SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the quarterly period ended March 31, 1997
[ ] 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
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 ____
The number of shares of the registrant's common stock, $1.00 par value per
share, outstanding as of April 30, 1997 was 11,815,267.
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share amounts)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
(Unaudited)
<S> <C> <C>
ASSETS
Investments-Note 1 and 3
Securities available for sale
Fixed maturities, at fair value
(cost: 1997-$568,402; 1996-$562,702) $ 556,861 $ 561,654
Fixed maturities held in trust pursuant to reinsurance
agreement (cost: 1977-$187,619; 1996-$189,157) 190,294 196,584
Equity securities, at fair value
(cost: 1997-$25,864; 1996-$26,164) 30,917 28,630
Fixed maturities held to maturity, at amortized cost
(fair value: 1997-$256,019; 1996-$266,172) 260,234 266,049
Mortgage loans--at unpaid balance 9,804 9,890
Real estate--at cost, less accumulated depreciation 14,998 14,989
Policy loans--at unpaid balance 83,902 83,054
Short-term investments--at cost,
which approximates fair value 21,076 34,659
Total Investments 1,168,086 1,195,509
Cash 23,114 25,857
Premiums and other receivables, less
allowance for doubtful accounts 28,683 24,499
Reinsurance receivables and amounts
on deposit with reinsurers 207,580 226,632
Accrued investment income 16,443 16,481
Deferred policy acquisition costs 237,507 224,010
Value of purchased insurance in force 40,181 42,719
Land, building and equipment-at cost, less
accumulated depreciation 30,775 31,051
Other 40,299 40,982
$1,792,668 $1,827,740
March 31, December 31,
1997 1996
(Unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
Policy liabilities:
Future policy benefits $1,049,334 $1,072,153
Policy and contract claims 198,066 208,561
Unearned premiums 92,794 91,374
Other 19,183 16,803
1,359,377 1,388,891
General expenses and other liabilities 50,199 44,924
Amounts due to reinsurers 58,112 70,942
Deferred federal income taxes 17,467 14,963
Repurchase agreement 5,177 5,178
Short-term notes payable 6,253 6,248
Long-term notes payable 20,198 21,514
Convertible subordinated notes due 2003 86,250 86,250
1,603,033 1,638,910
Stockholders' Equity
Common Stock, $1 par value:
Authorized: 20,000,000 shares
Issued, including shares in treasury
(1997-12,937,567; 1996-12,893,467) 12,938 12,893
Additional paid-in capital 91,982 91,622
Unrealized appreciation (depreciation) of
available-for-sale securities-Note 3 (4,611) 224
Retained earnings 99,546 94,311
Less treasury stock at cost
(1997-1,132,300 shares; 1996-1,132,300 shares) (10,220) (10,220)
Total Stockholders' Equity 189,635 188,830
$1,792,668 $1,827,740
See notes to condensed consolidated financial statements.
</TABLE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)
(In thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Income:
Premiums and policy charges $213,866 $175,573
Net investment income 21,791 17,991
Other income and realized gains
and losses from investments 4,124 12,614
239,781 206,178
Benefits and expenses:
Benefits 157,157 121,454
Insurance and general expenses 53,316 54,804
Interest expense 1,865 961
Amortization of deferred policy
acquisition costs 18,527 18,838
230,865 196,057
INCOME BEFORE INCOME TAXES 8,916 10,121
Federal income taxes 3,031 3,390
NET INCOME 5,885 6,731
PREFERRED STOCK DIVIDENDS - 451
INCOME APPLICABLE TO
COMMON STOCKHOLDERS $ 5,885 $ 6,280
NET INCOME PER COMMON SHARE
Primary $ .48 $ .60
Fully Diluted $ .41 $ .54
DIVIDENDS DECLARED
PER COMMON SHARE $ .055 $ .055
AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING
Primary 12,358 10,500
Fully Diluted 16,671 12,859
See notes to condensed consolidated financial statements.
</TABLE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
NET CASH PROVIDED (USED) BY OPERATING ACTIVITIES $ (11,653) $ 11,470
INVESTING ACTIVITIES
Net decrease (increase) in
short-term investments 13,452 (33,528)
Purchases of investments (30,544) (83,753)
Sale of investments 18,930 52,932
Maturities of investments 12,788 12,406
Net purchase of property and equipment (1,103) (896)
Purchase of subsidiaries - (22,739)
NET CASH PROVIDED (USED) BY
INVESTING ACTIVITIES 13,523 (75,578)
FINANCING ACTIVITIES
Net proceeds from debt offering - 83,016
Increase in notes payable - 5,848
Repayments of notes payable (1,311) (27,401)
Proceeds from sale of agent receivables 6,000 6,426
Transfer of collections on previously
sold agent receivables (6,200) (5,467)
Policyholder account deposits 7,348 10,882
Policyholder account withdrawals (10,206) (11,260)
Dividends paid - preferred - (451)
Dividends paid - common (649) (555)
Stock options exercised 402 231
Other 3 7
NET CASH PROVIDED (USED) BY
FINANCING ACTIVITIES (4,613) 61,276
DECREASE IN CASH (2,743) (2,832)
CASH AT BEGINNING OF PERIOD 25,857 20,274
CASH AT END OF PERIOD $ 23,114 $ 17,442
See notes to condensed consolidated financial statements.
</TABLE>
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
March 31, 1997
NOTE 1 -- ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles (GAAP) for
interim financial information and with the instructions to Form 10-Q and Article
10 of Regulation S-X. Accordingly, they do not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for the three month period ended March 31,
1997 are not necessarily indicative of the results that may be expected for the
year ended December 31, 1997. For further information, refer to the
consolidated financial statements and footnotes thereto included in the Pioneer
Financial Services, Inc. ("Pioneer" or "the Company") Annual Report on Form 10-K
for the year ended December 31, 1996.
Certain amounts in the 1996 financial statements have been reclassified to
conform to the 1997 presentation.
EARNINGS PER SHARE
Primary earnings per share of Common Stock are determined by dividing net income
for the period, less dividends on Preferred Stock, by the weighted average
number of common stock and common stock equivalents (dilutive stock options)
outstanding. Fully diluted earnings per share assumes conversion of the
Preferred Stock outstanding and conversion of the Subordinated Debentures and
Notes with related tax-effected interest added back to net income. (See
discussion in Exhibit 11 on page 15).
NOTE 2 -- STOCKHOLDERS' EQUITY
The statutory accounting practices prescribed for Pioneer's insurance
subsidiaries by regulatory authorities differ from GAAP. The combined
statutory-basis capital and surplus of Pioneer's direct insurance subsidiaries
was $155,982,000 and $164,466,000 at March 31, 1997 and December 31, 1996,
respectively. Statutory net loss of the insurance subsidiaries amounted to
$9,753,000 for the three months ended March 31, 1997 compared to statutory net
income of $3,800,000 for the same period in 1996.
NOTE 3 -- INVESTMENTS
Realized investment losses for the three month period ended March 31, 1997 were
$842,000 and realized gains for the three month period ended March 31, 1996 were
$459,000.
Unrealized depreciation of available-for-sale securities at March 31, 1997 of
$4,611,000 included unrealized depreciation of $4,419,000 less unrealized
appreciation of $2,675,000 on investments in trust accounts that are guaranteed
as to principal value by reinsurers and net of deferred tax benefits of
$2,483,000. Unrealized appreciation on available-for-sale securities at
December 31, 1996 of $224,000 included gross appreciation of $8,241,000 less
unrealized appreciation of $7,863,000 on investments in trust accounts that are
guaranteed as to principal value by reinsurers and net of deferred taxes of
$154,000.
NOTE 4 -- CONTINGENCIES
Pioneer and its subsidiaries are named as defendants in various legal actions,
some claiming significant damages, arising primarily from claims under insurance
policies, disputes with agents, reinsurance arbitrations, and other items.
Pioneer's management and its legal counsel are of the opinion that the
disposition of these actions will not have a material adverse effect on
Pioneer's financial position.
NOTE 5 -- MERGER AGREEMENT
On December 15, 1996, the Company and Conseco, Inc. entered into an agreement
and plan of merger pursuant to which Conseco, Inc. will acquire the Company
through an exchange of stock. Completion of the merger, which is subject to
customary terms and conditions, including approval of the Company's stockholders
and regulatory agencies, is expected at the end of May.
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Results of Operations - First Three Months of 1997 Compared to First Three
Months of 1996
Overview
The information set forth below is based on the Company's major product lines.
<TABLE>
<CAPTION>
Three Months
Ended March 31
1997 1996
<S> <C> <C>
Revenues
Group Medical $ 122,454 $ 104,381
Senior Health 76,895 64,347
Life Insurance 40,418 30,432
Corporate and other 14 7,018
TOTAL $ 239,781 $ 206,178
Pre-tax operating income
Group Medical $ 1,793 $ 5,035
Senior Health 6,405 2,670
Life Insurance 3,348 2,842
Corporate and other (1,788) (885)
TOTAL $ 9,758 $ 9,662
</TABLE>
Group Medical
Revenue. Total revenue in the Group Medical Division increased $18.1million, or
17%, from $104.4 million to $122.5 million. Premiums increased $18.2 million or
19% from $97.6 million to $115.8 million. The increase in premiums was due to
the acquisition of the block of business from Washington National Insurance
Company (WNIC) during the third quarter of 1996. This increase was offset by a
decline in the major medical in force due to the Company's discontinued
marketing in certain states due to the unfavorable regulatory environment.
Net investment income decreased $0.1 million, or 3%, from $2.2 million to $2.1
million, due to a reduction in invested assets. Total realized investment gains
and losses were relatively unchanged compared to the first quarter of 1996.
Benefits. The following table sets forth the earned premium, benefits, and loss
ratios for products issued by the Group Medical Division:
<TABLE>
<CAPTION>
Three Months
Ended March 31
1997 1996
<S> <C> <C>
Earned Premium (1) $ 116,806 $ 98,898
Benefits (1) 79,393 60,681
Loss Ratio 68.0% 61.4%
(1) In the Company's statement of consolidated income, accident and health
premium revenue represent premiums written; the changes in unearned
premiums are reflected in accident and health benefits.
</TABLE>
The increase in the loss ratio is due to the assumed block of WNIC business
which has a higher ultimate loss ratio and the continued shift to a lower
commission and higher benefit structure due to small group reform. The loss
ratio on the assumed block of WNIC business was 78.8% for the first quarter of
1997.
Insurance and General Expenses. Insurance and general expenses increased $3.8
million, from $29.1 million to $32.9 million. The increase related primarily to
expenses on the business assumed from WNIC.
The amortization of Deferred Policy Acquisition Costs (DAC) decreased $1.2
million, or 12%, from $10.2 million to $9.0 million.
Senior Health Division
Revenue. Total revenue in the Senior Health Division increased $12.6 million,
or 20%, from $64.3 million to $76.9 million. Senior health premium increased
$10.0 million, or 16%, from $60.6 million to $70.6 million due to the March 1996
purchase of Universal Fidelity Life Insurance Company (UFLIC).
Net investment income increased $3.0 million, primarily due to increased
invested assets allocated to the senior division and the purchase of UFLIC. The
total realized gains were relatively unchanged compared to the first quarter of
1996.
Benefits. The following table sets forth the earned premium, benefits, and loss
ratios for senior health products:
<TABLE>
<CAPTION>
Three Months
Ended March 31
1997 1996
<S> <C> <C>
Earned Premium (1) $ 70,126 $ 57,653
Benefits (1) 49,929 39,879
Loss Ratio 71.2% 69.2%
(1) In the Company's statement of consolidated income, accident and health
premium revenue represent premiums written; the changes in unearned
premiums are reflected in accident and health benefits.
</TABLE>
The loss ratio on the renewal block of Medicare supplement business acquired
from UFLIC was 84.0% for the first quarter which is higher than the Company's
historical loss ratios.
Insurance and General Expenses. Insurance and general expenses increased $0.9
million, or 6%, from $13.7 million to $14.6 million. The expense ratio remained
relatively unchanged.
The amortization of DAC decreased $0.2 million, or 3%, from $5.7 million to $5.5
million.
Life Insurance Divison
Revenue. Total revenue in the Life Insurance Division increased $10.0 million,
or 33%, from $30.4 million to $40.4 million. The increase was due primarily to
the acquisition of Secura Life Insurance Company (SLIC) in December 1996 and a
significant increase in new business sales.
Net investment income increased $0.9 million, or 7%, from $13.0 million to $13.9
million.
Benefits. Total life and annuity policy benefits increased $8.6 million, or
44%, from $19.6 million to $28.2 million. This increase was primarily due to
the acquisition of SLIC and increased life insurance in-force.
Insurance and General Expenses. Insurance and general expenses increased $0.9
million, or 19%, from $4.9 million to $5.8 million. The increase was primarily
due to the acquisition of SLIC. The unit cost of administration per policy in-
force remained relatively constant in 1997.
The amortization of DAC increased $1.1 million from $2.9 million to $4.0
million.
Corporate and Other
Total revenue from the Company's managed care subsidiaries, which were sold in
the third quarter of 1996, included in the segment were $7.0 million in the
first quarter of 1996.
Interest expense increased $1.1 million, or 39%, from $2.9 million to $4.0
million. The increase was due to the offering of the Company's 6 1/2% notes in
the first quarter of 1996.
CONSOLIDATED FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net Income. The Company's consolidated net income decreased $.8 million, or
13%, from $6.7 million to $5.9 million.
Premiums and Policy Charges. Total premiums and policy charges increased $38.3
million, or 22%, from $175.6 million to $213.9 million. This increase was due
primarily to the increase in accident and health premiums of $28.1 million, or
18%. Premiums from Medicare supplement and long-term care products increased
$10.0 million, or 16%, due to the March 1996 purchase of UFLIC. Premiums from
major medical products increased $18.2 million or 19%, primarily due to the
acquisition of the WNIC block of business. Life insurance premiums increased
$10.2 million, or 59%, primarily due to new business sales and the acquisition
of SLIC.
Net Investment Income. Net investment income increased $3.8 million from $18.0
million to $21.8 million due to an increase in invested assets.
Other Revenue. Other income and realized investment gains and losses decreased
$8.5 million, or 83%, from $12.6 million to $4.1 million. The decrease in other
income was due to the sale of the Company's managed care subsidiaries in the
third quarter of 1996. The remaining other income generated by the Company's
non-insurance subsidiaries remained relatively unchanged. Realized investment
losses were $0.8 million compared to realized gains of $0.5 million for the same
period in 1996.
Benefits. Total benefits increased $35.7 million, or 29%, from $121.5 million
to $157.2 million. Accident and health benefits, which include the change in
unearned premiums, increased $27.0 million, or 27%, from $101.9 million to
$128.9 million. The accident and health loss ratio increased to 69.2% from
64.2%. Life and annuity benefits increased $8.6 million, or 44%.
Insurance and General Expenses. Insurance and general expenses (which includes
non-deferred commission compensation to agents) decreased $1.5 million, or 3%,
from $54.8 million to $53.3 million due to the sale of the Company's managed
care subsidiaries.
Amortization of DAC. Amortization of DAC decreased $.3 million, or 2%, from
$18.8 million to $18.5 million.
Income Tax Rate. The effective federal income tax rate was 34% due to the
continued investment in non-taxable securities included in the Company's
portfolio.
Other. Invested assets decreased due to the first year strain of new business
issued by the life division. Reinsurance receivables and amounts due to
reinsurers decreased due to the timing of payments to reinsurers. Deferred
policy acquisition costs increased due to costs capitalized by the life division
for the increased new business. General expenses and other liabilities
increased due to the timing of payments. Notes payable decreased in accordance
with the scheduled repayments. The remaining balance sheet amounts remained
consistent with the amounts at December 31, 1996.
DEFERRED POLICY ACQUISITION COSTS
Under generally accepted accounting principles, a DAC asset is established to
match properly the costs of writing new business against the expected future
revenues or gross profits from the policies. The costs which are capitalized
and amortized consist of first-year commissions in excess of renewal comissions
and certain home office expenses related to selling, policy issue, and
underwriting.
The deferred acquisition costs for accident and health policies and traditional
life policies are amortized over future premium revenues of the business to
which the costs are related. The rate of amortization depends on the expected
pattern of future premium revenues for a block of policies. The scheduled
amortization for a block of policies is established when the policies are
issued. However, the actual amortization of DAC will reflect the actual
persistency and profitability of the business. For example, if actual policy
terminations are higher than expected or if future losses are anticipated, DAC
could be amortized more rapidly than originally scheduled or written-off, which
would reduce earnings in the applicable period.
EFFECT OF INFLATION
In pricing its insurance products, the Company gives effect to anticipated
levels of inflation; however, the Company believes that the high rate of medical
cost inflation during recent years has had an adverse impact on its major
hospital accident and health claims experience. The Company continues to
implement rate increases, as permitted by state regulations, in response to this
experience.
LIQUIDITY AND CAPITAL RESOURCES
The Company's consolidated liquidity requirements are created and met primarily
by operations of its subsidiaries. The insurance subsidiaries' primary sources
of cash are premiums, investment income, and investment sales and maturities.
The insurance subsidiaries' primary uses of cash are operating costs, policy
acquisition costs, payments to policyholders and investment purchases. In
addition, liquidity requirements of the holding company are created by Common
Stock dividends, interest payments on the 6 1/2% Notes, and other debt service
requirements. These liquidity requirements of the holding company have
historically been met through dividends from the non-insurance subsidiaries
which receive payments primarily from fees charged for administrative and
marketing services provided to the Company's insurance subsidiaries and other
unaffiliated companies. Dividends from the insurance subsidiaries could be
required in the future to meet such liquidity requirements.
The ability of the insurance subsidiaries to pay dividends and make other
payments to the Company is subject to state insurance department regulations
which generally permit dividends and other payments to be paid for any twelve
month period in amounts equal to the greater of (i) net gain from operations in
the case of a life insurance company or net income in the case of all other
insurance companies for the preceding calendar year or (ii) 10% of surplus as of
the preceding December 31st. Any dividends in excess of these levels require
the prior approval of the Director or Commissioner of the applicable state
insurance department. The amount of dividends that the Company's insurance
subsidiaries could pay in 1997 without prior approval is approximately $5.6
million.
Notwithstanding the foregoing, if insurance regulators otherwise determine that
payment of a dividend or any other payment to an affiliate would be detrimental
to an insurance subsidiary's policyholders or creditors because of the financial
condition of the insurance subsidiary or otherwise, the regulators may block
dividends or other payments to affiliates that would otherwise be permitted
without prior approval.
The Company's insurance subsidiaries require capital to fund acquisition costs
incurred in the initial year of policy issuance and to maintain adequate surplus
levels for regulatory purposes. These capital requirements have been met
principally from internally generated funds, including premiums and investment
income, and capital contributions from the holding Company.
The Company has offered agent commission financing to certain of its agents and
marketing organizations which consists primarily of annualization of first year
commissions. This means that when the first year premium is paid in
installments, the Company will advance a percentage of the commissions that the
agent would otherwise receive over the course of the first policy year. The
Company through a subsidiary has entered into agreements with an unaffiliated
corporation to provide financing for a portion of its agent commission advance
program through the sale of agent receivables. Proceeds from such sales for the
three month periods ended March 31, 1997 and 1996 were $6.0 million and $6.4
million, respectively. The termination date of the current program is December
31, 1997, subject to extension or termination as provided therein. The Company
has retained approximately $13.7 million of agent advances at March 31, 1997.
In January 1995, an insurance subsidiary of the Company issued a note in the
amount of $1.7 million as a portion of the acquisition price of CNL. The
principal balance of the note may be reduced by the amount of capital losses
incurred by the Company on mortgage loan and real estate holdings of CNL through
January 31, 1997. During 1996, a net capital loss reduced the principal balance
to $1.0 million. Interest is payable on the note at the average earnings rate
of these investments, currently 8.7%. The note matures in November 1997.
In September 1995, a non-insurance subsidiary of the Company borrowed $3.3
million from a finance company to finance the purchase of certain equipment.
The note, which is secured by the equipment purchased, bears interest at a fixed
rate of 7.81% and has principal and interest payments of $40,000 payable monthly
through August 2005.
In March 1996, the Company issued $86.25 million of its 6 1/2% Notes. Net
proceeds from the offering totaled $83.0 million. The notes are convertible
into the Company's Common Stock at any time prior to maturity, unless previously
redeemed, at a conversion price of $20 per share.
In August 1996, the Company borrowed $25.0 million under a term loan agreement
with six banks to fund the acquisition of the WNIC block of business and to
repay the notes issued as a portion of the acquisition price of UFLIC. Interest
is payable quarterly and is based upon either a corporate base rate, LIBOR, or a
prime rate plus a margin. The loan bore interest at 8.5% per annum at May 1,
1997, and requires principal payments of $1.25 million per quarter with a final
payment on July 31, 2001.
The Company has a line of credit arrangement for short-term borrowings with six
banks amounting to $30.0 million through July 1999, all of which was unused at
March 31, 1997 (the "Credit Facility"). Amounts borrowed under the Credit
Facility accrue interest at a rate per annum based upon either a corporate base
rate, LIBOR, or a prime rate plus a margin. The line of credit arrangement can
be terminated, in accordance with the agreement, at the Company's option.
The Company's debt agreements include provisions requiring maintenance of
minimum working capital and risk based capital and limiting the Company's
ability to incur additional indebtedness. The Company's debt agreements also
restrict the amount of retained earnings which is available for dividends and
require the maintenance of certain minimum insurance company ratings at the
Company's subsidiaries.
In March 1997 the Board of Directors announced a quarterly stock dividend of
$.055 per share which was paid in April, 1997.
Management believes that the diversity of the Company's investment portfolio and
the liquidity attributable to the large concentration of investments in highly
liquid United States government agency securities provide sufficient liquidity
to meet foreseeable cash requirements. Because the Company's insurance
subsidiaries experience strong positive cash flows, including monthly cash flows
from mortgage-backed securities, the Company does not expect its insurance
subsidiaries to be forced to sell the held-to-maturity investments prior to
their maturities and realize material losses or gains. Although the Company has
the ability and intent to hold those securities to maturity, there could occur
infrequent and unusual conditions under which it would sell certain of these
securities. Those conditions would include a significant deterioration of the
issuer's creditworthiness, significant changes in tax law affecting the taxation
of securities, a significant business acquisition or disposition, and changes in
regulatory capital requirements or permissible investments.
Life insurance and annuity liabilities are generally long-term in nature
although subject to earlier surrender as a result of the policyholder's ability
to withdraw funds or surrender the policy, subject to surrender and withdrawal
penalties. The Company believes its policyholder liabilities should be backed
by an investment portfolio that generates predictable investment returns. The
Company seeks to limit exposure to risks associated with interest rate
fluctuations by concentrating its invested assets principally in high quality,
readily marketable debt securities of intermediate duration and by attempting to
balance the duration of its invested assets with the estimated duration of
benefit payments arising from contract liabilities.
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 management, seeks
to balance the duration of its invested assets with the expected duration of
benefit payments arising from insurance liabilities. At March 31, 1997, 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 majority of the Company's fixed maturity investments are classified as
"available-for-sale" for purposes of SFAS 115. Impact on the market valuation
of securities classified in such a manner is reflected through an adjustment to
surplus, but not through income. Since the asset valuations are adjusted in
such a manner, while accounting standards do not allow such an adjustment for
the Company's insurance liabilities, a subsequent significant move in interest
rates could result in a positive or negative impact on the Company's
shareholders' equity.
RECENTLY ISSUED ACCOUNTING STANDARDS
In February 1997, the Financial Accounting Standards Board issued
Statement No. 128, Earnings per Share, which is required to be adopted on
December 31, 1997. At that time, the Company will be required to change the
method currently used to compute earnings per share and to restate all prior
periods. The Company has not yet determined what the impact of the Statement
128 will be on the calculation of earnings per share.
PIONEER FINANCIAL SERVICES, INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11 - Statement of Computation
of Per Share Earnings
Exhibit 27 - Financial Data Schedule
(b) Reports on Form 8-K
The Company filed no reports on Form 8-K during the first
quarter of 1997.
SIGNATURES
Pursuant to the requirements of the Securities and 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.
May 13, 1997 /s/ Peter W. Nauert
Date Peter W. Nauert
Chairman and Chief Executive Officer
May 13, 1997 /s/ David I. Vickers
Date David I. Vickers
Treasurer and Chief Financial Officer
EXHIBIT 11
PIONEER FINANCIAL SERVICES, INC.
STATEMENT OF COMPUTATION OF PER SHARE EARNINGS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
1997 1996
<S> <C> <C>
Net income $ 5,885 $ 6,731
Average shares outstanding 11,791 10,105
Common Stock equivalents from
dilutive stock options,
based on the treasury stock
method using average market
price 567 395
TOTAL-PRIMARY 12,358 10,500
Additional shares assuming
conversion of
Preferred Stock - 1,358
Additional shares assuming
conversion of
Subordinated Debentures and Notes 4,313 1,001
TOTAL-FULLY DILUTED 16,671 12,859
Net income per share-
Primary* $ .48 $ .60
Net income per share-
Fully Diluted** $ .41 $ .54
* Primary net income per share was calculated after deducting dividends
on Preferred Stock of $451,000 for the three month period ended March
31, 1996.
** Fully diluted net income per share was calculated after adding tax
effected interest and amortization of offering costs on Subordinated
Debentures and Notes of $1,025,000 and $196,000 for the three month
periods ended March 31, 1997 and 1996 respectively.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> MAR-31-1997
<DEBT-HELD-FOR-SALE> 747,155
<DEBT-CARRYING-VALUE> 260,234
<DEBT-MARKET-VALUE> 256,019
<EQUITIES> 30,917
<MORTGAGE> 9,804
<REAL-ESTATE> 14,998
<TOTAL-INVEST> 1,168,086
<CASH> 23,114
<RECOVER-REINSURE> 5,199
<DEFERRED-ACQUISITION> 237,507
<TOTAL-ASSETS> 1,792,668
<POLICY-LOSSES> 1,049,334
<UNEARNED-PREMIUMS> 92,794
<POLICY-OTHER> 198,066
<POLICY-HOLDER-FUNDS> 19,183
<NOTES-PAYABLE> 112,701<F1>
0
0
<COMMON> 12,938<F2>
<OTHER-SE> 176,697<F3>
<TOTAL-LIABILITY-AND-EQUITY> 1,792,668
213,866
<INVESTMENT-INCOME> 21,791
<INVESTMENT-GAINS> (842)
<OTHER-INCOME> 3,282
<BENEFITS> 157,157
<UNDERWRITING-AMORTIZATION> 18,527
<UNDERWRITING-OTHER> 53,316
<INCOME-PRETAX> 8,916
<INCOME-TAX> 3,031
<INCOME-CONTINUING> 5,885
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,885
<EPS-PRIMARY> .48
<EPS-DILUTED> .41
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>Includes short-term and long-term borrowings and convertible subordinated
debentures and notes.
<F2>Common stock at par value.
<F3>Includes additional paid in capital and retained earnings less unrealized
depreciation and treasury stock.
</FN>
</TABLE>
