SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1997 Commission file number 1-11834
PROVIDENT COMPANIES, INC.
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(Exact name of registrant as specified in its charter)
DELAWARE 62-1598430
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 FOUNTAIN SQUARE
CHATTANOOGA, TENNESSEE 37402
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (423) 755-1011
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Securities registered pursuant to
Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
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(Title of Class)
8.10% CUMULATIVE PREFERRED STOCK, LIQUIDATION VALUE $150 PER SHARE
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(Title of Class)
Securities registered pursuant to
Section 12(g) of the Act: None
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 X No
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As of March 9, 1998, there were 135,250,678 shares of the registrant's Common
Stock, and -0- shares of the registrant's 8.10% Cumulative Preferred Stock
outstanding. The aggregate market value of the shares of Common Stock, based on
the closing price of those shares on the New York Stock Exchange, Inc., held by
non-affiliates was approximately $2,414,224,610.
Selected material from the Annual Report to Stockholders for the year ended
December 31, 1997 and Proxy Statement for the Annual Meeting of Stockholders
scheduled for May 6, 1998, have been incorporated by reference into Parts I, II,
and III of this Form 10-K.
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 registrant's 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. [ ]
Total of sequentially numbered pages 132
Index of Exhibits on sequential page number 46
PART 1
FORWARD LOOKING STATEMENTS
This Form 10-K and the information incorporated by reference herein contains and
incorporates by reference certain forward looking statements within the meaning
of the Private Securities Litigation Reform Act of 1995 with respect to results
of operations and businesses of the Company. These forward looking statements
involve certain risks and uncertainties. Factors that may cause actual results
to differ materially from those contemplated or projected, forecast, estimated
or budgeted in such forward looking statements include, among others, the
following possibilities: (i) heightened competition, including specifically the
intensification of price competition, the entry of new competitors, and the
development of new products by new and existing competitors; (ii) adverse state
and federal legislation and regulation, including limitations on premium levels,
increases in minimum capital reserves, and other financial viability
requirements; (iii) failure to develop multiple distribution channels in order
to obtain new customers or failure to retain existing customers; (iv) inability
to carry out product design, marketing and sales plans, including, among others,
planned changes to existing products (which may result in reduced market
acceptance of the revised products) or planned strategies to penetrate new
market segments; (v) loss of key executives; (vi) changes in interest rates
causing a reduction of investment income; (vii) general economic and business
conditions which are less favorable than expected; (viii) unanticipated changes
in industry trends; (ix) inaccuracies in assumptions regarding future morbidity,
persistency, mortality, and interest rates used in calculating reserve amounts;
(x) failure to continue improvement of the Company's disability insurance claims
management process; and (xi) with respect to cost savings that may be realized
from, and costs associated with, the acquisition of The Paul Revere Corporation
("Paul Revere")(the "Paul Revere Merger"), the following possibilities: (a) the
expected cost savings (through the implementation of a restructuring program
that includes combining certain functions of the Company and Paul Revere,
restructuring the field organizations of both companies to eliminate redundant
facilities and better serve the combined company's customers, and reducing
staff) are less than anticipated or cannot be fully realized because elements of
the restructuring program are not implemented or because of unanticipated
offsetting costs; and (b) costs or difficulties related to the integration of
the businesses of the Company and Paul Revere are greater than expected. See
"Risk Factors" herein.
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ITEM 1. BUSINESS
GENERAL
Provident Companies, Inc. (the "Company") is a Delaware business corporation.
The Company is the parent holding company for a group of insurance companies
that collectively operate in all 50 states, the District of Columbia, Puerto
Rico, and Canada. The Company's two principal operating subsidiaries are
Provident Life and Accident Insurance Company ("Accident") and The Paul Revere
Life Insurance Company ("Paul Revere Life"). The Company, through its
subsidiaries, is the largest provider of individual disability insurance and the
second largest overall disability insurer in North America on the basis of in-
force premiums. It also provides a complementary portfolio of life insurance
products, including life insurance, employer- and employee-paid group benefits,
and related services.
Since 1994, the Company has completed a comprehensive corporate repositioning
that has prepared it to support growth and increase stockholder value. A new
management team headed by J. Harold Chandler, who joined the Company in November
1993, initiated a strategic review of the business. As a result of its review,
management refocused the Company's strategy to (i) serve the individual and
employee benefits insurance markets, (ii) leverage the Company's disability
insurance expertise, (iii) utilize multiple distribution channels to reach
broader market segments, and (iv) more closely align the interests of the
Company's employees with those of its stockholders.
The Company has successfully undertaken a number of major initiatives in
pursuing this strategy. Specifically, the Company (i) sold its group medical
business for $231.0 million in cash and stock, (ii) began winding down its
guaranteed investment contracts ("GIC") business which carried high capital
requirements, (iii) reduced the annual dividend on the Common Stock from $0.52
to $0.40 per share on a split-adjusted basis to preserve capital to fund future
growth, (iv) simplified the corporate legal structure and eliminated a dual
class of common stock that had special voting rights in order to present a more
conventional corporate structure profile to the investing market, (v) sold in
six transactions $1,459.6 million in commercial mortgage loans as part of
repositioning its investment portfolio, (vi) restructured its marketing and
distribution channels, along with the support areas of product development,
underwriting, and claims, to better reach and serve individual and employee
benefits customers, (vii) strengthened its claims management procedures in the
disability income insurance business, on which the Company took a $423.0 million
pre-tax charge in the third quarter of 1993 to strengthen reserves on a portion
of that block of business, and (viii) began restructuring its disability income
products to discontinue over a reasonable period the sale of policies which
combined noncancelable contracts with long-term own-occupation provisions and to
offer in their place an income replacement contract with more reasonable limits
and better pricing for elective provisions.
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The acquisitions of Paul Revere and GENEX Services, Inc. ("Genex") in early
1997 and the disposition of certain non-core lines of business are recent
accomplishments under the Company's strategic plan. These actions strengthen the
Company's disability insurance capabilities and enable the Company to offer a
comprehensive and well-focused portfolio of products and services to its
customers. Paul Revere is a specialist in disability insurance, with $972.8
million of disability premium income (86 percent of its total premium income) in
1996. From 1989 through 1996 it was the largest provider of individual
disability insurance in the United States and Canada on the basis of in-force
premiums. By combining Paul Revere's operations with those of the Company, the
Company has begun to realize significant operating efficiencies, including
leveraging both companies' knowledge of disability risks, specialized claims and
underwriting skills, and sales expertise. The Company also has begun to realize
cost savings as a result of combining the corporate, administrative, and
financial operations of the two companies.
Genex provides the Company with specialized skills in disability case
management and vocational rehabilitation that advance the Company's goal of
providing products that enable disabled policyholders to return to work. Genex
provides a full range of disability management services, including worksite
injury management, telephonic early intervention services for injured workers,
medical case management, vocational rehabilitation, and disability cost
analysis, to third party administrators, corporate clients, and insurance
companies. It employs 1,300 people, including 1,100 medical and vocational
rehabilitation experts, in 120 offices in the United States and Canada. In
addition to its historical focus on the worker's compensation market, Genex and
the Company are now working together to offer customized disability programs for
the employee benefits market that are intended to integrate and simplify
coverages, control costs, and improve efficiency for employers with significant
disability and related claims. The Company also expects Genex to play an
increasingly significant role in helping the Company to manage its own exposure
to individual and group disability claims.
As it has acquired operations that complement its core business, the Company
has also continued to exit non-core lines. On June 30, 1997, the Company
announced that it had agreed to transfer its dental business to Ameritas Life
Insurance Corp. ("Ameritas"). The dental block, which was acquired in the Paul
Revere Merger, produced $48.3 million in premium income in 1996 and $39.2
million in 1997. The full transition of the dental business to Ameritas was
completed in November 1997.
On December 8, 1997, the Company entered into a definitive agreement to sell
Provident's in-force individual and tax-sheltered annuity business to various
affiliates of American General Corporation ("American General"). The in-force
business being sold consists primarily of individual fixed annuities and
tax-sheltered annuities in Accident, Provident National Assurance Company
("National"), Paul Revere Life, The Paul Revere Protective Life Insurance
Company ("Paul Revere Protective") and The Paul Revere Variable
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Annuity Insurance Company ("Paul Revere Variable"). American General is also
acquiring a number of miscellaneous group pension lines of business sold in the
1970's and 1980's which are no longer actively marketed. In addition, pursuant
to an administrative services agreement, American General will be providing
administrative services to registered separate accounts of Paul Revere Variable
and National. The Company and American General have agreed to request that
contract holders of contracts issued under the separate accounts exchange the
separate account contracts for contracts to be issued by a subsidiary of
American General. The sale does not include the Company's block of traditional
GICs or group single premium annuities, which will continue in a run-off mode
until such time as these blocks are completely discontinued. In consideration
for the transfer of the annuity reserves, American General is paying the Company
a ceding commission of approximately $58.0 million. The annuities being sold to
American General represent approximately $2.4 billion of statutory reserves. The
transaction, which is subject to requisite regulatory approvals and certain
other conditions, is expected to close in the second quarter of 1998.
BUSINESS STRATEGIES
The Company's objective is to grow its business and improve its profitability
by continuing to follow the strategies set forth below.
Serve the Individual and Employee Benefits Markets. The Company believes
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that the broad individual and employee benefits insurance markets are
attractive for a company with its specialty focus on disability insurance.
First, the Company believes disability insurers have not traditionally served
the broad market's potential demand for protection against loss of income due
to disability, as evidenced by the industry's size. The total in-force premium
from disability products is approximately $9 billion, compared to $50 billion
for annuities and $97 billion for life insurance. The Company believes that if
it is responsive to the needs of its markets, there is opportunity for growth
in the disability industry.
Second, individual disability insurance has traditionally been sold primarily
in the medical and physician markets, where market penetration has been
significant. The Company believes that expanding its marketing to other market
segments offers greater opportunities for growth. The penetration of the
attorney, executive, and professional markets, for example, is far less than
that of the medical and physician markets. The market of middle managers and
front-line workers has not been significantly developed by individual disability
insurers. Each of these markets is significantly larger than the medical and
physician market. The Company's strategy is to design products and services that
meet the needs of these underpenetrated market segments, offering them both
individual disability insurance and related life insurance, as well as other
products.
Third, the Company believes that the markets for group disability insurance
are also underpenetrated. The Company is focused on creating
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customized solutions for employee benefits customers that include group
disability insurance and related employee- and employer-paid benefits as well as
disability management services. The employee benefits market is undergoing a
change as employers seek to simplify coverages, control costs, and improve
efficiency. The Company has positioned itself to package its products and
services to meet this growing demand for managed disability programs and 24-hour
coverage.
The Company encourages its sales representatives and producers to respond to
the needs of customers by cross-selling complementary products to each account.
In the past several years, for example, the Company has made ease of meeting
customers' needs the priority for its information systems investments. The
Company can now offer combined proposals that include pre-approved life
insurance with individual disability policies and bill a range of voluntary
product offerings through a single payroll deduction entry on an employee's
paycheck. The Company has also recently introduced new employee and producer
compensation plans that reward the sale of several of the Company's products
rather than single product sales, including grants of stock options to selected
producers and a new multi-line producer compensation plan designed to leverage a
producer's production and overall compensation.
Leverage Disability Insurance Expertise and Risk Management Skills. In
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serving its markets, the Company leads with its disability insurance expertise.
The Company is the largest provider of individual disability insurance with $1.4
billion of premium income in 1997 (pro forma for the Paul Revere Merger), and
the second largest overall disability insurer in North America, on the basis of
in-force premiums, with an additional $302.6 million of group disability
insurance premium (pro forma). The skills required for disability risk
management are more highly specialized than those used in managing the risk of
other life insurance products. The Company believes that its risk management
skills represent a competitive advantage in the disability businesses. The
Company has made a number of recent improvements to its capabilities. In the
claims management area, for example, the Company has shifted from a geographic
distribution of workflow to an organization focused on impairments (psychiatric,
orthopedic, cardiac, and general medical) in order to provide claimants with
more specialized attention. The addition of Genex's case management and
vocational rehabilitation expertise has enabled the Company to further refine
its efforts to assist disabled claimants to return to gainful employment.
Utilize Multiple Distribution Channels to Reach Different Market Segments.
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The Company's experience is that different distribution channels reach different
market segments. Therefore, its strategy is to distribute its products through a
number of channels in order to reach the broad individual and employee benefits
markets. The Company distributes its individual products primarily through
independent insurance brokers and agents, corporate marketing agreements
with other insurance companies, associations, and
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financial institutions. It distributes employee benefits products primarily
through brokers, benefits consultants, and a direct sales force that calls on
large corporations. All products and distribution channels are supported through
a network of 70 integrated sales and service offices in the United States, nine
offices in Canada, and non-field sales organizations located in Chattanooga,
Tennessee, Worcester, Massachusetts and Burlington, Ontario.
The Company believes there are substantial opportunities to increase sales by
improving the productivity of each of these distribution channels and opening
new distribution channels for its products. For example, the National Accounts
distribution system, which involves the sales of the Company's products by
agents of other insurance companies, generates sales from a small percentage of
the agents of the National Account companies. A major focus for 1998 is
increasing the penetration of these National Account relationships.
Align the Interests of the Company's Employees and Producers With Those of its
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Stockholders. The Company's strategic plan is supported by the goal of raising
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employee stock ownership in the Company. Beginning in 1994, the Company shifted
its long-term cash compensation program for executives to a stock-based plan,
introduced ownership requirements of several times salary for executive
management, and instituted stock option and share grant plans for executive and
middle management. The Company continued to introduce new programs to encourage
ownership in 1995, establishing an employee stock purchase plan open to all
employees, introducing stock-based incentive awards, and expanding the option
program to field sales employees. Most recently, the Company has created a
stock-based plan for executives' short-term compensation and has expanded its
option plans to producers who meet certain sales and profitability goals. These
programs are intended to more closely align the interests of employees,
producers, and stockholders.
Prior to the implementation of these programs in 1994, there was little
employee ownership of Common Stock. The Company had 1,128,434 outstanding
options for shares of Common Stock on a split-adjusted basis as of December 31,
1993. As of December 31, 1997, employees owned more than 550,000 shares of
Common Stock through the employee stock purchase and 401(k) plans, and the
Company had 6,938,108 outstanding options for shares of Common Stock.
Approximately 50 percent of Provident's employees participate in one or more of
these stock ownership programs.
REPORTING SEGMENTS
The Company is organized around its customers, with reporting segments that
reflect its major market segments: Individual Life and Disability and Employee
Benefits. The Other Operations segment includes products that the Company no
longer actively markets. The Company's Individual Life and Disability reporting
segment includes individual
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disability insurance and individual life insurance. The Employee Benefits
segment includes group long- and short-term disability insurance, group life
insurance, accident and sickness and accidental death and dismemberment
coverages, and voluntary benefits (employer-sponsored individual products sold
at the worksite through payroll deduction). For 1997, the Employee Benefits
segment also includes the results of Genex. The Company's Other Operations
segment includes the results from products the Company no longer actively
markets, including GICS, group single premium annuities, corporate-owned life
insurance ("COLI"), the group medical business sold in 1995, the Paul Revere
dental insurance business, individual annuities, and medical stop-loss
insurance.
Individual Life and Disability. The Individual Life and Disability segment
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includes the results of disability and life products sold to policyholders on an
individual basis. Individual disability comprises the majority of the segment,
with $1,207.7 million of premium income in 1997 and $1,413.4 million of premium
income on a pro forma basis. Individual life insurance products generated $78.9
million of premium income in 1997 and $86.9 million of premium income on a pro
forma basis.
Individual disability income insurance provides the insured with a portion of
earned income lost as a result of sickness or injury. Under an individual
disability income policy, monthly benefits generally are fixed at the time the
policy is written. The benefits typically range from 30 percent to 75 percent of
the insured's monthly earned income. Various options with respect to length of
benefit periods and waiting periods before payment begins are available and
permit tailoring of the policy to a specific policyholder's needs. Provident
also markets individual disability income policies which include payments for
transfer of business ownership and business overhead expenses. Individual
disability income products do not provide for the accumulation of cash values.
Premium rates for these products are varied by age, sex, and occupation based
on assumptions concerning morbidity, persistency, policy related expenses, and
investment income. The Company develops its assumptions based on its own claims
experience and published industry tables. The Company's underwriters evaluate
the medical and financial condition of prospective policyholders prior to the
issuance of a policy.
Almost all of the Company's in-force individual disability income insurance
was written on a noncancelable basis. Under a noncancelable policy, as long as
the insured continues to pay the fixed annual premium for the policy's duration,
the policy cannot be canceled by the Company nor can the premium be raised. Due
to the noncancelable, fixed premium nature of the policies marketed in the past,
profitability of this part of the business of Accident and Provident Life and
Casualty Insurance Company (collectively "Provident") is largely dependent upon
achieving the morbidity and interest rate assumptions set in the 1993 loss
recognition study with respect to the
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business written in 1993 and prior and those set in the pricing of business
written after 1993. The profitability of the Paul Revere business will be
largely dependent on meeting the assumptions included in the purchase accounting
adjustments recorded in connection with the Paul Revere Merger. As of December
31, 1997, reserves were adequate for Provident and for Paul Revere. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 28 to 29 of the Annual Report to Stockholders for the year
ended December 31, 1997, incorporated herein by reference.
In November 1994, the Company announced its intention to discontinue selling
individual noncancelable contracts with long-term own-occupation provisions
(other than conversion policies available under existing contractual
arrangements), lifetime benefits, and high maximum issue and participation
limits that were identified as the cause of the 1993 loss recognition. The
Company is phasing out the sale of these traditional noncancelable, long-term
own-occupation contracts over a reasonable period of time during which such
products are being modified and repriced and is focusing on replacing them with
a noncancelable loss of earnings ("LE") contract.
In contrast to traditional noncancelable own-occupation policies, for which
benefits are determined based on whether the insured can work in his or her
original occupation, the LE policy requires the policyholder to satisfy two
conditions for benefits to begin: reduced ability to work due to accident or
sickness and earnings loss of at least 20 percent. These policies are aimed at
repositioning the individual disability income product by making it more
attractive to a broader market of individual consumers, including middle to
upper income individuals and corporate benefit buyers.
The Company's life insurance offerings include term, universal life, and
interest-sensitive life insurance products. Universal life products provide
permanent life insurance with adjustable interest rates applied to the cash
value and are designed to achieve specific policyholder objectives such as
higher accumulation values and/or flexibility with respect to amount of coverage
and premium payments. The principal difference between fixed premium and
universal life insurance policies centers around policy provisions affecting the
amount and timing of premium payments. Under universal life policies,
policyholders may vary the frequency and size of their premium payments, and
policy benefits may fluctuate accordingly. Premium payments under the fixed
premium policies are not variable by the policyholder and, as a result,
generally reflect lower administrative costs than universal life products for
which extensive monitoring of premium payments and policy benefits is required.
The largest number of ordinary life policies sold in 1996 and 1997 were ten-
year level-term policies. These products have level premiums for an
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initial ten-year period after which the policyholder may resubmit to the
underwriting process and possibly qualify for a new ten year period at the
attained age premiums; otherwise, premiums revert to a yearly renewable term
premium which increases annually. When measured by annualized premiums,
universal life with the flexibility and features described above was the largest
product category sold by Provident in this segment in recent years. Paul
Revere's largest product category is interest-sensitive whole life insurance.
Premium rates for the Company's life insurance products are based on
assumptions as to future mortality, investment yields, expenses, and lapses.
Although a margin for profit is included in setting premium rates, the actual
profitability of products is significantly affected by the variation of actual
experience from assumed experience. Profitability of fixed premium products is
also dependent upon investment income on reserves. The profitability of
interest-sensitive products is determined primarily by the ultimate underwriting
experience and the ability to maintain anticipated investment spreads. The
Company believes that the historical claims experience for these products has
been satisfactory.
From the Company's viewpoint, the risks involved with interest-sensitive
products include actual versus assumed mortality, achieving investment returns
that at least equal the current declared rate, competitive position of declared
rates on the policies, meeting the contractually guaranteed minimum crediting
rate, and recovery of policy acquisition costs. From the policyholder's
perspective, the risk involved with interest-sensitive products is whether or
not the declared rates on the policy will compare favorably with the returns
available elsewhere in the marketplace.
Employee Benefits. The Employee Benefits segment includes the results of
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group products sold to employers for the benefit of employees and individual
products sold to groups of employees through payroll deduction at the worksite
("voluntary benefits products"). The Company's Employee Benefits product
offerings include disability, permanent and term life insurance, accident and
sickness, accidental death and dismemberment, and cancer products. Group life
comprises the majority of the segment, with $265.8 million of premium income in
1997 ($281.3 million of premium income on a pro forma basis). Group disability
generated $249.1 million of premium income in 1997 ($302.6 million of premium
income on a pro forma basis). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations" on pages 30 to 31 of the Annual
Report to Stockholders for the year ended December 31, 1997, incorporated herein
by reference.
Group long-term disability insurance provides employees with insurance
coverage for loss of income in the event of extended work absences due to
sickness or injury. Services are offered to employers and insureds to encourage
and facilitate rehabilitation, retraining, and re-employment. Premiums for this
product are generally based on expected claims of a pool of similar risks plus
provisions for administrative expenses and profit. Some cases, however, carry
experience rating provisions. Premiums for experience
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rated group disability business are based on the expected experience of the
client given their industry group, adjusted for the credibility of the specific
claim experience of the client. A few accounts are handled on an administrative
services only basis with responsibility for funding claim payments remaining
with the customer.
Profitability of group disability insurance is affected by deviations of
actual claims experience from expected claims experience and the ability of the
Company to control its administrative expenses. Morbidity is an important factor
in disability claims experience. Also important is the general state of the
economy; for example, during a recession the incidence of claims tends to
increase under this type of insurance. In general, experience rated disability
coverage for large groups has narrower profit margins and represents less risk
to the Company than business of this type sold to small employers. This is
because the Company must bear all of the risk of adverse claims experience in
small case coverages while larger employers often bear much of this risk
themselves. For disability coverages, case management and rehabilitation
activities with regard to claims, along with appropriate pricing and expense
control, are important factors contributing to profitability.
Group life insurance consists primarily of renewable term life insurance with
the coverages frequently linked to employees' wages. Profitability in group life
is affected by deviations of actual claims experience from expected claims
experience and the ability of the Company to control administrative expenses.
The Company also markets several group benefits products and services including
accident and sickness indemnity, accidental death and dismemberment policies,
and life and health benefits packages for affinity groups.
Voluntary benefits products are offered through employer-sponsored payroll
deduction programs. Provident's in-force business in 1997 consisted primarily of
universal life and interest-sensitive life products as well as health products,
principally intermediate disability income policies. Profitability in voluntary
benefits is affected by the level of employee participation, persistency,
deviations of actual morbidity and mortality experience from expected
experience, and the ability of the Company to control administrative expenses.
Other Operations. The Other Operations segment includes the results of GICs,
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group SPAs, a closed block of COLI, the medical services business sold in 1995,
individual annuities, Paul Revere's dental insurance business, medical stop-loss
insurance, and any capital and assets that are not allocated to the principal
business segments. See Management's Discussion and Analysis of Financial
Condition and Results of Operations on pages 31 to 33 of the Annual Report to
Stockholders for the year ended December 31 1997, incorporated herein by
reference.
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GIC products include traditional GICs, separate account GICs, and synthetic
GICs, in which the assets underlying the contract continue to be owned and
retained by the trustee of the contract holder instead of the Company. In the
first quarter of 1997, the Company announced that the synthetic GIC business was
being sold through an assumptive reinsurance transaction. The sale, which was
subject to the approval of the contract holders and respective state regulators,
was completed in January 1998.
Traditional GICs have comprised a major portion of this segment's products
sold since 1982. Under traditional GICs, the Company guarantees the principal
and interest to the contract holder for a specified period, generally three to
five years. The Company marketed GICs for use in corporate tax-qualified
retirement plans and derives profits from GICs on the spread between the amount
of interest earned on invested funds and the fixed rate guaranteed in the GIC.
Separate account GICs, which were introduced in 1992, differ from traditional
GICs in that the assets underlying the contract are segregated from the general
account of Provident and held solely for the benefit of the specific contract
involved. In December 1994, Provident discontinued the sale of traditional GICs,
but continues to service its block of existing business. Sales of separate
account GICs were discontinued in 1996, and none remained at December 31, 1997.
See ''--Reserves.'' Group SPAs are used as funding vehicles primarily when
defined benefit pension plans are terminated. The Company also offers annuities
as an employer-sponsored option for retirees receiving their distributions from
401(k) plans. Pursuant to a group SPA contract, the Company receives a one-time
premium payment and in turn agrees to pay a fixed monthly retirement benefit to
specified employees. Sales of group SPAs were discontinued in 1996. Traditional
GICs accounted for $1,603.6 million and group SPAs accounted for $1,199.1
million of accumulated funds under management at December 31, 1997.
The Company believes that there are three primary sources of risk associated
with traditional GICs and group SPAs. Underwriting risk represents the risk
that a GIC has been priced properly to reflect the risk of withdrawal and for
group SPAs, that the mortality rates and the ages and frequency at which
annuitants will retire have been accurately projected. Asset/liability risk
represents the risk that the investments purchased to back the GIC or group SPA
will adequately match the future cash flows. Investment risk represents the risk
that the underlying investments backing the GICs and group SPAs will perform
according to the expectations of the Company at the time of purchase.
COLI is a tax-leveraged policy sold from 1983 to 1990, with most of the block
having been sold before June 21, 1986. Beginning in 1986, Congress began to
enact tax legislation that significantly reduced the ability of policyholders to
deduct policy loan interest on these products which detracted from the internal
rate of return which theretofore had been available. In 1988, Congress went
further by enacting legislation that had adverse tax consequences for
distributions/policy loans from modified endowment contracts.
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Under this legislation, new sales of the majority of Provident's COLI products
would have been subject to adverse tax treatment as modified endowment contracts
due to their high premium level. As a consequence, many of these products were
withdrawn, and revised products which would not be considered modified endowment
contracts were introduced. Policies issued prior to June 21, 1986, however, were
grandfathered from the modified endowment provisions. In 1996, Congress enacted
tax legislation which generally eliminates tax deductions for policy loan
interest on COLI products issued on or after June 21, 1986.
Medical stop-loss insurance is provided to protect the insured against
significant adverse claims experience with respect to group medical coverage.
Under a variety of stop-loss arrangements, the Company charges a premium in
exchange for an obligation that it will absorb (or reimburse the employer or
plan for) claims in excess of a stated amount on an aggregate or individual
basis. Profitability in medical stop-loss arrangements depends upon the ability
of the Company to accurately predict actual claim trends relative to expected
trends, predict rates of medical cost inflation, and analyze the claim practices
of the underlying plan.
The individual annuities block of business is to be sold to American General
under a reinsurance agreement signed on December 8, 1997, and the sale is
expected to close in the second quarter of 1998.
REINSURANCE
The Company routinely reinsures portions of its business with other insurance
companies. In a reinsurance transaction a reinsurer agrees to indemnify another
insurer for part or all of its liability under a policy or policies it has
issued for an agreed upon premium. The maximum amount of risk retained by the
Company and not reinsured is $1 million on any individual life insured and
$500,000 on individual accidental death insurance. The amount of risk retained
by the Company on individual disability income products varies by policy type
and year of issue. The Company also reinsures against catastrophic losses in the
Employee Benefits segment. Since the ceding of reinsurance by the Company does
not discharge its primary liability to the policyholder, the Company has control
procedures with regard to reinsurance ceded. These procedures include the
exchange and review of financial statements filed with regulatory authorities,
exchange of Insurance Regulatory Information System results, review of ratings
by A.M. Best Co., determination of states in which the reinsurer is licensed to
do business, on-site visits before entering a contract to assess the operations
and management of the reinsurer, consideration of the need for collateral, such
as letters of credit, and audits of the Company's reinsurance activities by its
Internal Audit staff. The Company also assumes reinsurance from other insurers.
13
RESERVES
The applicable insurance laws under which insurance companies operate require
that they report, as liabilities, policy reserves to meet future obligations on
their outstanding policies. These reserves are the amounts which, with the
additional premiums to be received and interest thereon compounded annually at
certain assumed rates, are calculated to be sufficient to meet the various
policy and contract obligations as they mature. These laws specify that the
reserves shall not be less than reserves calculated using certain specified
mortality and morbidity tables, interest rates, and methods of valuation. The
reserves reported in the Company's financial statements incorporated herein by
reference are calculated based on generally accepted accounting principles
("GAAP") and differ from those specified by the laws of the various states and
carried in the statutory financial statements of the life insurance
subsidiaries. These differences arise from the use of mortality and morbidity
tables and interest assumptions which are believed to be more representative of
the actual business than those required for statutory accounting purposes and
from differences in actuarial reserving methods.
The consolidated statements of income include the annual change in reserves
for future policy and contract benefits. The change reflects a normal accretion
for premium payments and interest buildup and decreases for policy terminations
such as lapses, deaths, and annuity benefit payments.
In addition to reserves for future policy and contract benefits, the Company
maintains a balance sheet liability for policyholders' funds. Policyholders'
funds, as shown on the Company's consolidated statements of financial condition
as of December 31, 1997, were $4,194.9 million. Of this amount, $1,603.6 million
reflected the Company's outstanding GICs, the maturity of which is as follows
(in millions):
1 year or less............................................ $ 830.8
Over 1 year but less than 2 years......................... 572.5
Over 2 years but less than 3 years........................ 167.9
Over 3 years.............................................. 32.4
--------
Total.................................................. $1,603.6
========
In the third quarter of 1996, Paul Revere recorded a reserve strengthening of
$380.0 million before income taxes. The reserve strengthening recorded was
prompted by the results of a comprehensive study of the adequacy of its
individual disability reserves under GAAP completed in October 1996. In
connection with such reserve study, Paul Revere received an actuarial report
from an independent actuarial firm, which report concluded that the net
individual disability reserves of $2.2 billion reported by Paul Revere at
September 30, 1996, which reflected the $380.0 million reserve strengthening
14
adjustment, were adequate on a GAAP basis, based on the assumptions reflected
therein.
Subsequently, Paul Revere completed, in cooperation with the Division of
Insurance of the Commonwealth of Massachusetts (the Massachusetts Division of
Insurance"), a comprehensive study of the adequacy of its statutory individual
disability reserves, as a result of which Paul Revere's statutory reserves were
increased by $144.0 million before income taxes. Pursuant to an agreement with
the Company, dated as of April 29, 1996, Textron Inc. ("Textron"), then the
largest shareholder of Paul Revere, contributed to Paul Revere $121.0 million,
representing the amount of required statutory reserve increases, net of tax
benefits.
See "Risk Factors--Reserves".
COMPETITION
There is intense competition among insurance companies for the individual and
group insurance products of the types sold by the Company. At the end of 1997,
there were over 2,000 legal reserve life insurance companies in the United
States, many offering one or more insurance products similar to those marketed
by the Company. The Company's principal competitors in the employee benefits
market include the largest insurance companies in the United States, many of
which have substantially greater financial resources and larger staffs than the
Company. In addition, in the individual life market, the Company competes with
banks, investment advisers, mutual funds, and other financial entities for
investment of savings and retirement funds in general. In the individual and
group disability markets, the Company competes in the United States and Canada
with a limited number of major companies and regionally with other companies
offering specialty products.
All areas of the employee benefits markets are highly competitive due to the
yearly renewable term nature of the products and the large number of insurance
companies offering products in this market. The Company competes with other
companies in attracting and retaining independent agents and brokers to actively
market its products. The principal competitive factors affecting the Company's
business are price and quality of service.
REGULATION
The Company and its insurance subsidiaries are subject to detailed regulation
and supervision in the jurisdictions in which each does business. With respect
to the insurance subsidiaries, such regulation and supervision is primarily for
the protection of policyholders rather than for the benefit of investors or
creditors. Although the extent of such regulation varies, state
15
insurance laws generally establish supervisory agencies with broad
administrative powers.
These supervisory and administrative powers relate chiefly to the granting and
revocation of the licenses to transact business, the licensing of agents, the
approval of policy forms, reserve requirements, and the form and content of
required financial statements. As to the type and amounts of its investments,
the Company's insurance subsidiaries must meet the standards and tests
promulgated by the insurance laws and regulations of Tennessee, Massachusetts,
New York, Delaware, and certain other states in which they conduct business.
The Company and its insurance subsidiaries are required to file various,
usually quarterly and/or annual, financial statements and are subject to
periodic and intermittent review with respect to their financial condition and
other matters by the various departments having jurisdiction in the states in
which they do business. The last such examination of the Provident insurance
subsidiaries was completed on April 30, 1997, and covered operations for the
five-year period ending December 31, 1995. The final report was issued in the
second quarter of 1997 and no objections were raised by the reviewing
authorities as a result of that examination. The field work related to the last
financial examination of Paul Revere Life and Paul Revere Variable was completed
on March 27, 1997, and covered the operations for the four-year period ending
December 31, 1994. As a result of the examination, statutory reserves were
increased by $35.0 million, which adjustment was reflected in the statutory
financial statements of Paul Revere Life as of December 31, 1995. The scope of
the examination was extended to include a review of the individual disability
income reserves as of September 30, 1996. As a result of that review, which was
completed on February 5, 1997, Paul Revere Life was required to increase its
statutory reserves by $144.0 million on a pre-tax basis or $121.0 million on an
after-tax basis. As a result of the reserve strengthening required, the former
parent of Paul Revere Life made additional capital contributions totaling $121.0
million: $83.5 million was contributed in December 1996 and the balance of $37.5
million was contributed on February 5, 1997. Paul Revere Protective is currently
undergoing a financial examination for the three-year period ending December 31,
1996. As of March 1, 1998, no issues or objections had been raised.
The laws of the states of Tennessee, Massachusetts, New York, and Delaware
require the registration of and periodic reporting by insurance companies
domiciled within their jurisdiction which control or are controlled by other
corporations or persons so as to constitute a holding company system. The
Company is registered as a holding company system in Tennessee, Massachusetts,
New York, and Delaware. The holding company statutes require periodic disclosure
concerning stock ownership and prior approval of certain intercompany
transactions within the holding company system. The Company may
16
from time to time be subject to regulation under the insurance and insurance
holding company statutes of one or more additional states. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 33 of the Annual Report to Stockholders for the year ended December 31,
1997, incorporated herein by reference.
The National Association of Insurance Commissioners ("NAIC") and insurance
regulators are re-examining existing laws and regulations and their application
to insurance companies. In particular, this re-examination has focused on
insurance company investment and solvency issues and, in some instances, has
resulted in new interpretations of existing law, the development of new laws,
and the implementation of non-statutory guidelines. The NAIC has formed
committees and appointed advisory groups to study and formulate regulatory
proposals on such diverse issues as the use of surplus notes, accounting for
reinsurance transactions, and the adoption of risk-based capital rules. The NAIC
is currently in the process of recodifying statutory accounting practices, the
result of which is expected to standardize prescribed statutory accounting
practices. Accordingly, this project, which is expected to be completed in 1998,
will likely change, to some extent, prescribed statutory accounting practices
and may result in changes to the accounting practices that the Company's
insurance subsidiaries use to prepare their statutory financial statements.
RISK FACTORS
- ------------
Any one or more of the following factors may cause the Company's actual
results for various financial reporting periods to differ materially from those
expressed in any forward looking statements made by or on behalf of the Company.
RESERVES
The Company maintains reserves for future policy benefits and unpaid claims
expenses which include policy reserves and claim reserves established for its
individual disability insurance, group insurance, and individual life insurance
products. Policy reserves represent the portion of premiums received which are
reserved to provide for future claims. Claim reserves are established for
future payments not yet due on claims already incurred, primarily relating to
individual disability and group disability insurance products. Reserves,
whether calculated under GAAP or statutory accounting practices, do not
represent an exact calculation of future benefit liabilities but are instead
estimates made by the Company using actuarial and statistical procedures. There
can be no assurance that any such reserves would be sufficient to fund future
liabilities of the Company in all circumstances. Future loss development could
require reserves to be increased, which would adversely affect earnings
17
in current and future periods. Adjustments to reserve amounts may be required in
the event of changes from the assumptions regarding future morbidity (the
incidence of claims and the rate of recovery, including the effects thereon of
inflation and other societal and economic factors), persistency, mortality, and
interest rates used in calculating the reserve amounts.
CAPITAL ADEQUACY
The capacity for an insurance company's growth in premiums is in part a
function of its statutory surplus. Maintaining appropriate levels of statutory
surplus, as measured by state insurance regulators, is considered important by
state insurance regulatory authorities and the private agencies that rate
insurers' claims-paying abilities and financial strength. Failure to maintain
certain levels of statutory surplus could result in increased regulatory
scrutiny, action by state regulatory authorities or a downgrade by the private
rating agencies.
Effective in 1993, the NAIC adopted a risk-based capital ("RBC") formula,
which prescribes a system for assessing the adequacy of statutory capital and
surplus for all life and health insurers. The basis of the system is a risk-
based formula that applies prescribed factors to the various risk elements in a
life and health insurer's business to report a minimum capital requirement
proportional to the amount of risk assumed by the insurer. The life and health
RBC formula is designed to measure annually (i) the risk of loss from asset
defaults and asset value fluctuation, (ii) the risk of loss from adverse
mortality and morbidity experience, (iii) the risk of loss from mismatching of
asset and liability cash flow due to changing interest rates, and (iv) business
risks. The formula is to be used as an early warning tool to identify companies
that are potentially inadequately capitalized. The formula is intended to be
used as a regulatory tool only and is not intended as a means to rank insurers
generally.
Based on computations made by the Company in accordance with the prescribed
life and health RBC formula, each of the Company's life insurance subsidiaries
exceeded the minimum capital requirements at December 31, 1997.
During 1995 and 1996, the Massachusetts Division of Insurance conducted a
quadrennial examination of Paul Revere Life and Paul Revere Variable for the
period ended December 31, 1994. In connection with this examination, as well as
in consideration of a comprehensive study undertaken by Paul Revere in 1995 and
early 1996 of its statutory reserves, Paul Revere Life and Paul Revere
Protective strengthened their individual disability statutory reserves by a
combined total of $35.0 million and reflected this strengthening in the annual
statutory financial statements for the year ended December 31, 1995.
18
During the third quarter of 1996, Paul Revere initiated a comprehensive study
of the adequacy of its individual disability reserves under GAAP and under
statutory accounting principles to consider experience through September 30,
1996. The results of such study prompted Paul Revere to strengthen its GAAP
individual disability reserves by $380.0 million before taxes in the quarter
ended September 30, 1996. The Massachusetts Division of Insurance subsequently
updated its examination of Paul Revere's statutory reserves to review the
results of Paul Revere's statutory reserve study, with the result that Paul
Revere's statutory reserves were strengthened by $144.0 million before income
taxes. In connection with the Paul Revere Merger, Textron, the principal
stockholder of Paul Revere, contributed $121.0 million, representing the amount
of the statutory reserve increases, net of tax benefits, as additional capital
to Paul Revere prior to the effective time of the Paul Revere Merger.
DISABILITY INSURANCE
Disability insurance may be affected by a number of social, economic,
governmental, competitive, and other factors. Changes in societal attitudes,
work ethics, motivation, stability, and mores can significantly affect the
demand for and underwriting results from disability products. Economic
conditions affect not only the market for disability products, but also
significantly affect the claims rates and length of claims. The climate and the
nature of competition in disability insurance have also been markedly affected
by the growth of Social Security, worker's compensation, and other governmental
programs in the workplace. The nature of that portion of the Company's
outstanding insurance business that consists of noncancelable disability
policies, whereby the policy is guaranteed to be renewable through the life of
the policy at a fixed premium, does not permit the Company to adjust its
premiums on business in-force on account of changes resulting from such factors.
Disability insurance products are important products for the Company. To the
extent that disability products are adversely affected in the future as to sales
or claims, the business or results of operations of the Company could be
materially adversely affected.
INDUSTRY FACTORS
All of the Company's businesses are highly regulated and competitive. The
Company's profitability is affected by a number of factors, including rate
competition, frequency and severity of claims, lapse rates, government
regulation, interest rates, and general business considerations. There are many
insurance companies which actively compete with the Company in its lines of
business, some of which are larger and have greater financial resources than the
Company, and there is no assurance that the Company will be able to compete
effectively against such companies in the future.
19
In recent years, some U.S. life insurance companies have faced claims,
including class-action lawsuits, alleging various improper sales practices in
the sales of certain types of life insurance products. These claims often relate
to the selling of whole life and universal life policies that accumulate cash
values which may be utilized to fund the cost of the insurance in later years of
the policy. Due to subsequent reductions in dividends or interest credited or
due to other factors, the cash values have not accumulated sufficiently to cover
costs of insurance, resulting in the need for ongoing premium payments. Although
never a principal product line for the Company or Paul Revere, both companies
have sold a modest amount of interest sensitive whole life and universal life
policies. Paul Revere Variable has been named as a defendant in a lawsuit filed
in New Jersey state court related to the sale of certain universal life
policies. The plaintiff in such lawsuit seeks to represent a national class of
Paul Revere Variable policyholders. This case is in an early stage and has not
been certified as a class action. In addition, Accident is a defendant in two
lawsuits filed by individuals related to the sale of certain life insurance
policies. The Company intends to defend all of the foregoing cases vigorously.
There can be no assurance that any future claims relating to sales of such
policies will not have a material adverse effect on the Company.
EFFECT OF THE PAUL REVERE MERGER; INTEGRATION OF OPERATIONS
The success of the Paul Revere Merger will be determined by various factors,
including the financial performance of the combined company's operations and
management's ability to realize expected cost savings through combining certain
functions of both the Company and Paul Revere and restructuring the field
organizations of both companies. The integration of the operations of Paul
Revere and the Company may be negatively affected if, among other things, the
proposed changes are not made, customers do not react positively to some of the
planned changes intended to increase service or integrate the businesses of the
two companies, unanticipated offsetting costs are incurred, or costs or
difficulties related to the integration of the businesses of the Company and
Paul Revere are greater than expected. There can be no assurance that the
anticipated benefits of the Paul Revere Merger will be realized or that the Paul
Revere Merger will not adversely affect the future operating results of the
Company.
20
SELECTED DATA OF SEGMENTS
The following table reflects for the indicated years selected financial data
for the Company's segments.
1997 1996 1995
YEAR ENDED DECEMBER 31 --------- --------- ---------
(IN MILLIONS OF DOLLARS)
RECLASSIFIED
-------------------
REVENUE (EXCLUDING NET REALIZED INVESTMENT GAINS
AND LOSSES)
Individual Life and Disability.................. $ 1,902.3 $ 1,025.0 $ 999.1
Employee Benefits............................... 883.7 555.5 520.3
Other Operations................................ 752.1 720.0 1,067.6
--------- --------- ---------
Total........................................ $ 3,538.1 $ 2,300.5 $ 2,587.0
========= ========= =========
INCOME BEFORE NET REALIZED INVESTMENT GAINS AND
LOSSES AND FEDERAL INCOME TAXES
Individual Life and Disability.................. $ 232.3 $ 115.4 $ 34.0
Employee Benefits............................... 63.3 46.1 32.2
Other Operations................................ 69.6 73.3 141.5
--------- --------- ---------
Total........................................ $ 365.2 $ 234.8 $ 207.7
========= ========= =========
REVENUE (INCLUDING NET REALIZED INVESTMENT GAINS
AND LOSSES)
Individual Life and Disability.................. $ 1,910.2 $ 1,033.0 $ 1,003.2
Employee Benefits............................... 887.3 555.5 524.2
Other Operations................................ 755.7 703.4 1,027.9
--------- --------- ---------
Total........................................ $ 3,553.2 $ 2,291.9 $ 2,555.3
========= ========= =========
INCOME BEFORE FEDERAL INCOME TAXES
Individual Life and Disability.................. $ 240.2 $ 123.4 $ 38.1
Employee Benefits............................... 66.9 46.1 36.1
Other Operations................................ 73.2 56.7 101.8
--------- --------- ---------
Total........................................ $ 380.3 $ 226.2 $ 176.0
========= ========= =========
ASSETS
Individual Life and Disability.................. $11,051.1 $ 5,735.0 $ 5,443.9
Employee Benefits............................... 2,145.2 1,490.0 1,407.8
Other Operations................................ 9,981.3 7,767.5 9,449.6
--------- --------- ---------
Total........................................ $23,177.6 $14,992.5 $16,301.3
========= ========= =========
Total revenue (excluding net realized investment gains and losses) includes
premium income, net investment income, and other income. Total revenue
(including net realized investment gains and losses) includes premium income,
net investment income, net realized investment gains and losses, and other
income. Assets have been allocated to the segments based upon identifiable
liabilities and allocated stockholders' equity. Segment information for 1996
and 1995 has been reclassified to conform to current year reporting. The
reclassification, which reflects the Company's current marketing and
operational structure, did not change total Revenue, total Income Before
Federal Income Taxes, or total Assets.
Additional information regarding the operations of these segments may be
found under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 26-35 of the Annual Report to
Stockholders for the year ended December 31, 1997, incorporated herein by
reference.
21
EMPLOYEES
At March 1, 1998, the Company had approximately 4,039 full-time employees
(excluding Genex), including approximately 1,819 at its headquarters in
Chattanooga, Tennessee, and Genex had approximately 1,308 full time employees,
including approximately 173 in its home office in Wayne, Pennsylvania.
ITEM 2. PROPERTIES
The Company's home office property consists of two connected office
buildings totaling 840,000 square feet at 1 Fountain Square, Chattanooga,
Tennessee. The office buildings and substantially all of the surrounding 25
acres of land, used primarily as parking lots, are owned by the Company in fee.
With the acquisition of Paul Revere in 1997, the Company also has a large
operations center and owns facilities in Worcester, Massachusetts comprised of
two connected buildings totaling 438,000 gross square feet of office space and
approximately 5.6 acres of land, used primarily as parking. In addition,
approximately 72,000 square feet of space is leased in three buildings located
in the Worcester area and 15,000 square feet of office space is leased in
Springfield, Massachusetts. Total rents are approximately $1.5 million annually.
The Company also leases other office space and minor storage space at
approximately 65 locations in 33 states in the United States and 14 locations in
7 Canadian provinces for its sales and service force. The Company's real
property lease payments for 1997 were approximately $9.7 million (net of rents
received on subleased property).
Management of the Company believes that the Company's properties and the
properties which it leases are in good condition and are suitable and adequate
for the Company's current business operations.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business operations, the Company is involved in
routine litigation with policyholders, beneficiaries, and others, and a number
of such lawsuits were pending as of the date of this filing. In the opinion of
management, the ultimate liability, if any, under these suits would not have a
material adverse effect on the consolidated financial condition or the
consolidated results of operations of the Company.
An appeal of the decision of the Massachusetts Commissioner of Insurance
approving the acquisition of control of the Paul Revere insurance subsidiaries
domiciled in Massachusetts by the Company was filed by George E. Ginther and
Niagara Financial Services, Inc. (the ''Petitioners''). Mr. Ginther appeared and
testified at the hearing held in connection with such acquisition of control
prior to the approval on March 24, 1997 by the Massachusetts Commissioner of
Insurance. The appeal alleged that the findings in the decision were
unsubstantiated by the evidence and that the statutory criteria for approval of
the merger were not met. The appeal requested a trial de novo before a state
court to determine if the merger meets the statutory criteria under
Massachusetts law and requested that the application of the order
22
approving the merger be stayed and that the merger be ultimately disapproved or
conditionally approved. The Company filed a motion to dismiss, and the
Massachusetts lower court dismissed the appeal based upon the Petitioners' lack
of standing. The Petitioners have appealed to the Massachusetts Supreme Judicial
Court for review of the decision of the lower court. Oral argument on
Petitioners' appeal took place on March 5, 1998. Although the Company believes
the likelihood of Petitioners' success in the proceeding is remote, there can be
no absolute assurance that the proceeding will not result in a decision that is
materially adverse to the Company.
Two alleged class action lawsuits have been filed in Superior Court in
Worcester, Massachusetts against the Company--one purporting to represent all
career agents of Paul Revere whose employment relationships ended on June 30,
1997 and were offered contracts to sell insurance policies as independent
producers, and the other purporting to represent independent brokers who sold
certain Paul Revere individual disability income policies with benefit riders.
Motions have been filed by the Company to dismiss most of the counts in the
complaints, which allege various breach of contract and statutory claims. To
date no class has been certified in either lawsuit. The Company has strong
defenses to both lawsuits and will vigorously defend its position and resist
certification of the classes. In addition, the same plaintiff's attorney who has
filed the purported class action lawsuits has filed 41 individual lawsuits on
behalf of current and former Paul Revere sales managers alleging various breach
of contract claims. The Company has strong defenses and will vigorously defend
its position in these cases as well. Although the alleged class action lawsuits
and the 41 individual lawsuits are in the early stages, management does not
currently expect these suits to materially affect the financial position or
results of operations of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
23
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is included on page 72 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1997,
under the caption "Common Stock Information" and is incorporated herein by
reference. As of March 9, 1998, there were 1,581 holders of Common Stock and -0-
holders of the Depositary Shares.
For information on restrictions relating to the Company's insurance
subsidiaries' ability to pay dividends to the Company see "Management's
Discussion and Analysis of Financial Condition and Results of Operations" on
page 33 and "Note 17 of the Notes to Consolidated Financial Statements" on page
70 of the Annual Report to Stockholders for the year ended December 31, 1997,
incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is included on page 36 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1997,
under the caption "Selected Financial Data" and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is included on pages 26 - 35 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1997,
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included on pages 37-71 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1997,
under the captions "Report of Ernst & Young LLP, Independent Auditors,"
"Consolidated Statements of Financial Condition," "Consolidated Statements of
Income," "Consolidated Statements of Stockholders' Equity," "Consolidated
Statements of Cash Flows," and "Notes to Consolidated Financial Statements," and
is incorporated herein by reference.
24
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
25
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information required by this Item with respect to directors is included
under the caption "Information Concerning the Nominees" of the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held May 6, 1998,
and is incorporated herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, all of whom are also executive officers
of its principal subsidiaries, were elected to serve in their respective offices
for one year or until their successors are chosen and qualified.
Name Age Position
- ---- --- --------
J. Harold Chandler 48 Chairman, President, Chief Executive
Officer, and Director
Thomas R. Watjen 43 Vice Chairman and Chief
Financial Officer, and Director
Robert O. Best 48 Executive Vice President and Chief
Information Officer/Client Services
F. Dean Copeland 58 Executive Vice President and
General Counsel
Thomas B. Heys, Jr. 51 Executive Vice President,
Institutional Sales
Peter C. Madeja 39 Executive Vice President and President
and CEO of GENEX Services, Inc.
Jeffrey F. Olingy 48 Executive Vice President, Field
Sales Management
Ralph A. Rogers, Jr. 49 Senior Vice President and Treasurer
Mr. Chandler became Chairman of the Company April 28, 1996, and President and
Chief Executive Officer and a Director of the Company
effective November 8, 1993. Immediately prior to his employment with the
Company, he served as President of NationsBank Mid-Atlantic
26
Banking Group which includes the NationsBank and Maryland National Corporation
entities in the District of Columbia, Maryland, and northern Virginia. He
formerly served as President of the Citizens and Southern National Bank of South
Carolina, a predecessor company of NationsBank. He is a director of AmSouth
Bancorporation, Herman Miller, Inc., and Storage Technology. He is currently a
member of the Board of Trustees of Wofford College.
Mr. Watjen became Vice Chairman and Chief Financial Officer of the Company on
March 26, 1997. He became Executive Vice President and Chief Financial Officer
on July 1, 1994. Prior to joining the Company, he served as a Managing Director
of the insurance practice of the investment banking firm, Morgan Stanley & Co.,
which he joined in 1987.
Mr. Best became an Executive Vice President of the Company on May 7, 1997. He
became Senior Vice President and Chief Information Officer of the Company on
July 11, 1994. He was previously Senior Vice President and Chief Information
Officer at UNUM, which he joined in 1993 following UNUM's acquisition of
Colonial Life and Accident Insurance Company. At Colonial, he served as Vice
President, Operations and Information Systems, until 1992 when he was named
Executive Vice President.
Mr. Copeland became Executive Vice President and General Counsel of the
Company on May 12, 1997. Prior to joining the Company he had been a partner
since 1972 in the law firm of Alston & Bird, where he concentrated on the
financial services industry.
Mr. Heys became an Executive Vice President of the Company on May 7, 1997. He
became a Senior Vice President, Corporate Risk Management, of the Company in
August 1994. He served as Vice President and Chief Officer of various operating
departments from November 1990 until August 1994.
Mr. Madeja became an Executive Vice President of the Company on May 7, 1997.
He became Senior Vice President of the Company in February 1997 when the Company
acquired Genex. He continues to serve as President and Chief Executive Officer
of Genex, which he joined in 1982.
Mr. Olingy became an Executive Vice President of the Company on May 7, 1997.
He became Senior Vice President, Sales and Marketing, of the Company on April 3,
1996. Prior to joining the Company, he was a Retail Banking Director with Bank
of Boston which he joined in 1993. He served as Executive Vice President of
NationsBank from 1991 to 1993.
Mr. Rogers became a Senior Vice President and Treasurer of the Company on May
7, 1997. Prior to this position he served as Vice President and Controller of
the Company since 1984.
27
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included under the captions
"Compensation of Directors" and "Executive Compensation" of the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held May 6, 1998,
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption
"Beneficial Ownership of Company Securities" and under the caption "Security
Ownership of Directors and Officers" of the Registrant's Proxy Statement for the
Annual Meeting of Stockholders to be held May 6, 1998, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included under the caption "Certain
Transactions" of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 6, 1998, and is incorporated herein by reference.
28
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this report
(1) Financial Statements
The following report and consolidated financial statements of Provident
Companies, Inc. and Subsidiaries, included in the Registrant's Annual Report to
Stockholders for the year ended December 31, 1997, are incorporated by reference
in Item 8:
Report of Ernst and Young LLP, Independent Auditors
Consolidated Statements of Financial Condition at December 31, 1997 and
1996
Consolidated Statements of Income for the three years ended December 31,
1997
Consolidated Statements of Stockholders' Equity for the three years ended
December 31, 1997
Consolidated Statements of Cash Flows for the three years ended December
31, 1997
Notes to Consolidated Financial Statements
(2) Schedules Supporting Financial Statements
The following financial statement schedules of Provident Companies, Inc. and
Subsidiaries are included in Item 14(d):
Page
----
I. Summary of Investments - Other Than Investments
in Related Parties (Consolidated) 34
II. Condensed Financial Information of Registrant 35
III. Supplementary Insurance Information
(Consolidated) 39
IV. Reinsurance (Consolidated) 41
29
V. Valuation and Qualifying Accounts (Consolidated) 42
Schedules not referred to have been omitted as inapplicable or because they
are not required by Regulation S-X.
(3) Exhibits
(2.1) Agreement and Plan of Share Exchange between Provident Companies, Inc.
and Provident Life and Accident Insurance Company of America
(incorporated by reference to Exhibit 2.1 of the Company's Form 10-K
filed for fiscal year ended 1995).
(2.2) Amended and Restated Agreement and Plan of Merger dated as of April
29, 1996 by and among Patriot Acquisition Corporation, The Paul Revere
Corporation and the Company (including exhibits thereto),
(incorporated by reference to Exhibit 2.1 of the Company's Form 10-Q
and Form 10-Q/A filed for fiscal quarter ended September 30, 1996).
(3.1) Amended and Restated Certificate of Incorporation, (incorporated by
reference to Exhibit 3.1 of the Company's Form 10-K for fiscal year
ended 1995, as amended by Certificate of Amendment).
(3.2) Bylaws of the Company (incorporated by reference to Exhibit 3.2 of the
Company's Form 10-K filed for fiscal year ended 1995).
(4.1) Form of Preferred Stock Certificate relating to the registration of
6,000,000 Depositary Shares each representing a one-sixth interest in
a share the 8.10% Cumulative Preferred Stock of America (incorporated
by reference to America's Registration Statement on Form S-3,
Registration No. 33-5612).
(4.2) Form of Depositary Agreement relating to the registration of 6,000,000
Depositary Shares each representing a one-sixth interest in a share
the 8.10% Cumulative Preferred Stock of America (incorporated by
reference to America's Registration Statement on Form S-3,
Registration No. 33-5612).
(4.3) Form of Depositary Receipt relating to the registration of 6,000,000
Depositary Shares each representing a one-sixth interest in a share
the 8.10% Cumulative Preferred Stock of America (incorporated by
reference to America's Registration Statement on Form S-3,
Registration No. 33-5612).
(4.4) Certificate of Amendment of Restated Charter relating to the
registration of 6,000,000 Depositary Shares each representing a one-
sixth interest in a share the 8.10% Cumulative Preferred Stock of
America (incorporated by reference to Exhibit 3.1 of America's Form
10-K filed for the fiscal year ended December 31, 1992 and to
America's Registration Statement on Form S-3, Registration No. 33-
5612).
(4.5) Articles of Share Exchange (incorporated by reference to the Company's
Form 10-K filed for fiscal year ended 1995).
30
(10.1) Reinsurance and Administration Agreement by and between Transamerica
Occidental Life Insurance Company of Illinois and Accident dated
March 18, 1987 (incorporated by reference to Exhibit 10.3 of
Capital's Registration Statement on Form S-1, Registration No. 33-
17017).
(10.2) Tax Indemnification and Guaranty Agreement by and among Transamerica
Occidental, Transamerica Corporation and Accident dated March 18,
1987 (incorporated by reference to Exhibit 10.4 of Capital's
Registration Statement on Form S-1, Registration No. 33-17017).
(10.3) Asset and Stock Purchase Agreement by and between Healthsource and
America and its subsidiaries dated December 21, 1994. (incorporated
by reference to Exhibit 10.3 to America's Form 10-K filed for fiscal
year ended December 31, 1995).
(10.4) Annual Management Incentive Compensation Plan (MICP), adopted by
stockholders May 4, 1994 (incorporated by reference to Exhibit 10.5
to America's Form 10-K filed for fiscal year ended December 31,
1994), and amended by stockholders May 1, 1996 (incorporated by
reference to Exhibit 10.4 of Company's Form 10-K filed for fiscal
year ended December 31, 1996) and as amended by stockholders May 7,
1997 (incorporated by reference to the Company's Proxy Statement for
the Annual Meeting of Stockholders held May 7, 1997).*
(10.5) Stock Option Plan, adopted by stockholders May 3, 1989, as amended by
the Compensation Committee on January 10, 1990, and October 29, 1991
(incorporated by reference to Exhibit 10.6 to America's Form 10-K
filed for the fiscal year 1991); and as amended by the Compensation
Committee on March 17, 1992 and by the stockholders on May 6, 1992
(incorporated by reference to registrant's Form 10-K filed for the
fiscal year ended December 31, 1992). Terminated effective December
31, 1993.*
(10.6) Accident and Subsidiaries Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.8 of Capital's Registration
Statement on Form S-1, Registration No. 33-17017).*
(10.7) Form of Surplus Note, dated December 1, 1996, in the amount of $150
million executed by Accident in favor of the Company (incorporated by
reference to Exhibit 10.7 of the Company's Form 10-K filed for the
fiscal year ended December 31, 1996).
(10.8) Reinsurance and Administration Agreement by and between Transamerica
Occidental and Accident dated March 18, 1987 (incorporated by
reference to Exhibit 10.15 to Capital's Registration Statement on
Form S-1, Registration No. 33-17017).
(10.9) Form of Severance Agreement offered to selected executive officers
(incorporated by reference to Exhibit 10.14 to Capital's Form 10-K
filed for fiscal year ended December 31, 1990), revised February 8,
1994 (incorporated by reference to Exhibit 10.14 to registrant's Form
10-K filed for fiscal year ended December 31, 1993).
(10.10) Description of Compensation Plan for Non-Employee Directors
(incorporated by reference to Amendment No. 1 to registrant's Form
10-K filed January 27, 1993 on Form 8), and amended by the
31
Board of Directors on February 8, 1994 (incorporated by reference to
Exhibit 10.15 to America's Form 10-K filed for fiscal year ended
December 31, 1993).
(10.11) Stock Option Plan, originally adopted by stockholders May 5, 1993, as
amended by stockholders on May 1, 1996 (incorporated by reference to
Exhibit 10.2 of Company's Form 10-Q for fiscal quarter ended June 30,
1996) and as amended by stockholders on May 7, 1997 (incorporated by
reference to the Company's Proxy Statement for the Annual Meeting of
Stockholders held May 7, 1997).*
(10.12) Employment contract between America and J. Harold Chandler, President
and Chief Executive Officer, dated November 8, 1993 (incorporated by
reference to Exhibit 10.17 to America's Form 10-K filed for fiscal
year ended December 31, 1993).*
(10.13) Employee Stock Purchase Plan (of 1995) adopted by stockholders June
13, 1995 (incorporated by reference to the Company's Form 10-K filed
for fiscal year ended 1995).*
(10.14) Credit Agreement between Provident and a consortium of financial
institutions with The Chase Manhattan Bank as Administrative Agent,
relating to revolving loan in the aggregate of $800 million maturing
on July 30, 2001 (incorporated by reference to Exhibit 10.14 of the
Company's Form 10-K filed for fiscal year ended December 1996).
Terminated effective February 28, 1998.
(10.15) Amended and Restated Common Stock Purchase Agreement between
Provident Companies, Inc. and Zurich Insurance Company dated as of
May 31, 1996 (incorporated by reference to Exhibit 10.15 of the
Company's Form 10-K filed for fiscal year ended 1996).
(10.16) Amended and Restated Relationship Agreement between Provident
Companies, Inc. and Zurich Insurance Company dated as of May 31, 1996
(incorporated by reference to Exhibit 10.16 of the Company's Form 10-
K filed for fiscal year ended 1996).
(10.17) Amended and Restated Registration Rights Agreement between Provident
Companies, Inc. and Zurich Insurance Company dated as of May 31, 1996
(incorporated by reference to Exhibit 10.17 of the Company's Form 10-
K filed for fiscal year ended 1996).
(11) Statement re computation of per share earnings (incorporated herein
by reference to "Note 10 of the Notes to Consolidated Financial
Statements" on page 63 of the Annual Report to Stockholders for the
year ended December 31, 1997).
(13) Portions of the Annual Report to Stockholders for year ended December
31, 1997, incorporated by reference as described in
32
Items 1, 5, 6, 7, 8, 10 and 14 hereof, which portions shall be deemed
filed as a part hereof.
(19) Previously unfiled documents filed herewith include Exhibit 13.
(21) Subsidiaries of the Company.
(23) Consent of Independent Auditors.
(24) Powers of Attorney.
(27) Financial Data Schedule.
* Management contract or compensatory plan required to be filed as an exhibit to
this form pursuant to Item 14(c) of Form 10-K.
The total amount of securities authorized pursuant to any instrument defining
rights of holders of long-term debt of the Company does not exceed 10% of the
total assets of the Company and its consolidated subsidiaries. The Company will
furnish copies of any such instrument to the Commission upon request.
(b) Reports on Form 8-K
No reports were filed by the registrant during the fourth quarter of 1997.
(c) Exhibits
See "Item 14(a)(3)" above.
(d) Financial Statement Schedules
See "Item 14(a)(2)" above.
33
SCHEDULE I--SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
December 31, 1997
Amount at which
shown in the
Fair statement of
Type of Investment Cost Value financial position
(in millions of dollars)
- ------------------------------------------------------------------------------------------------------------------------------------
Available-for-Sale Fixed Maturity Securities:
Bonds
United States Government and Government
Agencies and Authorities $ 336.6 $ 399.5 $ 399.5
States, Municipalities, and Political Subdivisions 13.6 14.8 14.8
Foreign Governments 526.3 636.2 636.2
Public Utilities 2,579.5 2,859.9 2,859.9
Mortgage-backed Securities 2,841.8 2,971.6 2,971.6
Convertible Bonds 143.6 154.7 154.7
All Other Corporate Bonds 8,915.7 9,851.7 9,851.7
Redeemable Preferred Stocks 134.3 146.7 146.7
-------------- -------------- --------------
Total 15,491.4 $ 17,035.1 17,035.1
-------------- ============= --------------
Held-to-Maturity Fixed Maturity Securities:
Bonds
United States Government and Government
Agencies and Authorities 13.1 $ 15.7 13.1
States, Municipalities, and Political Subdivisions 2.9 3.1 2.9
Mortgage-backed Securities 276.9 300.6 276.9
All Other Corporate Bonds 13.9 17.2 13.9
-------------- -------------- --------------
Total 306.8 $ 336.6 306.8
-------------- ============== --------------
Equity Securities:
Common Stocks 5.4 $ 5.3 5.3
Nonredeemable Preferred Stocks 5.7 4.7 4.7
-------------- -------------- --------------
Total 11.1 $ 10.0 10.0
-------------- ============== --------------
Mortgage Loans 18.8 17.8 *
Investment Real Estate 110.0 87.1 *
Policy Loans 1,983.9 1,983.9
Other Long-term Investments 22.6 22.6
Short-term Investments 57.5 57.5
-------------- --------------
$ 18,002.1 $ 19,520.8
============== ==============
*Difference between cost and carrying value results from certain valuation
allowances and other temporary declines in value.
34
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PROVIDENT COMPANIES, INC. (Parent Company)
STATEMENTS OF FINANCIAL CONDITION
December 31
1997 1996
(in millions of dollars)
------------------------------
ASSETS
Fixed Maturity Securities
Available-for-Sale--at fair value (cost: $9.6; $9.6) $ 10.8 $ 10.3
Short-term Investments 13.3 121.5
Investment in Subsidiaries 3,720.0 1,659.9
Short-term Notes Receivable from Subsidiaries 36.6 7.1
Surplus Notes of Subsidiaries 250.0 150.0
Other Assets 36.9 11.1
--------- ---------
Total Assets $ 4,067.6 $ 1,959.9
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Short-term Debt from Subsidiaries $ 24.7 $ -
Long-term Debt 725.0 200.0
Other Liabilities 38.6 21.3
--------- ---------
Total Liabilities 788.3 221.3
--------- ---------
STOCKHOLDERS' EQUITY
Preferred Stock 156.2 156.2
Common Stock 135.2 45.6
Additional Paid-in Capital 750.6 11.4
Net Unrealized Gain on Securities, net of deferred federal
income taxes ($0.4; $0.2) 0.8 0.5
Net Unrealized Gain on Investment of Subsidiaries 602.8 85.2
Retained Earnings 1,635.2 1,439.7
Treasury Stock (1.5) -
--------- ---------
Total Stockholders' Equity 3,279.3 1,738.6
--------- ---------
Total Liabilities and Stockholders' Equity $ 4,067.6 $ 1,959.9
========= =========
See notes to condensed financial information.
35
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PROVIDENT COMPANIES, INC. (Parent Company)
STATEMENTS OF NET INCOME
Year Ended December 31
1997 1996 1995
(in millions of dollars)
----------------------------
Dividends from Subsidiaries $109.9 $ 52.6 $ -
Interest from Subsidiaries 17.1 12.3 -
Other Income 1.3 1.7 -
------ ------ ------
Total Revenue 128.3 66.6 -
------ ------ ------
Interest Expense on Debt 38.7 10.2 -
Other Expenses 4.3 1.2 -
------ ------ ------
Total Expenses 43.0 11.4 -
------ ------ ------
Income Before Federal Income Taxes and Equity in
Undistributed Earnings of Subsidiaries 85.3 55.2 -
Federal Income Taxes (Credit) (7.3) 1.1 -
------ ------ ------
Income Before Equity in Undistributed Earnings
of Subsidiaries 92.6 54.1 -
Equity in Undistributed Earnings of Subsidiaries 154.7 91.5 115.6
------ ------ ------
Net Income $247.3 $145.6 $115.6
====== ====== ======
See notes to condensed financial information.
36
SCHEDULE II-CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PROVIDENT COMPANIES, INC. (Parent Company)
STATEMENTS OF CASH FLOWS
Year Ended December 31
1997 1996 1995
(in millions of dollars)
---------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 105.8 $ 69.7 $ -
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Fixed Maturity Securities - 0.2 -
Net (Purchases) Sales of Short-term Investments 108.2 (120.8) -
Acquisition of Business (860.3) - -
Cash Distribution (to) from Subsidiaries (5.0) 100.0 -
Short-term Notes Receivable from Subsidiaries (29.5) - -
Surplus Notes Issued to Subsidiaries (100.0) (3.0) -
Other (0.1) (2.7) -
--------- -------- --------
CASH USED BY INVESTING ACTIVITIES (886.7) (26.3) -
--------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Short-term Borrowings from Subsidiaries 24.7 - -
Net Long-term Borrowings 425.9 - -
Issuance of Common Stock 389.8 5.8 -
Dividends Paid to Stockholders (60.0) (45.5) -
Other 0.5 (3.6) -
--------- -------- -------
CASH PROVIDED (USED) BY FINANCING ACTIVITIES 780.9 (43.3) -
--------- -------- -------
INCREASE IN CASH $ 0.0 $ 0.1 $ -
========= ======== =======
See notes to condensed financial information.
37
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PROVIDENT COMPANIES, INC. (Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Provident
Companies, Inc. and Subsidiaries.
Corporate Reorganization
Effective December 27, 1995, Provident Life and Accident Insurance Company of
America completed a step in a corporate reorganization which created a new
parent holding company, Provident Companies, Inc., a non-insurance holding
company incorporated in Delaware. In accordance with the Plan of Share Exchange
approved by shareholders at the 1995 annual meeting, each share of common stock
of Provident Life and Accident Insurance Company of America was exchanged for a
share of common stock of Provident Companies, Inc. Each depositary share of
cumulative preferred stock of Provident Life and Accident Insurance Company of
America was also exchanged for an equivalent depositary share of cumulative
preferred stock of Provident Companies, Inc.
In March 1996, Provident Life and Accident Insurance Company of America and
Provident Life Capital Corporation were dissolved and their respective assets
and liabilities were distributed to and assumed by Provident Companies, Inc.
Assets transferred to the Company had a carrying value of approximately $187.3
million. Liabilities assumed by the Company in connection with the transfer
totaled $205.0 million.
38
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
(CONTINUED FROM PRECEDING PAGE)
Benefits, Amortization
Claims, of Deferred
Net Losses and Policy Other
Investment Settlement Acquisition Operating Premiums
Segment Income (2) Expenses Costs Expenses Written
(in millions of dollars)
- ----------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Individual Life and Disability $ 589.8 $ 1,196.9 $ 62.8 $ 410.3 $ 1,207.9
Employee Benefits 130.3 573.1 9.2 238.1 280.0
Other Operations 634.6 588.1 2.4 92.0 64.3
------------ -------------- --------- ----------
Total $ 1,354.7 $ 2,358.1 $ 74.4 $ 740.4
============ ============== ========= ==========
Year Ended December 31, 1996 (1)
Individual Life and Disability $ 371.8 $ 680.9 $ 54.2 $ 174.5 $ 581.9
Employee Benefits 96.9 406.2 8.4 94.8 189.2
Other Operations 621.4 574.1 1.4 71.2 52.2
------------ -------------- --------- ----------
Total $ 1,090.1 $ 1,661.2 $ 64.0 $ 340.5
============ ============== ========= ==========
Year Ended December 31, 1995 (1)
Individual Life and Disability $ 341.6 $ 731.0 $ 57.4 $ 176.7 $ 583.9
Employee Benefits 90.4 394.1 12.0 82.0 178.0
Other Operations 789.3 779.5 1.6 145.0 145.3
------------ -------------- --------- ----------
Total $ 1,221.3 $ 1,904.6 $ 71.0 $ 403.7
============ ============== ========= ==========
(1) Segment information for 1996 and prior has been reclassified to conform to
current year reporting.
(2) Net investment income is allocated based upon segmentation. In other words,
as cash flow from operations and assigned capital is generated by a
segment, the cash is invested in assets with the appropriate
characteristics for that segment's liabilities and operating structure.
Thus, each segment has its own specifically identified assets and receives
the investment income generated by those assets.
39
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Future Other
Policy Policy
Deferred Benefits, Claims
Policy Losses, and
Acquisition Claims, and Unearned Benefits Premium
Segment Costs Loss Expenses Premiums Payable Revenue
(in millions of dollars)
- ----------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Individual Life and Disability $ 290.1 $ 8,351.3 $ 186.4 $ 299.0 $ 1,286.6
Employee Benefits 57.8 1,290.6 3.4 164.7 671.9
Other Operations 15.0 3,359.2 2.9 67.5 95.2
------------ -------------- --------- ---------- -------------
Total $ 362.9 $ 13,001.1 $ 192.7 $ 531.2 $ 2,053.7
============ ============== ========= ========== =============
Year Ended December 31, 1996 (1)
Individual Life and Disability $ 367.0 $ 4,229.5 $ 52.5 $ 178.8 $ 646.1
Employee Benefits 44.4 777.0 4.1 158.1 452.0
Other Operations 10.4 3,044.8 2.2 74.8 77.6
------------ -------------- --------- ---------- -------------
Total $ 421.8 $ 8,051.3 $ 58.8 $ 411.7 $ 1,175.7
============ ============== ========= ========== =============
Year Ended December 31, 1995 (1)
Individual Life and Disability $ 647.4
Employee Benefits 423.7
Other Operations 180.8
-------------
Total $ 1,251.9
=============
(1) Segment information for 1996 and prior has been reclassified to conform
to current year reporting.
(CONTINUED ON FOLLOWING PAGE)
40
SCHEDULE IV--REINSURANCE
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Percentage
Ceded Assumed Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
(in millions of dollars)
- -------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Life Insurance in Force $137,924.6 $6,184.7 $416.2 $132,156.1 0.3 %
========== ======== ====== ========== ======
Premium Income:
Individual Life and Disability $ 1,160.0 $ 40.6 $167.2 $ 1,286.6 13.0 %
Employee Benefits 710.7 39.8 1.0 671.9 0.1 %
Other Operations 279.0 190.0 6.2 95.2 6.5 %
---------- -------- ------ ----------
Total $ 2,149.7 $ 270.4 $174.4 $ 2,053.7
========== ======== ====== ==========
Year Ended December 31, 1996
Life Insurance in Force $102,227.5 $4,347.9 $437.0 $ 98,316.6 0.4 %
========== ======== ====== ========== ======
Premium Income: (1)
Individual Life and Disability $ 659.0 $ 48.2 $ 35.3 $ 646.1 5.5 %
Employee Benefits 467.6 16.1 0.5 452.0 0.1 %
Other Operations 303.1 241.2 15.7 77.6 20.2 %
---------- -------- ------ ----------
Total $ 1,429.7 $ 305.5 $ 51.5 $ 1,175.7
========== ======== ====== ==========
Year Ended December 31, 1995
Life Insurance in Force $ 98,492.4 $4,258.5 $460.2 $ 94,694.1 0.5 %
========== ======== ====== ========== ======
Premium Income: (1)
Individual Life and Disability $ 658.3 $ 47.8 $ 36.9 $ 647.4 5.7 %
Employee Benefits 438.1 14.8 0.4 423.7 0.1 %
Other Operations 352.4 186.6 15.0 180.8 8.3 %
---------- -------- ------ ----------
Total $ 1,448.8 $ 249.2 $ 52.3 $ 1,251.9
========== ======== ====== ==========
(1) Premium income has been reclassified for 1996 and prior to conform to current year reporting.
41
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Additions Deductions for
Charged to Amounts Applied
Balance at Realized to Specific Loan Balance at
Beginning Investment at Time of Sale/ End of
Description of Period Losses Foreclosure Period
(in millions of dollars)
- --------------------------------------------------------------------------------------------------
Year Ended December 31, 1997
Mortgage loan loss reserve $ 1.0 $ - $ - $ 1.0
Real estate reserve $21.5 $7.6 $ 6.2 $22.9
Year Ended December 31, 1996
Mortgage loan loss reserve $12.0 $ - $11.0 $ 1.0
Real estate reserve $19.1 $2.4 $ - $21.5
Year Ended December 31, 1995
Mortgage loan loss reserve $49.0 $3.0 $40.0 $12.0
Real estate reserve $18.3 $0.8 $ - $19.1
42
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.
Date: March 26, 1998 PROVIDENT COMPANIES, INC.
(Registrant)
By: /s/ J. Harold Chandler
-----------------------------
J. Harold Chandler
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 26, 1998.
/s/ J. Harold Chandler
- -------------------------------------
J. Harold Chandler
Chairman, President and Chief Executive Officer
and a Director
(Principal Executive Officer)
/s/ Thomas R. Watjen /s/Ralph A. Rogers, Jr.
- --------------------- -----------------------------------
Thomas R. Watjen Ralph A. Rogers, Jr.
Vice Chairman, and Chief Senior Vice President and Treasurer
Financial Officer and a Director
Signature Title
--------- -----
*
_____________________________________________Director
WILLIAM L. ARMSTRONG
*
_____________________________________________Director
WILLIAM H. BOLINDER
(REMAINDER ON FOLLOWING PAGE)
43
(REMAINDER ON PRECEDING PAGE)
*
_____________________________________________Director
STEVEN M. GLUCKSTERN
*
_____________________________________________Director
CHARLOTTE M. HEFFNER
*
_____________________________________________Director
HUGH B. JACKS
*
_____________________________________________Director
WILLIAM B. JOHNSON
*
_____________________________________________Director
HUGH O. MACLELLAN, JR.
*
_____________________________________________Director
A.S. MACMILLAN
*
_____________________________________________Director
C. WILLIAM POLLARD
*
_____________________________________________Director
SCOTT L. PROBASCO, JR.
*
_____________________________________________Director
STEVEN S REINEMUND
*
_____________________________________________Director
BURTON E. SORENSEN
*By: /s/ Susan N. Roth For all of the Directors
-----------------------
Susan N. Roth
Attorney-in-Fact
44
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM 10-K
PROVIDENT COMPANIES, INC.
45
INDEX OF EXHIBITS
EXHIBIT PAGE
------- ----
(13) Portions of the Annual Report to Stockholders
for year ended December 31, 1997............................ 48
(21) Subsidiaries of the Company................................. 117
(23) Consent of Independent Auditors............................. 118
(24) Powers of Attorney.......................................... 121
All other Exhibits are incorporated by reference as explained in the list in
Item 14(a)(3).
46