<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
[x] Quarterly Report pursuant to Section 13 or 15 (d) of the Securities Exchange
Act of 1934
For the quarterly period ended September 30, 1995
or
[ ] Transition Report pursuant to Section 13 or 15 (d) of the Securities
Exchange Act of 1934 for the transition period from
____________________to____________________
Commission file number 0-13972
PENN TREATY AMERICAN CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
PENNSYLVANIA 23-1664166
- - ------------------- ----------------------
(State or other juris- (I.R.S. Employer Identi-
diction of incorporation fication No.)
of organization)
3440 LEHIGH STREET, ALLENTOWN, PA 18103
----------------------------------------
(Address, including zip code, of principal executive offices)
(610) 965-2222
--------------
(Registrant's telephone number, including area code)
NOT APPLICABLE
--------------
(Former name, former address and former fiscal year,
if change since last report)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES X NO ___
---
The number of shares outstanding on the Registrant's common stock, par value
$.10 per share, as of November 9, 1995 was 6,971,283.
<PAGE>
PART I FINANCIAL INFORMATION
Item I. Financial Statements
The registrant's Unaudited Consolidated Balance Sheets, Statements of Operations
and Statements of Cash Flows and Notes thereto required under this item are
contained on pages 3 through 9 of this report, respectively.
<PAGE>
<TABLE>
<CAPTION>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1995 DECEMBER 31, 1994
------------------ -----------------
<S> <C> <C>
(UNAUDITED)
ASSETS
Investments:
Bonds, available for sale at market,
(amortized cost $129,130,724 and
$94,660,452 respectively)........... 131,848,469 90,495,790
Equity securities at market value,
(cost $1,699,327 and $880,507
respectively). 2,091,906 933,287
Policy loans.......................... 68,795 61,315
----------------- ----------------
Total Investments................... 134,009,170 91,490,392
----------------- ----------------
Cash and cash equivalents............... 11,805,594 7,226,769
Property and equipment, at cost, less
accumulated depreciation of $1,949,891
and $1,752,474, respectively.......... 5,317,716 4,874,132
Unamortized policy acquisition costs.... 57,964,667 47,830,598
Receivables from agents, less allowance
for uncollectable amounts of $231,226.. 1,271,261 1,148,564
Accrued investment income............... 2,200,292 1,627,734
Cost in excess of net assets acquired,
less accumulated amortization of
$222,886 and $196,066, respectively.... 1,206,514 1,233,334
Receivable from reinsurers.............. 7,475,787 6,525,247
Federal income tax refundable........... 0 481,799
Other assets............................ 2,501,085 1,907,822
----------------- -----------------
Total Assets........................ 223,752,086 164,346,391
================= =================
LIABILITIES
Policy reserves:
Accident and health................... 55,984,492 43,140,978
Life.................................. 6,903,396 5,861,581
Unearned premium reserve................ 31,208 52,338
Policy and contract claims.............. 48,701,740 41,344,428
Accounts payable and other liabilities.. 2,889,850 2,138,290
Mortgages and other debts............... 2,259,111 6,372,209
Federal income taxes payable............ 877,087 0
Deferred income taxes................... 13,681,770 9,993,026
----------------- -----------------
Total Liabilities................... 131,328,654 108,902,850
----------------- -----------------
Commitments and contingencies...........
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00;
5,000,000 shares authorized, none
outstanding........................... ___ ___
Common stock, par value $.10; 10,000,000
shares authorized, 7,576,913 and
5,276,913 shares issued............... 757,691 527,691
Additional paid-in capital.............. 41,146,594 15,311,594
Net unrealized appreciation
(depreciation) of securities.......... 2,052,814 (2,713,842)
Retained earnings....................... 50,172,207 44,023,972
----------------- ----------------
94,129,306 57,149,415
Less 605,630 common shares held in
treasury, at cost..................... (1,705,874) (1,705,874)
----------------- ----------------
Total Shareholders' Equity.......... 92,423,432 55,443,541
----------------- ----------------
Total Liabilities and Shareholders' 223,752,086 164,346,391
Equity.
================= ================
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
3
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------ ----------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenue:
Accident and health premiums........... 25,509,433 19,861,264 72,966,691 58,748,487
Life premiums.......................... 746,164 633,336 2,387,984 1,965,219
---------- ---------- ---------- ----------
26,255,597 20,494,600 75,354,675 60,713,706
Net investment income.................. 2,177,418 1,514,895 5,666,792 4,318,282
Net realized capital gains............. 2,996 5,458 16,254 8,528
Other income........................... 124,601 69,769 256,429 213,978
---------- ---------- ---------- ----------
28,560,612 22,084,722 81,294,150 65,254,494
---------- ---------- ---------- ----------
Benefits and expenses:
Benefits to policyholders.............. 16,387,215 11,855,517 47,498,682 34,426,101
Commissions............................ 9,261,009 6,460,378 26,032,354 20,230,034
Policy acquisition costs deferred...... (7,287,188) (4,556,338) (19,790,855) (14,227,006)
Amortization of deferred policy
acquisition costs..................... 3,778,342 3,529,228 9,656,786 10,022,470
General and administrative............. 3,033,698 2,572,711 8,827,055 7,580,380
Interest............................... 40,702 41,277 286,893 124,291
---------- ---------- ---------- ----------
25,213,778 19,902,773 72,510,915 58,156,270
---------- ---------- ---------- ----------
Income before federal income taxes...... 3,346,834 2,181,949 8,783,235 7,098,224
Provision for federal income taxes...... 1,004,000 538,000 2,635,000 2,062,000
---------- ---------- ---------- ----------
Net Income............................ 2,342,834 1,643,949 6,148,235 5,036,224
========== ========== ========== ==========
Earnings per share...................... 0.35 0.35 1.15 1.08
Weighted average number of shares
outstanding............................ 6,736,501 4,668,831 5,367,255 4,668,414
========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1995 1994
---- ----
<S> <C> <C>
Net cash flow from operating activities:
Net income............................. 6,148,235 5,036,224
Adjustments to reconcile net income to
cash provided by operations:
Amortization of intangible assets.... 26,820 308,070
Policy acquisition costs, net........ (10,134,069) (4,204,536)
Deferred income taxes................ 1,233,194 601,138
Depreciation expense................. 198,390 222,655
Net realized capital (gains) losses.. (16,254) (8,528)
Increase (decrease) due to change in:
Receivables from agents.............. (122,697) 21,041
Receivable from reinsurers........... (950,540) (321,629)
Policy and contract claims........... 7,357,312 7,168,668
Policy and unearned premium reserves. 13,864,199 5,529,029
Accounts payable and other liabilities 751,560 129,039
Federal income taxes recoverable..... 481,799 0
Federal income tax payable........... 877,087 459,581
Accrued investment income............ (572,558) (367,154)
Other, net........................... (593,263) (250,889)
------------ ------------
Cash provided by operations........ 18,549,215 14,322,709
------------ ------------
Cash flow from (used in) investing
activities:
Proceeds from sales of investments.... 3,844,760 6,123,295
Maturities of investments............. 4,320,808 4,209,163
Purchase of investments............... (43,445,886) (24,683,798)
Acquisition of property and equipment. (641,974) (326,964)
------------ ------------
Cash used by investing............. (35,922,292) (14,678,304)
------------ ------------
Cash flow from (used in) financing
activities:
Net proceeds from public offering..... 26,065,000 0
Proceeds from excercise of stock
options............................... 0 7,371
Repayments of mortgages and other debts (4,113,098) (106,330)
------------ ------------
Cash used by financing............. 21,951,902 (98,959)
------------ ------------
Increase (decrease) in cash............. 4,578,825 (454,554)
Cash balances:
Beginning of period.................... 7,226,769 1,343,347
------------ ------------
End of period.......................... 11,805,594 888,793
============ ============
SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
</TABLE>
5
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1995
(unaudited)
The Consolidated Financial Statements should be read in conjunction with this
note and with the Notes to Consolidated Financial Statements included in Penn
Treaty American Corporation's ("the Company's") Annual Report on Form 10-K for
the year ended December 31, 1994.
In the opinion of management, the summarized financial information reflects all
adjustments (consisting only of normal recurring adjustments) which are
necessary for a fair presentation of financial position and results of
operations for the interim periods. Certain prior period amounts have been
reclassified to conform with current period presentation.
1. Investments
-----------
On January 1, 1994, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" (SFAS No. 115"). SFAS No. 115 requires all
entities to allocate their investments among three categories as
applicable: (1) trading, (2) available for sale, and (3) held to maturity.
Management categorized all of its investment securities as available for
sale since they may be sold in response to changes in interest rates,
prepayments, and similar factors. Investments in this classification are
reported at the current market value with net unrealized gains and losses,
net of the applicable deferred income tax effect, being added to or
deducted from the Company's total shareholders' equity on the balance
sheet.
The cumulative effect of adopting SFAS No. 115 as of January 1, 1994 was an
increase in the balance of shareholders' equity of $3,528,500 to reflect
the net unrealized gain (net of $1,512,000 in deferred income taxes) on
investment securities classified as available for sale. As of September
30, 1995, shareholders' equity was increased by $2,052,814 due to
unrealized gains of $3,110,324 in the investment portfolio. As of December
31, 1994 shareholders equity was decreased by $2,713,842 due to unrealized
losses of $4,111,882 in the investment portfolio.
6
<PAGE>
The amortized cost and estimated market value of investments available for
sale as of September 30, 1995 and December 31, 1994 are as follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
Amortized Estimated Amortized Estimated
Cost Market Value Cost Market Value
---- ------------ ---- ------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of
U.S. Government
corporations and
agencies $ 95,669,630 $ 97,384,361 $ 63,954,663 $ 61,170,290
Obligations of states
and political
sub-divisions 24,937,912 25,779,928 22,946,937 22,005,000
Debt securities issued by
foreign governments 448,853 461,886 448,853 451,500
Corporate securities 5,616,128 5,676,789 5,816,128 5,469,000
Other debt securities 2,458,201 2,545,505 1,493,871 1,400,000
Equities 1,699,327 2,091,906 880,507 933,287
Policy Loans 68,795 68,795 61,315 61,315
------------ ------------ ----------- -----------
Total Investments $130,898,846 $134,009,170 $95,602,274 $91,490,392
============ ============ =========== ===========
Net unrealized gain (loss) $3,110,324 ($4,111,882)
------------ ------------
$134,009,170 $91,490,392
============ ===========
</TABLE>
7
<PAGE>
2. Reinsurance
-----------
The Company has assumed and ceded reinsurance on certain life and accident
and health contracts under various agreements. The tables below highlight
the amounts shown in the accompanying consolidated statements of operations
which are net of reinsurance activity:
<TABLE>
<CAPTION>
Assumed
Three Months Ended Gross Ceded to from Other Net
September 30, 1995 Amount Other Companies Companies Amount
------------------ ------ --------------- ---------- ------
<S> <C> <C> <C> <C>
Premiums:
Accident and health $25,925,710 $ 540,737 $ 124,460 $25,509,433
Life 1,298,345 552,181 0 746,164
Benefits to Policyholders: 16,764,111 581,122 204,226 16,387,215
Commissions 9,469,872 274,041 65,178 9,261,009
Assumed
Three Months Ended Gross Ceded to from Other Net
September 30, 1994 Amount Other Companies Companies Amount
------------------ ------ --------------- ---------- ------
Premiums:
Accident and health $20,071,667 $ 344,129 $ 133,726 $19,861,264
Life 1,026,453 393,117 0 633,336
Benefits to Policyholders: 12,683,407 704,611 (123,279) 11,855,517
Commissions 6,594,692 154,373 20,059 6,460,378
Assumed
Nine Months Ended Gross Ceded to from Other Net
September 30, 1995 Amount Other Companies Companies Amount
------------------ ------ --------------- ---------- ------
Premiums:
Accident and health $74,166,229 $1,634,061 $ 434,523 $72,966,691
Life 3,771,281 1,383,297 0 2,387,984
Benefits to Policyholders: 49,637,939 2,343,483 204,226 47,498,682
Commissions 26,772,135 804,959 65,178 26,032,354
Assumed
Nine Months Ended Gross Ceded to from Other Net
September 30, 1994 Amount Other Companies Companies Amount
------------------ ------ --------------- ---------- ------
Premiums:
Accident and health $59,275,372 $ 984,668 $ 457,783 $58,748,487
Life 3,015,188 1,049,969 0 1,965,219
Benefits to Policyholders: 35,695,332 1,334,081 64,850 34,426,101
Commissions 20,556,611 395,244 68,667 20,230,034
</TABLE>
8
<PAGE>
3. Public Offering:
----------------
On July 6, 1995, the Company consummated a public offering of 2,000,000
shares of its common stock at $12.25 per share. On July 27, 1995, the
Underwriters managing the offering notified the Company of their election to
exercise their over-allotment option to purchase 300,000 shares of Common Stock.
Closing of this transaction took place on August 1, 1995. The Company realized
$26,065,000 in net proceeds from the sale of the 2,300,000 shares of common
stock in the public offering.
9
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Three Months Ended September 30, 1995 and 1994:
Accident and Health Premiums. First year accident and health premiums earned
by the Company in the three month period ended September 30, 1995, including
long-term care and Medicare supplement, increased 59.2% to $9,877,625, compared
to $6,203,013 in the same period in 1994.
First year long-term care premiums earned by the Company in the three month
period ended September 30, 1995 increased 59.7% to $9,815,629, compared to
$6,146,733 in the same period in 1994. This increase was attributable to
increased sales of home health care policies, which increased to $3,968,734 for
the three month period ended September 30, 1995 from $1,073,797 for the same
period in 1994 and by an increase in premiums from sales of nursing home care
policies from $5,072,936 in the three month period ended September 30, 1994 to
$5,846,895 in the same period in 1995. These results reflect increasing market
demand for the Company's home health care policies relative to its nursing home
policies and the Company's marketing focus on its Independent Living policy
first introduced in the fourth quarter of 1994. First year Medicare supplement
premiums earned by the Company in the three month period ended September 30,
1995 increased 10.2% to $61,996, compared to $56,280 in the same period in 1994.
Total new business for this product remains low due to the Company's continued
de-emphasis of its Medicare supplement products because of lower profit margins
associated with this line of business.
Renewal accident and health premiums earned by the Company in the three
month period ended September 30, 1995, including long-term care and Medicare
supplement, increased 14.4% to $15,631,808, compared to $13,658,251 in the same
period in 1994.
Renewal long-term care premiums earned by the Company in the three month
period ended September 30, 1995 increased 16.2% to $14,989,221, compared to
$12,899,141 in the same period in 1994. This increase reflects renewals of a
larger base of in-force policies as well as the effect of rate increases the
Company received in various states. The Company believes that this increase also
reflects an increase in persistency. Renewal Medicare supplement premiums earned
by the Company in the three month period ended September 30, 1995 decreased
15.3% to $642,587, compared to $759,110 in the same period in 1994, consistent
with the Company's de-emphasis in marketing this product discussed above.
Life Premiums. First year life premiums earned by the Company in the three
month period ended September 30, 1995 decreased 22.6% to $381,391, compared to
$492,576 in the same period in 1994. The Company believes that first year life
premiums have been negatively
10
<PAGE>
impacted by the Company's utilization of stricter underwriting standards.
Renewal life premiums earned by the Company in the three month period
ended September 30, 1995 increased to $364,773, compared to $140,760 in the same
period in 1994. This increase was primarily the result of renewals of first-year
policies written in 1994.
Net Investment Income. Net investment income earned by the Company for the
three month period ended September 30, 1995 increased 43.8% to $2,177,418, from
$1,514,895 for the same period in 1994. This increase was primarily the result
of growth in the Company's investment assets due to continued premium growth and
additional funds of $22,065,000 from the Company's recent public offering which
were, offset by a decrease in the average yield on the Company's investments to
6.1% for the three month period ended September 30, 1995 from 6.7% for the same
period in 1994.
Benefits to Policyholders. Accident and health benefits to policyholders in
the three month period ended September 30, 1995 increased 37.9% to $16,021,632
compared to $11,616,067 in the same period in 1994. The Company's accident and
health loss ratio (the ratio of benefits to policyholders to total accident and
health premiums) was 62.8% in the three month period ended September 30, 1995,
compared to 58.5% in the same period in 1994. This increase in loss ratio was
due to (i) refinement of actuarial data used to calculate return of premium
benefits and (ii) modification of assumptions used to reflect benefit payment
frequency. The refinement of actuarial data and modification of assumptions were
recommended by the Company's actuarial consultant. Reserves are increased on the
anniversary date of the policy.
Life benefits to policyholders in the three month period ended September
30, 1995 increased to $365,583, compared to $239,450 for the same period in
1994. The life loss ratio (the ratio of claims experience and increases in
policy reserves to total life premiums) was 49.0% in the three month period
ended September 30, 1995, compared to 37.8% for the same period in 1994. These
increases in benefits and the Company's life loss ratio are a result of the sale
of the Company's new life insurance products which were introduced in late 1993.
Acquisition Costs Amortized. The amortization of deferred policy acquisition
costs in the three month period ended September 30, 1995 increased 7.1% to
$3,778,342, compared to $3,529,228 in the same period in 1994. The increase in
amortization is due to the growth in first year premiums during the second and
third quarters of 1995 resulting in an increased deferral of acquisition costs
during those quarters. As a result, amortization of the larger deferred
acquisition cost asset increased during the third quarter. The company believes
that the increase was offset by improved persistency which serves to moderate
the amortization.
11
<PAGE>
Acquisition Costs Deferred. The deferral of policy acquisition costs in the
three month period ended September 30, 1995 increased 59.9% to $7,287,188,
compared to $4,556,338 in the same period in 1994. The ratio of deferred policy
acquisition costs to first year premiums was 71.0% in the three month period
ended September 30, 1995 compared to 68.0% in the same period during 1994. These
increases were due to the Company's deferral of policy acquisition costs related
to life premiums, which were not being deferred in the first three quarters of
1994. These dollar increases were also due to the increase in first year
accident and health premiums discussed above.
General and Administrative Expenses. General and administrative expenses in
the three month period ended September 30, 1995 increased 17.9% to $3,033,698,
compared to $2,572,711 in the same period in 1994. This increase was due to
increases in marketing and underwriting costs associated with the introduction
of a new product and increased sales. The ratio of general and administrative
expenses to total revenues decreased to 10.6% in the three month period ended
September 30, 1995 compared to 11.6% in the same period during 1994.
First Year Commissions. First year commissions on accident and health
business in the three month period ended September 30, 1995 increased 58.5% to
$6,517,477, compared to $4,113,220 in the same period in 1994, corresponding to
the increase in first year accident and health premiums. The ratio of first
year accident and health commissions to first year accident and health premiums
was 66.0% in the three month period ended September 30, 1995, compared to 66.3%
in the same period in 1994.
First year commissions on life business in the three month period ended
September 30, 1995 decreased 18.8% to $308,683, compared to $380,211 in the same
period in 1994, corresponding to the decrease in first year life premiums. The
ratio of first year life commissions to first year life premiums was 80.9% in
the three month period ended September 30, 1995 compared to 77.2% in the same
period in 1994, reflecting a commission structure which varies with the premium
payment terms of policies.
Renewal Commissions. Renewal commissions on accident and health business in
the three month period ended September 30, 1995 increased 21.9% to $2,389,987,
compared to $1,960,669 in the same period in 1994, consistent with the increase
in renewal premiums discussed above. The ratio of renewal accident and health
commissions to renewal accident and health premiums was 15.3% in the three month
period ended September 30, 1995 compared to 14.4% in the same period in 1994.
This ratio fluctuates in relation to the age of the policies in force and the
rates of commissions paid to the agents.
12
<PAGE>
Provision for Federal Income Taxes. The provision for federal income taxes
recorded by the Company in the three month period ended September 30, 1995
increased 86.6% to $1,004,000, compared to $538,000 in the same period in 1994.
The effective tax rate increased from 24.7% in the three month period ended
September 30, 1994 to 30% in the same period in 1995. The tax for the third
quarter 1994 reflects adjustments to revise the estimated annual effective tax
rate. The Company's effective tax rate was below the normal federal corporate
rate as a result of deductions allowed for small life insurance companies as
well as the Company's tax-exempt investment income.
Nine Months Ended September 30, 1995 and 1994:
Accident and Health Premiums. First year accident and health premiums earned
by the Company in the nine month period ended September 30, 1995, including
long-term care and Medicare supplement, increased 35.3% to $26,603,300, compared
to $19,661,065 in the same period in 1994.
First year long-term care premiums earned by the Company in the nine month
period ended September 30, 1995 increased 35.9% to $26,410,217, compared to
$19,431,365 in the same period in 1994. This increase was attributable to
increased sales of home health care policies, which increased to $9,217,563 for
the nine month period ended September 30, 1995 from $3,232,105 for the same
period in 1994 and continued strong sales of nursing home care policies, which
increased from $16,199,260 in the nine month period ended September 30, 1994 to
$17,192,654 in the same period in 1995. These results reflect increasing market
demand for the Company's home health care policies relative to its nursing home
policies and the Company's marketing focus on its home health care Independent
Living policy first introduced in the fourth quarter of 1994. First year
Medicare supplement premiums earned by the Company in the nine month period
ended September 30, 1995 decreased 15.9% to $193,083, compared to $229,700 in
the same period in 1994. This decrease was due to the Company's continued de-
emphasis of its Medicare supplement products because of lower profit margins
associated with this line of business.
Renewal accident and health premiums earned by the Company in the nine
month period ended September 30, 1995, including long-term care and Medicare
supplement, increased 18.6% to $46,363,391, compared to $39,087,422 in the same
period in 1994.
Renewal long-term care premiums earned by the Company in the nine month
period ended September 30, 1995 increased 20.6% to $44,241,488, compared to
$36,677,381 in the same period in 1994. This increase reflects renewals of a
larger base of in-force policies as well as the effect of rate increases the
Company received in various states. The Company believes that this increase also
reflects an increase in persistency. Renewal Medicare
13
<PAGE>
supplement premiums earned by the Company in the nine month period ended
September 30, 1995 decreased 12.0% to $2,121,903, compared to $2,410,041 in the
same period in 1994, consistent with the Company's de-emphasis in marketing this
product discussed above.
Life Premiums. First year life premiums earned by the Company in the nine
month period ended September 30, 1995 decreased 24.0% to $1,264,120, compared to
$1,662,608 in the same period in 1994. This change was attributable to record
sales of the Company's life insurance products during 1994, particularly in the
first quarter of 1994 resulting from the Company's focused marketing efforts in
late 1993 and early 1994 related to the introduction of these new products.
Since the first quarter of 1994, first year life premiums have been negatively
impacted by the Company's utilization of stricter underwriting standards.
Renewal life premiums earned by the Company in the nine month period ended
September 30, 1995 increased 271.4% to $1,123,864, compared to $302,611 in the
same period in 1994. This increase was primarily the result of renewals of
first-year policies written in 1994.
Net Investment Income. Net investment income earned by the Company for the
nine month period ended September 30, 1995 increased 31.2% to $5,666,792, from
$4,318,282 for the same period in 1994. This increase was primarily the result
of growth in the Company's investment assets due to continued premium growth and
additional funds of $22,065,000 from the Company's recent public offering which
were offset by a decrease in the average yield on the Company's investments to
6.2% for the nine month period ended September 30, 1995 from 6.6% for the same
period in 1994.
Benefits to Policyholders. Accident and health benefits to policyholders in
the nine month period ended September 30, 1995 increased 36.3% to $46,314,600,
compared to $33,975,803 in the same period in 1994. The Company's accident and
health loss ratio (the ratio of benefits to policyholders to total accident and
health premiums) was 63.5% in the nine month period ended September 30, 1995,
compared to 57.8% in the same period in 1994. This increase in loss ratio was
due to (i) refinement of actuarial data used to calculate return of premium
benefits and (ii) modification of assumptions used to reflect benefit payment
frequency. The refinement of actuarial data and modification of assumptions
were recommended by the Company's actuarial consultant. Reserves are increased
on the anniversary date of the policy.
Life benefits to policyholders in the nine month period ended September
30, 1995 increased to $1,184,082, compared to $450,298 for the same period in
1994. The life loss ratio was 49.6% in the nine month period ended September 30,
1995, compared to 22.9% for the same period in 1994. These increases in benefits
and the
14
<PAGE>
Company's life loss ratio are a result of the sale of the Company's new life
insurance products which were introduced in late 1993.
Acquisition Costs Amortized. The amortization of deferred policy acquisition
costs in the nine month period ended September 30, 1995 decreased 3.6% to
$9,656,786, compared to $10,022,470 in the same period in 1994. The Company
believes that the amortization was reduced as a result of improved persistency
which serves to moderate the amortization.
Acquisition Costs Deferred. The deferral of policy acquisition costs in the
nine month period ended September 30, 1995 increased 39.1% to $19,790,855,
compared to $14,227,006 in the same period in 1994. The ratio of deferred policy
acquisition costs to first year premiums was 71.0% in the nine month period
ended September 30, 1995 compared to 66.7% in the nine months ended September
30th of 1994. These increases were due to the Company's deferral of policy
acquisition costs related to life premiums, which were not being deferred in the
first and second quarters of 1994. The first quarter of 1994 included the first
significant sales of the Company's new life insurance products, and there was at
that time a degree of uncertainty regarding the assumptions for deferrable
expenses, as is ordinarily the case with recently introduced products. These
increases were also due to the increase in first year accident and health
premiums discussed above.
General and Administrative Expenses. General and administrative expenses in
the nine month period ended September 30, 1995 increased 16.4% to $8,827,055,
compared to $7,580,380 in the same period in 1994. This increase was due to
increases in marketing and underwriting costs associated with the introduction
of a new product and increased sales. The ratio of general and administrative
expenses to total revenues decreased to 10.9% in the nine month period ended
September 30, 1995 compared to 11.6% in the first nine months of 1994.
First Year Commissions. First year commissions on accident and health
business in the nine month period ended September 30, 1995 increased 35.9% to
$17,562,104, compared to $12,920,847 in the same period in 1994, reflecting the
increase in first year accident and health premiums. The ratio of first year
accident and health commissions to first year accident and health premiums was
66.0% in the nine month period ended September 30, 1995, compared to 65.7% in
the same period in 1994.
First year commissions on life business in the nine month period ended
September 30, 1995 decreased 33.1% to $975,343, compared to $1,297,999 in the
same period in 1994, corresponding to the decrease in first year life premiums.
The ratio of first year life commissions to first year life premiums was 77.2%
in the nine month period ended September 30, 1995 compared to 78.1% in the same
15
<PAGE>
period in 1994, reflecting a commission structure which varies with the premium
payment terms of policies.
Renewal Commissions. Renewal commissions on accident and health business in
the nine month period ended September 30, 1995 increased 23.0% to $7,381,518,
compared to $5,999,799 in the same period in 1994, consistent with the increase
in renewal premiums discussed above. The ratio of renewal accident and health
commissions to renewal accident and health premiums was 15.9% in the nine month
period ended September 30, 1995 compared to 15.6% in the same period in 1994.
This ratio fluctuates in relation to the age of the policies in force and the
rates of commissions paid to the agents.
Provision for Federal Income Taxes. The provision for federal income taxes
recorded by the Company in the nine month period ended September 30, 1995
increased 27.8% to $2,635,000, compared to $2,062,000 in the same period in
1994. The effective tax rate increased from 29.0% in the nine month period ended
September 30, 1994 to 30.0% in the same period in 1995. The Company's effective
tax rate was below the normal federal corporate rate as a result of deductions
allowed for small life insurance companies as well as the Company's tax-exempt
investment income.
Liquidity and Capital Resources. The Company's consolidated liquidity
--------------------------------
requirements have historically been created and met from the operations of the
Insurers. The Company's primary sources of cash are premiums and investment
income. The primary uses of cash are policy acquisition costs (principally
commissions), payments to policyholders, investment purchases and general and
administrative expenses.
The Company invests in securities and other investments authorized by applicable
state laws and regulations and follows an investment policy designed to maximize
yield to the extent consistent with liquidity requirements and preservation of
assets. At December 31, 1994, the average maturity of the Company's bond
portfolio was 6.9 years and its cost exceeded market value by 4.6% or
approximately $4,165,000. At September 30, 1995, the average maturity of the
Company's bond portfolio was 6.7 years and its market value exceeded cost by
2.1% or $2,718,000.
On December 28, 1994, the Company entered into an agreement with CoreStates
Bank, N.A., whereby a loan was extended to the Company in an amount of
$4,000,000. The proceeds of the loan were contributed to the surplus of PTLIC
in the form of cash to strengthen its overall capital position. The Company
repaid this loan as required by the loan agreement, with a portion of the
proceeds of the Company's recent public offering of 2,300,000 shares of common
stock. The public offering was consummated on July 6, 1995 and the Company
realized net proceeds of $26,165,000,
16
<PAGE>
including the proceeds from the exercise of the underwriters' over-allotment
option.
On January 1, 1994, the Company adopted SFAS 115. The cumulative effect of
adoption of SFAS 115 was an increase in shareholders' equity of $3,528,512, net
of taxes, for unrealized gains of $5,040,731 in the investment securities
available for sale portfolio. During the year ended December 31, 1994, the
Company experienced a decrease in unrealized gains of $9,205,393. As of
September 30, 1995, shareholders' equity was increased by $2,052,814 due to
unrealized gains of $3,110,324 in the investment portfolio. As of December 31,
1994 shareholders' equity was decreased by $2,713,842 due to unrealized losses
of $4,111,882 in the investment portfolio.
The Company's continued growth is dependent upon its ability to (i) continue
marketing efforts to expand its historical markets, (ii) continue to expand its
network of agents and effectively market its products in states where the
Insurers are currently licensed and (iii) fund such marketing and expansion
while at the same time maintaining minimum statutory levels of capital and
surplus required to support such growth. Management believes that the funds
necessary to accomplish the foregoing, including funds required to maintain
adequate levels of statutory surplus in the Insurers, can be met for at least
the next 24 months by funds generated from the Company's recent public offering
and from operations.
PTLIC's capital position was improved in December 1994 by the Company's
$4,000,000 contribution, and the capital position of the Insurers was improved
further by the contribution of $14,000,000 of the net proceeds of the recent
public offering to the capital and surplus of the Insurers during the third
quarter of 1995. The Insurers are, on a combined basis, currently licensed in
all states except Kansas, Maine, Massachusetts, New Jersey, New York and West
Virginia. The Company believes that the Insurers' capital and surplus presently
meets or exceeds the requirements in all jurisdictions in which they each are
licensed.
17
<PAGE>
PART II OTHER INFORMATION
Item 1. Legal Proceedings
The Insurers are parties to various lawsuits generally arising in the normal
course of their insurance business. The Company does not believe that the
eventual outcome of any of the suits to which the Insurers are currently a party
will have a material effect on the financial condition or result of operations
of the Company.
Item 2. Changes in Securities
Not Applicable
Item 3. Defaults Upon Senior Securities
Not Applicable
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
Not Applicable
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits: Exhibit 11
(b) There were no reports on Form 8-K filed during the quarter for which this
report is filed.
18
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant had duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PENN TREATY AMERICAN CORPORATION
--------------------------------
Registrant
Date November 10, 1995 /s/ Irving Levit
------------------- ----------------------------------
Irving Levit
President
Date November 10, 1995 /s/ Michael F. Grill
------------------ ---------------------------------
Michael F. Grill
Treasurer
19
<PAGE>
EXHIBIT 11
PENN TREATY AMERICAN CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(unaudited)
<TABLE>
<CAPTION>
Three months Nine months
ended September 30, ended September 30,
------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Shares outstanding, 4,671,284 4,668,831 4,671,284 4,666,725
beginning of period
Weighted average shares
issued during the period
Public offering 2,065,217 -- 695,971 --
Exercise of stock options -- -- -- 1,689
Weighted average primary
shares outstanding 6,736,501 4,668,831 5,367,255 4,668,414
--------- --------- --------- ---------
Net income for primary
earnings per share 2,342,834 1,643,949 6,148,235 5,036,224
Net income per common
primary share $0.35 $0.35 $1.15 $1.08
========= ========= ========= =========
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 9-MOS 3-MOS
<FISCAL-YEAR-END> DEC-31-1994 DEC-31-1994
<PERIOD-START> JAN-01-1995 JUL-01-1995
<PERIOD-END> SEP-30-1995 SEP-30-1995
<DEBT-HELD-FOR-SALE> 131,848,469 0
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 2,091,906 0
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 134,009,170 0
<CASH> 11,805,594 0
<RECOVER-REINSURE> 7,475,787 0
<DEFERRED-ACQUISITION> 57,964,667 0
<TOTAL-ASSETS> 223,752,086 0
<POLICY-LOSSES> 48,701,740 0
<UNEARNED-PREMIUMS> 31,208 0
<POLICY-OTHER> 62,887,888 0
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 0 0
<COMMON> 757,691 0
0 0
0 0
<OTHER-SE> 91,665,741 0
<TOTAL-LIABILITY-AND-EQUITY> 223,752,086 0
75,354,675 26,255,597
<INVESTMENT-INCOME> 5,666,792 2,177,418
<INVESTMENT-GAINS> 16,254 2,996
<OTHER-INCOME> 256,429 124,601
<BENEFITS> 47,498,682 16,387,215
<UNDERWRITING-AMORTIZATION> 9,656,786 3,778,342
<UNDERWRITING-OTHER> 15,355,447 5,048,221
<INCOME-PRETAX> 8,783,235 3,346,834
<INCOME-TAX> 2,635,000 1,004,000
<INCOME-CONTINUING> 6,148,235 2,342,834
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 6,148,235 2,342,834
<EPS-PRIMARY> 1.15 .35
<EPS-DILUTED> 1.15 .35
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
