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
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 0-14391
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 November 1, 1996, there were 16,328,780 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)
September 30, December 31,
1996 1995
ASSETS
Investments-
Bonds, available for sale, at fair value (cost $689,646 $582,621
$705,541 and $566,859)
Mortgage loan 435 447
Total investments 690,081 583,068
Cash and cash equivalents 12,205 70,214
Accrued investment income 7,732 6,781
Premiums due and unpaid 7,431 7,027
Deferred acquisition costs 168,691 144,767
Value of business acquired (accumulated 10,861 12,846
amortization $14,759 and $12,619)
Property and equipment, at cost ( accumulated 3,850 4,176
depreciation $4,289 and $3,682)
Other assets 6,761 7,262
Total assets $907,612 $836,141
LIABILITIES AND SHAREHOLDERS' EQUITY
Policy liabilities-
Future policy benefit reserves $283,145 $247,562
Claim reserves 240,582 210,073
Unearned premium reserves 62,613 60,477
Total policy liabilities 586,340 518,112
Other liabilities 10,892 7,785
Current and deferred income taxes 26,148 35,939
6.5% convertible subordinated debentures 102,900 103,500
Total liabilities 726,280 665,336
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; 16,322,986 and
16,053,105 shares issued, respectively 163 161
Capital in excess of par value 64,282 59,961
Net unrealized (loss)/gain on investments (10,332) 10,245
Retained earnings 127,219 101,187
Less: Shares of common stock held in treasury -- (749)
(cost $200)
Total shareholders' equity 181,332 170,805
Total liabilities and shareholders' equity $907,612 $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
September 30,
1996 1995
Revenues-
Accident and health premiums $94,394 $61,435
Life premiums 2,057 2,101
Net investment income 11,834 4,587
Realized investment (30) 155
(losses)/gains
Total revenues 108,255 68,278
Benefits and expenses-
Benefits to policyholders
Paid claims 41,809 25,939
Change in claim reserves 11,374 7,765
Change in future policy 11,713 5,230
benefit reserves
Total benefits to 64,896 38,934
policyholders
Commissions 24,351 17,531
General and administrative 8,409 5,653
Premium taxes 2,224 1,610
Amortization of value of 375 676
business acquired
Amortization of deferred 5,053 5,440
acquisition costs
Less: policy acquisition costs (12,984) (10,496)
deferred
Interest expense 1,787 614
Total expenses 29,215 21,028
Total benefits and expenses 94,111 59,962
Income before provision for income 14,144 8,316
taxes
Provision for income taxes 4,936 2,589
Net income $9,208 $5,727
Primary number of shares 17,040 16,266
outstanding
Primary earnings per common share $0.54 $0.35
Net income $9,208 $5,727
Add: interest on convertible 1,144 109
debentures (net of tax)
Net income for fully diluted $10,352 $5,836
earnings per common share
Primary number of shares
outstanding 17,040 16,266
Add: incremental shares
representing-
Stock option plans 147 --
Shares issuable on convertible 6,822 683
debentures
Fully diluted number of shares
outstanding 24,009 16,949
Fully diluted earnings per common
share $0.43 $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 nine months ended
September 30,
1996 1995
Revenues-
Accident and health premiums $277,187 $179,898
Life premiums 6,138 6,294
Net investment income 33,134 12,697
Realized investment gains 1,329 179
Total revenues 317,788 199,068
Benefits and expenses-
Benefits to policyholders
Paid claims 126,028 74,184
Change in claim reserves 30,515 20,150
Change in future policy 35,657 17,390
benefit reserves
Total benefits to 192,200 111,724
policyholders
Commissions 71,909 54,011
General and administrative 23,887 17,532
Premium taxes 6,772 4,700
Amortization of value of 2,139 1,557
business acquired
Amortization of deferred 14,240 16,394
acquisition costs
Less: policy acquisition costs (38,163) (32,269)
deferred
Interest expense 5,762 1,477
Total expenses 86,546 63,402
Total benefits and expenses 278,746 175,126
Income before provision for income 39,042 23,942
taxes
Provision for income taxes 13,010 7,483
Net income $26,032 $16,459
Primary number of shares 16,820 16,254
outstanding
Primary earnings per common share $1.55 $1.01
Net income $26,032 $16,459
Add: interest on convertible 3,415 109
debentures (net of tax)
Net income for fully diluted $29,447 $16,568
earnings per common share
Primary number of shares 16,820 16,254
outstanding
Add: incremental shares
representing-
Stock option plans 189 --
Shares issuable on convertible 6,824 226
debentures
Fully diluted number of shares
outstanding 23,833 16,480
Fully diluted earnings per common
share $1.24 $1.01
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)
For the nine months ended September 30,
Cash flows-operating activities 1996 1995
Net income $26,032 $16,459
Adjustments to reconcile net income to cash
provided by operating activities-
Amortization of deferred policy acquisition 14,240 16,394
costs
Amortization of discount and premium (1,146) 550
Depreciation and amortization 967 1,619
Realized securities (gains) (1,329) (153)
Increase/(Decrease) in current and deferred 3,474 (5,317)
income taxes
Increase in reserves 68,228 40,980
Increase in other liabilities 3,107 1,488
Deferred policy acquisition costs (38,163) (32,269)
Decrease in other assets and value of 750 424
business acquired
Total adjustments 50,128 23,716
Net cash provided by operating activities 76,160 40,175
Cash flows-investing activities
Proceeds from sales of investments 156,657 --
Proceeds from calls and maturities on 260,911 29,045
investments
Purchase of investments (553,763)(105,396)
Purchase of fixed assets (282) (439)
Net cash used in investing activities (136,477) (76,790)
Cash flows-financing activities
Proceeds from issuance of Subordinated -- 103,500
Debentures
Debentures issue costs -- (3,905)
Repayments on notes payable -- (20,000)
Exercise of stock options 2,308 404
Net cash provided by financing activities 2,308 79,999
Net (decrease)/ increase in cash and cash (58,009) 43,384
equivalents
Cash and cash equivalents, beginning of period 70,214 9,133
Cash and cash equivalents, end of period $12,205 $52,517
Supplemental disclosure of cash flow
information:
Cash paid during the period for:
Interest $ 3,583 $ 1,262
Income Taxes $ 9,962 $12,800
AMERICAN TRAVELLERS CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(In thousands)
(Unaudited)
Net
Common Capital in Unrealized Re- Treas- Share-
Common Stock Excess of gain/(loss) tained ury holders'
Shares Amount Par Value on Invest. Earn. Stock Equity
Balance, $ 16,053 $161 $59,961 $10,245 $101,187 ($749) $170,805
12/31/95
Net income -- -- -- -- 26,032 -- $ 26,032
Exercise of 430 4 2,306 -- -- -- $ 2,310
stock options
Tax benefit from
exercise of
stock options -- -- 2,184 -- -- -- $ 2,184
Conversion of 40 -- 578 -- -- -- $ 578
debentures
Change in
unrealized gain/
(loss) on -- -- -- (20,577) -- -- ($20,577)
investments
Retirement of (200) (2) (747) -- 749 $ 0
treasury stock
Balance, 9/30/96 16,323 $163 $64,282 ($10,332) $127,219 $0 $181,332
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
SEPTEMBER 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 presentation 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 the nine months ended September 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 and the Notes
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 affect the reported amounts of
assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and 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 (the
"Debentures"). Net income is increased by the interest on the
Debentures, 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.
(4) Pending Merger:
On August 25, 1996, the Company and Conseco, Inc. ("Conseco")
jointly entered into a definitive agreement providing for all
shareholders of the Company to receive an amount of Conseco
Common Stock for each of their shares through a share exchange
based upon the following exchange ratio: (I) if the average
closing prices of Conseco Common Stock for the ten trading days
immediately preceding the second trading day prior to the
consummation of the Merger ("the Conseco Share Price") is greater
than or equal to $42.25 per share and less than or equal to
$46.25 per share, 0.7574 of a share of Conseco Common Stock, (II)
if the Conseco Share Price is less than $42.25 per share, the
fraction of a share of Conseco Common Stock determined by
dividing $32.00 by the Conseco Share Price, or (III) if the
Conseco Share Price is greater than $46.25 per share, the
fraction of a share of Conseco Common Stock determined by
dividing $35.03 by the Conseco Share Price. Accordingly, the
Company's shareholders will receive Conseco Common Stock with a
value of not less than $32.00 and up to $35.03 per share. The
Company's Debentures will become convertible into shares of
Conseco Common Stock on an equivalent basis.
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
On August 25, 1996, ATC and Conseco entered into an Agreement and
Plan of Merger whereby ATC would merge with and into Conseco,
with Conseco being the surviving entity. Such merger is subject
to, among other things, the approval by the shareholders of both
companies and various regulatory bodies. A Joint Proxy Statement
was mailed to shareholders of both companies on October 25, 1996
and shareholder meetings are scheduled to take place on November
26, 1996 to vote on the merger.
If the merger is consummated, ATC will cease to exist and ATL,
UGL, ATICNY and ATIS will become wholly owned subsidiaries of
Conseco. It is anticipated, but not assured, that the merger
will be consummated before December 31, 1996 assuming that the
requisite shareholder and regulatory approvals are obtained.
The following discussion of results of operations and liquidity
and capital resources of the Company speaks only in the context
of the Company as it presently exists. It does not contain pro
forma information or otherwise contemplate the combination of the
Company with Conseco pursuant to the merger.
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 and $29.6 million of net assets, 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 nine months
periods presented may not be directly comparable.
Revenues
For the quarter ended September 30, revenues increased 59% to
$108.3 million in 1996 from $68.3 million in 1995. For the nine
months ended September 30, revenues increased 60% to $317.8
million in 1996 from $199.1 million in 1995. Premiums for the
quarter ended September 30, 1996 included $5.1 million
attributable to the JCP Acquisition and $22.3 million
attributable to the Transport Acquisition; premiums for the
quarter ended September 30, 1995 included $5.4 million
attributable to the JCP Acquisition. Premiums for the nine
months ended September 30, 1996 included $15.1 million
attributable to the JCP Acquisition and $68.4 million
attributable to the Transport Acquisition; premiums for the nine
months ended September 30, 1995 period included $17.3 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)
September 30, Percentage Change
1996 1995 1996 v.1995
Nursing home $ 283.8 $ 164.7 72%
Home health care 82.4 60.2 37%
Total long term care 366.2 224.9 63%
Medicare supplement 21.0 23.2 (9%)
Other accident and health 8.0 8.9 (10%)
Life insurance 8.8 8.7 1%
Total premiums in force $ 404.0 $ 265.7 52%
Amount attributable to:
JCP Acquisition $ 19.9 $ 22.1
Transport Acquisition $ 89.7 --
As of September 30, 1996, the Company had $404.0 million of
annualized premiums in force, a 52% increase from September 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 September 30, Nine months ended September 30,
% %
1996 1995 Change 1996 1995 Change
Nursing home $ 14.6 $ 10.6 38% $ 41.1 $ 31.4 31%
Home health care 5.2 4.8 8% 16.4 15.3 7%
Total long term 19.8 15.4 29% 57.5 46.7 23%
care
Other accident 0.3 0.5 (40%) 1.0 1.5 (33%)
and health
Life insurance 0.4 0.8 (50%) 1.3 2.7 (52%)
Total new
business $ 20.5 $ 16.7 23% $ 59.8 $ 50.9 18%
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 $7.2 million or 158% during the third
quarter of 1996 as compared to the third quarter of 1995.
Investment income, including securities gains, increased by $21.6
million or 168% for the nine months ended September 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 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. The Company
sold $74.6 million of its municipal securities or 96% of its
total municipal securities portfolio during the nine months ended
September 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 September 30, 1996, the Company had increased its
holdings in mortgage-backed securities, all of which are highly
liquid public issues, to $242.3 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 $26.0
million or 67% in the third quarter of 1996 as compared to the
third quarter of 1995. Benefits to policyholders increased
$80.5 million or 72% for the nine months ended September 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 September 30, Nine months ended September 30,
% %
1996 1995 Change 1996 1995 Change
Paid claims $ 41.8 $ 25.9 61% $ 126.0 $ 74.2 70%
Change in claim 11.4 7.8 46% 30.5 20.1 52%
reserves
Change in benefit 11.7 5.2 125% 35.7 17.4 105%
reserves
Total benefits to
policyholders $ 64.9 $ 38.9 67% $ 192.2 $111.7 72%
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 increases 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 $6.8 million or 39% in the third
quarter of 1996 as compared to the third quarter of 1995.
Commission expense increased $17.9 million or 33% for the nine
months ended September 30, 1996, as compared the same period in
1995. As a percentage of total premiums, commission expense
decreased to 25.2% in the third quarter of 1996 as compared to
27.6% in the third quarter of 1995. As a percentage of total
premiums, commission expense decreased to 25.4% for the nine
months ended September 30, 1996, as compared to 29.0% 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 49% in the third quarter of 1996 as compared to the
third quarter of 1995. Total general and administrative expenses
increased by $6.4 million or 36% for the nine months ended
September 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 nine months
of 1996 as a result of the Company's issuance in September 1995
of the Debentures, the net proceeds of which were used for, among
other purposes, repayment of the Company's $20.0 million
revolving credit facility which was previously the sole source of
interest expense.
Policy acquisition costs deferred increased $2.5 million or 24%
in the third quarter of 1996 as compared to the third quarter of
1995. Policy acquisition costs deferred increased $5.9 million
or 18% for the nine months ended September 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 $0.4
million or 7% in the third quarter of 1996 as compared to the
third quarter of 1995. Amortization of deferred policy
acquisition costs decreased $2.2 million or 13% for the nine
months ended September 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 $2.3 million or 89% in
the third quarter of 1996 as compared to the third quarter of
1995. The provision for income taxes increased $5.5 million or
73% for the nine months ended September 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 September 30, Nine months ended September 30,
% %
1996 1995 Change 1996 1995 Change
Income before
provision for
income tax $ 14.1 $ 8.3 70% $ 39.0 $ 23.9 63%
Tax-free income (0.1) (0.8) (88%) (1.2) (2.4) (50%)
Taxable income 14.0 7.5 87% 37.8 21.5 76%
Total provision $ 4.9 $ 2.6 89% $ 13.0 $ 7.5 73%
for income tax
The increased tax provisions are directly attributable to the
increases in the Company's pre-tax earnings. The Company's
effective tax rate for financial reporting purposes was 34.9% for
the third quarter of 1996, as compared to 31.1% for the third
quarter of 1995. The Company's effective tax rate for financial
reporting purposes was 33.3% for the nine months ended September
30, 1996 and 31.3% for the same period in 1995. The increases
in 1996, as compared to 1995 are primarily the result of lower
percentages of income being derived from municipal securities as
the Company is in the process of liquidating such securities.
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 September
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 September 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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS-
2. Agreement and Plan of Merger dated as of August 25,
1996 by and between Conseco, Inc. and American
Travellers Corporation. Incorporated by reference to
Exhibit 2.1 contained in the Company's Form 8-K filed
August 28, 1996.
27. FINANCIAL DATA SCHEDULE - Electronic format only.
(b) The following reports on Form 8-K were filed during
the quarter ended September 30, 1996
On August 28, 1996, the Company filed an 8-K
disclosing an Agreement and Plan of Merger dated as of
August 25, 1996 by and between Conseco and American
Travellers Corporation.
SIGNATURES
Pursuant to the requirements 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: November 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
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 689,646,000
<DEBT-CARRYING-VALUE> 705,541,000
<DEBT-MARKET-VALUE> 689,646,000
<EQUITIES> 0
<MORTGAGE> 435,000
<REAL-ESTATE> 0
<TOTAL-INVEST> 690,081,000
<CASH> 12,205,000
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 168,691,000
<TOTAL-ASSETS> 907,612,000
<POLICY-LOSSES> (240,582,000)
<UNEARNED-PREMIUMS> (62,613,000)
<POLICY-OTHER> (283,145,000)
<POLICY-HOLDER-FUNDS> (586,340,000)
<NOTES-PAYABLE> 0
0
0
<COMMON> (163,000)
<OTHER-SE> (181,169,000)
<TOTAL-LIABILITY-AND-EQUITY> (907,612,000)
(283,325,000)
<INVESTMENT-INCOME> (33,134,000)
<INVESTMENT-GAINS> (1,329,000)
<OTHER-INCOME> 0
<BENEFITS> 192,200,000
<UNDERWRITING-AMORTIZATION> 14,240,000
<UNDERWRITING-OTHER> 71,909,000
<INCOME-PRETAX> (39,042,000)
<INCOME-TAX> 13,010,000
<INCOME-CONTINUING> (26,032,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (26,032,000)
<EPS-PRIMARY> 1.55
<EPS-DILUTED> 1.24
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
