Capital Insurance Company and United
Insurance Companies, Inc., filed as Exhibit 10.15 to the
1988 Annual Report on
Form 10-K,
File
No. 0-14320,
filed with the Securities and Exchange Commission on
March 30, 1989 and incorporated by reference herein.
|
|
10
|
.16
|
|
|
|
Agreement of Substitution and
Assumption Reinsurance dated as of January 1, 1991 by and
among Farm and Home Life Insurance Company, the Arizona Life and
Disability Insurance Guaranty Fund and United Group Insurance
Company, as modified by a Modification Agreement dated
August 26, 1991, together with schedules and exhibits
thereto, filed as Exhibit 2 to Schedule 13D, filed
with the Securities and Exchange Commission on September 3,
1991 and incorporated by reference herein.
|
|
10
|
.17
|
|
|
|
Stock Purchase Agreement dated as
of August 26, 1991 by and among Farm and Home Life
Insurance Company, First United, Inc. and The MEGA Life and
Health Insurance Company, filed as Exhibit 3 to
Schedule 13D, filed with the Securities and Exchange
Commission on September 3, 1991 and incorporated by
reference herein.
|
|
10
|
.18
|
|
|
|
Stock Purchase Agreement dated as
of August 26, 1991 by and among Farm and Home Life
Insurance Company, The Chesapeake Life Insurance Company and
Mid-West
National Life Insurance Company of Tennessee, filed as
Exhibit 4 to Schedule 13D, File
No. 0-14320
filed with the Securities and Exchange Commission on
September 3, 1991 and incorporated by reference herein.
|
|
10
|
.19
|
|
|
|
Second Agreement of Modification
to Agreement of Substitution and Assumption Reinsurance dated as
of November 15, 1991 among Farm and Home Life Insurance
Company, United Group Insurance Company, and the Arizona Life
and Disability Insurance Guaranty Fund, filed as Exhibit 1
to Amendment No. 1 to Schedule 13D, File
No. 0-14320
filed with the Securities and Exchange Commission on
February 5, 1992 and incorporated by reference herein. This
agreement refers to a Modification Agreement dated
September 12, 1991. The preliminary agreement included in
the initial statement was originally dated August 26, 1991.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.20
|
|
|
|
Addendum to Agreement of
Substitution and Assumption Reinsurance dated as of
November 22, 1991 among United Group Insurance Company,
Farm and Home Life Insurance Company, and the Arizona Life and
Disability Insurance Guaranty Fund, filed as Exhibit 2 to
Amendment No. 1 to Schedule 13D, File
No. 0-14320
filed with the Securities and Exchange Commission on
February 5, 1992 and incorporated by reference herein.
|
|
10
|
.21
|
|
|
|
Modification Agreement dated
November 15, 1991 between First United, Inc., Underwriters
National Assurance Company, and Farm and Home Life Insurance
Company, The MEGA Life and Health Insurance Company, and the
Insurance Commissioner of the State of Indiana, and filed as
Exhibit 3 to Amendment No. 1 to Schedule 13D,
File
No. 0-14320
filed with the Securities and Exchange Commission on
February 5, 1992 and incorporated by reference herein.
|
|
10
|
.22
|
|
|
|
Agreement of Reinsurance and
Assumption dated December 14, 1992 by and among Mutual
Security Life Insurance Company, in Liquidation, National
Organization of Life and Health Insurance Guaranty Associations,
and The MEGA Life and Health Insurance Company, and filed as
Exhibit 2 to the Companys Report on
Form 8-K
dated March 29, 1993, (File No.
0-14320),
and incorporated by reference herein.
|
|
10
|
.23
|
|
|
|
Acquisition Agreement dated
January 15, 1993 by and between United Insurance Companies,
Inc. and Southern Educators Life Insurance Company, and filed as
Exhibit 2 to the Companys Report on
Form 8-K
dated March 29, 1993, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.24
|
|
|
|
Stock Exchange Agreement effective
January 1, 1993 by and between Onward and Upward, Inc. and
United Insurance Companies, Inc. and filed as Exhibit 2 to
the Companys Report on
Form 8-K
dated March 29, 1993, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.25
|
|
|
|
Stock Purchase Agreement by and
among United Insurance Companies, Inc. and United Group
Insurance Company and Landmark Land Company of Oklahoma, Inc.
dated January 6, 1994, and filed as Exhibit 10.27 to
Form 10-Q
dated March 31, 1994, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.26
|
|
|
|
Private Placement Agreement dated
June 1, 1994 of 8.75% Senior Notes Payable due June
2004 in the aggregate amount of $27,655,000, and filed as
Exhibit 28.1 to the Companys Report on
Form 8-K
dated June 22, 1994, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.27
|
|
|
|
Asset Purchase Agreement between
UICI Companies and PFL Life Insurance Company, Bankers United
Life Assurance Company, Life Investors Insurance Company of
America and Monumental Life Insurance Company and Money
Services, Inc. effective April 1, 1996, as filed as
Exhibit 10.2 to the Companys Report on
Form 8-K
dated April 1, 1996 (File
No. 0-14320)
and incorporated by reference herein.
|
|
10
|
.28
|
|
|
|
General Agents Agreement
between
Mid-West
National Life Insurance Company of Tennessee and United Group
Association, Inc. effective April 1, 1996, and filed as
Exhibit 10.3 to the Companys Report on
Form 8-K
dated April 1, 1996 (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.29
|
|
|
|
General Agents Agreement
between The MEGA Life and Health Insurance Company and United
Group Association, Inc. Effective April 1, 1996, and filed
as Exhibit 10.4 to the Companys Report on
Form 8-K
dated April 1, 1996 (File No.
0-14320) and
incorporated by reference herein.
|
|
10
|
.30
|
|
|
|
Agreement between United Group
Association, Inc. and Cornerstone Marketing of America effective
April 1, 1996, and filed as Exhibit 10.5 to the
Companys Current Report on
Form 8-K
dated April 1, 1996 (File
No. 0-14320)
and incorporated by reference herein.
|
|
10
|
.31
|
|
|
|
Stock exchange agreement dated
October 1996 by and between AMLI Realty Co. and UICI, as amended
by that first amendment stock exchange agreement dated
November 4, 1996 filed as Exhibit 10.31 to the
Registration Statement on
Form S-3
File
No. 333-23899
filed with the Securities and Exchange Commission on
April 25, 1997 and incorporated by reference herein.
|
|
10
|
.32
|
|
|
|
Agreement dated December 6,
1997 by and between UICI, UICI Acquisition Corp., ELA Corp., and
Marcus A. Katz, Cary S. Katz, Ryan D. Katz and RK Trust #2
filed as Exhibit 10.32 to the Registration Statement on
Form S-3
File
No. 333-42937
filed with the Securities and Exchange Commission on
December 22, 1997 and incorporated by reference herein.
|
|
10
|
.33
|
|
|
|
Repurchase Agreement dated as of
March 27, 1998 as amended between Lehman Commercial Paper,
Inc. and Educational Finance Group, Inc. filed as
Exhibit 10.1 to
Form 10-Q
dated September 30, 1999, (File
No. 0-14320),
and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.34
|
|
|
|
Loan Agreement among UICI, Bank of
America, as administrative agent, The First National Bank of
Chicago as documentation agent, and Fleet National Bank as
co-agent dated May 17, 1999 filed as Exhibit 10.2 to
Form 10-Q
dated September 30, 1999, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.35
|
|
|
|
Indenture Agreement dated as of
August 5, 1999 between EFG-III, LP, as Issuer and The First
National Bank of Chicago, as Indenture Trustee and Eligible
Lender Trustee filed as Exhibit 10.3 to
Form 10-Q
dated September 30, 1999, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.36
|
|
|
|
Indenture Agreement dated as of
June 14, 1999 between EFG-II, LP, as Issuer and The First
National Bank of Chicago, as Indenture Trustee and Eligible
Lender Trustee filed as Exhibit 10.4 to
Form 10-Q
dated September 30, 1999, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.44
|
|
|
|
Stock Purchase Agreement dated,
July 27, 2000, between UICI and C&J Investments, LLC
filed as Exhibit 10.44 to
Form 10-Q
dated June 30, 2000, (File
No. 0-14320),
and incorporated by reference herein.
|
|
10
|
.45*
|
|
|
|
Management Agreement, dated
December 31, 2000 between UICI, The Mega Life and Health
Insurance Company and William J. Gedwed, filed as
Exhibit 10.45 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.46*
|
|
|
|
UICI 2000 Restricted Stock Plan
effective January 1, 2000, filed as Exhibit 10.46 to
the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.47*
|
|
|
|
UICI 2001 Restricted Stock Plan
effective January 1, 2001, filed as Exhibit 10.47 to
the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.48
|
|
|
|
Termination Agreement, dated
April 13, 2000 between UICI, UICI Acquisition Co., UICI
Capital Trust I, and HealthPlan Services Corporation, filed
as Exhibit 10.48 to the Companys 2000 Annual Report
on
Form 10-K,
File No.
001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.49*
|
|
|
|
Management Agreement dated
October 13, 2000 between UICI and William P. Benac, filed
as Exhibit 10.49 to the Companys 2000 Annual Report
on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.50
|
|
|
|
Information Technology Services
Agreement by and between UICI and Insurdata Incorporated (now
Healthaxis, Inc.), dated January 3, 2000, filed as
Exhibit 10.50 to the Companys 2000 Annual Report on
Form 10-K,
File No.
001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.51
|
|
|
|
Management Agreement between NMC
Holdings, Inc. and UICI dated July 27, 2000, filed as
Exhibit 10.51 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.52
|
|
|
|
Administrative Service Agreement
dated July 27,2000 between The MEGA Life and Health
Insurance Company and National Motor Club of America, Inc. filed
as Exhibit 10.52 to the Companys 2000 Annual Report
on
Form 10-K,
File No.
001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.53
|
|
|
|
Stock Purchase Agreement dated
May 12, 2000 between UICI and The Mega Life and Health
Insurance Company with respect to all of the outstanding capital
stock of The Chesapeake Life Insurance Company, filed as
Exhibit 10.53 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.54
|
|
|
|
Promissory Note dated
June 29, 2000 between UICI and Columbus Bank and Trust
maturing June 30, 2005, filed as Exhibit 10.54 to the
Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.55
|
|
|
|
Stock Purchase Agreement dated
June 20, 2000 between UICI and The MEGA Life and Health
Insurance Company with respect to all of the Outstanding capital
stock of AMLI Realty Co., filed as Exhibit 10.55 to the
Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.56
|
|
|
|
Agreement dated September 15,
1999 between UICI and Onward and Upward, Inc. (Put/Call
Agreement) with respect to the TOP Plan Funding Obligation,
together with extension agreements dated August 15, 2000,
October 16, 2000, and February 7, 2001, filed as
Exhibit 10.56 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.57
|
|
|
|
Promissory Note and Loan Agreement
dated July 19, 2000 between United Group Reinsurance, Inc.
and Money Services, Inc., maturing August 1, 2001, filed as
Exhibit 10.57 to the Companys 2000 Annual Report on
Form 10-K,
File No.
001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.58
|
|
|
|
Promissory Note and Loan Agreement
dated July 19, 2000 between Financial Services Reinsurance
Ltd. and Money Services, Inc., maturing August 1, 2001,
filed as Exhibit 10.58 to the Companys 2000 Annual
Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.59
|
|
|
|
Promissory Note and Loan Agreement
dated July 19, 2000 between U.S. Managers Life
Insurance Company Ltd. and Money Services, Inc., maturing
August 1, 2001, filed as Exhibit 10.59 to the
Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.60
|
|
|
|
Asset Purchase and Transfer
Agreement dated August 4, 2000 between Specialized Card
Services, Inc., United Credit National Bank, UICI Receivables
Funding Corporation, and UICI and Household Bank (SB), N.A. and
Household Credit Services, Inc., together with Amendment
No. 1, filed as Exhibit 10.60 to the Companys
2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.61
|
|
|
|
Lease Agreement dated
September 30, 2000 between Household Credit Services, Inc.
(tenant) and Specialized Card Services, Inc. (Landlord), filed
as Exhibit 10.61 to the Companys 2000 Annual Report
on
Form 10-K,
File No.
001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.62
|
|
|
|
Sublease Agreement dated
July 27, 2000 between The Mega Life and Health Insurance
and National Motor Club of America, Inc., filed as
Exhibit 10.62 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.63
|
|
|
|
Software License Agreement dated
January 30, 2001 between UICI and HealthAxis.com, filed as
Exhibit 10.63 to the Companys 2000 Annual Report on
Form 10-K,
File No.
001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.64*
|
|
|
|
Agreement, dated March 14,
2001, between UICI, MEGA and Charles Prater, filed as
Exhibit 10.64 to the Companys 2000 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 16, 2001 and incorporated by reference herein.
|
|
10
|
.65
|
|
|
|
Loan agreement dated
January 25, 2002 between UICI and Bank of America, N. A.
and La Salle Bank National Association, filed as
Exhibit 10.65 to the Companys 2001 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 22, 2002 and incorporated by reference herein.
|
|
10
|
.66
|
|
|
|
General and First Supplemental
Indenture between CLFD-I, Inc. and Zions First National Bank, as
Trustee relating to the Student Loan Asset Backed Notes
dated as of April 1, 2001, filed as Exhibit 10.66 to
the Companys 2001 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 22, 2002 and incorporated by reference herein.
|
|
10
|
.67
|
|
|
|
Indenture agreement dated
January 30, 2002 between
AMS-12002,
LP as Issuer and Bank One, National Association, as Indenture
Trustee and Eligible Lender Trustee filed as Exhibit 10.67
to the Companys 2001 Annual Report on
Form 10-K,
File
No. 001-14953,
filed with the Securities and Exchange Commission on
March 22, 2002 and incorporated by reference herein.
|
|
10
|
.68
|
|
|
|
Stock purchase agreement dated
February 28, 2002 among The S.T.A.R. Human Resource Group,
Inc., STAR Administrative Services, Inc. and certain
Shareholders and UICI filed as Exhibit 10.68 to the
Form 10-Q
dated March 31, 2002, File
No. 001-14953
and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.69
|
|
|
|
Second Supplemental Indenture,
dated as of April 1, 2002, between CFLD-I, Inc. and Zions
First National Bank, as Trustee, relating to $50,000,000 CFLD-I,
Inc. Student Loan Asset Backed Notes, Senior
Series 2002A-1
(Auction Rate Certificates) filed as Exhibit 10.69 to the
Form 10-Q
dated June 30, 2002, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.70
|
|
|
|
Third Supplemental Indenture,
dated as of April 1, 2002, between CFLD-I, Inc. and Zions
First National Bank, as Trustee, amending General Indenture,
dated as of April 1, 2001, relating to CFLD-I, Inc. Student
Loan Asset Backed Notes filed as Exhibit 10.70 to the
Form 10-Q
dated June 30, 2002, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.71
|
|
|
|
Indenture Agreement dated
August 21, 2002 among AMS-2 2002, LP, as Issuer, and
BankOne, National Association, as Indenture Trustee and Eligible
Lenders Trustee filed as Exhibit 10.71 to the
Form 10-Q
dated September 30, 2002, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.72
|
|
|
|
EFG-II Waiver dated July 24,
2003, entered into by MBIA Insurance Corporation, Bank One,
National Association, as successor to The First National Bank of
Chicago, not in its individual capacity but solely as Indenture
Trustee, Eligible Lender Trustee and EFG Eligible Lender
Trustee, EFG-II, LP, and Academic Management Services Corp.
filed as Exhibit 10.72 to the
Form 10-Q
dated June 30, 2003, File No.
001-14953
and incorporated by reference herein.
|
|
10
|
.73
|
|
|
|
EFG-III Waiver dated July 24,
2003, entered into by MBIA Insurance Corporation, Fleet National
Bank, Bank of America, N.A., Bank One, National Association, as
successor to The First National Bank of Chicago, not in its
individual capacity but solely as Indenture Trustee and Eligible
Lender Trustee,
EFG-II
SPC-I, Inc., Academic Management Services Corp., and EFG Funding
LLC filed as Exhibit 10.73 to the
Form 10-Q
dated June 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.74
|
|
|
|
EFG-IV Waiver dated July 24,
2003, entered into by MBIA Insurance Corporation, Bank One,
National Association, EFG-IV, LP, and Academic Management
Services Corp. filed as Exhibit 10.74 to the
Form 10-Q
dated June 30, 2003, File No.
001-14953
and incorporated by reference herein.
|
|
10
|
.75
|
|
|
|
AMS-I Waiver dated July 24,
2003, entered into by MBIA Insurance Corporation,
AMS-1 2002,
LP, and Academic Management Services Corp. filed as
Exhibit 10.75 to the
Form 10-Q
dated June 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.76
|
|
|
|
Indenture Agreement dated
May 8, 2003 among
AMS-3 2003,
LP, as Issuer, and Bank One, National Association, as Indenture
Trustee and Eligible Lender Trustee filed as Exhibit 10.76
to the
Form 10-Q
dated June 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.77
|
|
|
|
Master Repurchase Agreement, dated
as of August 7, 2003, between Lehman Brothers Bank, FSB,
and Academic Management Services Corp. filed as
Exhibit 10.77 to the
Form 10-Q
dated June 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.78
|
|
|
|
Guaranty and Warranty Agreement,
dated as of August 7, 2003 made by UICI in favor of Lehman
Brothers Bank, FSB filed as Exhibit 10.78 to the
Form 10-Q
dated June 30, 2003, File No.
001-14953
and incorporated by reference herein.
|
|
10
|
.79
|
|
|
|
Agreement between Student Loan
Marketing Association, Fleet National Bank (solely in its
capacity as Trustee for the AMS Education Loan Trust), and
Academic Management Services, Inc. dated July 1, 2000 and
as amended June 25, 2003 and July 29, 2003 filed as
Exhibit 10.79 to the
Form 10-Q
dated June 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.80*
|
|
|
|
Stock purchase agreement between
Ronald L. Jensen and Gregory T. Mutz filed as Exhibit 10.80
to the
Form 10-Q
dated June 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.81*
|
|
|
|
Stock purchase agreement between
UICI and Gregory T. Mutz filed as Exhibit 10.81 to the
Form 10-Q
dated June 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.82
|
|
|
|
Amendment No. 1 dated
October 17, 2003 to EFG-IV Waiver dated July 24, 2003,
entered into by MBIA Insurance Corporation, Bank One, National
Association, EFG-IV, LP, and Academic Management Services Corp.
filed as Exhibit 10.82 to the
Form 10-Q
dated September 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.83
|
|
|
|
Amendment No. 1 dated
October 17, 2003 to AMS-I Waiver dated July 24, 2003,
entered into by MBIA Insurance Corporation,
AMS-1 2002,
LP, and Academic Management Services Corp. filed as
Exhibit 10.83 to the
Form 10-Q
dated September 30, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.84
|
|
|
|
Amendment dated October 2,
2003 to Master Repurchase Agreement dated August 7, 2003,
between Lehman Brothers Bank, FSB, and Academic Management
Services Corp. filed as Exhibit 10.84 to the
Form 10-Q
dated September 30, 2003, File
No. 001-14953
and incorporated by reference herein
|
|
10
|
.85
|
|
|
|
Stock Purchase Agreement, dated
October 29, 2003, between UICI and SLM Corporation,
contemplating the sale by UICI, and the purchase by SLM
Corporation, of all issued and outstanding shares of Academic
Management Services Corp. filed as Exhibit 10.85 to the
Current Report on
Form 8-K
dated November 18, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.86
|
|
|
|
Amendment to Stock Purchase
Agreement, dated November 18, 2003, between UICI and SLM
Corporation filed as Exhibit 10.86 to the Current Report on
Form 8-K
dated November 18, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.87*
|
|
|
|
Agreement, dated as of
February 11, 2004, between the Company and Gregory T. Mutz
filed as Exhibit 10.87 to the
Form 10-K
dated December 31, 2003, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.88
|
|
|
|
Amended and Restated
Trust Agreement among UICI, JP Morgan Chase Bank, Chase
Manhattan Bank USA, National Association, and The Administrative
Trustees dated April 29, 2004 and incorporated by reference
herein.
|
|
10
|
.89*
|
|
|
|
Form of Grant Letter Pursuant to
1987 UICI Non-Qualified Stock Option Agreement and incorporated
by reference herein
|
|
10
|
.90*
|
|
|
|
Form of Stock Grant under
UICIs 2000 and 2001 Restricted Stock Agreement and
incorporated by reference herein.
|
|
10
|
.91
|
|
|
|
Vendor Agreement, dated as of
January 1, 2005 between The MEGA Life and Health Insurance
Company and the National Association for the Self-Employed filed
as exhibit 10.91 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.92
|
|
|
|
Vendor Agreement, dated as of
January 1, 2005 between The MEGA Life and Health Insurance
Company and Americans for Financial Security, Inc. filed as
exhibit 10.92 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.93
|
|
|
|
Amended and Restated Vendor
Agreement, dated as June 1, 2005, between
Mid-West
National Life Insurance Company of Tennessee and Alliance for
Affordable Services filed as exhibit 10.93 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.94
|
|
|
|
Vendor Agreement, dated as of
January 1, 2005 between The Chesapeake Life Insurance
Company and Alliance for Affordable Services filed as
exhibit 10.94 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.95
|
|
|
|
Master General Agent Agreement,
dated April 16, 2003, between The Chesapeake Life Insurance
Company and Tim McCoy & Associates, Inc. (NEAT) filed
as exhibit 10.95 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.96
|
|
|
|
Master General Agent Agreement,
dated March 29, 2004, between The Chesapeake Life Insurance
Company and Life Professionals Marketing Group, Inc. filed as
exhibit 10.96 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.97
|
|
|
|
Assumption Reinsurance and
Marketing Agreement, dated October 8, 2004, among The
Chesapeake Life Insurance Company; HEI Exchange, Inc. (formerly
HealthMarket Inc.); and American Travelers Assurance Company, as
amended by Amendment No. 1 thereto dated March 1, 2005
filed as exhibit 10.97 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.98
|
|
|
|
Asset Sale Agreement, effective
January 1, 1997, as amended by Amendments No, 1, 2, 3
and 4 thereto, between UICI and Specialized Investment Risks,
inc. (formerly known as United Group Agency, Inc.) filed as
exhibit 10.98 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.99
|
|
|
|
Loan Underwriting and Processing
Agreement, dated June 12, 2002, between Richland State Bank
and the College Fund Life Division of The MEGA Life and
Health Insurance Company filed as exhibit 10.99 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.100
|
|
|
|
Loan Origination and Sale
Agreement, dated July 28, 2005, between Richland State
Bank, Richland Loan Processing Center, Inc. and UICI and UICI
Funding Corp 2 filed as exhibit 10.100 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.101
|
|
|
|
Vendor Agreement, dated as of
January 1, 2005, between Specialized Association Services,
Inc. and The MEGA Life and Health Insurance Company filed as
exhibit 10.101 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.102
|
|
|
|
Administrative Services Agreement,
dated as of January 1, 2005, between NMC Holdings, Inc. and
The MEGA Life and Health Insurance Company and amendment dated
July 1, 2005 filed as exhibit 10.102 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.103
|
|
|
|
Field Services Agreement, dated as
of January 1, 2005, between Performance Driven Awards, Inc.
and the National Association for the Self-Employed filed as
exhibit 10.103 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.104
|
|
|
|
Field Services Agreement, dated as
of January 1, 2005, between Performance Driven Awards, Inc.
and Americans for Financial Security, Inc. filed as
exhibit 10.104 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.105
|
|
|
|
Field Services Agreement, dated as
of January 1, 2005, between Success Driven Awards, Inc. and
Alliance for Affordable Services filed as exhibit 10.105 to
the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.106
|
|
|
|
Form of Stock Grant under
UICIs 2005 Restricted Stock Agreement filed as
exhibit 10.106 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.107
|
|
|
|
Vendor Agreement, effective
January 1, 2003 between Specialized Association Services,
LTD and Benefit Administration for the Self-Employed filed as
exhibit 10.107 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.108
|
|
|
|
Vendor Agreement, effective
January 1, 2005 between Specialized Association Services,
LTD and Benefit Administration for the Self-Employed filed as
exhibit 10.108 to the
Form 10-Q
dated June 30, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.109
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and Jeffrey James Jensen
filed as Exhibit 10.1 to the Current Report on
Form 8-K
dated September 16, 2005, File No.
001-14953
and incorporated by reference herein.
|
|
10
|
.110
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and Jami Jill Jensen filed
as Exhibit 10.2 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.111
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and Janet Jarie Jensen
filed as Exhibit 10.3 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.112
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and James Joel Jensen
filed as Exhibit 10.4 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.113
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and Julie Jean Jensen
filed as Exhibit 10.5 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.114
|
|
|
|
Non-Compete Agreement, dated as of
September 15, 2005, between UICI and Gladys M. Jensen filed
as Exhibit 10.6 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
10
|
.115
|
|
|
|
Term Sheet for New Employment
Agreement for William J. Gedwed, dated as of September 15,
2005, filed as Exhibit 10.7 to the Current Report on
Form 8-K
dated September 16, 2005, File No.
001-14953
and incorporated by reference herein.
|
|
10
|
.116
|
|
|
|
Term Sheet for New Employment
Agreement for William J. Truxal, dated as of September 15,
2005, filed as Exhibit 10.8 to the Current Report on
Form 8-K
dated September 16, 2005, File No.
001-14953
and incorporated by reference herein.
|
|
10
|
.117
|
|
|
|
Term Sheet for New Employment
Agreement for Troy McQuagge, dated as of September 15,
2005, filed as Exhibit 10.9 to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
|
|
|
|
|
|
Exhibit
|
|
|
|
|
Number
|
|
|
|
Description of Exhibit
|
|
|
10
|
.118
|
|
|
|
Term Sheet for New Employment
Agreement for Phillip J. Myhra, dated as of September 15,
2005, filed as Exhibit 10.10 to the Current Report on
Form 8-K
dated September 16, 2005, File No.
001-14953
and incorporated by reference herein.
|
|
10
|
.119
|
|
|
|
UICI Success Award Bonus Plan,
dated as of September 15, 2005, filed as Exhibit 10.11
to the Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
99
|
.1
|
|
|
|
Voting Agreement, dated as of
September 15, 2005, filed as Exhibit 99.1 to the
Current Report on
Form 8-K
dated September 16, 2005, File
No. 001-14953
and incorporated by reference herein.
|
|
21
|
|
|
|
|
Subsidiaries of UICI
|
|
23
|
|
|
|
|
Consent of Independent Registered
Public Accounting Firm-KPMG LLP
|
|
24
|
|
|
|
|
Power of Attorney
|
|
31
|
.1
|
|
|
|
Certification of William J.
Gedwed, Chief Executive Officer of the Registrant, required by
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Securities Exchange Act of 1934
|
|
31
|
.2
|
|
|
|
Certification of Mark D. Hauptman,
Chief Financial Officer of the Registrant, required by
Rule 13a-14(a)
or
Rule 15d-14(a)
of the Securities Exchange Act of 1934
|
|
32
|
.1
|
|
|
|
Certification of William J.
Gedwed, Chief Executive Officer of the Registrant, pursuant to
§906 of the Sarbanes-Oxley Act of 2002
|
|
32
|
.2
|
|
|
|
Certification of Mark D. Hauptman,
Chief Financial Officer of the Registrant, pursuant to §906
of the Sarbanes-Oxley Act of 2002
|
|
|
|
* |
|
Indicates that exhibit constitutes an Executive Compensation
Plan or Arrangement |