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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended March 31, 1996.
Commission file number 000-19388
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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)
(423)755-1011
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(Registrant's telephone number, including area code)
None
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Former name, former address and former fiscal year, if changed since last
report
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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Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT March 31, 1996
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Common Stock, $1.00 Par Value 45,465,135
Total number of pages included are 28
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PROVIDENT COMPANIES, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial
Condition at March 31, 1996 and December 31, 1995 3
Condensed Consolidated Statements of Income for the
Three Months Ended March 31, 1996 and 1995 5
Condensed Consolidated Statements of Cash Flows for the
Three Months Ended March 31, 1996 and 1995 6
Notes to Condensed Consolidated Financial Statements 7
Independent Accountants' Review Report 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 21
</TABLE>
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
(in millions of dollars)
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(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed Maturity Securities
Available-for-Sale $11,668.9 $12,318.6
Held-to-Maturity 238.5 299.0
Equity Securities 4.7 5.3
Mortgage Loans 19.5 104.8
Real Estate 188.2 203.7
Policy Loans 1,593.0 1,574.6
Other Long-term Investments 14.0 14.0
Short-term Investments 123.8 231.0
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Total Investments 13,850.6 14,751.0
Cash and Bank Deposits 34.7 24.8
Accounts Receivable 80.7 41.3
Premiums Receivable 81.8 75.5
Reinsurance Receivable 447.9 435.3
Accrued Investment Income 304.5 277.4
Deferred Policy Acquisition Costs 439.0 271.8
Property and Equipment 50.4 49.2
Miscellaneous 17.6 17.2
Separate Account Assets 348.9 357.8
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TOTAL ASSETS $15,656.1 $16,301.3
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - CONTINUED
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31 December 31
1996 1995
(in millions of dollars)
--------------------------------------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy and Contract Benefits 383.0 $ 383.7
Reserves for Future Policy and Contract Benefits 7,752.8 7,814.6
and Unearned Premiums
Policyholders' Funds and Experience Rating Refunds 4,904.6 5,492.4
Federal Income Tax Liability 62.5 67.1
Short-term Debt 45.6 1.4
Long-term Debt 200.0 200.0
Other Liabilities 326.1 332.0
Separate Account Liabilities 348.9 357.8
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TOTAL LIABILITIES 14,023.5 14,649.0
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COMMITMENTS AND CONTINGENT LIABILITIES - NOTE 4
STOCKHOLDERS' EQUITY
Preferred Stock 156.2 156.2
Common Stock, $1 par 45.5 45.4
Additional Paid-in Capital 7.0 5.8
Net Unrealized Gain on Securities 58.0 101.9
Foreign Currency Translation Adjustment (4.9) (4.8)
Retained Earnings 1,370.8 1,347.8
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TOTAL STOCKHOLDERS' EQUITY 1,632.6 1,652.3
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $15,656.1 $16,301.3
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended March 31
1996 1995
(in millions of dollars, except share data)
----------------------------------------------------
<S> <C> <C>
REVENUE
Premium Income $ 304.6 $ 361.0
Net Investment Income 278.5 313.0
Net Realized Investment Losses (0.6) (3.9)
Other Income 9.2 43.7
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TOTAL REVENUE 591.7 713.8
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BENEFITS AND EXPENSES
Policy and Contract Benefits 299.4 394.7
Change in Reserves for Future Policy and Contract Benefits 140.8 155.6
and Policyholders' Funds
Amortization of Policy Acquisition Costs 16.9 17.1
Salaries 17.1 39.0
Other Operating Expenses 64.1 87.8
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TOTAL BENEFITS AND EXPENSES 538.3 694.2
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INCOME BEFORE FEDERAL INCOME TAXES 53.4 19.6
FEDERAL INCOME TAXES 19.0 7.3
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NET INCOME $ 34.4 $ 12.3
========== ==========
NET INCOME PER COMMON SHARE - NOTE 2 $ 0.69 $ 0.20
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 45,434,964 45,363,263
DIVIDENDS PER COMMON SHARE $ 0.18 $ 0.18
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended March 31
1996 1995
(in millions of dollars)
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<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 142.2 $ 120.7
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investments 438.7 344.6
Proceeds from Maturities of Investments 427.5 251.7
Purchase of Investments (503.7) (425.7)
Net Sales of Short-term Investments 107.1 267.7
Other (47.5) (52.0)
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NET CASH PROVIDED BY INVESTING ACTIVITIES 422.1 386.3
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CASH FLOWS FROM FINANCING ACTIVITIES
Deposits to Policyholder Accounts 97.4 165.3
Maturities and Benefit Payments from Policyholder Accounts (685.9) (674.3)
Net Short-term Borrowings 44.2 3.8
Issuance of Common Stock 1.3 0.6
Dividends Paid to Stockholders (11.4) (11.4)
Other - (0.4)
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NET CASH USED BY FINANCING ACTIVITIES (554.4) (516.4)
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NET INCREASE (DECREASE) IN CASH AND BANK DEPOSITS 9.9 (9.4)
CASH AND BANK DEPOSITS AT BEGINNING OF PERIOD 24.8 35.3
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CASH AND BANK DEPOSITS AT END OF PERIOD $ 34.7 $ 25.9
========= ==========
</TABLE>
See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
MARCH 31, 1996
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three month
period ended March 31, 1996, are not necessarily indicative of the results that
may be expected for the year ended December 31, 1996. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended December 31,
1995.
NOTE 2--EARNINGS PER SHARE
Earnings per common share are computed using net income less preferred stock
dividends ($3.2 million for the three month periods ended March 31, 1996 and
1995) divided by the weighted average number of common shares outstanding.
There is no significant difference between earnings per share on a primary or
fully diluted basis.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
MARCH 31, 1996
NOTE 3--SEGMENT INFORMATION
A summary by segment of the Company's revenue and income before federal income
taxes, excluding and including net realized investment gains and losses,
follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
1996 1995
(in millions of dollars)
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<S> <C> <C>
Revenue (Excluding Net Realized
Investment Gains and Losses)
Individual Life and Disability $257.7 $250.4
Employee Benefits 161.9 150.7
Other Operations 172.7 316.6
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Total $592.3 $717.7
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Income (Loss) Before Net Realized
Investment Gains and Losses and
Federal Income Taxes
Individual Life and Disability $ 22.8 $ (16.8)
Employee Benefits 14.6 12.4
Other Operations 16.6 27.9
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Total $ 54.0 $ 23.5
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</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
MARCH 31, 1996
NOTE 3--SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Three Months Ended March 31
1996 1995
(in millions of dollars)
----------------------------
<S> <C> <C>
Revenue (Including Net Realized
Investment Gains and Losses)
Individual Life and Disability $ 262.2 $ 251.1
Employee Benefits 161.5 151.0
Other Operations 168.0 311.7
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Total $ 591.7 $ 713.8
======= =======
Income (Loss) Before Federal Income Taxes
Individual Life and Disability $ 27.3 $ (16.1)
Employee Benefits 14.2 12.7
Other Operations 11.9 23.0
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Total $ 53.4 $ 19.6
======= =======
</TABLE>
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.
NOTE 4--COMMITMENTS AND CONTINGENT LIABILITIES
Various lawsuits against the Company have arisen in the normal course of
business. Contingent liabilities that might arise from litigation are not
deemed likely to materially affect the financial position or results of
operations of the Company.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - Continued
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
MARCH 31, 1996
NOTE 5--CHANGE IN ACCOUNTING PRINCIPLE
The Company adopted Statement of Financial Accounting Standards No. 121 (SFAS
121), Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed Of,effective January 1, 1996. SFAS 121 requires that
long- lived assets and certain identifiable intangibles to be held and used by
an entity be reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable. Measurement of an impairment loss for long-lived assets and
identifiable intangibles that an entity expects to hold and use should be based
on the fair value of the asset. SFAS 121 also requires that long-lived assets
and certain intangibles to be disposed of generally be reported at the lower of
the carrying amount or fair value less cost to sell.
The primary assets of the Company which are subject to SFAS 121 are investment
real estate and property and equipment used in the Company's daily operations.
The effect of the adoption of SFAS 121 on the Company's financial position and
results of operations was immaterial.
NOTE 6--SuBSEQUENT EVENTS
On April 29, 1996, the Company entered into a definitive agreement (the
Agreement) to acquire The Paul Revere Corporation (Paul Revere), a provider of
life and disability insurance products, at a price of approximately $1.2
billion. Under the terms of the Agreement, the Company has agreed to pay $20
per share in cash and $6 per share in newly issued common stock to Textron
Inc., an 83 percent shareholder of Paul Revere. The remaining Paul Revere
shareholders may elect to receive per share $26 in cash; a combination of $20
cash and a number of shares of the Company's common stock equal to the product
of 6 and the Exchange Ratio; or a number of shares of the Company's common
stock equal to the product of 26 and the Exchange Ratio. The Exchange Ratio
(as defined in the Agreement) is based on the Company's common stock price
during a defined period prior to closing and is subject to certain maximum and
minimum share amounts.
The transaction will be financed through $145.0 million of internally generated
funds, $541.8 million in debt, approximately $270.0 million in common equity
issuance to Paul Revere shareholders, and $300.0 million in common equity
issuance to Zurich Insurance Company, a Swiss insurer, or one or more of its
affiliates. The Company has also entered into a strategic alliance with the
Zurich Insurance Group.
The transaction is subject to regulatory and shareholder approval and is
expected to close during the third quarter of 1996.
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INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Shareholders
Provident Companies, Inc.
We have reviewed the accompanying condensed consolidated statement of financial
condition of Provident Companies, Inc. and Subsidiaries as of March 31, 1996,
the related condensed consolidated statements of income for the three month
periods ended March 31, 1996 and 1995, and the condensed consolidated
statements of cash flows for the three month periods ended March 31, 1996 and
1995. These financial statements are the responsibility of the Company's
management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Provident
Companies, Inc. and Subsidiaries as of December 31, 1995, and the related
consolidated statements of operations, stockholders' equity and cash flows for
the year then ended, not presented herein, and in our report dated February 8,
1996, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial condition as of December 31,
1995, is fairly stated in all material respects in relation to the consolidated
statement of financial condition from which it has been derived.
ERNST & YOUNG LLP
Chattanooga, Tennessee
May 3, 1996
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenue excluding net realized investment gains and losses ("revenue")
declined $125.4 million, or 17.5 percent, to $592.3 million in the first
quarter of 1996 from $717.7 million in the first quarter of 1995. The decline
was the result of lower revenue in the other operations segment ($143.9
million), which was partly offset by increased revenue in the individual life
and disability segment ($7.3 million) and the employee benefits segment ($11.2
million).
Income before net realized investment gains and losses and federal
income taxes ("income") increased $30.5 million, or 129.8 percent, to $54.0
million in the first quarter of 1996 from $23.5 million in the first quarter of
1995. The increase was the result of increased income in the individual life
and disability segment ($39.6 million) and employee benefits segment ($2.2
million) which was partly offset by lower income in the other operations
segment ($11.3 million).
INDIVIDUAL LIFE AND DISABILITY
Revenue in the individual life and disability segment increased $7.3
million or 2.9 percent, to $257.7 million in the first quarter of 1996 from
$250.4 million in the first quarter of 1995. The increase was primarily the
result of higher net investment income. Net investment income in this segment
increased $9.0 million, or 10.5 percent, due to an increased allocation of
capital to the individual disability income line of business and higher
investment income from the individual annuity line of business. Premium income
in this segment increased $0.6 million, or 0.4 percent, to $161.0 million in
the first quarter of 1996 from $160.4 million in the first quarter of 1995.
The increase was primarily the result of improvements in persistency in the
individual disability income line of business.
In November 1994, the Company announced its intention to discontinue
selling individual non-cancellable disability income contracts with
own-occupation provisions (other than conversion policies available under
existing contractual arrangements). The Company is focusing on providing "loss
of earnings" contracts which insure income rather than occupation, instead of
the traditional non-cancellable own-occupation contracts. During the
transition to the new products, revenue in this line is expected to
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decline as a result of a period of lower premiums associated with the new
products. The magnitude and duration of the expected decline are dependent on
the response of customers and competitors in the industry. In the first
quarter of 1996, annualized new premiums for individual disability income
declined to $8.8 million, from $18.2 million in the first quarter of 1995.
Income in this segment increased $39.6 million to $22.8 million in the
first quarter of 1996 from a loss of $16.8 million in the first quarter of
1995. This segment includes the results of the individual disability income
line, which produced income of $14.5 million in the first quarter of 1996
compared to a loss of $20.5 million in the first quarter of 1995. The loss in
the first quarter of 1995 resulted primarily from adverse claim experience.
Morbidity experience was at somewhat higher levels than expected in the first
quarter of 1995. New claims declined at the end of 1995, and claim termination
rates were at higher levels in the final three quarters of 1995. Claim
experience in the first quarter of 1996 was improved over that of the first
quarter of 1995. Management believes substantial investments in the individual
disability claims management process over the past year helped produce the
significant improvement in results in this line. The individual life line of
business produced income of $8.1 million in the first quarter of 1996, compared
to $3.7 million in the first quarter of 1995, primarily due to improved
mortality.
The Company performed a loss recognition study as of September 30, 1993,
which projected that morbidity would improve over time as a result of stricter
policy provisions, tighter underwriting requirements, improved claim handling
procedures (consisting of centralization of the claims-paying function in the
home office and the availability of additional technical resources), the
effects of anti-selection wearing off over time, and general improvement in the
economy. Loss recognition studies were also performed as of December 31, 1994,
and December 31, 1995. The December 1994 and December 1995 studies followed
the same principles as the September 1993 study. Based upon the assumptions
used in the December 1995 study, which represented management's best estimates
at the time of the study, reserves were adequate at the end of 1995.
The Company has engaged outside consultants to work with its personnel
in refining its methodology for analyzing frequency and severity rates, as well
as other factors that may affect reserve adequacy. Management believes these
refinements should provide the Company a better methodology for anticipating
changes in morbidity rates and a better methodology for
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reflecting those changes in the management of its business. Although still in
the developmental stage, the results of preliminary testing of these
methodologies appear encouraging, and if they prove reliable, would indicate a
sufficiency in the Company's reserves at December 31, 1995. As the Company
gains additional experience to prove the validity of the refined methodologies,
adjustments to reserve assumptions for new claims on the existing block of
business may be appropriate in future periods.
It is not possible to predict with certainty whether morbidity, interest
rates, and expenses will continue at a level consistent with the Company's
assumptions, improve, or deteriorate; however, the current assumptions as to
these factors represent management's best estimates in light of present
circumstances. Additional increases to reserves would be required if there is
material deterioration in morbidity, interest rates, and/or expenses. As part
of its ongoing management of this line of business, the Company will conduct a
loss recognition study annually to validate the continued adequacy of current
reserves.
EMPLOYEE BENEFITS
Revenue in the employee benefits segment increased $11.2 million, or 7.4
percent, to $161.9 million in the first quarter of 1996 from $150.7 million in
the first quarter of 1995. The increase was primarily the result of an
increase in premium income of $8.6 million, or 6.7 percent, to $136.9 million
in the first quarter of 1996 from $128.3 million in the first quarter of 1995.
Increased premium income in the voluntary benefits, group life, group
disability, and packaged products lines of business contributed to this
increase. Net investment income increased $2.3 million, or 10.9 percent, to
$23.4 million in the first quarter of 1996 from $21.1 million in the first
quarter of 1995.
Income in this segment increased $2.2 million, or 17.7 percent, to $14.6
million in the first quarter of 1996 from $12.4 million in the first quarter of
1995. Increased income in the voluntary benefits and group disability lines of
business was only partially offset by lower income in the medical stop-loss and
packaged products lines of business. Income from the group life line of
business was even at $3.6 million in the first quarter of 1996 compared to the
first quarter of 1995. The group disability line of business produced income
of $0.4 million in the first quarter of 1996, compared to a loss of $3.5
million in the first quarter of 1995. This increase was due to improved loss
ratios. The voluntary benefits line of business produced income
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of $4.4 million in the first quarter of 1996, compared to $1.3 million in the
first quarter of 1995, primarily due to improved loss ratios and an improved
expense ratio.
OTHER OPERATIONS
Revenue in the other operations segment declined $143.9 million, or 45.5
percent, to $172.7 million in the first quarter of 1996 from $316.6 million in
the first quarter of 1995. The decline was primarily due to the sale of the
medical services line of business effective April 30, 1995, which produced
revenue of $107.7 million in the first quarter of 1995. In addition, revenue
in the group pension line of business declined $47.7 million, or 29.7 percent,
to $112.7 million in the first quarter of 1996 from $160.4 million in the first
quarter of 1995 due to a decrease in funds under management. Premium income in
this segment declined $65.6 million to $6.7 million in the first quarter of
1996 from $72.3 million in the first quarter of 1995. This decline is
primarily due to the sale of the medical services line of business, which
produced $67.4 million of premium income in the first quarter of 1995.
Income in this segment declined $11.3 million, or 40.5 percent, to $16.6
million in the first quarter of 1996 from $27.9 million in the first quarter of
1995. The decline was primarily the result of lower income in the group
pension line of business, which declined $6.5 million, or 33.9 percent, to
$12.7 million in the first quarter of 1996 from $19.2 million in the first
quarter of 1995. The decline in this line was primarily the result of lower
funds under management and lower income from a reduced amount of capital
allocated to this line. The Company announced in December 1994, that it would
discontinue the sale of traditional guaranteed investment contracts (GICs).
Funds under management from traditional GICs declined $2.241 billion, or 34.5
percent, to $4.249 billion at March 31, 1996, from $6.490 billion at March 31,
1995. Total funds under management and equivalents declined $1.357 billion, or
13.6 percent, to $8.597 billion at March 31, 1996, from $9.954 billion at March
31, 1995. Included in this total are accumulated funds from the sale of
synthetic GICs which totaled $2.716 billion at March 31, 1996 compared to
$1.832 billion at March 31, 1995. Deposits of synthetic GICs totaled $139.6
million in the first quarter of 1996, and $202.6 million in the first quarter
of 1995.
Income from the medical services line of business contributed $2.1
million to the income of the other operations segment in the first quarter of
1995. Income from the block of corporate-owned life insurance declined to
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$4.5 million in the first quarter of 1996, compared to $5.0 million in the
first quarter of 1995.
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, the Company is dependent upon payments from its
wholly-owned subsidiaries, Provident Life and Accident Insurance Company
("Accident"), Provident Life and Casualty Insurance Company ("Casualty"), and
Provident National Assurance Company ("National") (collectively "Provident") to
pay dividends to its shareholders and to pay its expenses. Payments by
Provident may take the form of either dividends or interest payments on amounts
loaned to Provident by the Company.
State insurance laws generally restrict the ability of insurance
companies to pay cash dividends or make other payments to their affiliates in
excess of certain prescribed limitations. In Tennessee, Provident's state of
domicile, regulatory approval is required if an insurance company seeks to make
loans to affiliates in amounts equal to or in excess of three percent of the
insurer's admitted assets, or to pay cash dividends in excess of the greater of
such company's net gains from operations of the preceding year or ten percent
of its surplus as regards policyholders, as determined at the end of the
preceding year in accordance with prescribed or permitted accounting practices.
On December 22, 1995, Accident distributed all of the stock of its then
wholly-owned subsidiaries, National and Casualty, to its sole shareholder.
This constituted an extraordinary dividend, and approval was sought and
received from the Tennessee Department of Commerce and Insurance. Under
Tennessee law, this dividend will be aggregated with all dividends after that
date for a period of twelve months. This will have the effect of making any
dividends paid by Accident before December 22, 1996, "extraordinary dividends"
for which regulatory approval will be required.
The Company's requirements are met primarily by cash flow provided from
operations, principally in Provident. Premium and investment income as well as
maturities and sales of invested assets provide the primary sources of cash.
Cash flow from operations was sufficient in 1995 and the first quarter of 1996.
Cash is applied to the payment of policy benefits, costs of acquiring new
business (principally commissions) and operating expenses as well as purchases
of new investments. The Company has established an investment strategy that
management believes will provide for adequate cash flow from operations.
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The Company expects no material adverse effect on its liquidity as a
result of the discontinuance of sales of traditional GICS. While traditionally
the investment strategy for this product line has been to match the effective
asset durations with the related expected liability durations, the Company has
moved to a cash flow matching strategy.
In May 1995, the Company sold 26 restructured mortgage loans with a
principal amount of $147.5 million and a book value of $122.6 million. The
transaction resulted in a before-tax realized investment loss of $23.1 million.
In October 1995, the Company completed the sale of commercial mortgage loans
with a principal amount and a book value of $962.4 million through a
securitization collateralized by 366 loans. The transaction resulted in a
before-tax realized investment gain of $8.9 million. In February 1996, the
Company sold 24 mortgage loans with a principal amount of $81.6 million and a
book value of $75.9 million, realizing a before-tax investment loss of $5.7
million. These transactions have increased the liquidity of the investment
portfolio and facilitated the move to a cash flow matching strategy for the GIC
portfolios. The sale of the mortgage loans is expected to result in lower
investment income in the future, as well as lower net realized investment
losses and lower investment expenses. Overall, the Company expects these
transactions to have a positive effect on net income in future years and to
improve asset quality, liquidity, asset/liability management, and the capital
adequacy ratios.
As a result of the release of capital generated by the run-off of the
GIC portfolio, the sale of the commercial mortgage loans, the sale of the
medical services line, and other corporate actions, the Company has increased
its available capital to support the growth of its businesses. On April 29,
1996, the Company announced that it had entered into an Agreement and Plan of
Merger with Textron, Inc. and The Paul Revere Corporation ("Paul Revere")
pursuant to which the Company would acquire Paul Revere at a price of
approximately $1.2 billion. The acquisition will be financed through $570.0
million of new common equity and $541.8 million of new debt for which
contractual commitments are in place. The Company believes the cash flows from
the combined operations will be sufficient to meet its operating and financing
cash flow requirements. For information concerning this transaction see Note 6
of the Notes to Condensed Consolidated Financial Statements.
- 17 -
<PAGE> 18
INVESTMENTS
The Company's exposure to non-current investments has been insignificant
for the past few years. Non-current investments are primarily foreclosed real
estate investments and mortgage loans which became more than thirty days past
due in their principal and interest payments. Non-current investments at March
31, 1996 were $30.0 million, or 0.22 percent of invested assets.
As previously discussed under Liquidity and Capital Resources, the
Company sold a substantial portion of its commercial mortgage loan portfolio in
October 1995. The remaining $19.5 million of mortgage loans is expected to be
repaid or sold by mid-1996. The reserve for problem mortgage loans totaled
$5.5 million at March 31, 1996. Management believes this amount of mortgage
loan loss reserve is adequate given the level of the mortgage loan exposure and
the level of problem mortgage loans.
The Company's investment in mortgage-backed securities totaled $2.9
billion on an amortized cost basis at March 31, 1996, and December 31, 1995.
At March 31, 1996, the mortgage-backed securities had an average life of 6.6
years and effective duration of 4.7 years. The mortgage-backed securities are
valued on a monthly basis using valuations supplied by the brokerage firms that
are dealers in these securities. The primary risk involved in investing in
mortgage-backed securities is the uncertainty of the timing of cash flows from
the underlying loans due to prepayment of principal. The Company uses models
which incorporate economic variables and possible future interest rate
scenarios to predict future prepayment rates. The Company has not invested in
mortgage-backed derivatives, such as interest-only, principal-only or
residuals, where market values can be highly volatile relative to changes in
interest rates.
As with most other fixed income investments, below-investment-grade
bonds are subject to the effects of changes in the overall level of interest
rates, which can affect both capital and reinvestment return.
Below-investment-grade bonds are inherently more risky than investment-grade
bonds since the risk of default by the issuer, by definition and as exhibited
by bond rating, is higher. Also, the secondary market for certain
below-investment-grade issues can be highly illiquid. Management does not
anticipate any liquidity problem being caused by the investments in below-
investment-grade securities, nor does it expect these investments to
- 18 -
<PAGE> 19
adversely affect its ability to hold its other investment to maturity. Adverse
events occurring in the market for this type of investment in the last 5-10
years are not reasonably expected to have a material adverse effect on results
of operations or the financial condition of the Company primarily because of
the minimal exposure to such investments.
The Company's exposure to below-investment-grade fixed maturity
securities at March 31, 1996 was $829.4 million, representing 6.0 percent of
invested assets, below the internal limit of 7.5 percent of invested assets for
this type of investment. The Company's holding of $100 million of Healthsource
6.25% preferred stock, related to the sale of the group medical services
business, was redeemed in cash at par by Healthsource during the first quarter
of 1996.
During 1995, GIC portfolios totaling $643.0 million were restructured on
a duration neutral basis, moving maturities from 1996 and 1997 to 1995, 1998,
and 1999. Hedge transactions totaling $300.0 million were initiated, fixing
the sales price of future asset sales. In addition, $104.0 million of
long-term bonds were sold in the group pension portfolio with $35.0 million
invested in 1997 maturity bonds and the remainder used to meet current
obligations.
During the third quarter of 1995, the Company executed a series of cash
flow hedges in its individual disability income portfolio, hedging $495.0
million of expected cash flows in the years 1996 through 2000. This was
accomplished by the execution of $495.0 million notional amount of forward
interest rate swaps. The purpose of this action was to hedge the reinvestment
of future cash flows and protect the Company from the potential adverse impact
of declining interest rates on the loss recognition reserve over the next five
years. Management estimates that the yields on cash flows in the 1996 to 2000
time period for the individual disability income portfolio will range between
8.15 percent and 8.55 percent when the hedges terminate and long-term assets
are purchased.
During the first quarter of 1996, the Company continued the program of
using forward interest rate swaps to hedge reinvestment of future cash flows.
A notional amount of $100.0 million of forward swaps was executed in the group
pension single premium annuity portfolio against cash flows expected in the
years 2000 and 2001. Management estimates the hedge-adjusted yield on
long-term asset purchases will range between 8.20 percent and 8.40 percent when
the hedges terminate.
- 19 -
<PAGE> 20
Management has added resources in the investment area to address
portfolio risks and expects further rebalancing activities in the future.
REVIEW BY INDEPENDENT ACCOUNTANTS
The condensed consolidated financial statements at March 31, 1996, and
for the three month period then ended have been reviewed, prior to filing, by
Ernst & Young LLP, the Company's independent accountants, and their report is
included herein.
- 20 -
<PAGE> 21
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 15 Letter re: unaudited interim financial information
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K - None
- 21 -
<PAGE> 22
SIGNATURES
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 Companies, Inc.
Date: May 10, 1996 /s/ J. Harold Chandler
-------------------------------------
J. Harold Chandler
Chairman, President and
Chief Executive Officer
Date: May 10, 1996 /s/ Thomas R. Watjen
-------------------------------------
Thomas R. Watjen
Executive Vice President and
Chief Financial Officer
- 22 -
<PAGE> 23
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM 10-Q
PROVIDENT COMPANIES, INC.
- 23 -
<PAGE> 24
INDEX OF EXHIBITS
EXHIBIT PAGE
Exhibit 15 Letter re: unaudited interim financial information 26
Exhibit 27 Financial Data Schedule (for SEC use only) 28
- 24 -
<PAGE> 1
Board of Directors and Shareholders
Provident Companies, Inc.
We are aware of the incorporation by reference in the Registration Statement
(Form S-8 No. 33-47551) pertaining to the Provident Life and Accident Insurance
Company Moneymaker, A Long-Term 401(k) Retirement Savings Plan for the
registration of 500,000 shares of Class B common stock of Provident Life and
Accident Insurance Company of America, the Registration Statement (Form S-8 No.
33-88108) of Provident Life and Accident Insurance Company Stock Option Plan of
1994 for the registration of 3,500,000 shares of Class B common stock of
Provident Life and Accident Insurance Company of America, and in the
Registration Statement (Form S-8 No. 33-62231) of Provident Life and Accident
Insurance Company Employee Stock Purchase Plan of 1995 for the registration of
1,000,000 shares of Class B common stock of Provident Life and Accident
Insurance Company of America of our report dated May 3, 1996 relating to the
unaudited condensed consolidated interim financial statements of Provident
Companies, Inc. which is included in its Form 10-Q for the quarter ended March
31, 1996.
Pursuant to Rule 436(c) of the Securities Act of 1933, our report is not a part
of the registration statements prepared or certified by accountants within the
meaning of Section 7 or 11 of the Securities Act of 1933.
Ernst & Young LLP
Chattanooga, Tennessee
May 3, 1996
- 26 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PROVIDENT COMPANIES, INC. FOR THE THREE MONTHS ENDED
MARCH 31, 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<DEBT-HELD-FOR-SALE> 11,668,900
<DEBT-CARRYING-VALUE> 238,500
<DEBT-MARKET-VALUE> 235,300
<EQUITIES> 4,700
<MORTGAGE> 19,500
<REAL-ESTATE> 188,200
<TOTAL-INVEST> 13,850,600
<CASH> 34,700
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 439,000
<TOTAL-ASSETS> 15,656,100
<POLICY-LOSSES> 7,752,800<F1>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 383,000
<POLICY-HOLDER-FUNDS> 4,904,600
<NOTES-PAYABLE> 245,600
0
156,200
<COMMON> 45,500
<OTHER-SE> 1,430,900
<TOTAL-LIABILITY-AND-EQUITY> 15,656,100
304,600
<INVESTMENT-INCOME> 278,500
<INVESTMENT-GAINS> (600)
<OTHER-INCOME> 9,200
<BENEFITS> 440,200
<UNDERWRITING-AMORTIZATION> 16,900
<UNDERWRITING-OTHER> 81,200
<INCOME-PRETAX> 53,400
<INCOME-TAX> 19,000
<INCOME-CONTINUING> 34,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 34,400
<EPS-PRIMARY> 0.69
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>"POLICY LOSSES" INCLUDES RESERVES FOR FUTURE POLICY AND CONTRACT BENEFITS OF
$7,695,300 AND UNEARNED PREMIUMS OF $57,500.
</FN>
</TABLE>
