<PAGE>
FORM 10-K
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
For the fiscal year ended December 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from _______________ to _______________
Commission File No. 0-15972
PENN TREATY AMERICAN CORPORATION
--------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-1664166
------------ ----------
(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
3440 Lehigh Street, Allentown, Pennsylvania 18103
------------------------------------------- -----
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 965-2222
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None Not Applicable
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 par value
----------------------------
(Title of class)
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of 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. [X]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 19, 1997 was $203,923,851. The number of shares
outstanding of the registrant's common stock as of March 19, 1997 was
7,518,080.
Documents Incorporated By Reference:
(1) Proxy Statement for the 1996 Annual Meeting of Shareholders - Part III
-1-
<PAGE>
PART I
Item 1. Business
(a) General
The Company is one of the leading providers of long-term nursing home and
home health care insurance. The Company markets its products primarily to
persons age 65 and over through independent insurance agents and underwrites its
policies through three subsidiaries, Penn Treaty Life Insurance Company,
("PTLIC"), Network America Life Insurance Company ("Network America") and
American Network Insurance Company ("ANIC"). The Company's principal products
are individual fixed, defined benefit accident and health insurance policies
covering long-term skilled, intermediate and custodial nursing home care and
home health care. Policies are designed to make the administration of claims
simple, quick and sensitive to the needs of the policyholders. As of December
31, 1996, long-term nursing home care and home health care policies accounted
for approximately 90% of the Company's total annualized premiums in force.
The Company introduced its first long-term nursing home care insurance
product in 1975 and its first home health care product in 1987. In late 1994,
the Company introduced its Independent Living policy, which provides coverage
over the full term of the policy for home care services furnished by an
unlicensed homemaker or companion as well as a licensed care provider. Available
policy riders allow insureds to tailor their policies and include an automatic
annual benefit increase, benefits for adult day-care centers and a return of
premium benefit. The Company also markets and sells life, disability, Medicare
supplement and other hospital care insurance products.
Long-Term Care Industry
Long-term care insurance policies were first introduced in the 1970's.
Significant sales of these policies commenced in the mid 1980's. Typical early
policies provided limited nursing home coverage for a limited benefit period and
were subject to certain restrictions such as prior hospitalization and a
certificate of medical necessity. As awareness of the long-term care needs of
senior citizens has grown, the long-term care insurance industry has responded
with more diverse insurance offerings to provide needed benefits in a
cost-effective fashion. Requirements for prior hospitalization and medical
necessity are no longer standard and benefit periods have been extended up to
the life of the insured. Coverages for custodial care and home health care are
now offered by many insurers.
A survey conducted by a national industry organization estimated that the
number of long-term care policies in force grew from 815,000 in 1987 to
approximately 3,800,000 by the end of 1994. While the number of policies sold
has grown an average of more than 24% annually since 1987, this same survey
indicated that only 11% of the population age 65 and over is covered by
long-term care insurance.
The emphasis on long-term care insurance has evolved primarily as a result
of the aging of society, increasing life expectancies and the escalating cost of
care. According to a 1992 survey of the U.S. Bureau of the Census, by the year
2050 the population age 65 and over is expected to grow to approximately 98
million, or more than three times the 1990 figure, while the population age 85
and over is expected to grow to 26 million, or more than eight times the 1990
figure. Another study has suggested that at age 65 a person has a 43% chance of
being confined to a nursing home during some time in his or her life. The cost
of care has also increased significantly. It has been estimated by the U.S.
Census Bureau that from 1980 to 1990, the cost of care for Medicaid nursing home
residents increased from $8.7 billion to $21.5 billion.
Other factors causing growth of the long-term care insurance industry
include the lack of suitable alternatives for financing long-term care. There
are four primary alternatives to long-term care insurance: government programs
such as Medicare and Medicaid, personal assets, dependence on family members and
life insurance. Medicare offers only limited coverage of the cost of long-term
care. Medicaid is the single largest source of financing for nursing home care
in the U.S. However, since eligibility for Medicaid requires that its recipients
have a very small amount of assets or income, many individuals are forced to
deplete their assets in order to become eligible.
Strategy
-2-
<PAGE>
The Company's objective is to strengthen its position as a leader in
providing long-term care insurance to senior citizens. To meet this objective
and to continue to increase profitability, the Company is implementing the
following strategies:
Developing and qualifying new products with state insurance regulatory
authorities. The Company has been an originator in the field of long-term care
insurance for over twenty years. The Company introduced its Independent Living
policy in 1994 which provides coverage over the full term of the policy for
services furnished by an unlicensed homemaker or companion or a licensed care
provider. Most recently, the Company introduced a Life Plus policy which
provides the security of whole life insurance plus the protection of long-term
care coverage. The Company intends to continue to develop new insurance products
designed to meet the needs of senior citizens and their families.
Increasing the size and productivity of the Company's network of independent
agents. The Company has significantly increased the number of producing agents
(agents who produce premiums for the Company on new policies) selling its
policies by focusing its efforts on certain geographic areas of the country
which have larger concentrations of individuals age 65 and over. The Company
intends to continue to recruit agents in these states and believes that it will
be able to continue to expand its business in these and other states.
Seeking to acquire existing insurance companies and blocks of in-force policies
underwritten by other insurance companies. The Company has augmented its premium
revenue from time to time through the acquisition of existing insurance
companies and blocks of policies underwritten by other insurance companies. The
Company intends to continue to evaluate complementary acquisitions and policy
blocks as a means of enhancing its revenue base.
Introducing existing products in newly licensed states. The Company is currently
licensed to market products in 49 states and the District of Columbia. Although
not all of the Company's products are currently eligible for sale in all of
these jurisdictions, the Company actively seeks to expand the regions where it
sells its products. Through the recent acquisition of ANIC, the company acquired
licenses to conduct business in some new states, including New Jersey and
Massachusetts. These states are considered by the Company's management to offer
significant opportunities for sales growth. In addition, the Company has applied
for a license to underwrite accident and health insurance products in New York.
The Company is also continuing its efforts to broaden its marketing within those
states where it is already licensed.
Corporate Background
The Company, which is registered and approved as a holding company under
the Pennsylvania Insurance Code, was incorporated in Pennsylvania on May 13,
1965 under the name Greater Keystone Investors, Inc., and changed its name to
Penn Treaty American Corporation on March 25, 1987. PTLIC was incorporated in
Pennsylvania under the name Family Security Life Insurance Company on June 6,
1962, and its name was changed to Quaker State Life Insurance Company on
December 29, 1969, at which time it was operating under a limited insurance
company charter. Quaker State Life Insurance Company was acquired by the
Company on May 4, 1976, and its name was changed to Penn Treaty Life
Insurance Company. On July 13, 1989, PTLIC acquired all of the outstanding
capital stock of AMICARE Insurance Company (formerly Fidelity Interstate Life
Insurance Company), a stock insurance company organized and existing under
the laws of Pennsylvania which changed its name to Network America Life
Insurance Company on August 1, 1989. The Agency was incorporated in
Pennsylvania on February 23, 1988 under the name Penn Treaty Service Company.
On February 29, 1988, the Agency acquired, among other assets, the rights to
renewal commissions on a certain block of PTLIC's existing in-force policies
from Cher-Britt Agency, Inc., and an option to purchase the rights to renewal
commissions on a certain block of PTLIC's existing policies from Cher-Britt
Insurance Agency,Inc., an affiliated company of Cher-Britt Agency, Inc. In
connection with this acquisition, on March 3, 1988, the name of the Agency
was changed to Cher-Britt Service Company. The option was exercised on March
3, 1989. The Agency's name was changed to "Senior Financial Consultants
Company" on August 9, 1994. On August 30, 1996, the Company consummated the
acquisition of all of the issued and outstanding capital stock of Health
Insurance of Vermont, Inc. ("HIVT"), which has since changed its name to
American Network Insurance Company.
(b) Insurance Products
Since 1976, the Company has developed, marketed and underwritten fixed,
defined benefit accident and health insurance policies designed to be responsive
to changes in (i) the characteristics and needs of the senior citizen market,
-3-
<PAGE>
(ii) governmental regulations and governmental benefits available for this
population segment and (iii) the health care and long-term care industries in
general. As of December 31, 1996, approximately 90% of the Company's total
annualized premiums in force were derived from long-term care policies which
include nursing home and home health care policies. The Company's other lines of
insurance include (i) life insurance, (ii) Medicare supplement, (iii)
blue-collar disability coverage and (iv) various accident and health policies
and riders. The Company solicits input from both its independent agents and its
policyholders with respect to the changing needs of its insureds. In addition,
Company representatives regularly attend seminars to monitor significant trends
in the industry.
The following table sets forth, as of the dates indicated, and for each
class of policies, the annualized premiums (in thousands) in force, the
percentage of total annualized premiums, the number of policies in force, and
the average premium per policy. Policies are classified by their base coverage
but may include a rider for a different coverage. For example, if a policyholder
purchased a home health care policy with a nursing home rider, premiums
collected in connection with the nursing home rider would be included in the
home health care class.
<TABLE>
<CAPTION>
Year ended December 31,
---------------------------------------------------------------------------------
1994 1995 1996
---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Long term nursing home care:
Annualized premiums $ 67,059 77.4% $ 77,217 70.3% $ 89,692 62.6%
Number of policies 47,525 53,084 60,874
Average premium per policy $ 1,411 $ 1,455 $ 1,473
Long term home health care:
Annualized premiums $ 11,822 13.6% $ 24,881 22.6% $ 38,609 26.9%
Number of policies 12,637 22,967 34,594
Average premium per policy $ 936 $ 1,083 $ 1,116
Disability insurance
Annualized premiums $ 0 0.0% $ 0 0.0% $ 7,092 4.9%
Number of policies 0 0 16,674
Average premium per policy $ 0 $ 0 $ 425
Medicare supplement:
Annualized premiums $ 3,604 4.2% $ 3,246 3.0% $ 3,206 2.2%
Number of policies 2,988 2,527 2,757
Average premium per policy $ 1,206 $ 1,285 $ 1,163
Life insurance:
Annualized premiums $ 2,754 3.2% $ 3,273 3.0% $ 3,629 2.5%
Number of policies 4,012 5,270 6,112
Average premium per policy $ 686 $ 621 $ 594
Other insurance:
Annualized premiums $ 1,389 1.6% $ 1,267 1.2% $ 1,163 0.8%
Number of policies 7,895 7,161 6,509
Average premium per policy $ 176 $ 177 $ 179
Total annualized premiums in force (1) $ 86,628 100% $109,884 100% $143,391 100%
</TABLE>
- ------------
(1) Excludes credit life and credit accident and health insurance premiums in
force. Credit insurance premiums in force are calculated as the cumulative total
of one-time premiums received by the Company for policies issued for terms of up
to 120 months. Credit insurance premiums in force for the years ended December
31, 1994, 1995, and 1996 were approximately $702,000, $453,000 and $199,000,
respectively.
Long-Term Care Generally. The majority of the Company's long-term care policies
are written on an annual basis and provide for guaranteed renewability at then
current premium rates at the option of the insured. The insured may elect to pay
premiums
-4-
<PAGE>
on a monthly, quarterly, semi-annual or annual basis. In addition, the Company
offers an automatic payment feature that allows policyholders to have premiums
automatically withdrawn from a checking account. The Company may increase
premium rates on a particular form of policy only upon approval of the
applicable insurance regulatory authority in each state. Although the insured
may elect to pay premiums on a monthly, quarterly or semi-annual basis, as of
December 31, 1996, premiums on approximately 56.3% of the Company's long-term
care policies in force were paid on an annual basis.
As a supplement to some of its long-term care policies, the Company offers
various riders providing benefits such as an automatic annual benefit increase
to help offset the effects of inflation and a return of premium option. The
return of premium benefit rider provides that after a policy has been in force
for ten years, the policyholder is entitled to a return of 80% of all premiums
paid during the ten year period less any claims paid by the Company. If,
however, claims exceed 20% of the premiums paid during the ten year period, no
return of premium is made. In addition, in most states the rider provides for a
pro-rata return of premium in the event of death or surrender beginning in the
sixth year. The Company also offers and encourages the purchase of home health
care riders to supplement its nursing home policies and nursing home riders to
supplement its home health care policies.
In the past, the Company offered numerous other riders to supplement its
long-term care policies. The need, however, for many of these riders has been
eliminated due to the incorporation of many of these benefits into the basic
coverage under the Company's newest long-term care policies. Among the built-in
benefits provided under the long-term care policies currently marketed by the
Company are hospice care and adult day care benefits, survivorship benefits,
restoration of benefits and a guaranteed upgrade option pursuant to which the
policyholder may increase the benefits available under the policy during the
first two years if no claims have been made. These policies also provide a
yearly wellness benefit (a payment made to policyholders who have not made a
claim) after the first year of the policy.
Long-Term Nursing Home Care. The Company's long-term nursing home care policies
generally provide a fixed benefit payable during periods of nursing home
confinement prescribed by a physician or necessitated by the policyholder's
cognitive impairment or inability to perform two or more activities of daily
living. These policies include built-in benefits for alternative plans of care,
waiver of premium after 90 days of benefit payments on a claim and unlimited
restoration of the policy's maximum benefit period.
The policies also provide that pre-existing conditions disclosed on the
application are covered immediately as of the effective date of the policy, and
there is no "prior hospitalization" requirement. Historically, most nursing home
policies required that a policyholder must have been discharged from a hospital
within a certain number of days prior to being confined in a nursing home. The
Company has phased out the prior hospitalization requirement on its new policies
and has made a policy rider to eliminate the prior hospitalization requirement
available to policyholders of the Company's older policies. Additionally, all
levels of nursing care, including skilled, custodial and intermediate care, are
covered and benefits continue even when the policyholder's required level of
care changes. Skilled nursing care refers to professional nursing care provided
by a medical professional (a doctor or registered or licensed practical nurse)
located at a licensed facility which cannot be provided by a non-medical
professional. Custodial care refers to non-medical care which does not require
professional treatment and can be provided by a non-medical professional with
minimal or no training. Intermediate nursing care is designed to cover
situations which would otherwise fall between skilled and custodial care and
includes situations in which an individual may require skilled assistance on a
sporadic basis.
The Company's current long-term nursing home care policies provide benefits
which are payable over periods ranging from one to five years and lifetime.
These policies provide for a fixed daily benefit ranging from $40 to $200 per
day. Certain of the Company's nursing home care policies provide benefits which
are payable over periods ranging from six months to five years and lifetime, and
from $800 to $5,000 per month of nursing home benefits. According to an
independent study published in 1994, the average cost of nursing home care was
estimated to be approximately $37,000 per year, resulting in an aggregate of
more than $85,000 for the average nursing home stay of approximately 2.3 years.
Long-Term Home Health Care. The Company's home health care policies generally
provide a benefit payable on an expense-incurred basis during periods of home
care prescribed by a physician or necessitated by the policyholder's cognitive
impairment or inability to perform two or more activities of daily living. These
policies cover the services of registered nurses,
-5-
<PAGE>
licensed practical nurses, home health aides, physical therapists, speech
therapists, medical social workers and other similar home health practitioners.
Benefits for home health care policies currently being marketed by the Company
are payable over periods ranging from six months to five years and lifetime and
provide from $40 to $160 per day of home benefits. The Company also has policies
outstanding that provide benefits which are payable over periods ranging from
six months to three years and in amounts ranging from $5.00 to $20.00 per hour
of home benefits subject to a limit of eight hours per day. Some of these
policies require prior hospitalization as a condition to receipt of benefits. On
all home health care policies sold by the Company since 1993, pre-existing
conditions disclosed on an application are not covered during the initial six
months following the effective date of the policy and there is no prior
hospitalization requirement. The Company's home health care policies also
include built-in benefits for waiver of premium and unlimited restoration of the
policy's maximum benefit period.
A recent addition to the Company's long-term care product line is its
Independent Living policy. This policy was first introduced in the fourth
quarter of 1994. This policy provides coverage over the full term of the policy
for services furnished by a homemaker or companion, including a member of the
insured's family, who is not a qualified or licensed care provider
("Homemaker/Companion Services"). Homemaker/Companion Services include cooking,
shopping, housekeeping and assisting the insured with such activities as
laundry, correspondence, using the telephone and paying bills. Historically,
only limited coverage had been provided under certain of the Company's home
health care policies for Homemaker/Companion Services, typically for a period of
up to 30 days per calendar year during the term of the policy.
The Independent Living policy provides that the Company will waive the
elimination period, the time at the beginning of the period during which care
is provided for which no benefits are available under the policy (usually
twenty days), if the insured agrees to utilize an independent case management
agency ("Case Manager") referred by the Company. The Case Manager is engaged
by the Company at the time a claim is submitted to prepare a written
assessment of the insured's condition and to establish a written plan of
care. The Company believes that the Independent Living policy, which
represents a significant expansion of the benefits previously available for
Homemaker/Companion Services, is the first of its kind. The Company has
subsequently incorporated the use of Case Management in all of its new home
healthcare policies.
Disability Insurance. The Company underwrites and markets disability income
insurance entirely on an individual basis through ANIC. The various
disability policies concentrate on serving working class or "blue collar"
individuals or employees. The policies provide for benefit periods ranging
from 6 months to 60 months with monthly benefit amounts ranging from $250 to
$3,000. The Company also offers mortgage disability and accident only
disability policies.
Life Insurance. Beginning in August 1993, the Company began to market actively
its whole life insurance products which were approved by various state insurance
authorities during 1992 and 1993. These policies have face amounts of $2,000 to
$25,000 for individuals age 50-80 years and $2,000 to $10,000 for individuals
age 80-85 years. For the convenience of the insured, the Company offers three
premium payment options for these policies: (i) monthly, quarterly, semi-annual
or annual payments; (ii) one-time single premium payment; or (iii) two, three
and five year payment plans. These policies were developed to be sold by the
Company's agents to senior citizens so as to complete the Company's portfolio of
insurance products.
The most recent addition to the Company's long-term care product line is
its Life Plus policy. This policy was first introduced during the third quarter
of 1996 and is currently being marketed in those states in which regulatory
approval has been received. This product is a whole life insurance policy that
also offers the protection of long-term care coverage. When policyholders
purchase this policy, with face value benefits ranging from $50,000 to $250,000,
they have the option of customizing their policy by electing to add a nursing
home and/or home health care rider. The policyholder may then access up to the
face amount of the policy for nursing home or home health care as needed. This
reduces the face amount of the policy at a rate of 4% a month for nursing home
benefits received and 2% a month for home health care benefits received.
The life insurance products currently marketed by the Company have been
designed for the senior citizen market. The Company previously marketed life
insurance policies, including annual renewable term and whole life policies, to
all ages of insureds.
Medicare Supplement. The Company writes policies designed to provide coverage to
supplement benefits available under Medicare, such as payment of deductible
amounts. OBRA `90 enacted various changes in Medicare reimbursement, set more
stringent standards for Medicare supplement insurance policies and required that
states adopt these new standards by July 31, 1992. OBRA `90 sets forth ten
federally standardized benefit plans of which the Company offers five such plans
in most states. With respect to these benefit packages, every company writing
Medicare supplement coverages must adopt at least the Basic Plan, which covers
Medicare Part A coinsurance amounts for in-patient hospitalization (without the
Part A deductible), the cost of the first three pints of blood and 20% of
allowable charges under Medicare Part B. The other nine plans provide for the
Basic Plan coverage in addition to more extensive benefits such as skilled
nursing home coinsurance amounts, the Medicare
-6-
<PAGE>
Part A deductible, the Medicare Part B deductible, 100% of Medicare Part B
Excess Charges, Foreign Travel Emergency Care, At-Home Recovery, Extended Drug
Coverage and Preventive Care.
All Medicare supplement benefit plans offered by the Company are subject to
"open enrollment" and the Company is required to issue a policy to any person
applying for Medicare supplement insurance within six months of becoming
eligible for Medicare Part B, which generally occurs within the first six months
after a person's 65th birthday.
Because of lower profit margins associated with the Company's Medicare
supplement products, the Company has gradually de-emphasized the marketing of
these products. Medicare supplemental premiums represented 2.2% of the Company's
annualized premiums in-force for the period ended December 31, 1996.
Other Insurance. The Company also sells other insurance products including
accidental death and dismemberment policies, and cancer policies, of which
the aggregate premiums represented 0.8% of the Company's total annualized
premium in-force as of December 31, 1996.
(c) Marketing and Expansion
The Company's goal is to underwrite, market and sell its products
throughout the United States. The Company focuses its marketing efforts
primarily in those states (i) where it has successfully developed networks of
agents and (ii) which have the highest concentration of individuals whose
financial status and insurance needs are compatible with its products.
Agents. The Company employs no agents directly but relies instead on
relationships with independent agents and their sub-agents. In 1996, the
Company's policies were marketed through approximately 7,500 producing
agents, an increase of 46% over the number of producing agents in 1995. The
Company provides assistance to its agents through the use of seminars,
underwriting training and field representatives who consult with agents on
underwriting matters, assist agents in research and accompany agents on
marketing visits to current and prospective policyholders.
-7-
<PAGE>
Each independent agent must be authorized by contract to sell the Company's
products in each particular state in which the agent and the Company are
licensed. Some of the Company's independent agents are large general agencies
with many sales persons (sub-agents), while others are individuals operating as
sole proprietors. Some independent agents sell multiple lines of insurance,
while others concentrate primarily or exclusively on accident and health
insurance.
The Company generally does not impose production quotas or assign exclusive
territories to agents. The amount of insurance written for the Company by
individual independent agents varies. The Company periodically reviews and
terminates its agency relationships with non-producing or under-producing
independent agents or agents who do not comply with the Company's guidelines and
policies with respect to the sale of its products.
The Company is actively engaged in recruiting and training new agents.
Sub-agents are recruited by the independent agents and are licensed by the
Company with the appropriate state regulatory authorities to sell the Company's
policies. Independent agents are generally paid higher commissions than those
employed directly by an insurance company, in part to account for the expenses
of operating as an independent agent. The Company believes that the commissions
it pays to independent agents are competitive with the commissions paid by other
insurance companies selling similar policies. The independent agent's right to
renewal commissions is vested and commissions are paid as long as the policy
remains in force, provided the agent continues to abide by the terms of the
contract. The Company generally permits its established independent agents to
collect the initial premium with the application and remit such premium to the
Company less the commission. New independent agents are required to remit the
full amount of initial premium with the application. The Company provides
assistance to its independent agents in connection with the processing of
paperwork and other administrative services.
Marketing General Agents. The Company selectively utilizes marketing general
agents for the purpose of recruiting independent agents and developing networks
of agents in various states. The Company has a marketing general agent for the
purpose of generating business for PTLIC and Network America in various states.
This marketing general agent receives an overriding commission on business
written in return for recruiting, training, and motivating the independent
agents. In addition, this marketing general agent functions as a general agent
for PTLIC and Network America in various states. In its capacity as marketing
general agent and general agent, this agent accounted for 20%, 18% and 21% of
the total premiums earned by the Company during 1994, 1995 and 1996,
respectively.
General Agents. The ten independent general agents accounting for the most
new business premium revenue accounted for approximately 27% of the Company's
new business written during 1996. In 1996, no independent general agents,
other than the marketing general agent discussed above, accounted for more
than 10% of the Company's total premium income. No underwriting or claims
processing authority has been delegated to any agents of the Company.
Group and Franchise Insurance. The Company also sells a relatively small amount
of group insurance. True group insurance ("Group Insurance") may be sold by the
Company through the issuance of a Group Master Policy to a group formed for
purposes other than the purchase of insurance, such as an employee group, an
association or a professional organization. The Group Master Policy is issued to
the group and all participating members are issued certificates of insurance
which describe the benefits available under the policy. Eligibility for
insurance is guaranteed to all members of the group without an underwriting
review on an individual basis. The Company also sells franchise insurance
("Franchise Insurance") from time to time. While Franchise Insurance is
generally presented to an employee group, association or professional
organization which endorses the insurance, the policies are issued to individual
group members. Each application is underwritten and issuance of policies is not
guaranteed to members of the franchise group. The Company is currently seeking
to expand its Group Insurance and Franchise Insurance business and has recently
enhanced its marketing efforts towards this end. The Company's management
considers these areas to offer significant opportunities for sales growth.
Markets. The following chart shows premium revenues by state for each of the
states where the Company does business:
-8-
<PAGE>
Year Ended December 31,
Year -------------------------------------
State Entered (l) 1994 1995 1996
----- ----------- ---- ---- ----
(in thousands)
Arizona 1988 $ 2,466 $ 3,603 $ 5,284
California 1992 4,585 9,379 17,403
Florida 1987 29,372 33,116 38,394
Georgia 1990 1,061 995 1,545
Illinois 1990 3,185 4,084 5,160
Iowa 1990 945 1,459 1,805
Maryland 1987 1,775 1,969 2,441
Missouri 1990 2,156 2,540 2,673
Nebraska 1990 1,101 1,222 1,538
North Carolina 1990 1,643 2,046 3,074
Ohio 1989 2,476 2,989 3,682
Pennsylvania 1972 17,628 19,680 22,056
South Dakota 1990 1,123 1,487 1,845
Texas 1990 1,851 2,887 3,550
Virginia 1989 5,570 7,903 10,532
Washington 1993 648 1,165 2,147
All Other States (2) 4,250 5,843 7,063
-------- -------- --------
All States $ 81,835 $102,367 $130,192
======== ======== ========
- -----------
(1) Represents year in which the Company commenced sale of policies in each
state.
(2) Includes all states in which premiums represented one percent or less of
the Company's total premiums in 1996.
(d) Administration
Underwriting.
The Company believes that the underwriting process through which an
accident and health insurance company, particularly one in the long-term care
segment, chooses to accept or reject an applicant for insurance is critical to
its success. All applications are reviewed by the Company's in-house
underwriting department and must be approved before a policy can be issued. The
Company considers age and medical history, among other factors, in deciding
whether to accept an application for coverage. With respect to medical history,
efforts are made to underwrite on the basis of the medical information listed on
the application, but an Attending Physician's Statement is often requested. In
all cases, a personal history interview is required, and a paramedic interview
is often conducted. In the event the Company determines that it cannot offer the
requested coverage, an alternative for suitable coverage for higher risk
applicants may be suggested to the agent. Accepted policies are usually issued
within seven working days from receipt of the information necessary to
underwrite the application. As noted above, while there is no individual
underwriting process for Group Insurance, the underwriting for Franchise
Insurance written by the Company is identical to that for individual policies.
In order to expedite the large volume of premiums generated from sales of
policies in Florida, the increasing volume of premiums from sales of policies in
California, and the specialization required in the sale and underwriting of
disability coverage, the Company operates field offices in Sarasota, Florida,
Stockton, California and Colchester, Vermont to underwrite and issue policies.
These regional offices enable the Company to respond more effectively and
efficiently to its agents and policyholders across the United States.
Applicants for insurance must respond to detailed medical questionnaires.
Physical examinations are not required for the Company's accident and health
insurance policies, but medical records are frequently requested. Pre-existing
conditions
-9-
<PAGE>
disclosed on the application for new long-term nursing home care policies are
covered immediately upon approval of the policy by the Company's underwriting
department, while undisclosed pre-existing conditions are not covered for six
months in most states and two years in certain other states. On certain of the
Company's older nursing home policy forms and all home health care policies,
pre-existing conditions disclosed on the application are not covered during the
initial six months following the effective date of the policy and undisclosed
pre-existing conditions are not covered for up to two years. In the case of
individual Medicare supplement policies, pre-existing conditions are generally
not covered during the six month period following the effective date of the
policy.
Claims.
All claims for policy benefits, except with respect to Medicare supplement
claims, are currently processed by the Company's claims department, which
includes physicians and nurses employed or retained as consultants by the
Company. From November 1, 1993 through July 31, 1994, all claims for policy
benefits, including Medicare supplement claims, were processed through an
unaffiliated third party administrator. In mid-1994, management decided to
process all claims (except the Medicare supplement claims) through the Company's
home office claims department. The Company transferred the processing of its
Medicare supplement claims to a new unaffiliated third party administrator,
effective March 1, 1995. The Company has historically utilized third party
administrators to process its Medicare supplement claims due to the typically
small amount per claim and the large number of claims. The processing of all
disability claims is performed by ANIC.
The Company periodically utilizes the services of unaffiliated Case
Managers to review certain claims, particularly those made under home health
care policies. When a claim is filed, the Company may engage the Case Manager
to review the claim, including the specific health problem of the insured and
the nature and extent of health care services being provided. The Case
Manager assists both the Company and the insured by determining that the
services provided to the insured, and the corresponding benefits paid by the
Company, are appropriate under the circumstances. Under the terms of its
Independent Living policy, the Company will waive the elimination period, the
time at the beginning of the period during which care is provided for which
no benefits are available under the policy (usually twenty days), if the
insured agrees to utilize a Case Manager. The Company estimates that
approximately 95% of all new home health care claims submitted in the last
year have been submitted to Case Managers. The Company anticipates that this
usage will continue as both its business and the need to manage effectively
the processing of claims grow.
Systems Operations.
The Company operates and maintains its own computer system for all
aspects of the Company's operations, including: policy issuance; billing;
claims processing; commission reports; premium production by agent (state and
product) and general ledger. During 1995, the Company commenced the
installation of a new computer system, including hardware and a variety of
applications software, which will enable the Company to (i) define and refine
its underwriting and claims functions so that data may be analyzed more
usefully, (ii) target agents and consumers more effectively and (iii)
continue to manage the increasing volume of information as the Company's
business grows. The Company considers an enhanced system critical to its
ability to continue to provide the quality of service for which the Company
has been known to its policyholders and agents. The Company is using both
in-house programmers and outside consultants in installing the system, and
expects portions of the new system to be fully operational during 1997. The
Company will continue to utilize its current system in an enhanced mode,
until a more-efficient application is installed.
(e) Premiums
Premium rates for all lines of insurance written by the Company are subject
to state by state regulation. Premium regulations vary greatly among
jurisdictions and lines of insurance. Rates for the Company's insurance policies
are established by the Company's independent actuarial consultants and reviewed
by the insurance regulatory authorities as part of the licensing process in the
states where the Company markets its products. Before a rate change can be made,
the proposed change must be filed with and approved by the insurance regulatory
authorities.
-10-
<PAGE>
As a result of minimum loss ratio standards imposed by state regulations,
the premiums charged by the Company with respect to all of its accident and
health polices are subject to reduction and/or corrective measures in the event
insurance regulatory agencies in states where the Company does business
determine that the Company's loss ratios either have not reached or will not
reach required minimum levels. See "Business--Government Regulation".
(f) Future Policy Benefits and Claims Reserves
The Company is required to maintain reserves equal to the probable ultimate
liability for claims and related claims expenses with respect to all policies in
force. Reserves, which are computed by the Company's actuarial consultant, are
established for (i) claims which have been reported but not yet paid, (ii)
claims which have been incurred but not yet reported and (iii) the discounted
present value of all future policy benefits less the discounted present value of
expected future premiums. See Note 4 of the Notes to Consolidated Financial
Statements.
The amount of reserves relating to reported and unreported claims incurred
is determined by periodically evaluating historical claims experience and
statistical information with respect to the probable number and nature of such
claims. The Company compares actual experience with estimates and adjusts its
reserves on the basis of such comparisons.
In addition to reserves for incurred claims, reserves are also established
for future policy benefits. The policy reserve represents the discounted present
value of future obligations that are likely to arise from the policies that the
Company underwrites, less the discounted present value of expected future
premiums on such policies. The reserve component is determined using generally
accepted actuarial assumptions and methods. However, the adequacy of this
reserve rests on the validity of the underlying assumptions that were used to
price the Company's products; the more important of these assumptions relate to
policy lapses, loss ratios and claim incidence rates.
The Company's long-term care experience, most of which is based on its
nursing home care products, is derived from the Company's twenty years of
significant claims experience with respect to this product line, and reserves
for these policies are based primarily upon this experience.
The Company began offering home health care coverage in 1987, and since
that time has realized a significant increase in the number of home health care
policies written by the Company. The Company's claims experience with home
health care coverage is more limited than is its nursing home care claims
experience, and the Company's claims experience with respect to its Independent
Living policy, which it first offered in November 1994, is extremely limited.
The Company's claims experience to date with respect to certain of its home
health care products has been characterized by a higher than expected number of
claims with a longer than expected duration. Management of the Company believes
that individuals may be more inclined to utilize home health care than nursing
home care, which is generally a last resort to be considered only after all
other possibilities have been explored. Accordingly, management believes that
there is a greater potential for wide variations in claims experience in its
home health care insurance than exists with respect to nursing home care
insurance. The Company's actuarial consultants utilize both the Company's
experience and other industry-wide data in the computation of reserves for the
home health care product line.
In addition, more recent long-term care products, developed as a result of
regulation or market conditions, may incorporate more benefits with fewer
limitations or restrictions. For instance, OBRA '90 required that Medicare
supplement policies provide for guaranteed renewability and waivers of
pre-existing condition coverage limitations under certain circumstances. In
addition, the NAIC has recently adopted model long-term care policy language
providing nonforfeiture benefits and has proposed a rate stabilization standard
for long-term care policies, either or both of which may be adopted by the
states in which the Company writes policies. See "Government Regulation." The
fluidity in market and regulatory forces might limit the Company's ability to
rely on historical claims experience for the development of new premium rates
and reserve allocations.
The Company employs full-time actuarial support and utilizes the services
of actuarial consultants (the "Actuaries"), to price insurance products and
establish reserves with respect to those products. Additionally, the actuaries
assist the Company in improving the documentation of its reserve methodology, a
process which has resulted in certain adjustments to the Company's reserve
levels. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations-
-11-
<PAGE>
Overview." Although management believes that the Company's reserves are adequate
to cover all policy liabilities, there can be no assurance that reserves are
adequate or that future claims experience will be similar to, or accurately
predicted by, the Company's past or current claims experience.
(g) Reinsurance
As is common in the insurance industry, the Company purchases reinsurance
to increase the number and size of the policies it may underwrite. Reinsurance
is purchased by insurance companies to insure their liability under policies
written to their insureds. By transferring, or ceding, certain amounts of
premium (and the risk associated with that premium) to reinsurers, the Company
can limit its exposure to risk. The Company currently reinsures any life
insurance policy to the extent the risk on that policy exceeds $50,000. The
Company currently reinsures its ordinary life policies through Reassurance
Company of Hannover (A.M. Best rating A-). The Company also has reinsurance
agreements with Life Insurance Company of North America (A.M. Best rating A+)
and Transamerica Occidental Life Insurance Company (A.M. Best rating A+) to
reinsure term life policies whose risk exceeds $15,000, and with Employers
Reassurance Corporation (A.M. Best rating A+) to reinsure credit life policies
whose risk exceeds $15,000.
PTLIC and Network America have entered into a reinsurance agreement,
effective in January 1994, to cede 100% of certain life, accident and health and
Medicare supplement insurance policies issued by PTLIC and Network America to
Life and Health Insurance Company of America ("Life and Health") (A.M. Best
rating B-), an unaffiliated insurer. This arrangement, known as a "fronting"
arrangement, is used when one insurer wishes to take advantage of another
insurer's ability to procure and issue policies. The fronting company remains
liable to the policyholder, even though all of its risk is reinsured. Because of
Life and Health's A.M. Best rating, PTLIC and Network America have structured
their agreement with Life and Health to require maintenance of securities in
escrow for PTLIC and Network America in an amount at least equal to their
statutory reserve credit. The value of these escrowed securities, which consist
of U.S. government bonds, exceeded PTLIC's and Network America's related
statutory and GAAP reserve credits as of December 31, 1996, which were
approximately $530,000. The policies subject to this fronting arrangement are
being marketed in six states to federal employees. Premium ceded under this
agreement totaled $984,600, $943,500 and $882,465 in 1994, 1995 and 1996,
respectively.
In January 1991, Network America entered into another fronting
arrangement under which Network America ceded 100% of certain whole life and
deferred annuity policies to Provident Indemnity Life Insurance Company
("Provident Indemnity"), (A.M. Best rating B-), an unaffiliated insurer. No
new policies have been ceded under this arrangement since December 31, 1995.
As a result, Network America has structured its agreement with Provident
Indemnity to require maintenance of securities in escrow for Network America
in an amount at least equal to its statutory reserve credit. The value of
these escrowed securities, which consist of U.S. government bonds, exceeded
Network America's related statutory reserve credit as of December 31, 1996 of
approximately $3,673,000, but was less than Network America's GAAP reserve
credit as of December 31, 1996, which was approximately $4,825,000. The
policies which are subject to this fronting agreement were intended for the
funeral arrangement or "pre-need" market, and were being underwritten in 24
states (with the largest markets in California and Michigan). Total ceded
life insurance in force approximated $8,018,000, $14,169,000 and $12,121,000
for 1994, 1995 and 1996, respectfully.
Effective in October 1994, the Insurers entered into reinsurance agreements
with Cologne Life Reinsurance Company (A.M. Best rating A+) with respect to
their home health care policies with benefit periods exceeding 36 months. Under
these reinsurance agreements, the Insurers are responsible for payment of claims
during the first 36 months of the benefit period, and the reinsurer will
reimburse the Insurers for 100% of all claims paid after such 36 month period.
Total reserve credits taken related to this agreement as of December 31, 1996
were approximately $859,000.
In May 1991, Network America acquired a block of long-term care business
under an assumption reinsurance agreement with Providentmutual Life and Annuity
Company of America (formerly known as Washington Square Life Insurance Company),
an unaffiliated insurance company. Network America assumed the obligations as
insurer for all policies in force as of that date. Network America received cash
totaling $1,512,300, net of $513,500 as consideration for the sale. Under this
agreement, Network America assumed a reinsurance treaty under which 66% of the
premiums assumed are, in turn, ceded by Network America to a third party
reinsurer. The total accident and health premiums ceded under this treaty
amounted to $1,287,502 in 1994, $1,174,792 in 1995 and $1,081,380 in 1996.
-12-
<PAGE>
On December 28, 1990, Network America entered into a reinsurance agreement
with Midland Mutual Life Insurance Company (A.M. Best rating A-) under which
Network America acquired approximately 3,100 nursing home policies in 22 states
with an annualized premium of approximately $3,000,000. The Company recognized
$1,886,790 of premium related to this acquisition in 1994, $1,768,467 in 1995
and $1,661,725 in 1996.
In the event a reinsurance company becomes insolvent or otherwise fails to
honor its obligations to the Company under any of its reinsurance agreements,
the Company would remain fully liable to the policyholder.
ANIC reinsures approximately $500,000 of premium with three Vermont
licensed companies. For a discussion of the amounts reinsured by the Company,
see Note 11 of the Notes to Consolidated Financial Statements.
For a discussion of A.M. Best ratings, see "A. M. Best Ratings and
Standard & Poor's Ratings."
(h) Investments
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. Investments are managed by James M. Davidson & Company
of Wayne, Pennsylvania and First Union National Bank of Charlotte, North
Carolina. Over the past five years, the Company has been able to meet its
liabilities through operations and has not had to utilize any of its investment
assets.
The following table shows the composition of the debt securities investment
portfolio (at carrying value), excluding short-term investments, by rating as of
December 31, 1996.
December 31, 1996
-----------------
Rating (1) Amount Percent
-------- --------
(in thousands)
U.S. Treasury and U.S. Agency securities $150,196 74.6%
Aaa or AAA 31,193 15.9%
Aa or AA 13,889 6.9%
A 4,197 2.1%
Other 1,085 0.5%
-------- --------
Total $201,330 100.0%
======== ========
As of December 31, 1996, over 94.7% of the Company's total investments
were fixed income debt securities, 74.6% of which were securities of the
United States Government (or its agencies or instrumentalities). The balance
of the Company's investment portfolio consisted principally of publicly
traded equity securities. As of December 31, 1996, all of the Company's bond
investment portfolio consisted of investment grade securities, with
substantially 100% rated "A" or better by either Moody's Debt Rating Service
or Standard and Poor's Corporation. The Company's investment policy is to
purchase only U.S. Treasury securities, U.S. agency securities and
investment-grade municipal and corporate securities primarily with an "A" or
higher rating with the highest yield to maturity available, and to have 7% to
10% of the Company's bond investment portfolio mature each year. The Company
generally buys investments maturing within two to twelve years of the date of
the purchase. At December 31, 1996, the average maturity of the Company's
bond investment portfolio was 5.8 years and the Company's investment
portfolio contained no collateralized mortgage obligations or investments in
real estate. The Company has historically limited its investments in equity
securities. In 1996, the Company expanded its common stock investments
slightly to approximately 5.3% of its total investments. The Company intends
to limit its common stock investments to 8.0% of its total investments. For
additional information regarding the Company's investments, see Note 3 of the
Notes to Consolidated Financial Statements.
The following table sets forth for the periods indicated certain
information concerning investment income.
-13-
<PAGE>
Investment Portfolio 1994 1995 1996
---- ---- ----
Year Ended December 31,
-----------------------
(Dollar amounts in thousands)
Average balance of investments,
cash and cash equivalents during
the period (1) $ 91,823 $ 125,524 $174,422
Net investment income 5,946 8,103 10,882
Average yield on investments 6.5% 6.5% 6.3%
- ----------
(1) Valued at amortized cost except for common stock which is carried at
market value.
(i) Selected Financial Information: Statutory Basis
The following table shows certain ratios derived from the Company's
insurance regulatory filings with respect to the Company's accident and health
policies presented in accordance with accounting principles prescribed or
permitted by insurance regulatory authorities ("SAP"), which differ from the
presentation under Generally Accepted Accounting Principles ("GAAP") and which
also differ from the presentation under SAP for purposes of demonstrating
compliance with statutorily mandated loss ratios. See Item 1,
"Business--Government Regulation".
Year ended December 31,
-----------------------
1994 1995 1996
---- ---- ----
Loss ratio (1) 59.0% 56.1% 61.5%
Expense ratio (2) 46.9 50.4 48.7
------ ------ ------
Combined loss and expense ratio 105.9 106.5 110.2
Persistency (3) 75.4 77.4 79.9
- ---------------
(1) Loss ratio is defined as incurred claims and increases in policy reserves
divided by earned premiums.
(2) Expense ratio is defined as commissions and expenses incurred divided by
earned premiums.
(3) Persistency represents the percentage of premiums renewed, which the
Company calculates by dividing the total annual premiums at the end of each
year (less first year business for that year) by the total annual premiums
in force for the prior year. For purposes of this calculation, a decrease
in total annual premiums in force at the end of any year would be a result
of non-renewal policies, including those policies that have terminated by
reason of death, lapse due to nonpayment of premiums, and/or conversion to
other policies offered by the Company.
The Company's loss ratio rose in 1995 and continued to rise in 1996 from
the prior year's level due in part to a mandated change in reserving method
wherein underwriters of long-term care products were required by the
Pennsylvania Insurance Department, commencing in October 1994, to use the
one-year preliminary term reserve method, instead of the two-year preliminary
term method previously permitted. This change had the effect of requiring
companies to establish a full annual reserve for a policy commencing at the
end of the first policy year, instead of at the end of the second policy
year. The increase in the persistency rate in 1996 and 1995, signifying a
greater percentage of policy renewals, also caused the loss ratio to
increase. This is due to the fact that as policies age, the reserves
associated with such policies must be increased.
Under SAP, costs associated with sales of new policies must be charged
to earnings as incurred. Because these costs, together with required
reserves, generally exceed first year premiums, statutory surplus may be
reduced during periods of increasing first year sales. Through November 1994,
the Company was able to expand its business from accumulation of statutory
retained earnings and from proceeds received from the Company's Common Stock
offering completed in December, 1989. In December 1994, PTLIC's capital
position was strengthened by a $4,000,000 contribution from the Company. The
-14-
<PAGE>
capital position of the Insurers was improved further by the contribution of
$14,000,000 of the net proceeds of the 1995 public offering to the capital and
surplus of the Insurers during the third quarter of 1995. In October 1996, the
Company contributed an additional $5,000,000 of the offering proceeds to Network
America. In December 1996, the Company contributed $20,000,000, $20,000,000 and
$5,000,000 to the capital and surplus of PTLIC, Network America, and ANIC,
respectively, from the proceeds of its $74,750,000 convertible subordinated debt
offering in November 1996.
Mandated loss ratios are calculated in a manner which provides adequate
reserving for the long-term care insurance risks, using statutory lapse rates
and certain assumed interest rates. The statutorily assumed interest rates
differ from those used in developing reserves under GAAP. For this reason,
statutory loss ratios differ from loss ratios reported under GAAP. Mandatory
statutory loss ratios also differ from loss ratios reported on a current basis
under SAP for purposes of the Company's annual and quarterly state insurance
filings. The states in which the Company is licensed have the authority to
change these minimum ratios and to change the manner in which these ratios are
computed and the manner in which compliance with these ratios is measured and
enforced. The Company is unable to predict the impact of (i) the imposition of
any changes in the mandatory statutory loss ratios for individual or group
long-term care policies to which the Company may become subject, (ii) any
changes in the minimum loss ratios for individual or group long-term care 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 minimums, and the Company
believes 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 its premiums on such policies.
(j) A.M. Best's Rating and Standard & Poor's Rating
The Insurers rating with A.M. Best is "B++ (very good)." A.M. Best's
ratings are based on a comparative analysis of the financial condition and
operating performance for the prior year of the companies rated, as determined
by their publicly available reports. A.M. Best's classifications are A++ and A+
(superior), A and A- (excellent), B++ and B+ (very good), B and B-(good), C++
and C+ (fair), and C and C- (marginal), D (below minimum standards), E (under
state supervision) and F (in liquidation). A.M. Best's ratings are based upon
factors of concern to policyholders and insurance agents and are not directed
toward the protection of investors. In evaluating a company's financial and
operating performance, the rating agencies review the company's profitability,
leverage and liquidity as well as the company's book of business, the adequacy
and soundness of its reinsurance, the quality and estimated market value of its
assets, the adequacy of its reserves and the experience and competency of its
management. PTLIC and Network America also have a Standard & Poor's claims
paying ability rating of "A- (good)," which falls within the most secure range
(AAA to BBB). ANIC is not rated by Standard & Poor's.
(k) Competition
The Company operates in a highly competitive industry. Many of its
competitors have considerably greater financial resources, higher ratings from
A.M. Best and larger networks of agents than the Company. Many insurers offer
long-term care policies similar to those offered by the Company and utilize
similar marketing techniques. The Company actively competes with these insurers
in attracting and retaining agents by offering competitive products and
commission rates and quality underwriting, claims service and policyholder
service.
(l) Government Regulation
Insurance companies are subject to supervision and regulation in all states
in which they transact business. The Company is registered and approved as a
holding company under the Pennsylvania Insurance Code. PTLIC and Network America
are chartered and licensed in Pennsylvania as stock life insurance companies.
ANIC is chartered and licensed in Vermont as a stock accident and health
insurance company. On a combined basis with its direct and indirect insurance
subsidiaries, the Company is currently licensed in all states except New York.
The extent of regulation of insurance companies varies, but generally
derives from state statutes which delegate regulatory, supervisory and
administrative authority to state insurance departments. Although many states'
insurance laws and
-15-
<PAGE>
regulations are based on models developed by the NAIC and are therefore similar,
variations among the laws and regulations of different states are common.
The NAIC is a voluntary association of all of the state insurance
commissioners in the United States. The primary function of the NAIC is to
develop model laws on key insurance regulatory issues which can be used as
guidelines for individual states in adopting or enacting insurance
legislation. While the NAIC model laws are accorded substantial deference
within the insurance industry, these laws are not binding on insurance
companies unless adopted by the state, and variations from the model laws
within the states is common.
The Pennsylvania Department, the Vermont Department of Banking, Insurance,
Securities and Health Care Administration (the "Vermont Department") and
insurance regulatory authorities in other jurisdictions, have broad
administrative and enforcement powers relating to the granting, suspending and
revoking of licenses to transact insurance business, the licensing of agents,
the regulation of premium rates and trade practices, the content of advertising
material, the form and content of insurance policies and financial statements
and the nature of permitted investments. In addition, regulators have the power
to require insurance companies to maintain certain deposits, capital, surplus
and reserve levels calculated in accordance with prescribed statutory standards.
The Company believes that its deposit, capital, surplus and reserve levels
currently meet or exceed all applicable regulatory requirements. The primary
purpose of such supervision and regulation is the protection of policyholders,
not investors.
The Company also is subject to the insurance holding company laws of
Pennsylvania and of the other states in which it is licensed to do business.
These laws generally require insurance holding companies and their subsidiary
insurers to register and file certain reports, including information concerning
their capital structure, ownership, financial condition and general business
operations. Further, states often require prior regulatory approval of changes
in control of an insurer and of intercorporate transfers of assets within the
holding company structure. The purchase of more than 10% of the outstanding
shares of Common Stock by one or more parties acting in concert requires the
prior approval of the Pennsylvania and Vermont Departments, and may subject such
party or parties to the reporting requirements of the insurance laws and
regulations of Pennsylvania and Vermont and to the prior approval and/or
reporting requirements of other jurisdictions in which the Company is licensed.
In addition, officers, directors and 10% shareholders of insurance companies,
such as the Insurers, are subject to the reporting requirements of the insurance
laws and regulations of Pennsylvania and Vermont, as the case may be, and may be
subject to the prior approval and/or reporting requirements of other
jurisdictions in which the Company is licensed.
Under Pennsylvania law, lending institutions, public utilities, bank
holding companies, savings and loan companies, and their affiliates,
subsidiaries, officers and employees may not be licensed or admitted as
insurers. If any of the foregoing entities or individuals (or any such entity
and its affiliates, subsidiaries, officers and employees in the aggregate)
acquires 5% or more of the outstanding shares of Common Stock, such party may be
deemed to be an affiliate, in which event the Company's Certificate of Authority
to do business in Pennsylvania may be revoked upon a determination by the
Department that such party exercises effective control over the Company.
As part of their routine regulatory, oversight process state insurance
regulators periodically conduct detailed examinations of the books, records and
operations of insurers. During 1995, the Pennsylvania Department completed its
examination of PTLIC and Network America for the five year period ended December
31, 1994 and had no recommendations for either PTLIC or Network America. During
1995, the Vermont Department completed its examination of ANIC for the three
year period ended December 31, 1994 and had no material recommendations. In
addition to conducting these examinations, state insurance regulatory
authorities from time to time also conduct separate market conduct examinations.
These examinations focus on an insurer's claims practices, policyholder
complaints, policy forms, advertising practices and other marketing aspects.
In recent years, there has been considerable legislative and regulatory
activity, at both the state and federal levels, with regard to long-term care
and Medicare supplement insurance. There is extensive federal and state
regulation applicable to the form and content of Medicare supplement policies,
including requirements for specified minimum benefits and loss ratios and
requirements relating to agent compensation and the sales practices of agents
and companies. For example, Pennsylvania, which had previously enacted
regulations governing Medicare supplement insurance, recently promulgated
regulations
-16-
<PAGE>
governing long-term care insurance. These regulations are effective for policies
written on or after February 8, 1995, and impact, affect and/or regulate areas
including permissible policy practices and provisions, lapse provisions,
required disclosure provisions, post-claims underwriting, minimum standards for
home health and community care benefits, inflation protection provisions,
application forms and replacement coverage, reporting requirements, reserve
standards, loss ratios, filings for out-of-state group policies, marketing
standards, agent recommendations, pre-existing condition limitations, coverage
outlines, allowable shoppers guides and permitted compensation arrangements.
Most states mandate minimum benefit standards and loss ratios for long-term
care insurance policies and for other accident and health insurance policies.
Most states have adopted the NAIC's proposed standard minimum loss ratios of 65%
for individual Medicare supplement policies and 75% for group Medicare
supplement policies. A significant number of states, including Pennsylvania and
Florida, also have adopted the NAIC's proposed minimum loss ratio of 60% for
both individual and group long-term care insurance policies. The states in which
the Company is licensed have the authority to change these minimum ratios, the
manner in which these ratios are computed and the manner in which compliance
with these ratios is measured and enforced.
The Department is provided, on an annual basis, with a calculation prepared
by the Company's independent consulting actuary regarding compliance with
required minimum loss ratios for Medicare supplement and credit policies. This
report is made available to all states. Although certain other policies (e.g.,
nursing home and hospital care policies) also have specific mandated loss ratio
standards, at the present there typically are no similar reporting requirements
in the states in which the Company does business for such other policies.
The NAIC has developed minimum capital and surplus requirements
utilizing certain risk-based factors associated with various types of assets,
credit, underwriting and other business risks. The Company did not experience
any problems meeting these requirements when they took effect in 1994. As of
December 31, 1996, the risk-based capital of PTLIC, Network America and ANIC
were 900% , 1,082%, and 767% respectively, of authorized control level
capital.
In December 1986, the NAIC adopted the Long-Term Care Insurance Model
Act (the "Model Act"), which was adopted to promote the availability of
long-term care insurance policies, to protect applicants for such insurance
and to facilitate flexibility and innovation in the development of long-term
care coverage. The Model Act establishes standards for long-term care
insurance, including provisions relating to disclosure and performance
standards for long-term care insurers, incontestability periods,
nonforfeiture benefits, severability, penalties and administrative
procedures. Model regulations were also developed by the NAIC to implement
the Model Act. Some states have also adopted standards relating to agent
compensation for long-term care insurance. In addition, from time to time,
the federal government has considered adopting standards for long-term care
insurance policies, but has not enacted any such legislation to date.
States also restrict the dividends the Company's insurance subsidiaries are
permitted to pay. Dividend payments will depend on profits arising from the
business of the Insurers, computed according to statutory formulae. In addition,
Pennsylvania law requires PTLIC and Network America to furnish the Pennsylvania
Department 30 days advance notice of any planned extraordinary dividend (any
dividend paid within any twelve-month period which exceeds the greater of (i)
10% of its surplus as shown in its most recent annual statement filed with the
Pennsylvania Department or (ii) its net gain from operations, after policyholder
dividends and federal income taxes and before realized gains or losses, shown in
such statement) and the Pennsylvania Department may refuse to allow it to pay
such extraordinary dividends. Under Vermont insurance law, ANIC is also required
to furnish 30 days advance written notice of an extraordinary dividend to the
Vermont Department which may disapprove the dividend. Vermont law defines an
extraordinary dividend as a dividend in excess of the lesser of (i) the net
earnings of the company during the preceding calendar year plus net income not
paid out as dividends during the prior two calendar years and (ii) 10% of the
capital surplus of the company, determined as of the immediately preceding
December 31.
OBRA '90 enacted various changes in Medicare reimbursement and set new
standards for Medicare supplement insurance policies. Among the changes in
reimbursement are (i) an increase in the premium paid by participants under
Part B and (ii) an extension until September 30, 1995 of the authority of the
Medicare program to use data provided by the Social Security Administration
and the Internal Revenue Service to improve collection in Medicare secondary
payor cases. Among
-17-
<PAGE>
the new standards for Medicare supplement insurance policies are those requiring
(i) guaranteed renewability, (ii) mandatory state reporting on the
implementation and enforcement of Medicare supplement policy standards, (iii)
the obtaining of statements by insurers from purchasers as to whether they are
already covered by another Medicare supplement policy or by Medicaid and (iv) a
waiver of pre-existing condition coverage limitations for policies that replace
existing policies.
During 1993, the NAIC adopted model language that requires long-term care
policies to include a nonforfeiture benefit. The mandated inclusion of a
nonforfeiture benefit is intended to protect policyholders against the lapse (or
cancellation) of policies without some value returning to the policyholder.
Issuers of long-term care insurance policies are subject to a tax if they fail
to meet certain requirements set forth in the long-term care insurance model
regulations and the long-term care insurance model act as promulgated by the
NAIC (January 1993). The amount of the tax is $100 per insured for each day any
of the requirements are not met with respect to each qualified long-term care
insurance contract. During 1994, the NAIC adopted a standard calling for "rate
stabilization" of long-term care policies. Some states, such as Florida, have
adopted regulations which require long-term care policies to include
nonforfeiture provisions. Other states, such as California, have adopted
regulations which require long-term care policies to include provisions allowing
insureds to obtain protection against the effects of inflation. Adoption of
nonforfeiture benefits would increase the price of long-term care policies,
while rate stabilization provisions limit the Company's ability to adjust to
adverse loss experiences.
In September 1996, Congress enacted the Health Insurance Portability and
Accountability Act of 1996 ("the Act") which permits premiums paid for
eligible long-term care insurance policies after December 31, 1996 to be
treated as deductible medical expenses. The deduction is limited to a
specified dollar amount ranging from $200 to $2,500, with the amount of the
deduction increasing with the age of the taxpayer. In order to qualify for
the deduction the insurance contract must, among other things, provide for
(i) limitations on pre-existing condition exclusions, (ii) prohibitions on
excluding individuals from coverage based on health status, and (iii)
guaranteed renewability of health insurance coverage. Although the Company
intends to offer tax deductible policies, it will continue to offer a variety
of non-deductible policies as well. The Company has filed long-term care
policies which qualify for tax exemption under the Act in all states in which
it is licensed.
From time to time, the federal government has considered adopting a
national health insurance program. Although it does not appear that the federal
government will enact an omnibus health care reform law in the near future, the
passage of such a program could have a material impact upon the Company's
operations. In addition, legislation currently pending in Congress could impact
the Company's business. Among the proposals are the implementation of certain
minimum consumer protection standards for inclusion in all long-term care
policies, including guaranteed renewability, protection against inflation and
limitations on waiting periods for pre-existing conditions. These proposals
would also prohibit "high pressure" sales tactics in connection with long-term
care insurance and would guarantee consumers access to information regarding
insurers, including lapse and replacement rates for policies and the percentage
of claims denied. Other pending legislation would permit premiums paid for
long-term care insurance to be treated as deductible medical expenses, with the
amount of the deduction increasing with the age of the taxpayer. As with any
pending legislation, it is possible that any laws finally enacted will be
substantially different than the current proposals. Accordingly, the Company is
unable to predict the impact of any such legislation on its business and
operations.
(m) Employees
As of December 31, 1996, the Company had approximately 235 full-time
employees (not including independent agents), 148 of whom are employed in the
Company's home office. Of those employees in the Company's home office, 31 are
employed in various administrative services, 21 in sales, 31 in underwriting, 17
in accounting, 7 in compliance, 21 in claims, 16 in an executive capacity, and 4
in systems. The Company had approximately 32 full-time employees employed in the
Florida field office as of December 31, 1996. Of the Florida employees, 24 are
employed in underwriting and administrative services and 8 are employed in
marketing. As of December 31, 1996, the Company has 20 employees in its
California office and has 35 employees in its Vermont office. The Company is not
a party to any collective bargaining agreements and believes that its
relationship with its employees is good.
Item 2. Properties
-18-
<PAGE>
The Company's principal offices in Allentown, Pennsylvania, occupy
approximately 25,500 square feet of office space in a 40,000 square foot
building, owned by the Company. The Company also leases additional office space
in Florida and California, and owns office space in Vermont.
The Company owns a 2.42 acre parcel of land and a warehouse, both located
across the street from its home office for future use.
Item 3. Legal Proceedings
The Insurers are parties to various lawsuits generally arising in the
normal course of business. The Company does not believe that the eventual
outcome of any such suit will have a material effect on its financial condition
or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted during the fourth quarter of the fiscal year
ended December 31, 1996 to a vote of security holders.
PART II
Item 5. Market for Registrant's Common Equity and Related Stockholder
Matters
The Common Stock of the Company is traded in the over-the-counter market
and is included on the National Market System of the National Association of
Securities Dealers, Inc. Automated Quotation System ("NASDAQ") under the symbol
PTAC. Until March 24, 1997, the transfer agent and registrar for the Company's
Common Stock is Registrar and Transfer Company of Cranford, New Jersey.
Effective March 24, 1997, First Union National Bank of Charlotte, North Carolina
will become the transfer agent and registrar for the Company's Common Stock.
As of March 19, 1997 the Company had 7,518,080 shares of Common Stock
outstanding, held by approximately 430 stockholders of record. This latter
number was derived from the Company's shareholder records, and does not include
beneficial owners of the Company's Common Stock whose shares are held in the
names of various dealers, clearing agencies, banks, brokers, and other
fiduciaries.
The range of high and low sale prices, as reported by NASDAQ, for the
Company's Common Stock for the periods indicated below, is as follows:
High Low
---- ---
1995
First Quarter 12 1/8 9 3/4
Second Quarter 13 11 3/8
Third Quarter 14 3/4 11 7/8
Fourth Quarter 16 1/2 13
1996
First Quarter 19 15 1/4
Second Quarter 21 1/2 18 1/2
Third Quarter 24 3/4 17
Fourth Quarter 26 22 1/2
-19-
<PAGE>
The Company has never paid any cash dividends on its Common Stock and
does not intend to do so in the foreseeable future. It is the present
intention of the Company to retain any future earnings to support the
continued growth of the Company's business. Any future payment of dividends
by the Company is subject to the discretion of the Board of Directors and is
dependent, in part, on any dividends it may receive as the sole shareholder
of PTLIC, ANIC and the Agency, and which PTLIC may in turn receive as the
sole shareholder of Network America. The payment of dividends by PTLIC, ANIC
and Network America, respectively, is in turn dependent on a number of
factors, including their respective earnings and financial condition,
business needs and capital and surplus requirements, and is also subject to
certain regulatory restrictions and the effect that such payment would have
on their ratings by A.M. Best Company. See Item 1, "Business--A.M. Best's
Rating and Standard & Poor's Rating" and Item 1, "Business--Government
Regulation".
-20-
<PAGE>
Item 6. Selected Financial Data
The following selected consolidated statement of operations data and
balance sheet data of the Company as of and for the years ended December 31,
1992, 1993, 1994, 1995 and 1996, have been derived from the Consolidated GAAP
Financial Statements of the Company, which have been audited by Coopers and
Lybrand L.L.P., independent accountants.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------------------
1992 (1) 1993 1994 1995 1996
---------- ---------- ---------- ---------- ----------
(in thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Statement of Operations Data:
Revenues:
Accident and health:
First year premiums $ 22,477 $ 25,836 $ 26,968 $ 36,770 $ 46,346
Renewal premiums 37,507 43,615 52,237 62,402 80,311
Life:
First year premiums 4 361 2,149 1,701 1,457
Renewal premiums 248 169 481 1,494 2,077
---------- ---------- ---------- ---------- ----------
Total premiums 60,236 69,981 81,835 102,367 130,192
Investment income, net
4,398 4,979 5,946 8,103 10,982
Net realized gains (losses) 173 182 8 46 20
Other income 371 321 305 347 342
---------- ---------- ---------- ---------- ----------
Total revenues 65,178 75,463 88,094 110,863 141,536
Benefits and expenses:
Benefits to policyholders 34,285 40,829 48,757 64,879 83,993
First year commissions 14,282 16,722 19,365 26,223 30,772
Renewal commissions 6,004 7,060 7,866 10,128 12,533
Net policy acquisition costs deferred (2) (5,832) (6,640) (7,643) (15,303) (19,043)
General and administrative expense 8,511 9,350 10,262 12,171 15,648
Interest expense 192 184 162 327 625
---------- ---------- ---------- ---------- ----------
Total benefits and expenses 57,442 67,505 78,769 98,425 124,529
---------- ---------- ---------- ---------- ----------
Income before federal income taxes 7,736 7,958 9,325 12,438 17,007
Provision for federal income taxes 2,436 2,137 2,562 3,609 4,847
---------- ---------- ---------- ---------- ----------
Net income $ 5,300 $ 5,821 $ 6,763 $ 8,829 $ 12,160
========== ========== ========== ========== ==========
Net income per share (3) $ 1.12 $ 1.24 $ 1.45 $ 1.53 $ 1.70
========== ========== ========== ========== ==========
Fully diluted net income per share -- -- -- -- $ 1.64
Weighted average shares outstanding 4,732 4,689 4,669 5,772 7,165
Fully diluted shares outstanding -- -- -- -- 7,608
GAAP Ratios:
Loss ratios 56.9% 58.3% 59.5% 63.4% 64.5%
Expense ratio 38.4 38.1 36.7 32.8 31.1
---------- ---------- ---------- ---------- ----------
Total 95.3% 96.4% 96.2% 96.2% 95.6%
Selected Statutory Data:
Net premiums written $ 60,385 $ 69,898 $ 81,878 $ 102,145 $ 133,950
Statutory surplus (beginning of
period) $ 10,688 $ 12,301 $ 17,256 $ 21,067 $ 38,148
Ratio of net premiums written to
statutory surplus 5.6x 5.7x 4.7x 4.8x 3.5x
Balance Sheet Data:
Total investments $ 60,685 $ 77,981 $ 91,490 $ 144,928 $ 212,662
Total assets 115,699 136,948 164,346 237,744 386,768
Total debt
2,625 2,516 6,372 2,206 77,115
Total liabilities 69,327 85,599 108,903 140,637 267,861
Shareholders' equity (4) 46,070 51,349 55,444 97,107 118,907
Book value per share (3)(4) $ 9.72 $ 11.00 $ 11.87 $ 13.93 $ 15.83
</TABLE>
- ------------------------
-21-
<PAGE>
(1) Restated to reflect adoption of Statement of Financial Accounting Standards
No. 109, "Accounting for Income Taxes," as of January 1, 1990. The effect
of adoption is as follows:
1992
----
Net income (reduction) $ (116,000)
Net income per share (reduction) $ (.02)
(2) For a discussion of policy acquisition costs, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
(3) Adjusted to give effect to a 50% stock dividend on the Common Stock
declared on April 19, 1995, payable to shareholders of record on May 3,
1995 and distributed on May 15, 1995.
(4) The Company adopted Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities," on
January 1, 1994. The cumulative effect of this adoption was an increase on
January 1, 1994 in shareholders' equity of $3,529,000 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 December 31, 1995,
shareholders' equity was increased by $4,056,000 due to unrealized gains of
$6,146,000 in the Company's investment portfolio. As of December 31, 1996,
shareholders' equity was increased by $2,261,000 due to unrealized gains
of $3,426,000 in the Company's investment portfolio. These increases were
caused primarily by decreases in interest rates since the date of purchase
of the debt securities in the Company's portfolio.
-22-
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following table sets forth the components of the Company's condensed
statements of operations for the years ended December 31, 1994, 1995 and 1996,
expressed as a percentage of total revenues.
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
1994 1995 1996
------ ------ ------
<S> <C> <C> <C>
Statement of Operations Data:
Revenues:
Accident and health:
First year premiums 30.6% 33.2% 32.7%
Renewal premiums 59.3% 56.3% 56.7%
Life:
First year premiums 2.4% 1.5% 1.0%
Renewal premiums 0.5% 1.3% 1.5%
------ ------ ------
Total premiums 92.9% 92.3% 92.0%
Investment income, net 6.7% 7.3% 7.8%
Net realized gains (losses) 0.0% 0.1% 0.0%
Other income 0.3% 0.3% 0.2%
------ ------ ------
Total revenues 100.0% 100.0% 100.0%
Benefits and expenses:
Benefits to policyholders 55.3% 58.5% 59.3%
First year commissions 22.0% 23.7% 21.7%
Renewal commissions 8.9% 9.1% 8.9%
Net policy acquisition costs deferred (8.7%) (13.8%) (13.5%)
General and administrative expense 11.6% 11.0% 11.1%
Interest expense 0.2% 0.3% 0.4%
------ ------ ------
Total benefits and expenses 89.4% 88.8% 87.9%
------ ------ ------
Income before federal income taxes 10.6% 11.2% 12.0%
Provision for federal income taxes 2.9% 3.2% 3.4%
------ ------ ------
Net income 7.7% 8.0% 8.6%
====== ====== ======
</TABLE>
-23-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
The Company develops and markets insurance products primarily designed for
individuals age 65 and over. The Company's principal products are individual
fixed, defined benefit accident and health insurance policies which consist of
nursing home care, home health care, Medicare supplement and long-term
disability insurance. The Company's underwriting practices rely upon the base of
experience which it has developed over twenty years of providing nursing home
care insurance, as well as upon available industry and actuarial information. As
the home health care market has developed, the Company has encouraged the
purchase of both nursing home care and home health care coverage, and has
introduced new life insurance products as well, thus providing policyholders
with enhanced protection while broadening the Company's policy base. In late
1994, the Company introduced its Independent Living policy which provides
coverage over the full term of the policy for services furnished by a homemaker
or companion who is not a qualified or licensed care provider. Long-term nursing
home care and home health care policies accounted for approximately 90% of the
Company's total annualized premiums in force as of December 31, 1996 and
approximately 86% of its consolidated revenues for 1996.
The Company and its insurance subsidiaries are subject to the insurance
laws and regulations of each state in which they are licensed to write
insurance. These laws and regulations govern matters such as payment of
dividends, settlement of claims and loss ratios. Premiums charged for insurance
products must be approved by state regulatory authorities. In addition, the
Company and its insurance subsidiaries are required to establish and maintain
reserves with respect to reported and incurred but not reported losses, as well
as estimated future benefits payable under the Company's insurance policies.
These reserves must, at a minimum, comply with mandated standards.
The Company's results of operations are affected significantly by the
following factors:
Level of required reserves for policies in force. The amount of reserves
relating to reported and unreported claims incurred is determined by
periodically evaluating historical claims experience and statistical information
with respect to the probable number and nature of such claims. Claim reserves
reflect actual experience through the most recent time period and policy
reserves reflect expectations of claims related to a block of business over its
entire life. The Company compares actual experience with estimates and adjusts
its reserves on the basis of such comparisons. Revisions to reserves are
reflected in the Company's results of operations through benefits to
policyholders expense.
Policy premium levels. The Company attempts to set premium levels to ensure
profitability, subject to the constraints of competitive market conditions and
state regulatory approvals.
Deferred acquisition costs. In connection with the sale of its insurance
policies, the Company defers and amortizes a portion of the policy acquisition
costs over the related premium paying periods of the life of the policy. These
costs include all expenses directly related to the acquisition of the policy,
including commissions, underwriting and other policy issue expenses. The
amortization of deferred acquisition costs is determined using the same
projected actuarial assumptions used in computing policy reserves. Deferred
acquisition costs can be affected by unanticipated termination of policies
because, upon such unanticipated termination, the Company is required to expense
fully the deferred acquisition costs associated with the terminated policy.
The number of years a policy has been in effect. Claims costs tend to be higher
on policies which have been in force for a longer period of time. As the policy
ages, it is more likely that the insured will have need for services covered by
the policy. On the other hand, the longer the policy is in effect, the more
premium the Company will receive.
Investment income. The Company's investment portfolio consists primarily of
high-grade fixed income securities. Income generated from this portfolio is
largely dependent upon prevailing levels of interest rates. As of December 31,
1996, approximately 5.3% of the Company's investment portfolio was committed to
high quality large capitalization common stocks. Due to the longevity of the
Company's investment portfolio duration (approximately 4 years), investment
interest income does not immediately reflect changes in market interest
rates. However, the Company is susceptible to changes in market rates when
cash flows from maturing investments are reinvested at prevailing market
rates.
-24-
<PAGE>
Other factors which affect the Company's results of operations are
lapsation and persistency, both of which relate to the renewal of insurance
policies, and first year compared to renewal premiums. Lapsation is the
termination of a policy by nonrenewal and, pursuant to the Company's policy, is
automatic if and when premiums become more than 31 days overdue; however,
policies may be reinstated, if approved by the Company, within six months after
the policy lapses. Persistency represents the percentage of premiums renewed,
which the Company calculates by dividing the total annual premiums at the end of
each year (less first year business for that year) by the total annual premiums
in force for the prior year. For purposes of this calculation, a decrease in
total annual premiums in force at the end of any year would be a result of
non-renewal of policies, including those policies that have terminated by reason
of death, lapse due to nonpayment of premiums, and/or conversion to other
policies offered by the Company. First year premiums are premiums covering the
first twelve months a policy is in force. Renewal premiums are premiums covering
all subsequent periods.
-25-
<PAGE>
Results of Operations
Quarterly Data
The unaudited quarterly data for the Company for each quarter of 1995 and
1996 have been derived from unaudited financial statements and include all
adjustments, consisting only of normal recurring accruals, which the Company
considers necessary for a fair presentation of the results of operations for
these periods. Such quarterly operating results are not necessarily indicative
of the Company's future results of operations.
The following table presents unaudited quarterly data for the Company for
each quarter of 1995 and 1996.
<TABLE>
<CAPTION>
1995
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data and ratios)
<S> <C> <C> <C> <C>
Accident and health premiums $ 22,562 $ 24,895 $ 25,509 $ 26,205
Life premiums
846 795 746 807
Total premiums 23,408 25,691 26,256 27,013
Investment income, net 1,683 1,807 2,177 2,436
Net realized capital gains and losses and
other income 74 71 128 121
Total revenues 25,165 27,568 28,561 29,570
Benefits to policyholders 14,699 16,412 16,387 17,381
Commissions & expenses 10,117 12,448 12,295 13,663
Net policy acquisition costs deferred (2,425) (4,200) (3,509) (5,169)
Net income $ 1,842 $ 1,963 $ 2,343 $ 2,681
Net income per share (primary) $ 0.39 $ 0.42 $ 0.35 $ 0.37
GAAP loss ratio 62.8% 63.9% 62.4% 64.3%
GAAP expense ratio
33.4 32.5 33.6 31.6
Total 96.2% 96.4% 96.0% 95.9%
1996
-------------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data and ratios)
Accident and health premiums $ 29,524 $ 31,344 $ 31,511 $ 34,279
Life premiums 946 866 874 848
Total premiums 30,470 32,210 32,385 35,127
Investment income, net 2,386 2,505 2,602 3,489
Net realized capital gains and losses and
other income 137 137 88 0
Total revenues 32,993 34,853 35,075 38,616
Benefits to policyholders 19,787 21,832 20,161 22,213
Commissions & expenses 13,493 14,171 14,509 16,780
Net policy acquisition costs deferred (4,170) (5,303) (4,054) (5,516)
Net income $ 2,693 $ 2,883 $ 3,098 $ 3,487
Net income per share (primary) $ 0.39 $ 0.41 $ 0.43 $ 0.46
GAAP loss ratio 64.9% 67.8% 62.3% 63.2%
GAAP expense ratio
30.7 27.6 32.4 33.5
Total 95.6% 95.4% 94.7% 96.7%
</TABLE>
-26-
<PAGE>
Twelve Months Ended December 31, 1996 and 1995
Accident and Health Premiums. First year accident and health premiums earned
by the Company, excluding the contribution of ANIC, in the twelve month
period ended December 31, 1996, increased 19.9% to $44,071,649, compared to
$36,769,835 in 1995. First year long-term care premiums in 1996 increased
19.1% to $43,478,707, compared to $36,507,436 in 1995. This increase was
primarily attributable to increased sales of home health care policies, which
increased to $19,866,692 for 1996 from $14,560,437 for 1995. Premiums from
sales of nursing home care policies increased from $21,946,999 in 1995 to
$23,612,015 in 1996. Management believes that the increase in the sale of
home health care policies reflects the continued growth in the home health
care market. Management further believes that the lower increase in the sale
of nursing home policies primarily resulted from nursing home policies
increasingly being sold as riders to home care policies as opposed to
separate stand-alone policies. First year Medicare supplement premiums earned
by the Company in 1996 increased to $592,083 from $262,399 in 1995. The
Company places reduced emphasis upon this product due to reduced
profitability caused by regulation.
Renewal accident and health premiums earned by the Company in 1996
increased 28.7% to $80,311,319, compared to $62,402,068 in 1995. Renewal
long-term care premiums in 1996 increased 30.4% to $77,734,271, compared to
$59,624,488 in 1995. This increase reflects higher persistency and growth of
in-force premiums. Renewal Medicare supplement premiums earned by the Company in
1996 decreased 7.2% to $2,577,048, compared to $2,777,580 in 1995. This trend is
consistent with the Company's decision not to actively pursue Medicare
supplement business.
In addition, ANIC, which the Company acquired on August 30, 1996, generated
accident and health premiums, comprised primarily of long-term disability
coverage, of $2,274,442 during 1996.
Life Premiums. First year life premiums earned by the Company decreased 14.3% to
$1,457,044, in 1996, compared to $1,700,549 in 1995. The Company's life business
has remained stable as the Company is focusing its marketing efforts on its
Independent Living policy and its other long-term care products. Renewal life
premiums in 1996 increased to $2,077,325, compared to $1,494,153 in 1995. This
increase was primarily the result of renewals of first-year policies written in
1995.
In order to enhance the marketability of certain products, the Company has
recently emphasized offering new policy holders a monthly premium payment plan.
The Company believes that the lower monthly payment is more attractive than the
historical larger annual premium payment and that offering the monthly payment
option enables it to sell more policies. However, because the Company records
premiums when due, and a higher percentage of new policy holders opted for the
monthly payment option in 1996 compared with 1995, management believes that it
has experienced a delay in premium recognition of approximately $5,000,000
throughout 1996.
Net Investment Income. Net investment income earned by the Company for 1996
increased 35.5% to $10,982,131 from $8,102,809 for 1995. This increase was
primarily the result of growth in the Company's investment assets due to
continued premium growth, additional funds of approximately $22,000,000 from the
Company's public offering in July 1995, and additional funds of approximately
$72,000,000 obtained from the issuance of convertible debt late in 1996.
Benefits to Policyholders. Benefits to policyholders in 1996 increased 29.5%
to $83,993,132, including ANIC expenses of $1,078,073, compared to
$64,879,275 in 1995. Accident and health benefits to policyholders in 1996
increased 29.6% to $81,860,045 compared to $63,175,068 in 1995. The Company's
accident and health loss ratio was 64.9% in 1996, compared to 63.7% in 1995.
This increase in loss ratio was due, in part, to the increase in premium and
policies of the Company's Independent Living policy which is reserved for at
a higher rate, and also to improved persistency. In addition, management
believes that claims were reported more quickly throughout 1996 due to the
Company's offer to waive a policy elimination period if the insured agreed to
utilize a Case Manager. See "Business-Claims." Management believes that this
acceleration of reported claims was completely recognized by the end of 1996.
During 1996, expenses for case management services of approximately $450,000
were classified as general and administrative expenses. The Company utilizes
case management services in order to reduce overall claims expense. Had this
expense been classified as Benefits to Policyholders, the total 1996 loss
ratio would have increased by .35% of premiums to 64.9% compared to 63.4% in
1995.
-27-
<PAGE>
Life benefits to policyholders in 1996 increased to $1,154,868, compared
to $1,032,224 for 1995. The life loss ratio was 32.7% in 1996, compared to
32.3% in 1995. This increase relates to the maturing of the life products
that the Company first introduced in 1993.
Commissions. Commissions to agents increased 19.1% to $43,305,148 in 1996
compared to $36,351,140 in 1995. Included are ANIC commissions on long-term
disability policies, which generated $445,084 of expenses in 1996.
For the Company, excluding ANIC, first year commissions on accident and
health business in 1996 increased 17.4% to $29,243,102, compared to $24,897,878
in 1995, 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 66.4% in 1996 and 67.7% in 1995. First year
commissions on life business in 1996 decreased 18.2% to $1,083,892, compared to
$1,325,521 in 1995, directly reflecting the Company's reduction in first year
life premiums. The ratio of first year life commissions to first year life
premiums was 74.4% in 1996 compared to 78.0% in 1995.
Renewal commissions on accident and health business in 1996 increased 23.6%
to $12,312,521, compared to $9,964,110 in 1995, remaining consistent with the
increase in renewal premiums discussed above. The ratio of renewal accident and
health commissions to renewal accident and health premiums was 15.4% in 1996 and
16.0% in 1995. This ratio fluctuates in relation to the age of the policies in
force and the rates of commissions paid to the producing agents.
Net Policy Acquisition Costs Deferred. The net deferred policy acquisition costs
in 1996 increased 24.4% to $19,042,509 compared to $15,303,161 in 1995,
consistent with the growth of the Company's business. This deferral is net of
amortization, which decreases or increases as the Company's actual persistency
is higher or lower than the persistency assumed for reserving purposes. The
deferral of policy acquisition costs has remained consistent with the growth of
premiums, and the growth in amortization of policy acquisition costs has been
modified by improved persistency.
General and Administrative Expenses. General and administrative expenses in
1996 increased 28.6% to $15,647,715, compared to $12,170,913 in 1995. ANIC
expenses accounted for $928,385 in 1996, which includes the amortization of
goodwill and the present value of future profits. Without the ANIC increase
in expenses, general and administrative costs would have increased 20.9%.
This amount also includes an additional $450,000 of case management charges,
which will be reported as policyholder benefits in subsequent years. General
and administrative expenses as a percentage of revenues were 11.1% in 1996,
compared to 11.0% in 1995, which is due to the additional costs of ANIC and
case management.
Net Income. Net income of $12,160,347 (including a contribution of $299,354 from
ANIC) for 1996 was $3,331,464 or 37.7% above 1995 income of $8,828,883. Net
income includes income tax provisions of $4,847,000 and $3,609,000, for 1996 and
1995 period, respectively. Income before federal income taxes increased in 1996
by $4,569,464 or 36.7% to $17,007,347. This increase was primarily attributable
to the continuing growth of premiums earned. The Company made a 1996 provision
for federal income taxes of 4,847,000 or 28.5%, as compared to an effective 1995
tax provision rate of 29.0%.
Years Ended December 31, 1995 and 1994
Accident and Health Premiums. First year accident and health premiums earned by
the Company in 1995, including long-term care and Medicare supplement, increased
36.3% to $36,769,835, compared to $26,967,973 in 1994.
First year long-term care premiums earned by the Company in 1995 increased
36.9% to $36,507,436, compared to $26,669,960 in the same period in 1994. This
increase was attributable to increased sales of home health care policies, which
increased to $14,560,437 in 1995 from $4,771,366 in 1994 and continued strong
sales of nursing home care policies, which increased from $21,898,594 in 1994 to
$21,946,999 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. Independent Living policy sales
were $10,643,354 in 1995. First year Medicare supplement premiums earned by the
Company in 1995 decreased 12.0% to $262,399, compared to $298,013 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.
-28-
<PAGE>
Renewal accident and health premiums earned by the Company in 1995,
including long-term care and Medicare supplement, increased 19.5% to
$62,402,068, compared to $52,236,980 in 1994.
Renewal long-term care premiums earned by the Company in 1995 increased
21.6% to $59,624,488, compared to $49,054,157 in 1994. This increase reflects
renewal 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 which increased from 75.4% in
1994 to 77.4% in 1995. Renewal Medicare supplement premiums earned by the
Company in 1995 decreased 12.7% to $2,777,580, compared to $3,182,823 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 1995 decreased
20.9% to $1,700,549, compared to $2,149,039 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 1995 increased 210.7% to
$1,494,153, compared to $480,842 in 1994. This increase was primarily the result
of renewal of first year policies written in 1993 and 1994.
Net Investment Income. Net investment income earned by the Company in 1995
increased 36.3% to $8,102,809, compared to $5,946,034 in 1994. This increase was
primarily the result of growth in the Company's investment assets due to
continued premium growth during 1995 and proceeds of approximately $22,000,000
from the Company's public offering in July 1995. See "-Liquidity and Capital
Resources" below for a discussion of the public offering. The average yield on
the Company's investments was 6.5% in 1995 and in 1994.
Benefits to Policyholders. Accident and health benefits to policyholders in 1995
increased 33.0% to $63,175,068, compared to $47,497,004 in 1994. The Company's
accident and health loss ratio (the ratio of benefits to policyholders to total
accident and health premiums) was 63.7% in 1995, compared to 60.0% 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 increased to $1,704,207 from $1,260,480 in
1994. The life loss ratio was 53.3% in 1995, compared to 47.9% 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.
Net Policy Acquisition Costs Deferred. The net deferred policy acquisition costs
in 1995 increased 100.2% to $15,303,161 compared to $7,642,875 in 1994,
consistent with the growth of the Company's business. This deferral is net of
amortization, which decreases or increases as the Company's actual persistency
is higher or lower than the persistency assumed for reserving purposes. The
Company believes that amortization decreased in 1995 relative to 1994 as a
result of higher persistency.
General and Administrative Expenses. General and administrative expenses
increased 18.6% to $12,170,913, compared to $10,262,410 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 was 11.0% in 1995 compared to 11.6% in
1994, due to the Company's ability to control these expenses.
First Year Commissions. First year commissions on accident and health business
increased 40.7% to $24,897,878, compared to $17,694,410 in 1994. The ratio of
first year accident and health commissions to first year accident and health
premiums was 67.7% in 1995 compared to 65.6% in 1994. The increase in the ratio
is a result of a decrease in the average age of the insured covered by new
business, which results in a higher agent commission.
-29-
<PAGE>
First year commissions on life business decreased to $1,325,521, compared
to $1,670,785 in 1994, corresponding to a decrease in first year life premiums.
The ratio of first year life commissions to first year life premiums was 78.0%
in 1995 compared to 77.8% in 1994, reflecting a commission structure which
varies with the premium payment terms of policies.
Renewal Commissions. Renewal commissions on accident and health business
increased 27.1% to $9,964,110, compared to $7,840,877 in 1994, consistent with
the increase in renewal premium discussed above. The ratio of renewal accident
and health commissions to renewal accident and health premiums was 16.0% in
1995, compared to 15.0% in 1994. This ratio fluctuates in relation to the age of
the policies in force and the rates of commissions paid to agents.
Provision for Federal Income Taxes. The provision for federal income taxes
recorded by the Company in 1995 increased 40.9% to $3,609,000, compared to
$2,562,000 in 1994. The effective tax rate increased to 29.0% in 1995 from 27.5%
in 1994. The Company's effective tax rate was below the normal federal corporate
rate as a result of credits from the small life insurance company deduction as
well as the Company's investments in tax-exempt bonds.
Changes in Accounting Principles
In the first quarter of 1993, the Company retroactively adopted Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). Under the asset and liability method provided for by SFAS 109, deferred
tax assets and liabilities are recognized for the tax consequences of temporary
differences between the financial statement carrying amounts and the tax basis
of existing assets and liabilities by applying enacted statutory tax rates.
In 1993, the Company adopted Statement of Financial Accounting Standards
No. 113, "Accounting and Reporting of Short-Duration and Long-Duration
Contracts" ("SFAS 113"). SFAS 113 established the conditions a reinsurance
contract must meet in order to be accounted for as such. In addition, it
eliminated the industry practice of reporting financial statement items, net of
the effects of reinsurance. SFAS 113 did not impact the Company's results of
operations, other than the financial statement presentation.
New Accounting Principles
On January 1, 1996, Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation," ("SFAS 123") became effective. SFAS
123 provides an alternative method of accounting for stock-based compensation
arrangements, based on the fair value of the stock-based compensation determined
by an option pricing model utilizing various assumptions regarding the
underlying attributes of the options and the Company's common stock. The
accounting under SFAS 123 differs from the existing method of accounting for
stock-based compensation which is provided in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25"). The
Financial Accounting Standards Board encourages entities to adopt the fair value
based method, but does not require the adoption of this method. For those
entities that continue to apply APB 25, pro forma disclosure of the effects, if
adopted, of SFAS 123 on net income and earnings per share is required in
the 1996 financial statements. The Company has adopted the disclosure-only
provisions of SFAS 123 and applies APB 25 in accounting for its plans.
Accordingly, no compensation cost has been recognized for its fixed stock
option plans. See Note 9 of the consolidated financial statements for full
disclosure under SFAS 123.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standard No. 128, "Earnings per Share"
("SFAS 128"). SFAS 128 establishes standards for computing and presenting
earnings per share, and simplifies the standards for computing earnings per
share previously found in Accounting Principles Board Opinion No. 15,
"Earnings per Share." Primary and fully diluted earnings per share will be
replaced with basic and diluted earnings per share, and these amounts are
required to be shown on the face of the income statement. In addition, a
reconciliation of the numerator and denominator of the basic earnings per
share computation to the numerator and denominator of the diluted earnings per
share computation will be required.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of
common shares outstanding for the period. Diluted earnings per share reflects
the potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock. This
Statement is effective for financial statements issued for periods ending
after December 15, 1997, and requires restatement of all prior-period
earnings per share data presented. Management has not determined the impact
that SFAS 128 may have on the Financial Statements.
Impact of Increases in Cost of Medical Care
Increases in the cost of medical care tend to increase the need for
insurance. Many policyholders who once had adequate insurance coverage increased
their insurance coverage to provide the same relative financial benefit and
protection. The increases in medical costs lead to accident and health policies
requiring higher benefits and an increased need for the products. Consequently,
the Company offers riders to its insurance policies which provide for increases
in policyholder benefits each year in the amount of 5% compounded annually on
the anniversary date of the policy for 20 years or to age 85, whichever occurs
first, or for the lifetime of the policyholder, as is mandated in certain
states.
-30-
<PAGE>
The adequacy of premium rates in relation to the level of health claims is
constantly monitored by the Company and, where appropriate, premium rates on
such policies are increased as policy benefits increase. Failure to make such
increases commensurate with health care cost increases may result in a loss from
health insurance operations.
Liquidity and Capital Resources
The Company's consolidated liquidity requirements have historically been
created and met from the operations of its insurance subsidiaries. The Company's
primary sources of cash are premiums and investment income. The Company has
provided, and may continue to provide, cash through public offerings of its
common stock, capital markets activities or debt instruments. The primary uses
of cash are policy acquisition costs (principally commissions), payments to
policyholders, investment purchases and general and administrative expenses.
Statutory requirements allow insurers to pay dividends only from statutory
earnings as approved by the state insurance commissioner. Statutory earnings are
generally lower than publicly-reported earnings due to the immediate or
accelerated recognition of all costs associated with premium growth and benefit
reserves. The Company has not and does not intend to pay shareholder dividends
in the near future due to these requirements, choosing to retain statutory
surplus to support continued premium growth. See "Dividend Policy" and
"Business-Government Regulation."
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. On December 31, 1995, the average maturity of the
Company's bond portfolio was 6.4 years, and its market value exceeded cost by
4.1% or approximately $5,643,000. On December 31, 1994, the average maturity of
the Company's portfolio was 6.9 years and its market value was below cost by
4.4% or approximately $4,165,000. The Company's equity portfolio exceeded cost
by $503,083 or 23.9% in 1995 and $52,780 or 6.0% in 1994. At December 31, 1996,
the average maturity of the Company's bond portfolio was 5.8 years, and its
market value represented approximately 100.9% of its cost, with a current
unrealized gain of $1,821,387. Its equity portfolio exceeded cost by
$1,604,604 at December 31, 1996.
In December 1994, a loan was extended to the Company by a bank in the
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 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 approximately $22,000,000, 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 December
31, 1994, shareholders' equity was decreased by $2,713,842 due to unrealized
losses of $4,111,882 in the investment portfolio. As of December 31, 1995,
shareholders' equity was increased by $4,055,788 due to unrealized gains of
$6,145,649 in the investment portfolio. As of December 31, 1996, shareholders'
equity was increased by $2,261,154 due to unrealized gains of $3,425,991 in the
investment portfolio.
During 1993, the Company contributed $2,000,000 in bonds to PTLIC and
Network America. During 1994, the Company contributed $4,000,000 in cash to
PTLIC. The capital position of PTLIC and Network America was further improved by
the contribution of $14,000,000 of the net proceeds of the public offering in
1995 to the capital and surplus of PTLIC and Network America during the third
quarter of 1995. In November 1996, the Company contributed an additional
$5,000,000 of the net proceeds of the public offering in July 1995 to Network
America. The Company believes that its insurance subsidiaries' capital and
surplus presently meet or exceed the requirements in all jurisdictions in which
they are licensed.
The Company's debt currently consists primarily of a mortgage note in the
approximate amount of $2,000,000 and $74,750,000 in convertible subordinated
debt. The convertible debt, issued in November 1996, is convertible at $28.44
per share until November 2003. The debt carries a fixed interest coupon of
6.25%, payable semi-annually. The mortgage note is currently amortized over 12
years, and has a balloon payment due on the remaining outstanding balance in
September 1998.
-31-
<PAGE>
Although the note carries a variable interest rate, the Company has entered
into an amortizing swap agreement with the same bank, with a notional amount
equal to the outstanding debt, which has the effect of converting the note to
a fixed rate of interest.
In December, 1996, the Company contributed $20,000,000, $20,000,000, and
$5,000,000 to the surplus of PTLIC, Network America, and ANIC, respectively,
from the proceeds of the convertible subordinated debt.
The remaining approximately $27,000,000 in proceeds from the debt
offering were retained at the parent in order to meet the interest service
requirements of the debt. If the debt is not converted to common shares of
the Company prior to December 2, 2003, the Company will be required to pay an
aggregate of $32,703,125 in interest. The Company believes that it has
retained sufficient funds to make these payments. The $74,750,000 balance of
the debt is expected to convert to shares of common stock of the Company by
design of the debt offering. However, in the event of maturity of the debt
without conversion, the Company would be required to refinance the debt in
order to meet its repayment obligations.
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
its insurance subsidiaries 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 Company's insurance
subsidiaries can be met for the foreseeable future by funds generated from this
offering, the Company's public offering in 1995 and from operations.
In the event (i) the Company fails to maintain minimum loss ratios
calculated in accordance with statutory guidelines, (ii) the Company fails to
meet other requirements mandated and enforced by regulatory authorities, (iii)
the Company has adverse claims experience in the future, (iv) the Company is
unable to obtain additional financing to support future growth, or (v) the
economy continues to effect the buying powers of senior citizens, the Company's
results of operations, liquidity and capital resources could be adversely
affected.
Certain statements made by the Company may be considered to be forward
looking. Although the Company believes that its expectations are based on
reasonable assumptions within the bounds of its knowledge of its business and
operations, there can be no assurance actual results will not differ
significantly from its expectations.
Item 8. Financial Statements and Supplementary Data
-32-
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
REPORT ON AUDITS OF
CONSOLIDATED FINANCIAL STATEMENTS
as of December 31, 1996 and 1995 and
for the years ended
December 31, 1996, 1995 and 1994
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGES
---------
<S> <C>
Report of Independent Accountants...................................................... F-2
Financial Statements:
Consolidated Balance Sheets as of December 31, 1996 and 1995......................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995 and
1994............................................................................... F-4
Consolidated Statements of Changes in Shareholders' Equity for the years ended
December 31, 1996, 1995 and 1994................................................... F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995 and
1994................................................................................. F-6-7
Notes to Consolidated Financial Statements........................................... F-8-22
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Penn Treaty American Corporation
Allentown, Pennsylvania
We have audited the accompanying consolidated balance sheets of Penn Treaty
American Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
related consolidated statements of operations, changes in shareholders' equity
and cash flows for each of the three years in the period ended December 31,
1996. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Penn Treaty
American Corporation and Subsidiaries as of December 31, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996, in conformity with generally
accepted accounting principles.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 5, 1997
F-2
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------------- --------------
<S> <C> <C>
ASSETS
Investments:
Bonds, available for sale at market,
(amortized cost $199,508,579 and
$136,600,775, respectively)................................... $ 201,329,966 $ 142,243,341
Equity securities at market value, (cost of
$9,642,912 and $2,102,529, respectively).................... 11,247,516 2,605,612
Policy loans.................................................... 84,232 79,404
-------------- --------------
Total investments............................................. 212,661,714 144,928,357
Cash and cash equivalents......................................... 51,612,067 8,881,061
Property and equipment, at cost, less accumulated
depreciation of $2,205,407 and $1,854,065, respectively......... 8,092,028 5,740,353
Unamortized deferred policy acquisition costs..................... 82,176,268 63,133,759
Receivables from agents, less allowance for
uncollectable amounts of $231,226 and $231,226, respectively.... 1,543,382 1,275,481
Accrued investment income......................................... 3,581,077 2,436,435
Federal income tax recoverable.................................... 175,219 --
Cost in excess of fair value of net assets acquired, less
accumulated amortization of $324,203 and $231,826, respectively 6,042,786 1,197,574
Present value of future profits acquired.......................... 4,011,668 --
Receivable from reinsurers........................................ 10,105,654 7,730,828
Other assets...................................................... 6,766,129 2,420,422
-------------- --------------
Total assets.................................................. $ 386,767,992 $ 237,744,270
-------------- --------------
-------------- --------------
LIABILITIES
Policy reserves:
Accident and health............................................. $ 101,107,697 $ 62,007,433
Life............................................................ 8,523,267 7,118,848
Unearned premium reserve.......................................... 12,215 26,503
Policy and contract claims........................................ 57,539,380 50,206,608
Accounts payable and other liabilities............................ 4,768,441 2,681,499
Long-term debt.................................................... 77,114,592 2,206,117
Federal income taxes payable...................................... -- 183,249
Deferred income taxes............................................. 18,795,316 16,206,959
-------------- --------------
Total liabilities............................................. 267,860,908 140,637,216
-------------- --------------
Commitments and contingencies (Note 10)
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, 8,116,464 and 7,576,913 shares issued....... 811,646 757,691
Additional paid-in capital........................................ 52,526,956 41,146,594
Net unrealized appreciation of securities......................... 2,261,154 4,055,788
Retained earnings................................................. 65,013,202 52,852,855
-------------- --------------
120,612,958 98,812,928
Less 605,629 common shares held in treasury, at cost.............. (1,705,874) (1,705,874)
-------------- --------------
118,907,084 97,107,054
-------------- --------------
Total liabilities and shareholders' equity.................... $ 386,767,992 $ 237,744,270
-------------- --------------
-------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-3
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Operations
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
-------------- ------------- -------------
<S> <C> <C> <C>
Revenue:
Accident and health premiums.................................. $ 126,657,410 $ 99,171,903 $ 79,204,953
Life premiums................................................. 3,534,369 3,194,702 2,629,881
-------------- ------------- -------------
130,191,779 102,366,605 81,834,834
Net investment income......................................... 10,982,131 8,102,809 5,946,034
Net realized capital gains.................................... 19,960 46,431 8,335
Other income.................................................. 342,388 347,113 304,823
-------------- ------------- -------------
141,536,258 110,862,958 88,094,026
Benefits and expenses:
Benefits to policyholders..................................... 83,993,132 64,879,275 48,757,484
Commissions................................................... 43,305,148 36,351,140 27,230,679
Net policy acquisition costs deferred......................... (19,042,509) (15,303,161) (7,642,875)
General and administrative expense............................ 15,647,715 12,170,913 10,262,410
Interest expense.............................................. 625,425 326,908 161,527
-------------- ------------- -------------
124,528,911 98,425,075 78,769,225
-------------- ------------- -------------
Income before federal income taxes............................. 17,007,347 12,437,883 9,324,801
Provision for federal income taxes............................. 4,847,000 3,609,000 2,562,000
-------------- ------------- -------------
Net Income................................................... $ 12,160,347 $ 8,828,883 $ 6,762,801
-------------- ------------- -------------
-------------- ------------- -------------
Primary earnings per share..................................... $ 1.70 $ 1.53 $ 1.45
Fully diluted earnings per share............................... $ 1.64 -- --
Weighted average number of shares outstanding.................. 7,164,782 5,771,558 4,668,834
Weighted average number of shares outstanding
(fully diluted)............................................. 7,614,321 -- --
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
UNREALIZED
APPRECIATION
(DEPRECIATION)
COMMON STOCK ADDITIONAL NET OF TOTAL
------------------------ PAID-IN DEFERRED RETAINED TREASURY SHAREHOLDERS'
SHARES AMOUNT CAPITAL TAXES EARNINGS STOCK EQUITY
----------- ----------- ------------- ------------- ------------- -------------- --------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December
31, 1993....... 5,272,312 $ 527,231 $ 15,284,932 $ (18,547) $ 37,261,171 $ (1,705,450) $ 51,349,337
Initial adoption
of SFAS 115.... 3,528,500 3,528,500
Exercised options
proceeds....... 4,601 460 26,662 27,122
Treasury stock
acquisition.... (424) (424)
Net income....... 6,762,801 6,762,801
Change in net
unrealized
gains on
investments.... (6,223,795) (6,223,795)
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balance, December
31, 1994....... 5,276,913 527,691 15,311,594 (2,713,842) 44,023,972 (1,705,874) 55,443,541
Net income....... 8,828,883 8,828,883
Proceeds from
public
offering....... 2,300,000 230,000 25,835,000 26,065,000
Change in net
unrealized loss
on
investments.... 6,769,630 6,769,630
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balance, December
31, 1995....... 7,576,913 757,691 41,146,594 4,055,788 52,852,855 (1,705,874) 97,107,054
Net income....... 12,160,347 12,160,347
Shares issued for
the
acquisition of
Health
Insurance of
Vermont........ 472,644 47,264 10,823,553 10,870,817
Change in net
unrealized
gains on
investments.... (1,794,634) (1,794,634)
Exercised options
proceeds....... 66,907 6,691 556,809 563,500
----------- ----------- ------------- ------------- ------------- -------------- --------------
Balance, December
31, 1996....... 8,116,464 $ 811,646 $ 52,526,956 $ 2,261,154 $ 65,013,202 $ (1,705,874) $ 118,907,084
----------- ----------- ------------- ------------- ------------- -------------- --------------
----------- ----------- ------------- ------------- ------------- -------------- --------------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
PENN TREATY AMERICAN CORPORATION
Consolidated Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Net cash flow from operating activities:
Net income........................................................... $ 12,160,347 $ 8,828,883 $ 6,762,801
Adjustments to reconcile net income to cash provided by operations:
Amortization of intangible assets.................................. 325,987 35,760 348,260
Policy acquisition costs, net...................................... (19,042,509) (15,303,161) (7,642,875)
Deferred income taxes.............................................. 3,095,000 2,726,032 1,779,620
Depreciation expense............................................... 375,092 353,589 342,246
Net realized capital (gains) losses................................ (19,960) (46,431) (8,335)
Increase (decrease) due to change in:
Receivables from agents............................................ (267,901) (126,917) 84,183
Receivable from reinsurers......................................... (904,238) (1,205,581) (1,052,417)
Policy and contract claims......................................... 6,885,661 8,862,180 9,130,004
Policy and unearned premium reserves............................... 29,844,074 20,097,887 9,815,820
Accounts payable and other liabilities............................. 1,207,846 543,209 179,541
Federal income taxes recoverable................................... (175,219) 481,799 (481,799)
Federal income tax payable......................................... (183,249) 183,249 (67,102)
Accrued investment income.......................................... (963,477) (808,701) (340,910)
Other, net......................................................... (1,070,083) (512,600) (330,353)
------------- ------------- -------------
Cash provided by operations...................................... 31,267,371 24,109,197 18,518,684
Cash flow used in investing activities:
Acquisition of business, net of cash received...................... (1,218,204) -- --
Proceeds from sales of bonds....................................... 16,684,028 5,356,956 4,671,988
Proceeds from sales of equity securities........................... 303,560 -- 1,451,329
Maturities and call of bonds....................................... 18,571,559 5,421,112 4,246,278
Purchase of bonds.................................................. (85,092,419) (52,690,049) (27,956,095)
Purchase of equity securities...................................... (7,953,520) (1,222,022) --
Acquisition of property and equipment.............................. (2,110,844) (1,219,810) (372,511)
------------- ------------- -------------
Cash used in investing........................................... (60,815,840) (44,353,813) (17,959,011)
Cash flow from financing activities:
Proceeds from stock offering....................................... -- 26,065,000 --
Proceeds from convertible debt offering............................ 72,207,500 -- --
Proceeds from exercise of stock options............................ 563,500 -- 27,122
Repayments of mortgages and other debts............................ (491,525) (4,166,092) (143,505)
Proceeds from note payable......................................... -- -- 4,000,000
Purchase of treasury stock......................................... -- -- (424)
------------- ------------- -------------
Cash provided by financing....................................... 72,279,475 21,898,908 3,883,193
------------- ------------- -------------
Increase in cash and cash equivalents................................ 42,731,006 1,654,292 4,442,866
Cash balances:
Beginning of period................................................ 8,881,061 7,226,769 2,783,903
------------- ------------- -------------
End of period...................................................... $ 51,612,067 $ 8,881,061 $ 7,226,769
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
F-6
<PAGE>
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Supplemental disclosures of cash flow information:
Cash paid during the year for interest............................. $ 161,102 $ 327,205 $ 163,414
Cash paid during the year for federal income taxes................. $ 2,109,955 $ 217,920 $ 1,331,281
Non-cash investing activities:
Common stock issued for business acquisition....................... $ 10,870,817 $ -- $ --
Purchase of block of renewal commission through installment note... $ 650,000 $ -- $ --
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
1. Summary of Significant Accounting Policies:
Basis of Presentation:
The accompanying consolidated financial statements of Penn Treaty American
Corporation and its Subsidiaries (the Company) have been prepared in accordance
with generally accepted accounting principles (GAAP) and include Penn Treaty
Life Insurance Company (PTLIC),Network America Life Insurance Company
(Network America), American Network Insurance Company (ANIC) and Senior
Financial Consultants Company. All significant intercompany transactions and
balances have been eliminated in consolidation. Certain prior year amounts have
been reclassified to conform with the current year presentation.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent liabilities and the reported
amounts of revenues and expenses. Actual results could differ from those
estimates.
The Company is subject to interest rate risk to the extent its investment
portfolio cash flows are not matched to its insurance liabilities. Management
believes it manages this risk through modeling of the cash flows under
reasonable scenarios.
Nature of Operations:
The Company sells accident and health, life and disability insurance through
its wholly-owned subsidiaries. The Company's principal lines of business are
long-term care products and home health care products. The Company distributes
its products principally through managing general agents and independent agents.
The Company operates its home office in Allentown, Pennsylvania and has
satellite offices in California, Florida and Vermont, whose principal functions
are to market and underwrite new business. State regulatory authorities have
powers relating to granting and revoking licenses to transact business, the
licensing of agents, the regulation of premium rates and trade practices, the
form and content of insurance policies, the content of advertising material,
financial statements and the nature of permitted practices. The Company is
licensed to operate in 49 states. Sales in seven states accounted for
approximately 73% of the Company's premiums for the year ended December 31,
1996.
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 or 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.
F-8
<PAGE>
The cumulative effect of adopting SFAS No. 115 as of January 1, 1994 was an
increase in the balance of shareholders' equity of approximately $3,528,500 to
reflect the net unrealized gain (net of approximately $1,512,000 in deferred
income taxes) on investment securities classified as available for sale. As of
December 31, 1995, shareholders' equity was increased by approximately
$4,056,000 due to net unrealized gains of approximately $6,146,000 in the
investment portfolio. As of December 31, 1996 shareholders' equity was increased
by approximately $2,261,000 due to net unrealized gains of approximately
$3,426,000.
Realized investment gains and losses, including provisions for market
declines considered to be other than temporary, are included in income. Gains
and losses on sales of investment securities are computed on the specific
identification method.
Policy loans are stated at the aggregate unpaid principal balance.
Unamortized Deferred Policy Acquisition Costs:
The costs primarily related to and varying with the acquisition of new
business, principally commissions, underwriting and policy issue expenses, have
been deferred. These deferred costs are amortized over the related
premium-paying periods utilizing the same projected premium assumptions used in
computing reserves for future policy benefits. Net policy acquisition costs
deferred, on the consolidated statements of operations, are net of amortization
of $13,678,181, $11,720,966, and $13,012,937 for the years ended December 31,
1996, 1995, and 1994, respectively.
Property and Equipment:
Property and equipment are stated at cost, less accumulated depreciation and
amortization. Expenditures for improvements which materially increase the
estimated useful life of the asset are capitalized. Expenditures for repairs and
maintenance are charged to operations as incurred. Depreciation is provided
principally on a straight-line basis over the related asset's estimated life.
Upon sale or retirement, the cost of the asset and the related accumulated
depreciation are removed from the accounts and the resulting gain or loss, if
any, is included in operations. During 1996, the Company capitalized
approximately $1,500,000 in computer software expenses.
Cash and Cash Equivalents:
Cash and cash equivalents include highly liquid debt instruments purchased
with a maturity of three months or less.
Cost in Excess of Fair Value of Net Assets Acquired:
The costs in excess of fair value of net assets acquired (goodwill) for
acquisitions made under purchase accounting methods are being amortized to
expense on a straight-line basis over a 10 to 40-year range.
Present Value of Future Profits Acquired:
The present value of all anticipated future profits of ANIC's acquired
business is being amortized over the life of insurance business acquired. During
1996, approximately $138,000 was amortized to expense.
F-9
<PAGE>
Other Assets:
Other assets consist primarily of due and unpaid insurance premiums and
unamortized debt offering costs.
Income Taxes:
Deferred income taxes relate principally to temporary differences in
reporting policy acquisition costs and policy reserves for financial statement
and income tax purposes. Deferred income tax assets and liabilities have been
recorded for temporary differences between the reported amounts of assets and
liabilities in the accompanying financial statements and those in the Company's
income tax return.
Premium Recognition:
Premiums on accident and health insurance, the majority of which is
guaranteed renewable, and life insurance are recognized when due. Estimates of
premiums due but not yet collected are accrued.
Policy Reserves and Policy and Contract Claims:
The Company establishes liabilities to reflect the impact of level renewal
premiums and the increasing risks of claims losses as policyholders age.
The present value of estimated future policy benefits to be paid to or on
behalf of policyholders less the present value of estimated future net premiums
to be collected from policyholders is accrued when premium revenue is
recognized. Those estimates are based on assumptions, such as estimates of
expected investment yield, mortality, morbidity, withdrawals and expenses,
applicable at the time insurance contracts are made, including a provision for
the risk of adverse deviation. These reserves differ from policy and contract
claims, which are recognized when insured events occur.
Policy and contract claims include amounts representing: (1) the actual in
force amounts for reported life claims and an estimate of incurred but
unreported claims; (2) an estimate, based upon prior experience, for accident
and health claims reported, and incurred but unreported losses. The methods for
making such estimates and establishing the resulting liabilities are continually
reviewed and updated and any adjustments resulting therefrom are reflected in
earnings currently.
The establishment of appropriate reserves is an inherently uncertain
process, and there can be no assurance that the ultimate liability will not
materially exceed the Company's claim and policy reserves and have a material
adverse effect on the Company's results of operations and financial condition.
Due to the inherent uncertainty of estimating reserves, it has been necessary,
and may over time continue to be necessary, to revise estimated future
liabilities as reflected in the Company's policy reserves and policy and
contract claims.
In late 1994, the Company began marketing its Independent Living policy, a
home health care insurance product which provides coverage over the full term of
the policy for services furnished by a homemaker or companion who is not a
qualified or licensed care provider. Because of the Company's relatively limited
claims experience with this product, the Company may incur higher than expected
F-10
<PAGE>
loss ratios and may be required to adjust further its reserve levels with
respect to this product.
The Company discounts all policy and contract claims which involve fixed
periodic payments extending beyond one year. This is consistent with the method
allowed for statutory reporting and the long duration of claims, as well as
industry practice for long-term care policies. Benefits are payable over periods
ranging from six months to five years and lifetime. These liabilites are
discounted using an assumed rate of 7% for 1996, 1995 and 1994 claims, 6% for
1993 and 1992 claims and 8% for claims in 1991 and prior.
Earnings Per Share:
Primary earnings per share amounts have been computed by dividing the
applicable amounts by the weighted average common shares outstanding. Due to the
issuance of the convertible debt, the Company calculated fully diluted earnings
per share in 1996. Prior to 1996, the impact of the outstanding options was
non-dilutive. Fully diluted earnings per share amounts have been computed by
dividing the applicable net income amounts, as adjusted assuming all convertible
debt had converted to common shares, by the weighted average common shares
outstanding, as adjusted assuming all convertible debt had converted to
common shares, and including the impact of all outstanding options as accounted
for using the treasury stock methodology.
New Accounting Principle:
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 establishes standards for computing and presenting earnings per share,
and simplifies the standards for computing earnings per share previously found
in Accounting Principles Board Opinion No. 15, "Earnings per Share." Primary and
fully diluted earnings per share will be replaced with basic and diluted
earnings per share, and these amounts are required to be shown on the face of
the income statement. In addition, a reconciliation of the numerator and
denominator of the basic earnings per share computation to the numerator and
denominator of the diluted earnings per share computation is required.
Basic earnings per share excludes dilution and is computed by dividing
income available to common stockholders by the weighted-average number of common
shares outstanding for the period. Diluted earnings per share reflects the
potential dilution that could occur if securities or other contracts to issue
common stock were exercised or converted into common stock. This Statement is
effective for financial statements issued for periods ending after December 15,
1997, and requires restatement of all prior-period earnings per share data
presented. Management has not determined the impact that SFAS 128 may have on
the financial statements.
2. Acquisitions of Businesses
On August 30, 1996, the Company acquired Health Insurance of Vermont. The
resultant wholly-owned subsidiary of the Company was incorporated under the laws
of the state of Vermont as ANIC. Pursuant to the merger, HIVT shareholders
received stock consideration consisting of 472,644 shares of the Company's
common stock and cash consideration of $2,200,380. Using the market value of the
Company's common stock at the date of closing, the value of the shares of
Company common stock issued on the merger was $10,870,817. As of December 31,
1996, ANIC had a total of 16,674 disability policies in-force and approximately
$7,092,000 of in-force annualized premiums. For the four-month period ended
December 31, 1996, ANIC generated premiums of $2,274,442 and net income of
$299,354. The acquisition was accounted for as a purchase.
F-11
<PAGE>
In connection with this purchase, the Company recognized goodwill in the
amount of $4,294,947, which is being amortized, straight-line, over a 25 year
period. The operating results of ANIC have been included in the consolidated
statement of income from the date of acquisition. Consolidated pro forma net
income and earnings per share would not have been materially different from the
reported amounts for fiscal 1996 and 1995.
On January 29, 1996, the Company acquired the rights to all renewal
commissions on a block of in-force policies and sub-agent contracts from a
marketing general agent. This agreement includes insurance policies of PTLIC
and other unaffiliated insurance companies. The cost of the acquisition was
$650,000. The Company recognized $251,108 of net commission income in 1996 from
this acquisition.
3. Investments and Financial Instruments:
Net investment income is applicable to the following investments:
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------ ------------
<S> <C> <C> <C>
Bonds............................ $10,262,611 $7,756,571 $5,798,152
Equity securities................ 92,358 27,920 32,833
Cash and short-term investments.. 796,319 480,274 260,853
------------- ------------ ------------
Investment income................ 11,151,288 8,264,765 6,091,838
Investment expense............... (169,157) (161,956) (145,804)
------------- ------------ ------------
Net investment income............ $10,982,131 $8,102,809 $5,946,034
------------- ------------ ------------
------------- ------------ ------------
</TABLE>
F-12
<PAGE>
The amortized cost and estimated market value of investments in debt
securities as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------
<S> <C> <C> <C> <C>
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
------------ ---------------- ---------------- --------------
U.S. Treasury securities
and obligations of U.S
Government authorities
and agencies.................. $149,354,655 $2,116,948 ($1,275,588) $150,196,015
Obligations of states and
political sub-divisions....... 30,460,952 1,076,049 0 31,537,001
Debt securities issued by
foreign governments........... 424,275 21,725 (750) 445,250
Corporate securities........... 19,068,114 61,013 (169,427) 18,959,700
Other debt securities.......... 200,583 0 (8,583) 192,000
-------------- ---------------- ---------------- --------------
$199,508,579 $3,275,735 ($1,454,348) $201,329,966
-------------- ---------------- ---------------- --------------
-------------- ---------------- ---------------- --------------
</TABLE>
<TABLE>
<CAPTION>
DECEMBER 31, 1995
---------------------------------------------------------------
<S> <C> <C> <C> <C>
AMORTIZED GROSS UNREALIZED GROSS UNREALIZED ESTIMATED
COST GAINS LOSSES MARKET VALUE
-------------- ---------------- ---------------- --------------
U.S. Treasury securities
and obligations of U.S
Government authorities
and agencies................... $103,119,270 $4,124,815 ($83,244) $107,160,841
Obligations of states and
political sub-divisions........ 24,952,467 1,194,533 0 26,147,000
Debt securities issued by
foreign governments............ 449,055 33,945 (2,500) 480,500
Corporate securities............ 5,619,499 227,415 (26,914) 5,820,000
Other debt securities........... 2,460,484 174,516 0 2,635,000
-------------- ---------------- ---------------- --------------
$136,600,775 $5,755,224 ($112,658) $142,243,341
-------------- ---------------- ---------------- --------------
-------------- ---------------- ---------------- --------------
</TABLE>
F-13
<PAGE>
The amortized cost and estimated market value of debt securities at December
31, 1996 by contractual maturity, are shown below. Expected maturities may
differ from contractual maturities because borrowers may have the right to call
or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
AMORTIZED ESTIMATED
COST MARKET VALUE
------------- --------------
<S> <C> <C>
Due in one year or less.................... $ 8,230,765 $ 8,249,250
Due after one year through five years...... 68,303,224 69,318,518
Due after five years through ten years..... 109,308,468 109,758,700
Due after ten years........................ 13,666,122 14,003,498
-------------- --------------
$199,508,579 $201,329,966
-------------- --------------
-------------- --------------
F-14
<PAGE></TABLE>
Gross proceeds and realized gains and losses on the sales of debt
securities, excluding calls, were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
REALIZED REALIZED
YEAR ENDED DECEMBER 31, PROCEEDS GAINS LOSSES
- ------------------------- ------------- ---------- ---------
<S> <C> <C> <C>
1996............. $16,684,028 $145,371 $15,834
1995............. 5,356,956 53,648 7,500
1994............. 4,671,988 48,170 --
</TABLE>
Gross proceeds and realized gains and losses on the sales of equity
securities were as follows:
<TABLE>
<CAPTION>
GROSS GROSS
REALIZED REALIZED
YEAR ENDED DECEMBER 31, PROCEEDS GAINS LOSSES
- ------------------------- ---------- --------- ----------
<S> <C> <C> <C>
1996............. $ 303,560 $ 12,580 $ 122,157
1995............. -- -- --
1994............. 1,451,329 23,388 163,334
</TABLE>
Gross unrealized gains (losses) pertaining to equity securities were as
follows:
<TABLE>
<CAPTION>
GROSS GROSS
ORIGINAL UNREALIZED UNREALIZED ESTIMATED
YEAR ENDED DECEMBER 31, COST GAINS LOSSES MARKET VALUE
- ------------------------- ------------ ------------ ----------- -------------
<S> <C> <C> <C> <C>
1996............. $ 9,642,912 $ 1,717,865 ($ 113,261) $ 11,247,516
1995............. 2,102,529 561,509 (58,426) 2,605,612
1994............. 880,507 135,651 (82,871) 933,287
</TABLE>
The Company's bond investment portfolio is comprised primarily of investment
grade securities at December 31, 1996. Securities are classified as "investment
grade" by utilizing ratings furnished by independent bond rating agencies.
Pursuant to certain statutory licensing requirements, as of December 31,
1996, the Company had on deposit bonds aggregating $8,029,732 in insurance
department safekeeping accounts. The Company is not permitted to remove the
bonds from these accounts without approval of the regulatory authority.
F-15
<PAGE>
4. Policy Reserves and Claims:
Policy reserves have been computed principally by the net level premium
method based upon estimated future investment yield, mortality, morbidity,
withdrawals and other benefits. The composition of the policy reserves at
December 31, 1996 and 1995 and the assumptions pertinent thereto are
presented below:
<TABLE>
<CAPTION>
AMOUNT OF POLICY RESERVES
AS OF DECEMBER 31,
-----------------------------
1996 1995
-------------- -------------
<S> <C> <C>
Accident and health........................................... $ 101,107,697 $ 62,007,433
Annuities and other........................................... 339,910 365,651
Ordinary life, individual..................................... 8,183,357 6,753,197
</TABLE>
<TABLE>
<CAPTION>
YEARS OF ISSUE DISCOUNT RATE
-------------- -------------
<S> <C> <C>
Accident and health........................................... 1976 to 1986 7.0%
1987 7.5%
1988 to 1991 8.0%
1992 to 1995 6.0%
1996 7.0%
Annuities and other........................................... 1977 to 1983 6.5% & 7.0%
Ordinary life, individual..................................... 1962 to 1996 3.0% to 5.5%
</TABLE>
BASIS OF ASSUMPTION
- -------------------
<TABLE>
<S> <C>
Accident and health....................... Morbidity and withdrawals based on actual and
projected experience.
Annuities and other....................... Primarily funds on deposit inclusive of
accrued interest.
Ordinary life, individual................. Mortality based on 1955-60 Intercompany
Mortality Table Combined Select and Ultimate.
</TABLE>
Policy and contract claims include approximately $45,300,000 and $38,150,000
at December 31, 1996 and 1995, respectively, that are discounted at varying
interest rates. The amount of discount was $3,618,000 and $2,044,000 at
December 31, 1996 and 1995, respectively.
Total reserves, including policy and contract claims, reported to statutory
authorities were approximately $3,510,000 and $3,077,000 less than those
recorded for GAAP as of December 31, 1996 and 1995, respectively.
F-16
<PAGE>
Activity in policy and contract claims is summarized as follows:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Balance at January 1........................................... $ 50,206,608 $ 41,344,428
Less reinsurance recoverables.................................. 1,576,207 1,198,897
------------- -------------
Net balance at January 1....................................... 48,630,401 40,145,531
Incurred related to:
Current year................................................. 52,128,679 43,599,323
Prior years.................................................. 3,099,034 2,047,708
------------- -------------
Total incurred............................................. 55,227,713 45,647,031
Paid related to:
Current year................................................. 15,894,011 11,867,015
Prior years.................................................. 32,149,776 25,295,146
------------- -------------
Total paid................................................. 48,043,787 37,162,161
Reserves assumed in acquisition................................ 447,111 --
Net balance at December 31..................................... 56,261,438 48,630,401
Plus reinsurance recoverables................................ 1,277,942 1,576,207
------------- -------------
Balance at December 31....................................... $ 57,539,380 $ 50,206,608
------------- -------------
------------- -------------
</TABLE>
The amounts related to prior years' incurral of claims reflects the
accretion of interest due to the discounting of pending claim reserves as
well as adjustments to reflect actual versus estimated claims experience.
5. Long-Term Debt:
Long-term debt, at December 31, 1996 and 1995 are as follows:
1996 1995
---- ----
Convertible, subordinated debt issued in November
1996, with semi-annual coupon of 6.25% annual
percentage rate. Debt is callable after December 2,
1999 at declining redemption values and matures in
2003. Prior to maturity, the debt is convertible to
shares of the Company's common stock at $28.44. $74,750,000 $ 0
Mortgage loan with interest rate fixed for two years
at 7.3% effective September 1996, which repriced
from 6.6% in 1995. Although carrying a variable rate,
the loan has an effective fixed rate due to an offsetting
swap with the same institution. Current monthly payment
of $20,103 based on a twelve year amortization schedule
with a balloon payment due September 14, 1998;
collateralized by property with depreciated cost of
$2,630,429 and $2,700,968 as of December 31, 1996 and
1995, respectively. 1,951,176 2,060,069
Installment note for purchase of block of renewal
commissions in January 1996, payable over two years
with interest accrued at 7% 325,000 0
Capital lease 88,416 146,048
----------- ----------
$77,114,592 $2,206,117
----------- ----------
----------- ----------
F-17
<PAGE>
Maturities of mortgage and other debt are as follows:
1997.............. $ 367,002
1998.............. 1,997,590
1999.............. --
2000.............. --
2001.............. --
Thereafter........ 74,750,000
----------
$77,114,592
-----------
-----------
6. Federal Income Taxes:
The provision for Federal income taxes for the years ended December 31
consisted of:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ------------ ------------
<S> <C> <C> <C>
Current................................................................. $ 1,752,000 $ 882,968 $ 782,380
Deferred................................................................ 3,095,000 2,726,032 1,779,620
------------ ------------ ------------
$ 4,847,000 $ 3,609,000 $ 2,562,000
------------ ------------ ------------
------------ ------------ ------------
</TABLE>
Deferred income tax assets and liabilities have been recorded for temporary
differences, between the reported amounts of assets and liabilities in the
accompanying financial statements and those in the Company's income tax
return. The sources of these differences and the approximate tax effect are
as follows for the years ended December 31:
1996 1995
----------- ----------
Deferred policy acquisition costs....... $20,677,263 $15,896,021
Policy reserves......................... (4,690,679) (2,627,583)
Present value of future profits
acquired.............................. 1,344,700 --
Premiums due and unpaid................. 829,600 592,225
Alternative minimum tax carryforward.... (599,000) --
Other................................... 68,595 256,775
Unrealized appreciation on
investments........................... 1,164,837 2,089,521
---------- -----------
Total deferred income taxes......... $18,795,316 $16,206,959
---------- -----------
---------- -----------
A reconciliation of the income tax provision computed using the Federal
income tax rate of 34% to income before Federal income taxes is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- ------------
<S> <C> <C> <C>
Computed Federal income tax provision at statutory rate................. $5,782,000 $4,289,000 $3,170,000
Small life insurance company deduction.................................. (560,000) (577,000) (579,000)
Tax-exempt interest income.............................................. (478,000) (431,000) (325,000)
Other................................................................... 103,000 328,000 296,000
---------- ---------- ----------
$4,847,000 $3,609,000 $2,562,000
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
At December 31, 1996, the accumulated earnings of the Company for Federal
income tax purposes included $1,055,873 of "Policyholders' Surplus", a special
memorandum tax account. This memorandum account balance has not been currently
taxed, but income taxes computed at then-current rates will become payable if
surplus is distributed. Provisions of the Deficit Reduction Act of 1984 (the
"Act") do not permit further additions to the "Policyholders' Surplus"
F-18
<PAGE>
account. "Shareholders' Surplus" represents an accumulation of taxable income
(net of tax thereon) plus the dividends received deduction, tax-exempt
interest, and certain other special deductions as provided by the Act. At
December 31, 1996, the combined balance in the "Shareholders' Surplus"
account amounted to approximately $21,470,000. There is no present intention to
make distributions in excess of "Shareholders' Surplus."
7. Regulatory Restrictions:
The Company's insurance subsidiaries (PTLIC, Network America, and ANIC) are
required by insurance laws and regulations to maintain minimum capital and
surplus. At December 31, 1996 and 1995, the subsidiaries' capital and surplus
exceeded the minimum required capital and surplus in all states in which they
are licensed to conduct business.
Under Pennsylvania and Vermont insurance law, dividends may be paid from
PTLIC, Network America or ANIC only from statutory profits of earned surplus and
require Insurance Department approval if the dividend is in excess of the
greater of 10% of surplus or net statutory income of the prior year.
Net income and capital and surplus as reported in accordance with statutory
accounting principles for the Company's insurance subsidiaries are as follows:
1996 1995 1994
----------- ---------- ------------
Net income (loss).............. $(4,512,941) $ 839,491 $ (97,230)
Capital and surplus............ $81,794,728 $32,291,981 $21,067,123
The National Association of Insurance Commissioners (NAIC) has
established risk-based capital standards that life and health insurers and
reinsurers must meet. In concept, risk-based capital standards are designed
to measure the acceptable amount of capital an insurer should have based on
the inherent and specific risks of each insurer. Insurers failing to meet
their benchmark capital level may be subject to scrutiny by the insurer's
domiciled insurance department and, ultimately, rehabilitation or
liquidation. Based on the NAIC's currently adopted standards, the Company has
capital and surplus in excess of the required levels. The differences in
statutory net income compared to GAAP are primarily due to the immediate
expensing of acquisition costs and deferred income taxes. Due to these
differences, under statutory accounting there is a net loss and decrease in
surplus, called surplus strain, in years of high growth. The surplus needed
to sustain growth must be raised externally or from profits from existing
business. In 1995, the Company received permission to include $3,287,501 of
this surplus strain, related to a new required valuation method, as a charge
to surplus.
8. Pension Plan and 401(k) Plan:
Until August 1, 1996, the Company maintained a defined contribution pension
plan covering substantially all employees. The Company contributed 3% of each
eligible employee's annual covered payroll to the plan. All contributions were
subject to limitations imposed by the Internal Revenue Code on retirement plans
and Section 401(k) plans. Upon the termination of the plan on August 1, 1996,
each participant became fully vested. A prorata portion of the 1996 scheduled
contribution was put into the plan upon termination. Pension expense was
$30,000, $55,000, and $70,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
F-19
<PAGE>
On August 1, 1996, the Company adopted a 401(k) retirement plan, covering
substantially all employees with one year of service. Under the plan,
participating employees may contribute up to 15% of their annual salary on a
pre-tax basis. The Company, under the plan, equally matches employee
contributions up to the first three percent of the employee's salary. The
Company and employee portion of the plan is vested immediately. The Company
expense in 1996 was $36,000. The Company may elect to make a discretionary
contribution to the plan, which will be contributed proportionately to each
eligible employee. The Company did not make a discretionary contribution in
1996.
ANIC maintained a defined benefit pension plan for all ANIC employees in
1996. This plan was subsequently terminated in 1997, with all eligible employees
joining the Company's 401(k) plan. There was no 1996 contribution expense for
this plan.
9. Stock Option Plans:
At December 31, 1996, the Company has two stock-based compensation plans
which are described below. The Company has adopted the disclosure-only
provisions of Statement of Financial Accounting Standards No. 123, ("SFAS No.
123"), and applies APB Opinion No. 25 "Accounting for Stock Issued to Employees"
and related Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock option plans. Had
compensation cost for the Company's two stock-based compensation plans been
determined based on the fair value at the grant dates for awards under those
plans consistent with the method of FASB Statement 123, the Company's net income
and earnings per share would have been reduced to the pro forma amounts
indicated below. The effects of applying the SFAS No. 123 proforma disclosure
are not indicative of future amounts.
<TABLE>
<CAPTION>
1996 1995
------------- ------------
<S> <C> <C> <C>
Net Income............................... As reported $12,160,347 $ 8,828,883
Proforma $12,017,629 $ 8,801,727
Primary Earnings Per Share............... As reported $ 1.70 $ 1.53
Proforma $ 1.68 $ 1.53
Fully Diluted Earnings Per Share......... As reported $ 1.64 $ 1.50
Proforma $ 1.62 $ 1.49
</TABLE>
Compensation cost is estimated using the Black-Scholes model with the
following assumptions for both 1995 and 1996: an expected life ranging from
5.3 to 8.3 years, volatility of 27.9% and a risk free rate ranging from 6.21%
to 6.35%. The weighted average fair value of those options granted in 1995
and 1996 was $4.98 and $8.21, respectively. No compensation expense is
calculated for those options granted prior to 1995.
The Company has an Incentive Stock Option Plan which provides for the
granting of options to purchase up to 600,000 shares of common stock. The
exercise price of all options granted under the plan may not be less than the
fair market value of the shares on the date of grant (110% of fair market value
in the case of any person who holds more than 10% of the combined voting power
of all classes of outstanding stock). The maximum allowable term of each option
is ten
F-20
<PAGE>
years (five years in the case of holders of more than 10% of the combined
voting power of all classes of outstanding stock), and the options become
exercisable in four equal, annual installments commencing one year from the
option grant date.
Effective May, 1995, the Company adopted a Participating Agent Stock Option
Plan which provides for the granting of options to purchase up to 300,000 shares
of common stock. The exercise price of all options granted under the plan may
not be less than the fair market value of the shares on the date of grant. The
maximum allowable term of each option is ten years, and the options become
exercisable in four equal, annual installments commencing one year from the
option grant date.
The following is a summary of the Company's option activity, including
grants, exercises, forfeitures and average price information:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------- ------------------------ ------------------------
<S> <C> <C> <C> <C> <C> <C>
EXERCISE EXERCISE EXERCISE
PRICE PRICE PRICE
OPTIONS PER OPTION OPTIONS PER OPTION OPTIONS PER OPTION
--------- ----------- --------- ------------- --------- -------------
Outstanding at beginning of year.................... 396,015 10.88 229,915 9.52 235,752 9.45
Granted............................................. 184,800 21.03 166,100 14.13 0 --
Exercised........................................... 66,907 8.42 0 -- 4,501 5.89
Canceled............................................ 3,800 12.38 0 -- 1,236 10.04
Outstanding at end of year.......................... 510,108 14.84 396,016 10.88 229,915 9.52
Exercisable at end of year.......................... 200,540 -- 197,929 -- 148,698 --
</TABLE>
OUTSTANDING REMAINING EXERCISABLE
AT DECEMBER CONTRACTUAL AT DECEMBER
RANGE OF EXERCISE PRICES 31, 1996 LIFE (YRS) 31, 1996
- ------------------------- ----------- ----------------- -----------
5.00............. 818 1 818
5.50............. 2,632 1 2,632
7.92............. 7,020 2 7,020
8.71............. 5,265 4 5,265
8.92............. 45,042 5 45,042
9.81............. 44,850 5 44,850
11.17............ 39,116 4 39,115
12.28............ 26,340 4 26,340
12.38............ 91,325 8 18,575
12.63............ 16,100 8 4,025
13.61............ 48,000 8 6,858
20.50............ 135,600 9 0
22.55............ 48,000 9 0
510,108 200,540
F-21
<PAGE>
10. Commitments and Contingencies:
Operating Lease Commitments:
The total net rental expenses under all leases amounted to approximately
$174,000, $142,000 and $148,000 for the years ended December 31, 1996, 1995 and
1994, respectively.
During May 1987, the Company assigned its rights and interests in a land
lease to a third party for $175,000. The agreement indemnifies the Company
against any further liability with respect to future lease payments. The Company
remains contingently liable to the lessor under the original deed of lease for
rental payments of $16,080 per year, the amount being adjustable based upon
changes in the consumer price index since 1987, through the year 2063.
Litigation:
The Company is a defendant in various lawsuits arising in the ordinary
course of business. In the opinion of management, the resolution of these
lawsuits will not have a significant effect on the financial condition or
results of operations of the Company.
11. Reinsurance:
Effective October, 1994, PTLIC and Network America entered into reinsurance
agreements to cede 100% of benefits exceeding 36 months on certain home health
care policies. Total reserve credits taken related to this agreement as of
December 31, 1996 and 1995 were approximately $859,000 and $391,000,
respectively.
The Company currently reinsures with unaffiliated companies any life
insurance policy to the extent the risk on that policy exceeds $50,000.
Effective January, 1994, PTLIC and Network America entered reinsurance
agreements to cede 100% of certain life, accident and health and Medicare
supplement insurance to a third party insurer. Total reserve credits taken
related to this agreement as of December 31, 1996 and 1995 were approximately
$530,000 and $662,000, respectively.
Network America is party to a Reinsurance Agreement to cede 100% of certain
whole life and deferred annuity policies to be issued by Network America to a
third party insurer. These policies are intended for the funeral arrangement or
"pre-need" market. Total reserve credits taken related to this agreement as of
December 31, 1996 and 1995 were approximately $3,862,000 and $3,735,000,
respectively. The third party reinsurer maintains securities at least equal to
the statutory reserve credit in escrow with a bank. Effective January 1, 1996,
this Agreement was modified, and as a result, no new business is reinsured under
this facility.
Network America is party to a coinsurance agreement on a previously acquired
block of long term care business whereby 66% is ceded to a third party. At
December 31, 1996 and 1995, reserve credits taken related to this treaty were
approximately $1,615,000 and $2,130,000, respectively.
ANIC reinsures approximately $500,00 of its risk with three reinsuring
companies, all of which are authorized to do business in the State of Vermont.
F-22
<PAGE>
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
GROSS CEDED TO FROM OTHER NET
AMOUNT OTHER COMPANIES COMPANIES AMOUNT
------------- ---------------- ----------- -------------
<S> <C> <C> <C> <C>
December 31, 1996
Ordinary Life Insurance In-Force.................... $ 66,932,000 $ 18,004,000 $ 0 $ 48,928,000
Premiums:
Accident and health............................... 130,551,727 4,438,137 543,820 126,657,410
Life.............................................. 4,146,768 612,399 0 3,534,369
Benefits to Policyholders:
Accident and health............................... 54,823,330 1,169,942 419,457 54,072,845
Life.............................................. 1,631,715 476,847 0 1,154,868
Inc (dec) in Policy Reserves:
Accident and health............................... 28,567,856 763,605 (17,051) 27,787,200
Life.............................................. 1,404,419 426,200 0 978,219
Commissions......................................... $ 44,770,782 $ 1,547,207 $ 81,573 $ 43,305,148
December 31, 1995
Ordinary Life Insurance In-Force.................... $ 63,653,000 $ 19,977,000 $ 0 $ 43,676,000
Premiums:
Accident and health............................... 101,103,823 2,512,930 581,010 99,171,903
Life.............................................. 4,815,878 1,621,176 0 3,194,702
Benefits to Policyholders:
Accident and health............................... 46,073,992 1,542,816 83,631 44,614,807
Life.............................................. 1,511,812 479,588 0 1,032,224
Inc (dec) in Policy Reserves:
Accident and health............................... 18,569,195 (3,107) (12,041) 18,560,261
Life.............................................. 1,257,267 585,284 0 671,983
Commissions......................................... $ 37,542,304 $ 1,278,316 $ 87,152 $ 36,351,140
December 31, 1994
Ordinary Life Insurance In-Force.................... $ 46,666,000 $ 13,880,000 $ 0 $ 32,786,000
Premiums:
Accident and health............................... 80,870,772 2,270,819 605,000 79,204,953
Life.............................................. 4,011,607 1,381,726 0 2,629,881
Benefits to Policyholders:
Accident and health............................... 39,865,707 1,181,485 852,801 39,537,023
Life.............................................. 788,369 407,475 0 380,894
Inc (dec) in Policy Reserves:
Accident and health............................... 8,393,090 249,249 (183,860) 7,959,981
Life.............................................. 1,657,464 777,878 0 879,586
Commissions......................................... $ 27,976,116 $ 836,187 $ 90,750 $ 27,230,679
</TABLE>
The Company remains contingently liable in the event that the reinsuring
companies are unable to meet their obligations.
F-23
<PAGE>
12. Transactions with Related Parties:
Irv Levit Insurance Management Corporation ("IMC"), an insurance agency
which is owned by the President of the Company, produced approximately $55,000,
$62,000, and $65,000 of new and renewal premiums for PTLIC, for the years ended
December 31, 1996, 1995 and 1994, respectively, for which it received
commissions of approximately $12,000, $14,000 and $15,000, respectively.
IMC also received commission overrides on business written for PTLIC by
certain agents, principally general agents who were IMC agents prior to January
1979 and any of their sub-agents hired prior and subsequent to January 1979. For
the years ended December 31, 1996, 1995 and 1994, IMC commission overrides
totaled approximately $539,000, $517,000, and $520,000, respectively.
13. Major Agencies:
A managing general agent accounted for approximately 21%, 18% and 20% of
total premiums in 1996, 1995 and 1994, respectively.
14. Concentrations of Credit Risk:
Financial instruments which potentially subject the Company to
concentrations of credit risk consist principally of cash and cash equivalents
and investments. The Company places its cash and cash equivalents and
investments with high quality financial institutions, and attempts to limit the
amount of credit exposure to any one institution. However, at December 31, 1996,
and at other times during the year, amounts in any one institution exceeded the
Federal Deposit Insurance Corporation limits.
15. Stock Dividend
On April 19, 1995, the Board of Directors of the Company declared a 50%
stock dividend payable to shareholders of record on May 3, 1995. The dividend
was distributed on May 15, 1995. Certain amounts comprising shareholders' equity
in these financial statements, weighted average shares outstanding and earnings
per share have been restated to reflect this dividend.
16. Fair Value of Financial Instruments
Fair values are based on estimates using present value or other valuation
techniques where quoted market prices are not available. Those techniques are
significantly affected by the assumptions used, including the discount rate and
estimates of future cash flows. The fair value amounts presented do not purport
to represent and should not be considered representative of the underlying value
of the Company.
The methods and assumptions used to estimate the fair values of each class
of the financial instruments described below are as follows:
F-24
<PAGE>
Investments--The fair value of fixed maturities and equity securities are
based on quoted market prices. It is not practicable to determine the fair value
of policy loans since such loans are not separately transferable and are often
repaid by reductions to benefits and surrenders.
Cash and cash equivalents--The statement value approximates fair value.
Long-term debt--The statement value approximates the fair value of mortgage
debt and capitalized leases, since the instruments carry interest rates which
approximate market value. The convertible, subordinated debt, as a publicly
traded instrument, has a readily accessible fair market value, and, as such is
reported at that value.
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------------------ ------------------------------
<S> <C> <C> <C> <C>
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------------- -------------- -------------- --------------
Financial assets:
Investments
Bonds, available for sale.................. $ 201,329,966 $ 201,329,966 $ 142,243,341 $ 142,243,341
Equity securities.......................... 11,247,516 11,247,516 2,605,612 2,605,612
Policy loans............................... 84,232 84,232 79,404 79,404
Cash and cash equivalents.................... 51,612,067 51,612,067 8,881,061 8,881,061
Financial liabilities:
Convertible debt............................. $ 74,750,000 $ 69,132,948 $ -- $ --
Mortgage and other debt...................... 2,364,592 2,364,592 2,206,117 2,206,117
</TABLE>
F-25
<PAGE>
PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENT SCHEDULE
<TABLE>
<CAPTION>
PAGES
----------
<S> <C>
Report of Independent Accountants on Schedule..................................... S-2
Schedule III--Condensed Financial Information of Registrant....................... S-3--S-5
</TABLE>
S-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors of
Penn Treaty American Corporation
Allentown, Pennsylvania
Our report on the consolidated financial statements of Penn Treaty American
Corporation and Subsidiaries is included on page F-2 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in the index on page S-1 of this
Form 10-K.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 5, 1997
S-2
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES (PARENT COMPANY)
Schedule III--Condensed Financial Information of Registrant
Balance Sheets
as of December 31, 1996 and 1995
<TABLE>
<CAPTION>
1996 1995
-------------- -------------
<S> <C> <C>
ASSETS
Bonds, available for sale at market (amortized cost
$11,399,502 and $7,472,848, respectively)................... $11,495,000 $7,681,000
Equity securities at market (cost $1,004,250 and $0,
respectively)............................................... 994,500 --
Cash and cash equivalents..................................... 16,375,868 657,086
Investment in subsidiaries*................................... 162,699,321 88,459,123
Other assets.................................................. 4,408,050 1,487,233
-------------- -------------
Total assets.............................................. $ 195,972,739 $ 98,284,442
-------------- -------------
-------------- -------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt................................................ $74,838,415 $146,048
Accounts payable and other liabilities........................ 797,211 --
Deferred income taxes......................................... 29,154 70,772
Due to subsidiaries*.......................................... 1,400,875 960,568
-------------- -------------
Total liabilities......................................... 77,065,655 1,177,388
-------------- -------------
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,
8,116,464 and 7,576,913 shares issued, respectively...... 811,646 757,691
Additional paid-in capital................................. 52,526,956 41,146,594
Unrealized appreciation, net of deferred taxes............. 2,261,154 4,055,788
Retained earnings.......................................... 65,013,202 52,852,855
-------------- -------------
120,612,958 98,812,928
Less 605,629 of common shares held in treasury, at cost.... (1,705,874) (1,705,874)
-------------- -------------
Total shareholders' equity............................... 118,907,084 97,107,054
-------------- -------------
Total liabilities and shareholders' equity............... $ 195,972,739 $ 98,284,442
-------------- -------------
-------------- -------------
</TABLE>
* Eliminated in consolidation.
The condensed financial information should be read in
conjunction with the Penn Treaty American Corporation and
Subsidiaries consolidated statements and notes thereto.
S-3
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES (PARENT COMPANY)
Schedule III-Condensed Financial Information of Registrant
Statements of Operations
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- -------------
<S> <C> <C> <C>
Management fees*.................................................... $56,400 $56,400 $56,400
Investment income................................................... 835,714 275,342 93,762
General and administrative expense.................................. 266,597 410,968 365,806
Interest expense.................................................... 455,756 -- --
------------ ---------- ----------
Gain (loss) before equity in undistributed net earnings of
subsidiaries*..................................................... 169,761 (79,226) (215,644)
Equity in undistributed net earnings of subsidiaries*............... 11,990,586 8,908,109 6,978,445
------------- ------------- -------------
Net income.......................................................... 12,160,347 8,828,883 6,762,801
Retained earnings, beginning of year................................ 52,852,855 44,023,972 37,261,171
------------- ------------- -------------
Retained earnings, end of year...................................... $65,013,202 $52,852,855 $44,023,972
------------- ------------- -------------
------------- ------------- -------------
</TABLE>
* Eliminated in consolidation.
The condensed financial information should be read in
conjunction with the Penn Treaty American Corporation and
Subsidiaries consolidated statements and notes thereto.
S-4
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES (PARENT COMPANY)
Schedule III-Condensed Financial Information of Registrant
Statements of Cash Flows
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income...................................... $ 12,160,347 $ 8,828,883 $ 6,762,801
Adjustments to reconcile net income to cash
provided by operations:
Equity in undistributed earnings of
subsidiaries................................ (12,289,940) (8,908,109) (6,978,445)
Depreciation and amortization................. 113,741 99,528 87,290
Net realized (gains) losses................... 5,495 (30,178) --
Increase (decrease) due to change in:
Due to/from subsidiaries.................... 440,307 302,568 --
Accounts payable and other liabilities...... 797,211 -- --
Other, net.................................. (138,086) (249,338) 309,295
------------ ------------ -----------
Net cash provided by operations........... 1,089,075 43,354 180,941
Cash flows used in investing activities:
Acquisition of business......................... (2,200,380) -- --
Sales and maturities of investments............. 12,372,277 1,512,195 --
Purchase of investments......................... (17,308,676) (8,358,058) --
Acquisition of property and equipment........... (396,882) (883,629) (122,172)
Contribution to subsidiary...................... (50,550,000) (14,000,000) (4,000,000)
------------ ------------ -----------
Net cash used in investing activities..... (58,083,661) (21,729,492) (4,122,172)
Cash flows from financing activities:
Proceeds from convertible debt offering......... 72,207,500 -- --
Proceeds from exercise of stock options......... 563,500 -- --
Repayment of mortgages and other borrowings..... (57,632) (4,052,835) (48,436)
Proceeds from public offering................... -- 26,065,000 27,122
Purchase of treasury stock...................... -- -- (424)
Proceeds from new debt.......................... -- -- 4,000,000
------------ ------------ -----------
Net cash provided by financing activities. 72,713,368 22,012,165 3,978,262
------------ ------------ -----------
Increase in cash and cash equivalents..... 15,718,782 326,027 37,031
Cash and cash equivalents balances:
Beginning of year............................... 657,086 331,059 294,028
------------ ------------ -----------
End of year..................................... $ 16,375,868 $ 657,086 $ 331,059
------------ ------------ -----------
------------ ------------ -----------
Supplemental disclosures of cash flow
information:
Cash paid during the year for interest.......... $ 7,768 $ 199,218 $ 16,964
Non-cash investing activities:
Common stock issued for business................ $ 10,870,817 -- --
</TABLE>
The condensed financial information should be read in conjunction with the
Penn Treaty American Corporation and Subsidiaries consolidated statements
and notes thereto.
S-5
<PAGE>
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not applicable.
PART III
Item 10. Directors and Executive Officers of the Registrant
Incorporated by reference from the Company's Definitive Proxy Statement
for the 1996 Annual Meeting of Shareholders.
Item 11. Executive Compensation
Incorporated by reference from the Company's Definitive Proxy Statement
for the 1996 Annual Meeting of Shareholders.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from the Company's Definitive Proxy Statement
for the 1996 Annual Meeting of Shareholders.
Item 13. Certain Relationship and Related Transactions
Incorporated by reference from the Company's Definitive Proxy
Statement for the 1996 Annual Meeting of Shareholders.
33
<PAGE>
PART IV
Item 14. Exhibits, Financial Statements, Schedule and Reports on Form 8-K
(a) The following documents are filed as a part of this report.
(1) Financial Statements.
<TABLE>
<CAPTION>
PAGES
--------
<S> <C>
Report of Independent Accountants.................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995....... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994................................ F-4
Consolidated Statements of Shareholders' Equity for the years
ended December 31, 1996, 1995, and 1994.......................... F-5
Consolidated Statements of Cash Flow for the years ended December
31, 1996, 1995, and 1994......................................... F-6-F-7
Notes to Consolidated Financial Statements......................... F-8-F-25
(2) Financial Statement Schedules.
Report of Independent Accountants on Schedule...................... S-2
Schedule III--Condensed Financial Information of Registrant........ S-3-S-5
</TABLE>
34
<PAGE>
(3) Exhibits.
<TABLE>
<C> <S>
3.1 Restated and Amended Articles of Incorporation of Penn Treaty
American Corporation. ****
3.1(b) Amendment to Restated and Amended Articles of Incorporation of
Penn Treaty American Corporation. *****
3.2 Amended and Restated By-laws of Penn Treaty American Corporation,
as amended. *****
4. Form of Penn Treaty American Corporation Common Stock Certificate. *
4.1 Indenture dated as of November 26, 1996 between Penn Treaty American
Corporation and First Union National Bank, as trustee (including
forms of Notes) (incorporated by reference to Exhibit 4.1 to Penn
Treaty American Corporation's current report on Form 8-K filed on
December 6, 1996).
4.3 Registration Rights Agreement dated as of November 26, 1996 by and
among Penn Treaty American Corporation and Bear Stearns and Company,
Inc. and Advest Inc. (incorporated by reference to Exhibit 4.3 to
Penn Treaty American Corporation's current report on Form 8-K filed
on December 6, 1996).
4.4 Form of Public Notes *****
10.1 Penn Treaty American Corporation Employee Incentive Stock Option Plan. *
10.2 Penn Treaty American Corporation Agent Stock Option Plan. ****
10.3 Penn Treaty American Corporation Employees' Pension Plan. *
10.4 Reinsurance Treaty between Penn Treaty Life Insurance Company and NRG
America Life Reassurance Corp. *
10.5 Assumption Agreement dated May 12, 1994 between Reassurance Company of
Hannover and Penn Treaty Life Insurance Company. ****
10.6 Reinsurance Agreement between Penn Treaty Life Insurance Company and
Life Insurance Company of North America, effective as of June 1, 1976. *
10.7 Personal Accident Quota Share issued to Penn Treaty Life Insurance
Company by American Accident Reinsurance Group, effective as of
November 23, 1982. *
10.8 Credit Life Quota Share Reinsurance Agreement between Penn Treaty Life
Insurance Company and The Centennial Life Insurance Company, effective
as of August 15, 1977. *
10.9 Treaty Endorsement replace The Centennial Life Insurance Company with
Puritan Life Insurance Company, effective June 1, 1986. ****
10.10 Endorsement replacing Puritan Life Insurance Company with Employers
Reassurance Corporation, effective as of December 31, 1986. ****
10.11 Reinsurance Agreement between Washington Square Life Insurance Company
and Cologne Life Insurance Company, effective March 1, 1987. ****
10.12 Reinsurance Agreements between Penn Treaty Life Insurance Company and
Cologne Life Reinsurance Company, effective October 1, 1994. ****
10.13 Reinsurance Agreements between Network America Life Insurance Company
and Cologne Life Reinsurance Company, effective October 1, 1994. ****
35
<PAGE>
10.14 Reinsurance Agreement between Penn Treaty Life Insurance Company and
Transamerica Occidental Life Insurance Company, effective April 1,
1988. ****
10.15 Reinsurance Agreement between Network America Life Insurance Company
and Provident Indemnity Life Insurance Company, effective January 1,
1991, as amended on November 30, 1993. ****
10.16 Quota Share Reinsurance Agreement between Network America Life
Insurance Company and Life and Health Insurance Company of America,
effective December 1, 1994. ****
10.17 Reinsurance Agreement between Penn Treaty Life Insurance Company and
Reassurance Company of Hannover, effective January 1, 1995. ****
10.18 Administrative Services Agreement between Network America Life
Insurance Company and Midland Mutual Life Insurance Company, effective
June 25, 1991. ****
10.19 Administration and Agency Agreements between Penn Treaty Life
Insurance Company, Network America Life Insurance Company and
Tower Insurance Services, Inc. effective December 1, 1993,
relating to the Quota Share Reinsurance Agreement between Network
America Life Insurance Company and Life and Health Insurance Company
of America, effective December 1, 1994. ****
10.20 Form of General Agent's Contract of Penn Treaty life Insurance
Company. ****
10.21 Form of General Agent's Contract of Network America Life Insurance
Company. ****
10.22 Form of Managing General Agency Agreement. ****
10.23 Regional General Agents' Contract dated August 1, 1971 between
Penn Treaty Life Insurance Company and Irving Levit of the Irv Levit
Insurance Management Corporation, as amended on August 15, 1971,
May 26, 1976 and June 16, 1987, and by an undated override commissions
schedule. ***
10.24 Managing General Agent's Contract dated March 10, 1988 between Penn
Treaty Life Insurance Company and Ameri-Life and Health Services,
Inc. ****
10.25 Commission Supplement to General Agent's Contract dated December 7,
1993 between Network America Life Insurance Company and Network
Insurance. ****
36
<PAGE>
10.26 Administrative Services Agreement dated February 14, 1995 between
National Benefits Corporation and Penn Treaty Life Insurance Company
and Network America Life Insurance Company. ****
10.27 Mortgage in the amount of $2,450,000 dated September 13, 1988 between
Penn Treaty Life Insurance Company and Merchants Bank, N.A. **
10.28 Amendments to Mortgage dated September 24, 1991, October 13, 1992 and
September 2, 1993. ****
10.29 Loan and Security Agreement by and between Penn Treaty American
Corporation and CoreStates Bank, N.A. dated December 28, 1994. ****
10.30 Investment Counseling Agreement dated May 3, 1995 between Penn Treaty
American Corporation and James M. Davidson & Company. ****
10.31 Investment Counseling Agreement dated May 3, 1995 between Penn Treaty
Life Insurance Company and James M. Davidson & Co. ****
10.32 Investment Counseling Agreement dated May 3, 1995 between Network
America Life Insurance Company and James M. Davidson & Company. ****
11. Statement re: computation of per share earnings.
21. Subsidiaries of the Registrant. ****
24. Consent of Coopers & Lybrand, L.L.P.
27. Financial Data Schedule
(b) Reports on Form 8-K:
</TABLE>
The Company filed three reports on Form 8-K during the quarter ended
December 31, 1996.
On November 26, 1996, the Company filed a current report on Form 8-K
pursuant to Item 5 of that form. No financial statements were filed as part of
that report.
On December 6, 1996, the Company filed a current report on Form 8-K pursuant
to Item 5 of that form. No financial statements were filed as part of that
report.
On December 13, 1996, the Company filed a current report on Form 8-K
pursuant to Item 5 and Item 7 of that form. No financial statements were filed
as part of that report.
* Incorporated by reference to the Company's Registration Statement on
Form S-1 dated May 12, 1987, as amended.
37
<PAGE>
** Incorporated by reference to the Company's Registration Statement on
Form S-1 dated November 17, 1989, as amended.
*** Incorporated by reference to the Company's Annual Report on Form 10-K
for the year ended December 31, 1989.
**** Incorporated by reference to the Company's Registration Statement on
Form S-1 dated June 30, 1995, as amended.
***** Incorporated by reference to the Company's Registration Statement on
Form S-3 dated February 20, 1997.
Executive Compensation Plans--see Exhibits 10.1 and 10.2
38
<PAGE>
SIGNATURES
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.
PENN TREATY AMERICAN CORPORATION
Date: March 25, 1997 By: /s/ Irving Levit
--------------------------------
Irving Levit, Chairman of the
Board and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Date: March 25, 1997 By: /s/ Irving Levit
--------------------------------
Irving Levit, Chairman of the
Board and President
Date: March 25, 1997 By: /s/ A.J. Carden
--------------------------------
A.J. Carden, Executive Vice
President and Director
Date: March 25, 1997 By: /s/ Michael F. Grill
--------------------------------
Michael F. Grill, Treasurer
and Director
Date: March 25, 1997 By: /s/ Domenic P. Stangherlin
--------------------------------
Domenic P. Stangherlin,
Secretary and Director
Date: March 25, 1997 By: /s/ Jack D. Baum
--------------------------------
Jack D. Baum, Vice President,
Marketing and Director
Date: March 25, 1997 By: /s/ Emile Ilchuk Emile
--------------------------------
Ilchuk, Director
Date: March 25, 1997 By: /s/ C. Mitchell Goldman
--------------------------------
C. Mitchell Goldman, Director
Date: March 25, 1997 By: /s/ Glen A. Levit
--------------------------------
Glen A. Levit, Vice President,
Sales and Director
Date: March 25, 1997 By: /s/ John W. Mahoney
--------------------------------
John W. Mahoney, Vice President,
ANIC and Director
39
<PAGE>
Exhibit 11
STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS
for the years ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------ ----------- -----------
<S> <C> <C> <C>
Net income.................................................. $ 12,160,347 $ 8,828,883 $ 6,762,801
Weighted average common shares outstanding.................. 7,164,782 5771558 4668834
Primary earnings per share.................................. $ 1.70 1.53 1.45
Net income.................................................. $ 12,160,347 -- --
Adjustments net of tax:
Interest expense on convertible debt...................... 320,311 -- --
Amortization of debt offering costs....................... 21,642 -- --
------------
Fully diluted net income.................................... 12,502,300 -- --
Weighted average common shares outstanding.................. 7,164,782 -- --
Common stock equivalents due to dilutive
effect of stock options................................... 224,314 -- --
Shares converted from convertible debt...................... 219,028 -- --
------------
Total outstanding shares for fully diluted earnings
per share computation..................................... 7,608,124 -- --
Fully diluted earnings per share............................ $ 1.64 -- --
</TABLE>
<PAGE>
Exhibit 24
CONSENT OF INDEPENDENT ACCOUNTANTS
We consent to the incorporation by reference in the registration statement
of Penn Treaty American Corporation on Form S-8 (File No. 33-38330) of our
reports dated March 5, 1997 on our audits of the consolidated financial
statements and financial statement schedule of Penn Treaty American Corporation
as of December 31, 1996 and 1995 and for the years ended December 31, 1996, 1995
and 1994, which reports are included in this Annual Report on Form 10-K.
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 26, 1997
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1995
<PERIOD-START> JAN-01-1996 JAN-01-1995
<PERIOD-END> DEC-31-1996 DEC-31-1995
<DEBT-HELD-FOR-SALE> 201,329,996 142,243,341
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 11,247,516 2,605,612
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 212,661,714 144,928,357
<CASH> 51,612,067 8,881,061
<RECOVER-REINSURE> 10,105,654 7,730,828
<DEFERRED-ACQUISITION> 82,176,268 63,133,759
<TOTAL-ASSETS> 386,767,992 237,744,270
<POLICY-LOSSES> 57,539,380 50,206,608
<UNEARNED-PREMIUMS> 12,215 26,503
<POLICY-OTHER> 109,630,964 69,126,281
<POLICY-HOLDER-FUNDS> 0 0
<NOTES-PAYABLE> 77,114,592 2,206,117
0 0
0 0
<COMMON> 811,646 757,691
<OTHER-SE> 118,095,438 96,349,363
<TOTAL-LIABILITY-AND-EQUITY> 386,767,992 237,744,270
130,191,779 102,366,605
<INVESTMENT-INCOME> 10,982,131 8,102,809
<INVESTMENT-GAINS> 19,960 46,431
<OTHER-INCOME> 342,388 347,113
<BENEFITS> 83,993,132 64,879,275
<UNDERWRITING-AMORTIZATION> (19,042,509) (15,303,161)
<UNDERWRITING-OTHER> 59,578,288 48,848,961
<INCOME-PRETAX> 17,007,347 12,437,883
<INCOME-TAX> 4,847,000 3,609,000
<INCOME-CONTINUING> 12,160,347 8,828,883
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 12,160,347 8,828,883
<EPS-PRIMARY> 1.70 1.53
<EPS-DILUTED> 1.64 0
<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>
