FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
(x) Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934. For the quarter ended June
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 0-14391
AMERICAN TRAVELLERS CORPORATION
(Exact name of Registrant as specified in its charter)
Pennsylvania 23-1738097
(State or other jurisdiction of (IRS Employer
Incorporation or Organization) Identification No.)
3220 Tillman Drive, Bensalem, Pennsylvania 19020
(Address of Principal Executive Offices) (Zip Code)
(215) 244-1600
(Registrant's telephone number, including area code)
Indicate by checkmark 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
requirement 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.
As of August 8, 1996, there were 16,281,432 shares of the
registrant's common stock, $.01 par value, outstanding. The
registrant has no other classes of common stock.
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
AMERICAN TRAVELLERS COPRORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(In thousands) (Unaudited)
June 30, December 31,
1996 1995
ASSETS
Investments-
Bonds, available for sale, at fair value (cost $651,782 $582,621
$668,449 and $566,859)
Mortgage loan 439 447
Total investments 652,221 583,068
Cash and cash equivalents 17,508 70,214
Accrued investment income 7,403 6,781
Premiums due and unpaid 7,283 7,027
Deferred acquisition costs 160,759 144,767
Value of business acquired ( accumulated amortization 11,236 12,846
$14,384 and $12,619)
Property and equipment, at cost ( accumulated 3,983 4,176
depreciation $4,083 and $3,682)
Other assets 7,052 7,262
Total assets $867,445 $836,141
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities-
Future policy benefit reserves $271,505 $247,562
Claim reserves 229,215 210,073
Unearned premium reserves 63,176 60,477
Total policy liabilities 563,896 518,112
Other liabilities 8,060 7,785
Current and deferred income taxes 20,972 35,939
6.5% convertible subordinated debentures 103,500 103,500
Total liabilities 696,428 665,336
Shareholders' equity-
Preferred stock, $.01 par value; 5,000,000 shares -- --
authorized; no shares issued
Common stock, $.01 par value; 50,000,000 shares
authorized; 16,281,432 and
16,053,105 shares issued, respectively 163 161
Capital in excess of par value 63,678 59,961
Net unrealized (loss)/gain on investments (10,834) 10,245
Retained earnings 118,010 101,187
Less: Shares of common stock held in treasury ( at -- (749)
cost $200,159)
Total shareholders' equity 171,017 170,805
Total liabilities and shareholders' equity $867,445 $836,141
All share amounts have been adjusted to reflect a three-for-two
stock split paid on April 10, 1996.
AMERICAN TRAVELLERS CORPORATION
AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)(Unaudited)
For the three
months ended June 30,
1996 1995
Revenues-
Accident and health premiums $91,428 $58,964
Life premiums 2,065 2,234
Net investment income 10,825 4,254
Realized investment gains 63 24
Total revenues 104,381 65,476
Benefit and expenses-
Benefits to policyholders
Paid claims 42,398 25,380
Change in claim reserves 9,481 4,650
Change in future policy 10,921 6,018
benefit reserves
Total benefits to 62,800 36,048
policyholders
Commissions 23,621 18,067
General and administrative 8,316 6,192
Premium taxes 2,300 1,534
Amortization of value of 378 447
business acquired
Amortization of deferred 4,730 5,457
acquisition costs
Less: policy acquisition costs (12,844) (10,755)
deferred
Interest expense 2,197 434
Total expenses 28,698 21,376
Total benefits and expenses 91,498 57,424
Income before provision for income 12,883 8,052
taxes
Provision for income taxes 4,102 2,544
Net income $8,781 $5,508
Primary number of shares
outstanding 16,823 16,272
Primary earnings per common share $0.52 $0.34
Net income $8,781 $5,508
Add: interest on convertible 1,135 --
debentures (net of tax)
Net income for fully diluted $9,916 $5,508
earnings per common share
Primary number of shares 16,823 16,272
outstanding
Add: incremental shares
representing-
Stock option plans 40 --
Shares issuable on convertible 6,825 --
debentures
Fully diluted number of shares
outstanding 23,688 16,272
Fully diluted earnings per common
share $0.42 $0.34
All share and per share amounts have been adjusted to reflect a
three-for-two stock split paid on April 10, 1996.
AMERICAN TRAVELLERS CORPORATION
AND SUBSIDIARIES CONSOLIDATED STATEMENT OF INCOME
(In thousands, except per share data)(Unaudited)
For the six months
ended June 30,
1996 1995
Revenues-
Accident and health premiums $182,793 $118,464
Life premiums 4,081 4,193
Net investment income 21,300 8,110
Realized investment gains 1,359 25
Total revenues 209,533 130,792
Benefit and expenses-
Benefits to policyholders
Paid claims 84,219 48,245
Change in claim reserves 19,141 12,385
Change in future policy 23,944 12,159
benefit reserves
Total benefits to 127,304 72,789
policyholders
Commissions 47,558 36,480
General and administrative 15,478 11,879
Premium taxes 4,548 3,090
Amortization of value of 1,764 881
business acquired
Amortization of deferred 9,187 10,914
acquisition costs
Less: policy acquisition costs (25,179) (21,733)
deferred
Interest expense 3,975 863
Total expense s 57,331 42,374
Total benefits and expenses 184,635 115,163
Income before provision for income 24,898 15,629
taxes
Provision for income taxes 8,075 4,895
Net income $16,823 $10,734
Primary number of shares 16,713 16,247
outstanding
Primary earnings per common share
$1.01 $0.66
Net income $16,823 $10,734
Add: interest on convertible 2,271 --
debentures (net of tax)
Net income for fully diluted $19,094 $10,734
earnings per common share
Primary number of shares 16,713 16,247
outstanding
Add: incremental shares
representing-
Stock option plans 63 --
Shares issuable on convertible 6,825 --
debentures
Fully diluted number of shares
outstanding 23,601 16,247
Fully diluted earnings per common
share $0.81 $0.66
All share and per share amounts have been adjusted to reflect a three-for-two
stock split paid on April 10, 1996.
AMERICAN TRAVELLERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
Six months ended June 30,
Cash flows-operating activities 1996 1995
Net income $16,823 $10,734
Adjustments to reconcile net income to cash
provided by operating activities-
Amortization of deferred policy acquisition 9,187 10,914
costs
Amortization of discount and premium (429) 866
Depreciation and amortization 568 1,358
Realized securities losses/(gains) (1,356) 2
(Decrease) in current and deferred income (1,453) (5,177)
taxes
Increase in reserves 45,784 28,669
Increase in other liabilities 276 (150)
Deferred policy acquisition costs (25,179) (21,733)
Decrease in other assets and value of 775 1,078
business acquired
Total adjustments 28,173 15,827
Net cash provided by operating activities 44,996 26,561
Cash flows-investing activities
Proceeds from sales of investments 148,380 --
Proceeds from calls and maturities on 147,178 17,639
investments
Purchase of investments (395,354) (36,837)
Purchase of fixed assets (208) (381)
Net cash used in investing activities (100,004) (19,579)
Cash flows-financing activities
Exercise of stock options 2,302 670
Net cash provided by financing activities 2,302 670
Net (decrease) increase in cash and cash (52,706) 7,652
equivalents
Cash and cash equivalents, beginning of period 70,214 9,133
Cash and cash equivalents, end of period $ 17,508 $16,785
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 3,550 $ 837
Income Taxes $ 9,962 $9,800
AMERICAN TRAVELLERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Commo Stock Exces Unrealized Retai Treas Sharehol
n s of gain/ ned ury ders'
Share Amoun Par (loss) Earni Stock Equity
s t value Investment ngs
s
Balance, 16,053 $161 $59,961 $10,245 $101,187 ($749) $170,805
12/31/95
Net income -- -- -- -- 16,823 -- $16,823
Exercise of 428 4 2,300 -- -- -- $2,304
stock options
Tax benefit from
exercise of
stock options -- -- 2,164 -- -- -- $2,164
Net unrealized
gain/(loss)
on investments -- -- -- (21,079) -- -- ($21,079)
Retirement of (200) (2) (747) 749 $0
treasury stock
Balance, 6/30/96 16,281 $163 $63,678 ($10,834) $118,010 $0 $171,017
All share amounts have been adjusted to reflect a three-for-two
stock split paid on April 10, 1996.
AMERICAN TRAVELLERS CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 1996
(In thousands, except share data)
(Unaudited)
(1) Basis of Presentation:
The accompanying unaudited consolidated financial statements have
been prepared in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and 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 annual financial statements. In the opinion of management,
all adjustments considered necessary for a fair representation
have been included. All adjustments were of a normal recurring
nature, unless otherwise noted in the Management's Discussion and
Analysis of Financial Condition and Results of Operations and the
Notes to Consolidated Financial Statements. Operating results
for the quarter or six months ended June 30, 1996, are not
necessarily indicative of the results that may be expected for
the year ending December 31, 1996. For further information,
refer to the Consolidated Financial Statements thereto included
in the Company's Annual Report on Form 10-K for the year then
ended December 31, 1995.
Certain amounts in the 1995 financial statements have been
reclassified to conform to the 1996 financial statement
presentation.
(2) Summary of significant accounting policies:
Principles of consolidation-
The accompanying consolidated financial statements include the
accounts of American Travellers Corporation ("ATC") and its
wholly owned subsidiaries, American Travellers Life Insurance
Company ("ATL"), United General Life Insurance Company ("UGL"),
American Travellers Insurance Company of New York ("ATICNY") and
American Travellers Insurance Services Company, Inc. ("ATIS").
ATC, ATL, UGL, ATICNY and ATIS are collectively referred to as
the "Company." All material intercompany accounts and
transactions have been eliminated in consolidation.
General-
The Company's operations consist of the underwriting and sale of
life and accident and health insurance. The Company is
principally a marketer and underwriter of long term care
insurance. The Company's long term care products consist of both
nursing home and home health care policies which provide limited
benefit payments primarily to senior citizens. The Company also
markets and underwrites other supplemental accident and health
insurance policies, as well as life insurance.
The preparation of financial statements in conformity with GAAP
requires the use of estimates which requires management to make
estimates and assumptions that effect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues expenses during the reporting
period. Actual results could differ from those estimates.
Investments-
The Company adopted the provisions of Statement of Financial
Accounting Standards No. 115, Accounting for Certain investments
in Debt and Equity Securities ("SFAS 115"), as of January 1,
1994. Under SFAS 115, investments in equity and debt securities
are classified in three categories and accounted for based upon
the classification. In December 1995, the Company transferred
its investments from the "held to maturity" classification to the
"available for sale" classification pursuant to SFAS 115 and has
recorded such investments at fair value with unrealized gains and
losses reported as a component of shareholders' equity, net of
tax.
Earnings per share-
Primary earnings per common share are based on the weighted
average number of shares outstanding during the period and the
dilutive effect of stock options and other common stock
equivalents. Fully diluted earnings per common share are based
on the weighted average number of shares outstanding, the
dilutive effect of common stock equivalents, and the assumed
conversion of the 6.5% convertible subordinated debentures. Net
income is increased by the interest on the debenture, net of
related income taxes.
Stock split-
On March 4, 1996, the board of directors declared a three-for-two
stock split for security holders of record on March 20, 1996,
which was paid on April 10, 1996. Share and per share amounts
have been retroactively adjusted to reflect this split for all
periods presented.
Accounting Pronouncements-
SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed of," was adopted in 1996
with no impact on the Company's financial condition. This
accounting pronouncement establishes accounting standards for the
impairment of long lived assets, certain identifiable intangibles
and goodwill related to (i) those assets to be held and used in
the business, and (ii) assets to be disposed of.
SFAS No. 123, "Accounting for Stock-Based Compensation," will be
adopted by the Company in 1996. This statement provides
alternative methods for accounting for employee stock
compensation plans. A company can elect to use the new fair-
value based method of accounting for employee stock compensation
plans, under which compensation cost is measured and recognized
in results of operations, or continue to account for these plans
under the current accounting standards. Entities electing to
remain with the present accounting method must make disclosures
of what net income and earnings per share would have been if the
fair-value-based method of accounting had been applied. The
Company plans to continue to account for employee stock options
using the present accounting method and include the required
disclosures in its financial statements.
(3) Investments:
As of December 31, 1994 the Company classified all of its
investments as "held to maturity" pursuant to the provisions of
SFAS 115. As a result of changes in the investment portfolio and
strategy and as a result of the acquisition discussed in Note 15
to the Consolidated Financial Statements included in the
Company's Annual Report on Form 10-K for the years ended December
31, 1995 and other factors, the Company changed the
classification of its investments to "available for sale,"
effective December 1995.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Results of Operations
During each of the past two years, the Company consummated the
acquisition of substantial blocks of in force policies of
insurance from other companies, and the revenues and expenses
associated with these policies are included in the Company's
operating results from the respective acquisition dates. In the
fourth quarter of 1994, the Company consummated an acquisition of
a block of long term care policies, representing $25.0 million in
annualized premiums, from two insurance subsidiaries of the J.C.
Penney Company (the "JCP Acquisition") and in the fourth quarter
of 1995, the Company consummated an acquisition of a block of
long term care policies, representing $96.0 million in annualized
premiums and $250.0 million of net assets, from two insurance
subsidiaries of Transport Holdings, Inc. (the "Transport
Acquisition"). These acquisitions (i) enabled the Company to
increase its premium income without incurring the customary
higher first year commissions and expenses associated with new
policy sales; (ii) enabled the Company to service the acquired
policies without significant additional infrastructure, thereby
contributing to a reduction in general and administrative
expenses as a percentage of revenues; and (iii) substantially
increased investment income. However, because of the amount and
timing of these acquisitions, the results of operations for the
quarterly and six months periods presented may not be directly
comparable.
Revenues
For the quarter ended June 30, premiums increased 53% to $93.5
million in 1996 from $61.2 million in 1995. For the six months
ended June 30, premiums increased 52% to $186.9 million in 1996
from $122.7 million in 1995. Premiums for the quarter ended June
30, 1996 included $5.0 million attributable to the JCP
Acquisition and $22.5 million attributable to the Transport
Acquisition; premiums for the quarter ended June 30, 1995
included $5.7 million attributable to the JCP Acquisition.
Premiums for the six months ended June 30, 1996 included $10.0
million attributable to the JCP Acquisition and $46.0 million
attributable to the Transport Acquisition; premiums for the six
months ended June 30, 1995 period included $12.1 million
attributable to the JCP Acquisition.
The Company's annualized long term care premiums in force have
grown significantly. The period-to-period changes in the various
components of annualized premiums in force, including components
attributable to the JCP Acquisition and the Transport
Acquisition, are summarized in the schedule below:
Annualized Premiums in Force
(Dollars in millions)
June 30, Percentage Change
1996 1995 1996 v.1995
Nursing home $ 274.9 $ 159.7 72%
Home health care 80.1 55.5 44%
Total long term care 355.0 215.2 65%
Medicare supplement 21.3 23.1 (9%)
Other accident and health 8.2 9.0 (9%)
Life insurance 8.8 8.4 5%
Total premiums in force $ 393.3 $ 255.7 54%
Amount attributable to:
JCP Acquisition $ 20.4 $ 23.0
Transport Acquisition $ 92.3 --
As of June 30, 1996, the Company had $393.3 million of annualized
premiums in force, a 54% increase from June 30, 1995. Partially
offsetting the growth in long term care premiums is a reduction
in the Company's Medicare supplement business. New sales of
Medicare supplement policies have been negligible since 1992 when
management decided to de-emphasize this product line.
New business premiums generated internally, which excludes
premiums attributable to the JCP Acquisition and the Transport
Acquisition, are summarized by line of business below:
New Business Premiums
(Dollars in millions)
Quarter ended June 30, Six months ended June 30,
% %
1996 1995 Change 1996 1995 Change
Nursing Home $ 13.7 $ 10.1 36% $ 26.4 $ 20.8 27%
Home health care 5.7 5.6 1% 11.3 10.5 8%
Total long term 19.4 15.7 24% 37.7 31.3 21%
care
Other accident 0.3 0.4 (25%) 0.7 0.9 (22%)
and health
Life insurance 0.4 0.9 (56%) 0.9 1.9 (53%)
Total new business $ 20.1 $ 17.0 18% $ 39.3 $ 34.1 15%
business
The growth in new business premiums for the periods presented is
attributable to an increase in the size of the Company's agent
network, increased sales of a newly introduced policy, the LTC-6
(the "Presidential Plan"), and the Company's achievement of an
A.M. Best rating of "A-" (Excellent) in September 1995. The
Company does not know the extent to which its competition is
likely to increase in the future but believes that it is well-
positioned to remain competitive in all of its markets.
Investment income increased $6.6 million or 155% during the
second quarter of 1996 as compared to the second quarter of 1995.
Investment income, including securities gains, increased by $14.5
million or 179% for the six months ended June 30, 1996, as
compared to the same period for 1995. The increases during the
periods noted reflect the availability of additional cash for
investment from premium growth, the net proceeds of the 6.5%
convertible subordinated debenture offering in September 1995,
the Transport Acquisition in October 1995 and the JCP Acquisition
in October 1994. In future years investment income is expected
to be a more significant component of the Company's revenues and
operating income due to the increasing size of the Company's
invested asset base.
During 1993, the Company began purchasing tax-free municipal
securities, which provided superior after-tax yields when
compared to taxable securities of similar quality and maturity.
This practice was continued during the first nine months in 1994.
In the fourth quarter of 1994, the Company changed its investment
criteria to include the purchase of taxable securities in
response to its changing tax planning requirements. During the
second quarter of 1996, the Company sold $42.9 million of its
municipal securities or 55% of its total municipal securities
portfolio. The Company sold $67.4 million of its municipal
securities or 87% of its total municipal securities portfolio
during the six months ended June 30, 1996. The Company intends
to liquidate the balance of its municipal securities in 1996.
The Company invests in publicly traded investment grade debt
instruments. It does not invest in high-yield debt securities,
equities or real estate, and has historically held its investment
portfolio at amortized cost. While the Company's investment
policy has been to hold its investments until maturity, the
Company changed its strategy in the fourth quarter of 1995 and
made its entire portfolio available for sale. This will provide
the Company with the flexibility to adjust its investment
holdings in response to changing market conditions and other
factors. The Company invests in securities and other investments
authorized by applicable state laws and regulations and follows
an investment policy designed to maximize yield to the extent
consistent with liquidity requirements and preservation of
assets. As of June 30, 1996, the Company had increased its
holdings in mortgage-backed securities, all of which are highly
liquid public issues, to $220.4 million (cost), as compared to
$180.9 million (cost) as of December 31, 1995.
Benefits and Expenses
Benefits to policyholders (the sum of claims paid and changes in
reserves for claims and future policy benefits) increased $26.8
million or 74% in the second quarter of 1996 as compared to the
second quarter of 1995. Benefits to policyholders increased
$54.5 million or 75% for the six months ended June 30, 1996 as
compared to the same period for 1995. The period-to-period
changes in the components of benefits to policyholders are as
follows:
Benefits to Policyholders
(Dollars in millions)
Quarter ended June 30, Six months ended June 30,
% %
1996 1995 Change 1996 1995 Change
Paid claims $ 42.4 $ 25.4 67% $ 84.2 $ 48.2 75%
Change in claim 9.5 4.7 102% 19.1 12.4 55%
reserves
Change in benefit 10.9 6.0 82% 24.0 12.2 97%
reserves
Total benefits to
policyholders $ 62.8 36.1 74% 127.3 72.8 75%
The recent increases in benefits to policyholders correspond to
the continued growth in the Company's policyholder base. The
increases in paid claims as a percentage of premiums over the
periods is a result of the increasing size of the Company's
renewal business relative to its total business. The 1996
periods include claim activity related to the Transport
Acquisition which was substantially comprised of renewal premiums
as opposed to new business premiums. The increase in benefit
reserves in the 1996 periods are more significant than in 1995 as
a result of improved persistency. This increase in reserves is
partially offset by a reduction in the rate of amortization of
deferred policy acquisition costs as policies remain in force for
longer periods of time. The Company actively monitors claims and
has its reserves reviewed annually by an independent actuarial
firm to ensure that claim and benefit reserves are adequate and
to make appropriate adjustments, if necessary, in marketing
strategy, product design and premium rates.
Commission expense increased $5.6 million or 31% in the second
quarter of 1996 as compared to the second quarter of 1995.
Commission expense increased $11.1 million or 30% for the six
months ended June 30, 1996, as compared the same period in 1995.
As a percentage of total premiums, commission expense decreased
to 25.3% in the second quarter of 1996 as compared to 29.5% in
the second quarter of 1995. As a percentage of total premiums,
commission expense decreased to 25.4% for the six months ended
June 30, 1996, as compared to 29.7% for the same period in 1995.
These decreases are directly related to the increase in renewal
business (for which a lower commission rate is payable) relative
to total business during the periods presented.
Total general and administrative expenses increased by $2.8
million or 34% in the second quarter of 1996 as compared to the
second quarter of 1995. Total general and administrative
expenses increased by $5.9 million or 37% for the six months
ended June 30, 1996, as compared to the same period for 1995.
The increase in total general and administrative expenses over
the recent periods is primarily due to the incremental costs of
servicing a larger in force policyholder base, as well as an
increase in state and local premium taxes, which vary directly
with premium. The premium tax increase continues a trend for all
periods presented. As a percentage of total premiums, general
and administrative expenses have decreased as the Company's
growth has enabled it to achieve certain operational economies of
scale.
Interest expense increased significantly in the first six months
of 1996 as a result of the Company's issuance in September 1995
of $103.5 million 6.5% convertible subordinated debentures, the
net proceeds of which were used, among other purposes, to repay
the Company's $20.0 million revolving credit facility which was
the sole source of interest expense previously.
Policy acquisition costs deferred increased $2.1 million or 19%
in the second quarter of 1996 as compared to the second quarter
of 1995. Policy acquisition costs deferred increased $3.4
million or 16% for the six months ended June 30, 1996 as compared
to the same period in 1995. Policy acquisition costs, which
consist principally of excess first year commissions and policy
issue and underwriting costs, vary with, and are directly related
to, new business premiums.
Amortization of deferred policy acquisition costs decreased $0.7
million or 13% in the second quarter of 1996 as compared to the
second quarter of 1995. Amortization of deferred policy
acquisition costs decreased $1.7 million or 16% for the six
months ended June 30, 1996 as compared to the same period in
1995. These decreases are due to improved persistency which
results in the amortization of deferred acquisition costs over a
longer policy life. At the same time, improved persistency
results in benefit reserve increases which are required to
recognize higher morbidity rates as policyholders maintain
policies in force for a longer period of time and to a higher
age. The total dollar reserve increases caused by improved
persistency have exceeded the total dollar decreases in the
amortization of deferred policy acquisition costs. Amortization
of deferred policy acquisition costs varies with, and is directly
related to, the lapse rates of premiums in force.
Amortization of the value of business acquired varies with and is
directly related to premiums in force on acquired business. The
amortization of the value of business acquired, primarily
relating to acquisitions made in 1991 and previously, for the
first quarter of 1996 includes an additional $1.0 million which
was voluntarily amortized by the Company.
The provision for income taxes increased $1.6 million or 64% in
the second quarter of 1996 as compared to the second quarter of
1995. The provision for income taxes increased $3.2 million or
65% for the six months ended June 30, 1996, as compared to the
same period in 1995. The components of the income tax provisions
are as follows:
Provision for Income Taxes
(Dollars in millions)
Quarter ended June 30, Six months ended June 30,
% %
1996 1995 Change 1996 1995 Change
Income before
provision for
income tax $ 12.9 $ 8.1 59% $ 24.9 $ 15.6 59%
Tax-free income (0.4) (0.8) (50%) (1.1) (1.6) (31%)
Taxable income 12.5 7.3 71% 23.8 14.0 66%
Total provision $ 4.1 $ 2.5 67% $ 8.1 $ 4.9 65%
for income tax
The increased tax provision is directly attributable to the
increase in the Company's pre-tax earnings. The Company's
effective tax rate for financial reporting purposes was 31.8% for
the second quarter of 1996, as compared to 31.6% for the second
quarter of 1995. The Company's effective tax rate for financial
reporting purposes was 32.4% for the six months ended June 30,
1996 and 31.3% for the same period in 1995. The increase in
1996, as compared to 1995 is primarily the result of a lower
percentage of income being derived from municipal securities as
the Company is in the process of liquidating such securities.
The Company's current tax provision was $6.0 million for the
second quarter of 1996, as compared to $4.0 million for the
second quarter of 1995. The Company's current tax provision was
$9.0 million for the six months ended June 30, 1996, as compared
to $5.8 million for the same period in 1995. The significant
increase in taxes currently payable is the result of the
Company's continued earnings growth which limits the availability
of the small life company deduction, while at the same time
increasing other temporary differences. These temporary
differences may grow during 1996 and 1997. Although these
differences will not increase the Company's effective tax rate
for financial reporting purposes, they will result in a greater
amount of currently payable taxes. During the second quarter of
1996, the Internal Revenue Service completed its review of the
Company's federal income tax returns for the years ended December
31, 1993, 1992, 1991 and 1990. The results of this review did
not have any material effect on the financial condition or
results of operations of the Company.
Liquidity and Capital Resources
The Company's primary sources of cash are premiums and
investment income. Its primary uses of cash are payments of
benefits, policy acquisition costs, operating costs and income
taxes. The Company has a $20.0 million revolving credit
facility. In September 1995, the Company issued the Debentures,
the net proceeds of which were utilized to make a $58.0 million
surplus contribution to ATL, repay all outstanding borrowings
under its $20.0 million credit facility, and add $22.0 million at
the holding company level for working capital purposes. In the
first quarter of 1996, the Company made an additional surplus
contribution to ATL of approximately $8.1 million. The Company
will be dependent on dividends from ATL to meet its debt service
requirements resulting from the outstanding debentures after the
cash at the holding company is exhausted.
The Company intends to maintain its credit facility in place.
The credit facility is secured by the common stock of ATL and
ATIS. The Company has no other lines of credit. As of June 30,
1996, the Company had no material commitments for any capital
expenditures.
In October 1994, the Company received net cash of $29.2 million
as a result of the JCP Acquisition. The transaction consisted of
the acquisition of approximately 20,000 policies with annualized
premiums of approximately $25.0 million at the date of
acquisition. The effect of this acquisition on the 1994 results
of operations was not material.
In December 1995, the Company received net assets of $250.0
million as a result of the Transport Acquisition. The
transaction consisted of the acquisition of approximately 97,000
policies with annualized premiums of approximately $96.0 million
at the date of acquisition. This transaction had the effect of
significantly increasing the Company's cash and invested assets
in support of the policy liabilities assumed. As a result, in
future years, investment income is likely to be a more
significant component of the Company's revenues and operating
income.
State insurance laws and regulations require that the Company's
insurance subsidiaries maintain capital and surplus at specific
levels. The regulators began to utilize a "risk-based" capital
and surplus analysis as a guide to determine the appropriate
level of capital and surplus. As of June 30, 1996, the
"adjusted" statutory capital and surplus for the Company's
insurance subsidiaries was above all required capital and surplus
levels. The Company must continue, however, to increase its
insurance subsidiaries' statutory capital and surplus in order to
significantly increase its sales of new policies or make
acquisitions of other blocks of business. The Company
continuously reviews the availability of additional lines of
credit and other funding sources that it may utilize to support
its future growth.
Management believes that the effect of inflation is insignificant
to its insurance operations, except with respect to its Medicare
supplement product line.
PART II. OTHER INFORMATION
ITEM 2. CHANGES IN SECURITIES
(a) On April 10, 1996, the Company's authorized common stock
increased from 25,000,000 to 37,500,000 as a result of a three-
for-two stock split of the authorized and outstanding common
stock paid on such date. On May 23, 1996, the shareholders of
the Company approved an increase in the authorized common stock
from 37,500,000 to 50,000,000.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Company's May 23, 1996 Annual Meeting of Shareholders
(the "Annual Meeting"), Alice E. Powell, Walter E. Conrad and
Arnold H. Keehn were re-elected.
The votes were as follows:
For Withheld
Alice E. Powell 8,650,970 413,307
Walter E. Conrad 8,659,892 404,385
Arnold H. Keehn 8,659,852 404,425
The terms of John A. Powell, Walter J. Diener, Henry G. Hager,
Susan T. Mankowski and Ramon R. Obod, the Company's other
Directors, continued following the Annual Meeting.
A proposal to amend Article 5(a) of the Corporation's Articles of
Incorporation to increase the Corporation's authorized Common
Stock to 50,000,000 shares, 8,753,586 votes "for", 299,559 votes
"against" and 11,132 "abstained."
A proposal to adopt the Company's 1996 Stock Option Plan received
6,142,037 votes "for", 2,905,513 votes "against" and 16,927
"abstained."
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS-
3(a) Articles of Amendment to the Articles of
Incorporation of American Travellers Corporation filed
with Pennsylvania Department of State reflecting an
increase in authorized shares of Common Stock to
50,000,000.
10(d). 1996 STOCK OPTION PLAN - Incorporated by reference
to Appendix A of the Company's 1996 Proxy Statement a
definitive copy of which was filed with the Securities and
Exchange Commission on or about April 19, 1996.
27. FINANCIAL DATA SCHEDULE - Electronic format only.
(B.) The following reports on Form 8-K were filed during the
quarter ended June 30, 1996
NONE
EXHIBIT 3(a) Articles of Amendment to the Articles of
Incorporation of American Travellers Corporation
The undersigned Business Corporation, desiring to amend
its Articles of Incorporation, in compliance with the
requirements of section 1915 of the Pennsylvania Business
Corporation Law of 1988, hereby certifies that:
1. The name of the corporation is :
American Travellers Corporation
2. The address, including street number, of the Corporation's
registered office is:
3220 Tillman Drive
Bensalem, PA 19020
3. The statute under which the Corporation was
incorporated is the Pennsylvania Business Corporation Law of
1933.
4. The date of its incorporation is:
January 8, 1971
5. The amendment was adopted by the shareholders at the annual
meeting of its shareholders held on May 23, 1996.
6. The amendment adopted by the Corporation, set forth in full,
is as follows:
Article 5(a) of the Corporation's Articles of
Incorporation as heretofore amended shall be
further amended to read in its entirety as
follows:
5.(a) The aggregate number of shares of stock
which the Corporation shall have authority to
issue is 50,000,000 shares of Common Stock, $.01
par value per share, and 5,000,000 shares of
Preferred Stock, $.01 par value per share.
IN WITNESS WHEREOF, the undersigned Corporation
has caused these Articles of Amendment to be
signed by its duly authorized officer this 23rd
day of May, 1996.
AMERICAN TRAVELLERS CORPORATION
BY: /s/ John A. Powell
President
SIGNATURES
Pursuant to the requirements of Section 130or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on is behalf by the undersigned
thereunto duly authorized.
DATE: August 14, 1996 AMERICAN TRAVELLERS CORPORATION
By: /s/ John A. Powell
Chairman of the Board and Chief Executive Officer
By: /s/ Benedict J. Iacovetti
Principal Financial Officer
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