SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 [Fee Required]
For the fiscal year ended December 31, 1996
[ ] Transition report pursuant to section 13 or 15(d) of the Securities Exchange
Act of 1934 [No Fee Required]
For the transition period from to
Commission file number 1-10522
PIONEER FINANCIAL SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware 36-2479273
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1750 East Golf Road, Schaumburg, Illinois 60173
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (847) 995-0400
Securities registered pursuant to Section 12(b) of the Act:
Name on Each Exchange
Title of Each Class on Which Registered
Common Stock, $1.00 par value New York Stock Exchange and
Midwest Stock Exchange
6 1/2% Convertible Subordinated Notes due 2003 New York Stock Exchange
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by a 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
While it is difficult to determine the number of shares owned by non-
affiliates (within the meaning of the term under the applicable regulations of
the Securities and Exchange Commission), the registrant estimates that the
aggregate market value of the registrant's common stock held by non-affiliates
on March 18, 1997 (based upon an estimate that 88% of the shares are so owned
by non-affiliates and upon the closing price of the common stock on the New York
Stock Exchange) was $270,241,000.
The number of shares of the registrant's common stock, $1.00 par value per
share, outstanding as of March 18, 1997 was 11,805,267.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein,
and will not be contained, to the best of the registrant's knowledge, in
definitive proxy or information statements incorporated by reference in Part III
of this Form 10-K or any amendment to this Form 10-K. [ ]
ITEM 1. BUSINESS
Pioneer Financial Services, Inc. (the Company) underwrites and markets
health insurance, life insurance and annuities throughout the United States. In
the ten years since it became public, the Company's total revenue has grown from
$52 million in 1986 to $888 million in 1996; total assets have increased from
$165 million at December 31, 1986 to over $1.8 billion at December 31, 1996; and
stockholders' equity has increased from $34 million at December 31, 1986 to $189
million at December 31, 1996. The Company sells its products and services
through three marketing divisions: Senior Health Division, Group Medical
Division and Life Insurance Division.
PENDING MERGER WITH CONSECO, INC.
On December 15, 1996, the Company and Conseco, Inc. ("Conseco"), a financial
services holding company engaged primarily in the development, marketing and
administration of annuity, individual health insurance and individual life
insurance products, entered into a merger agreement whereby the Company will be
acquired by Conseco. In the merger, each of the issued and outstanding shares
of the Company's common stock would be converted into the right to receive a
fraction of a share of Conseco common stock having a value between $25.00 and
$28.00, depending on the average closing price of Conseco common stock in the
ten trading days immediately preceding the second trading day prior to
closing. The Company's outstanding convertible subordinated notes would
become convertible into shares of Conseco common stock on an equivalent
basis. The total value of the transaction would be approximately $477
million, including $417 million to purchase the Company's 16.9 million
common shares and equivalents, and $60 million to retire bank debt and pay
other costs. Based on a Conseco common stock share value which exceeds $28.00
per share (said price being exceeded on the date hereof), Conseco will issue
8.7 million shares of Conseco common stock with a value of approximately
$352.4 million to acquire the Company's common stock. In addition, Conseco
will assume Company notes payable of $27.8 million and the Company's 6 1/2%
of Convertible Subordinated Notes due 2003, which will be convertible into an
assumed 3.0 million shares of Conseco common stock with a value of
approximately $120.7 million. The merger is subject to customary terms and
conditions, including approval by the Company's stockholders and regulatory
approvals.
OPERATIONS
Senior Health Division. The Senior Health Division markets a wide range
of specialty health insurance and life insurance and annuities for individuals
age 65 and older. Products which are underwritten by this division include
Medicare supplement, long-term care, home health care and specialty health. In
addition, this division markets cash burial life policies and annuities which
are underwritten by the Company's Life Insurance Division. The Company's
Medicare supplement policies provide coverage for many of the expenses which the
federal Medicare program does not fully cover and its long-term care and home
health care policies provide coverage, within various prescribed benefit limits,
for nursing home and in-home care.
The Company is the fifth largest issuer of individual Medicare supplement
insurance in the nation, excluding Blue Cross and Blue Shield-related entities,
based on direct premiums earned. The Company sells products designed for senior
citizens through a distribution network which has grown from approximately
15,000 agents at the end of 1994 to nearly 25,000 agents at the end of 1996.
Future revenue growth in this division is expected to be generated in part from
the increased number of agents and increased sales of Medicare supplement, long-
term care and home health care policies.
Group Medical Division. The Group Medical Division underwrites and
markets hospital and medical policies, primarily to self-employed individuals
and small business owners. In 1996, approximately 73% of this division's
business was sold through a sales force of approximately 1,200 career agents,
15% was sold through a brokerage system of 14,000 independent agents and the
remaining 12% was sold through 40,000 independent brokers in a distribution
system related to the block of business acquired in August 1996 from Washington
National Insurance Company. This division uses the services provided by the
preferred provider organizations ("PPOs") and other managed care operations to
help control claims costs. The Company believes that the Group Medical
Division's use of managed care services resulted in significant claims savings
for the Company in 1996, with most of these savings being passed on to customers
in the form of more competitive premium rates.
Life Insurance Division. The Life Insurance Division underwrites and
markets traditional life (term and whole life), universal life, and interest
sensitive life insurance and annuities targeted primarily to the middle income
market. The Life Insurance Division sells its products through a nationwide
network of brokerage general agents ("BGAs") and managing general agents
("MGAs") who in turn contract with multiple brokers and general agents. This
division grew significantly when the Company acquired Connecticut National Life
Insurance Company ("CNL") in January 1995. In addition, the Company acquired
Secura Life Insurance Company ("SLIC") in December 1996. This division also
underwrites, issues and administers the life insurance products marketed by the
Senior Health Division.
Investment Portfolio. The Company has maintained and intends to continue
to maintain a diversified portfolio of medium-term investment-grade fixed income
securities. As of December 31, 1996, 86% of the Company's invested assets were
fixed income securities and the weighted average quality of the fixed income
portfolio was "AA."
PRODUCTS AND SERVICES
The Company markets and underwrites health insurance, life insurance and
annuities throughout the United States. The Company sells products and provides
its services through three marketing divisions: Senior Health Division, Group
Medical Division and Life Insurance Division. The Company's distribution
systems for its products have increased from approximately 12,000 agents in 1986
to nearly 90,000 agents at the end of 1996.
Senior Health Division
The products marketed by the Senior Health Division include Medicare
supplement, long-term care, home health care, various specialty health
coverages, life insurance and annuities. In addition, this division markets
cash burial life policies and annuities which are underwritten by the Company's
Life Insurance Division. This division markets these products to individuals
age 65 and older and underwrites and issues all such products except the life
insurance and annuity products which are underwritten and issued by the Life
Insurance Division.
In the Senior Health Division, the Company may adjust health insurance
premium rates generally by class, policy form and state in which the policy is
issued, subject to applicable regulation, in order to maintain anticipated loss
ratios. Since premium rate increases can increase policy lapses, conservation
and customer service activities are emphasized. The Senior Health Division
follows a proactive approach involving the examination of health premium rates
on a monthly basis, including comparisons of pricing structure to actual claims
experience by product line and state. This ongoing analysis provides lead time
for the orderly adjustment of premiums.
Medicare Supplement. Since the inception of the federal Medicare program
in 1966, the Company has offered policies designed to supplement Medicare
benefits and is now the fifth largest issuer of individual Medicare supplement
insurance in the nation, excluding Blue Cross and Blue Shield-related entities,
based on direct premiums earned. Medicare supplement policies provide coverage
for many of the medical expenses which the Medicare program does not cover, such
as deductible and coinsurance costs and specified losses which exceed the
Federal program's maximum benefits.
In 1991, the National Association of Insurance Commissioners (the "NAIC")
defined ten model Medicare supplement policies. In states which have adopted
the NAIC model, only those ten policies can be sold. In most states, the
Company markets eight of the ten model policies those which the Company
believes are most applicable to its target market. All states have adopted
either the NAIC model or similar legislation which specifically defines policy
models.
Medicare Select policies combine the cost advantages of a preferred
provider organization with a Medicare supplement policy to provide a reduced
premium cost for policyholders. Utilization of specified hospitals, which waive
certain deductibles covered by the Medicare supplement policy, allows the
Company to reduce the premium charged. The federal government recently expanded
the Medicare Select program to all states. Although the market for this product
is just developing, the Company sells Medicare Select policies in a number of
states and has plans to expand sales nationally.
Long-Term Care and Home Health Care. The Senior Health Division also
offers long-term care and home health care products designed principally for
senior citizens. Long-term care policies generally provide specified per day
benefits for nursing home confinements, within prescribed limits. Home health
care policies provide specified per day benefits for required health services
received in the home and comprehensive coverages which provide benefits for all
levels of nursing home care, home health care and adult day care. In 1995, the
Company developed and introduced a new series of "Independent Choice" long-term
care and home health care plans which provide greater flexibility of benefit use
and include care coordination features to help lower benefit costs. The
Company's strategy is to cross-sell these products to customers who have already
purchased the Company's Medicare supplement product.
The Company believes that the market for long-term care and home health
care insurance could increase due to federal tax legislation to provide tax
deductibility for long-term care insurance premiums. See "--Health Care
Reform".
Specialty Health and Other. The Senior Health Division offers various
specialty health products which typically are sold in conjunction with the
Company's principal health products. These policies include hospital indemnity,
private duty nursing and cancer plans. Additionally, the Company intends to
develop and market managed care organizations for seniors as the demand for such
products expands. The Company believes that the market for senior managed care
products will grow as health care costs continue to grow. It is estimated that
approximately 10% of Medicare beneficiaries in the nation participate in HMOs.
There are many states with very low penetration of managed care in the senior
market, including states with a high concentration of Medicare beneficiaries.
The Company intends to take advantage of this opportunity by utilizing its
position in the senior market and its managed care experience to market managed
care products to senior citizens.
Life Insurance and Annuities. The Senior Health Division markets life
insurance and annuities which are issued by the Life Insurance Division to
individuals age 65 and over. In 1994, the Company began selling smaller face-
amount whole life insurance policies specifically designed to cover final
expenses for senior citizens, including funeral expenses and other expenses that
otherwise would be paid by the insured's family. As part of its cross-selling
strategy, the Company automatically offers a pre-approved (already underwritten
for issue) cash burial life insurance policy with all Medicare supplement
policies issued to customers age 66-79. The Company also offers annuity
products specifically designed for seniors. These products provide an
attractive investment alternative to seniors, offering higher interest rates
than bank savings accounts and certificates of deposit and the ability to
receive monthly payouts during retirement years.
Marketing. The Senior Health Division markets its products and services
primarily to individuals age 65 and older through a distribution system of
nearly 25,000 agents. The Company intends to enhance the Company's
cross-selling capabilities through increased agent training and packaging of
products. The agents receive extensive product and marketing information from
the Company. They also have access, through the Company, to lists of
prospective customers turning age 65 in their respective geographic areas and to
a direct-mail lead-generation system. By providing its agents with training,
sales materials, lead-generation programs and a full range of health and life
insurance products designed for senior citizens, the Company intends to increase
both sales to new customers and cross-sales to existing policyholders. The
agents receive commissions on each sale based on the type of product sold.
Group Medical Division
The Group Medical Division underwrites and markets small group and
individual hospital and medical products, including major hospital and specialty
health insurance policies, individually underwritten and issued. This
division's products and services are targeted primarily to individuals and small
business owners. The insureds in this division also become prospects for the
Senior Health Division -- when they reach age 65, the Company automatically
provides for conversion to a Medicare supplement policy.
As in the Senior Health Division, the Company may, in the Group Medical
Division, adjust health insurance premium rates by class, policy form and state
in which the policy is issued, subject to applicable regulation, in order to
maintain anticipated loss ratios. Since premium rate adjustments can have the
tendency to increase policy lapses, conservation and customer service activities
are emphasized. As with the Senior Health Division, the Group Medical Division
follows a proactive approach involving the examination of health premium rates
on a monthly basis. The matching of pricing structure with actual claims
experience varies by product line and state. This ongoing analysis provides
lead time for the orderly adjustment of premiums.
The Group Medical Division intends to focus its efforts on increasing
administrative efficiency and claims-cost containment on its existing block of
business through, among other things, continued development of medical provider
networks and continued migration of its fee-for-service indemnity health
insurance customers to managed care products. As the regulatory environment
evolves, the Company will evaluate growth opportunities in this market.
Major Hospital. The Company offers major hospital insurance plans on an
individual basis and on a group trust (multiple employer trust) and association
basis and has issued master policies for such plans to several trusts and
associations. These plans are designed to cover in-hospital expenses for self-
employed individuals, small business owners, employees and their families.
Hospital, surgical and other medical expenses are covered on an expense incurred
basis with certain benefit limits after a prescribed deductible. The Company
provides products with alternatives such as increased deductibles and different
benefit structures designed to enable policyholders to maintain insurance
protection without increased premium rates. The Company also has introduced a
product which combines HMO-type wellness features within a specific provider
network along with in-network and out-of-network indemnity benefits.
Marketing. The Group Medical Division markets its products and services
primarily to self-employed individuals and small business owners. In 1996,
approximately 73% of this division's business was sold through a sales force of
approximately 1,200 career agents, 15% was sold through a brokerage system of
14,000 independent agents and the remaining 12% was sold through 40,000
independent brokers in a distribution system related to the block of business
acquired in August 1996 from Washington National Insurance Company.
Life Insurance Division
The Life Insurance Division's products include traditional life (term and
whole life), universal life and interest sensitive insurance and annuities.
Substantially all of the Company's life insurance policies are individually
underwritten and issued. This division's products and services are targeted
primarily to the middle income market. In addition, this division underwrites,
issues and administers the life insurance and annuity products marketed by the
Senior Health and Life Division. This division grew significantly when the
Company acquired Connecticut National Life (CNL) in January 1995.
The following table sets forth the breakdown of collected premiums
(computed on a statutory basis) among traditional life policies, interest
sensitive and universal life policies and annuities for the years shown:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
(dollars in thousands)
<S> <C> <C> <C>
Traditional $ 53,439 $ 44,276 $ 32,238
Interest Sensitive and
Universal Life Policies 34,949 21,215 17,590
Annuities 12,837 19,639 22,807
Total $101,225 $ 85,130 $ 72,635
</TABLE>
For the fiscal year 1994, premiums collected from the Company's life insurance
products were approximately 28% first year and 72% renewal, the fiscal year 1995
premiums were approximately 32% first year and 68% renewal, and for fiscal year
1996 premiums collected were approximately 35% first year and 65% renewal.
The Company's gross life insurance in force was as follows at the dates
shown:
<TABLE>
<CAPTION>
December 31,
1996 1995 1994
(dollars in millions)
<S> <C> <C> <C>
Traditional $ 19,303 $ 14,863 $ 10,803
Interest Sensitive and
Universal Life Policies 2,467 2,880 1,779
Total $ 21,770 $ 17,743 $ 12,582
</TABLE>
Traditional Life. The largest portion of the Life Insurance Division's
business is in term life insurance. The Company specializes in face amounts of
$100,000 to $500,000, sold to middle income families. Marketed under the name
"Super Saver Term," this series features low cost 5-, 10- and 15-year term life
insurance products.
For a number of years, the Company has offered individually underwritten
insurance on lives of persons who, to varying degrees, do not meet the
requirements of standard insurability. Higher premiums are charged for these
"impaired" or "substandard" lives, and, where the amount of insurance is large
or the risk is significant, a portion of the risk is reinsured. Approximately
10% of the Company's in-force life insurance could be categorized as "impaired
risk."
Interest Sensitive Life and Universal Life. The Company's interest
sensitive and universal life insurance products provide life insurance with
rates of return which are adjusted in relation to prevailing interest rates.
The policies permit the Company to change the rate of interest credited to the
policy from time to time subject to certain minimum guaranteed rates. Universal
life insurance products credit current interest rates to cash value
accumulations, permit adjustments in benefits and premiums at the policyholder's
option, and deduct mortality and expense charges monthly. Under other interest
sensitive policies, premiums are flexible, allowing the policyholders to vary
the frequency and amount of premium payments, but typically death benefit
changes are not made by the policyholders. Some universal life products offer
lower premiums for non-smokers in good health. For both universal life and
other interest sensitive policies, surrender charges, if any, are deducted from
the policyholder's account value at the time of surrender. No surrender charges
are deducted if death benefits are paid or if the policy remains in-force for a
specified period.
The Company's "Interest Sensitive Series" includes whole life policies
ideally suited for the impaired risk market. This product series provides
permanent protection with a fixed, guaranteed level premium and an interest rate
persistency bonus. The "Financial Lifestyle II" is a highly flexible back-load
universal life policy providing low-cost protection with tax-deferred cash
accumulation.
Annuities. The Company offers single and flexible premium deferred
annuities. An annuity contract generally involves the accumulation of premiums
at a compound interest rate until the maturity date, at which time the
policyholder can choose one of the various payment options. Options include
periodic payments during the annuitant's lifetime or the lifetime of the
annuitant and spouse, with or without a guaranteed minimum period; periodic
payments for a fixed period regardless of the survival of the annuitant; or lump
sum cash payment of the accumulated value. The Company's annuities typically
provide for the crediting of interest at rates set from time to time by the
Company, subject to certain minimum guaranteed rates.
Marketing. The Life Insurance Division markets its products primarily to
individuals in middle income levels through a nationwide network of BGAs and
MGAs who in turn contract with approximately 15,000 brokers and general agents.
The Company's BGAs, MGAs and agents receive compensation through sales
commissions.
PREMIUM DISTRIBUTION
The Company's insurance subsidiaries collectively are licensed to sell
insurance in 49 states and the District of Columbia. The importance to the
Company of particular states may vary over time as the composition of its agency
network changes. The geographic distribution of collected premiums (before
reinsurance) of the Company's subsidiaries in 1996 was as follows:
<TABLE>
<CAPTION>
TOTAL PERCENT
(Dollars in thousands)
<S> <C> <C>
Texas $ 79,445 10.0%
Florida 67,715 8.5
California 49,302 6.2
Illinois 48,212 6.1
New Jersey 33,109 4.2
North Carolina 31,312 3.9
Georgia 28,904 3.6
Oklahoma 27,733 3.5
Mississippi 27,595 3.5
Pennyslvania 26,179 3.3
Tennessee 25,364 3.2
Missouri 24,377 3.1
Other (1) 326,706 40.9
Total $795,953 100.0%
(1) Includes 37 other states, the District of Columbia, and certain U.S.
territories and foreign countries, each of which accounts for less than 3%
of collected premiums.
</TABLE>
UNDERWRITING
A major portion of the Company's insurance coverages are individually
underwritten to assure that policies are issued by the Company's insurance
subsidiaries based upon the underwriting standards and practices established by
the Company. Applications for insurance are reviewed to determine if any
additional information is required to make an underwriting decision, which
depends on the amount of insurance applied for and the applicant's age and
medical history. Such additional information may include medical examinations,
statements from doctors who have treated the applicant in the past and, where
indicated, special medical tests. If deemed necessary, the Company uses
investigative services to supplement and substantiate information. For certain
coverages, the Company may verify information with the applicant by telephone.
After reviewing the information collected, the Company either issues the policy
as applied for, issues the policy with an extra premium charge due to
unfavorable factors, issues the policy excluding benefits for certain conditions
for a period of time or rejects the application. For certain of its coverages,
the Company has adopted simplified policy issue procedures in which the
applicant submits a simple application for coverage typically containing only a
few health related questions instead of a complete medical history.
In common with other life and health insurance companies, the Company may be
exposed to the risk of claims based on AIDS. The Company's AIDS claims to date
have been insignificant. Because of its emphasis on policies written for the
senior citizen market and its underwriting procedures and selection processes,
the Company believes its risk of AIDS claims is less than the risk to the
industry in general.
REINSURANCE
The Company's insurance subsidiaries reinsure portions of the coverages
provided by their insurance products with other insurance companies on both an
excess of loss and co-insurance basis. Co-insurance generally transfers a fixed
percentage of the Company's risk on specified coverages to the reinsurer.
Excess of loss insurance generally transfers the Company's risk on coverages
above a specified retained amount. Under its excess of loss reinsurance
agreements, the maximum risk retained by the Company on one individual in the
case of life insurance and accident and health insurance is $250,000.
The Company acquired CNL in January 1995 which had an existing modified
coinsurance arrangement with Reassurance Company of Hannover (RCH) ceding 90% of
all its retained business issued prior to December 31, 1994. CNL received an
initial ceding allowance of $15 million which was included in an experience
refund account. The experience refund account will be reduced by profits from
the reinsured business. The Company will share profits on the reinsured
business thereafter on a 50-50 basis with RCH. CNL is indemnified for losses on
the business reinsured.
Reinsurance agreements are intended to limit an insurer's maximum loss on the
specified coverages. The ceding of reinsurance does not discharge the primary
liability of the original insurer to the insured, but it is the practice of
insurers (subject to certain limitations of state insurance statutes) to account
for risks which have been reinsured with other approved companies, to the extent
of the reinsurance, as though they are not risks for which the original insurer
is liable. At December 31, 1996 approximately 28% of reinsurance receivables
and amounts on deposit with reinsurers were due from RCH, 23% from Lincoln
National Life Insurance Company, and 16% from Employers Reinsurance
Corporation. Amounts due from any one other reinsurer were immaterial.
See Note 7 of Notes to Consolidated Financial Statements.
The Company has occasionally used assumption reinsurance to acquire blocks of
business from other insurers. In addition, the Company has from time to time
entered into agreements to assume certain insurance business from companies for
which it is marketing insurance products. The Company intends to continue these
programs if they assist in expanding product lines and marketing territories and
contribute to profitability. In August 1996, the Company assumed the individual
and small group health business of Washington National Insurance Company (WNIC).
The total premiums assumed were approximately $100 million for the five months
ended Decemer 31, 1996. As of December 31, 1996, policy liabilities were
increased as a result of the treaty by $66.3 million. The Company entered into
a 50% quota share treaty with RCH on the business assumed from WNIC.
ACQUISITIONS
The Company believes that current trends in the life and health insurance
industry will provide opportunities for continued acquisitions and
consolidations. Larger companies are reducing administrative costs by divesting
divisions and blocks of life and health insurance business which do not fit
their overall strategies and are focusing on two or three core product lines to
improve efficiency and gain competitive advantage. Additionally, smaller, less
efficient companies with less capital at their disposal are experiencing
increasing difficulty in remaining competitive; regulatory requirements add
significant costs which may not be able to be absorbed by smaller companies;
capital requirements have increased due to the imposition of risk-based capital
ratios by regulatory agencies; state healthcare reform programs are reducing
health insurance profit margins; the costs of necessary information processing
systems have increased; and smaller companies cannot access capital markets to
finance additional growth.
The following table summarizes the recent significant acquisitions made by the
Company:
<TABLE>
<CAPTION>
ACQUISITIONS DATE OF TYPE OF BUSINESS
ACQUISITION
<S> <C> <C>
Continental Life & August 1993 Small group medical
Accident Company insurance; became part
(CLAC) of the Group Medical
Division.
Connecticut National January 1995 Interest sensitive and
Life Insurance universal life
Company (CNL) insurance; became part
of the Life Insurance
Division.
Western Fidelity July 1995 Major medical products;
Insurance Company became part of the Group
(block of business) Medical Division.
Universal Fidelity March 1996 Medicare supplement
Life carrier; to become part
Insurance Company of the Senior Health and
(UFLIC) Life Division.
Washington National August 1996 Major medical products;
Insurance became part of the Group
Company (block of Medical Division.
business)
SECURA Life December 1996 Term life insurance and
Insurance cash burial policies and
Company (SLIC) annuities; became part
of the Life Insurance
Division.
</TABLE>
In August 1993, the Company acquired, and added to the Group Medical
Division, CLAC, a small group medical insurer. In 1994 and 1995, the
administration of this subsidiary was consolidated with the Company's other
health insurance operations. In addition to CLAC, this acquisition included the
purchase of Continental Marketing Corporation which added an efficient broker-
to-broker telemarketing distribution system to the Group Medical Division.
In January 1995, the Company acquired, and added to the Life Insurance
Division, CNL, a $350 million asset company, which had issued primarily interest
sensitive and universal life insurance products. This acquisition increased the
distribution system of the Life Insurance Division.
In July 1995, the Company acquired, and consolidated into the Group Medical
Division's administrative facility in Dallas, Western Fidelity Insurance
Company's $42 million block of major medical policies. The Company was able to
integrate substantially all of this business into its operations within one
month.
In March 1996, the Company acquired Universal Fidelity, a company which
markets and underwrites primarily Medicare supplement products to senior
citizens in Oklahoma and Texas. Universal Fidelity generated approximately $33
million of annualized premium. The approximately 30,000 Universal Fidelity
Medicare supplement policyholders also provide potential for increased
profitability through cross-selling of long-term care, home health care and
other products.
In August 1996, the Company acquired,and added to the Group Medical Division,
a block of individual and small group health insurance business from Washington
National Insurance Company (WNIC).
In December 1996, the Company acquired, and added to the Life Insurance
Division, SLIC, a $119 million asset company which had issued primarily term
life insurance products.
INVESTMENTS
The Company's investment policy is to balance its portfolio between
long-term and short-term investments so as to achieve investment returns
consistent with preservation of capital and maintenance of liquidity adequate to
meet payment of policy benefits and claims. Current policy is to invest
primarily in fixed income securities of the U.S. government and its agencies and
authorities, and in fixed income corporate securities with investment grade
ratings of Baa3 and/or BBB- or better. At December 31, 1996, less than 2.9% of
the Company's total investment portfolio and less than 2.6% of its statutory
admitted assets were below-investment grade or unrated. The Company has a
policy to invest no more than 4% of its statutory admitted assets in fixed
income securities below-investment grade or unrated. At December 31, 1996, the
Company had invested assets of $1,195.5 million, compared to $1,042.6 million at
December 31, 1995. The Company manages all of its investments internally with
resource and evaluation assistance provided by independent investment
consultants.
The following table provides information on the Company's investments as
of the dates indicated:
<TABLE>
<CAPTION>
December 31,
(Dollars in thousands)
1996 1995
TYPE OF INVESTMENT: Amount Percent Amount Percent
<S> <C> <C> <C> <C>
Fixed maturities to be held to maturity:
U.S. Treasury . . . . . . . . . . . . . . . . . $ 29,719 2% $ 26,897 3%
States and political subdivisions . . . . . . . 5,475 1 4,669 1
Corporate securities . . . . . . . . . . . . . . 59,068 5 51,608 5
Mortgage-backed securities . . . . . . . . . . . 171,787 14 162,867 15
Total fixed maturities held to maturity. . 266,049 22 246,041 24
Fixed maturities available for sale:
U.S. Treasury . . . . . . . . . . . . . . . . . 27,358 2 34,084 3
States and political subdivisions . . . . . . . 37,361 3 26,976 3
Foreign governments . . . . . . . . . . . . . . 2,420 * 3,018 *
Corporate securities . . . . . . . . . . . . . . 462,598 39 313,501 30
Mortgage-backed securities . . . . . . . . . . . 228,501 20 245,087 23
Total fixed maturities available for sale . . . 758,238 64 622,666 59
Total fixed maturities . . . . . . . . . 1,024,287 86 868,707 83
Equity securities . . . . . . . . . . . . . . . . . 28,630 2 15,570 1
Real estate . . . . . . . . . . . . . . . . . . . . 14,989 1 18,250 2
Mortgage loans . . . . . . . . . . . . . . . . . . 9,890 1 9,253 1
Policy loans . . . . . . . . . . . . . . . . . . . 83,054 7 79,122 8
Short-term investments . . . . . . . . . . . . . . 34,659 3 51,690 5
Total Investments . . . . . . . . . $ 1,195,509 100% $1,042,592 100%
______________________
* less than one percent
</TABLE>
The following table provides information on the credit quality and
average lives of the Company's fixed maturity portfolio as of December 31, 1996.
<TABLE>
<CAPTION>
FIXED MATURITY PORTFOLIO
(dollars in thousands)
Carrying
Value Percent
<S> <C> <C>
Credit Quality - S&P (or equivalent) rating:
AAA $ 416,407 41%
AA+, AA, AA- 124,068 12
A+, A, A- 336,959 33
BBB+, BBB, BBB- 112,621 11
Below-investment grade 33,432 3
In default 800 *
Total $1,024,287 100%
Average Lives
One year or less $ 21,697 2%
Over one year through five years 276,863 27
Over five years through ten years 297,392 29
Over ten years 428,335 42
Total $1,024,287 100%
* Less than one percent.
</TABLE>
Fixed Maturity Investments. With the adoption of risk-based capital rules
and consumer concerns over insurance company solvency and financial stability,
the asset quality of insurance companies' investment portfolios has become of
greater concern to policyholders and has come under closer scrutiny by insurance
regulators and investors. The investment objectives of the Company are to
maximize investment yield without sacrificing high investment quality and
matched liquidity.
Investments in below-investment grade fixed maturity securities generally
have greater risks (and potentially greater returns) than other corporate fixed
maturity investments. Risk of loss upon default by the issuer is significantly
greater for these securities because they are often unsecured and are often
subordinated to other creditors of the issuer, and because these issuers usually
have high levels of indebtedness and are more sensitive to adverse economic
conditions, such as recession or increasing interest rates, than are investment
grade issuers. Also, the market for below-investment grade securities is less
liquid and not as actively traded as the market for investment grade securities.
The Company continually evaluates the creditworthiness of each issuer of
securities held in its portfolio. When the fair value of an individual security
declines materially, or when the Company's ongoing evaluation indicates that it
may be likely that the Company will be unable to realize the carrying value of
its investment, a determination is made as to the extent to which such declines
are attributable to changing market expectations regarding general interest
rates and inflation and other factors, such as a perceived increase in the
credit risk of the issuer, a general decrease in a particular industry sector or
an overall economic decline. If the decline in value is other than temporary,
and the carrying amount of the investment is reduced to its fair value based
principally on available market prices, the amount of the reduction is reported
as a realized loss on investments and the net fair value becomes the new cost
basis of the investment. In addition, the Company reverses any accrued interest
income previously recorded for the investment and records future interest income
only when cash is received.
Yields recognized in future periods on such investments may be less than
yields recognized on other investments and will be less than the yield expected
when the fixed maturity security was originally purchased. The effect on net
income from declines in interest income and portfolio yield from impaired
securities in future periods will depend on many factors, including, for life
insurance business, the level of interest rates credited to policyholder account
balances. Inasmuch as interest rates credited to the Company's policyholders
are typically guaranteed only for one year, the Company does not expect any
material adverse effect on net income in future periods from declines in yields
from impaired securities.
Mortgage-Related Securities. At December 31, 1996, the Company had $400.3
million (or 39% of its fixed maturities portfolio) in mortgage-related
securities compared to $408.0 million at December 31, 1995 (or 47% of its fixed
maturities portfolio). The mortgage-related securities are invested primarily
in U.S. government agency and non-agency pass-through certificates and various
components of U.S. government agency and non-agency collateralized mortgage
obligations ("CMOs"). CMOs are bonds that are collateralized by U.S. government
agency or non-agency whole loan mortgages and mortgage pass-through securities.
The yield characteristics of mortgage-related securities differ from those of
traditional fixed income securities. The major differences typically include
more frequent interest and principal payments, usually monthly, and the
possibility that prepayments of principal may be made at any time. Prepayment
rates are influenced by changes in current interest rates and a variety of
economic, geographic, social and other factors and cannot be predicted with
certainty. The yields to maturity of the mortgage-related securities will be
affected by the actual rate of payment (including prepayments) of principal of
the underlying mortgage loans. In general, prepayments on the underlying
mortgage loans, and subsequently the mortgage-related securities backed by these
loans, increase when the level of prevailing interest rates declines
significantly below the interest rates on such loans. When declines in interest
rates occur, the proceeds from the prepayment of such securities may be
reinvested at lower rates than the Company was earning on such securities.
The Company's mortgage-related securities portfolio is well diversified as
to collateral, maturity, duration and other characteristics. The majority of
the mortgage-related securities portfolio has the guarantee or backing of
agencies of the United States government. Generally, the mortgage-related
securities consist of pools of single-family, residential mortgages. At
December 31, 1996, the Company's mortgage-related securities portfolio included
$143.3 million of CMOs and pass-through certificates issued by non-government
agencies (35.8% of total mortgage-backed securities) compared to $136.9 million
at December 31, 1995 (33.6% of total mortgage-backed securities). The majority
of these holdings are senior securities in the CMO structures which are
collateralized by first mortgage liens on single-family residences and which
have investment grade ratings of Baa3 and/or BBB- or higher. The
creditworthiness of these securities is based solely on the underlying mortgage
loan collateral and credit enhancements in the form of senior/subordinated
structures, letters of credit, mortgage insurance or surety bonds. The
underlying mortgage loan collateral principally consists of whole loan mortgages
that exceed the maximum imposed by both the Federal National Mortgage
Association and the Federal Home Loan Mortgage Corporation. Therefore, the
collateral tends to be concentrated in states with the greatest number of higher
priced single family residences, including California, New York, New Jersey,
Maryland, Virginia and Illinois.
At December 31, 1996, the Company held $10.5 million carrying value of
inverse floater and interest-only tranches of CMOs. These derivative securities
were acquired to protect the Company in the event of adverse interest rate
fluctuations. The yields and fair values of these securities are generally more
sensitive to changes in interest rates and prepayments than other mortgage-
related securities.
The following table summarizes the components of the Company's mortgage-
related securities portfolio at December 31, 1996, and December 31, 1995:
<TABLE>
<CAPTION>
At December 31, 1996 At December 31, 1995
Carrying Fair Carrying Fair
Value Value Value Value
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Inverse floaters and interest-only
CMO tranches . . . . . . . . . . . . . . . . . $ 10,499 $ 10,499 $ 10,258 $ 10,258
Other CMOs:
U.S. government agency . . . . . . . . . . . . 199,694 199,502 207,637 211,507
Non-agency . . . . . . . . . . . . . . . . . . 140,625 140,625 73,784 73,793
Total other CMOs . . . . . . . . . . . . 340,319 340,127 281,421 285,300
U.S. government agency pass-through . . . . . . . 46,844 46,672 53,136 53,664
Non-agency pass-through . . . . . . . . . . . . . 2,626 2,626 63,139 63,139
Total mortgage-backed securities. . . . $ 400,288 $ 399,924 $ 407,954 $ 412,361
</TABLE>
Since investment income is an important component of revenue and
profitability for the Company; significant focus is placed on the analysis of
both asset and liability characteristics in the investment process.
Profitability is impacted by spreads between yields earned on investments and
rates credited on annuities, interest sensitive and life insurance liabilities.
Although substantially all credited rates on these liabilities can be changed
annually, changes in interest rates credited may not be sufficient to maintain
targeted investment spreads in all economic and market environments. In
addition, other factors including competition, the impact of the level of
surrenders and withdrawals may limit the Company's ability to adjust or to
maintain crediting rates at levels necessary to avoid narrowing of spreads under
certain market conditions.
The Company, in recognizing this importance of interest rate managment,
seeks to balance the duration of its invested assets with the expected duration
of benefit payments arising from insurance liabilities. At December 31, 1996,
the duration of the Company's fixed maturity portfolio is 4.5 years and the
duration of the Company's insurance liabilities is 4.1 years. The Company meets
at least monthly to review the asset and liability position in order to make
necessary adjustments including adjustments to investment activity or crediting
rates or both.
The Company's investment portfolio used to support this asset and liability
management is comprised of fixed maturity investments. These fixed maturity
investments are comprised primarily in investment grade debt securities of the
United States government, public utilities and other corporations, and mortgage-
backed securities (MBS).
Mortgage-backed securities included collateralized mortgage obligations
(CMOs) and mortgage-backed pass-through securities. CMOs are securities backed
by pools of pass-through securities and/or mortgages that are segregated into
sections or "tranches" which provide for sequential retirement of principal
rather than the pro rata share of principal return which occurs through regular
monthly principal payments on pass-through securities. Interest and principal
payments occur more frequently than those of traditional fixed income
securities. Almost all mortgage-backed securities are subject to risks
associated with variable prepayments.
Prepayment rates are influenced by a number of factors which cannot be
predicted with certainty including the relative sensitivity of the underlying
mortgages backing the assets to changes in interest rates; a variety of
economic, geographic and other factors; and the repayment priority of the
securities in the overall securitization structures.
In general, prepayments on the underlying mortgage loans, and the
securities backed by these loans, increase when the level of prevailing interest
rates declines significantly below the interest rates on such loans. MBS
purchased at a discount to par will experience an increase in yield when the
underlying mortgages prepay faster than expected. Those securities purchased at
a premium that prepay faster than expected will incur a reduction in yield.
The degree to which a MBS is susceptible to income fluctuations is
influenced by (i) the difference between its cost and par; (ii) the relative
sensitivity of the underlying mortgages backing the security to prepayment in a
changing interest environment; and (iii) the repayment priority of hte security
in the overall securitization structure. The Company limits the extent of these
risks and the impact they may have on asset/liability management by: (I)
generally purchasing securities which are backed by collateral with lower
prepayments sensitivity (such as seasoned mortgages or MBS priced at a discount
to par); (ii) avoiding securities whose values are heavily influenced by changes
in prepayments (such as interest-only and principal-only securities); and (iii)
investing in securities structured to reduce prepayment risk.
POLICY LIABILITIES
The Company records reserves for future policy benefits to meet future
obligations under outstanding policies. These reserves are amounts which are
calculated to be sufficient to meet policy and contract obligations as they
mature. The amount of reserves for insurance policies is calculated using
assumptions for interest, mortality and morbidity, expenses and withdrawals.
Reserves are established at the time the policy is issued and adjusted
periodically based on reported and unreported claims or other information. See
Note 2 of Notes to Consolidated Financial Statements.
COMPETITION
The insurance business is highly competitive and includes a large number of
insurance companies, many of which have substantially greater financial
resources and larger and more experienced staffs than the Company. The Company
competes with other insurers to attract and retain the allegiance of its
independent agents and marketing organizations who at this time are responsible
for a significant portion of the Company's premiums. Methods of competition
include the Company's ability to offer competitive products and to service these
programs efficiently. Other competitive factors applicable to the Company's
business include policy benefits, service to policyholders and premium rates.
GOVERNMENT REGULATION
The Company and its insurance subsidiaries are subject to extensive
governmental regulation and supervision in each of the jurisdictions in which it
or its subsidiaries conduct business. Such regulation vests in governmental
agencies broad regulatory, supervisory and administrative power with respect to
the Company's business, including premium rate levels, premium rate increases,
policy forms, minimum loss ratios, dividend payments, claims settlement,
licensing of insurers and their agents, capital adequacy, transfer of control,
the amount and type of investments the Company may have, reserve requirements,
solvency standards, trade practices and periodic examinations. Such regulations
are primarily intended to protect policyholders and not investors. The
Company's accident and health coverages generally are subject to rate regulation
by state insurance departments which in certain cases require that certain
minimum loss ratios be maintained.
The states in which the Company is licensed have the authority to change
the minimum mandated statutory loss ratios to which the Company is subject, the
manner in which these ratios are computed and the manner in which compliance
with these ratios is measured and enforced. Loss ratios are commonly defined as
incurred claims and increases in policy reserves divided by earned premiums.
Most states in which the Company writes insurance have adopted the loss ratios
recommended by the National Association of Insurance Commissioners (NAIC). The
Company is unable to predict the impact of (i) any changes in the mandatory
statutory loss ratios for individual or group policies to which the Company may
become subject, (ii) any changes in the minimum loss ratios for individual,
group or Medicare supplement policies, or (iii) any change in the manner in
which these minimums are computed or enforced in the future. The Company has
not been informed by any state that it does not meet mandated minimum ratios,
and the Company believes that it is in compliance with all such minimum ratios.
In the event the Company is not in compliance with minimum statutory loss ratios
mandated by regulatory authorities with respect to certain policies, the Company
may be required to reduce or refund premiums, which could have a material
adverse effect upon the Company.
Certain states also have insurance holding company laws which require
registration and periodic reporting by insurance companies controlled by other
corporations licensed to transact business within their respective
jurisdictions. The Company's insurance subsidiaries are subject to such laws
and are registered as controlled insurers in those jurisdictions in which such
registration is required. Such laws vary from state to state but typically
require periodic disclosure concerning the corporation which controls the
registered insurers and all subsidiaries of such corporation, and prior notice
to, or approval by, the state insurance department of intercorporate transfers
of assets and other transactions (including payments of dividends in excess of
specified amounts by the insurance subsidiary) within the holding company
system.
The federal government does not directly regulate the insurance business.
However, federal legislation and administrative policies in several areas,
including pension regulation, age and sex discrimination, financial services
regulation and federal taxation, do affect the insurance business. Recently, a
number of state legislatures have considered or have enacted legislative
proposals that alter, and in many cases increase, the authority of state
agencies to regulate insurance companies and holding company systems. In
addition, legislation has been introduced from time to time in recent years
which, If enacted, could result in the federal government assuming a more direct
role in the regulation of the insurance industry.
State insurance regulators and the NAIC periodically re-examine existing
laws and regulations and their application to insurance companies. In recent
years, the NAIC has approved, the recommended to the states for adoption and
implementation, several regulatory initiatives designed to decrease the risk of
insolvency of insurance companies. These initiatives include risk based capital
("RBC") requirements for determining the levels of capital and surplus an
insurer must maintain in relation to its insurance and investment risks. Other
NAIC regulatory initiatives impose restrictions on an insurance company's
ability to pay dividends to its stockholders. A majority of the states in
which the Company subsidiaries are licensed have adopted these initiatives.
It is not possible to predict the future impact of changing state and federal
regulation on the Company's operations, and there can be no assurance that
existing insurance related laws and regulations will not become more
restrictive in the future or that laws and regulations enacted in the future
will not be more restrictive.
The NAIC's RBC requirements are intended to be used as an early warning
tool to help insurance regulators identify deteriorating or weakly capitalized
companies in order to initiate regulatory action. Such requirements are not
intended as a mechanism for ranking adequately capitalized companies. The
formula defines a new minimum capital standard which supplements the low, fixed
minimum capital and surplus requirements previously implemented on a state-by-
state basis.
The NAIC's RBC requirements provide for four levels of regulatory
attention, varying with the ratio of the company's total adjusted capital
(defined as the total of its statutory capital, surplus, asset valuation reserve
and certain other adjustements) to its RBC. If a company's total adjusted
capital is less than 100 percent but greater than or equal to 75 percent of its
RBC, or if a negative trend (as defined by the regulators) has occurred and
total adjusted capital is less than 125 percent of RBC (the "Company Action
Level"), the company must submit a comprehensive plan to the regulatory
authority proposing corrective actions aimed at improving its capital position.
If a company's total adjusted capital is less than 75 percent but greater than
or equal to 50 percent of its RBC (the "Regulatory Action Level"), the
regulatory authority will perform a special examination of the company and issue
an order specifying corrective actions that must be followed. If a company's
total adjusted capital is less than 50 percent but greater than or equal to 35
percent of its RBC (the "Authorized Control Level"), the regulatory may take any
action it deems necessary, including placing the company under regulatory
control. If a company's total adjusted capital is less than 35 percent of its
RBC (the "Mandatory Control Level") the regulatory authority must place the
company under its control. At December 31, 1996 the RBC were as follows for
the company's significant insurance subsidiaries (dollars in thousands):
<TABLE>
<CAPTION>
Total Adjusted
Capital RBC Percent
<S> <C> <C> <C>
Pioneer Life Insurance Company $113,160 $82,220 138%
Manhattan National Life 41,460 19,091 217
Connecticut National Life 25,343 4,348 583
SECURA Life 7,100 2,591 274
National Group Life 41,933 28,842 145
Continental Life & Accident 18,293 9,146 200
Universal Fidelity 20,310 4,673 435
</TABLE>
Under statutory accounting, insurance companies are required to establish
an asset valuation reserve ("AVR") consisting of two components: a "default
component" which provides for future credit-related losses on fixed maturity
investments and an "equity component" which provides for losses on all types of
equity investments, including real estate. Insurers are also required to
establish an interest maintenance reserve ("IMR") for fixed maturity realized
capital gains and losses, net of tax, related to changes in interest rates. The
IMR must be amortized into earnings on a basis reflecting the remaining period
to maturity of the fixed maturity securities sold. State regulatory authorities
require that these reserves be established as a liability on a life insurer's
statutory financial statements. These reserves do not affect financial
statements of the Company prepared in accordance with generally accepted
accounting principles ("GAAP").
Under the solvency or guaranty laws of most states in which they do
business, the Company's insurance subsidiaries may be required to pay guaranty
fund assessments (up to certain prescribed limits). Guaranty funds are
established by various states to fund policyholder losses or the liabilities of
insolvent or rehabilitated insurance companies. These assessments may be
deferred or forgiven under most guaranty laws if they would threaten an
insurer's financial strength. In certain instances, the assessments may be
offset against future premium taxes. The amount of such assessments has
increased in recent years, however, and may increase in future years. The
likelihood and amount of any other future assessments in addition to estimated
amounts accrued at December 31, 1996, cannot be estimated. Such assessments are
beyond the control of the Company.
Approximately once every three years, as part of their routine regulatory
oversight process, insurance departments conduct detailed examinations of the
books, records and accounts of insurance companies domiciled in their states.
Such examinations are generally conducted in cooperation with the departments of
two or three other states, under guidelines promulgated by the NAIC. Several
examinations of the Company's life insurance subsidiaries have been recently
completed. The preliminary conclusions reached do not have a material adverse
effect on the Company or its business and operations.
Federal and state regulations have had, and are expected to continue to
have, the effect of increasing the regulation of Medicare supplement plans in
all states. In July 1991, the NAIC implemented regulations creating 10 model
Medicare supplement plans (Plans A throught J). Plan A provides the least
extensive coverage, while Plan J provides the most extensive coverage. Under
NAIC regulations, Medicare insurers must offer Plan A, but may offer any of the
other plans at their option. The Company currently offers eight of the model
plans.
The NAIC model regulation concerning Medicare supplement policies also
regulates the profits that insurance companies may earn in respect of any such
policies by providing that Medicare supplement policies may not be issued unless
it can be expected, as estimated for the period for which the prescribed rate
thereunder is to provide coverage, to return to policyholders aggregate benefits
equal to at least: (I) 75 percent of the aggregate amount of premiums earned on
group policies; and (ii) 65 percent of the aggregate amount of premiums earned
on individual policies. Technical corrections to OBRA mandate compliance with
these calculations for policies issued prior to the original OBRA regulations.
Under this regulation, the Company must file a Medicare Supplement Refund
Calculation Form each year. If the Company's actual loss ratio falls below
ratios prescribed by the Form by more than a de minimis amount, the Company must
make a refund to policyholders. The Company has reviewed the loss ratios on
business subject to the NAIC model regulations and currently believes that no
significant refunds will be required.
HEALTH CARE REFORM
Many proposals have been introduced in Congress and various state
legislatures to reform the present health care system. Most of these proposals
are specifically directed at the small group health care market, a significant
portion of the Company's health business. A number of states have passed or are
considering legislation that would limit the differentials in rates that
insurers could charge between new business and renewal business with respect to
similar demographic groups. State legislation also has been adopted or is being
considered that would make health insurance available to all small groups by
requiring coverage of all employees and their dependents, by limiting the
applicability of pre-existing conditions exclusions, by requiring insurers to
offer a basic plan exempt from certain mandated benefits as well as a standard
plan and by establishing a mechanism to spread the risk of high risk employees
to all small group insurers.
At the federal level, the Health Insurance Portability and Accountability
Act of 1996 includes provisions which permit premiums paid for long-term care
insurance to be treated as tax-deductible medical expenses, with the amount of
the deduction increasing with the age of the taxpayer. The Company has
responded to this legislation by developing new tax-qualified long-term care
policies which are being introduced in 1997.
The Health Insurance Portability and Accountability Act of 1996 also
includes provisions affecting group and individual health insurance products,
including requirements for guaranteed portability, specifications of coverage
for pre-existing conditions and a test program for medical savings accounts.
The Company has developed a medical savings account plan to be marketed in
conjunction with one of its high-deductible major medical policies which is
expected to be introduced in the second quarter of 1997. Other provisions of
this Act will require modifications of existing products and marketing in the
Company's Group Medical Division. The Company cannot predict with certainty the
effect legislative developments could have on its business and operations. It
is likely that health care reform at the federal and state levels will require
the Company to make significant changes to the way it conducts its health
insurance business. The Company has already initiated activity to prepare for
expected legislation.
EMPLOYEES
As of December 31, 1996, the Company employed approximately 1,700 persons
on a full-time basis. The Company considers its employee relations to be good.
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Peter W. Nauert . . . . . . . . . . . . . . . . 53 Chairman, Chief Executive Officer and Director
Charles R. Scheper . . . . . . . . . . . . . . 44 President - Life Insurance Operations
Thomas J. Brophy . . . . . . . . . . . . . . . 61 President - Health Insurance Operations
Mark S. Fischer. . . . . . . . . . . . . . . 40 Executive Vice President and Chief Operating Officer
Billy B. Hill, Jr. . . . . . . . . . . . . . . 45 Executive Vice President and General Counsel
David I. Vickers . . . . . . . . . . . . . . . 35 Senior Vice President, Treasurer and Chief Financial Officer
Philip J. Fiskow . . . . . . . . . . . . . . . 40 Senior Vice President and Chief Investment Officer
Michael A. Cavataio . . . . . . . . . . . . . . 53 Director and Vice Chairman
William B. Van Vleet . . . . . . . . . . . . . 72 Director
R. Richard Bastian, III . . . . . . . . . . . . 50 Director
Karl Heinz Klaeser . . . . . . . . . . . . . . 65 Director
Michael K. Keefe . . . . . . . . . . . . . . . 52 Director
Robert F. Nauert . . . . . . . . . . . . . . . 72 Director
Carl A. Hulbert . . . . . . . . . . . . . . . . 74 Director
John W. Gardiner . . . . . . . . . . . . . . . 66 Director
</TABLE>
All executive officers are elected annually and serve at the pleasure of
the Board of Directors. Certain of the executive officers have employment
agreements with the Company. The Company's Board of Directors is divided into
three classes, each of which serves for a three year term.
Peter W. Nauert has been Chief Executive Officer and a director of the
Company since its incorporation in 1982. He was President of the Company from
1982 to 1988 and 1991 to 1995, and became Chairman of the Company in 1988.
Since 1968, Mr. Nauert has been employed in an executive capacity by one or more
of the Company's insurance subsidiaries.
Charles R. Scheper was elected President--Life Insurance Operations of the
Company in March 1995. He was Vice President of the Company from 1991 to March
1995 and was Chief Financial Officer from May 1993 to December 1993. In March
1992, he was elected Executive Vice President. Since February 1992, he has been
President and Vice Chairman of the Board of Manhattan National Life, a
subsidiary of the Company. Prior to the Company's acquisition of Manhattan
National Life, Mr. Scheper was Manhattan National Life's Senior Vice President
and Chief Financial Officer, a position which he held from May 1987 until the
acquisition. Prior to joining Manhattan National Life, Mr. Scheper was with
Union Central Life Insurance Company from 1979, having served as Vice President
and Controller since 1985.
Thomas J. Brophy was elected President--Health Insurance Operations of the
Company in March 1995. He was Senior Vice President since joining the Company
in November 1993. Prior to joining the Company, Mr. Brophy was President and
Chief Operating Officer of Southwestern Life Insurance Company from June 1990 to
September 1993. Mr. Brophy also held senior executive positions with various
I.C.H. Corporation (now known as Southwestern Life Corp.) subsidiaries from
March 1974 to his joining the Company in November 1993.
Mark S. Fischer has been a Vice President of the Company since December
1994 and has been a Vice President of one of the Company's subsidiaries since
May 1993. Prior to joining the Company, he had been a consultant to the Company
and was with the public accounting firm of Ernst & Young LLP from May 1978 to
October 1992 where he was a Senior Manager in the Insurance Division.
Billy B. Hill, Jr. was elected Executive Vice President and General Counsel
of the Company on May 23, 1996. Prior to that time, he acted as outside legal
counsel to the Company and others and functioned as a legal consultant to, and
Acting General Counsel of, the Company from January 1, 1996 to May 23, 1996.
Mr. Hill has served as a director of a subsidiary of the Company since 1995.
David I. Vickers has been with the Company since June 1992 and has been a
Vice President of the Company since December 1992, Treasurer since May 1993 and
Chief Financial Officer since January 1994. He is also an officer and director
of several subsidiaries of the Company. Prior to joining the Company, he was
with the public accounting firm of Ernst & Young LLP since 1983 where he was a
Senior Manager in the Insurance Division.
Philip J. Fiskow has been Senior Vice President since May 1993 and the
Chief Investment Officer since joining the Company in 1991. He was Vice
President of the Company from June 1991 until May 1993. He is also an officer
of other subsidiaries of the Company. Mr. Fiskow was with Asset Allocation and
Management Company as an Investment Advisory Portfolio Manager from January 1989
to June 1991. From May 1987 to December 1988 he was an Investment Advisor with
Van Kampen Merritt and a Portfolio Manager with Aon Corporation from May 1981 to
May 1987.
Michael A. Cavataio has been a director of the Company since 1986 and Vice
Chairman since December 1995. Mr. Cavataio is a real estate developer in
Northern Illinois and Southern Wisconsin. His business experience also includes
25 years as an owner and manager of a regional clothing store chain. He has
also been a member of the board of directors of Today's Bank East since 1987.
William B. Van Vleet has been a director of the Company since 1982. He was
Executive Vice President of the Company from 1986 to 1995 and General Counsel of
the Company from 1982 to 1988. In June 1991, he was again elected General
Counsel and served until his retirement from that position in 1995. Mr. Van
Vleet had served Pioneer Life Insurance Company, a subsidiary of the Company,
from 1948 until 1995 as General Counsel and a director. Mr. Van Vleet also
serves as a director of other subsidiaries of the Company.
R. Richard Bastian, III has been a director of the Company since December
1994. Mr. Bastian is a management consultant, specializing in strategic
planning and organizational development. Mr. Bastian's career includes over 28
years in the financial services industry, most recently as President and Chief
Executive Officer of Heritage Bank & Trust of Racine, Wisconsin. Prior to
Heritage, he served as Chairman, President and Chief Executive Officer of Bank
One, Rockford and its predecessor, First Community Bancorp, an $800 million
multi bank holding company. He has also held management positions at banks in
Tulsa and Philadelphia where his banking career began in 1966.
Karl Heinz Klaeser has been a director of the Company since 1986. Mr.
Klaeser has also been a director of LSW Holding Corporation and Insurance
Investors Life Insurance Company and the Chairman of the Board of Life Insurance
Company of the Southwest since 1989 and a director of Personal Assurance Company
PLC (United Kingdom) since 1991.
Michael K. Keefe has been a director of the Company since March 1994. Mr.
Keefe has been Chief Executive Officer and Chairman of the Board of Keefe Real
Estate, Inc., a family owned real estate brokerage operation since 1982. Mr.
Keefe has also been Chairman of the Board of Southern Wisconsin Bankshares, Inc.
since 1988.
Robert F. Nauert has been a director of the Company since November 1991.
Mr. Nauert is also a director and officer of various subsidiaries of the
Company. Mr. Nauert is the brother of Peter W. Nauert.
Carl A. Hulbert was elected director of the Company in March 1995 and has
been a director of a subsidiary of the Company since 1990. Mr. Hulbert is a
management consultant, specializing in the insurance industry. Mr. Hulbert is a
past Insurance Commissioner of the state of Utah. He has also been a director
for numerous insurance companies during his 49 year business career.
John W. Gardiner was elected director of the Company in May 1996. Mr.
Gardiner was a director, President and Chief Operating Officer of Life Partners
Group and a director and Chairman and Chief Executive Officer of Massachusetts
General Life Insurance Company and Philadelphia Life Insurance Company, two
subsidiaries of Life Partners, from March 1990 to his retirement in May 1995.
Pursuant to the requirements of Section 13 or 15(d) 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.
PIONEER FINANCIAL SERVICES, INC.
BY: /S/ Peter W. Nauert
Peter W. Nauert, Chairman and
Chief Executive Officer
BY: /S/ David I. Vickers
David I. Vickers, Treasurer
Chief Financial Officer, and
Senior Vice President
Date: April 17, 1997
