ratios and underwriting margins. However, the rate increases negatively impacted sales, particularly when other insurers were charging less. United American has been in this situation many times in the past, but we won’t compromise acceptable profit margins in order to gain market share. For 2003, we expect our rate increase to be in the 7 – 8% range, and we expect competitors to have larger rate increases. As has been the case in the past, as the gap between our rates and their rates close, our sales increase. There does exist the need for Medicare reform and Medicare supplement reform. The federally mandated Medicare supplement products of 1992 are becoming outmoded. They provide too much "first dollar" coverage and too little customer "cost sharing". As a result, the current mandated coverages are becoming pre-payment plans instead of insurance products. We are working at the federal level to develop new products that include greater "cost sharing" features which will result in reduced premiums and greater affordability to the senior market. Our other health insurance sales, primarily to customers under the age of 65, increased 130% to $78 million. The need for supplemental health insurance has never been greater. The availability of major medical insurance has all but disappeared; for a number of reasons, it is a product that may never have been profitable throughout its existence...a reason that United American never sold it. In addition, the rising cost of group health insurance is driving employers to cut back on benefits, thereby creating the need for employees to purchase supplemental insurance to help fill the void. Going forward into 2003, we expect growth in both Medicare supplement sales and other supplemental health insurance sales, but growth in premium income and underwriting margin will be modest. 13 (In millions, except %) LIFE ANNUALIZED PREMIUM ISSUED 31 32 UNDERWRITING MARGIN: PREMIUM INCOME 256 245 POLICY OBLIGATIONS 110 43% 106 43% ACQUISITION EXPENSES 84 33% 80 33% UNDERWRITING MARGIN 62 24% 59 24% 2001 $ %* 2002 $ %* OTHER INDEPENDENT AGENCY LIFE INSURANCE OPERATIONS * PERCENT OF PREMIUM Annualized premium issued decreased 2% to $31 million. Premium income increased 5% to $256 million, and underwriting margin increased 6% to $62 million. Our primary independent agency relationship is our military operation which is comprised of a large agency of some 1,000 agents in over 200 offices on or near military installations both in the U.S. and abroad. The agency sells exclusively to commissioned and non-commissioned military officers and their families. Military annualized premium sales increased 11% to $23 million. Premium income increased 11% to $149 million, and underwriting margin increased 12% to $35 million. The military agency produces new business for several other insurers, but over the past decade we have consistently earned an increasingly larger portion of their total life production. Going forward, we will strive to earn more of their production and more of the production of our other independent partners. Letter to Shareholders • 2002 Annual Report