UICI

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UICI

4001 McEwen Drive, Suite 200
Dallas, Texas 75244
U.S.A.
Telephone: (972) 392-6700
Fax: (972) 392-6721
Web site: http://www.uici.net

Public Company
Incorporated: 1982 as United Insurance Companies, Inc.
Employees: 4,000
Sales: $1.18 billion (1998)
Stock Exchanges: New York
Ticker Symbol: UCI
NAIC: 524114 Direct Health and Medical Insurance Carriers

UICI is a diversified company that offers insurance and financial services to niche consumer and institutional markets. Through its many subsidiaries, UICI operates in five key areas: life, health, property, and casualty insurance; credit cards; student loans; institutional technology; and real estate. UICI has succeeded by targeting its services to narrow markets underserved by other providers, such as by selling insurance to students and the self-employed, as well as offering credit cards to higher risk clients. The company also has a thriving business that supplies technical and administrative support service to health care payors and providers. UICI conducts most of its insurance marketing through its staff of 5,000 agents, who work on a straight commission basis. Among its subsidiaries are The MEGA Life and Health Insurance Co., The Education Finance Group (EFG), Insurdata, The National Motor Club of America, and AMLI Realty Company. Although UICI initially was involved in the insurance sector only, the company began to diversify its holdings in 1992, in anticipation of greater federal regulation of the health care industry.

Early Years: 1983-86

Ronald L. Jensen founded United Insurance Companies, Inc. in 1983. Previously, Jensen had served for 22 years as the chairman and president of another insurance company, Life Investors. In 1981 Jensen sold a controlling interest in that business to AEGON N.V., a Dutch holding company. Although this transaction made Jensen a wealthy man, he continued to look for new professional challenges. He soon hit on the idea of selling insurance to specific niche groups that other insurers tended to overlook.

With this goal in mind, Jensen launched United Insurance. He also took over United Group Association (UGA), a small insurance agency that was “essentially bankrupt,” according to Investor’s Business Daily. Although UGA became a wholly owned subsidiary of United Insurance, the two maintained separate corporate structures, and Jensen retained his closely held ownership stake in UGA. Rekindling his relationship with AEGON, Jensen devised an arrangement whereby UGA would sell insurance policies issued by the Dutch company. United Insurance’s role would then be to co-insure UGA’s operations. In fact, for the first three years of its existence, this was United Insurance’s only business.

As a result, United Insurance did not underwrite or even administer the policies it sold. Instead, through its UGA subsidiary, it concentrated on marketing health and life insurance policies to a particular group of consumers—self-employed workers who, because they did not receive insurance through their employers (as most Americans did), had to purchase their own policies. This market was virtually untapped and offered United Insurance considerable opportunities. With more than seven million consumers classified as self-employed (defined as any person who ran a business with ten or fewer employees), United Insurance had a significant pool from which to draw. “Within any industry there are niches that companies can capitalize on,” Jensen told the Dallas Business Courier. “The secret is in picking out the niche.” The company built a network of agents who sold policies face-to-face and were paid on a commission basis. United Insurance grew quickly, with its earnings rising from $13.2 million in 1984 to $30.1 million in 1985.

To reach its target market, United Insurance cultivated a strong relationship with the National Network for the Self-Employ ed (NNSE), an organization representing the interests of self-employed workers nationwide. In a major boost to United Insurance, NNSE endorsed United Insurance as its preferred accident and health insurance provider. In return, United Insuranee agents encouraged membership in NNSE while selling policies. This alliance was crucial to United Insurance’s success. Nearly 90,000 consumers belonged to NNSE, and the organization’s public endorsement of the insurance company led to the “vast majority of sales for United Insurance,” according to the Dallas Business Courier.

Continued Growth and Diversification: 1986-92

In 1986 Jensen opted to take United Insurance public to expand the scope of the company’s operations. Jensen’s primary goals in the initial public stock offering were to put his company in a more secure financial position and to allow it to assume greater control over its operations. Instead of relying on AEGON to provide most of the services associated with United Insurance’s business (and having to pay it to provide them), Jensen planned to acquire a company that could itself administer and service the policies his affiliates sold. Because such an acquisition would be costly, Jensen hoped to use the capital raised from the stock sale to fund his purchase. The offering was a success, raising about $16 million. Later in the year, United Insurance acquired the Oklahoma-based Mark Twain Life Insurance Corp. Mark Twain not only afforded United Insurance with an ample administrative base, so that that company might one day undertake its own underwriting, but it also broadened United Insurance’s reach. With the acquisition, United Insurance became licensed to sell insurance in 27 additional states.

Following United Insurance’s success in reaching the self-employed, the company expanded its niche-oriented strategy to include a new group in 1987, when it purchased Keystone Life Insurance Co. Keystone was a leading provider of student health, accident, and life insurance. Through Keystone, United Insurance launched its Student Insurance Division (SID) and entered the student insurance market, selling group student health programs to colleges and universities. Just as United Insurance had nurtured its relationship with NNSE, the company now used its sales force to build alliances on campuses. During its first year, SID experienced massive losses, and many analysts expected that United Insurance would quickly shed its latest subsidiary. Nevertheless, Jensen stayed the course, a decision that ultimately paid dividends for the company.

By 1989 United Insurance’s total assets were valued at $244.6 million, while its net income was $32.8 million. Moreover, the company continued to add to its portfolio of subsidiaries in the late 1980s and early 1990s. As it had in the past, United Insurance expanded vertically within its selected niche markets. By far the most important of these acquisitions occurred in 1988, when United Insurance purchased Orange State Life Insurance, a Florida company specializing in small group insurance. United Insurance renamed its new subsidiary The MEGA Life and Health Insurance Co., and within a few short years, MEGA came to generate a substantial portion of United Insurance’s business. In the early 1990s, United Insurance also purchased Chesapeake Life Insurance Co. and Mid-West National Life Insurance Co.

Diversification into Credit Card Services and Administration: 1992-96

United Insurance’s landscape changed suddenly and dramatically in 1992, when Governor Bill Clinton campaigned for and won the presidency in large part by virtue of his vow to reform the U.S. health care system. United Insurance, which was almost wholly dependent on the health insurance market, felt quite threatened by the sorts of changes under discussion. (In 1992 alone, nearly 80 percent of United Insurance’s revenues was derived from its health insurance operations, 68 percent from the Self-Employed Agency Division, and an additional ten percent from the SID. Earnings from purchased blocks of life insurance represented the remainder of the company’s income.) With its core assets jeopardized by proposed health care legislation, United Insurance looked for ways to safeguard itself. It decided that the best strategy would be for the company rapidly to diversify itself outside the health care sector. As Jensen would explain later in an Annual Report, “UICI made a very important choice at that time … to purchase companies that could offer employment opportunities for its employees … in the event [Clinton] was successful [in dramatically revamping the U.S. health care system].”

To implement this new approach, United Insurance ventured into the credit card business in 1992 when it purchased two small insurance agencies that issued credit cards to those who could not otherwise obtain them because of bad credit reports or a lack of credit history. To jump-start its new business, United Insurance initially began issuing cards to everyone who purchased its life insurance policies. After a shaky beginning in 1992, when the new credit card division lost $134,000, it struggled even more significantly in 1993, losing more than $4.2 million. After this debacle, United Insurance decided to de-link the issuance of credit cards from the sale of life insurance policies and began to promote the cards in their own right, particularly through a cable television advertising campaign. The company had reason for optimism. Despite the losses suffered by the credit card division, United Insurance’s assets had risen to $814.8 million, and its net income to $32.8 million, by the close of 1993.

Company Perspectives:

From its founding, UICI’s primary direction was to choose a narrow focus in the health insurance business offering a narrow range of insurance products distributed by a dedicated field force. That direction changed in 1993. We did not abandon the Health Insurance business; rather, the overriding direction and focus was to ask the question, how does UICI diversify? While diversification has been a success story, I believe UICI should again modify its game plan and overriding direction. I believe the primary direction of UICI should now be to strengthen and expand the insurance business with particular emphasis placed on positioning and strengthening the role of the field forces.

United Insurance’s diversification program did not end with the launch of its credit card division. In 1995 it branched out into the fledgling but booming field of providing administrative services to health care insurers when it acquired a 51 percent stake in Insurdata (United Insurance purchased the remaining 49 percent of Insurdata in 1997). This Irving, Texas-based company had experience with the clerical aspects of health care—data entry, filing, and copying—and allowed United Insurance to provide these services at a lower cost to insurers seeking to outsource these time-consuming and labor-intensive tasks. Insurdata also took over the processing of United Insurance’s own student insurance division. Insurdata’s other clients included preferred provider organizations (PPOs), managed care organizations, assorted insurance carriers, Blue Cross/Blue Shield organizations, and third-party administrators.

The year 1996 brought even more changes to United Insurance. To signify its broad range of services, and to emphasize the fact that it was no longer exclusively an insurance provider, the company changed its name to UICI. The company continued to expand into new spheres that year as well when it acquired AMLI Realty Company, a 20 percent owner of AMLI Commercial Properties.

Despite its many forays into new arenas, however, UICI had not abandoned its lucrative and substantial insurance operations. (President Clinton’s health care initiative had failed fundamentally to alter the U.S. health care market.) In 1996 UICI acquired PLF Life Insurance Co.’s Health Administration Offices, which had underwritten and serviced most of UGA’s health insurance business. By purchasing this independent insurance agency, UICI gained the opportunity to underwrite more of its policies. In fact, The MEGA Life Insurance announced in April 1996 that it would begin issuing policies directly, rather than through AEGON, as it had done in the past. Moreover, Jensen sold his 100 percent ownership of UGA to UICI in 1996, bringing that company entirely within the UICI fold and allowing UICI total control over its most important sales and marketing arm. In addition, SID had become the largest provider of student health insurance in the United States by the mid-1990s. Buoyed by these successes, UICFs assets totaled $1.32 billion in 1996, and its net income grew to $69.2 million.

Offering Student Loans: 1997

UICI made perhaps its boldest move in June 1997, when it acquired the Hyannis, Massachusetts-based Education Finance Group (EFG), and thereby expanded into the complex realm of student loans. Founded in 1992, EFG was firmly rooted in the business. Its loan volume in 1996 had exceeded $350 million, and it offered an array of student loan products and services, including federally funded loans. UICFs strategy was logical. The company had gained access to many college and university administrators through its years of marketing student health care. The company could use these contacts to grow its new loan business.

Four months after completing its acquisition of EFG, UICI announced its purchase of EduServ Technologies, Inc., which UICI planned to fold into its EFG division. Like many of UICFs prior ventures, EduServ conformed to its desire to target niche markets. EduServ had built its business by servicing school-based loan initiatives (such as the Perkins Program)—institutional loan programs administered directly through schools. In December 1997, UICI added another subsidiary to its EFG division when it bought Educational Loan Administration Group, Inc. (ELA), which also limited itself to specialized services. ELA focused on offering loans directly to parents who wished to finance their children’s education.

In addition to launching its student loan venture, UICI continued to develop its credit card services. Following a stellar year for the division in 1996, in which it earned $15.1 million and increased its credit card portfolios 44 percent, UICI opened its own credit card bank, United Credit National Bank. In this way, UICI furthered its trend toward self-sufficiency. With the bank, the credit card division was no longer dependent on third-party banks to finance its operations. To increase demand for its cards, UICI committed to more television advertising, as well as a substantial direct marketing effort. Also in 1997, UICI acquired National Motor Club of America, Inc., a provider of motor club services to drivers. By year’s end, UICI’s assets totaled more than $1.5 billion, and net income had risen to yet another record high—$86.5 million.

Refocusing: 1998-2000

Just when it seemed that UICI’s prolonged efforts to reduce dependence on its health care holdings had succeeded, the company was undermined by a difficult financial year in 1998 that caused its stock prices to plummet. Although the company’s assets remained high at $2.47 billion, its net income plunged to a level below that of 1996—$58.8 million. Shocked by the downturn, Jensen stepped down as president and chief executive officer, although he remained intimately involved in the company as its chairman. He was replaced by Greg Mutz. After so many years of refocusing on new operations, UICI found that its health insurance business was still essential to the company’s viability, a fact that proved problematic in 1998 when both the self-employed and student insurance divisions (long the top earners for UICI) reported significant losses. New business in the company’s self-employed insurance sector dropped about 22 percent, while earnings in the student insurance division plummeted 14 percent. Company officials pledged to refocus on the insurance business, especially on the struggling self-employed area.

Key Dates:

1983:: Ronald Jensen launches United Insurance Companies.
1986:: United Insurance makes its initial public stock offering.
1987:: United Insurance enters into student insurance business.
1988:: Company buys Orange State Life Insurance Company.
1992:: United Insurance enters credit card business.
1993:: Threat of greater health care regulation prompts United Insurance to step up its efforts to diversify beyond health care.
1995:: United Insurance begins providing administrative services to health care payors and providers; purchases Insurdata.
1996:: Company changes its name to UICI.
1997:: UICI enters student loan business; acquires National Motor Club of America.
1998:: UICI refocuses on insurance.

By recommitting to its insurance operations, however, UICI did not intend to abandon its financial services divisions. UICI did shed some of its less successful ventures, including several small companies in its health care administration sector. But the company remained fully supportive of EFG, which had experienced considerable losses in 1998 as well. UICI refinanced a portion of EFG’s loans in an effort to stabilize the division and continued to focus on expanding it. Ranked the nation’s fastest-growing student loan lender, EFG had a great deal of potential. In 1999 EFG acquired AMS Investment Group, Inc., which held the distinction of being the largest provider of tuition payment plans in the United States. Early in 2000, UICI restructured EFG’s management in a further effort to position it for growth and profitability. In a similar fashion, UICI reorganized the management of its credit card division (christened United Credit Serv in 1999), which had reported losses in 1999.

UICI also continued to expand its successful health care administration programs. In January 2000, the company announced the merger of Insurdata and HealthAxis.com, a leading online insurance marketer. Since Insurdata had emerged as one of the nation’s leading providers of health care administration software, the combined entity—which would adopt the Health-Axis, com moniker—was poised to become one of the largest players in Web-related health insurance space. With all of these maneuvers, UICI hoped to prepare itself for continued strong growth.

Principal Subsidiaries

The MEGA Life and Health Insurance Company; Mid-West National Life Insurance Company of Tennessee; The Chesapeake Life Insurance Company; National Motor Club of America; United Credit National Bank; United Membership Marketing Group, LLC; Insurdata, Incorporated; Educational Finance Group, Inc.