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. . . . . . . . . . .September 30, 1997
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: (610) 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
--- ---
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: 10,109,160 shares
of common stock, par value $.10, outstanding as of November 7, 1997.
Page 1 of 17 Pages
PROVIDENT AMERICAN CORPORATION
INDEX
Page No.
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition 10
Part II. OTHER INFORMATION
Items 1- 5 16
Reports on Form 8-K 16
SIGNATURES 17
Exhibit 11
Exhibit 27
Page 2 of 17 Pages
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Provident American Corporation and Subsidiaries
Consolidated Statements of Operations
(UNAUDITED)
(Dollars in thousands except per share data) 3 Months Ended September 30, 9 Months Ended September 30
1997 1996 1997 1996
------- ------- ------- -------
Revenue:
Premium: Accident and health, gross $21,338 $15,259 $59,676 $40,623
Life and annuity, gross 2,316 2,759 7,162 8,615
------- ------- ------- -------
Total gross premium 23,654 18,018 66,838 49,238
------- ------- ------- -------
Accident and health reinsurance ceded 9,863 6,899 27,614 18,115
Life and annuity reinsurance ceded 138 88 416 (2,134)
------- ------- ------- -------
Total reinsurance ceded 10,001 6,987 28,030 15,981
------- ------- ------- -------
Net premium 13,653 11,031 38,808 33,257
Net investment income 853 832 2,619 2,312
Realized gains (losses) on investments (44) 745 886 774
Other revenue 1,068 434 2,224 886
Litigation settlement, net of expenses 22,400
------- ------- ------- -------
Total revenue 15,530 13,042 44,537 59,629
------- ------- ------- -------
Benefits and expenses:
Death and other policy benefits:
Life 1,485 964 4,507 3,464
Accident and health, net of reinsurance 8,269 4,401 27,275 12,884
Annuity and other 156 231 545 407
Increase in liability for future policy benefits 559 1,166 1,579 6,549
Depreciation and amortization of goodwill 143 115 439 260
Commissions, net of ceding allowance and
deferred acquisition costs 2,039 1,510 5,278 6,400
Other operating expenses, net of ceding allowance
and deferred acquisition costs 3,950 3,300 11,400 8,561
Amortization of deferred policy acquisition costs 487 118 3,506 170
------- ------- ------- -------
Total benefits and expenses 17,088 11,805 54,529 38,695
------- ------- ------- -------
Income (loss) before income taxes (1,558) 1,237 (9,992) 20,934
Provision for income taxes (benefit):
Current (994) 1,597 (4,390) 6,497
Deferred 448 (1,143) 282 (743)
------- ------- ------- -------
Total income taxes (546) 454 (4,108) 5,754
------- ------- ------- -------
Net income (loss) (1,012) 783 (5,994) 15,180
Dividends on preferred stock 37 37 111 157
------- ------- ------- -------
Net income (loss) applicable to common stock ($1,049) $746 ($5,995) $15,023
------- ------- ------- -------
Income (loss) per share of common stock ($0.10) $0.07 ($0.60) $1.38
------- ------- ------- -------
Common shares and equivalents used in
computing income (loss) per share 10,072 11,279 10,069 10,889
See notes to condensed financial statements.
Page 3 of 17 Pages
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets
UNAUDITED
(Dollars in thousands) September 30, December 31,
1997 1996
---- ----
Assets
Investments:
Bonds, amortized cost $50,026 and $55,258 $50,065 $ 54,985
Equity securities, cost $448 and $3,901 253 4,930
Real estate, at cost, less accumulated depreciation of $176 and $158 924 942
Policy loans 517 526
Other invested assets 547 559
-------- -------
Total Investments 52,306 61,942
Cash and cash equivalents 7,244 6,218
Premium due and uncollected 1,733 1,318
Amounts due from reinsurers 12,519 9,240
Loans receivable from officer, director and stockholder 1,480 461
Accrued investment income 728 836
Federal income taxes recoverable 3,543 90
Property and equipment, at cost, less accumulated depreciation of $1,552 and $1,261 6,794 4,711
Deferred tax asset 191 154
Unamortized deferred policy acquisition costs 6,111 3,140
Goodwill 3,005 3,166
Other assets 1,515 1,778
-------- -------
Total Assets $97,169 $93,054
======== =======
Liabilities And Stockholders' Equity
Future policy benefits:
Life 40,120 38,459
Annuity and other 5,650 6,354
Policy claims 22,783 15,438
Premium received in advance and unearned 2,719 2,348
Amounts due to reinsurers 1,871 705
Accrued commissions and expenses 4,877 4,179
Notes payable 53 298
Current income taxes 463
Other liabilities 3,534 2,757
-------- -------
Total Liabilities 81,607 71,001
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, none issued
Common stock, par value $.10,; authorized 25,000,000, Issued 10,109,610 and 10,078,710 1,011 1,008
Common stock, Class A, par value $.10 authorized 2,500,000, none issued
Additional paid-in capital 13,039 12,945
Net unrealized appreciation (depreciation) of bonds 25 (177)
Net unrealized appreciation (depreciation) of equity securities (127) 668
Retained earnings 1,110 7,105
-------- -------
15,638 22,129
Less common stock held in treasury, at cost, 36,300 shares (76) (76)
-------- -------
Total Stockholders' Equity 15,562 22,053
-------- -------
Total Liabilities and Stockholders' Equity $ 97,169 $ 93,054
======== ========
See notes to condensed consolidated financial statements.
Page 4 of 17 Pages
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
UNAUDITED
9 Months Ended September 30,
(Dollars in thousands) 1997 1996
-------- --------
OPERATING ACTIVITIES
Net income (loss) $ (5,884) $ 15,180
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Equity securities received from litigation settlement (19,400)
Change in future policy benefits and policy claims 8,891 7,132
Change in premium due and uncollected and
premium received in advance and unearned (44) 903
Change in amounts due to/from reinsurers (2,113) (748)
Change in accrued investment income 108 (81)
Change in accrued commissions and expenses 698 1,476
Change in other assets, current and deferred
income taxes and other liabilities (2,594) 517
Depreciation and amortization 479 277
Deferred policy acquisition costs, net (2,971) (1,129)
Net realized gain on investments (886) (774)
-------- --------
Net cash from operating activities (4,316) 3,353
-------- --------
INVESTING ACTIVITIES
Purchases of bonds (12,105) (18,199)
Purchases of equity securities and other investments (1,018) (205)
Sale of bonds 15,466 16,719
Sale of equity securities 5,134 14,395
Maturity of investments and loans 2,105 513
Acquisition of property and equipment (2,373) (389)
Increase in loans receivable from officer, director and
stockholder (1,019) (454)
Acquisition of business, net of cash acquired (6,330)
-------- --------
Net cash from investing activities 6,190 6,050
-------- --------
FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds 217 372
Withdrawals from contractholder deposit funds (806) (1,689)
Issuance of common stock 97 2,141
Dividends paid on preferred stock (111) (157)
Proceeds from note payable 78
Repayment of note payable (245) (463)
-------- --------
Net cash from financing activities (848) 282
-------- --------
Increase in cash and cash equivalents 1,026 9,685
Cash and cash equivalents, beginning of period 6,218 2,162
-------- --------
Cash and cash equivalents, end of period $ 7,244 $ 11,847
-------- --------
Supplemental disclosure of cash flow information:
Interest paid $ 5 $ 47
Income taxes paid (refunded), net $ (477) $ 4,826
See notes to condensed consolidated financial statement.
Page 5 of 17 Pages
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 nine-month period ended September 30, 1997, are not
necessarily indicative of the results that may be expected for the year ending
December 31, 1997.
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, 1996.
Certain prior year amounts have been reclassified to conform with the
current presentation.
The Company is a Pennsylvania corporation which was organized in 1982
and is regulated as an insurance holding company by the 42 states in which its
principal insurance subsidiaries, Provident Indemnity Life Insurance Company
("PILIC") and Provident American Life and Health Insurance Company ("PALHIC"),
both Pennsylvania stock life insurance companies, are licensed. The Company
markets and underwrites group life and accident and health coverages as well
as individual life insurance policies through independent agents and brokers.
The Company's major line of combined group life and health business is written
through several association groups and discretionary group trusts.
(2) Bonds and Marketable Securities at Fair Market Value
The Company has classified all of its debt and equity securities as
"available-for-sale" and accordingly, at September 30, 1997, the Company
recorded as a separate component of stockholders' equity an unrealized gain of
$39 on bonds net of $14 applicable to deferred federal income taxes and an
unrealized loss of $195 on equity securities, net of $68 applicable to
deferred federal income taxes. The net effect on stockholders' equity as a
result of this fair market value accounting method was to decrease
stockholders' equity by $102 at September 30, 1997. At December 31, 1996, the
Company recorded as a separate component of stockholders' equity an unrealized
gain amounting to approximately $756, net of $265 applicable to deferred
federal income taxes. The cumulative change in aggregate fair market values of
bonds is a direct result of the overall change in interest rates.
(3) Earnings (Loss) Per Share of Common Stock
Primary earnings (loss) per share has been computed by dividing net
income 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.
Page 6 of 17 Pages
(4) Reinsurance and Deferred Acquisition Cost Impact on Benefits and
Expenses
Accident and health policy benefits, commissions and other operating
expenses are net of the following ceded reinsurance and deferred acquisition
cost amounts:
3 Months Ended 9 Months Ended
September 30, September 30,
1997 1996 1997 1996
------- ------- ------- -------
Accident and health benefits
Gross before reinsurance ceded $16,076 $ 8,698 $53,023 $24,973
Less reinsurance ceded 7,807 4,297 25,748 12,089
------- ------- ------- -------
Net of reinsurance $ 8,269 $ 4,401 $27,275 $12,884
======= ======= ======= =======
Commissions
Gross before reinsurance ceded $ 4,944 $ 3,475 $13,584 $11,019
Less reinsurance ceded 1,880 1,270 5,315 3,583
Less deferred acquisition costs 1,025 695 2,991 1,036
------- ------- ------- -------
Net $ 2,039 $ 1,510 $ 5,278 $ 6,400
======= ======= ======= =======
Other operating expenses
Gross before reinsurance ceded $ 6,114 $ 4,410 $18,429 $11,213
Less reinsurance ceded 1,195 847 3,543 2,389
Less deferred acquisition costs 969 263 3,486 263
------- ------- ------- -------
Net $ 3,950 $ 3,300 $11,400 $ 8,561
======= ======= ======= =======
Page 7 of 17 Pages
(5) Loans Receivable from Officer, Director and Shareholder
During 1996 the Company made a loan of $300 to Mr. Clemens, Chairman
of the Board and Chief Executive Officer of the Company, collateralized by
100,000 shares of the Company's Common Stock owned by Mr. Clemens and
represented by a promissory note which is repayable, together with interest at
a rate of 5.33% per annum, on or before April 8, 1999. During the second
quarter of 1997, the Company increased the principal amount of the note to Mr.
Clemens by an additional $300, bringing the principal balance to $600.
Collateral was increased by an additional 20,000 shares of the Company's
Common Stock owned by Mr. Clemens. The entire principal balance and interest
is due and payable on April 8, 1999. The interest rate was 5.33% through April
7, 1997, and increased to 5.75% per annum thereafter. During the third quarter
of 1997, the Company made a loan of $250 to Mr. Clemens represented by a
promissory note which is repayable, together with interest at a rate of 5.75%
per annum, on or before December 15, 1997. Total loans to Mr. Clemens amounted
to $850 of principal and $35 accrued interest as of September 30, 1997.
During 1996 the Company made a loan of $141 to John T. Gillin, a
Director of the Company, collateralized by 15,000 shares of the Company's
Common Stock owned by Mr. Gillin and represented by a promissory note which
was repayable, together with interest at a rate of 8.5% per annum. During the
second quarter of 1997, the promissory note with Mr. Gillin was amended. The
principal amount was increased to $156 to include the accrued interest as of
June 30, 1997. Collateral was increased to include options to purchase 25,000
shares of the Company's Common Stock at a price of $8.75 owned by Mr. Gillin.
Interest is payable quarterly on September 30, 1997, December 31, 1997, March
31, 1998 and September 30, 1998. Commencing on July 31, 1998, for a period of
60 months, Mr. Gillin shall make equal payments of $3 to the Company
representing principal and interest. The loan to Mr. Gillin amounted to $156
of principal and $3 accrued interest as of September 30, 1997.
During the second quarter of 1997, the Company made a loan of $422 to
Richard E. Field, a consultant to and shareholder of the Company,
collateralized by Mr. Field's consulting agreement with the Company, and
represented by a promissory note which is repayable with interest at the prime
rate plus one percent and payable on demand. The loan to Mr. Field amounted to
$422 of principal and $14 accrued interest as of September 30, 1997.
(6) Accounting Standards Not Yet Adopted
In 1997 the Company will adopt the recently issued SFAS No. 128
"Earnings Per Share", establishing standards for computing and presenting
earnings per share (EPS). This Statement simplifies the previous standards for
computing earnings per share and replaces the presentation of primary EPS with
a presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement. Basic EPS excludes dilution
and is computed by dividing income available to common stockholders by the
weighted-average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised or converted into common stock
or resulted in the issuance of common stock that then shared in the earnings
of the entity. Diluted EPS is computed similarly to fully diluted EPS. This
Statement is effective for periods ending after December 15, 1997, including
interim periods; earlier application is not permitted. This statement requires
restatement of all prior-period EPS data presented. The effect of the
pronouncement on the financial statements has not been quantified.
Page 8 of 17 Pages
(7) Subsequent Events
On October 16, 1997 the Company and HealthPlan Services Corporation
(NYSE:HPS) entered into a 5 year agreement under which Provident will
outsource to HPS all of its current health insurance policy issuance, billing,
and claims, effective January 1, 1998. The arrangement will enhance customer
service for Provident's new and existing members under HPS's operation, the
nation's largest independent third party administrator. The Company's life and
stop loss operations are unaffected. The Company expects to benefit from a
reduction in G&A expense. HPS will charge the Company a fixed base service fee
plus a sliding scale variable percentage of premium for customer service and
claim processing. HPS will charge the Company a fixed amount per policy
submitted for underwriting services. The Company received $5.0 million from
HPS in the fourth quarter of 1997 as a business transfer cost for
transitioning the block and for providing various other services and
guarantees. The Company anticipates that restructuring charges of
approximately $2.5 million will be incurred in connection with the transition
which will be recognized in the quarter ending December 31, 1997.
(8) Investment Considerations
In analyzing whether to make, or continue, an investment in the
Company, investors should consider, among other factors, certain investment
considerations more particularly described in the Company's Annual Report on
Form 10-K for the year ended December 31, 1996, a copy of which can be
obtained from Anthony R. Verdi, Chief Financial Officer of Provident American
Corporation.
(9) Forward-looking Statements
The information contained in the Quarterly Report on form 10-Q for
the quarter ended September 30, 1997 contains forward-looking statements (as
such term is defined under Section 21E of the Securities Exchange Act of 1934
and the regulations thereunder), including without limitation, statements as
to trends, management's beliefs, expectations or opinions, which are based
upon a number of assumptions concerning future conditions that ultimately may
prove to be inaccurate.
Such forward-looking statements are subject to risks and
uncertainties and may be affected by various factors which may cause actual
results to differ materially from those in the forward-looking statements.
Certain of these risks, uncertainties and other factors, are discussed in the
Company's Annual Report on Form on 10-K for the year ended December 31, 1996.
(10) Legal Proceedings
PILIC and PAMCO have been named as defendants in the Doris Elaine
James and Elmer William James v. Provident Indemnity Life Insurance Company,
Provident American Corporation, and Mark Hunter Harrison, Superior Court,
Clark County, Georgia, No. SU97CV1893-3, which was filed September 26, 1997.
The complaint alleges that the failure to pay claims under a certain health
insurance policy issued by PILIC are part of a fraudulent scheme and
constitutes bad faith, and violations of the Georgia Racketeer Influenced and
Corrupt Organizations Act. Plaintiffs claim damages in excess of $30,000 for
medical expenses, and seek the imposition of unspecified additional damages.
Due to the recent filing of the litigation, PILIC and PAMCO have not reached a
conclusion as to the amount or likelihood of the assessment of damages in the
matter.
Page 9 of 17 Pages
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
For the three months ended September 30, 1997 (the "third quarter"),
the Company's Consolidated Statement of Operations was adversely impacted by
increased accident and health benefits expense. The Company's net loss
applicable to common stock for the third quarter was $1.0 million or $0.10 per
share compared to a net gain of $0.7 million ($0.07 per share) for the three
months ended September 30, 1996 (same quarter last year).
Accident and health gross premium was $21.3 million for the third
quarter compared to $15.3 million for the same quarter last year and accident
and health ceded premium was $9.9 million for the third quarter as compared to
$6.9 million for the same quarter last year. Both increases resulted from
increased new business related to one-life managed-care health insurance
products.
Life and annuity gross premium, consisting primarily of group life
and individual pre-need and final expense business was $2.3 million for the
third quarter, which, due to reduced sales volume, declined from $2.8 million
for the same quarter last year.
Net investment income was $0.9 million for the third quarter compared
to $0.8 million for the same quarter last year. The nominal increase related
to increased bond investments over the same quarter last year.
Other revenue was $1.1 million for the third quarter which increased
from $0.4 million from the same quarter last year primarily due to increased
fee income from the HealthQuest business.
Accident and health policy benefits net of reinsurance represented
72% of net accident and health earned premium for the third quarter compared
to 65% for the same quarter last year. The increase in the ratio was due to
the diminished effect of underwriting and pre-existing exclusion policy
provisions as the business sold during 1995 and 1996 ages. Policy benefits
tend to be lower during the first year a policy is inforce, while underwriting
and policy provisions tend to produce loss ratios that are lower than business
greater than one-year inforce.
Recent analysis of actual payment patterns indicated higher than
expected policy benefit expense for managed-care plans. This resulted
primarily from increased frequency of doctor visits coupled with more
procedures such as x-rays and lab work performed on an outpatient basis and a
greater differential between in- and out-of-network doctor and hospital
charges. The Company implemented more stringent underwriting in the second
quarter of 1997 and has begun implementing more aggressive price increases for
new and renewal business. The Company plans on implementing an enhanced
product design providing for greater penalties when policyholders utilize
doctors and hospitals outside the HealthCare COMPARE network in early 1998.
Although the Company believes that the combination of more aggressive
underwriting, rate action and enhanced product design will reduce policy
benefit expense, they will minimally impact results from operations during the
fourth quarter of 1997.
Increase in liability for future policy benefits of $0.6 million
declined from $1.2 million from the same quarter last year primarily due to
lower premium volume.
Commissions, net of ceding allowance and deferred acquisition costs
of $2.0 million for the third quarter increased from $1.5 million from the
same quarter last year due to growth in new business.
Page 10 of 17 Pages
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the third quarter of $4.0 million increased compared to
$3.3 million for the same quarter last year due to greater business volume.
Deferred costs represent policy issue, underwriting and certain marketing
costs.
Amortization of deferred policy acquisition costs for the third
quarter of $0.5 million increased from $0.1 million for the same quarter last
year as a result of amortization of policy acquisition costs relating to
managed-care products. Increased lapsation over current levels or future
unprofitability in managed care and certain life products could result in an
increase in the amortization rate of deferred acquisition costs ("DAC"), which
would adversely impact future earnings. Prior to the third quarter of 1996,
acquisition costs for all managed-care products were expensed as incurred.
For the nine months ended September 30, 1997 ("current year"), the
Company's Consolidated Statement of Operations was adversely impacted by
increased accident and health benefits expense and expensing certain policy
acquisition and product development costs. The Company's net loss applicable
to common stock for the current year was $6.0 million or $0.60 per share
compared to net income of $15.0 million or $1.38 per share for the nine months
ended September 30, 1996 ("prior year"). The Company's net loss in the current
year included approximately $2 million of accident and health policy benefits
expense net of reinsurance related to prior periods ($3 million pre-tax, net
of reinsurance), $1.3 million additional amortization of deferred policy
acquisition costs ($2 million pre-tax) and $0.3 million of costs related to
the start-up of a new individual-life product line ($0.5 million pre-tax). Net
income for the prior year also included a $16.6 million litigation settlement,
net of tax.
Accident and health gross premium was $59.7 million for the current
year compared to $40.6 million for the prior year and accident and health
ceded premium was $27.6 million for the current year as compared to $18.1
million for the prior year. The increases were the result of increased new
business from one-life managed-care health insurance product.
At September 30, 1997 and 1996, annualized accident and health
premium in force on small group and managed-care business amounted to $90.7
million and $65.0 million, respectively, consisting of approximately 85,100
and 59,400 covered lives, respectively. The $25.7 million net increase in
annualized premium resulted from new business issued of $58 million plus
premium rate increases less lapses. The Company's one life managed care
products, namely the "The Provident Solution" and HealthQuest products,
comprised 86% and 66% of annualized premium in force as of September 30, 1997
and 1996, respectively.
Life and annuity net premium, consisting primarily of group life and
individual pre-need and final expense business was $6.7 million for the
current year, which declined from $10.7 million for the prior year due to
reduced sales volume.
Net investment income was $2.6 million for the current year compared
to $2.3 million for the prior year. The increase in investment income related
to increased bond investments over the prior year. The gross average book
yield on bond investments, which accounted for 96% and 81% of total
investments at September 30, 1997 and 1996, respectively, decreased slightly
from 6.6% at September 30, 1996, to 6.4% at September 30, 1997. Realized gains
in the current year related primarily to the sale of Loewen stock acquired as
a result of litigation.
Page 11 of 17 Pages
Accident and health policy benefits represented 85% of accident and
health earned premium for the current year compared to 57% for the prior year.
Current year accident and health policy benefits included a $3.0 million
increase to prior year reserves (net of reinsurance) due to management's
anticipation of greater than expected health policy benefits in the Company's
one-life managed-care products. Excluding this prior-period reserve increase,
accident and health policy benefits for the current year represented 76% of
accident and health earned premium. Based on the Company's current assessment
of loss experience, the Company estimates accident and health policy benefits
for the prior year at 68% of accident and health earned premium. Excluding the
prior-period reserve increase, the increase in the ratio was due to the
diminished effect of underwriting and pre-existing exclusion policy provisions
as the business sold during 1995 and 1996 ages.
Increase in liability for future policy benefits of $1.6 million in
the current year declined from $6.5 million from the prior year primarily due
to a non-recurring charge in 1996, which related to the Company's recapture of
reinsurance ceded on certain multi-pay pre-need life insurance policies.
Commissions, net of ceding allowance and deferred acquisition costs
of $5.3 million for the current year declined from $6.4 million for the prior
year due to the deferral of acquisition costs related to the Company's
one-life managed-care products in the current year of $3.0 million and
declining life commissions as a result of declining life premiums.
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the current year of $11.4 million increased compared to
$8.6 million for the prior year due to $0.5 million of costs related to the
start-up of a new individual-life product line and increased policy
administration expenses arising from increased new sales volume and policy
administration expenses associated with the acquired HealthQuest book of
business. Partially offsetting the increased costs was the deferral of
managed-care policy acquisition costs.
Other operating expenses, net of ceding allowance and deferred
acquisition costs for the current year excluding start-up costs related to a
new individual-life product line represented 28% of net premiums for the
current year which increased from 26% for the same period last year due to the
Company's decision to insource its group health policy and claims processing
effective September 1996. The Company's decision was based on the third-party
administrator's inability to honor pricing and performance agreements.
Amortization of deferred policy acquisition costs for the current
year of $3.5 million increased from the prior year as a result of the
Company's deferral and amortization of policy acquisition costs relating to
managed-care products. The current year included approximately $2.0 million of
additional amortization expense reflecting a reduction of unamortized managed
care policy acquisition costs to the estimated future profitability of those
products.
Page 12 of 17 Pages
Liquidity and Capital Resources
A major objective of the Company is to maintain sufficient liquidity
to fund growth, fulfill statutory requirements and meet all cash requirements
with cash and short term equivalents plus funds generated from the cash flow
from operations. The primary sources of cash are premiums and investment
income. The primary uses of cash are operating costs and benefit payments to
policyholders. The Company anticipates that it will continue to fund
surrenders and benefit payments through cash flow of normal operations,
scheduled investment maturities and interest income. Excess cash flow from
operations is transferred to the investment portfolio where it is available
for investment and future cash needs.
For the nine months ended September 30, 1997, total cash and cash
equivalents increased by approximately $1.0 million, of which $6.2 million was
provided by investing activities, primarily the sale of Loewen stock, and $4.3
million was used by operating activities, primarily the settlement of pending
accident and health benefit payments and increased acquisition costs as a
result of increased sales volume.
Amounts due from reinsurers increased as a result of increased ceded
group health policy claim reserves. These amounts are payable by the reinsurer
to the Company as group health claims are paid by the Company to
policyholders.
Acquisition of Property and Equipment during the year primarily
represent construction progress payments for an approximately
18,000-square-foot addition to the Company's principal office located in
Norristown, Pennsylvania. Construction began in the second quarter of 1997 and
was completed in the third quarter of 1997 at a cost of approximately $1.8
million.
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
September 30, 1997, the Company had stockholders' equity of $15.6 million with
total assets of $97.2 million. Total assets included cash and investments
carried at market value of $59.6 million which consisted of $50.1 million in
bonds issued by the U.S. Government or government agencies, public utilities
and other corporations, $0.3 million of equity securities, $2.0 million
invested in policy loans, real estate and other invested assets and $7.2
million in cash and cash equivalents. The Company's bond investments are
investment-grade securities ranging in maturity from one to twenty-nine years.
Page 13 of 17 Pages
The Company plans on increasing the level of liquidity during the
quarter ending December 31, 1997. The Company anticipates that restructuring
charges will be incurred in connection with the outsourcing of the Company's
health insurance to HPS and will be recognized in the quarter ending December
31, 1997. The cash payment of the restructuring expenditures will occur
throughout 1998.
The Company utilizes reinsurance in order to both spread the risk of
large accident and health claims through an Excess of Loss Agreement and to
increase underwriting capacity of accident and health business through a Quota
Share Reinsurance Agreement. The Company's retention amount for health
insurance is up to $85 per individual. Under the terms of a Quota Share
Reinsurance Agreement, the Company cedes 47.5% of the liability on the first
$85 of claims per person, per calendar year of its group accident and health
insurance business. The Company received a ceding commission recorded as a
reduction to commissions and other operating expenses as described in footnote
4 of the unaudited financial statements. In addition, the Company generally
assumes 30% (up to $150 per individual) of the liability on its limited
self-funded accident and health 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
("Stop Loss Assumption Reinsurance Agreement"). The Excess of Loss Agreement,
Quota Share Reinsurance Agreement and Stop Loss Assumption Reinsurance
Agreement ("Agreements") were renewable based on mutual agreement on an annual
basis on October 1, 1997. The Company has been notified by its reinsurer that
it will not be renewing the Quota Share Reinsurance Agreement effective
January 1, 1998. The Company notified the reinsurer that it would not be
renewing the Excess of Loss Agreement and the Stop Loss Assumption Reinsurance
Agreement effective January 1, 1998. The Company is currently seeking
alternative reinsurance and while management believes that it will replace
these Agreements, there is no assurance that alternative reinsurance at
comparable terms will be available. Although management does not anticipate
the non renewal will have a material impact on the Company for the year ended
December 31, 1997, the Company could be adversely affected thereafter if
alternative reinsurance at comparable terms is not obtained.
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 ten years.
This policy necessitates periodic sales of securities prior to maturity when
cash flow from operations is not sufficient to meet current obligations.
Changes in net unrealized depreciation of bonds from December 31, 1996, to
September 30, 1997, was due to changes in interest rates.
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.
Page 14 of 17 Pages
The statutory capital and surplus of PILIC, which includes amounts
related to its subsidiary, PALHIC, was $9.8 million at September 30, 1997,
which includes the benefits of certain permitted practices. The minimum
statutory capital and surplus requirement for life insurance companies
domiciled in Pennsylvania is currently $1.7 million. At December 31, 1996,
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
$14.8 million, exceeded the Company Action Level amount required by
approximately $8.3 million. PALHIC's results of this computation indicate its
adjusted capital, amounting to approximately $5.4 million, exceeded the
Company Action Level amount required by approximately $5.3 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 insurer's business. This formula is the primary measurement as to the
adequacy of total capital and surplus of life insurance companies.
Administrative rules and legal restrictions of state insurance departments
presently prevent payment of dividends by PILIC and PALHIC to their respective
parent companies without regulatory approval.
Page 15 of 17 Pages
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
PILIC and PAMCO have been named as defendants in the Doris
Elaine James and Elmer Williams James v. Provident Indemnity
Life Insurance Company, Provident American Corporation, and Mark
Hunter Harrison, Superior Court, Clark County, Georgia, No.
SU97CV1893-3, which was filed September 26, 1997. The complaint
alleges that the failure to pay claims under a certain health
insurance policy issued by PILIC are part of a fraudulent scheme
and constitutes bad faith, and violations of the Georgia
Racketeer Influenced and Corrupt Organizations Act. Plaintiffs
claim damages in excess of $30,000 for medical expenses, and
seek the imposition of unspecified additional damages. Due to
the recent filing of the litigation, PILIC and PAMCO have not
reached a conclusion as to the amount or likelihood of the
assessment of damages in the matter.
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: Not applicable.
(b) Reports on Form 8-K:
No reports of Form 8-K were filed during the
quarter ended September 30, 1997.
Page 16 of 17 Pages
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/ Alvin H. Clemens
----------------------------------------------------
Alvin H. Clemens, Chairman of the Board of Directors
and CEO
By: /s/ James O. Bowles
----------------------------------------------------
James O. Bowles, President
By: /s/ Anthony R. Verdi
----------------------------------------------------
Anthony R. Verdi, Treasurer and
Chief Financial Officer
Date: November 14, 1997
Page 17 of 17 Pages