SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended. . . . . . . . . . . . . . . ..March 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from. . . . . . . . . . . to. . . .. . . . . . .
Commission file number. . . . . . . . . . . . . . . . . . . . . . . 0-13591
PROVIDENT AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2214195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 DeKalb Pike, Norristown, Pennsylvania 19404
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (215) 279-2500
Former name, former address and former fiscal year, if changed
since last report: N/A
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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APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date: 8,616,331 shares of
common stock, par value $.10, outstanding as of May 10, 1996.
PROVIDENT AMERICAN CORPORATION
INDEX
Page No.
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Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Statements of Operations -
Three months ended March 31, 1996 and 1995. . . . . . 3
Condensed Consolidated Balance Sheets -
March 31, 1996 and December 31, 1995. . . . . . . . . 4
Condensed Consolidated Statements of Cash Flows -
Three months ended March 31, 1996 and 1995. . . . . . 5
Notes to Condensed Consolidated Financial Statements . . 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition. . . . . . . . . . 9
Part II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . 17
Exhibit Index . . . . . . . . . . . . . . . . . . . . . . . . . 18
SIGNATURE . . . . . . . . . . . . . . . . . . . . . . . . . . . 19
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Provident American Corporation and Subsidiaries
Condensed Consolidated Statements of Operations
(In thousands except per share data) 3 Months Ended March 31,
1996 1995
-------- --------------
Revenue:
Premiums: Accident and health.......................................... $ 11,658 $ 9,904
Less reinsurance ceded ...................................... (5,142) (4,123)
-------- --------
6,516 5,781
Life and annuity net of
reinsurance ceded of
$96 and $120 ............................................... 2,865 3,114
-------- --------
Total Premiums .............................................. 9,381 8,895
Net investment income ......................................................... 709 693
Realized gains on investments ................................................. 130 28
Other revenues ................................................................ 214 309
Litigation settlement, net of expenses ........................................ 22,400
-------- --------
Total revenue ............................................... 32,834 9,925
-------- --------
Benefits and expenses:
Death and other policy benefits:
Life ........................................................ 1,297 1,229
Accident and health net of
reinsurance ceded of $3,555
and $2,106 ................................................. 3,876 3,596
Annuity and other ........................................... 200 161
Increase in liability for
future policy benefits ............................. 2,078 1,196
Depreciation and amortization ........................................ 56 212
Taxes, licenses, and fees ............................................ 573 530
Commissions, net of ceding allowance
of $1,727 and $1,206 ....................................... 1,524 1,244
Other operating expenses ............................................. 2,584 2,287
Amortization of deferred policy
acquisition costs ........................................... 26 44
Policy acquisition costs deferred .................................... (191) (225)
-------- --------
Total benefits and expenses ................................. 12,023 10,274
-------- --------
Income (loss) before income taxes ............................................. 20,811 (349)
Provision for income taxes:
Current .............................................................. 5,350 18
Deferred ............................................................. 400
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Total income taxes .......................................... 5,750 18
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Net income (loss) ........................................... 15,061 (367)
Dividends on preferred stock .................................................. 83 83
Net income (loss) applicable -------- --------
to common stock .................................... $ 14,978 $ (450)
-------- --------
Income (loss) per share of common stock ..................... $ 1.49 $ (.05)
-------- --------
Common shares and equivalents used in
computing income (loss) per share .................................... 10,030 8,484
See notes to condensed consolidated financial statements.
Provident American Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars In Thousands) March 31, December 31,
1996 1995
-------- ------------
Assets
Investments:
Bonds, amortized cost $42,984 and $44,062 ........................... $ 42,373 $ 44,996
Real estate, at cost, less accumulated
depreciation of $140 and $134 ............................... 960 966
Policy loans ......................................................... 539 533
Other invested assets ................................................ 535 395
-------- --------
Total Investments .................................. 44,407 46,890
Cash and cash equivalents ..................................................... 1,632 2,162
Receivable from litigation settlement,
net of expenses ...................................................... 22,400
Accrued investment income ..................................................... 610 650
Premiums due and uncollected .................................................. 1,505 1,201
Amounts due from reinsurers ................................................... 8,635 10,191
Property and equipment, at cost, less
accumulated depreciation of $881
and $831 ............................................................. 3,429 3,479
Unamortized deferred policy acquisition costs ................................. 1,151 986
Other assets .................................................................. 1,777 1,592
-------- --------
Total Assets ....................................... $ 85,546 $ 67,151
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Liabilities and Stockholders' Equity
Future policy benefits:
Life ................................................................. 36,168 35,290
Annuities and other .................................................. 7,636 8,265
Policy claims ................................................................. 11,575 10,105
Unearned premiums ............................................................. 633 544
Premiums received in advance .................................................. 914 716
Amounts due to reinsurers ..................................................... 612 3,768
Accrued commissions and expenses .............................................. 2,570 1,893
Notes payable - bank .......................................................... 717 830
Current income taxes .......................................................... 5,385 36
Deferred income taxes ......................................................... 186 327
Other liabilities ............................................................. 1,580 1,953
-------- --------
Total Liabilities .................................. 67,976 63,727
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $1: authorized
5,000,000 shares:
Series A Cumulative Convertible, issued 580,250 ............. 580 580
Series B Cumulative Convertible, issued 426,250 ............. 426 426
Common stock, par value $.10: authorized
25,000,000 issued 8,659,881 in 1996
and 8,650,481 in 1995 ....................................... 866 865
Common stock, Class A, par value $.10:
Authorized 2,500,000, none issued
Additional paid-in capital .................................................... 10,259 10,227
Net unrealized appreciation (depreciation) of bonds ........................... (397) 467
Retained earnings (deficit) ................................................... 6,156 (8,821)
-------- --------
17,890 3,744
Less common stock held in treasury,
at cost, 143,550 shares .............................................. (320) (320)
-------- --------
Total Stockholders' Equity ......................... 17,570 3,424
-------- --------
Total Liabilities & Stockholders' Equity ...................................... $ 85,546 $ 67,151
-------- --------
See notes to condensed consolidated financial statements.
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(In Thousands) 3 Months ended March 31,
1996 1995
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OPERATING ACTIVITIES
Net income (loss) ......................................... $ 15,061 $ (367)
Adjustments to reconcile net income (loss) to net cash from
operating activities:
Change in receivable from litigation .............. (22,400)
Change in future policy benefits
and claims ............................... 2,487 1,931
Change in premium due and uncollec-
ted, unearned premiums and
premiums received in advance ............. (17) (642)
Change in amounts due to/from
reinsurers ............................... (1,600) 1,612
Change in accrued investment income ............... 40 26
Change in accrued commissions and
expenses ................................. 677 (92)
Change in other assets, current
and deferred income taxes and
other liabilities ........................ 5,172 (135)
Depreciation and amortization ..................... 55 208
Deferred policy acquisition costs, net ............ (165) (181)
Net realized gain on investments .................. (130) (28)
-------- --------
Net cash from operating activities ......................... (820) 2,332
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INVESTING ACTIVITIES
Purchases of investments and loans
made .............................................. (7,625) (2,794)
Sale of investments ........................................ 8,602 4,587
Maturity of investments and loans .......................... 86 77
Acquisition of property and equipment ...................... (76)
Decrease in loan receivable ................................ 19 54
-------- --------
Net cash from investing activities ......................... 1,082 1,848
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FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds ....................... 173 333
Withdrawals from contractholder
deposit funds ..................................... (802) (456)
Issuance of common stock ................................... 33
Dividends paid on preferred stock .......................... (83) (83)
Proceeds from note payable - bank .......................... 18
Repayment of note payable - bank ........................... (113) (112)
-------- --------
Net cash from financing activities ......................... (792) (300)
-------- --------
Increase (decrease) in cash
and cash equivalents .............................. (530) 3,880
Cash and cash equivalents,
beginning of period ............................... 2,162 2,310
-------- --------
Cash and cash equivalents,
end of period ..................................... $ 1,632 $ 6,190
-------- --------
Interest paid ....................................................... $ 19 $ 27
Income tax paid ..................................................... $ 1 $
See notes to condensed consolidated financial statements.
Provident American Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands)
(1) General
The condensed consolidated financial statements included herein have
been prepared by Provident American Corporation (the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and reflect all adjustments which, in the opinion of the Company, are necessary
to present fairly results for the interim periods. Certain financial information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the accompanying disclosures are adequate to make the information presented
not misleading. Results of operations for the three-month period ended March 31,
1996 are not necessarily indicative of the results that may be expected for the
year ending December 31, 1996.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
The Company is a Pennsylvania corporation which was organized in 1982
and is regulated as an insurance holding company by the states in which its
principal insurance subsidiary, Provident Indemnity Life Insurance Company
("PILIC"), a Pennsylvania stock life insurance company, is licensed.
(2) Acquisitions
On November 30, 1995, the Company entered into an agreement to acquire
all of the outstanding common stock of Union Benefit Life Insurance Company
("UBLIC") for an amount equal to its adjusted capital and surplus, $500 in cash,
plus the issuance of 100,000 shares of the Company's common stock. The shares to
be issued are not currently registered securities and will have trading
restrictions attached. At the time of the closing, UBLIC will not retain or
operate any insurance business. Concurrently, the Company, UBLIC and PILIC
entered into an agreement for the purchase and sale of the UBLIC business with
Life and Health Insurance Company of America, a Pennsylvania insurer ("LHI"),
pursuant to which all of the insurance business of UBLIC is to be purchased by
LHI immediately prior to or concurrently with the purchase of the UBLIC stock by
PILIC. The purchase price payable by LHI to UBLIC for the purchase of the UBLIC
business is $1,800. These transactions are subject to the approval of the
Pennsylvania Insurance Department and are expected to be completed during April
1996. UBLIC is licensed to transact life, accident and health insurance in forty
(40) states and the District of Columbia. After the closing, it is anticipated
that UBLIC will engage in the sale of life, accident and health insurance
business, subject to approval by the Pennsylvania Insurance Department and the
availability of adequate capital and surplus. This transaction, which will be
accounted for as a purchase, is not expected to have a material effect on the
Company's consolidated results of operations, total assets or stockholders'
equity.
On April 18, 1996, the Company announced that it had terminated
negotiations with the principals of Residential Healthcare, Inc. t/a Medical
Resources, Ltd. ("Medical Resources") for the purchase of all of the outstanding
capital stock of Medical Resources and a portion of two affiliated companies,
Coastal Services, Eastern, Inc. and National Hospital Network, Inc.
(collectively the "Medical Resources Acquisitions"), pursuant to the conditions
of a letter of intent executed by the parties in August 1995.
PILIC, through its subsidiary, Montgomery Management Corporation
("Montgomery"), continues to own a 25% interest in the issued and outstanding
shares of Coastal Services, Eastern, Inc. ("CSE").
As a result of the discontinuance of negotiations relative to the
Medical Resources Acquisitions and its attendant business, the Company
discontinued further negotiations with NationsCredit Commercial Corporation
relative to the commitment of NationsCredit for financing in the approximate
amount of $14.5 million in connection with the Medical Resources Acquisitions.
In addition, effective in April 1996, PILIC ceased utilizing CSE for
the provision of administrative services with respect to certain specified
health insurance business of PILIC, and administration of such business was
recaptured and will be continued by PILIC.
(3) Litigation Settlement
Effective as of February 12, 1996, the Loewen Group, Inc. and Loewen
Group International, Inc. (collectively "Loewen") agreed to settle certain
litigation with the Company by agreeing to pay on April 1, 1996 $3 million in
cash and to issue to the Company 718,519 shares of the common stock of Loewen to
compensate the Company for damages sustained. The settlement amounts to
approximately $14.6 million which is net of approximately $7.8 million of income
taxes and $7.6 million of counsel fees and costs. Loewen is also required to use
its best efforts to cause the 718,519 shares to be registered under the
Securities Act of 1933. The value of each Loewen share is $27.00 and to the
extent that the value of each share is less that $27.00 at the end of a
determination period Loewen has agreed to pay to the Company cash
or additional shares of Loewen common stock as shall be equal to the difference
between $27.00 per share and the then NASDAQ market price.
(4) Income Taxes
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Prior to 1996,
the Company established a valuation allowance (approximately $2,800 at December
31, 1995) for deferred tax assets because of reasonable doubt as to their
realization.
During the first quarter of 1996, the Company reduced the valuation
allowance to reflect the deferred tax assets utilized in 1996 to reduce current
income taxes (approximately $1.1 million) and to recognize a deferred tax asset
of approximately $.9 million. The recognized deferred tax asset is based upon
expected utilization of certain net operating loss carryforwards and reversal of
certain temporary differences and has been offset against the required deferred
tax liability at March 31, 1996. The remaining valuation allowance at March 31,
1996 amounts to approximately $.8 million. The Company will continue to review
this valuation allowance and make adjustments as appropriate.
(5) Earnings (loss) per share of common stock
Primary earnings (loss) per share has been computed by dividing net
income (loss) applicable to common stock, by the weighted average number of
common shares and equivalents outstanding. Common share equivalents included in
the computation represent shares issuable upon assumed exercise of stock options
which would have a dilutive effect in periods where there are earnings.
Equivalents were anti-dilutive in 1995.
There is no significant difference between earnings per share on a
primary and a fully diluted basis since the assumed conversion of the
outstanding convertible preferred stock is anti-dilutive.
(6) Reclassification
Certain prior year amounts have been reclassified to conform with the
current presentation.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
The Company's principal business consists of the underwriting and
administration of life, annuities and accident and health insurance policies.
The insurance business is operated through the Company's wholly-owned
subsidiary, PILIC.
The Company is continuing the process of shifting its healthcare
insurance business to managed care plans. The initial step in this process was
to "outsource" the policy and claims administration functions. In addition to
providing improved operating efficiencies, the new administration system is
expected to provide claim cost savings. This important first step in the
evolution to a managed care environment was implemented at the end of 1994. The
Company presently has several alliances with doctors and hospitals and during
1996 expects to expand this business by vigorously seeking additional alliances
with various doctor and hospital groups in the states where the Company is
licensed to do business. The formation of these alliances with favorable fee
schedules and a reputation for high quality medical care is allowing the Company
to develop attractive new small group health products and recruit high caliber
distributors for this market. These health products will be competitively priced
flexible managed care alternatives to the Blue Cross/Blue Shield and various
Health Maintenance Organization (HMO) products.
The Company has devoted considerable marketing efforts to the
development and sale of pre-need life insurance policies to prefund the purchase
of a funeral and its companion product, the Final Expense Policy. This whole
life final expense plan includes a Retirement Deposit Fund Rider, is targeted at
a younger senior citizen and continues to expand the Company's funeral insurance
business. The market for pre-need life insurance policies and other insurance
and savings products for senior citizens has been expanding since the early
1980's, and the Company believes that the market will continue to expand,
sometimes rapidly, in the 1990's and beyond. Thus, one of the Company's major
business efforts has been concentrated on the development and sale of life
insurance policies and other products appropriate for senior citizens in this
market by the use of captive agents, independent agents and brokers and direct
mail.
Since 1989, the Company has made a significant investment in the
development of its pre-need life insurance business. Cumulative losses to date
have approximated $9.0 million including substantial market and product
development costs, as well as policy acquisition costs, none of which have been
deferred. The pre-need business is not expected to be profitable in the
immediate future as the Company's lapse and mortality experience continue to be
higher than originally anticipated. Premium growth has been reduced due to the
product and marketing program refinements that have been made to achieve
appropriate profitability.
The Company has entered into agreements pursuant to which options to
purchase shares of the Company's common stock will be granted to various agents
licensed by PILIC as they achieve certain production quotas and performance
levels. The Company believes the granting of options to purchase its common
stock will provide an incentive for its agents in the production of premiums
from the sale of pre-need insurance products in the future.
Results of Operations
During the three months ended March 31, 1996, premium revenues were
$9.4 million compared to $8.9 million for the three months ended March 31, 1995.
Accident and health premium increased $.7 million, to $6.5 million, group life
premium remained steady at $.5 million and individual life insurance, consisting
primarily of pre-need and final expense business, decreased by $.3 million to
$2.8 million. Accident and health policy benefits represent 59.4% of accident
and health earned premium for the three months ended March 31, 1996 compared to
62.2% for the three months ended March 31, 1995. The reported loss ratio for the
year ended December 31, 1995 was 62.5%.
Net investment income remained steady at approximately $.7 million. The
average yield on investments owned has decreased from 6.7% at March 31, 1995 to
6.3% at March 31, 1996.
At March 31, 1996 and 1995, annualized accident and health premium
amounted to $43.8 million and $35.3 million, respectively, consisting of
approximately 23,000 and 16,000 certificate holders, respectively. The net
increase in annualized premium resulted from an increase in business of $7.9
million (consisting of new business amounting to approximately $31.5 million net
of lapses amounting to approximately $23.6 million) plus premium rate increases
of approximately $2.3 million.
The group accident and health insurance lapse ratios for the twelve
months ended March 31, 1996 and 1995 were 56.7% and 57.6%, respectively. The
group accident and health lapse ratios include small group medical plans which
by their nature have higher lapsation. The small group medical business amounts
to approximately 77% and 57%, respectively, of the group accident and health
business. The lapse ratios continue to reflect the results of continued premium
rate increases as well as the continuing trend away from traditional healthcare
insurance to managed care plans. The Company is continuing the process of
shifting its healthcare insurance business to managed care plans. In order to
further reduce the lapse ratio, the Company continues to follow the practice of
pooling claim experience for re-rating of all cases with less than 25
participants. In addition, the Company has a conservation program which, as part
of the renewal process, offers alternative types of insurance products. While
some policy-holders have switched to less expensive insurance plans, the Company
does not believe the plans are less profitable.
The individual life insurance lapse ratios on an annualized basis for
the three months ended March 31, 1996 and 1995 were 12.7% and 8.7%,
respectively. The higher 1996 lapse ratio results primarily from an increase in
the non-renewal of final expense policies.
Operating expenses, including commissions, depreciation and
amortization and other operating expenses, amounted to $4.1 million and $3.7
million for the three months ended March 31, 1996 and 1995, respectively. Such
expenses for the three months ended March 31, 1996 and 1995 are net of ceding
commissions on reinsurance agreements of approximately $1.7 million and $1.2
million, respectively and represent approximately 40.3% and 37.7%, respectively,
of earned premium before reinsurance ceded. The percentage increase in 1996
expenses results primarily from increased first year commissions on the small
group medical business. The present level of operating expenses anticipates a
significant increase in future business volume.
Net income applicable to common stock for the three months ended March
31, 1996, was a gain of $15.0 million ($1.49 per share) compared to a loss of
$450 thousand ($.05 per share) for the three months ended March 31, 1995. The
three months ended March 31, 1996 includes a litigation settlement of $14.6
million ($1.46 per share) net of estimated income taxes of approximately $7.8
million and counsel fees and costs of approximately $7.6 million.
Liquidity and Capital Resources
A major objective of the Company is to continue to strengthen its
financial position with sufficient liquidity to fund growth and fulfill
statutory requirements. Liquidity in the insurance business generally relates to
the insurer's ability to meet all cash requirements with funds generated from
the cash flow of normal operations.
The primary sources of cash are premiums and investment income. The
primary uses of cash are operating costs and benefit payments to policyholders.
Cash flow from operations is transferred to the investment portfolio where it is
available for future cash needs. The Company anticipates that it will continue
to fund surrenders and benefit payments through cash flow of normal operations,
scheduled investment maturities, interest income and the liquidation of
short-term investments.
Effective as of February 12, 1996, the Loewen Group, Inc. and Loewen
Group International, Inc. (collectively "Loewen") agreed to settle certain
litigation with the Company by agreeing to pay on April 1, 1996 $3 million in
cash and to issue to the Company 718,519 shares of the common stock of Loewen to
compensate the Company for damages sustained. The settlement amounts to
approximately $14.6 million which is net of approximately $7.8 million of income
taxes and $7.6 million of counsel fees and costs. Loewen is also required to use
its best efforts to cause the 718,519 shares to be registered under the
Securities Act of 1933. The value of each Loewen share is $27.00 and to the
extent that the value of each share is less that $27.00 at the end of a
determination period Loewen has agreed to pay to the Company cash or additional
shares of Loewen common stock as shall be equal to the difference between $27.00
per share and the then NASDAQ market price.
For the three months ended March 31, 1996, total cash and investments
decreased by approximately $3.0 million, of which approximately $.8 million was
used by operating activities approximately $1.5 million as a result of the
change in the aggregate market value of debt securities, $.8 million of
withdrawals from deposit funds, and approximately $.1 million used to pay
dividends on preferred stock; cash and investments increased by approximately
$.2 million of deposit funds received and interest credited thereon; and $.1
million was provided from other sources. The decrease in amounts due from
reinsurers results primarily from a reduction in amounts due under a life
reinsurance agreement resulting from the collection of a ceding allowance and
recapture of the reinsurance ceded offset by an increase in the backlog of
policy claims. The decrease in amounts due to reinsurers results primarily from
the payment of reinsurance premiums accrued at December 31, 1995. The increase
in future policy benefits results primarily from the continuing sales of new
business and renewal of existing policies. The liability for future policy
benefits of annuities decreased because of surrenders of deposit administration
group annuities. The increase in the liabilities for policy claims results from
an increase in the number of unprocessed claims. The liability for current
income taxes results primarily from the significant increase in operating
results primarily from the litigation settlement. The decrease in deferred
income taxes results from a reduction in the prior year's valuation allowance
for deferred tax assets, the tax effect of the increase in the amount of net
unrealized losses on investments classified as "available for sale" offset by an
increase in deferred tax liabilities. Accrued commissions and expenses increased
primarily as a result of the timing of when payments, for such expenses, are
made. Other liabilities decreased primarily from a reduction in the net
liability to several insurance carriers for premium received, less claims paid,
on limited self funded business by Montgomery as Managing General Underwriter.
PILIC has approximately $3.6 million of deposit administration group
annuities which may be surrendered by contractholders. Practically all these
contracts are subject to a 5% surrender charge, a six month waiting period, a
maximum withdrawal of $50 thousand per month and reduction to 3% in the amount
of interest which is credited during the termination phase. During the three
months ended March 31, 1996 and 1995 and for the year ended December 31, 1995
group annuity surrenders amounted to approximately $647, $350 and $1,100,
respectively. Surrender benefits on all other insurance products over the past
several years have not been significant and are not expected to be in the
future. The pre-need and final expense products presently being sold are
relatively small and do not accumulate significant surrender benefits.
The Company has classified all of its debt securities as "available for
sale" and accordingly, at December 31, 1995 recorded as a separate component of
stockholders equity an unrealized gain amounting to approximately $467, net of
approximately $327 applicable to deferred federal income taxes and
approximately $140 applicable to life future policy benefits. At March 31, 1996,
the Company recorded an unrealized loss of approximately $397, net of
approximately $214 applicable to deferred federal income taxes. The net effect
on shareholders' equity as a result of this fair market value accounting method
was to decrease shareholders' equity by approximately $.9 million for the three
months ended March 31, 1996. The cumulative change in aggregate fair market
values is a direct result of the overall change in interest rates.
Management believes, under its present assessment of the Company's
insurance operations, that the Company has sufficient liquidity and capital to
meet the Company's short-term and long-term financial commitments. At March 31,
1996, the Company had shareholders' equity of $17.3 million with total assets of
$85.5 million. Total assets included cash and investments of $46.0 million which
consisted of $42.4 million in bonds issued by the U.S. Government or government
agencies, public utilities and other corporations, $2.0 million invested in
policy loans, real estate and other invested assets and $1.6 million in cash and
cash equivalents. The market value of cash and investments was approximately
$46.0 million at March 31, 1996. The $42.4 million of bonds are investment grade
securities ranging in maturity from one to twenty-nine years.
The Company and its subsidiaries historically have not and currently do
not invest in high yield debt instruments, defined as securities below
investment grade with interest rates or yields significantly above market
rates.
Because of the long-term nature of its life insurance and annuity
contracts, the Company expects to hold its bonds to maturity. However, all bonds
are considered to be "available for sale" and in order to maximize investment
income, Company policy presently is to purchase medium-term U.S. Treasury and
government agency bonds rather than purchasing short-term securities which would
provide for anticipated maturities up to 10 years. This policy necessitates
periodic sales of securities prior to maturity when cash flow from operations is
not sufficient to meet current obligations.
The sale of life insurance policies requires substantial capital due to
acquisition costs incurred in the initial year of issuance and the necessity to
maintain sufficient surplus levels for regulatory purposes. In general, the
Company anticipates meeting these demands from premiums on new business,
investment income and income from current business in force.
Under the terms of a Quota Share Reinsurance Agreement, PILIC presently
cedes 47.5% of the liability on the first $85,000 of claims per person, per
calendar year of its group accident and health insurance business. PILIC
receives a 31.5% ceding commission except on its small group medical business,
which for the three months ended March 31, 1996 and 1995 amounts to
approximately 77% and 57%, respectively, of the Company's group accident and
health business, it receives ceding commissions of 41.5% on first year business
and 26.5% on renewal business. Effective January 1, 1996, the ceding allowance
was increased by 4% for both new and renewal business. For the three months
ended March 31, 1996 and 1995 the combined ceding commissions amounted to
approximately 38.8% and 31.6%, respectively. This agreement is unlimited as to
duration, however, it may be terminated on October 1, 1996 or any October 1
thereafter by either party giving 120 days notice. In addition, the Company
generally assumes 30% (up to $150 per individual) of the liability on its
limited self funded business, which consists generally of policies issued to
limit the claims expenses of employers that self-insure group medical benefits
with respect to any individual employee and in the aggregate.
Unfavorable economic conditions have contributed to an increase in the
number of insurance companies that are under regulatory supervision. This is
expected to result in an increase in mandatory assessments by state guaranty
funds of solvent insurance companies to cover losses to policyholders of
insolvent or rehabilitated companies. Although PILIC is not able to reasonably
estimate the potential effect on it of any such assessments or voluntary
payments, such amounts are not expected to have a material adverse effect on
PILIC's financial condition. Guaranty fund assessments charged against
operations for the three months ended March 31, 1996 and 1995 and the year ended
December 31, 1995 amounted to $2, $36 and $105, respectively, and are net of
approximately $5, $4 and $68, respectively, which is estimated to be allowable
as a credit against future state premium taxes.
The statutory capital and surplus of PILIC was approximately $8.6
million at March 31, 1996 which includes the benefits of certain permitted
practices. The minimum statutory capital and surplus requirement for life
insurance companies domiciled in Pennsylvania is currently $1,650.
Administrative rules and legal restrictions of state insurance departments
presently prevent payment of dividends by PILIC to its parent company without
regulatory approval. At December 31, 1995, PILIC calculated its "Risk Based
Capital" utilizing a formula required by the National Association of Insurance
Commissioners. The results of this computation indicate PILIC's adjusted
capital, amounting to approximately $6.7 million, exceeds the amount required by
approximately $1.5 million. In concept, Risk Based Capital standards are
designed to measure the acceptable amounts of capital an insurer should have
based on inherent and specific risks of the insurers business. This formula is
expected to be the primary measurement as to the adequacy of total capital and
surplus of life insurance companies.
On November 30, 1995, the Company entered into an agreement to acquire
all of the outstanding common stock of Union Benefit Life Insurance Company
("UBLIC") for an amount equal to its adjusted capital and surplus, $500 in cash,
plus the issuance of 100,000 shares of the Company's common stock. The shares to
be issued are not currently registered securities and will have trading
restrictions attached. At the time of the closing, UBLIC will not retain or
operate any insurance business. Concurrently, the Company, UBLIC and PILIC
entered into an agreement for the purchase and sale of the UBLIC business with
Life and Health Insurance Company of America, a Pennsylvania insurer ("LHI"),
pursuant to which all of the insurance business of UBLIC is to be purchased by
LHI immediately prior to or concurrently with the purchase of the UBLIC stock by
PILIC. The purchase price payable by LHI to UBLIC for the purchase of the UBLIC
business is $1,800. These transactions are subject to the approval of the
Pennsylvania Insurance Department and are expected to be completed during April
1996. UBLIC is licensed to transact life, accident and health insurance in forty
(40) states and the District of Columbia. After the closing, it is anticipated
that UBLIC will engage in the sale of life, accident and health insurance
business, subject to approval by the Pennsylvania Insurance Department and the
availability of adequate capital and surplus. This transaction, which will be
accounted for as a purchase, is not expected to have a material effect on the
Company's consolidated results of operations, total assets or stockholders'
equity.
On April 18, 1996, the Company announced that it had terminated
negotiations with the principals of Residential Healthcare, Inc. t/a Medical
Resources, Ltd. ("Medical Resources") for the purchase of all of the outstanding
capital stock of Medical Resources and a portion of two affiliated companies,
Coastal Services, Eastern, Inc. and National Hospital Network, Inc.
(collectively the "Medical Resources Acquisitions"), pursuant to the conditions
of a letter of intent executed by the parties in August 1995.
PILIC, through its subsidiary, Montgomery Management Corporation,
continues to own a 25% interest in the issued and outstanding shares of Coastal
Services, Eastern, Inc. ("CSE").
As a result of the discontinuance of negotiations relative to the
Medical Resources Acquisitions and its attendant business, the Company
discontinued further negotiations with NationsCredit Commercial Corporation
relative to the commitment of NationsCredit for financing in the approximate
amount of $14.5 million in connection with the Medical Resources Acquisitions.
In addition, effective in April 1996, PILIC ceased utilizing CSE for
the provision of administrative services with respect to certain specified
health insurance business of PILIC, and administration of such business was
recaptured and will be continued by PILIC.
Ratio of Premiums Written to Capital and Surplus
Certain industry guidelines, including those of the National
Association of Insurance Commissioners, suggest that a life insurer's ratio of
annual net premiums written to statutory capital and surplus should not exceed 3
to 1 for the accident and health segment of the industry, which currently
accounts for approximately 70% of the Company's business and between 7 and 10 to
1 for annuities and ordinary life, which currently accounts for approximately
25% of the Company's business. For the year ended December 31, 1995, PILIC's
overall ratio was 5.9 to 1. For the three months ended March 31, 1996 the ratio
on an annualized basis was 4.4 to 1. Although PILIC's statutory surplus is small
compared to its competitors, business in the areas in which it is focusing
(pre-need funeral insurance and accident and health insurance) will not be
materially adversely affected by its ratio of net premium written to statutory
capital and surplus because those products do not cause a material strain on
surplus due to the single premium basis on which a majority of such policies are
sold. However, the Company believes, the primary measurement as to the adequacy
of capital and surplus will be determined on the basis of the "Risk Based
Capital" formula of the National Association of Insurance Commissioners and
adopted in Pennsylvania and a number of other states where the Insurance
Subsidiaries do business.
Other
Capital expenditures in 1996 are not expected to be significant.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In April of 1992, the Company and PILIC commenced an action in the
United States District Court for the Eastern District of Pennsylvania (Civil
Action No. CV92-1964) against The Loewen Group, Inc. and Loewen Group
International, Inc. (collectively "Loewen") for breach of contract, fraud,
conspiracy, negligence, malicious interference with contractual relations, and
breach of the duty of good faith, and seeking compensatory damages in the amount
of $58.8 million dollars, together with punitive damages against Loewen. This
litigation was settled, effective as of February 12, 1996, pursuant to the terms
and conditions of a Settlement Agreement and Mutual General Release ("Settlement
Agreement"). The Settlement Agreement provides that Loewen shall make a cash
payment in the amount of $3,000,000 on April 1, 1996, plus issue stock
certificates representing One Million (1,000,000) shares of the common stock,
without par value, of The Loewen Group, Inc. ("Settlement Shares"), allocated as
follows: (a) $500,000 and 77,500 Settlement Shares to compensate the Company for
damages sustained through its loss of goodwill in the insurance industry as a
result of litigation; (b) $500,000 and 82,500 Settlement Shares to compensate
the Company for damages sustained through the loss in the value of the shares of
the common stock of PILIC as a result of the litigation; (c) 279,260 Settlement
Shares to PILIC to compensate it for damages sustained as a result of the loss
of unrealized profits; (d) 123,630 Settlement Shares to PILIC in payment of the
overhead, administration and management expenses incurred by PILIC during the
period May 1, 1991 through January 31, 1992; (e) $2,000,000 and 155,629
Settlement Shares to PILIC to compensate PILIC for damages sustained as a result
of the claimed tortious conduct of Loewen; and (f) the balance of the Settlement
Shares allocated to counsel fees and costs. Pursuant to the Settlement
Agreement, Loewen is required to use its best efforts to cause the Settlement
Shares to be registered under the Securities Act of 1933, as amended, in
accordance with the terms and conditions of the Settlement Agreement. For the
purposes of the Settlement Agreement, the value of a Settlement Share is $27.00,
and, to the extent that the value of a Settlement Share, as of the end of the
Determination Period (as such term is described in the Settlement Agreement) is
less than $27.00 per share, Loewen has agreed to pay to Company or PILIC, as the
case may be, cash or additional shares of Loewen common stock, without par
value, as shall be equal to the difference between $27.00 per share and the then
NASDAQ market price of a share of Loewen common stock. The settlement is subject
to other terms, conditions or restrictions as are set forth in the Settlement
Agreements.
Item 2. Change in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(11) Earnings Per Share Computation
(27) Financial Data Schedule
(b) Reports on Form 8-K:
April 18, 1996 - Item 5 - Announcing the termination of negotiations
for the purchase of all of the outstanding capital stock of Residential
Healthcare Inc., trading as Medical Resources, Ltd. and a portion of two
affiliated businesses.
No other reports of Form 8-K were filed during the quarter ended March
31, 1996.
Signature
Pursuant to the requirements 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.
Provident American Corporation
By: /s/Anthony R. Verdi
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Anthony R. Verdi, Treasurer and
Chief Financial Officer
Date: May 13, 1996