<PAGE> 1
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 June 30, 1995.
Commission file number 000-19388
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PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA
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(Exact name of registrant as specified in its charter)
TENNESSEE 62-1321664
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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)
(615) 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
--- ---
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 JUNE 30, 1995
------------------------------- ----------------------------
A Common Stock, $1.00 Par Value 8,592,888
B Common Stock, $1.00 Par Value 36,795,968
Total number of pages included are 39
Exhibit Index Page 26
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PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA
INDEX
<TABLE>
<CAPTION>
Page
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<S> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial 2
Condition at June 30, 1995 and December 31, 1994
Condensed Consolidated Statements of Income for the 4
Three Months and Six Months Ended June 30, 1995 and 1994
Condensed Consolidated Statements of Cash Flows for the 5
Six Months Ended June 30, 1995 and 1994
Notes to Condensed Consolidated Financial Statements 6
Independent Auditors' Report on Review of Interim 10
Financial Information
Item 2. Management's Discussion and Analysis of Financial 11
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 6. Exhibits and Reports on Form 8-K 24
</TABLE>
<PAGE> 3
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
(in millions of dollars)
-----------------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed Maturity Securities
Available-for-Sale $12,113.5 $11,585.1
Held-to-Maturity 173.7 10.7
Equity Securities 7.2 7.3
Mortgage Loans 1,236.3 1,502.5
Real Estate 222.6 243.5
Policy Loans 1,434.4 1,361.5
Other Long-term Investments 12.8 10.1
Short-term Investments 58.2 296.9
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Total Investments 15,258.7 15,017.6
Cash and Bank Deposits 23.1 35.3
Accounts Receivable 40.1 72.8
Premiums Receivable 63.1 62.7
Reinsurance Receivable 459.5 300.1
Accrued Investment Income 299.9 281.8
Deferred Policy Acquisition Costs 460.0 638.2
Deferred Federal Income Tax Asset - 172.6
Property and Equipment 46.3 103.2
Miscellaneous 17.8 152.6
Separate Account Assets 343.7 313.0
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TOTAL ASSETS $17,012.2 $17,149.9
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - CONTINUED
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
<TABLE>
<CAPTION>
June 30 December 31
1995 1994
(in millions of dollars)
-----------------------
(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy and Contract Benefits $ 358.9 $ 354.1
Reserves for Future Policy and Contract Benefits
and Unearned Premiums 7,331.4 6,861.5
Policyholders' Funds and Experience Rating Refunds 6,733.0 7,707.7
Federal Income Tax Liability 67.2 33.4
Short-term Debt 13.4 14.4
Long-term Debt 200.3 202.5
Other Liabilities 389.5 494.2
Separate Account Liabilities 343.7 313.0
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TOTAL LIABILITIES 15,437.4 15,980.8
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COMMITMENTS AND CONTINGENT LIABILITIES - NOTE 4
STOCKHOLDERS' EQUITY
Preferred Stock 156.2 156.2
Common Stock, Class A 8.6 8.6
Common Stock, Class B 36.8 36.8
Additional Paid-in Capital 5.6 4.8
Net Unrealized Gain (Loss) on Securities 69.6 (302.3)
Foreign Currency Translation Adjustment (5.2) (5.4)
Retained Earnings 1,303.2 1,270.4
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TOTAL STOCKHOLDERS' EQUITY 1,574.8 1,169.1
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $17,012.2 $17,149.9
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1995 1994 1995 1994
(in millions of dollars, except share data)
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<S> <C> <C> <C> <C>
REVENUE
Premium Income $313.1 $346.4 $ 674.1 $ 695.2
Net Investment Income 309.8 305.8 622.8 610.5
Net Realized Investment Losses (24.6) (3.3) (28.5) (7.6)
Gain on Sale of a Portion of a
Line of Business - Note 5 21.8 - 21.8 -
Other Income 24.0 39.7 67.7 79.9
------ ------ -------- --------
TOTAL REVENUE 644.1 688.6 1,357.9 1,378.0
------ ------ -------- --------
BENEFITS AND EXPENSES
Policy and Contract Benefits 353.0 372.1 747.7 759.9
Change in Reserves for Future Policy and 119.0 111.9 271.2 210.0
Contract Benefits
Change in Policyholders' Funds 7.1 5.5 10.5 11.4
Amortization of Policy Acquisition Costs 18.1 15.5 35.2 31.5
Salaries 23.5 40.1 62.5 79.5
Other Operating Expenses 71.5 86.5 159.3 174.1
------ ------ -------- --------
TOTAL BENEFITS AND EXPENSES 592.2 631.6 1,286.4 1,266.4
------ ------ -------- --------
INCOME BEFORE FEDERAL INCOME TAXES 51.9 57.0 71.5 111.6
FEDERAL INCOME TAXES 16.9 19.4 24.2 38.4
------ ------ -------- --------
NET INCOME $ 35.0 $ 37.6 $ 47.3 $ 73.2
====== ====== ======== ========
NET INCOME PER COMMON SHARE - NOTE 2 $ 0.70 $ 0.76 $ 0.90 $ 1.48
WEIGHTED AVERAGE COMMON SHARES 45,383,342 45,300,240 45,372,442 45,286,319
OUTSTANDING
DIVIDENDS PER COMMON SHARE $ 0.18 $ 0.26 $ 0.36 $ 0.52
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
<TABLE>
<CAPTION>
Six Months Ended June 30
1995 1994
(in millions of dollars)
----------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 353.1 $ 247.7
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investments 850.0 273.4
Proceeds from Maturities of Investments 601.5 1,376.1
Purchase of Investments (948.8) (2,424.5)
Net Sales of Short-term Investments 231.4 323.4
Disposition of Group Medical Business (48.9) -
Other (53.0) 97.0
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 632.2 (354.6)
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CASH FLOWS FROM FINANCING ACTIVITIES
Deposits to Policyholder Accounts 304.4 972.0
Maturities and Benefit Payments from Policyholder Accounts (1,278.3) (980.1)
Net Short-term Borrowings (1.0) 220.7
Issuance of Common Stock 0.8 1.3
Dividends Paid to Stockholders (22.7) (29.9)
Other (0.7) (43.2)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (997.5) 140.8
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NET INCREASE (DECREASE) IN CASH AND BANK DEPOSITS (12.2) 33.9
CASH AND BANK DEPOSITS AT BEGINNING OF PERIOD 35.3 32.0
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CASH AND BANK DEPOSITS AT END OF PERIOD $ 23.1 $ 65.9
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
JUNE 30, 1995
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 and
six month periods ended June 30, 1995 are not necessarily indicative of the
results that may be expected for the year ended December 31, 1995. 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, 1994.
NOTE 2--EARNINGS PER SHARE
Earnings per common share are computed using net income less preferred stock
dividends ($3.1 million for the three month periods ended June 30, 1995 and
1994 and $6.3 million for the six month periods ended June 30, 1995 and 1994)
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 LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
JUNE 30, 1995
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 June 30 Six Months Ended June 30
1995 1994 1995 1994
(in millions of dollars)
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<S> <C> <C> <C> <C>
Revenue (Excluding Net Realized
Investment Gains and Losses)
Individual Life and Disability $251.1 $234.6 $ 501.5 $ 468.4
Employee Benefits 146.7 140.4 297.4 281.2
Other Operations 270.9 316.9 587.5 636.0
------ ------ -------- --------
Total $668.7 $691.9 $1,386.4 $1,385.6
====== ====== ======== ========
Income Before Net Realized
Investment Gains and Losses and
Federal Income Taxes
Individual Life and Disability $ 17.3 $ 15.8 $ 0.5 $ 30.0
Employee Benefits 8.1 22.0 20.5 39.0
Other Operations 51.1 22.5 79.0 50.2
------ ------ -------- --------
Total $ 76.5 $ 60.3 $ 100.0 $ 119.2
====== ====== ======== ========
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
JUNE 30, 1995
NOTE 3--SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Three Months Ended June 30 Six Months Ended June 30
1995 1994 1995 1994
(in millions of dollars)
-----------------------------------------------------------
<S> <C> <C> <C> <C>
Revenue (Including Net Realized
Investment Gains and Losses)
Individual Life and Disability $249.8 $236.7 $ 500.9 $ 473.5
Employee Benefits 147.1 141.5 298.1 282.3
Other Operations 247.2 310.4 558.9 622.2
------ ------ -------- --------
Total $644.1 $688.6 $1,357.9 $1,378.0
====== ====== ======== ========
Income (Loss) Before Federal Income Taxes
Individual Life and Disability $ 16.0 $ 17.9 $ (0.1) $ 35.1
Employee Benefits 8.5 23.1 21.2 40.1
Other Operations 27.4 16.0 50.4 36.4
------ ------ -------- --------
Total $ 51.9 $ 57.0 $ 71.5 $ 111.6
====== ====== ======== ========
</TABLE>
The Other Operations segment now includes the results of the group medical
business which was sold in the second quarter of 1995. Previously, these
results were reported separately in the Medical Services segment.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA AND SUBSIDIARIES
JUNE 30, 1995
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.
NOTE 5--SALE OF A PORTION OF A LINE OF BUSINESS
On December 20, 1994, the Company entered into an Asset and Stock Purchase
Agreement (the Agreement) with Healthsource, Inc. (Healthsource) whereby
Healthsource agreed to acquire certain assets and assume certain liabilities of
the Company's group medical business. The sale was completed on May 31, 1995
effective April 30, 1995. The Company received $131.0 million in cash and
$100.0 million of a new issue of Healthsource 6.25% preferred stock which is
redeemable at par for two years or exchangeable for marketable securities under
certain circumstances. Pursuant to the Agreement, assets were transferred to
Healthsource which had a carrying value of approximately $297.5 million.
Liabilities assumed by Healthsource in connection with the transferred business
totaled $221.5 million. Total revenue and income before federal income taxes
for the group medical business were $146.2 million and $3.3 million,
respectively, for the four month period ended April 30, 1995. The gain on sale
of the Company's group medical business increased second quarter and
year-to-date operating earnings by $21.8 million ($0.48 per common share)
before taxes and $14.2 million ($0.31 per common share) after taxes.
NOTE 6--RESTATEMENT
The Company restated its first quarter results to correct premium income and
related expenses. This restatement is reflected in year-to-date statements of
income and cash flows and in the segment information. During the process of
separating the group business between the product lines retained by the Company
and the product lines sold as part of the Medical Services business, an error
occurred which resulted in the overstatement of premium income by $6.3 million,
of income before federal income taxes by $6.1 million, of net income by $4.0
million, of income before federal income taxes per common share of $0.14, and
of net income per common share of $0.09.
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<PAGE> 11
INDEPENDENT AUDITORS' REPORT ON REVIEW
OF INTERIM FINANCIAL INFORMATION
Board of Directors and Shareholders
Provident Life and Accident Insurance Company of America
We have reviewed the accompanying condensed consolidated statement of financial
condition of Provident Life and Accident Insurance Company of America and
Subsidiaries as of June 30, 1995, the related condensed consolidated statements
of income for the three and six month periods ended June 30, 1995 and 1994, and
the condensed consolidated statements of cash flows for the six month periods
ended June 30, 1995 and 1994. 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 Life
and Accident Insurance Company of America and Subsidiaries as of December 31,
1994, 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 6, 1995, 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, 1994, 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
August 9, 1995
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenue excluding net realized investment gains/losses ("revenue")
decreased $23.2 million, or 3.4 percent, to $668.7 million in the second quarter
of 1995 from $691.9 million in the second quarter of 1994. The decline was the
result of a decrease in revenue in the other operations segment ($46.0 million),
which more than offset higher revenue in the individual life and disability
segment ($16.5 million) and employee benefits segment ($6.3 million).
For the first six months of 1995, revenue increased $0.8 million to
$1,386.4 million from $1,385.6 million in the first six months of 1994. Revenue
in the other operations segment declined $48.5 million, which was offset by
increased revenue in the individual life and disability segment ($33.1 million)
and employee benefits segment ($16.2 million).
Income before net realized gains and losses and federal income taxes
("income") increased $16.2 million, or 26.9 percent, to $76.5 million in the
second quarter of 1995 from $60.3 million in the second quarter of 1994. The
increase was the result of higher income in the individual life and disability
segment ($1.5 million) and other operations segment ($28.6 million), which was
partly offset by decreased income in the employee benefits segment ($13.9
million).
For the first six months of 1995, income declined $19.2 million, or 16.1
percent, to $100.0 million from $119.2 million in the first six months of 1994.
Lower income in the individual life and disability segment ($29.5 million) and
employee benefits segment ($18.5 million) was partly offset by increased income
in the other operations segment ($28.8 million).
INDIVIDUAL LIFE AND DISABILITY
Revenue in this segment increased $16.5 million, or 7.0 percent, to
$251.1 million in the second quarter of 1995 from $234.6 million in the second
quarter of 1994. Increases in both premium income and net investment income
contributed to the higher revenue. Premium income increased $0.2 million, or
0.1 percent, to $159.8 million in the second quarter of 1995 from $159.6 million
in the second quarter of 1994. The increase was the result of higher premium
income in the individual disability income line of business, which increased
$1.0 million, or 0.7 percent, to $144.1 million in the second quarter of 1995
from $143.1 million in the second quarter of 1994. Net investment income for
the segment increased $15.2 million, or 20.7 percent, to $88.5 million in the
second quarter of 1995 from $73.3 million in the second quarter of 1994. The
increase was the result of increased capital and surplus allocated to the
individual disability line of business, the normal growth in reserve liabilities
and related assets held in individual life and disability contracts, and the
growth in investment income related to the deferred deposits in the annuity line
of business.
For the first six months of 1995, revenue increased $33.1 million, or
7.1 percent, to $501.5 million from $468.4 million in the first six months of
1994. Premium income increased $2.2 million, or 0.7 percent, to $320.2 million
in the first six months of 1995 from $318.0 million in the first six months of
1994. Increased premium income in the individual disability income line offset a
decline in premium income from the individual life line of business. Net
investment income increased $28.0 million, or 19.1 percent, to $174.6 million in
the first six months of 1995 from $146.6 million in the first six months of
1994. The increase was the result of increased capital and surplus allocated to
the individual disability line of business, the normal growth in reserve
liabilities and related assets held in individual life and disability contracts,
and the growth in investment income related to the deferred deposits in the
annuity line of business.
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<PAGE> 13
In November 1994, the Company announced its intention to discontinue
selling individual non-cancellable disability income contracts with long-term
own-occupation provisions (other than conversion policies available under
existing contractual arrangements). The Company will focus on replacing the
traditional non-cancellable, long-term own-occupation contracts with "loss of
earnings" contracts which insure income rather than occupation and require the
insured to participate in occupational rehabilitation as appropriate.
During this product transition period, premium income in the individual
disability line is expected to decline as a result of a period of lower sales
and the premium differential that exists between the traditional
non-cancellable, own-occupation contracts and the new loss of earnings
contracts. The magnitude and duration of the expected decline are dependent on
the response of customers and competitors in the industry.
This segment reported income of $17.3 million in the second quarter of
1995 compared to $15.8 million in the second quarter of 1994, an increase of
$1.5 million, or 9.5 percent. The individual disability line of business
produced income of $10.2 million in the second quarter of 1995 compared to
income of $8.1 million in the second quarter of 1994. This line benefited from
improved claim experience in the second quarter of 1995 relative to the year ago
quarter and the first quarter of 1995. Management believes that improved claims
handling procedures, initiated over the past several months, helped produce this
improvement in experience. New claims in the second quarter of 1995 were lower
than the level experienced in the first quarter of 1995, but above the levels of
the year ago quarter.
For the first six months of 1995, the segment reported income of $0.5
million compared to $30.0 million in the first six months of 1994. The decline
is primarily due to the individual disability income line, which produced a loss
of $10.3 million in the first six months of 1995 compared to income of $15.5
million in the first six months of 1994. The loss was a result of adverse claim
experience in the first quarter of 1995 on individual non-cancellable disability
income contracts with own-occupation provisions which were issued between 1983
and 1989. Specifically, the severity of the new claims in the first quarter of
1995 was higher than the average levels experienced in the 1994 first quarter
and for all of 1994, and the level of claim terminations was lower relative to
both periods.
A loss recognition deficiency of $423.0 million on a pre-tax basis was
recorded as an increase in "policy and contract benefits" and "change in
reserves for future policy and contract benefits" in the third quarter of 1993
to reflect the lower interest rates available at the time of the charge compared
to the interest rate assumptions used in pricing the business at earlier dates.
Higher than expected claim experience, caused by the general economic recession
and trends in particular regions of the country toward increasing claims for
certain occupations and types of disabilities, also contributed to the
requirement under generally accepted accounting principles to record the
deficiency. Although interest rates are currently consistent with those
projected at the time of the charge, it is not reasonably possible to determine
at this time exactly what the trends in interest rates will be.
Besides movement of interest rates, changes in expenses and morbidity
can affect results. The loss recognition study performed as of September 30,
1993, also 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. Incidence and termination rate studies have been performed as of
December 31, 1994, to evaluate actual morbidity experience. Morbidity
experience was at somewhat higher levels than expected for 1994, and also the
first quarter of 1995. In the second quarter of 1995, however, actual
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<PAGE> 14
morbidity experience was more in line with expected experience. It is not
possible at this time to predict what actual morbidity will be in the future.
However, if morbidity experience is higher than the levels assumed in the loss
recognition studies, a further adjustment might be required. Since the study
in 1993, expenses have been lower than projected in that study, primarily as a
result of expense control efforts and centralization of the claims-paying
function into the home office.
The Company considers its individual disability income business to be
one block or line of business for purposes of conducting a loss recognition
study. The individual disability income business is analyzed on an ongoing basis
to determine particular geographic areas, occupations, policy provisions, etc.
which may be a factor in the results being experienced. Such reviews have shown
that policies written for medical professionals and for residents of California
and south Florida are more likely to result in claims than those written in
other professions or in other areas of the United States or Canada.
Additionally, policies written during the period 1983 through 1989 have a higher
claim rate than those policies written before or after this time period. The
Company, in intense competition with other companies in this line of business
during this time period, liberalized underwriting standards and policy
provisions without a corresponding increase in premium rates to offset the
increased risk undertaken. Since 1989, however, the Company has been
strengthening its underwriting and policy provisions and adjusting the price on
its new business written to better reflect the risks in this line of business.
Because individual disability income policies are long-term contracts
(with typical effective terms of five to forty years, depending upon the age of
the insured at the time of issue), assumptions as to interest rates and
morbidity, as well as expenses, lapse rates and other variables, used to price
the product and to calculate policyholder liabilities during the term of the
contracts, must be made with a long-term perspective. Fluctuations in actual
experience from such assumptions are normal, especially since these assumptions
are a long-term prediction of future events and conditions. These assumptions
are long-term averages of the experience that the Company expects to realize
over the duration of the policies and do not attempt to predict each short-term
rise or decline in interest rates, morbidity, or other factors. Variations
between actual experience and such long-term averages are monitored through a
variety of ongoing statistical studies. Such variations over a one or two year
period do not necessarily indicate that a change in the long-term assumptions is
necessary or that higher or lower reserves are required. Normally, such
fluctuations between actual experience and assumed experience are included in
income or loss in the current year. However, when these deviations occur in a
magnitude and/or over a time period such that if they continued the sufficiency
of reserves and the recoverability of deferred policy acquisition costs is
questionable, it is prudent to perform a loss recognition study.
In a loss recognition study, the Company uses its best estimates as to
future experience with regard to interest rates, morbidity rates, lapse rates,
expenses, and other factors to update its assumptions. These revised
assumptions are then used to determine if reserves currently held plus the
present value of future cash inflows (primarily from premiums and investment
income) are projected to be sufficient to meet the present value of future cash
outflows (primarily for benefits and expenses) and the amortization of deferred
policy acquisition costs. If they are not sufficient, an additional provision
must be recorded either as a reduction of deferred policy acquisition costs or
as an increase in reserve liabilities.
While claims were higher and interest rates generally lower in 1991 than
in previous years, at that time the Company believed these fluctuations to be
short-term and acceptable variations from the assumptions underlying these
long-term policies. However, in light of a continuing decline in interest rates
and deterioration of morbidity experience during 1992, the Company began such a
loss recognition study on its individual disability income business in December
1992 to determine whether or not a loss recognition deficiency existed at
December 31, 1992. An
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<PAGE> 15
independent actuarial consulting firm was engaged to assist in the development
of a gross premium valuation model appropriate to the Company's business, to
review the reasonableness of the assumptions used by the Company at the time of
the study, and to work with Company employees in the actual performance of the
calculations. The loss recognition study completed in February 1993 showed
that no loss recognition deficiency existed at December 31, 1992, using the
assumptions with respect to morbidity, interest rates, and expenses that
reflected management's best estimates as of that date. Although there is
always uncertainty as to the direction of future morbidity experience and
interest rates, the Company believed the results of the study indicated that
reserves were sufficient as of that date. The Company also believed at that
time that, under its "most likely case" scenario, interest rates would rise in
1993 and morbidity rates would do no worse than remain at 1988-1992 levels.
Through the first half of 1993, however, the interest rates continued to
decline, and the Company experienced further morbidity deterioration related to
this business. As a result, reserves were increased during the first two
quarters of 1993. Also, as part of its normal, ongoing reserve analysis, the
Company performs several detailed actuarial studies, including measuring
morbidity experience over a run-off period of several years. Increased claim
activity experienced in the first two quarters of 1993 and studies performed in
the second and third quarters of 1993, which reflected 1992 morbidity
experience, caused management to revise its December 31, 1992, estimate of
long-term morbidity rates. At the same time, the portfolio of assets related to
this line of business experienced a significant decline in long-term interest
rates combined with increased prepayment of fixed maturity securities, resulting
in a significant decline in the portfolio's future investment returns. The
yields on assets supporting the individual disability business declined to 9.32
percent at the end of the first quarter and to 9.17 percent at the end of the
second quarter, compared to an aggregate yield of 9.57 percent at the end of
1992.
Because of these developments during the first half of 1993, the Company
again evaluated the sufficiency of reserves and the recoverability of deferred
policy acquisition costs. Although a loss recognition study had been scheduled
for year-end 1993 as a follow-up to the study at December 31, 1992, the
deviations between actual experience and assumptions were widening rapidly
enough to warrant accelerating the study to the third quarter of 1993 to
determine if reserves continued to be sufficient in light of these fluctuations.
The specific conditions that precipitated the third quarter 1993 loss
recognition study were:
1. A sharp drop in interest rates as evidenced by the decline in the
rate on 10-year U.S. Treasury Notes from 6.93 percent in December
1992, to 5.23 percent in September 1993. This drop of 170 basis
points was a 25 percent decline in nine months.
2. Prepayment of many fixed maturity securities during this nine-month
period, brought about primarily by the lower interest rate levels,
caused the yield on the portfolio supporting the individual
disability income business to decline 59 basis points in only nine
months.
3. Morbidity studies covering the first and second quarters of 1993
reflected further deterioration in morbidity experience during this
part of 1993 compared with previous morbidity experience.
The September 30, 1993, loss recognition study followed the same
principles as the study performed as of December 31, 1992. The independent
actuarial consulting firm, which assisted in conducting the December 1992 study,
served in a review capacity (rather than as an active participant) in the
performance of the study. Based upon the revised assumptions, which
-14-
<PAGE> 16
represented management's best estimates at the time of the study, a loss
recognition deficiency of $423.0 million on a pre-tax basis was required to be
recognized under generally accepted accounting principles. Management believes
that the required charge taken in the third quarter was a prompt and
appropriate response to these previously unforeseen changes.
The December 31, 1994, study again followed the same principles as the
previous two studies. Based upon the revised assumptions, which represented
management's best estimates at the time of the study, reserves were adequate at
the end of 1994.
The following table shows the new money interest rate assumptions on a
net effective yield rate basis and the portfolio yield interest rate assumptions
which were used in the December 31, 1992, September 30, 1993, and December 31,
1994, loss recognition studies.
The interest rate assumptions in each of the loss recognition studies
represented management's best estimates at the time the studies were performed.
The equivalent level portfolio net effective yield rate represents the effective
yield on the portfolio over a thirty year period, using the actual portfolio
yield at the date of the loss recognition study and the assumed yield rates at
which new money will be invested.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------
December 31, 1992 September 30, 1993 December 31, 1994
------------------------------------------------------------------------------------------------------------
New New New
Money Portfolio Money Portfolio Money Portfolio
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993 8.19% 9.38%
1994 8.92 9.33 6.53% 8.57%
1995 8.92 9.27 6.51 8.46 7.95% 8.40%
1996 8.92 9.24 6.82 8.43 7.64 8.29
1997 8.92 9.21 7.07 8.45 7.64 8.20
1998 8.92 9.18 7.13 8.42 7.64 8.13
Ultimate 8.92 8.92 7.13 7.13 7.64 7.64
Equivalent Level Portfolio
Net Effective Yield Rate: 9.27% 9.27% 7.91% 7.91% 8.19% 8.19%
------------------------------------------------------------------------------------------------------------
</TABLE>
Annual net effective interest rates at which new money was actually
invested for the individual disability income business for the year 1992, the
first nine months of 1993, and the year 1994 were 8.82 percent, 7.59 percent,
and 8.17 percent, respectively. The net effective interest rate at which new
money was invested for this line in the second quarter of 1995 was 7.98 percent
and 8.32 percent for the first half of 1995. The overall net effective
portfolio yield rates for invested assets supporting the individual disability
income business were 9.57 percent, 8.98 percent, and 8.64 percent as of
December 31, 1992, September 30, 1993, and December 31, 1994, respectively.
The overall net effective portfolio yield for invested assets supporting this
line was 8.58 percent at June 30, 1995. The September 1993 loss recognition
study projected that morbidity would improve as a result of 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. The December 1994 study also projected improved morbidity, with
reduced or delayed improvement, but projected no improvement in the economy.
-15-
<PAGE> 17
In performing a loss recognition study the Company is required to use
its best estimates with regard to assumptions used in the calculation. Using
"best estimates" means that no provision for adverse deviation is included in
the assumptions and the expectation is for a break-even outcome, that is, there
is about an even chance that experience will be better than or worse than the
assumptions. If future experience conforms to assumptions used in the loss
recognition study, no gain or loss would be expected from the line of business
other than (i)investment income relative to the capital and surplus allocated to
that line, and (ii) profit from new individual disability income policies. If
actual experience in a future period is worse than assumed and is expected to
continue, an additional loss would have to be recognized. If actual experience
is better than assumed, the resulting gain will be recognized over future years
as it is actually realized.
On a pre-tax basis, approximately 51 percent of the difference between
the results of the December 1992 and September 1993 loss recognition studies
related to the effects of rapidly declining interest rates during 1993,
including prepayment of fixed maturity securities as well as lower portfolio
yields on both new and reinvested money. Approximately 26 percent of the
difference related to higher morbidity costs and the associated claim
administration expenses. Approximately 11 percent of the difference was related
to the inclusion in the September 1993 loss recognition study of guaranteed
increases in coverage on existing policies. The remaining amount was primarily
attributable to differences in assumptions with respect to expenses, other than
claim administration expenses, and to persistency.
Based on the assumptions used in the September 1993 loss recognition
study, a ten basis point change in the equivalent level interest rates would
result in approximately a $22 million change in reserves, and a one percent
change in actual to assumed morbidity would result in approximately a $29
million change in reserves. Based on the assumptions used in the December 1994
study, a ten basis point change in the equivalent level interest rates would
result in approximately a $29 million change in reserves, and a one percent
change in actual to assumed morbidity would result in approximately a $28
million change in reserves.
It is not possible to predict with certainty whether morbidity, interest
rates, and fixed maturity securities prepayments 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 further material deterioration in morbidity, interest
rates, and fixed maturity securities prepayments from current assumptions. As
part of its ongoing management of this line of business, the Company will
conduct a gross premium valuation annually to validate the continued adequacy of
current reserves.
Income from the individual life line of business declined to $5.8
million in the second quarter of 1995, compared to $7.2 million in the second
quarter of 1994. For the first six months of 1995, income from this line was
$9.5 million compared to $13.5 million in the first six months of 1994. The
decline in the first half was primarily attributable to a $1.9 million
non-recurring expense item recorded in the first quarter of 1995 pertaining to
reinsurance reserves, as well as higher mortality experience and slower revenue
growth in the second quarter of 1995.
Deposits on deferred annuities totaled $19.2 million in the second
quarter of 1995 compared to $24.9 million in the second quarter of 1994. For
the first six months of 1995, deposits totaled $62.1 million compared to $42.7
million for the first six months of 1994.
-16-
<PAGE> 18
EMPLOYEE BENEFITS
Revenue in the employee benefits segment increased $6.3 million, or 4.5
percent, to $146.7 million in the second quarter of 1995 from $140.4 million in
the second quarter of 1994. This increase was primarily the result of an
increase in premium income of $5.4 million, or 4.6 percent, to $123.2 million in
the second quarter of 1995 from $117.8 million in the second quarter of 1994.
Increased premium income in the group long-term disability (LTD), voluntary
benefits, and packaged products lines of business contributed to this increase.
Net investment income declined by $0.2 million, or 0.9 percent, to $21.3 million
in the second quarter of 1995 from $21.5 million in the second quarter of 1994.
For the first six months of 1995, revenue increased $16.2 million, or
5.8 percent, to $297.4 million from $281.2 million in the first six months of
1994. This increase was primarily the result of an increase in premium income
of $16.0 million, or 6.8 percent, to $251.5 million in the first six months of
1995 from $235.5 million in the first six months of 1994. Increased premium
income in the voluntary benefits, packaged products, group life, and group LTD
lines of business contributed to this increase. Net investment income declined
$1.2 million, or 2.8 percent, to $42.4 million in the first six months of 1995
from $43.6 million in the first six months of 1994.
Income in this segment decreased $13.9 million to $8.1 million in the
second quarter of 1995 from $22.0 million in the second quarter of 1994. The
decline is primarily attributable to higher loss ratios in the group LTD and
group life lines of business. The LTD line of business produced a loss of $6.6
million in the second quarter of 1995 compared to income of $1.3 million in the
second quarter of 1994 due to higher claim incidence and severity. During the
first quarter of 1995, the Company notified the existing group LTD customers in
the medical and legal occupational classes that coverages will be terminated
under the terms of the existing contracts, and the Company will no longer accept
proposals for group disability coverage of new medical or legal groups. This
action will impact approximately 15 percent of the group LTD block of business,
which produced $58.9 million of premium income in 1994. Results in the group
LTD line were negatively impacted by $2.2 million in the second quarter and
first six months of 1995 due to an acceleration in the amortization of deferred
policy acquisition costs. The group life line produced income of $4.2 million
in the second quarter of 1995 compared to income of $8.5 million in the second
quarter of 1994. The decline was primarily due to a higher loss ratio.
For the first six months of 1995, income in this segment declined $18.5
million to $20.5 million from $39.0 million in the first six months of 1994. The
decline is primarily attributable to higher loss ratios in the group LTD and
group life lines. Group LTD produced a loss of $10.1 million in the first half
of 1995 compared to income of $2.9 million in the first half of 1994 due to
higher claims and severity. Income from the group life line declined to $7.8
million in the first six months of 1995 from $15.8 million in the first six
months of 1994 due to the poor experience in the second quarter of 1995.
OTHER OPERATIONS
Revenue in the other operations segment declined $46.0 million, or 14.5
percent, to $270.9 million in the second quarter of 1995 from $316.9 million in
the second quarter of 1994. Net investment income declined $11.0 million, or
5.2 percent, to $200.0 million in the second quarter of 1995 from $211.0 million
in the second quarter of 1994. This was a result of the lower investment income
from the corporate (unallocated) capital and assets, which are included in this
segment, due to additional capital being allocated to the individual disability
line of business, and lower investment income in the group pension line due to a
decrease in funds under management. Premium income declined $38.9 million to
$30.1 million in the second quarter of 1995 from $69.0
-17-
<PAGE> 19
million in the second quarter of 1994 due to the sale of the medical services
business to Healthsource, Inc. This segment includes only one month of results
of the medical services line in the second quarter of 1995, due to the sale of
this line effective May 1, 1995. This line of business produced $23.5 million
of premium income and $12.4 million of fee income in April compared to $61.5
million and $34.5 million, respectively, for the second quarter of 1994.
For the first six months of 1995, revenue declined $48.5 million, or 7.6
percent, to $587.5 million from $636.0 million in the first six months of 1994.
Net investment income declined $14.5 million, or 3.4 percent, to $405.8 million
in the first half of 1995 from $420.3 million in the first half of 1994. This
was a result of lower investment income from the corporate (unallocated) capital
and assets, the group pension line, and the inclusion of only four months of net
investment income for the medical services line. Premium income in this segment
declined $39.3 million, or 27.7 percent, to $102.4 million in the first half of
1995 from $141.7 million in the first half of 1994. The decline was primarily
the result of the sale of the medical services business which became effective
May 1, 1995. This line produced $90.9 million of premium in the first four
months of 1995, compared to $127.5 million in the first six months of 1994.
Premium income in this segment was also impacted by the discontinuation of the
sale of group single premium annuities which produced $0.7 million of premium
income in the first half of 1995 compared to $3.0 million in the first six
months of 1994.
Income in this segment increased $28.6 million, or 127.1 percent, to
$51.1 million in the second quarter of 1995 from $22.5 million in the second
quarter of 1994. This segment includes a before-tax gain of $21.8 million from
the sale of the medical services business to Healthsource during the second
quarter of 1995. Within this segment, the group pension line of business
produced income of $17.5 million in the second quarter of 1995, compared to
$11.9 million in the second quarter of 1994. This line of business benefited
from an improvement in the spread between interest credited on contracts and the
interest earned on the invested assets.
During the first half of 1995, income in this segment increased $28.8
million, or 57.4 percent to $79.0 million from $50.2 million in the first half
of 1994. The increase is primarily due to the gain from the medical services
sale and the improved results in the group pension line. Results in the second
quarter and first six months of 1995 were negatively impacted by a $1.9 million
guaranty fund assessment.
The Company announced in December 1994, that it would discontinue the
sale of traditional guaranteed investment contracts (GICs). Traditional GICs
under management declined $1.21 billion, or 16.8 percent, to $6.01 billion at
June 30, 1995, from $7.22 billion at June 30, 1994. Total funds under
management and equivalents decreased $0.15 billion, or 1.5 percent, to $9.91
billion at June 30, 1995 from $10.06 billion at June 30, 1994. Included in this
total are accumulated funds from the sale of synthetic GICs which totaled $2.25
billion at June 30, 1995 compared to $1.21 billion at June 30, 1994. Deposits of
synthetic GICs totaled $418.0 million in the second quarter of 1995, compared to
$250.8 million in the second quarter of 1994. Deposits of synthetic GICs
totaled $620.6 million in the first half of 1995 compared to $574.7 million in
the first half of 1994.
Income from the block of corporate-owned life insurance, included in the
other operations segment, improved to $9.3 million in the first half of 1995
from $8.8 million in the first half of 1994. Improved mortality experience was
a primary source of the higher income in this line of business.
-18-
<PAGE> 20
LIQUIDITY AND CAPITAL RESOURCES
As a holding company, the Company is dependent upon payments from its
wholly-owned subsidiary, Provident Life Capital Corporation ("Capital"), to pay
dividends to its shareholders and to pay its expenses. Capital is also a
holding company and therefore dependent upon payments from its wholly-owned
subsidiary, Provident, to pay dividends, to meet its debt service obligations
and to pay its expenses. These payments by Provident may take the form of
either dividends or interest payments on amounts loaned to Provident by Capital.
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, the Company'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 3 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 10 percent of
its surplus as regards policyholders, as determined at the end of the preceding
year in accordance with prescribed or permitted accounting practices. Under
these regulatory restrictions, up to $80.4 million would be available in 1995
for the payment of dividends or other distributions by the Company without
regulatory approval.
The Company's requirements are met primarily by cash flow provided from
operations, principally in Provident. Cash flow from operations has been
substantial over the past three years. Premium and investment income as well as
maturities and sales of invested assets provide the primary sources of cash.
Cash flows from operations were ample in the first six months of 1995 and 1994.
Premium and investment income as well as maturities and sales of invested assets
provide the primary sources of cash. Cash is applied to the payment of policy
benefits, cost 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.
The Company expects that the sale of the group medical services business
to Healthsource will have no material adverse effect on its liquidity. The sale
produced an after-tax gain of $14.2 million on a generally accepted accounting
principles (GAAP) basis and an after-tax gain of $86.4 million on a statutory
basis.
The Company expects no material adverse effect on its liquidity as a
result of the strategic decision to discontinue the sale 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 toward a cash-matching investment strategy. In
addition, management expects that capital from the GIC business will be
redeployed in other lines of business or used for other business purposes.
INVESTMENTS
The Company is actively exploring transactions which will reduce its
exposure to both restructured mortgage loans and currently performing mortgage
loans either through the outright sale of mortgage loans or the securitization
of part or all of the portfolio. In anticipation of the sale the Company has
used puts on Treasury securities to hedge the expected proceeds from the sale.
On May 10, 1995, the Company sold restructured mortgage loans with a principal
amount of $147.5 million and a book value of $122.6 million. The Company
received $99.5 million in cash for these restructured loans, which resulted in a
before-tax realized investment loss of $23.1 million.
-19-
<PAGE> 21
Prior to 1992, the Company experienced increases in non-current
investments. For the past three years, however, the Company's exposure to such
investments has declined significantly. These non-current investments are
primarily foreclosed real estate investments, mortgage loans which became more
than thirty days past due in their principal and interest payments, and bonds
and preferred stocks in default. Non-current investments at June 30, 1995 were
$104.0 million, or 0.68 percent of invested assets. Non-current investments at
year-end 1994 were $88.5 million, or 0.59 percent of invested assets, compared
to $170.2 million, or 1.13 percent of invested assets, at year-end 1993.
A distribution of the mortgage loan portfolio by state and by property
type as of June 30, 1995 is presented below.
<TABLE>
<CAPTION>
Percent of
Region Amount Mortgage Portfolio
------ ------ ------------------
(in millions)
<S> <C> <C>
Pacific $ 336.6 27.2%
South Atlantic 274.4 22.2
East North Central 168.8 13.7
Mountain 136.5 11.0
West North Central 112.2 9.1
West South Central 100.7 8.1
East South Central 97.2 7.9
Middle Atlantic 25.9 2.1
New England 6.2 0.5
Mortgage Loan Loss Reserve (22.2) (1.8)
-------- -----
TOTAL $1,236.3 100.0%
======== =====
</TABLE>
<TABLE>
<CAPTION>
Property Percent of
Type Amount Mortgage Portfolio
---- ------ ------------------
(in millions)
<S> <C> <C>
Retail $ 401.2 32.5%
Apartment 307.6 24.9
General Office Buildings 188.1 15.2
Industrial & Warehouse 184.4 14.9
Healthcare 142.3 11.5
Hotel/Motel 23.9 1.9
Other 11.0 0.9
Mortgage Loan Loss Reserve (22.2) (1.8)
-------- -----
TOTAL $1,236.3 100.0%
======== =====
</TABLE>
The basic types of risk associated with mortgage lending are default
risk (that the borrower will fail to make payments as scheduled), interest rate
risk (that the interest rate charged to a borrower will fall below the lender's
cost of funds), and inflation risk (that the rate of return expected when the
loan was made does not adequately compensate the lender for actual inflation
over the term of the loan). Additionally, the secondary market for certain
types of mortgage loans can be highly illiquid.
-20-
<PAGE> 22
The following chart outlines the mortgage loan portfolio and delinquent
loans, restructured mortgage loans, foreclosed real estate, and bonds and
preferred stocks in default.
<TABLE>
<CAPTION>
June 30, 1995 Dec 31, 1994 Dec 31, 1993
------------- ------------ ------------
($ in millions)
<S> <C> <C> <C>
Mortgage Loans $ 1,236.3 $ 1,502.5 $ 1,824.9
Invested Assets 15,258.7 15,017.6 15,009.6
Mortgage Loans as Percent
of Invested Assets 8.1% 10.0% 12.2%
Delinquent Mortgage Loans $ 40.5 $ 25.4 $ 64.7
Restructured Mortgage Loans 66.4 243.5 246.2
Foreclosed Real Estate 32.3 45.2 81.4
Problem Mortgages as Percent
of Invested Assets 0.9% 2.1% 2.6%
Mortgage Loan Reserve $ 22.2 $ 49.0 $ 55.3
Real Estate Reserve - Foreclosed 11.6 10.6 12.0
Real Estates Reserve - Investment 7.0 7.7 0.7
Bonds and Preferred Stocks
in Default $ 31.2 $ 17.9 $ 24.1
</TABLE>
Management believes the mortgage loan loss reserve is adequate given the
level of delinquent mortgage loans. Foreclosed real estate is reported at the
lower of cost or fair value.
Management does not expect the non-current mortgage loan and foreclosed
real estate investments to have a material adverse effect on its results of
operations, financial condition, or ability to hold its other investments to
maturity. This is primarily because of the relatively small amount of these
non-current investments compared to total invested assets and to the total of
high quality, liquid investments. Mortgage loans are placed on a non-accrual
status when the loan becomes thirty days past due, and at that time all accruals
on such delinquent mortgage loans are reversed.
In addition, the Company actively manages its non-current investments
through sales and leasing of foreclosed real estate in order to achieve the
highest current return as well as to preserve capital. Write-downs and
provisions for losses on mortgage loans and foreclosed real estate were $16.8
million for the year 1994. During the first half of 1995, the Company increased
the loss provision for $3.0 million and released $31.4 million from the reserve
as actual losses were incurred. The net effect was a realized investment loss
of $3.0 million. These losses are not expected to have a material adverse
impact on the financial condition and results of the Company due to the strong
capitalization of the Company.
During the first six months of 1995, the Company sold six foreclosed
properties with a book value of $11.7 million. During 1994, the Company sold
thirteen foreclosed properties with a book value of $58.9 million at the date of
sale.
The Company's investment in mortgage-backed securities totaled $3.1
billion on an amortized cost basis at June 30, 1995, and $3.3 billion at
December 31, 1994. At June 30, 1995,
-21-
<PAGE> 23
the mortgage-backed securities had an average life of 5.7 years and effective
duration of 3.6 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 prepayments 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
adversely affect its ability to hold its other investments 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 maturities at
June 30, 1995, was $841.4 million, representing 5.5 percent of invested assets,
below the internal limit of 7.5 percent of investment assets for this type of
investment. The Company's exposure to below-investment-grade fixed maturities
at December 31, 1994, was $694.8 million, representing 4.6 percent of invested
assets. The Company's holding of $100 million of Healthsource 6.25% preferred
stock, related to the sale of the group medical services business, is included
in this figure at June 30, 1995.
In the fourth quarter of 1994, the Company announced that it would
discontinue the sale of traditional GICs as a part of its overall strategic
review. Subsequently, the decision was made to move to a cash-matched basis
instead of a duration-matched basis. In the fourth quarter of 1994, the
investment portfolio of Provident National Assurance Company ("PNAC"), one of
the Company's subsidiaries through which group pension products are marketed,
was rebalanced. Approximately $220 million of long duration bonds were sold to
fund maturing liabilities, and the balance was reinvested in shorter duration
bonds in order to minimize the exposure to interest rate changes. Approximately
$7 million in capital losses was realized from the sale of longer duration
assets. In addition, the future sales value of approximately $700 million in
assets held by PNAC was hedged by entering into $200 million (notional value) of
futures contracts and $500 million (notional value) of forward interest rate
swaps. The net asset and hedge losses that could potentially be realized over
the next two years are presently estimated to be approximately $30 million
within a range of $3 million to $6 million per quarter, assuming interest rates
do not increase more than 100 basis points and asset spreads do not change
dramatically. In addition, in the fourth quarter of 1994 the Company used
forward interest rate swaps to hedge $300 million of anticipated future asset
sales in the group pension investment portfolio of Provident, the other of the
Company's subsidiaries through which group pension products are marketed.
During 1995, management has continued to adjust the investment
portfolio. GIC contracts totaling $643 million were restructured on a duration
neutral basis, moving maturities from 1996 and 1997 to 1995, 1998, and 1999.
Hedge transactions totaling $300 million were initiated, fixing the sales price
of future asset sales. In addition, $104 million of long maturity bonds were
sold in the Provident group pension portfolio with $69 million of the proceeds
transferred to PNAC in cash in exchange for bonds which mature in 1997 and $35
million
-22-
<PAGE> 24
invested in 1997 bonds which mature in 1997. Management has added resources in
the investment area to address modeling and testing all asset and liability
portfolios to improve interest rate risk management.
REVIEW BY INDEPENDENT AUDITORS
The condensed consolidated financial statements at June 30, 1995, and
for the three month and six month periods then ended have been reviewed, prior
to filing, by Ernst & Young LLP, the Company's independent auditors, and their
report is included herein.
-23-
<PAGE> 25
PART II - OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Company conducted its Annual Meeting of Stockholders on June
13, 1995. Proxies for the meeting were solicited pursuant to
Regulation 14 under the Securities Exchange Act of 1934. The
stockholders elected all of management's nominees for the Board of
Directors as listed in the proxy statement and also approved the
Reorganization of the Company (vote FOR: 32,604,236; AGAINST: 296,502;
ABSTAIN: 364,211; NON-VOTE: 8,360,827); a proposal to allow the meeting
to be adjourned if sufficient votes to approve the Reorganization were
not received (vote FOR: 31,870,329; AGAINST: 2,489,042; ABSTAIN:
152,456; NON-VOTE: 7,113,949); an amendment to the Annual Management
Incentive Compensation Plan of 1994 (vote FOR: 30,960,315; AGAINST:
623,256; ABSTAIN: 271,162; NON-VOTE: 5,362,301); amendments to the
Stock Option Plan of 1994 (vote FOR: 26,620,255; AGAINST: 836,247;
ABSTAIN: 267,917; NON-VOTE: 9,492,615); and the Provident Employee
Stock Purchase Plan (vote FOR: 29,197,238; AGAINST: 586,887; ABSTAIN:
258,505; NON-VOTE: 7,174,404); all as described in the Proxy Statement.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10.1 An amendment to the Annual Management Incentive
Plan of 1994
Exhibit 10.2 Amendments to the Stock Option Plan of 1994
Exhibit 10.3 Employee Stock Purchase Plan
Exhibit 15 Letter re unaudited interim financial
information
Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K June 1, 1995
-24-
<PAGE> 26
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 Life and Accident Insurance
Company of America
Date: August 10, 1995 /s/ J. Harold Chandler
--------------------------------------
J. Harold Chandler
President and Chief Executive Officer
Date: August 10, 1995 /s/ Thomas R. Watjen
--------------------------------------
Thomas R. Watjen
Executive Vice President and
Chief Financial Officer
-25-
<PAGE> 27
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM 10-Q
PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA
<TABLE>
<CAPTION>
Page
<S> <C> <C>
Exhibit 10.1 An amendment to Annual Management Incentive Compensation
Plan of 1994 27
Exhibit 10.2 Amendments to Stock Option Plan of 1994 29
Exhibit 10.3 Employee Stock Purchase Plan 31
Exhibit 15 Letter re unaudited interim financial information 38
Exhibit 27 Financial Data Schedule (for SEC use only) 39
</TABLE>
-26-
<PAGE> 1
EXHIBIT 10.1
AMENDMENT NO. 1 TO THE
ANNUAL MANAGEMENT INCENTIVE COMPENSATION PLAN OF 1994
(Approved by Stockholders on June 13, 1995)
1. The section headed MEASURES OF PERFORMANCE is amended to reflect the
following:
a) Performance measure (a), Corporate earnings (after-tax operating
earnings per share) is revised to provide a table of award levels
as related to percent of goal achieved which provides for no award
if earnings per share do not exceed 90% of goal. The table is as
follows:
Corporate After-Tax Operating Earnings Performance
<TABLE>
<CAPTION>
Earnings per share Percent
(% of goal) Achievement Awarded
---------------- -------------------
<S> <C>
90% 0
93 50%
97 75
100 100
104 110
110 125
120 150
130 200
Above 130 Additional 25% per
10% of goal reached
</TABLE>
b) Performance measure (b) is deleted and replaced by the following
performance measure:
Efficiency Ratio
<TABLE>
<CAPTION>
%
Ratio Achievement
----- -----------
<S> <C>
25.71% 0
25.66 25%
25.48 50
25.29 75
25.18 90
25.10 100
25.06 110
25.00 125
24.89 150
24.65 200
</TABLE>
*Maximum = 200% Achievement
-27-
<PAGE> 2
"Efficiency Ratio" is defined as the ratio of expenses to premium
income (including Group administrative services only fees).
2. The Plan is further amended to add a Key Contributor Plan. This plan
will function as follows:
a) There will be 5-25 participants each year, with participation for
the year based on special performance.
b) Award payments under the plan will be equivalent to a flat dollar
amount not related to salary.
c) Determination of participants and payout amounts will be made by
the Compensation Committee upon recommendation by the CEO.
d) Award payments will be made in the Class B Common Stock of the
Company, with the number of shares determined by dividing the
dollar value of the award by the market price of the stock at the
time of the award.
e) While the participant will own the stock immediately upon grant,
the stock cannot be sold for a period of three years from the date
of grant.
The total cost of this plan will not exceed $1,750,000 during any year.
-28-
<PAGE> 1
EXHIBIT 10.2
AMENDMENT NO. 1 TO STOCK OPTION PLAN OF 1994
(Approved by Stockholders on May 4, 1994)
Eligibility for Non-Employee Directors
As a logical extension of the stated purpose of the Plan, the Company believes
that non-employee members of the Board of Directors also should be encouraged
and enabled to acquire an ownership interest in the Company for the same
reasons applicable to key employees. Therefore, the Plan is amended to allow
grants of stock options to non-employee Directors.
Stock option awards shall be awarded to non-employee Directors elected to the
Board for the first time on or after May 4, 1994. Such Directors are precluded
from participation in the existing retirement benefits program for Directors
which provides monthly cash payments upon retirement from the Board of
Directors. In addition, non-employee members of the Board of Directors
appointed prior to 1994 shall be required to elect either (i) to continue
building credits under that retirement plan or (ii) to limit such retirement
plan credits to those earned prior to 1994 and to receive stock options in the
future. The total number of stock options to be granted to all non-employee
Directors shall not exceed in the aggregate 100,000 shares (20,000 annually)
for the duration of the Stock Option Plan of 1994.
"RELOAD" TO FACILITATE STOCK OWNERSHIP BY PLAN PARTICIPATION
A new feature is being added to assist participants in purchasing and retaining
the common stock of the Company. This feature applies to all options granted
under this Plan in 1994, and to options granted under this Plan in the future
subject to the discretion of the Compensation Committee based on then
applicable tax and/or accounting rules.
To encourage increased ownership, the Plan shall include what is commonly
referred to as a "reload" feature. Under this arrangement, when options are
exercised, payment for the option shares by delivery of shares already owned by
the optionee (which were acquired either (i) by direct purchase outside the
option process, or (ii) through exercise of options more than six (6) months
prior to the date of the current exercise) would entitle the optionee to a new
stock option grant equal to the number of shares delivered. The new option
grant would acquire the remaining exercise period with respect to the options
exercised and the option price would be the then current fair market value as
defined by the Plan.
REQUIREMENT THAT STOCK PRICE REACH SPECIFIED LEVEL FOR OPTION EXERCISE
For all options granted to participants other than those granted to the CEO on
January 6, 1994, the Plan is amended to add a requirement that the price per
share of the Company's Class B common stock must reach a specified level before
half of the options in any grant can be exercised. For such options, this
specified price will be $40 per share. Options subject to this requirement
will become exercisable subject to the vesting and termination provisions of
the Plan
-29-
<PAGE> 2
when the price of the stock reaches $40 per share during any three trading days
occurring within a period of ninety (90) days. The Committee will retain
discretion to establish similar terms and conditions applicable to any options
which may be granted to the CEO.
INCREASE IN THE NUMBER OF SHARES AVAILABLE FOR GRANTS
The Plan presently stipulates that the total number of shares available though
exercise of options granted to participants will not exceed 1,000,000 shares.
The Plan is amended to increase the number of shares available for grants of
options from 1,000,000 to 3,500,000 in order to meet the need for shares
created by the other changes proposed by the Board in keeping with its
strategic emphasis on stock ownership. The maximum number of options which the
Committee may grant to any non-Director participant is limited to no more than
300,000 in a calendar year.
-30-
<PAGE> 1
EXHIBIT 10.3
EMPLOYEE STOCK PURCHASE PLAN
PURPOSE OF THE PLAN
The Employee Stock Purchase Plan of 1995 ("Plan") is sponsored by Provident
Life and Accident Insurance Company ("Company") to provide its employees and
those of its subsidiaries and affiliates an opportunity to share in the
ownership of the parent company, Provident Life and Accident Insurance Company
of America or its successor company ("America"), by providing them with a
convenient means for regular and systematic purchases of shares of the parent
company's Class B Common Stock, $1.00 par value ("Stock"), at favorable prices
and on favorable terms, and thus to develop a stronger incentive to work for
continued success of the Company.
The Plan is intended to qualify as an "Employee Stock Purchase Plan" under
Sections 421 and 423 of the Internal Revenue Code of 1986, as amended ("Code").
The provisions of the Plan will be construed in a manner consistent with the
requirements of such sections of the Code.
ADMINISTRATION
The Plan is administered by the Compensation Committee of the Board of
Directors ("Committee"). Members of the Committee are non-employee directors
who are elected by the stockholders. Members of the Committee serve without
fixed terms and are appointed or removed by the Board. The Committee has the
power to make, amend, and repeal rules and regulations for the interpretation
and administration of the Plan.
The Company reserves the right for the Committee to amend, suspend, or
discontinue the Plan. No amendments will be made without stockholder approval
if such approval is required under any law or requirement of the stock exchange
upon which the Stock is listed. Amendments to change the number of shares
reserved for option under the Plan or to decrease the option price may only be
made with stockholder approval.
STOCK SUBJECT TO PLAN; TERM OF PLAN; PRORATION OF SHARES
The total number of shares that may be optioned to all participants under the
Plan may not exceed 1,000,000 shares. The shares are available for purchases
under the Plan through December 31, 1999. Stock subject to the Plan may be
unissued shares, reacquired shares or shares bought on the open market for
purposes of the Plan. If the total number of shares to be purchased by all
participants in any Option Period exceeds the number of shares set aside for
the Plan, shares will be purchased only for the number of shares equal to a pro
rata portion of the available number of shares. If this occurs, any remaining
balance in a participant's account will be returned to the participant.
Whenever any change is made in Stock subject to the Plan or subject to
deductions outstanding under the Plan (through merger, consolidation,
reorganization, recapitalization, stock dividend, stock split, combination of
shares, exchange of shares, change in corporate structure, or otherwise),
action will be taken by the Committee to adjust the number of shares subject to
the Plan and the terms of options outstanding under the Plan.
-31-
<PAGE> 2
ELIGIBILITY
All employees of the Company and America and their subsidiaries are eligible to
participate in the Plan except:
a) Employees who own stock possessing 5% or more of the total combined
voting power or value of all classes of stock of the parent company.
b) Employees who have been employed by the Company and America and their
subsidiaries for less than 90 days.
c) Employees who customarily work 20 hours or less per week.
d) Employees who customarily work 5 months or less per calendar year.
PURCHASE PERIODS AND PURCHASE PRICE
In each calendar year there are four three-month "Purchase Periods" beginning
January 1, April 1, July 1, and October 1. Options to purchase shares under
the Plan will be granted by the Company at the beginning of each period and are
nontransferable by the employee. Each Purchase Period will end on March 31,
June 30, September 30 and December 31, respectively. Options granted at the
beginning of each Purchase Period will be exercised at the end of such Purchase
Period. Unless the participating employee withdraws from the Plan (see
"WITHDRAWAL FROM THE PLAN"), whole and fractional shares of Stock will
automatically be purchased for such participating employee with the money
withheld through payroll deductions during the period.
The purchase price per share is 85% of the fair market value of the stock on
the beginning date of a Purchase Period or the ending date of a Purchase
Period, whichever amount is lower. The fair market value of a share of stock
shall be the official closing market price of the Stock on the New York Stock
Exchange (NYSE). If the NYSE is closed, or if no sale of the Stock occurred on
either of these dates, then the closing market price on the date preceding the
beginning or ending of a Purchase Period on which there was a sale will apply.
The following examples illustrate how the purchase price is determined:
EXAMPLE #1: PURCHASE PERIOD JANUARY 1 - MARCH 31
Closing price on January 1 - $25 ($25 x 85%) = $21.25
Closing price on March 31 - $27 ($27 x 85%) = $22.95
Since 85% of $25 is less than 85% of $27, the purchase price on March 31
would be $21.25.
EXAMPLE #2: PURCHASE PERIOD JULY 1 - SEPTEMBER 30.
Closing price on July 1 - $28 ($28 x 85%) = $23.80
Closing price on September 30 - $26 ($26 x 85%) = $22.10
Since 85% of $26 is less than 85% of $28, the purchase price on
September 30 would be $22.10 per share.
-32-
<PAGE> 3
ENROLLMENT
Participation in the Plan is voluntary. When an employee becomes eligible to
participate in the Plan, such employee may enroll prior to the beginning of a
Purchase Period by completing an enrollment form. By completing this form, the
employee authorizes the Company to make after-tax payroll deductions from
compensation (as defined in "PAYROLL DEDUCTION AMOUNTS"). A completed form
must be submitted prior to the first payroll period of the applicable Purchase
Period. Any employee who does not enroll at the initial eligibility date, may,
if eligible, enroll in the manner described above and begin participating at
any later Purchase Period if eligible at that time.
PAYROLL DEDUCTION AMOUNTS
A participating employee may elect payroll deduction of any amount in $5
increments of "compensation" each pay period but not less than $10 per pay
period. Compensation is defined, for purposes of the Plan, as the
participant's regular base wages, but excluding overtime, bonuses and any
incentive pay.
CHANGES IN PAYROLL DEDUCTION
An employee may change payroll deduction amounts at any time while enrolled in
the Plan, subject to the "Payroll Deduction Amounts" discussed above. However,
any change in payroll deductions during a Purchase Period will not become
effective until the first payroll deduction of the following Purchase Period.
If an employee changes the deduction amount to $0, this is considered a
withdrawal from the Plan. See "WITHDRAWAL FROM THE PLAN" for further details.
LUMP SUM PURCHASE PAYMENTS
A participating employee may make lump sum purchase payments during the first
calendar year of participation under the Plan. This election must be made
prior to the first payroll period of the applicable Purchase Period by
submitting an election form. This form commits the employee to make the
payment prior to the tenth business day before the end of the Purchase Period.
Any lump sum purchase payment will be added to the payroll deduction amounts
accumulated during the period and applied for purchase of shares at the end of
the Purchase Period. Such lump sum purchase payments are subject to the
minimum and maximum amounts discussed below under "MAXIMUM AMOUNT OF
PURCHASES."
MAXIMUM AMOUNT OF PURCHASES
The maximum amount of Stock a participating employee can purchase under this
Plan is limited to $25,000 in Fair Market Value of Stock (determined at the
time of option grant) for each calendar year. If a participating employee's
purchases reach this amount, such participating employee's excess payroll
deductions will be returned as soon as practicable.
-33-
<PAGE> 4
STOCK ACCOUNT, RIGHTS OF A STOCKHOLDER AND DELIVERY OF SHARES
Payroll deductions on behalf of each participating employee, including lump sum
purchase payments, if any, will be used to purchase stock of the Company, with
such stock purchased credited to an account maintained by a brokerage firm
selected by the Committee.
STOCK ACCOUNT
Whole and fractional shares are automatically credited to a participating
employee's Stock account at the brokerage firm as soon as practicable after
each Purchase Period ends. No interests in, and no further rights or
obligations under, the Plan are created by crediting a participating employee's
Stock account.
RIGHTS OF A STOCKHOLDER
A participating employee will have the rights and privileges of a stockholder
once the shares are credited to his/her account, subject to the twelve-month
restriction period discussed under "Holding Period and Delivery of Shares"
below. Whole shares, but not fractional shares, can be voted. Dividends on
shares purchased and maintained in a participating employee's Stock account
automatically will be reinvested in Stock under the terms and conditions for
dividend reinvestment, unless the participating employee requests a dividend
check from the brokerage firm. Shares purchased through dividend reinvestment
are not offered under the Plan and are not purchased pursuant to, or at a price
determined under, the Plan.
HOLDING PERIOD AND DELIVERY OF SHARES
Shares of Stock purchased pursuant to this Plan may not be transferred or
disposed of for a period of twelve months following the date on which such
shares are purchased, except in the event of Involuntary Termination, Death or
Disability as discussed under "TERMINATION OF EMPLOYMENT".
WITHDRAWAL FROM THE PLAN
A participating employee may withdraw from the Plan at any time before, during
or after a Purchase Period. If a withdrawal occurs for any reason, the
participating employee's interest in the Plan terminates. To voluntarily
withdraw, a participating employee must notify the Company in writing. If a
participating employee becomes ineligible to participate in the Plan for any
reason, the Company will automatically withdraw that employee from the Plan.
When a participating employee withdraws from the Plan, the Company will cease
payroll deductions and refund the total amount in such employee's account as
soon as practicable. Such participating employee may not participate in the
Plan until the beginning of the Purchase Period following completion of one
year from the date of withdrawal. For example, if a participating employee
withdrew in March of a year, he/she would not be eligible to participate again
until the Purchase Period beginning April 1 of the following year.
If a participating employee elects a "hardship withdrawal" from a 401(k) plan,
such as the Provident Life and Accident Insurance Company Employee Savings
Plan, such employee may be ineligible to participate in the Employee Stock
Purchase Plan to the extent required by section 401(k) of the Internal Revenue
Code of 1986, as amended.
To resume participation after any type of withdrawal, an employee must complete
a new enrollment form. This form must be received by the Company prior to the
payroll period deadline of the applicable Purchase Period.
-34-
<PAGE> 5
TERMINATION OF EMPLOYMENT
OTHER THAN INVOLUNTARY TERMINATION, DEATH OR DISABILITY
If an employee leaves the company for any reason other than involuntary
termination, death or disability, such employee's participation will
automatically end on the date of termination of employment and any payroll
deductions that have accumulated will be refunded as soon as practicable.
Shares in the participating employee's Stock Account will continue to be
subject to the twelve-month restriction period as discussed under "Holding
Period and Delivery of Shares."
INVOLUNTARY TERMINATION, DEATH OR DISABILITY
If an employee is involuntarily terminated, dies or becomes disabled while
participating in the Plan, such employee's participation will automatically end
on the date of termination of employment, death or disability, and any payroll
deductions that have accumulated will be refunded as soon as practicable. In
the event of a participating employee's death, funds will be refunded to the
named beneficiary of the payroll deduction account, or if a beneficiary has not
been named, to such deceased employee's estate. Shares in a Stock Account for
employees mentioned in this section will not be subject to the twelve-month
restriction period discussed under "Holding Period and Delivery of Shares."
For this Plan, involuntary termination is a termination whereby an employee is
eligible for the Company's Separation Pay Plan or Severance Pay Plan.
TAX OBLIGATIONS
The following summary of the principal U.S. federal income tax consequences
under current federal income tax laws relating to stock purchased under the
Plan is not intended to be exhaustive and, among other things, does not
describe state, local or international tax consequences. Tax consequences may
vary depending on individual circumstances, and an employee should consult his
or her tax advisor as to the consequences resulting from the grant, purchase
and subsequent sale of Stock under all applicable laws.
The Plan is intended to meet the requirements of an "employee stock purchase
plan" ("ESPP") within the meaning of section 423 of the Internal Revenue Code
of 1986, as amended. Under federal income tax law presently in effect, an
employee is not taxed by reason of the purchase of shares received under the
Plan. Since deductions for purchase of shares are made after taxes are
withheld from pay, an employee will have no future income tax obligation
related to the Stock's value until sale, exchange or other lifetime transfer of
legal title (such as a gift) of one or more shares of Stock ("disposition").
If a sale, exchange or other lifetime transfer occurs, the federal income tax
consequences will depend on whether the disposition occurs before or after the
expiration of a period of at least one year after the ESPP Stock was purchased
and two years after the beginning of the Purchase Period in which the stock was
purchased ("Minimum Qualified Holding Period").
If an employee holds ESPP Stock for the Minimum Qualified Holding Period or if
the employee dies, then for the year in which the disposition or death occurs
an employee must realize as ordinary income (and not as capital gain) an amount
equal to the lesser of (1) the excess of the fair market value of such Stock at
the date of the disposition or death over the amount paid for such Stock, or
(2) the excess of the fair market value of such Stock at the beginning of the
Purchase Period over the discounted price at the beginning of the Purchase
Period. An amount equal to the amount realized as ordinary income is added to
an employee's basis of Stock purchased under this Plan for the purpose of
determining the amount of any capital gain or loss
-35-
<PAGE> 6
resulting from the disposition. In the case of death, the basis of the stock
in the hands of the estate or heir is the fair market value of the stock on the
date of the decedent's death or the alternate estate valuation date.
If an employee has not held Stock purchased under this Plan for the Minimum
Qualified Holding Period, then for the year in which disposition occurs the
employee must realize as ordinary taxable income an amount equal to the excess
of the fair market value of such Stock at the date of purchase over the amount
paid for such Stock. This amount may be subject to federal income tax
withholding (which may be taken from the employee's regular paycheck) and will
be reported on the employee's Form W-2 for the year the disposition occurs. An
amount equal to the amount realized as ordinary income is added to an
employee's basis of such Stock for the purpose of determining the amount of
any capital gain or loss resulting from the disposition.
The Company will not obtain any federal income tax deduction by reason of the
discount the employee receives on the purchase of ESPP Stock, the disposition
of such Stock after the end of the Minimum Qualified Holding Period, or the
employee's death. However, if there is a disposition of such Stock before the
end of the Minimum Qualified Holding Period, the Company will be entitled to
deduct, in the taxable year in which such disposition occurs, an amount
equivalent to the ordinary taxable income an employee recognized.
-36-
<PAGE> 1
EXHIBIT 15
[LOGO] ERNST & YOUNG LLP 300 Krystal Building Phone: 615 756 2461
One Union Square Fax: 615 267 0304
Chattanooga, Tennessee 37402
Board of Directors and Shareholders
Provident Life and Accident Insurance
Company of America
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 of Provident
Life and Accident Insurance Company for the registration of 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. 33-88108) of Provident
Life and Accident Insurance Company Stock Option Plan of 1994 of Provident Life
and Accident Insurance Company of America for the registration of 3,500,000
shares of Class B common stock of Provident Life and Accident Insurance Company
of America of our report dated August 9, 1995 relating to the unaudited
condensed consolidated interim financial statements of Provident Life and
Accident Insurance Company of America which is included in its Form 10-Q for
the quarter ended June 30, 1995.
Pursuant to Rule 436(c) of the Securities Act of 1993, 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
August 9, 1995
- 38 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PROVIDENT LIFE AND ACCIDENT INSURANCE COMPANY OF AMERICA
FOR THE SIX MONTHS ENDED JUNE 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 12,113,500
<DEBT-CARRYING-VALUE> 173,700
<DEBT-MARKET-VALUE> 182,700
<EQUITIES> 7,200
<MORTGAGE> 1,236,300
<REAL-ESTATE> 222,600
<TOTAL-INVEST> 15,258,700
<CASH> 23,100
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 460,000
<TOTAL-ASSETS> 17,012,200
<POLICY-LOSSES> 7,331,400<F1>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 358,900
<POLICY-HOLDER-FUNDS> 6,733,000
<NOTES-PAYABLE> 213,700
<COMMON> 45,400
0
156,200
<OTHER-SE> 1,373,200
<TOTAL-LIABILITY-AND-EQUITY> 17,012,200
674,100
<INVESTMENT-INCOME> 622,800
<INVESTMENT-GAINS> (28,500)
<OTHER-INCOME> 89,500
<BENEFITS> 1,018,900
<UNDERWRITING-AMORTIZATION> 35,200
<UNDERWRITING-OTHER> 221,800
<INCOME-PRETAX> 71,500
<INCOME-TAX> 24,200
<INCOME-CONTINUING> 47,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 47,300
<EPS-PRIMARY> 0.90
<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
$7,274,900 AND UNEARNED PREMIUMS OF $56,500.
</FN>
</TABLE>
