<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended. . . . . . . . . . . . . . .September 30, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from. . . . . . . . . . . to. . . . . . . . . . .
Commission file number. . . . . . . . . . . . . . . . . . . . 0-13591
PROVIDENT AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2214195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 DeKalb Pike, Norristown, Pennsylvania 19404
(Address of principal executive offices)
(Zip Code)
Registrant's telephone number, including area code: (610) 279-2500
Former name, former address and former fiscal year,
if changed since last report: N/A
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes __X__ No _____
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: 10,026,410 shares of common
stock, par value $.10, outstanding as of November 11, 1996.
Page 1 of 22 Pages
<PAGE>
PROVIDENT AMERICAN CORPORATION
INDEX
Page No.
--------
Part I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Consolidated Statements of Operations 3
Consolidated Balance Sheets 4
Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Results
of Operations and Financial Condition. 11
ITEMS 1-5 18
EXHIBIT 11 19
EXHIBIT 27 20
REPORTS ON FORM 8-K 21
SIGNATURES 22
Page 2 of 22 Pages
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Condensed Financial Statements
Provident American Corporation and Subsidiaries
Consolidated Statements of Operations
<TABLE>
<CAPTION>
(In thousands ecept per share data)
3 Months Ended 9 Months Ended
September 30, September 30,
1996 1995 1996 1995
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenue:
Premium: Accident and health, gross $15,259 $ 9,878 $40,623 $28,896
Life and annuity, gross 2,759 3,360 8,615 10,190
------- ------- ------- -------
Total gross premiums 18,018 13,238 49,238 39,086
------- ------- ------- -------
Accident & health reinsurance ceded 6,899 4,490 18,115 12,306
Life and annuity reinsurance ceded 88 119 (2,134) 363
------- ------- ------- -------
Total reinsurance ceded 6,987 4,609 15,981 12,669
------- ------- ------- -------
Net premium 11,031 8,629 33,257 26,417
Net investment income 832 667 2,312 2,114
Realized gains on investments 745 21 774 163
Other revenue 434 271 886 848
Litigation settlement, net of expenses 22,400
------- ------- ------- -------
Total revenue 13,042 9,588 59,629 29,542
------- ------- ------- -------
Benefits and expenses:
Death and other policy benefits:
Life 964 1,071 3,464 3,277
Accident and health, net of reinsurance 4,401 3,141 12,884 10,337
Annuity and other 231 137 407 608
Increase in liability for future policy
benefits 1,166 1,503 6,549 4,440
Depreciation and amortization of goodwill 115 213 260 639
Taxes, licenses and fees 713 466 1,887 1,277
Commissions, net of ceding allowance 1,358 1,461 5,047 3,975
Other operating expenses 3,697 2,375 9,326 7,163
Amortization of deferred policy acquisition
costs 118 65 170 172
Policy acquisition costs deferred (958) (163) (1,299) (646)
------- ------- ------- -------
Total benefits and expenses 11,805 10,269 38,695 31,242
------- ------- ------- -------
Income (loss) before income taxes 1,237 (681) 20,934 (1,700)
Provision for income taxes (benefit):
Current 1,597 1 6,497 (125)
Deferred (1,143) 3 (743) 149
------- ------- ------- -------
Total income taxes 454 4 5,754 24
------- ------- ------- -------
Net income (loss) 783 (685) 15,180 (1,724)
Dividends on preferred stock 37 83 157 250
------- ------- ------- -------
Net income (loss) applicable to
common stock $ 746 $ (768) $15,023 $(1,974)
======= ======= ======= =======
Income (loss) per share of common
stock $ 0.07 ( $0.08) $ 1.38 ( $0.22)
Common shares and equivalents used in
computing income (loss) per share 11,279 9,098 10,889 9,096
</TABLE>
See notes to condensed consolidated financial statements.
Page 3 of 22 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
September 30, December 31,
1996 1995
--------- --------
Assets:
Investments:
Bonds, amortized cost $48,723 and $44,062 $47,764 $44,996
Marketable securities, cost $5,700 8,841
Real estate, at cost, less accumulated
depreciation of $152 and $134 948 966
Policy loans 519 533
Other invested assets 572 395
------- -------
Total Investments 58,644 46,890
Cash and cash equivalents 11,847 2,162
Accrued investment income 731 650
Premium due and uncollected 1,283 1,201
Amounts due from reinsurers 7,887 10,191
Property and equipment, at cost, less
accumulated depreciation of $992 and $831 3,999 3,479
Goodwill 3,746
Unamortized deferred policy acquisition costs 2,115 986
Loans receivable from director and stockholders 454
Other assets 1,857 1,592
------- -------
Total Assets $92,563 $67,151
------- -------
Liabilities and Stockholders' Equity
Future policy benefits:
Life 38,370 35,290
Annuity and other 6,853 8,265
Policy claims 14,112 10,105
Unearned premium 1,167 544
Premium received in advance 1,078 716
Amounts due to reinsurers 716 3,768
Accrued commissions and expenses 3,727 1,893
Notes payable -- bank 445 830
Current income taxes 2,117 36
Deferred income taxes 22 327
Other liabilities 2,416 1,953
------- -------
Total Liabilities 71,023 63,727
Commitments and Contingencies
Stockholders' Equity
Preferred stock, par value $1: authorized
5,000,000 shares;
Series A Cumulative Convertible, issued
580,250 580 580
Series B Cumulative Convertible, issued
0 and 426,250 426
Common stock, par value $.10: authorized
25,000,000, issued 9,933,843 and 9,260,481 993 926
Common stock, Class A, par value $.10:
authorized 2,500,000, none issued
Additional paid-in capital 12,422 10,166
Net unrealized appreciation (depreciation)
of bonds (623) 467
Net unrealized appreciation of marketable
securities 2,042
Retained earnings (deficit) 6,202 (8,821)
------- -------
21,616 3,744
Less common stock held in treasury, at cost,
36,300 and 143,550 shares (76) (320)
------- -------
Total Stockholders' Equity 21,540 3,424
------- -------
Total Liabilities and Stockholders' Equity $92,563 $67,151
======= =======
See notes to condensed consolidated financial statements.
Page 4 of 22 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Statement of Cash Flows
(In thousands)
9 Months Ended September 30,
1996 1995
--------- --------
OPERATING ACTIVITIES
Net income (loss) $15,180 $ (1,724)
Adjustments to reconcile net income (loss)
to net cash from operating activities:
Marketable securities received from
litigation (19,400)
Change in future policy benefits and claims 7,132 4,566
Change in premium due and uncollected,
unearned premium and premium received in
advance 903 242
Change in amounts due to/from reinsurers (748) 810
Change in accrued investment income (81) 16
Change in accrued commissions and expenses 1,476 (131)
Change in other assets, current and deferred
income taxes and other liabilities 517 (87)
Depreciation and amortization 277 636
Deferred policy acquisition costs, net (1,129) (474)
Net realized gain on investments (774) (163)
------- --------
Net cash from operating activities 3,353 3,691
------- --------
INVESTING ACTIVITIES
Purchases of investments and loans made (18,404) (9,353)
Sale of investments 31,114 6,634
Maturity of investments and loans 513 164
Acquisition of property and equipment (389) (76)
(Increase) decrease in loans receivable (454) 315
Acquisition of business, net of cash acquired (6,330)
Sale of business, net of cash given 1,756
------- --------
Net cash from investing activities 6,050 (560)
------- --------
FINANCING ACTIVITIES
Deposits and interest credited to
contractholder deposit funds 372 566
Withdrawals from contractholder deposit funds (1,689) (1,619)
Issuance of common stock 2,141 46
Dividends paid on preferred stock (157) (250)
Proceeds from note payable -- bank 78 78
Repayment of note payable -- bank (463) (312)
------- --------
Net cash from financing activities 282 (1,491)
------- --------
Increase in cash and cash equivalent 9,685 1,640
Cash and cash equivalents, beginning of period 2,162 2,310
------- --------
Cash and cash equivalents, end of period $11,847 $ 3,950
------- --------
Interest paid $ 47 $ 79
Income tax paid, net $ 4,826 $ (17)
See notes to condensed consolidated financial statements.
Page 5 of 22 Pages
<PAGE>
Provident American Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(Dollars in thousands)
(1) General
The condensed consolidated financial statements included herein have
been prepared by Provident American Corporation (the "Company") without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
and reflect all adjustments which, in the opinion of the Company, are necessary
to present fairly results for the interim periods. Certain financial information
and footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to such rules and regulations, although the Company believes
that the accompanying disclosures are adequate to make the information presented
not misleading. Results of operations for the nine-month period ended September
30, 1996 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1996.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in the Company's Annual Report
on Form 10-K for the year ended December 31, 1995.
The Company is a Pennsylvania corporation which was organized in 1982
and is regulated as an insurance holding company by the state of Pennsylvania in
which its principal insurance subsidiaries, Provident Indemnity Life Insurance
Company ("PILIC"), and Provident American Life and Health Insurance Company
("PALHIC"), both Pennsylvania stock life insurance companies, are licensed.
Certain prior year amounts have been reclassified to conform with the
current presentation.
(2) Acquisitions
Effective March 1, 1996 PILIC acquired all of the issued and outstanding
stock of Union Benefit Life Insurance Company, a Pennsylvania stock life
insurance company, ("UBLIC") for an amount equal to its adjusted capital and
surplus (approximately $3,750), $500 in cash, plus the issuance of 100,000
shares of the Company's common stock. The shares issued are registered
securities but have trading restrictions attached. Concurrently, the
Company, UBLIC and PILIC entered into an agreement for the purchase and sale of
the UBLIC business with Life and Health Insurance Company of America, a
Pennsylvania insurer ("LHI"), pursuant to which all of the insurance business of
UBLIC was purchased by LHI immediately prior to or concurrently with the
purchase of the UBLIC stock by PILIC. The purchase price payable by LHI to UBLIC
for the purchase of the UBLIC business is $1,800. UBLIC is licensed to transact
life, accident and health insurance in forty (40) states and the District of
Columbia. It is anticipated that UBLIC will engage in the sale of life, accident
and health insurance business. This transaction is accounted for as a purchase
and it is not expected to have a material effect on the Company's consolidated
results of operations, total assets or stockholders' equity. The Company has
changed UBLIC's name to Provident American Life and Health Insurance Company
("PALHIC").
Page 6 of 22 Pages
<PAGE>
Notes to Condensed Consolidated Financial Statements (Continued)
Effective May 1, 1996 the Company acquired all of the issued and
outstanding stock of NIA Corporation ("NIA"), d/b/a National Insurance
Administrators, and its wholly owned subsidiary, American Brokerage Corporation
("ABC") from MidAmerica Mutual Life Insurance Company ("MAM") for $254 of cash
and 50,000 shares of the company's common stock. NIA and ABC are Colorado
corporations. NIA, a third party administrator and ABC, an insurance marketer
collectively design, market and service private label health insurance plans. As
a part of this transaction PILIC assumed approximately 3,500 inforce
"HealthQuest" medical policies originally underwritten by MAM and its
subsidiaries. This transaction is accounted for as a purchase and its impact on
the Company's consolidated results of operations is discussed in Management's
Discussion and Analysis and its impact on the Company's Condensed Consolidated
Balance Sheet is disclosed in Note 3.
On June 18, 1996 the Company acquired effective January 1, 1996 all of
the issued and outstanding stock of Richard E. Field Associates, Inc., d/b/a REF
Associates, Inc. from its shareholders Richard E. Field and Arthur Ivey for
610,000 shares of the Company's common stock. REF Associates, a California
corporation, is engaged in marketing certain life and health insurance products
of PILIC, owns certain product trademarks and derives commission earnings from
PILIC. This transaction is accounted for as a Pooling of Interests and does not
have a material affect on the Company's consolidated results of operations,
total assets or stockholders' equity. See note (9) Earnings (loss) per share of
common stock.
On August 15, 1996 the Company acquired Coastal Services Eastern, Inc.
(CSE) from its shareholders Saul and Joan Rose for 123,937 shares of the
Company's common stock. CSE's sole business is providing the Company with policy
and claims administration at the Company's facility using CSE's administration
system along with its employees. This transaction is accounted for as a purchase
and its impact on the Company's consolidated results of operations and its
impact on the Company's Condensed Consolidated Balance Sheet is disclosed in
Note 3.
(3) Goodwill
Goodwill arises from the Company's 1996 acquisitions of NIA, PALHIC and
CSE and represents the difference between the Company's cost and the acquired
tangible assets net of assumed liabilities. Goodwill at September 30, 1996 of
$3,746 is made up of $1,276 relating to the Company's purchase of PALHIC to be
amortized over 20 years straight line, $793 relating the Company's purchase of
NIA to be amortized over 10 years straight line and $1,677 relating to the
Company's purchase of CSE to be amortized over a period of 3 years straight line
for the value of system purchased and 10 years straight line for the balance.
Goodwill is net of $93 of amortization expense of which $39 relates to PALHIC,
$37 relates to NIA and $18 relates to CSE. Amortization of Goodwill Expense is
included in the Company's Condensed Consolidated Statements of Operations in
Depreciation and amortization line item.
Page 7 of 22 Pages
<PAGE>
Notes to Condensed Consolidated Financial Statements (Continued)
(4) Litigation Settlement
Effective February 12, 1996, the Loewen Group, Inc. and Loewen Group
International, Inc. (collectively "Loewen") agreed to settle certain litigation
with the Company by agreeing to pay on April 1, 1996 $3 million in cash and to
issue to the Company and PILIC 718,519 shares of the common stock of Loewen to
compensate the Company for damages sustained. Also see Note 5. The settlement
amounts to approximately $14.6 million which is net of approximately $7.8
million of income taxes and $7.6 million of counsel fees and costs.
(5) Bonds and Marketable Securities at Fair Market Value
The Company has classified all of its debt and equity securities as
"available for sale" and accordingly, at December 31, 1995 recorded as a
separate component of stockholders equity an unrealized gain amounting to
approximately $467, net of $327 applicable to deferred federal income taxes and
$140 applicable to life future policy benefits. At September 30, 1996, the
Company recorded an unrealized loss of $959 on bonds net of $336 applicable to
deferred federal income taxes and an unrealized gain of $3,141 on Marketable
stock securities (Loewen stock), net of $1,099 applicable to deferred federal
income taxes. The net effect on shareholders' equity as a result of this fair
market value accounting method was to increase shareholders' equity by $1,419
for the nine months ended September 30, 1996. The cumulative change in aggregate
fair market values of bonds is a direct result of the overall change in interest
rates.
Marketable Securities represent the Company's 211,119 shares of Loewen
common stock acquired as a result of litigation described in Note 4. These
registered securities are classified as "available for sale" and are therefore
carried at fair market value.
(6) Income Taxes
Deferred income taxes reflect the net tax effect of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Prior to 1996,
the Company established a valuation allowance (approximately $2,800 at December
31, 1995) for deferred tax assets because of reasonable doubt as to their
realization.
The Company reduced the valuation allowance to reflect the deferred tax
assets utilized during the first nine months of 1996 to reduce current income
taxes (approximately $ 1 million) and to recognize a deferred tax asset of
approximately $1 million. The recognized deferred tax asset is based upon
expected utilization of certain net operating loss carryforwards and reversal of
certain temporary differences and has been offset against the required deferred
tax liability at September 30, 1996. The remaining valuation allowance at
September 30, 1996 amounts to approximately $1.1 million. The Company will
continue to review this valuation allowance and make adjustments as appropriate.
Page 8 of 22 Pages
<PAGE>
Notes to Condensed Consolidated Financial Statements (Continued)
(7) Loans Receivable from Directors and Stockholders
During the second quarter of 1996 the Company entered into loans with 2
related parties. The Company lent Alvin H. Clemens who is Chairman of the Board,
CEO and a stockholder $300 at an annual rate of interest of 5.33% collateralized
by 100,000 shares of the Company's common stock owned by Mr. Clemens. The loan
is represented by a promissory note which is due in 1999. The Company lent John
T. Gillin who is a member of the Board of Directors and a shareholder $140 at an
annual rate of interest of 8.5% collateralized by 15,000 shares of the Company's
common stock owned by Mr. Gillin. The loan is represented by a promissory note
which is due in 1996.
(8) Stock Option Plan for Key Employees
In September 1996 the Company initiated a "Stock Option Plan for Key
Employees". This plan grants options to purchase shares of the Company's common
stock to key management employees of which the options vest 20% per year over a
five year period subject to continued employment. The Company has not recorded
expense relating to this plan. If the Company recorded expense for this plan it
would be included in "Other operating expenses" in the amount of $82 based on
the Company's September 30, 1996 common stock closing price and anticipated
employee forfeitures.
(9) Earnings (loss) per share of common stock
Primary earnings (loss) per share has been computed by dividing net
income (loss) applicable to common stock, by the weighted average number of
common shares and equivalents outstanding. Common share equivalents included in
the computation represent shares issuable upon assumed exercise of stock options
which would have a dilutive effect in periods where there are earnings.
Equivalents were anti-dilutive in 1995.
Common shares and equivalents used in computing loss per share for 1995
have been restated to include 610,000 shares issued to acquire REF associates
accounted for as a "Pooling of Interest" as described in Note (2).
There is no significant difference between earnings per share on a
primary and a fully diluted basis since the assumed conversion of the
outstanding convertible preferred stock is anti-dilutive.
Accident and health policy benefits and Commissions are net of the
following ceded reinsurance amounts.
Page 9 of 22 Pages
<PAGE>
Notes to Condensed Consolidated Financial Statements (Continued)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, September 30,
1996 1995 1996 1995
--------- ------- -------- --------
<S> <C> <C> <C> <C>
Accident and health benefits
Gross before reinsurance ceded $8,698 $6,243 $24,973 $18,354
Reinsurance ceded 4,297 3,102 12,089 8,017
------ ------ ------- -------
Net of reinsurance $4,401 $3,141 $12,884 $10,337
====== ====== ======= =======
Commissions
Gross before reinsurance ceded $3,475 $2,742 $11,019 $ 7,597
Reinsurance ceded 2,117 1,281 5,972 3,622
------ ------ ------- -------
Net of reinsurance $1,358 $1,461 $ 5,047 $ 3,975
====== ====== ======= =======
</TABLE>
Page 10 of 22 Pages
<PAGE>
Notes to Condensed Consolidated Financial Statements (Continued)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
General
The Company's principal business consists of the underwriting and
administration of life, annuities and accident and health insurance policies.
The insurance business is operated through the Company's wholly-owned
subsidiaries PILIC and PALHIC. The Company has expanded its healthcare insurance
and managed care business through recent alliances and acquisitions. The Company
has agreements with HealthCare COMPARE (NASDAQ: HCCC) for managed care cost
containment and HealthPlan Services Corporation (NYSE: HPS) for certain policy
administration services.
With the NIA acquisition the Company acquired a 3,500 customer inforce
book of business representing approximately $6.5 million of annualized premium
at the date of acquisition. This book consists primarily of the "HealthQuest"
product which is a managed care one-life PPO product similar to the Company's
"Provident Solution" Plan. The Company also gains access to over 3,000 agents
selling in nearly 30 states.
The Company acquired UBLIC which has since been renamed Provident
American Life and Health Insurance Company (PALHIC) for the purpose of expanding
the number of available states which the company is licensed to sell life and
health insurance. PALHIC is licensed in 40 states while PILIC is licensed in 25
states and the District of Columbia. Together the Company can write business in
42 states. PALHIC is in the process of obtaining regulatory approval to sell
life and health plans in various states to be marketed by the Company's MGA, NIA
and other distribution channels.
The Company acquired all of the outstanding shares of REF Associates in
order to obtain full control and the rights to the Company's "Provident
Solution" plans and eliminates future commission expense between the Company and
REF Associates, Inc.
The Company has entered into agreements pursuant to which options to
purchase shares of the Company's common stock will be granted to various agents
as they achieve certain production quotas and performance levels. In September
1996 the Company initiated a "Stock Option Plan for Key Employees". This plan
grants options to purchase shares of the Company's common stock to key
management employees whom the Company believes are critical to the future
success of the Company and which the Company desires to provide these key
employees additional compensation contingent on the Company's common stock
value. These options vest over a five year period and are subject to continued
employment.
Recent acquisitions, alliances and stock option plans reflect the
Company's commitment to broadening and strengthening its strategic position in
the ever changing managed health care business.
Results of Operations
For the three months ended September 30, 1996 (the quarter) the
Company's Consolidated Statement of Operations was impacted by increasing sales,
the NIA Acquisition and strong investment returns. Premium Revenue increased as
a result of the sales growth and NIA. Net income applicable to common stock for
the quarter was $0.8 million or $0.07 per share compared to a loss of $0.8
million ($.09 per share) the three months ended September 30, 1995 (same quarter
last year). The Company's Net income
Page 11 of 22 Pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
for the quarter improved from the same quarter last year due to realized gains
on the sale of investments, improved overall average Accident and health loss
experience and lower expenses as a percentage to net earned premium.
During the quarter Accident and health gross premium was $15.3 million
compared to $9.9 million for the same quarter last year and Accident and health
ceded premium was $6.9 million for the quarter as compared to $4.5 million for
the same quarter last year with both increases a result of increased new
business from "The Provident Solution" one life managed care health insurance
product introduced in the fourth quarter of 1995 and premium related to the
HealthQuest book of business acquired from MAM discussed later.
Life and annuity net premium consisting primarily of group life and
individual pre-need and final expense business decreased $0.2 million, to $2.7
million for the quarter.
Net investment income was $0.8 million for the quarter, up $0.1 million
from the same quarter last year due to increased bond investments. The gross
average book yield on bond investments has increased from 6.4% at September 30,
1995 to 6.6% at September 30, 1996 based representing 96% and 85% of total
investments at September 30, 1995 and 1996, respectively. Marketable securities
are Loewen stock acquired as a result of a litigation settlement described in
Notes to Condensed Consolidated Financial Statements, (4) Litigation Settlement
and (5) Marketable Securities at Fair Market Value
Accident and health policy benefits represent 52.6% of accident and
health earned premium for the quarter compared to 54.8% for the same quarter
last year. The decrease in the loss ratio is the result of more first duration
business where underwriting and policy provisions tend to produce loss ratios
that are lower than subsequent durations.
Other expenses for the quarter of $3.7 million increased $1.3 million
compared to $2.4 million for the same quarter last year due to increased policy
administration expenses caused by increased new sales volume and policy
administration expenses associated with the acquired HealthQuest book of
business.
Deferred policy acquisition costs of $1 million for the quarter
increased $0.8 million from the same quarter last year due to the deferral of
Managed Care policy acquisition costs related to "The Provident Solution" and
"HealthQuest" products. Deferred policy acquisition costs represent one time
costs which vary with and in direct proportion to new business volume and
included excess first year commissions, policy issue and underwriting expenses
net of application fees and net of reinsurance ceding allowances.
Total Expenses excluding Death and other policy benefits represents
45.7% of Total premiums for the quarter which is down from 51.1% for the same
quarter last year due to the deferral of Managed Care policy acquisition costs
and spreading fixed costs over a growing earned premium base for the quarter as
compared to the same quarter last year.
Current provision for income taxes of $1.6 million and Deferred benefit
for income taxes of $1.1 million for the quarter both include a reclassification
increasing current and decreasing deferred income taxes by $1.1 million each
related to the first six months tax provisions with no impact on Net Income.
Page 12 of 22 Pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The impact of the NIA Acquisition and the HealthQuest book of business
on the quarter accounted for the following amounts in; Accident and Health
Premiums gross before reinsurance ceded of $2.1 million, Accident and Health
Premiums net of reinsurance ceded of $1 million, Other Income of $0.2 million,
Benefits net of reinsurance of $0.5 million, Commissions of $0.1 million, Other
operating expenses of $0.7 million and Deferred policy acquisition costs of $0.3
million. The impact on Goodwill and a description of the acquisition is found in
Notes to Condensed Consolidated Financial Statements, Note 2.
For the nine months ended September 30, 1996 (YTD) the Company's Net
income applicable to common stock was $15 million or $1.38 per share compared to
a loss of $2 million or $.22 per share for nine months ended September 30, 1995
(prior YTD). The Company's YTD Net income improved from the same quarter last
year due to the Litigation Settlement amounting to $22.4 million pre-tax and
$16.6 million net of tax as described in Note 4, realized pre-tax gains of $0.8
million primarily from the sale of Loewen stock. acquired as a result of the
Litigation settlement, improved overall average Accident and health loss
experience and lower expenses as a percentage to net earned premium. Results
were unfavorably impacted by the Company's recapture of reinsurance ceded on
certain multi-pay pre-need life insurance policies which resulted in a one time
pre-tax loss of approximately $1 million.
Accident and health gross premium was $40.6 million YTD compared to
$28.9 million for the prior YTD and Accident and health ceded premium was $18.1
million YTD compared to $12.3 both of which increased as a result of increased
new business from "The Provident Solution" and HealthQuest one life managed care
health insurance products. The impact of the HealthQuest book of business
acquired from MAM is discussed later.
At September 30, 1996 and 1995, annualized accident and health premium
amounted to $65 million and $40.3 million, respectively, consisting of
approximately 33,000 and 18,000 certificate holders, respectively. The net
increase in annualized premium resulted from an increase in business of $17.3
million (consisting of new business amounting to approximately $56.2 million net
of lapses amounting to approximately $38.9 million) plus premium rate increases
of approximately $0.3 million, plus the book of business acquired as a result of
the NIA acquisition consisting of approximately $9.6 million annual premium and
5,900 certificate holders.
The group accident and health insurance premium lapse ratios for the
twelve months ended September 30, 1996 and 1995 were 74% and 70.7%,
respectively. The group accident and health lapse ratios include small group
medical plans which by their nature have higher lapsation. The small group
medical business amounts to approximately 80% and 61%, respectively, of the
group accident and health business. The lapse ratios continue to reflect the
results of continued premium rate increases as well as the continuing trend away
from traditional healthcare insurance to managed care plans. The Company is
continuing the process of shifting its healthcare insurance business to managed
care plans. In order to further reduce the lapse ratio, the Company continues to
follow the practice of pooling claim experience for re-rating of all cases with
less than 25 participants. In addition, the Company has a conservation program
which, as part of the renewal process, offers alternative types of insurance
products. While some policy-holders have switched to less expensive insurance
plans, the Company does not believe the plans are less profitable.
Page 13 of 22 Pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
The individual life insurance premium lapse ratios on an annualized
basis for the nine months ended September 30, 1996 and 1995 were 9.8% and 9.1%,
respectively. The higher 1996 lapse ratio results primarily from an increase in
the non-renewal of final expense policies.
Net investment income of $2.3 million YTD increased approximately $0.2
million compared to the prior YTD primarily due to increased bond investments.
The gross average yield on investments owned has increased from 6.4% at
September 30, 1995 to 6.6% at September 30, 1996.
Accident and health policy benefits represent 57.2% of accident and
health earned premium YTD compared to 62.3% for the prior YTD last year. The
decrease in the loss ratio is the result of more first duration business where
underwriting and policy provisions tend to produce loss ratios that are lower
than subsequent durations.
Other expenses of $9.3 million YTD increased $2.2 million from $7.2
million for prior YTD due to increased policy administration expenses caused by
increased new sales volume and policy administration expenses associated with
the acquired HealthQuest book of business.
Deferred policy acquisition costs of $1.3 million for YTD increased $0.7
million from prior YTD due to the deferral of Managed Care policy acquisition
costs related to "The Provident Solution" and "HealthQuest" products net of $0.1
million reduction to individual life deferrals caused by lower new business
production. Deferred policy acquisition costs represent one time costs which
vary with and in direct proportion to new business volume and included excess
first year commissions, policy issue and underwriting expenses net of
application fees and net of reinsurance ceding allowances.
Total Expenses excluding Death and other policy benefits represents
46.3% of Total premiums YTD which is up from 47.6% for the prior YTD due to the
deferral of Managed Care policy acquisition costs in the quarter and spreading
fixed costs over a growing earned premium base for the quarter as compared to
the same quarter last year.
The impact of the NIA Acquisition and the HealthQuest book of business
on YTD results accounted for the following amounts in; Accident and Health
Premiums gross before reinsurance ceded of $3.3 million, Accident and Health
Premiums net of reinsurance ceded of $1.6 million, Other Income of $0.2 million,
Benefits net of reinsurance of $0.8 million, Commissions of $0.2 million, Other
operating expenses of $1.1 million and Deferred policy acquisition costs of $0.3
million. The impact on Goodwill and a description of the acquisition is found in
Notes to Condensed Consolidated Financial Statements, Note 2.
Liquidity and Capital Resources
A major objective of the Company is to maintain sufficient liquidity to
fund growth, fulfill statutory requirements and meet all cash requirements with
Cash and short term equivalents plus funds generated from the cash flow from
operations. The primary sources of cash are premiums and investment income. The
primary uses of cash are operating costs and benefit payments to policyholders.
The Company anticipates that it will continue to fund surrenders and benefit
payments through cash flow of normal operations,
Page 14 of 22 Pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
scheduled investment maturities, interest income and the liquidation of
short-term investments. Excess cash flow from operations is transferred to the
investment portfolio where it is available for investment and future cash needs.
For the nine months ended September 30, 1996 (YTD), total cash and
investments increased by approximately $9.6 million of which $3.4 million was
provided by operating activities, $6.1 million was provided by the sale of
investments (primarily Loewen stock) net of funds used to acquire businesses.
Marketable securities received from litigation settlement with Loewen as
described in Note 4 provided a significant source of cash and invested assets.
The settlement contributed $14.6 million to Net Income which is net of $7.8
million of unpaid income taxes for a $22.4 million increase in cash and invested
assets. $19.4 million of the settlement was in the form of Loewen common stock".
The Company has liquidated a portion of the Loewen stock representing $14.4
million of Sale of investments with the remaining investment included in
Marketable securities as described in Notes to Condensed Consolidated Financial
Statements, (5) Marketable Securities at Fair Market Value.
Change in future policy benefits and Claims and Change in Premium due
and uncollected, unearned premium and premium received in advance YTD increased
compared to prior YTD due to increased Accident and health new business from
"The Provident Solution" and HealthQuest one life managed care health insurance
products.
Acquisition of business, net of cash received represents the
consideration and assets net of liabilities acquired as a result of PALHIC, NIA
and CSE acquisitions as described in Notes to Condensed Consolidated Financial
Statements, (2) Acquisitions. The Company's acquisition of PALHIC included a
high quality bond portfolio whose market and book value was approximately $3.6
million as of the date of acquisition and at September 30, 1996. Financing for
these acquisitions included $1.9 million from Issuance of common stock and $4.4
million from Cash and cash equivalents.
Withdrawals from contractual deposit funds represents PILIC's $2.9
million of deposit administration group annuities which were originally sold in
the late 1970s and may be surrendered by contractholders. Practically all these
contracts are subject to a 5% surrender charge, a six month waiting period, a
maximum withdrawal of $50 per month and reduction to 3% in the amount of
interest which is credited during the termination phase. During the nine months
ended September 30, 1996 and 1995 and for the year ended December 31, 1995 group
annuity surrenders amounted to approximately $1.5 million, $1 million and $1,1
million, respectively. Surrender benefits on all other insurance products over
the past several years have not been significant and are not expected to be in
the future. The pre-need and final expense products presently being sold are
relatively small and do not accumulate significant surrender benefits.
Cash and cash equivalents, end of period of $11.8 million increased $9.7
million largely as a result of $14.4 million proceeds from the sale of Loewen
stock net of $4.8 million of tax payments. The Company anticipates investing a
portion of the Cash and cash equivalents, end of period balance in bond
investments consistent with the Company's exiting investment policies as
investment opportunities arise. The Company and its subsidiaries historically
have not and currently do not invest in high yield debt instruments, defined as
securities below investment grade with interest rates or yields significantly
above market rates.
Page 15 of 22 Pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
Management believes, under its present assessment of the Company's
insurance operations, that the Company has sufficient liquidity and capital to
meet the Company's short-term and long-term financial commitments. At September
30, 1996, the Company had shareholders' equity of $21.5 million with total
assets of $92.6 million. Total assets included cash and investments carried at
market value of $70.3 million which consisted of $47.8 million in bonds issued
by the U.S. Government or government agencies, public utilities and other
corporations, $8.8 million of Marketable securities invested in Loewen common
stock, $2 million invested in policy loans, real estate and other invested
assets and $11.8 million in cash and cash equivalents. The $44.9 million of
bonds are investment grade securities ranging in maturity from one to
twenty-nine years.
Because of the long-term nature of its life insurance and annuity
contracts, the Company expects to hold its bonds to maturity. However, all bonds
are considered to be "available for sale" and in order to maximize investment
income, Company policy presently is to purchase medium-term U.S. Treasury and
government agency bonds rather than purchasing short-term securities which would
provide for anticipated maturities up to 10 years. This policy necessitates
periodic sales of securities prior to maturity when cash flow from operations is
not sufficient to meet current obligations.
The sale of life insurance policies requires substantial capital due to
acquisition costs incurred in the initial year of issuance and the necessity to
maintain sufficient surplus levels for regulatory purposes. In general, the
Company anticipates meeting these demands from premiums on new business,
investment income and income from current business in force.
Under the terms of a Quota Share Reinsurance Agreement, PILIC presently
cedes 47.5% of the liability on the first $85,000 of claims per person, per
calendar year of its group accident and health insurance business. PILIC
receives a 31.5% ceding commission except on its small group medical business,
which for the nine months ended September 30, 1996 and 1995 amounts to
approximately 86% and 61%, respectively, of the Company's group accident and
health business, it receives ceding commissions of 41.5% on first year business
and 26.5% on renewal business. Effective January 1, 1996, the ceding allowance
was increased by 4% for both new and renewal business. For the nine months ended
September 30, 1996 and 1995 the combined ceding commissions amounted to
approximately 38.9% and 32.1%, respectively. This agreement is renewable based
on mutual agreement on an annual basis on October 1, 1996 or any October 1
thereafter. In addition, the Company generally assumes 30% (up to $150 per
individual) of the liability on its limited self funded business, which consists
generally of policies issued to limit the claims expenses of employers that
self-insure group medical benefits with respect to any individual employee and
in the aggregate.
Other insurance companies under regulatory supervision result in
mandatory assessments by state guaranty funds of solvent insurance companies
like PILIC and PALHIC to cover losses to policyholders of insolvent or
rehabilitated companies. Although the Company is not able to reasonably estimate
the potential effect on it of any such assessments or voluntary payments, such
amounts are not expected to have a material adverse effect on the Company's,
PILIC's or PALHIC's financial condition. Guaranty fund assessments charged
against operations for the nine months ended September 30, 1996 and 1995 and the
year ended December 31, 1995 amounted to $9, $80 and $105, respectively, and are
net of approximately $5, $54 and $68, respectively, which is estimated to be
allowable as a credit against future state premium taxes.
The statutory capital and surplus of PILIC was $15.5 million at
September 30, 1996 which includes the
Page 16 of 22 Pages
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (Continued)
benefits of certain permitted practices. The minimum statutory capital and
surplus requirement for life insurance companies domiciled in Pennsylvania is
currently $1,650. Administrative rules and legal restrictions of state insurance
departments presently prevent payment of dividends by PILIC to its parent
company without regulatory approval. At December 31, 1995, PILIC calculated its
"Risk Based Capital" utilizing a formula required by the National Association of
Insurance Commissioners. The results of this computation indicate PILIC's
adjusted capital, amounting to approximately $6.7 million, exceeds the amount
required by approximately $1.5 million. In concept, Risk Based Capital standards
are designed to measure the acceptable amounts of capital an insurer should have
based on inherent and specific risks of the insurers business. This formula is
expected to be the primary measurement as to the adequacy of total capital and
surplus of life insurance companies.
Other
Capital expenditures in 1996 are not expected to be significant.
Page 17 of 22 Pages
<PAGE>
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
In April of 1992, the Company and PILIC commenced an action in
the United States District Court for the Eastern District of
Pennsylvania (Civil Action No. CV92-1964) against The Loewen
Group, Inc. and Loewen Group International, Inc. (collectively
"Loewen") for breach of contract, fraud, conspiracy, negligence,
malicious interference with contractual relations, and breach of
the duty of good faith, and seeking compensatory damages in the
amount of $58.8 million dollars, together with punitive damages
against Loewen. This litigation was settled, effective as of
February 12, 1996, pursuant to the terms and conditions of a
Settlement Agreement and Mutual General Release ("Settlement
Agreement"). The Settlement Agreement provides that Loewen shall
make a cash payment in the amount of $3,000,000 on April 1,
1996, plus issue stock certificates representing One Million
(1,000,000) shares of the common stock, without par value, of
The Loewen Group, Inc. ("Settlement Shares"), allocated as
follows: (a) $500,000 and 77,500 Settlement Shares to compensate
the Company for damages sustained through its loss of goodwill
in the insurance industry as a result of litigation; (b)
$500,000 and 82,500 Settlement Shares to compensate the Company
for damages sustained through the loss in the value of the
shares of the common stock of PILIC as a result of the
litigation; (c) 279,260 Settlement Shares to PILIC to compensate
it for damages sustained as a result of the loss of unrealized
profits; (d) 123,630 Settlement Shares to PILIC in payment of
the overhead, administration and management expenses incurred by
PILIC during the period May 1, 1991 through January 31, 1992;
(e) $2,000,000 and 155,629 Settlement Shares to PILIC to
compensate PILIC for damages sustained as a result of the
claimed tortious conduct of Loewen; and (f) the balance of the
Settlement Shares allocated to counsel fees and costs. Pursuant
to the Settlement Agreement, Loewen is required to use its best
efforts to cause the Settlement Shares to be registered under
the Securities Act of 1933, as amended, in accordance with the
terms and conditions of the Settlement Agreement. For the
purposes of the Settlement Agreement, the value of a Settlement
Share is $27.00, and, to the extent that the value of a
Settlement Share, as of the end of the Determination Period (as
such term is described in the Settlement Agreement) is less than
$27.00 per share, Loewen has agreed to pay to Company or PILIC,
as the case may be, cash or additional shares of Loewen common
stock, without par value, as shall be equal to the difference
between $27.00 per share and the then NASDAQ market price of a
share of Loewen common stock. The settlement is subject to other
terms, conditions or restrictions as are set forth in the
Settlement Agreements.
Item 2. Change in Securities.
Not applicable.
Item 3. Defaults Upon Senior Securities.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders.
Not applicable.
Item 5. Other Information.
Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
(b) Reports on Form 8-K:
No reports of Form 8-K were filed during the quarter
ended September 30, 1996.
Page 18 of 22 Pages
<PAGE>
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Provident American Corporation
By: ___________________________________________________
Alvin H. Clemens, Chairman of the Board of Directors
and CEO
By: ___________________________________________________
James O. Bowles, President
By: ___________________________________________________
Anthony R. Verdi, Treasurer and
Chief Financial Officer
Date: November 13, 1996
Page 19 of 22 Pages
<PAGE>
EXHIBIT 11
PROVIDENT AMERICAN CORPORATION
COMPUTATION OF EARNINGS (LOSS) PER SHARE
<TABLE>
<CAPTION>
(In thousands except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
1996 1995 1996 1995
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Primary Earnings (Loss) Per Share
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK: $ 746 $ (768) $15,023 $ (1,974)
- ----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES:
Common stock 9,789 9,098 9,461 9,096
Common stock equivalents applicable to
stock options and warrants 1,380 * 1,290 *
- ----------------------------------------------------------------------------------------------------
Total 11,169 9,098 10,751 9,096
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE: $ 0.07 $(0.08) $ 1.40 $ (0.22)
- ----------------------------------------------------------------------------------------------------
Fully Diluted Earnings (Loss) Per Share
NET INCOME (LOSS) APPLICABLE TO COMMON STOCK: $ 746 $ (768) $15,023 $ (1,974)
- ----------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE SHARES:
Common stock 9,789 9,098 9,461 9,096
Common stock equivalents applicable to
stock options and warrants 1,490 * 1,428 *
- ----------------------------------------------------------------------------------------------------
Total 11,279 9,098 10,889 9,096
- ----------------------------------------------------------------------------------------------------
NET INCOME (LOSS) PER SHARE: $ 0.07 $(0.08) $ 1.38 $ (0.22)
- ----------------------------------------------------------------------------------------------------
</TABLE>
* Anti-dilutive; therefore effects have been excluded.
Page 20 of 22 Pages
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 47,764
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 8,841
<MORTGAGE> 338
<REAL-ESTATE> 946
<TOTAL-INVEST> 58,644
<CASH> 11,847
<RECOVER-REINSURE> 7,887
<DEFERRED-ACQUISITION> 2,115
<TOTAL-ASSETS> 92,563
<POLICY-LOSSES> 38,370
<UNEARNED-PREMIUMS> 1,167
<POLICY-OTHER> 14,112
<POLICY-HOLDER-FUNDS> 6,853
<NOTES-PAYABLE> 445
0
580
<COMMON> 993
<OTHER-SE> 19,967
<TOTAL-LIABILITY-AND-EQUITY> 92,563
33,257
<INVESTMENT-INCOME> 2,312
<INVESTMENT-GAINS> 774
<OTHER-INCOME> 23,266
<BENEFITS> 23,304
<UNDERWRITING-AMORTIZATION> 170
<UNDERWRITING-OTHER> 15,221
<INCOME-PRETAX> 20,934
<INCOME-TAX> 5,754
<INCOME-CONTINUING> 15,180
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 15,180
<EPS-PRIMARY> 1.40
<EPS-DILUTED> 1.38
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
