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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from to
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Commission File No. 0-15972
PENN TREATY AMERICAN CORPORATION
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(Exact name of registrant as specified in its charter)
Pennsylvania 23-1664166
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(State or other (I.R.S. Employer
jurisdiction of Identification No.)
incorporation or
organization)
3440 Lehigh Street, Allentown, Pennsylvania 18103
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 965-2222
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Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
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Common Stock, $.10 par value New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
(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. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant as of March 16, 2000 was $101,948,000.
The number of shares outstanding of the registrant's common stock as of March
16, 2000 was 7,808,589.
Documents Incorporated By Reference:
(1) Proxy Statement for the 2000 Annual Meeting of Shareholders - Part III
(2) Other documents incorporated by reference on this report are listed in
the Exhibit Reference
<PAGE>
PART I
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Item 1. Business
(a) General
Penn Treaty American Corporation is one of the leading providers of
long-term nursing home and home health care insurance. We market our products
primarily to persons age 65 and over through independent insurance agents and
underwrite our policies through our subsidiaries: Penn Treaty Network America
Insurance Company ("Penn Treaty Network"), American Network Insurance Company
("American Network"), American Independent Network Insurance Company of New York
("American Independent Network"), Penn Treaty Life Insurance Company ("Penn
Treaty Life"), of which we sold all of the common stock on December 30, 1998,
and Penn Treaty (Bermuda), Ltd. ("Penn Treaty (Bermuda)") (collectively "the
Insurers"). Our principal products are individual, 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, 1999, long-term nursing home care and home
health care policies accounted for approximately 95% of our total annualized
premiums in-force.
We introduced our first long-term nursing home care insurance product in
1972 and our first home health care product in 1987. In late 1994, we introduced
our 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. In late 1996 and throughout 1997, we began
the introduction of our Personal Freedom policies, which provide comprehensive
coverage for nursing home and home health care. In late 1996, we also introduced
our Assisted Living policy, which, as a nursing home plan, provides enhanced
benefits and includes a home health care rider. During 1998, we developed our
Secured Risk Nursing Facility and Post Acute Recovery Plans, which provide
limited benefits to higher risk applicants. 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.
We also market and sell 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 that 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. Coverage for custodial care and home health care are
now offered by many insurers.
A survey conducted by a national industry organization estimated that the
cumulative number of long-term care policies sold grew from 815,000 in 1987 to
approximately six million by June of 1998, an average increase of more than 22%
annually since 1987. 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. The U.S. Census Bureau
has estimated that from 1980 to 1997, the cost of care for Medicaid nursing home
residents increased from $8.7 billion to $32.5 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 three primary alternatives to long-term care insurance: government programs
such as Medicare and Medicaid, personal assets and dependence on family members.
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.
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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
Our objective is to strengthen our position as a leader in providing
long-term care insurance to senior citizens. To meet this objective and to
continue to increase profitability, we are implementing the following
strategies:
Developing and qualifying new products with state insurance regulatory
authorities. We have sold long-term care insurance for over twenty-eight years.
As an innovator in home health care insurance, we introduced our 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. More recently, we began our introduction of our Personal Freedom
policies, which provide comprehensive coverage for nursing home and home health
care. We also introduced our Assisted Living policy, which, as a nursing home
plan, provides enhanced benefits and includes a home health care rider. During
1998, we developed our Secured Risk Nursing Facility and Post Acute Recovery
Plans, which provide limited benefits to higher risk applicants. We intend to
continue to develop new insurance products designed to meet the needs of senior
citizens and their families.
Increasing the size and productivity of our network of independent agents. We
have significantly increased the number of producing agents (agents who produce
premiums for us on new policies) selling our policies by focusing our efforts on
certain geographic areas of the country that have larger concentrations of
individuals age 65 and over. We intend to continue to recruit agents in these
states and believe that we will be able to continue to expand our business in
these and other states.
Seeking to acquire existing insurance companies and blocks of in-force policies
underwritten by other insurance companies. We have augmented our premium revenue
from time to time through the acquisition of existing insurance companies and
blocks of policies underwritten by other insurance companies. We intend to
continue to evaluate complementary acquisitions and policy blocks as a means of
enhancing our revenue base.
Introducing existing products in newly licensed states. We are currently
licensed to market products in 50 states and the District of Columbia. Although
not all of our products are currently eligible for sale in all of these
jurisdictions, we actively seek to expand the regions where we sell our
products. Through the acquisition of American Network in 1996, we acquired
licenses to conduct business in some new states, including New Jersey and
Massachusetts. These states are considered by our management to offer
significant opportunities for sales growth. In addition, in 1998 we received a
license to underwrite accident and health insurance products in New York through
American Independent Network.
Utilizing Internet strategies. We have developed our proprietary LTCWorks, which
enables agents to sell our products utilizing downloadable software. We believe
that LTCWorks increases the potential distribution of our products by enhancing
our agents' ability to present the products, to assist policyholders in the
application process and to submit the application over the Internet.
Introducing Group Products. In 1999, we began filing our master group policy in
various states. We intend to actively market our group policy beginning in 2000,
which we anticipate will generate additional premium revenue from a younger
policyholder base.
Entering marketing and administration agreements with third parties. We intend
to solicit unaffiliated affinity groups to provide third party processing and/or
underwriting of their long-term care products.
Corporate Background
We are registered and approved as a holding company under the Pennsylvania
Insurance Code. We were incorporated in Pennsylvania on May 13, 1965 under the
name Greater Keystone Investors, Inc. and changed our name to Penn Treaty
American Corporation on March 25, 1987. Penn Treaty Life 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. We acquired Quaker State Life Insurance Company on May 4, 1976,
and changed its name to Penn Treaty Life Insurance Company. On July 13, 1989,
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Penn Treaty Life 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, and
changed its name to Network America Life Insurance Company on August 1, 1989.
On August 30, 1996, we consummated the acquisition of all of the issued and
outstanding capital stock of Health Insurance of Vermont, Inc., and have since
changed its name to American Network Insurance Company.
Senior Financial Consultants Company (the "Agency"), an insurance agency
that we own, 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 Penn
Treaty Life'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 Penn
Treaty Life'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, we changed the name of the Agency 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 December 31, 1997, Penn Treaty Life dividended its common stock
ownership of Penn Treaty Network to us. At that time, Penn Treaty Network
assumed substantially all of the assets, liabilities and premium in-force of
Penn Treaty Life through a purchase and assumption reinsurance agreement. On
December 30, 1998, we sold our common stock interest in Penn Treaty Life to an
unaffiliated insurer. All remaining policies in-force were assumed by Penn
Treaty Network through a 100% quota share agreement.
On November 25, 1998, we entered into a purchase agreement to acquire all
of the common stock of United Insurance Group Agency, Inc. ("United Insurance
Group"), a Michigan based consortium of long-term care insurance agencies. The
acquisition was effective January 1, 1999.
On December 10, 1999, we incorporated Penn Treaty (Bermuda), a Bermuda
based reinsurer, for the purpose of reinsuring affiliated long-term insurance
contracts at a future date.
Subsequent to December 31, 1999, we acquired Network Insurance Senior
Health Division ("Network Insurance Senior Health"), a Florida-based insurance
agency brokerage company. Network Insurance Senior Health was purchased by Penn
Treaty Network and the acquisition was effective January 1, 2000.
(b) Insurance Products
Since 1972, we have developed, marketed and underwritten, defined benefit
accident and health insurance policies designed to be responsive to changes in
(1) the characteristics and needs of the senior citizen market, (2) governmental
regulations and governmental benefits available for this population segment and
(3) the health care and long-term care industries in general. As of December 31,
1999, approximately 95% of our total annualized premiums in-force were derived
from long-term care policies which include nursing home and home health care
policies. Our other lines of insurance include (A) life insurance, (B) Medicare
supplement, (C) blue-collar disability coverage and (D) various accident and
health policies and riders. We solicit input from both our independent agents
and our policyholders with respect to the changing needs of our insureds. In
addition, our representatives regularly attend seminars to monitor significant
trends in the industry.
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The following table sets forth, as of the dates indicated, and for each
class of policies, the annualized 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>
(annualized premiums in $000's)
Year ended December 31,
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1997 1998 1999
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<S> <C> <C> <C> <C> <C> <C>
Nursing home care and comprehensive coverage:
Annualized premiums $ 121,819 67.4% $ 182,977 74.0% $ 259,582 78.4%
Number of policies 78,137 115,802 163,689
Average premium per policy $ 1,559 $ 1,580 $ 1,586
Long term home health care:
Annualized premiums $ 42,921 23.8% $ 47,644 19.3% $ 53,640 16.3%
Number of policies 38,553 41,040 45,266
Average premium per policy $ 1,113 $ 1,161 $ 1,185
Disability insurance
Annualized premiums $ 7,145 4.0% $ 6,715 2.7% $ 7,126 2.2%
Number of policies 16,373 15,704 14,963
Average premium per policy $ 436 $ 428 $ 476
Medicare supplement:
Annualized premiums $ 4,248 2.4% $ 5,506 2.2% $ 6,131 1.9%
Number of policies 4,018 4,970 5,934
Average premium per policy $ 1,057 $ 1,108 $ 1,033
Life insurance:
Annualized premiums $ 3,567 2.0% $ 3,791 1.5% $ 4,095 1.2%
Number of policies 6,262 6,752 6,677
Average premium per policy 570 $ 562 $ 613
Other insurance:
Annualized premiums $ 1,015 0.6% $ 566 0.2% $ 548 0.2%
Number of policies 5,827 3,377 2,968
Average premium per policy $ 174 $ 168 $ 185
Total annualized premiums in force $ 180,715 100% $ 247,200 100% $ 331,122 100%
Total policies 149,170 187,645 239,497
</TABLE>
Long-Term Care Generally. Our long-term care policies provide for guaranteed
renewability at then current premium rates at the option of the insured. The
insured may elect to pay premiums on a monthly, quarterly, semi-annual or annual
basis. In addition, we offer an automatic payment feature that allows
policyholders to have premiums automatically withdrawn from a checking account.
We may increase premium rates on a particular form of policy only upon approval
of the applicable insurance regulatory authority in each state.
As a supplement to some of our long-term care policies sold prior to 1999,
we offered 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 us. 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. We also offer and encourage the purchase of home health care riders
to supplement our nursing home policies and nursing home riders to supplement
our home health care policies.
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Previously, we offered numerous other riders to supplement our 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
our newest long-term care policies. Among the built-in benefits provided under
the long-term care policies we currently market are hospice care and adult day
care benefits, survivorship benefits, and restoration of benefits.
Long-Term Nursing Home Care. Our long-term nursing home care policies generally
provide a fixed or maximum daily 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. All levels of nursing care,
including skilled, custodial (assisted living) 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 that cannot be provided by a non-medical
professional. Assisted living care generally 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 that would otherwise fall between skilled and assisted
living care and includes situations in which an individual may require skilled
assistance on a sporadic basis.
Our current long-term nursing home care policies provide benefits that are
payable over periods ranging from one to five years and also for lifetime
coverage. These policies provide for a maximum daily benefit on costs incurred
ranging from $60 to $300 per day. Our Personal Freedom policies also provide
comprehensive coverage for nursing home and home health care, offering benefit
"pools of coverage" ranging from $75,000 to $250,000 total coverage, as well as
lifetime coverage. 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. Our 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, 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 us are payable over periods ranging
from six months to five years, and also covering lifetime, and provide from $40
to $160 per day of home benefits. Our home health care policies also include
built-in benefits for waiver of premium after 90 days of claims and unlimited
restoration of the policy's maximum benefit period.
In late 1994, we introduced our Independent Living policy. This policy
provides coverage over the full term of the policy for services furnished by a
homemaker, including a member of the insured's family, who is not a qualified or
licensed care provider ("Homemaker Care"). Homemaker Care includes assistance
with cooking, shopping, housekeeping, laundry, correspondence, using the
telephone and paying bills. Historically, only limited coverage had been
provided under certain of our home health care policies for Homemaker Care,
typically for a period of up to 30 days per calendar year during the term of the
policy.
The Independent Living policy provides that we 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 care management service ("Care Manager")
referred by us. Newer policies offer up to 100% of the daily benefit if a Care
Manager is used, versus 80% if the policyholder does not elect Care Management
services. We engage the Care Manager 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. We believe that the Independent Living policy, which represents a
significant expansion of the benefits previously available for Homemaker
Services, is the first of its kind. We have subsequently incorporated the use of
Care Management in all of our new home health care policies.
We first introduced our Personal Freedom policy during the fourth quarter
of 1996 and are currently marketing it in most states. This product is a
comprehensive coverage policy, which combines long-term care and home health
care insurance. When policyholders purchase this policy, with face value
benefits ranging from $75,000 to unlimited coverage, they may then access up to
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the face amount of the policy for nursing home or home health care as needed
subject to maximum daily limits.
We developed the Secured Risk Nursing Facility Plan to meet the needs of
individuals having difficulty obtaining coverage due to certain medical
conditions. This plan offers protection to such individuals by providing
coverage for care in a nursing facility, or in the insured's home if he or she
chooses the optional Home Health Care Benefits. Features of this plan, as with
many of our other plans, include coverage for pre-existing conditions after six
months, guaranteed renewal for life, premiums that will not increase with age,
and there is no prior hospitalization required.
We designed the Post Acute Recovery Care Plan to fill the gap in today's
dynamic health care environment in which early discharge after surgery forces
those who still require nursing care or medical supervision to shift their
recovery to nursing facilities or their own homes. The Post Acute Recovery Plan,
coupled with optional home health care benefits pays for medical recovery in a
facility or in the insured's home when their traditional health care coverage
stops. Features of this plan include immediate coverage (no elimination period
or deductible), coverage for pre-existing conditions after six months,
guaranteed renewal and premiums that will not increase with age. We offer a
"Care Solutions" service with this plan, in which a Care Manager works with
the insured to design a plan of care suited to meet his or her individual needs.
Our policies generally offer an optional Lifetime Inflation Rider, which
provides for an increase of the selected Daily Benefit Amount by 5% annually on
each anniversary date for the lifetime of the policy. An optional Nonforfeiture
Shortened Benefit Rider provides the insured with the right to maintain a
portion of their benefit period in the event their policy lapses after being
continuously in-force for at least three years.
Disability Insurance. We underwrite and market disability income insurance
through American Network. The various disability policies concentrate on serving
working class or "blue collar" individuals or employees. The policies provide
for benefit periods ranging from six months to 60 months with monthly benefit
amounts ranging from $250 to $3,000. We also offer mortgage disability and
accident-only disability policies.
Life Insurance. Beginning in August 1993, we began to market actively our whole
life insurance products. 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, we offer three premium payment
options for these policies: (1) monthly, quarterly, semi-annual or annual
payments; (2) one-time single premium payment; or (3) two, three and five year
payment plans. We developed these policies to be sold by our agents to senior
citizens so as to complete our portfolio of insurance products.
The life insurance products currently marketed by us have been designed for
the senior citizen market. We previously marketed life insurance policies,
including annual renewable term and whole life policies, to all ages of
insureds.
Medicare Supplement. We write 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 in July 1992. OBRA `90 sets forth ten federally
standardized benefit plans of which we offer five such plans in two states.
Companies that write Medicare supplement coverage 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 and more extensive benefits, such
as skilled nursing home coinsurance amounts, the Medicare 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 that we offer are subject to "open
enrollment." We are 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.
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Other Insurance. We also sell other insurance products, including accidental
death and dismemberment policies and cancer policies, of which the aggregate
premiums represented less than one percent of our total annualized premium
in-force as of December 31, 1999.
(c) Marketing and Expansion
Our goal is to strengthen our position as a leader in providing long-term
care insurance to senior citizens by underwriting, marketing and selling our
products throughout the United States. We focus our marketing efforts primarily
in those states (1) where we have successfully developed networks of agents and
(2) that have the highest concentration of individuals whose financial status
and insurance needs are compatible with our products.
Agents. With the exception of agents employed by our subsidiaries, United
Insurance Group and the Agency, we employ no agents directly but rely instead on
relationships with independent agents and their sub-agents. In 1999, our
policies were marketed through approximately 35,000 licensed agents. We provide
assistance to our 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.
Each independent agent must be authorized by contract to sell our products
in each particular state in which the agent and our companies are licensed. Some
of our 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.
We generally do not impose production quotas or assign exclusive
territories to agents. The amount of insurance written for us by individual
independent agents varies. We periodically review and terminate our agency
relationships with non-producing or under-producing independent agents or agents
who do not comply with our guidelines and policies with respect to the sale of
our products.
We are actively engaged in recruiting and training new agents. Sub-agents
are recruited by the independent agents and are licensed by us with the
appropriate state regulatory authorities to sell our 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. We believe that the commissions we pay 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. We generally permit many
of our established independent agents to collect the initial premium with the
application and remit such premium to us less the commission. New independent
agents are required to remit the full amount of initial premium with the
application. We provide assistance to our independent agents in connection with
the processing of paperwork and other administrative services.
Marketing General Agents and General Agents. We selectively utilize marketing
general agents for the purpose of recruiting independent agents and developing
networks of agents in various states. Marketing general agents receive an
overriding commission on business written in return for recruiting, training and
motivating the independent agents. In addition, marketing general agents may
function as a general agent for us in various states. In its capacity as
marketing general agent and general agent, one agent accounted for 18%, 17% and
16% of the total premiums earned by us during 1997, 1998 and 1999, respectively.
In 2000, we purchased a division of this managing agent, which serves to reduce
our dependence upon this agency in future periods. No other single grouping of
agents accounted for more than 10% of our new premium or renewal premium written
in 1999. We have not delegated any underwriting or claims processing authority
to any agents.
Group and Franchise Insurance. We also sell a relatively small amount of group
insurance. We may sell group insurance ("Group Insurance") 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.
We also sell franchise insurance ("Franchise Insurance") from time to time,
which is individually underwritten policies sold to an association or group.
While Franchise Insurance is generally presented to an employee group,
association or professional organization that endorses the insurance, the
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policies are issued to individual group members. Each application is
underwritten and issuance of policies is not guaranteed to members of the
franchise group. We are currently seeking to expand our Group Insurance and
Franchise Insurance business and have recently enhanced our marketing efforts
towards this end. Our 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 we do business:
($000)
----------------------------------------
Year Ended December 31,
---------------------------------------- Current
Year % of 1999
State Entered 1997 1998 1999 Total
- - ----- ------- ---- ---- ---- -----
Arizona 1988 $7,253 $10,608 $13,715 5%
California 1992 23,462 33,089 43,514 15%
Florida 1987 43,638 53,607 63,218 22%
Georgia 1990 1,737 2,174 3,350 1%
Illinois 1990 7,771 12,132 15,970 5%
Iowa 1990 2,081 2,976 4,317 1%
Kentucky 1989 2,466 2,130 3,123 1%
Maryland 1987 2,314 2,682 3,427 1%
Michigan 1989 3,463 4,108 5,469 2%
Missouri 1990 2,809 3,817 4,297 1%
Nebraska 1990 2,130 3,162 3,952 1%
New Jersey 1996 379 2,127 4,707 2%
North Carolina 1990 4,334 6,122 8,089 3%
Ohio 1989 4,428 7,162 10,149 3%
Pennsylvania 1972 24,420 28,821 37,661 13%
South Dakota 1990 2,269 2,743 3,177 1%
Texas 1990 3,809 6,732 11,879 4%
Virginia 1989 12,426 16,094 19,597 7%
Washington 1993 2,727 4,834 7,485 3%
All Other States (1) 13,764 18,572 25,420 9%
------ ------ ------ ----
All States $167,680 $223,692 $292,516 100%
======== ======== ========
- - ----------
(1) Includes all states in which premiums comprised less than one percent of
our total premiums in 1999.
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(d) Administration
Underwriting
We believe that our underwriting process through which we, as an accident
and health insurance company, particularly one in the long-term care segment,
choose to accept or reject an applicant for insurance is critical to our
success. All long-term care applications are reviewed by our in-house
underwriting department and must be approved before a policy can be issued. We
consider 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 we determine that we 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.
Until, and throughout, 1999, we operated field offices in Sarasota,
Florida, Stockton, California, Colchester, Vermont and Elmira, New York to
underwrite and issue policies in order to expedite the large volume of premiums
generated from sales of policies in these states, to satisfy the new business
development and regulatory requirements of New York, and to accommodate the
specialization required in the sale and underwriting of disability coverage. In
June, 1999, we transferred our disability operations to a third party
administrator in Pennsylvania and closed our Vermont operation. In December
1999, we determined that the continued operation of the Florida and California
operations was inefficient, and moved all but the marketing processes and
limited underwriting function from these offices to the Allentown, Pennsylvania
office.
Applicants for insurance must respond to detailed medical questionnaires.
Physical examinations are not required for our accident and health insurance
policies, but medical records are frequently requested. Pre-existing conditions
disclosed on the application for new long-term nursing home care and most home
health care policies are covered immediately upon approval of the policy, while
undisclosed pre-existing conditions are not covered for six months in most
states and two years in certain other states. In addition, our Independent
Living policies immediately cover all disclosed pre-existing conditions. 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.
In conjunction with the development of our LTCWorks internet strategy, we
developed an underwriting credit-scoring system, which provides consistent
underwriting and rate classification for applicants with similar medical
histories and conditions.
Claims
All claims for policy benefits, except with respect to Medicare supplement
and disability claims, are currently processed by our claims department, which
includes nurses employed or retained as consultants. We have historically
utilized third party administrators to process our Medicare supplement claims
due to the typically small benefit amount per claim and the large number of
claims. During 1999, we engaged a third party administrator to perform all
administration, including claims processing, for our disability business.
We periodically utilize the services of Care Managers to review certain
claims, particularly those made under home health care policies. When a claim is
filed, we may engage the Care 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 Care Manager assists the insured and us by
determining that the services provided to the insured, and the corresponding
benefits paid, are appropriate under the circumstances. Under the terms of our
Independent Living policy, we 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 Care Manager. Newer policies offer 100% claims coverage if the
claimant uses Care Management, yet provide up to 80% of the daily benefit if
Care Management services are not used. We estimate that approximately 75% of all
home health care claims and 95% of all new home health care claims submitted in
the last year have been submitted to Care Managers. We anticipate that this
usage will continue as our business grows.
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In 1998 and throughout 1999, we created and staffed an in-house Care
Management unit. This in-house unit conducts the full range of care management
services, which were previously provided exclusively by subcontractors. We
intend to develop this unit, as we believe it can meet many of our care
management needs more effectively and with less expense than by relying on third
party vendors.
Systems Operations
We operate and maintain our own computer system for most aspects of our
operations, including policy issuance, billing, claims processing, commission
reports, premium production by agent (state and product) and general ledger.
Critical to our ongoing success is our ability to continue to provide the
quality of service for which we are known by our policyholders and agents. We
believe that our overall systems are an integral component in delivering that
service.
During the second quarter 1999, we determined to discontinue our planned
implementation of our new system, finding that the system was unable to fully
perform its expected operations. We decided to continue operations utilizing our
current system, which is currently processing all long-term care functions. We
began the development of new systems, which are expected to more adequately
perform necessary operations to maintain and grow our long-term care insurance
operations.
Also, subsequent to the end of 1999, we entered an outsourcing agreement
with a computer services vendor, whereby the majority of our daily systems
operations, future program development and business continuity planning have
been assigned to a third party. This vendor provides both in-house and external
servicing of all existing legacy systems and hardware. We believe that this
vendor can provide better expertise in the evolving arena of information
technology than we can provide by running our own operations.
(e) Premiums
Premium rates for all lines of insurance written by us are subject to state
by state regulation. Premium regulations vary greatly among jurisdictions and
lines of insurance. Rates for our insurance policies are established with the
assistance of our independent actuarial consultants and reviewed by the
insurance regulatory authorities as part of the licensing process in the states
where we market our products. Before a rate change can be made, the proposed
change must be filed with and approved by the insurance regulatory authorities.
As a result of minimum loss ratio standards imposed by state regulations,
the premiums we charge, with respect to all of our accident and health polices,
are subject to reduction and/or corrective measures in the event insurance
regulatory agencies in states where we do business determine that our loss
ratios either have not reached or will not reach required minimum levels. See "
Government Regulation."
(f) Future Policy Benefits and Claims Reserves
We are 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 with the assistance of our actuarial
consultants, are established for (1) claims which have been reported but not yet
paid, (2) claims which have been incurred but not yet reported and (3) the
discounted present value of all future policy benefits less the discounted
present value of expected future premiums. See Note 5 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. We compare actual experience with estimates and adjust our 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 we
underwrite, 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
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<PAGE>
on the validity of the underlying assumptions that were used to price our
products; the more important of these assumptions relate to policy lapses, loss
ratios and claim incidence rates.
Our long-term care experience, much of which is based on our nursing home
care products, is derived from our twenty-eight years of significant claims
experience with respect to this product line, and reserves for these policies
are based primarily upon this experience industry experience.
We began offering home health care coverage in 1987, and since that time
have realized a significant increase in the number of home health care policies
written. Our claims experience with home health care coverage is more limited
than is our nursing home care claims experience. Our experience with respect to
our Independent Living policy, which we first offered in November 1994, and
Assisted Living and Personal Freedom policies, which we first offered in late
1996, is extremely limited. We believe 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, we believe that there is a greater potential for wide variations in
claims experience in our home health care insurance than exists with respect to
nursing home care insurance. Our actuarial consultants utilize both our
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 National Association of Insurance Commissioners ( 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 we write
policies. See "Government Regulation." The fluidity in market and regulatory
forces may limit our ability to rely on historical claims experience for the
development of new premium rates and reserve allocations.
We utilize the services of actuarial consultants (the "actuaries") to price
insurance products and establish reserves with respect to those products. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations-Overview." Although we believe that our 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 can be
accurately predicted by, our past or current claims experience.
(g) Reinsurance
As is common in the insurance industry, we purchase reinsurance to increase
the number and size of the policies we 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, we can limit our exposure to risk.
We reinsure any life insurance policy to the extent the risk on that policy
exceeds $50,000. We currently reinsure our ordinary life policies through
Reassurance Company of Hannover (A.M. Best rating A). We also have 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.
For a discussion of A.M. Best ratings, see "A. M. Best Ratings and Standard
& Poor's Ratings."
On December 28, 1990, Penn Treaty Network entered into an assumption
reinsurance agreement with Midland Mutual Life Insurance Company (A.M. Best
rating A-) under which Penn Treaty Network acquired approximately 3,100 nursing
home policies in 22 states with an annualized premium of approximately
$3,000,000. We recognized approximately $1,551,000 of premium related to this
acquisition in 1997, $1,411,000 in 1998 and $1,317,000 in 1999.
In January 1991, Penn Treaty Network entered into a fronting arrangement
under which Penn Treaty Network ceded 100% of certain whole life and deferred
annuity policies to Provident Indemnity Life Insurance Company ("Provident
Indemnity") (A.M. Best rating B). No new policies have been ceded under this
arrangement since December 31, 1995. Penn Treaty Network has structured its
agreement with Provident Indemnity to require maintenance of securities in
12
<PAGE>
escrow for Penn Treaty Network in an amount at least equal to its statutory
reserve credit. The market value of these escrowed securities, which consist of
U.S. Government bonds, exceeds Penn Treaty Network's related statutory reserve
credit as of December 31, 1999 of approximately $4,711,000. 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 $10,562,000, $9,718,000 and $9,182,000 for 1997, 1998 and
1999, respectively.
In May 1991, Penn Treaty Network 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). Penn Treaty Network assumed the obligations as insurer for all
policies in-force as of that date. Under this agreement, Penn Treaty Network
assumed a reinsurance treaty under which 66% of the premiums assumed are, in
turn, ceded by Penn Treaty Network to a third party reinsurer. The total
accident and health premiums ceded under this treaty amounted to approximately
$1,002,000 in 1997, $951,000 in 1998 and $928,000 in 1999.
Penn Treaty Network 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 Penn Treaty Network to Life and Health
Insurance Company of America ("Life and Health") (A.M. Best rating B-). This
fronting arrangement, is used when one insurer wishes to take advantage of
another insurer's ability to procure and issue policies. As the fronting
company, we remain ultimately liable to the policyholder, even though all of our
risk is reinsured. Because of Life and Health's A.M. Best rating, Penn Treaty
Network structured their agreement with Life and Health to require maintenance
of securities in escrow for Penn Treaty Network in an amount at least equal to
their statutory reserve credit. The market value of these escrowed securities,
which consist of U.S. Government bonds, exceeded Penn Treaty Network's related
statutory reserve credits as of December 31, 1999, which were approximately
$369,000. The policies subject to this fronting arrangement are being marketed
in six states to federal employees. Premium ceded under this agreement totaled
approximately $779,000, $777,000 and $729,000 in 1997, 1998 and 1999,
respectively.
Effective in October 1994, Penn Treaty Network entered into reinsurance
agreements with Cologne Life Reinsurance Company (A.M. Best rating A) with
respect to its home health care policies with benefit periods exceeding 36
months. Under these reinsurance agreements, Penn Treaty Network is responsible
for payment of claims during the first 36 months of the benefit period, and the
reinsurer will reimburse Penn Treaty Network for 100% of all claims paid after
such 36 month period. Total reserve credits taken related to this agreement as
of December 31, 1999 were approximately $928,000. Effective January 1998, no new
policies were reinsured under this treaty.
On December 31, 1998, Penn Treaty Network entered a funds withheld
financial reinsurance agreement with Cologne Life Reinsurance Company for
statutory purposes. Under the agreement, Penn Treaty Network ceded the claims
risk of approximately $80,128,000 of nursing home premium and ceded $124,605,000
of reserves to the reinsurer. The effect of the transaction increased statutory
surplus and net gain from operations by $14,700,000. We believe this agreement
does not qualify as reinsurance according to generally accepted accounting
principles, in accordance with Financial Accounting Standards Board Statement
113, as there does not exist a material probability of loss to the reinsurer
under the treaty. We terminated the agreement during the third quarter of 1999,
and Penn Treaty Network recaptured all of the insurance in-force under the
agreement, reducing statutory surplus and 1999 gains from operations by
$15,000,000.
On December 31, 1999, Penn Treaty Network entered a funds withheld
financial reinsurance agreement with London Life Reinsurance Company for
statutory purposes. Under the agreement, Penn Treaty Network ceded the claims
risk of approximately $90,230,000 of nursing home premium and ceded $133,892,000
of reserves to the reinsurer. The effect of the transaction increased statutory
surplus and net gain from operations by $25,000,000. We believe this agreement
does not qualify as reinsurance according to generally accepted accounting
principles, in accordance with Financial Accounting Standards Board Statement
113, as there does not exist a material probability of loss to the reinsurer
under the treaty design.
Effective December 31, 1999, Penn Treaty Network entered into a reinsurance
agreement with Independence Blue Cross, under which Penn Treaty Network assumed
on a 100% quota share basis all of the risks related to approximately $2,251,000
of in-force long-term care policies. Under the agreement, Penn Treaty Network
will also perform administration for the policies, including underwriting and
reinsuring future policies.
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American Network reinsures approximately $500,000 of premium with three
Vermont licensed companies.
In the event a reinsurance company becomes insolvent or otherwise fails to
honor its obligations to any of the Insurers under any of its reinsurance
agreements, we would remain fully liable to the policyholder.
(h) Investments
We invest in securities and other investments authorized by applicable
state laws and regulations and follow an investment policy designed to maximize
yield to the extent consistent with liquidity requirements and preservation of
assets. Investments are managed by four external firms: Davidson Capital
Management of Wayne, Pennsylvania, First Union National Bank of Charlotte, North
Carolina, Palisade Capital Management of Fort Lee, New Jersey and American
General Life Insurance Company of Houston, Texas.
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, 1999.
December 31, 1999
-----------------
Rating Amount Percent
------ -------
(Dollar amounts in thousands)
U.S. Treasury and U.S. Agency securities $116,697 33.0%
Aaa or AAA 21,991 6.2%
Aa or AA 49,699 14.1%
A 96,853 27.4%
BBB 37,695 10.7%
Other or Not Rated 30,753 8.6%
-------- ------
Total $353,688 100.0%
======== ======
As of December 31, 1999, 95% of our total investments were fixed income
debt securities, 33% of which were securities of the United States Government
(or its agencies or instrumentalities). The balance of our total investment
portfolio consisted substantially of publicly traded equity securities. As of
December 31, 1999, our bond investment portfolio consisted substantially of
investment grade securities, with 80.7% rated "A" or better by either Moody's
Debt Rating Service or Standard and Poor's Corporation. Our investment policy is
to purchase U.S. Treasury securities, U.S. agency securities and
investment-grade municipal and corporate securities with the highest yield to
maturity available, and to have 7% to 10% of our bond investment portfolio
mature each year. Our policy also limits high-yield investments (those rated
below BBB-) to 5% percent of our total portfolio and we may only purchase bonds
rated B or higher. Certain investments may be unrated or are in process of
receiving ratings. We generally buy investments maturing within two to 15 years
of the date of the purchase. At December 31, 1999, the average maturity of our
bond investment portfolio was 6.9 years and our investment portfolio contained
no direct investments in real estate.
During 1998, we evaluated and changed our investment policy to allow for
the acquisition of debt and equity securities rated "B" or better by bond rating
agencies. Included in our investment strategy was the decision to purchase
convertible or preferred securities. We hired an investment management firm that
specializes in convertible securities to manage this portfolio. The management
firm is also a principle shareholder of our common stock.
We have historically limited our investments in equity securities. We sold
our equities securities portfolio in March 1998, and later purchased additional
common and preferred equities, comprising 5.1% of our portfolio at December 31,
1998. At December 31, 1999, we held common and preferred stock investments that
represented 5.1% of our total investments. We intend to limit our common and
preferred stock investments to less than 10% or less of our total investments.
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<PAGE>
During March 1998, we sold our entire equity securities portfolio, or
approximately $21,000,000 of invested assets. From this sale, we recognized an
approximate $6,400,000 capital gain. During November 1998, we liquidated our
entire tax-exempt bond portfolio, yielding an approximate gain of $1,500,000. In
May 1999, we liquidated equity investments sufficient to produce approximate
gains of $2,800,000 in order to offset the net income impact of a loss due to
the impairment of our discontinued computer system. For additional information
regarding our investments, see Note 4 of the Notes to Consolidated Financial
Statements.
Market Risk of Financial Instruments. We invest in securities and other
investments authorized by applicable state laws and regulations and follow an
investment policy designed to maximize yield to the extent consistent with
liquidity requirements and preservation of assets.
A significant portion of assets and liabilities are financial instruments,
which are subject to the market risk of potential losses from adverse changes in
market rates and prices. Our primary market risk exposures relate to interest
rate risk on fixed rate domestic medium-term instruments and, to a lesser
extent, domestic short-term and long-term instruments. We have established
strategies, asset quality standards, asset allocations and other relevant
criteria for our portfolio to manage our exposure to market risk.
We currently have an interest rate swap on our mortgage, with the same
bank, which is used as a hedge to convert the mortgage to a fixed interest rate.
We believe that since the notional amount of the swap is amortized at the same
rate as the underlying mortgage, and that both financial instruments are with
the same bank, no credit or financial risk is carried with the swap.
Our financial instruments are held for purposes other than trading. Our
portfolio does not contain any significant concentrations in single issuers
(other than U.S. treasury and agency obligations), industry segments or
geographic regions.
We urge caution in evaluating overall market risk from the information
below. Actual results could differ materially because the information was
developed using estimates and assumptions as described below, and because
insurance liabilities and reinsurance receivables are excluded in the
hypothetical effects (insurance liabilities represent 76.0% of total liabilities
and reinsurance receivables on unpaid losses represent 2.2% of total assets).
Long-term debt, although not carried at fair value, is included in the
hypothetical effect calculation.
The hypothetical effects of changes in market rates or prices on the fair
values of financial instruments as of December 31, 1999, excluding insurance
liabilities and reinsurance receivables on unpaid losses because such insurance
related assets and liabilities are not carried at fair value, would have been as
follows:
If interest rates had increased by 100 basis points, there would have been
an approximate $11,300,000 decrease in the net fair value of our investment
portfolio less our long-term debt and the related swap agreement. The change in
fair values was determined by estimating the present value of future cash flows
using models that measure the change in net present values arising from selected
hypothetical changes in market interest rate. A 200 basis point increase in
market rates at December 31, 1999 would have resulted in an approximate
$21,700,000 decrease in the net fair value. If interest rates had decreased by
100 and 200 basis points, there would have been an approximate $12,300,000 and
$25,800,000 net increase, respectively, in the net fair value of our total
investments and debt.
We hold certain mortgage and asset backed securities as part of our
investment portfolio. The fair value of these instruments may react in a convex
or non-linear fashion when subjected to interest rate increases or decreases.
The anticipated cash flows of these instruments may differ from expectations in
changing interest rate environments, resulting in duration drift or a varying
nature of predicted time-weighted present values of cash flows. The result of
unpredicted cash flows from these investments could cause the above hypothetical
estimates to change. However, we believe that our minimal invested amount in
these instruments and their broadly defined payment parameters sufficiently
outweigh the cost of computer models necessary to accurately predict their
possible impact to our investment income from the hypothetical effects of
changes in market rates or prices on the fair values of financial instruments as
of December 31, 1999.
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<PAGE>
The following table sets forth for the periods indicated certain
information concerning investment income, including dividend payments made on
common and preferred stock. The average yield calculation does not reflect the
impact upon market value of investments due to changes in market interest rates.
Investment Portfolio 1997 1998 1999
---- ---- ----
Year Ended December 31,
-----------------------
(Dollar amounts in thousands)
Average balance of investments,
cash and cash equivalents
during the period (at cost) $284,323 $332,872 $392,592
Net investment income 17,009 20,376 22,619
Average yield on investments 6.0% 6.1% 5.8%
i) Selected Financial Information: Statutory Basis
The following table shows certain ratios derived from our insurance
regulatory filings with respect to our 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, "Government Regulation."
Year ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Loss ratio (1) (4) 70.9% 46.8% 70.4%
Expense ratio (2) (4) 57.9% 76.4% 44.1%
---- ---- ----
Combined loss and expense ratio 128.8% 123.2% 114.5%
Persistency (3) 83.1% 85.5% 86.7%
---------------
(1) Loss ratio is defined as incurred claims and increases in policy reserves
divided by collected premiums.
(2) Expense ratio is defined as commissions and expenses incurred divided by
collected premiums.
(3) Persistency represents the percentage of premiums renewed, which we
calculate by dividing the total annual premiums in-force 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 us.
(4) The 1998 and 1999 loss ratios and expense ratio are significantly affected
by the reinsurance of approximately $80,128,000 and $90,230,000,
respectively in premium on a statutory basis under financial reinsurance
treaties.
The increase in the persistency rate in 1999, 1998 and 1997, signifying a
greater percentage of policy renewals, 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. In addition, we added approximately $12,000,000 to
this reserve in 1997 as a result of our reassessment of assumptions utilized in
the actuarial determination of reserves for current claims liabilities and
incurred but unreported liabilities for nursing home and home health care
claims. We reviewed the assumptions underlying our reserves in connection with
our 1997 employment of a new long-term care consulting actuary. The review
encompassed certain actuarial assumptions related to our products' benefit
utilization and duration.
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. In December 1997, we contributed
$5,000,000 to American Network to support our long-term care growth. In March
1998, we funded American Independent Network with approximately $6,000,000.
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We have been able to mitigate the statutory impact of our growth through
the use of statutory financial reinsurance. In the event we are unable to obtain
additional financial reinsurance to support future growth, it may be necessary
for us to raise additional capital to contribute to the Insurers. In the event
that additional capital is raised, earnings per share would be adversely
affected. See "Government Regulation" for a discussion of risk-based capital and
required surplus levels.
Mandated loss ratios are calculated in a manner intended to provide
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 our annual and quarterly state insurance filings. The
states in which we are 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. We are
unable to predict the impact of (1) the imposition of any changes in the
mandatory statutory loss ratios for individual or group long-term care policies
to which we may become subject, (2) any changes in the minimum loss ratios for
individual or group long-term care or Medicare supplement policies, or (3) any
change in the manner in which these minimums are computed or enforced in the
future. We have not been informed by any state that any of the Insurers do not
meet mandated minimums, and we believe we are in compliance with all such
minimum ratios. In the event we are not in compliance with minimum statutory
loss ratios mandated by regulatory authorities with respect to certain policies,
we may be required to reduce or refund our premiums on such policies.
The commissions paid to agents on new business production affect our
expense ratios, which are generally higher for new business than for renewing
policies. Statutory accounting requires commissions to be expensed as paid. As a
result, rapid growth in first year business results in higher expense ratios.
(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 our profitability, leverage
and liquidity, as well as our book of business, the adequacy and soundness of
our reinsurance, the quality and estimated market value of our assets, the
adequacy of our reserves and the experience and competency of our management.
Penn Treaty Network has a Standard & Poor's claims paying ability rating of "A-
(good)," which falls within the most secure range (AAA to BBB). American Network
and American Independent Network are not rated by Standard & Poor's.
(k) Competition
We operate in a highly competitive industry. Many of our competitors have
considerably greater financial resources, higher ratings from A.M. Best and
Standard & Poor's and larger networks of agents. Many insurers offer long-term
care policies similar to those we offer and utilize similar marketing
techniques. We actively compete 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. We are registered and approved as a holding
company under the Pennsylvania Insurance Code. Penn Treaty Network is chartered
and licensed in Pennsylvania as a stock life insurance company. American Network
is chartered and licensed in Vermont as a stock accident and health insurance
company. American Independent Network is chartered and licensed in New York as a
stock accident and health insurance company. We are currently licensed in all
states and the District of Columbia.
17
<PAGE>
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 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 that 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 variation 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"), the New
York Insurance Department (the "New York 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. We believe that
our 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.
In 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance which will replace the current Accounting Practices and
Procedures manual as the NAIC's primary guidance on statutory accounting. The
Codification provides guidance for areas where statutory accounting has been
silent and changes current statutory accounting in some areas.
The Pennsylvania Department and the Vermont Department have adopted the
Codification guidance, effective January 1, 2001. The New York Department has
not yet adopted the Codification guidance. We have not estimated the effect of
adoption upon our financial condition or results of operations.
We are also subject to the insurance holding company laws of Pennsylvania
and of the other states in which we are 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 Pennsylvania, Vermont and New York Departments
must approve the purchase of more than 10% of the outstanding shares of our
Common Stock by one or more parties acting in concert, and may subject such
party or parties to the reporting requirements of the insurance laws and
regulations of Pennsylvania, Vermont and New York and to the prior approval
and/or reporting requirements of other jurisdictions in which we are 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, Vermont and New York, as the case may be,
and may be subject to the prior approval and/or reporting requirements of other
jurisdictions in which they are 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 our Common Stock, such party
may be deemed to be an affiliate, in which event our Certificate of Authority to
do business in Pennsylvania may be revoked upon a determination by the
Department that such party exercises effective control over us. Although several
entities own more than 5% of our common stock, including one bank holding
company, none of these entities hold sufficient voting authority to exercise
effective control over us.
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 Penn Treaty Life and Penn Treaty Network for the five-year period
ended December 31, 1994 and had no recommendations for either Penn Treaty Life
18
<PAGE>
or Penn Treaty Network. During 1995, the Vermont Department completed its
examination of American Network 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.
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. Certain states,
including New Jersey and New York, have adopted a minimum loss ratio of 65% for
long-term care. The states in which we are 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 Pennsylvania, Vermont and New York Departments are provided, on an
annual basis, with a calculation prepared by our appointed actuaries 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 we do 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. As of December 31, 1999, the risk-based
capital of Penn Treaty Network, American Network and American Independent
Network was 335%, 269%, and 8,821%, respectively, of authorized control level
capital. Beginning in 1999, risk-based capital is required to be held
specifically for long-term care premium in-force. This NAIC change presents
additional capital requirements for each of the Insurers, which could limit
their ability to grow future premiums.
In the event that any of the Insurers fail to maintain sufficient capital
levels to satisfy NAIC requirements, we would be required to raise additional
capital or to provide a plan that proposes how we will meet these capital
requirements in the future.
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 our 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 each insurance company to give 30 days advance notice
to the Pennsylvania Department of any planned extraordinary dividend (any
dividend paid within any twelve-month period which exceeds the greater of (1)
10% of an insured's surplus as shown in its most recent annual statement filed
with the Pennsylvania Department or (2) 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,
American Network is also required to furnish 30 days advance written notice to
the Vermont Department of an extraordinary dividend, who may disapprove the
dividend. Vermont law defines an extraordinary dividend as a dividend in excess
of the lesser of (1) the net earnings during the preceding calendar year plus
net income not paid out as dividends during the prior two calendar years and (2)
10% of the capital surplus, determined as of the immediately preceding December
31.
19
<PAGE>
Although no legislation has been enacted to date, some state legislatures
have discussed proposed language that, if passed, could limit rate increases on
long-term care insurance products. In the event that restrictive legislation
would pass in any state, we believe it would have a negative impact on our
future earnings.
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 returned 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. 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 has increased the price of long-term care
policies, while rate stabilization provisions limit our ability to adjust for
adverse loss experiences. We are in compliance with all such regulations.
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 for the Internal Revenue Service. 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 (1) limitations on pre-existing condition exclusions, (2)
prohibitions on excluding individuals from coverage based on health status and
(3) guaranteed renewability of health insurance coverage. Although we offer
tax-deductible policies, we will continue to offer a variety of non-deductible
policies as well. We have long-term care policies that qualify for tax exemption
under the Act in all states in which we are licensed.
Periodically, 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 our operations. In
addition, legislation enacted by Congress could impact our 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. As with any
pending legislation, it is possible that any laws finally enacted will be
substantially different than the current proposals. Accordingly, we are unable
to predict the impact of any such legislation on our business and operations.
We monitor economic and regulatory developments that have the potential to
impact our business. Recently enacted federal legislation will allow banks and
other financial organizations to have greater participation in securities and
insurance businesses. This legislation may present an increased level of
competition for sales of our products. Furthermore, the market for our products
is enhanced by the tax incentives available under current law. Any legislative
changes that lessen these incentives could negatively impact the demand for
these products.
20
<PAGE>
(m) Employees
As of December 31, 1999, we had approximately 350 full-time employees (not
including independent agents), 322 of whom are employed in our home office. Of
those employees in our home office, 139 are employed in various administrative
services, 28 in sales, 48 in underwriting, 6 in accounting, 10 in compliance, 56
in claims, 17 in an executive capacity, and 18 in systems. We had approximately
15 full-time employees employed in the Florida field office as of December 31,
1999. As of December 31, 1999, we had 11 in our California office and 2 in our
New York office. Of the 28 field office employees, approximately 6 were in
underwriting and administration and 22 were in marketing. United Insurance Group
employs approximately 25 employees on a full-time basis, as well as numerous
agents who are compensated on a commission basis. We are not a party to any
collective bargaining agreements and believe that our relationship with our
employees is good.
Item 2. Properties
Our principal offices in Allentown, Pennsylvania occupy two contiguous
buildings, occupying approximately 30,000 square feet of office space in a
40,000 square foot building and all of an 8,000 square foot facility. We own
both buildings. We also lease additional office space in Florida, California,
Michigan, Texas and New York.
We own a 2.42 acre undeveloped parcel of land, which is located across the
street from our home offices.
Item 3. Legal Proceedings
The Insurers are parties to various lawsuits generally arising in the
normal course of their insurance business.
During the second quarter 1999, we filed a lawsuit in state court, naming
IBM and others, for breach of contract and other claims. The lawsuit, filed
Monday, June 28, 1999, in the Court of Common Pleas in Lehigh County,
Pennsylvania, names IBM, Tangent International Computer Consultants, Inc. of New
York and The Outsourcing Partnership LLC of Pennsylvania, and seeks damages for
alleged misrepresentations concerning our LifePro computer software.
We do not believe that the eventual outcome of any of the suits to which we
are currently a party will have a material adverse effect on our 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, 1999 to a vote of security holders.
21
<PAGE>
PART II
-------
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters
Our Common Stock is traded on the New York Stock Exchange under the symbol
PTA. The transfer agent and registrar for our Common Stock is First Union
National Bank of Charlotte, North Carolina.
As of March 16, 2000 we had 7,808,589 shares of Common Stock outstanding,
held by approximately 380 stockholders of record. This latter number was derived
from our shareholder records, and does not include beneficial owners of our
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 the Nasdaq Stock
Market until December 1998 and by the New York Stock Exchange through December
31, 1999, for our Common Stock for the periods indicated below, is as follows:
High Low
---- ---
1998
First Quarter 31 15/16 28
Second Quarter 32 3/4 29 1/4
Third Quarter 32 23 1/8
Fourth Quarter 29 1/8 18 5/8
1999
First Quarter 27 1/8 24 1/8
Second Quarter 29 5/8 25 1/8
Third Quarter 27 5/8 23 5/8
Fourth Quarter 20 7/8 15 3/4
We have never paid any cash dividends on our Common Stock and do not intend
to do so in the foreseeable future. It is our present intention to retain any
future earnings to support the continued growth of our business. Any future
payment of dividends is subject to the discretion of our Board of Directors and
is dependent, in part, on any dividends we may receive as the sole shareholder
of Penn Treaty Network, American Network, American Independent Network, the
Agency and United Insurance Group. The payment of dividends by Penn Treaty
Network, American Network and American Independent Network, 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 and Standard & Poor's.
22
<PAGE>
Item 6. Selected Financial Data
The following selected consolidated statement of operations data and
balance sheet data as of and for the years ended December 31, 1995, 1996, 1997,
1998 and 1999, have been derived from our Consolidated GAAP Financial
Statements, which have been audited by PricewaterhouseCoopers LLP, independent
accountants.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
(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 $ 36,770 $ 46,346 $ 55,348 $ 82,686 $ 97,677
Renewal premiums 62,402 80,311 108,794 137,459 191,522
Life:
First year premiums 1,701 1,457 1,056 837 596
Renewal premiums 1,494 2,077 2,482 2,710 2,721
-------- -------- -------- -------- --------
Total premiums 102,367 130,191 167,680 223,692 292,516
Investment income, net 8,103 10,982 17,009 20,376 22,619
Net realized gains (losses) 46 20 1,417 9,209 5,393
Other income 347 342 417 885 6,297
-------- -------- -------- -------- --------
Total revenues 110,863 141,535 186,523 254,162 326,825
Benefits and expenses:
Benefits to policyholders 64,879 83,993 123,865 154,300 200,328
First year commissions 26,223 30,772 37,834 58,174 66,801
Renewal commissions 10,128 12,533 17,406 22,099 29,951
Net acquisition costs deferred (1) (15,303) (19,043) (28,294) (46,915) (51,134)
General and administrative expenses 12,171 15,648 20,614 26,069 43,535
Interest expense 327 625 4,804 4,809 5,187
-------- -------- -------- -------- --------
Total benefits and expenses 98,425 124,528 176,229 218,536 294,668
-------- -------- -------- -------- --------
Income before federal income taxes 12,438 17,007 10,294 35,626 32,157
Provision for federal income taxes 3,609 4,847 2,695 11,578 10,837
-------- -------- -------- -------- --------
Net income $ 8,829 $ 12,160 $ 7,599 $ 24,048 $ 21,320
======== ======== ======== ======== ========
Basic earnings per share $ 1.53 $ 1.70 $ 1.01 $ 3.17 $ 2.83
======== ======== ======== ======== ========
Diluted earnings per share $ 1.51 $ 1.66 $ 0.98 $ 2.64 $ 2.40
======== ======== ======== ======== ========
Weighted average shares outstanding 5,772 7,165 7,540 7,577 7,533
Diluted shares outstanding 5,842 7,528 7,758 10,402 10,293
GAAP Ratios:
Loss ratio 63.4% 64.5% 73.9% 69.0% 68.5%
Expense ratio 32.8% 31.1% 31.2% 28.7% 32.3%
-------- -------- -------- -------- --------
Total 96.2% 95.6% 105.1% 97.7% 100.8%
======== ======== ======== ======== ========
Selected Statutory Data:
------------------------
Net premiums written $102,145 $133,950 $167,403 $143,806 $208,655
Statutory surplus (beginning of
period) $ 21,067 $ 38,148 $ 81,795 $ 67,249 $ 76,022
Ratio of net premiums written to
statutory surplus 4.8x 3.5x 2.0x 2.1x 2.7x
Balance Sheet Data:
-------------------
Total investments $144,928 $212,662 $301,787 $338,889 $373,001
Total assets 237,744 386,768 465,772 580,552 697,639
Total debt 2,206 77,115 76,752 76,550 82,861
Total liabilities 140,637 267,861 333,016 422,882 538,954
Shareholders' equity 97,107 118,907 132,756 157,670 158,685
Book value per share $ 13.93 $ 15.83 $ 17.53 $ 20.79 $ 21.81
</TABLE>
(1) For a discussion of policy acquisition costs, see "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
23
<PAGE>
Quarterly Data
Our unaudited quarterly data for each quarter of 1998 and 1999 have been
derived from unaudited financial statements and include all adjustments,
consisting only of normal recurring accruals, which we consider necessary for a
fair presentation for the results of operations for these periods. Such
quarterly operating results are not necessarily indicative of our future results
of operations.
The following table presents unaudited quarterly data for each quarter of
1998 and 1999.
1998
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data and ratios)
Accident and health premiums $50,912 $53,749 $57,575 $57,909
Life premiums 867 854 830 996
Total premiums 51,779 54,603 58,405 58,905
Investment income, net 4,626 4,950 5,432 5,368
Net realized capital gains and
losses and other income 6,791 165 607 2,531
Total revenues 63,196 59,718 64,444 66,804
Benefits to policyholders 34,282 38,093 40,535 41,390
Commissions & expenses 23,320 25,786 27,420 29,816
Net acquisition costs deferred (8,275) (12,034) (12,141) (14,465)
Net income $8,371 $4,491 $5,058 $6,128
Net income per share (basic) $1.11 $0.59 $0.67 $0.79
GAAP loss ratio 66.2% 69.8% 69.4% 70.3%
GAAP expense ratio 31.4% 27.4% 28.2% 28.1%
----- ----- ----- -----
Total 97.6% 97.1% 97.6% 98.4%
1999
-------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(in thousands, except per share data and ratios)
Accident and health premiums $66,166 $71,212 $71,311 $80,510
Life premiums 893 930 854 640
Total premiums 67,059 72,142 72,165 81,150
Investment income, net 5,183 5,571 5,967 5,898
Net realized capital gains and
losses and other income 2,056 4,884 1,833 2,917
Total revenues 74,298 82,597 79,965 89,965
Benefits to policyholders 45,404 49,305 49,623 55,996
Commissions & expenses 31,450 36,476 33,743 38,617
Net acquisition costs deferred (11,070) (12,388) (12,201) (15,475)
Net income $4,904 $5,240 $5,015 $6,161
Net income per share (basic) $0.65 $0.69 $0.66 $0.83
GAAP loss ratio 67.7% 68.3% 68.8% 69.0%
GAAP expense ratio 32.2% 35.3% 31.7% 30.1%
------ ------ ------ ------
Total 99.9% 103.7% 100.5% 99.1%
24
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following table sets forth the components of our condensed statements
of operations for the years ended December 31, 1997, 1998 and 1999, expressed as
a percentage of total revenues.
Year Ended December 31,
-----------------------
1997 1998 1999
---- ---- ----
Statement of Operations Data:
Revenues:
Accident and health:
First year premiums 29.7% 32.5% 29.9%
Renewal premiums 58.3% 54.1% 58.6%
Life:
First year premiums 0.6% 0.3% 0.2%
Renewal premiums 1.3% 1.1% 0.8%
----- ----- -----
Total premiums 89.9% 88.0% 89.5%
Investment income, net 9.1% 8.1% 6.9%
Net realized gains (losses) 0.8% 3.6% 1.7%
Other income 0.2% 0.3% 1.9%
------ ------ ------
Total revenues 100.0% 100.0% 100.0%
Benefits and expenses:
Benefits to policyholders 66.4% 60.7% 61.3%
First year commissions 20.3% 22.9% 20.4%
Renewal commissions 9.3% 8.7% 9.2%
Net policy acquisition costs deferred -15.2% -18.5% -15.6%
General and administrative expense 11.1% 10.3% 13.3%
Interest expense 2.6% 1.9% 1.6%
----- ----- -----
Total benefits and expenses 94.5% 86.0% 90.2%
----- ----- -----
Income before federal income taxes 5.5% 14.0% 9.8%
Provision for federal income taxes 1.4% 4.5% 3.3%
---- ---- ----
Net income 4.1% 9.5% 6.5%
==== ==== ====
25
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
We develop and market insurance products primarily designed for the care of
individuals age 65 and over. Our principal products are individual fixed,
defined benefit accident and health insurance policies that consist of nursing
home care, home health care, Medicare supplement and long-term disability
insurance. Our underwriting practices rely upon the base of experience, which we
have developed over 28 years of providing nursing home care insurance, as well
as upon available industry and actuarial information. As the home health care
market has developed, we have encouraged the purchase of both nursing home care
and home health care coverage, and have introduced new life insurance products
as well, thus providing policyholders with enhanced protection while broadening
our policy base. In late 1996, we introduced our Personal Freedom Plan and
Assisted Living Plan. Both plans are designed to provide comprehensive nursing
home and home health care coverage. During 1998, we developed our Secured Risk
Nursing Facility and Post Acute Recovery Plans, which provide limited benefits
to higher risk applicants. Long-term nursing home care and home health care
policies accounted for approximately 95% of our total annualized premiums
in-force as of December 31, 1999 and approximately 85% of our consolidated
revenues for 1999.
Our 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. State regulatory authorities must approve premiums
charged for insurance products. In addition, our 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 our insurance policies. These reserves must, at a minimum, comply with
mandated standards.
Our 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. We compare actual experience with estimates and adjust our reserves
on the basis of such comparisons. Revisions to reserves are reflected in our
current results of operations through benefits to policyholder's expense.
We also maintain reserves for policies that are not currently in claim
based upon actuarial expectations that a policy may go on claim in the future.
These reserves are calculated based on factors that include estimates for
mortality, morbidity, interest rates and persistency. Factor components
generally include assumptions that are consistent with both our experience and
industry practices.
Policy premium levels. We attempt to set premium levels to ensure profitability,
subject to the constraints of competitive market conditions and state regulatory
approvals. Premium levels are reviewed on new product filings, as well as for
rate increases as claims experience warrants.
Deferred acquisition costs. In connection with the sale of our insurance
policies, we defer and amortize 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, we are 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 that have been in-force for a longer period of time. As the policy
ages, it is more likely that the insured will need services covered by the
policy. However, the longer the policy is in effect, the more premium we will
receive.
26
<PAGE>
Investment income. Our investment portfolio consists primarily of high-grade
fixed income securities. Income generated from this portfolio is largely
dependent upon prevailing levels of interest rates. Due to the longevity of our
investment portfolio duration (approximately 5.0 years), investment interest
income does not immediately reflect changes in market interest rates. However,
we are susceptible to changes in market rates when cash flows from maturing
investments are reinvested at prevailing market rates. As of December 31, 1999,
approximately 5.1% of our invested assets were committed to high quality large
capitalization common stocks and preferred stocks of smaller corporations.
Lapsation and persistency. Factors that affect our 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 our policy, is automatic
if and when premiums become more than 31 days overdue; however, policies may be
reinstated, if approved, within six months after the policy lapses. Persistency
represents the percentage of premiums renewed, which we calculate 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 us. First year
premiums are premiums covering the first twelve months a policy is in-force.
Renewal premiums are premiums covering all subsequent periods.
Policies renew or lapse for a variety of reasons, due both to internal and
external causes. We believe that our efforts to address any policyholder
concerns or questions in an expedient fashion help to ensure ongoing policy
renewal. We also believe that we enjoy a favorable policyholder reputation for
providing desirable policy benefits, minimal premium rate increases and
efficient claims processing. We work closely with our licensed agents, who play
an integral role in policy conservation and policyholder communication.
External factors also contribute to policy renewal or lapsation. Economic
cycles can influence a policyholder's ability to continue the payment of
insurance premiums when due. New government/ legislative initiatives have raised
public awareness of the escalating costs of long-term care, which we believe
boosts new sales and promotes renewal payments. Recent initiatives also include
tax relief for certain long-term care insurance coverage, which promotes new and
renewal payments.
Lapsation and persistency can positively and adversely impact future
earnings. Improved persistency generally results in higher renewal premium and
reduced amortization of deferred acquisition costs than anticipated. However,
higher persistency may lead to increased claims in future periods. Additionally,
increased lapsation can result in reduced premium collection, accelerated
deferred acquisition cost amortization and anti-selection of higher-risk,
remaining policyholders.
27
<PAGE>
Twelve Months Ended December 31, 1999 and 1998
(amounts in thousands, except per share data)
Premiums. Total premium revenue earned in the twelve month period ended December
31, 1999, including long-term care, disability, life and Medicare supplement,
increased 30.8% to $292,516, compared to $223,692 in the same period in 1998.
During 1999, we entered a reinsurance and administration transaction with an
unaffiliated insurer (the "Reinsurance Transaction"). Under the terms of the
Reinsurance Transaction, we assumed $2,251 of first year and renewal long term
care insurance in-force under a 100% quota share agreement.
Excluding the impact of the Reinsurance Transaction, first year long-term
care premiums earned in 1999 increased 17.3% to $93,957, compared to $80,126 in
1998. We attribute our growth to continued improvements in product offerings,
which competitively meet the needs of the long-term care marketplace, and
expansion into new states, such as New Jersey, Connecticut and New York. In
addition, we have continued to actively recruit and train agents to sell our
products.
When actuarially warranted, we have been generally successful in obtaining
premium rate increases.
Excluding the impact of the Reinsurance Transaction, renewal premiums
earned in 1999 increased 38.6% to $194,243, compared to $140,170 in 1998.
Renewal long-term care premiums earned in 1999 increased 41.1% to $181,010,
compared to $128,259 in 1998. This increase reflects renewals of a larger base
of in-force policies. We also attribute this renewal growth to an increase in
persistency from 85.5% in 1998 to 86.7% in 1999 (renewals as a percentage of
total prior year business).
Net Investment Income. Net investment income earned for 1999 increased 11.0% to
$22,619, from $20,376 for 1998. Management attributes this growth to more
invested assets as a result of higher established reserves. Investment income is
reduced, however, by our use of invested cash for the acquisition of United
Insurance Group on January 1, 1999. Our average yield on invested balances was
5.8% in 1999, compared to 6.1% in 1998.
Net Realized Capital Gains. During 1999, we recognized capital gains of $5,393,
compared to gains of $9,209 in 1998. During 1999, we recorded gains of
approximately $2,800 from the sale of a portion of our equities securities
portfolio. These gains were recognized as a result of our desire to offset the
net income impact of our recorded expense attributable to the impairment of
fixed assets. In February 1998, we recognized approximately $6,400 of capital
gains from the sale of substantially all of our equities securities portfolio.
Following both the 1998 and 1999 substantive sales, we replenished our equities
securities portfolio in subsequent market purchases. The remainder of the gains
in both periods was recorded as a result of our normal investment management
operations.
Other Income. We recorded $6,297 in other income during 1999, up from $885 in
1998. The increase is attributable to the inclusion of commissions earned by
United Insurance Group on sales of insurance products underwritten by
unaffiliated insurers.
Benefits to Policyholders. Total benefits to policyholders in 1999 increased
29.8% to $200,328, compared to $154,300 in 1998. Our loss ratio, or policyholder
benefits to premiums, was 68.5% in 1999, compared to 69.0% in 1998.
Under the Reinsurance Transaction, we established policy and claim reserves
of $2,840, for which we received cash from the reinsured party. The
establishment of the reserves is included in 1999 as benefits to policyholders.
Policyholder benefits include additions to reserves and claims payments for
policyholders' incurring claims in the current and prior years. In 1999, we paid
$25,145 related to current year incurrals and $69,887 related to claims incurred
in 1998 and prior years. In 1998, we paid $22,744 for current year claims and
$52,402 related to prior year incurrals. Paid claims as a percentage of premiums
were 32.5% in 1999, compared to 33.6% in 1998. We anticipate that as policies
age, and new premium as a percentage of total premium decreases, this paid ratio
will increase.
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<PAGE>
In the year in which a claim is first incurred, we establish reserves that
are actuarially determined to be the present value of all future payments
required for that claim. We assume that our current reserve amount and interest
income earned on invested reserves will be sufficient to make all future
payments. We measure the validity of our prior year assumptions by reviewing the
development of reserves for the prior period (i.e., incurred from prior years).
This amount, $10,064 and $9,016 in 1999 and 1998, respectively, includes imputed
interest from prior year-end reserve balances of $5,085 and $3,913,
respectively, plus adjustments to reflect actual versus estimated claims
experience. These adjustments, particularly as a percentage of the prior
year-end reserve balance, yield a relative measure of deviation in actual
performance to our initial assumptions. In 1999, we added approximately $4,100
or 3.9% of prior year-end reserves to our claim reserves for 1998 and prior
claim incurrals. In 1998, we added approximately $5,100 or 6.4% of prior
year-end reserves to our claim reserves for 1997 and prior claim incurrals.
While we do not believe that either 1999 or 1998 additions represent
material deviation from our estimates, we note that claims development has
exceeded our expectations in both periods. Claims experience can differ from our
expectations due to numerous factors, including mortality rates, duration of
care and type of care utilized. When we experience deviation from our estimates,
we typically seek premium rate increases that are sufficient to offset future
deviation. We have been generally successful in the past in obtaining state
insurance department approvals for these increases when deemed to be actuarially
sound.
Commissions. Commissions to agents increased 20.5% to $96,752 in 1999, compared
to $80,273 in 1998.
Commissions in 1999 include a one time ceding allowance of $1,925, which we
paid to an unaffiliated third party under the Reinsurance Transaction.
Excluding the impact of the Reinsurance Transaction and from the inclusion
of United Insurance Group, which serves to reduce commissions by $2,474 from
policies that we underwrite, first year commissions on accident and health
business in 1999 increased 15.8% to $65,538, compared to $56,594 in 1998,
corresponding to the increase in first year accident and health premiums and to
the issuance of younger age policies, which typically pay a higher first year
commission rate. The ratio of first year accident and health commissions to
first year accident and health premiums was 69.4% in 1999 and 69.2% in 1998.
Renewal commissions on accident and health business in 1999 increased 40.1%
to $29,736, compared to $21,226 in 1998, consistent with the increase in renewal
premiums discussed above. The ratio of renewal accident and health commissions
to renewal accident and health premiums was 16.0% in 1999 and 16.1% in 1998.
Net Policy Acquisition Costs Deferred. The net deferred policy acquisition costs
in 1999 increased 9.0% to $51,134, compared to $46,915 in 1998.
Deferred costs are typically all costs that are directly related to, and
vary with, with the acquisition of new premiums. These costs include the
variable portion of commissions, which are defined as the first year commission
rate less renewal commission rates, and variable general and administrative
expenses related to policy underwriting. Deferred costs are amortized over the
life of the policy based upon actuarial assumptions, including persistency of
policies in-force. In the event a policy lapses prematurely due to death or
termination of coverage, the remaining unamortized portion of the deferred
amount is immediately recognized as expense in the current period.
During 1999, we recognized $17,722 in expense due to the amortization of
prior and current deferred policy acquisition costs. We amortized $16,277 in
1998.
General and Administrative Expenses. General and administrative expenses in 1999
increased 56.3% to $40,736, compared to $26,069 in 1998. 1999 general and
administrative expenses include United Insurance Group expense of $7,748,
including $680 of goodwill amortization. While the remaining 1999 expense has
grown over 1998 with overall premium growth, management believes that current
cost savings initiatives, such as remote office consolidation and outsourcing of
certain administrative functions, will reduce this growth in the future.
Loss Due to Impairment of Property and Equipment. During the second quarter
1999, we determined to discontinue our planned implementation of our LifePro
computer system. At that time, we had capitalized $2,799 of expenditures related
29
<PAGE>
to this project, including licensing costs and fees paid to outside parties for
system development and implementation. As the system was not yet placed in
service, none of these costs had previously been depreciated on our Consolidated
Statements of Income and Comprehensive Income. Upon determining not to utilize
these fixed assets, their value became fully impaired and we recognized the
entire amount as current period expense.
Provision for Federal Income Taxes. Our provision for federal income taxes for
1999 decreased 6.4% to $10,837, compared to $11,578 for 1998. The effective tax
rates of 33.7% and 32.5% in 1999 and 1998, respectively, are below the normal
federal corporate rate as a result of credits from the small life insurance
company deduction, as well as our investments in tax-exempt bonds and from
dividends received that are partially exempt from taxation, which are partially
offset by non-deductible goodwill amortization.
Comprehensive Income. During 1999, our investment portfolio generated pre-tax,
unrealized losses of $18,009 due to increased market interest rates, compared to
1998 period unrealized gains of $10,032. After accounting for deferred taxes
from these gains, shareholders' equity increased by $5,875 from comprehensive
income during 1999, compared to comprehensive income of $24,591 in 1998.
Twelve Months Ended December 31, 1998 and 1997 (amounts in thousands, except per
share data)
Premiums. Total premium revenue earned in the twelve month period ended December
31, 1998, including long-term care disability, life and Medicare supplement
increased 33.4% to $23,692, compared to $167,680 in the same period in 1997.
First year long-term care premiums in 1998 increased 51.9% to $80,126, compared
to $52,747 in 1997. We attribute our growth to continued improvements in product
offerings that competitively meet the needs of the long-term care marketplace.
In addition, we actively recruit and train agents to sell our products.
Renewal long-term care premiums in 1998 increased 27.4% to $128,258,
compared to $100,674 in 1997. This increase reflects higher persistency and
growth of in-force premiums. Persistency in 1998 was 85.5%, compared to 83.1% in
1997.
In addition, American Network, which we acquired on August 30, 1996,
generated disability premiums of $6,715 during 1998, down from $6,822 recognized
in 1997.
Net Investment Income. Net investment income for 1998 increased 19.8% to $20,376
from $17,009 for 1997, which is a result of higher invested assets achieved
through cash receipts from premiums, with corresponding reserve increases.
During 1998, we sold our entire equity securities portfolio, or approximately
$21,000 of invested assets. From this sale, we recognized an approximate $6,400
capital gain. We subsequently reestablished our equities portfolio in future
periods. Also, we liquidated our tax-exempt bond holdings in order to recognize
higher tax equivalent yields. This sale generated an approximate $1,500 gain. We
recognized $1,417 of capital gains in 1997. Our average yield on invested assets
and cash balances was 6.1% in 1998, compared to 6.0% in 1997.
Benefits to Policyholders. Benefits to policyholders in 1998 increased 24.6% to
$154,300, compared to $123,865 in 1997. Accident and health benefits to
policyholders in 1998 increased 24.4% to $151,247, compared to $121,608 in 1997.
The 1998 loss ratio for accident and health business was 68.7%, compared to
74.1% in 1997. In 1997 we added approximately $12,000 to our reservs as a result
of our reassessment of assumptions utilized in the actuarial determination of
reserves for current reserves. This resulted in a higher loss ratio for 1997.
The remaining growth in benefits is attributable to new premium growth.
Management expects the loss ratio to increase with time due to the impact of a
maturing portfolio. Also, due to our policy of discounting reserves, reserve
releases will typically be less than actual claims payments. Management believes
that interest earnings from invested assets will be sufficient to offset the
difference between claims payments and reserve releases.
Commissions. Commissions to agents increased 45.3% to $80,273 in 1998 compared
to $55,240 in 1997. Commissions expense includes American Network commissions on
long-term disability policies, which generated $1,084 of expenses in 1998.
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<PAGE>
First year commissions on total accident and health business in 1998
increased 56.2% to $56,594, compared to $36,240 in 1997, 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
69.2% in 1998 and 66.9% in 1997. The commission ratio increased in 1998 as a
result of the increased sale of policies to younger individuals. We pay higher
first year commissions on younger policies due to our expectation that these
policies will generate revenues for more years than at older issue ages. First
year commissions on life business in 1998 decreased 17.4% to $726, compared to
$879 in 1997, directly reflecting our reduction in first year life premiums. The
ratio of first year life commissions to first year life premiums was 86.8% in
1998 compared to 83.2% in 1997 due to an increase in single premium policies
sold.
Renewal commissions on accident and health business in 1998 increased 28.0%
to $21,226, compared to $16,580 in 1997, 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 16.1% in 1998 and 16.1%
in 1997. 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 1998 increased 65.8% to $46,915, compared to $28,294 in 1997, primarily due
to higher commission rates paid for first year premiums as a result of the sale
of younger age policies, which pay a higher commission percentage in the first
year. This deferral is net of amortization, which decreases or increases as our
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 1998
increased 26.5% to $26,069, compared to $20,614 in 1997. General and
administrative expenses, excluding goodwill and convertible debt cost
amortization, as a percentage of premiums were 11.3% in 1998, compared to 11.9%
in 1997.
Net Income. Net income of $24,048 for 1998 was $16,449 or 216.5% above 1997
income of $7,599. Net income includes income tax provisions of $11,578 and
$2,695 for the 1998 and 1997 periods, respectively. Income before federal income
taxes increased in 1998 by $25,332 or 246.1% to $35,626. This increase was
primarily attributable to premium growth and capital gains realized from bond
and equity sales. We made a 1998 provision for federal income taxes of $11,578,
reflecting an effective rate of 32.5%, as compared to an effective 1997 tax rate
of 26.2%.
Comprehensive Income. During 1998, our investment portfolio generated increases
in unrealized gains of $10,032, compared to 1997 gains of $9,867. After
accounting for deferred taxes from these gains, shareholders' equity increased
by $24,591 from comprehensive income during 1998, compared to $13,176 in 1997,
or an increase of $11,415 or 86.6%.
New Accounting Principles
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and reporting
standards for derivative instruments, including certain derivative instruments
embedded in other contracts (collectively referred to as "derivatives") and for
hedging activities. SFAS No. 133 requires an entity to recognize all derivatives
as either assets or liabilities in the statement of financial position and
measure those instruments at fair value. We are currently evaluating the impact
of SFAS No. 133 as relates to the imbedded option value of our investments in
convertible bonds.
Statement of Position 98-1 "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use" (SOP 98-1) was issued by the American
Institute of Certified Public Accountants in March 1998 and provides guidance on
accounting for the costs of computer software developed or obtained for internal
use. The statement is effective for 1999 financial statements. The adoption of
SOP 98-1 has not had a material impact on our financial condition or results of
operations.
31
<PAGE>
Year 2000
(amounts in thousands)
As many computer systems and other equipment with embedded chips or
processors use only two digits to represent the year, they may be unable to
accurately process certain data before, during or after the year 2000. As a
result, business and governmental entities may be at risk for possible
miscalculations or systems failures causing disruptions in their business
operations. This is commonly known as the Year 2000 ("Y2K") issue. The Y2K issue
can arise at any point in our supply, billing, processing, sales or financial
chains.
We implemented a Y2K readiness program with the objective of having all of
our significant operations functioning properly with respect to Y2K before
January 1, 2000. We believe that our preparation for Y2K was successful, and
have subsequently identified no material problems as a result.
Since January 1999, we have been operating our system using Y2K dates and
have not experienced any difficulties or problems. Any policy written with an
annual collection of premium has been successfully processed since January 1999,
with no interruption of services. No material issues have been experienced since
January 1, 2000.
We have not experienced any material impact from external suppliers as a
result of the Y2K issue.
We have spent approximately $400 to date related to modifying existing
systems to become Y2K compliant, and estimate that this amount represented
approximately 15% of our total information technology budget in 1999. We expect
the impact of Y2K to have no material impact upon our financial condition and
results of operations.
Liquidity and Capital Resources
(amounts in thousands)
Our consolidated liquidity requirements have historically been created and
met from the operations of our insurance subsidiaries. Our primary sources of
cash are premiums, investment income and maturities of investments. We have
provided, and may continue to provide, cash through public offerings of our
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. We have not and do 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." In 1998, American Network paid us a dividend of $397 and paid us
$250 in 1999, which were used for general corporate purposes.
In 1999, our cash flows were attributable to cash provided by operations,
cash used in investing and cash used in financing. Our cash decreased $21,055 in
1999 primarily due to the purchase of $192,990 in bonds and equity securities,
$4,999 used for the purchase of our Common Stock, which is held as Treasury
Stock, as well as cash of $9,194 used to purchase United Insurance Group. Cash
was provided primarily from the maturity and sale of $140,892 in bonds and
equity securities. These sources of funds were supplemented with $50,533 from
operations. The major provider of cash from operations was premium revenue used
to fund reserve additions of $104,610.
Our cash increased $27,161 in 1998 primarily due to the sale of $95,860 in
bonds and equity securities and the maturity of $31,640 of bonds. These sources
of funds coupled with $52,126 from operations more than offset $154,544 used to
acquire bonds and equity securities. The major provider of cash from operations
was premium revenue used to fund reserve increases of $78,915.
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<PAGE>
Our cash decreased by $40,373 in 1997 primarily due to the purchase of
$134,199 in bonds, which more than offset cash provided by operations and
$44,080 in proceeds from the sale of bonds. The major provider of cash from
operations was additions to reserves of $59,038 in 1997.
We invest in securities and other investments authorized by applicable
state laws and regulations and follow an investment policy designed to maximize
yield to the extent consistent with liquidity requirements and preservation of
assets. At December 31, 1999, the average maturity of our bond portfolio was 6.9
years, and our market value represented 96.7% of our cost, with a current
unrealized loss of $12,013. Our equity portfolio exceeded cost by $1,310 at
December 31, 1999. Our equity portfolio exceeded cost by $2,244 in 1998 and
$5,042 in 1997. On December 31, 1998, the average maturity of our bond portfolio
was 6.3 years, and its market value exceeded its cost by approximately $10,455.
During 1998, we evaluated and changed our investment policy to allow for
the acquisition of debt and equity securities rated "B" or better by bond rating
agencies. Included in our investment strategy was the decision to purchase
convertible or preferred securities. We hired an investment management firm that
specializes in convertible securities to manage this portfolio. The management
firm is also a principle shareholder of our common stock.
As of December 31, 1999, shareholders' equity was decreased by $7,064 due
to unrealized losses of $10,703 in the investment portfolio. As of December 31,
1998, shareholders' equity was increased by $8,381 due to unrealized gains of
$12,699 in the investment portfolio. As of December 31, 1997, shareholders'
equity was increased by $7,838 due to unrealized gains of $11,875 in the
investment portfolio.
Our debt currently consists primarily of a mortgage note in the approximate
amount of $1,700 and $74,750 in convertible subordinated debt. The convertible
debt, issued in November 1996, is convertible into common stock 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 15 years,
and has a balloon payment due on the remaining outstanding balance in December
2003. Although the note carries a variable interest rate, we have 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 of 6.85%.
In March 1998, we contributed approximately $6,000 of the proceeds from the
proceeds of the convertible subordinated debt to American Independent Network to
initially capitalize this subsidiary. In December 1999, we contributed $1,000 to
initially capitalize Penn Treaty (Bermuda). Penn Treaty (Bermuda) concurrently
lent us $750 in exchange for a note receivable. The note is expected to pay
interest at a rate of six percent, with principal repaid upon demand.
On December 31, 1997, Penn Treaty Life dividended us its common stock
ownership of Penn Treaty Network. At that time, Penn Treaty Network assumed
substantially all of the assets, liabilities and premium in-force of Penn Treaty
Life through a purchase and assumption reinsurance agreement. On December 30,
1998, we sold our common stock interest in Penn Treaty Life to an unaffiliated
insurer. All remaining policies in-force were assumed by Penn Treaty Network
through a 100% quota share agreement.
On November 26, 1998, we entered a purchase agreement to acquire all of the
common stock of United Insurance Group, a Michigan based consortium of long-term
care insurance agencies. The acquisition was effective January 1, 1999, for the
amount of $18,192. As part of the purchase, we issued a note payable for $8,078,
which was in the form of a three-year zero-coupon installment note. The
installment note, after discounting for imputed interest, was recorded as a note
payable of $7,167, with a current outstanding balance of $6,372 at December 31,
1999. The remainder of the purchase was for cash. United Insurance Group paid us
a dividend of $750 in 1999.
Our company consists of the Insurers and a non-insurer parent company, Penn
Treaty American Corporation (the "Parent"). The Parent directly controls 100% of
the voting stock of the Insurers. In the event the Parent is unable to meet its
financial obligations, becomes insolvent, or discontinues operations, the
Insurers' financial condition and results of operations could be materially
affected.
The Parent currently has the obligation of making semi-annual interest
payments attributable to its convertible debt. In that the dividend ability of
the subsidiaries is restricted, the Parent must rely on its own liquidity and
33
<PAGE>
cash flows to make all required interest installments. Management believes that
the Parent holds sufficient liquid funds from its current investments, dividend
capabilities of United Insurance Group and from its line of credit to meet its
obligations for the foreseeable future.
We believe that our insurance subsidiaries' capital and surplus presently
meet or exceed the requirements in all jurisdictions in which they are licensed.
Our continued growth is dependent upon our ability to (1) continue marketing
efforts to expand our historical markets, (2) continue to expand our network of
agents and effectively market our products in states where our insurance
subsidiaries are currently licensed and (3) 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 our insurance subsidiaries, can be met
through 2000 by funds generated from non-insurance subsidiary dividends, current
and future financial reinsurance transactions, off-shore reinsurance through
Penn Treaty (Bermuda) and the availability of our line of credit facility. We
expect future capital market activities will be necessary to support our ongoing
growth, but continue to seek alternative measures. If alternative measures to
support our growth are unsuccessful, we believe that additional capital would be
required as early as 2001.
In the event (1) we fail to maintain minimum loss ratios calculated in
accordance with statutory guidelines, (2) we fail to meet other requirements
mandated and enforced by regulatory authorities, (3) we have adverse claims
experience in the future, (4) we are unable to obtain additional financing to
support future growth or (5) the economy continues to affect the buying powers
of senior citizens, our results of operations, liquidity and capital resources
could be adversely affected.
Certain information presented in this filing constitutes
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. Although we believe that our expectations are
based upon reasonable assumptions within the bounds of our knowledge of our
business and operations, there can be no assurance that actual results of our
operations will not differ materially from our expectations. Factors which could
cause actual results to differ from expectations include, among others, the
adequacy of our loss reserves and our ability to meet statutory surplus
requirements (especially in light of our recent growth), our ability to comply
with government regulations, the ability of senior citizens to purchase our
products given the increasing costs of health care, the modality of premium
revenue and our ability to expand our network of productive independent agents.
For additional information, please refer to our reports filed with the
Securities and Exchange Commission.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Refer to Business - Investments
Item 8. Financial Statements
Refer to Consolidated Financial Statements and notes thereto attached
to this report
34
<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 our Definitive Proxy Statement for the
2000 Annual Meeting of Shareholders.
Item 11. Executive Compensation
Incorporated by reference from our Definitive Proxy Statement for the
2000 Annual Meeting of Shareholders. See Exhibits 10.1, 10.2, 10.3,
10.34, 10.35 and 10.36.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Incorporated by reference from our Definitive Proxy Statement for the
2000 Annual Meeting of Shareholders.
Item 13. Certain Relationship and Related Transactions
Incorporated by reference from our Definitive Proxy Statement for the
2000 Annual Meeting of Shareholders.
35
<PAGE>
PART IV
-------
Item 14. Exhibits, Financial Statements, Schedule and Reports
(a) The following documents are filed as a part of this report.
(1) Financial Statements.
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Pages
-----
Report of Independent Accountants F-2
Financial Statements:
Consolidated Balance Sheets as of December 31,
1999 and 1998 F-3
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 1999, 1998 and 1997 F-4
Consolidated Statements of Shareholders'
Equity for the years ended December 31, 1999,
1998 and 1997 F-5
Consolidated Statements of Cash Flows for the
years ended December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7-29
Financial Pages (F) 1
<PAGE>
Report of Independent Accountants
To the Board of Directors and Shareholders of Penn Treaty American Corporation
Allentown, Pennsylvania
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income and comprehensive income, of shareholders'
equity and of cash flows, present fairly, in all material respects, the
financial position of Penn Treaty American Corporation and Subsidiaries (the
"Company") at December 31, 1999 and 1998 and the results of their operations and
their cash flows for each of the three years in the period ended December 31,
1999, in conformity with accounting principles generally accepted in the United
States. 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 of these statements in
accordance with auditing standards generally accepted in the United States,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
- - ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 17, 2000
Financial Pages (F) 2
<PAGE>
<TABLE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Balance Sheets
as of December 31, 1999 and 1998
($000)
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
Investments:
Bonds, available for sale at market (cost of $365,701
and $310,993, respectively) $ 353,688 $ 321,448
Equity securities at market (cost of $17,853
and $15,090, respectively) 19,163 17,334
Policy loans 150 107
--------- ---------
Total investments 373,001 338,889
Cash and cash equivalents 17,347 38,402
Property and equipment, at cost, less accumulated
depreciation of $3,882 and $2,906, respectively 10,614 9,635
Unamortized deferred policy acquisition costs 208,519 157,385
Receivables from agents, less allowance for
uncollectable amounts of $199 and $166, respectively 2,713 1,804
Accrued investment income 5,918 4,889
Federal income tax recoverable 1,616 1,741
Cost in excess of fair value of net assets acquired, less
accumulated amortization of $2,021 and $1,029, respectively 22,357 6,349
Present value of future profits acquired 2,767 3,181
Receivable from reinsurers 15,070 12,288
Other assets 37,717 5,989
--------- ---------
Total assets $ 697,639 $ 580,552
========= =========
LIABILITIES
Policy reserves:
Accident and health $ 260,046 $ 190,036
Life 12,167 9,434
Policy and contract claims 137,534 105,667
Accounts payable and other liabilities 12,887 8,639
Long-term debt 82,861 76,550
Deferred income tax liability 33,459 32,556
--------- ---------
Total liabilities 538,954 422,882
--------- ---------
Commitments and contingencies (Note 11)
SHAREHOLDERS' EQUITY
Preferred stock, par value $1.00; 5,000 shares authorized,
none outstanding - -
Common stock, par value $.10; 25,000 shares authorized,
8,191 and 8,189 shares issued, respectively 819 819
Additional paid-in capital 53,655 53,516
Accumulated other comprehensive income (7,064) 8,381
Retained earnings 117,980 96,660
--------- ---------
165,390 159,376
Less 915 and 606, respectively common shares held
in treasury, at cost (6,705) (1,706)
--------- ---------
158,685 157,670
--------- ---------
Total liabilities and shareholders' equity $ 697,639 $ 580,552
========= =========
See accompanying notes to consolidated financial statements.
</TABLE>
Financial Pages (F) 3
<PAGE>
<TABLE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Income and Comprehensive Income
for the years ended December 31, 1999, 1998, and 1997
($000)
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Revenue:
Accident and health premiums $ 289,199 $ 220,145 $ 164,142
Life premiums 3,317 3,547 3,538
--------- --------- ---------
292,516 223,692 167,68
Net investment income 22,619 20,376 17,009
Net realized capital gains 5,393 9,209 1,417
Other income 6,297 885 417
--------- --------- ---------
326,825 254,162 186,523
Benefits and expenses:
Benefits to policyholders 200,328 154,300 123,865
Commissions 96,752 80,273 55,240
Net policy acquisition costs deferred (51,134) (46,915) (28,294)
General and administrative expenses 40,736 26,069 20,614
Loss due to impairment of property and equipment 2,799 - -
Interest expense 5,187 4,809 4,804
--------- --------- ---------
294,668 218,536 176,229
--------- --------- ---------
Income before federal income taxes 32,157 35,626 10,294
Provision for federal income taxes 10,837 11,578 2,695
--------- --------- ---------
Net income $ 21,320 $ 24,048 $ 7,599
========= ========= =========
Other comprehensive income:
Unrealized holding (loss) gain arising during period (18,009) 10,032 9,867
Income tax benefit (expense) from unrealized holdings 6,123 (3,411) (3,355)
Reclassification adjustment for gain included in net income (5,393) (9,209) (1,417)
Income tax benefit from reclassification adjustment 1,834 3,131 482
--------- --------- ---------
Comprehensive income $ 5,875 $ 24,591 $ 13,176
========= ========= =========
Basic earnings per share $ 2.83 $ 3.17 $ 1.01
Diluted earnings per share $ 2.40 $ 2.64 $ 0.98
Weighted average number of shares outstanding 7,533 7,577 7,540
Weighted average number of shares outstanding
(Diluted) 10,293 10,402 7,758
See accompanying notes to consolidated financial statements.
</TABLE>
Financial Pages (F) 4
<PAGE>
<TABLE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
for the years ended December 31, 1999, 1998, and 1997
($000)
<CAPTION>
Accumulated
Common Stock Additional Other Total
-------------------- Paid-In Comprehensive Retained Treasury Shareholders'
Shares Amount Capital Income Earnings Stock Equity
------ ------ ------- ------ -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1996 8,117 $ 812 $ 52,528 $ 2,261 $ 65,013 $ (1,706) $ 118,908
Net income 7,599 7,599
Other comprehensive income 5,577 5,577
Exercised options proceeds 61 6 666 672
-------------------------------------------------------------------------------------
Balance, December 31, 1997 8,178 818 53,194 7,838 72,612 (1,706) 132,756
Net income 24,048 24,048
Other comprehensive income 543 543
Option-based compensation 183 183
Exercised options proceeds 11 1 139 140
-------------------------------------------------------------------------------------
Balance, December 31, 1998 8,189 819 53,516 8,381 96,660 (1,706) 157,670
Net income 21,320 21,320
Other comprehensive losses (15,445) (15,445)
Treasury stock purchase (4,999) (4,999)
Option-based compensation 108 108
Exercised options proceeds 2 31 31
-------------------------------------------------------------------------------------
Balance, December 31, 1999 8,191 $ 819 $ 53,655 $ (7,064) $ 117,980 $ (6,705) $ 158,685
=====================================================================================
See accompanying notes to consolidated financial statements.
</TABLE>
Financial Pages (F) 5
<PAGE>
<TABLE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Consolidated Statements of Cash Flows
for the years ended December 31, 1999, 1998, and 1997
($000)
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net cash flow from operating activities:
Net income $ 21,320 $ 24,048 $ 7,599
Adjustments to reconcile net income to cash
provided by operations:
Amortization of intangible assets 1,765 729 693
Deferred income taxes 8,860 8,426 2,181
Depreciation expense 996 629 468
Loss due to impairment of property and equipment 2,799 - -
Realized gain on sale of insurance charter - (300) -
Net realized capital gains (5,393) (9,209) (1,417)
Increase (decrease) due to change in:
Receivables from agents (347) (697) 436
Receivables from reinsurers (2,782) (1,746) (437)
Policy acquisition costs, net (51,134) (46,914) (28,294)
Policy and contract claims 31,867 26,003 22,124
Policy reserves 72,743 52,912 36,914
Accounts payable and other liabilities 2,959 2,447 1,424
Federal income tax recoverable 178 (559) (1,006)
Accrued investment income (1,029) (777) (531)
Other, net (32,269) (2,866) (459
-------- -------- --------
Cash provided by operations 50,533 52,126 39,695
Cash flow from (used in) investing activities:
Net cash purchase of subsidiary (9,194) - -
Proceeds from sale of property and equipment - 714 -
Proceeds from sales of bonds 108,003 70,702 44,080
Proceeds from sales of equity securities 25,572 25,158 3,436
Proceeds from sale of insurance charter - 3,300 -
Maturities of investments 7,317 31,640 18,863
Purchase of bonds (168,430) (139,350) (134,199)
Purchase of equity securities (24,560) (15,194) (11,430)
Acquisition of property and equipment (4,472) (1,873) (1,128)
-------- -------- --------
Cash used in investing (65,764) (24,903) (80,378)
Cash flow from (used in) financing activities:
Purchase of treasury stock (4,999) - -
Proceeds from exercise of stock options 31 140 673
Repayments of long-term debt (856) (202) (363)
-------- -------- --------
Cash (used in) provided by financing (5,824) (62) 310
-------- -------- --------
(Decrease) increase in cash and cash equivalents (21,055) 27,161 (40,373)
Cash balances:
Beginning of period 38,402 11,241 51,614
-------- -------- --------
End of period $ 17,347 $ 38,402 $ 11,241
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 4,996 $ 4,797 $ 4,795
Cash paid during the year for federal income taxes $ 1,290 $ 3,710 $ 1,200
Non-cash investing activities:
Acquisition of subsidiary with note payable $ 7,167 $ - $ -
See accompanying notes to consolidated financial statements.
</TABLE>
Financial Pages (F) 6
<PAGE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES
Notes to Consolidated Financial Statements
(amounts in thousands, except per share information)
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 Network America Insurance Company
("PTNA"), American Network Insurance Company ("ANIC"), American
Independent Network Insurance Company of New York ("AINIC"), Penn
Treaty (Bermuda), Ltd. ("PTB") and United Insurance Group Agency, Inc.
("UIG"), which the Company purchased effective January 1, 1999, and
Senior Financial Consultants Company. Significant intercompany
transactions and balances have been eliminated in consolidation.
Certain prior year amounts have been reclassified to conform to 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
monitoring cash flows and actuarial assumptions regarding the timing of
future insurance liabilities.
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 New York, 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 50 states. Sales in
Florida, Pennsylvania and California accounted for 22%, 13% and 15%,
respectively, of the Company's premiums for the year ended December 31,
1999. No other state sales accounted for more than 10% of the Company's
premiums for the year ended December 31, 1999.
Investments:
Management categorizes 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.
Financial Pages (F) 7
<PAGE>
As of December 31, 1999, shareholders' equity was decreased by $7,064
due to net unrealized losses of $10,703. As of December 31, 1998,
shareholders' equity was increased by $8,381 due to net unrealized
gains of $12,699 in the investment portfolio.
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.
Purchases and sales of securities are recorded on a trade date basis.
Interest income is recorded on the accrual basis. Dividends are
recorded on the ex-dividend date.
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 $17,722, $16,277 and $11,977 for
the years ended December 31, 1999, 1998 and 1997, respectively.
Recoverability of deferred acquisition costs, in certain instances, may
be dependent upon the Company's ability to obtain future rate
increases. The ability to obtain these increases is subject to
regulatory approval, but is not guaranteed.
The Company regularly determines the recoverability of deferred
acquisition costs through actuarial analysis. To determine
recoverability, the present value of future premiums less future costs
and claims are added to current reserve balances. If this amount is
greate than current unamortized deferred acquisition costs, the
unamortized amount is deemed recoverable. In the event recoverability
is not demonstrated, the Company reassesses the calculation using
justifiable premium rate increases. If rate increases are not received
or are deemed unjustified, the Company will expense, as impaired,
the attributable portion of the deferred asset, in the current period.
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.
The following table lists the range of lives used by the Company for
various asset classes:
Class Years
----- -----
Automobiles 5
Equipment and Software 5 - 12
Furniture 7 - 12
Buildings 10 - 40
Financial Pages (F) 8
<PAGE>
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. During
1999, 1998 and 1997, $993, $316 and $316 were amortized to expense,
respectively.
Present Value of Future Profits Acquired:
The present value of future profits of ANIC's acquired business is
being amortized over the life of the insurance business acquired.
During each of the years ended 1999, 1998 and 1997, $415 was amortized
to expense.
At the time of purchase, the acquired ANIC premium in-force was deemed
to have a remaining average life of approximately ten years.
Although amortization of future profits will normally occur in
accordance with actuarial assumptions over the life of the policies,
the Company determined to amortize this on a straight-line basis over
ten years. The Company believes that this approach is not materially
different than if an actuarial methodology had been employed.
Impairment of Long-Lived Assets:
Long-lived assets and certain identifiable intangible assets held and
used by the Company are reviewed for impairment whenever events or
circumstances indicate that the carrying amount may not be recoverable.
During 1999, the Company determined to discontinue its planned
implementation of its computer system. The Company expensed as fully
impaired the remaining carrying value of $2,799 for this asset.
Other Assets:
Other assets consist primarily of cash value of life insurance
policies, due and unpaid insurance premiums and unamortized debt
offering costs.
During 1999, the Company purchased approximately $30,000 of corporate
owned life insurance to fund the future payment of employee benefit
expenses. The Company includes the cash value of these policies, which
is invested in investment grade corporate bonds, as other assets.
Increases in the cash surrender value are recorded as other income.
Income Taxes:
Income taxes consist of amounts currently due plus deferred tax expense
or benefits. Deferred income tax liabilities, net of assets, 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.
Revenue Recognition:
Premiums on long duration 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.
Commission override revenue from unaffiliated insurers is included in
other income when its underlying premium is due.
Financial Pages (F) 9
<PAGE>
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.
A liability is determined using 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. This liability is accrued as policy reserves and is
recognized concurrent with premium revenue. Those estimates are based
on assumptions, including estimates of expected investment yield,
mortality, morbidity, withdrawals and expenses, applicable at the time
insurance contracts are effective, 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 reserves include amounts comprising: (1) an
estimate, based upon prior experience, for accident and health claims
reported, and incurred but unreported losses; (2) the actual in-force
amounts for reported life claims and an estimate of incurred but
unreported claims; (3) an estimate of future administrative expenses,
which would be incurred to adjudicate existing claims. The methods for
making such estimates and establishing the resulting liabilities are
periodically reviewed and updated and any adjustments resulting are
reflected in earnings currently.
The establishment of appropriate reserves is an inherently uncertain
process, including estimates for amounts of benefits and length of
benefit period for each claim, 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. In late
1996, the Company began marketing its Personal Freedom policy, a
comprehensive nursing home and home health care product, and its
Assisted Living policy, a revised nursing home with attached home
health care rider policy. In 1998, the Company introduced its Secured
Risk policy, a limited benefit plan made available to higher risk
applicants. Because of the Company's relatively limited claims
experience with these products, the Company may incur higher than
expected loss ratios and may be required to adjust further its reserve
levels with respect to these products.
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, the long duration of
claims, and industry practice for long-term care policies. Benefits are
payable over periods ranging from six months to five years, and are
also available for lifetime coverage.
Financial Pages (F) 10
<PAGE>
Earnings Per Share:
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 follows. 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 reflect the
potential dilution that could occur if securities or other contracts to
issue common stock were exercised or converted into common stock.
For the Periods Ended December 31,
----------------------------------
1999 1998 1997
---- ---- ----
Net income $ 21,320 $ 24,048 $ 7,599
Weighted average common shares outstanding 7,533 7,577 7,540
Basic earnings per share $ 2.83 $ 3.17 $ 1.01
================================
Net income $ 21,320 $ 24,048 $ 7,599
Adjustments net of tax:
Interest expense on convertible debt 3,098 3,154 -
Amortization of debt offering costs 241 245 -
--------------------------------
Diluted net income $ 24,659 $ 27,447 $ 7,599
================================
Weighted average common shares outstanding 7,533 7,577 7,540
Common stock equivalents due to dilutive
effect of stock options 132 196 218
Shares converted from convertible debt 2,628 2,629 -
--------------------------------
Total outstanding shares for fully diluted
earnings per share computation 10,293 10,402 7,758
Diluted earnings per share $ 2.40 $ 2.64 $ 0.98
================================
New Accounting Principles:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively
referred to as "derivatives") and for hedging activities. SFAS No. 133
requires an entity to recognize all derivatives as either assets or
liabilities in the statement of financial position and measure those
instruments at fair value. The Company is currently evaluating the
impact of SFAS No. 133 as relates to the imbedded option value of its
investments in convertible bonds.
Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use" (SOP 98-1) was issued
by the American Institute of Certified Public Accountants in March 1998
and provides guidance on accounting for the costs of computer software
developed or obtained for internal use. The statement is effective for
1999 financial statements. The adoption of SOP 98-1 has not had a
material impact on the Company's financial condition or results of
operations.
2. Sale of Insurance Charter
On December 30, 1998, the Company sold all of the common stock of PTLIC
to an unaffiliated insurance company. The Company received
approximately $3,300 in cash representing the final value of PTLIC's'
statutory capital and surplus at December 30, 1998 and a purchase
premium. All policies in-force were reinsured through a 100% quota
share agreement to PTNA. PTLIC was sold as a nameless corporate entity,
licensed to sell life and health products in 12 states.
Financial Pages (F) 11
<PAGE>
3. Acquisition of Business
The Company purchased all of the common stock of United Insurance Group
Agency, Inc. (UIG), a Michigan based consortium of long-term care
insurance agencies, for the amount of $18,192, of which $8,078 was in
the form of a three-year installment note, with the remainder paid in
cash. The acquisition was effective January 1, 1999. The Company
accounted for the acquisition as a purchase, and established $17,000 of
goodwill, which it will amortize over 25 years. The proforma effect of
consolidating the financial results of UIG prior to 1999 is immaterial
to the Company's financial condition or results of operations.
4. Investments and Financial Instruments:
The amortized cost and estimated market value of investments in debt
securities as of December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
December 31, 1999
-----------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated
Cost Gains Losses Market Value
--------- ---------------- ---------------- -------------
<S> <C> <C> <C> <C>
U.S. Treasury securities
and obligations of U.S
Government authorities
and agencies $118,547 $ 594 $ (2,443) $ 116,698
Mortgage backed securities 20,888 13 (775) 20,126
Obligations of states and
political sub-divisions 571 4 0 575
Debt securities issued by
foreign governments 18,533 0 (934) 17,599
Corporate securities 207,162 2,137 (10,609) 198,690
-------------------------------------------------------
$365,701 $ 2,748 $ (14,761) $ 353,688
========================================================
December 31, 1998
----------------------------------------------------------
Amortized Gross Unrealized Gross Unrealized Estimated
Cost Gains Losses Market Value
--------- ---------------- ---------------- ------------
U.S. Treasury securities
and obligations of U.S
Government authorities
and agencies $124,664 $ 7,458 $ (91) $132,031
Mortgage backed securities 10,368 88 (49) 10,407
Obligations of states and
political sub-divisions 2,660 204 0 2,864
Debt securities issued by
foreign governments 2,974 182 (47) 3,109
Corporate securities 170,327 3,273 (563) 173,037
---------------------------------------------------------
$310,993 $ 11,205 $ (750) $321,448
=========================================================
</TABLE>
The amortized cost and estimated market values of debt securities at
December 31, 1999 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.
Amortized Estimated
Cost Market Value
--------- ------------
Due in one year or less $ 13,362 $ 13,308
Due after one year through five years 101,248 100,563
Due after five years through ten years 205,880 196,665
Due after ten years 45,211 43,152
-------- --------
$365,701 $ 353,688
======== =========
Financial Pages (F) 12
<PAGE>
Gross proceeds and realized gains and losses on the sales of debt
securities, excluding calls, were as follows:
Gross Gross
Realized Realized
Proceeds Gains Losses
-------- -------- ---------
1999 $108,003 $ 3,133 $ 1,492
1998 $ 70,702 $ 2,395 $ 3
1997 $ 44,080 $ 787 $ 256
Gross proceeds and realized gains and losses on the sales of equity
securities were as follows:
Gross Gross
Realized Realized
Proceeds Gains Losses
-------- --------- ---------
1999 $ 25,572 $ 4,848 $ 1,073
1998 $ 25,158 $ 6,891 $ 400
1997 $ 3,436 $ 964 $ 89
Gross unrealized gains (losses) pertaining to equity securities were as
follows:
Gross Gross
Original Unrealized Unrealized Estimated
Cost Gains Losses Market Value
-------- ---------- ---------- ------------
1999 $ 17,853 $ 2,579 $ (1,269) $ 19,163
1998 $ 15,090 $ 2,558 $ (314) $ 17,334
Net investment income is applicable to the following investments:
1999 1998 1997
---- ---- ----
Bonds $21,460 $18,519 $16,025
Equity securities 482 342 340
Cash and short-term investments 1,432 1,794 946
---------------------------------
Investment income 23,374 20,655 17,311
Investment expense (755) (279) (302)
---------------------------------
Net investment income $22,619 $20,376 $17,009
=================================
Pursuant to certain statutory licensing requirements, as of December
31, 1999, the Company had on deposit bonds aggregating $7,316 in
insurance department safekeeping accounts. The Company is not permitted
to remove the bonds from these accounts without approval of the
regulatory authority.
Financial Pages (F) 13
<PAGE>
5. 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, 1999 and 1998 and the assumptions
pertinent thereto are presented below:
Amount of Policy Reserves
as of December 31,
------------------
1999 1998
---- ----
Accident and health $ 260,046 $ 190,036
Annuities and other 118 136
Ordinary life, individual 12,049 9,298
Years of Issue Discount Rate
Accident and health 1976 to 1986 7.0%
1987 7.5%
1988 to 1991 8.0%
1992 to 1995 6.0%
1996 7.0%
1997 to 1999 6.8%
Annuities and other 1977 to 1983 6.5% to 7.0%
Ordinary life, individual 1962 to 1999 3.0% to 5.5%
Basis of Assumption
-------------------
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.
Policy and contract claims reserves, including incurred but unreported
claims reserves, include approximately $142,300 and $109,400 at
December 31, 1999 and 1998, respectively, that are discounted at
varying interest rates. The amount of discount was approximately $4,800
and $3,700 at December 31, 1999 and 1998, respectively.
Financial Pages (F) 14
<PAGE>
Activity in policy and contract claims is summarized as follows:
1999 1998
---- ----
Balance at January 1 $ 105,667 $ 79,664
less reinsurance recoverable 3,335 2,650
--------- ---------
Net balance at January 1 102,332 77,014
Incurred related to:
Current year 117,086 91,395
Prior years 9,231 9,016
--------- ---------
Total incurred 126,317 100,411
Paid related to:
Current year 25,145 22,744
Prior years 69,887 52,402
--------- ---------
Total paid 95,032 75,146
Net balance at December 31 133,617 102,332
plus reinsurance recoverable 3,917 3,335
--------- ---------
Balance at December 31 $ 137,534 $ 105,667
========= =========
In the year in which a claim is first incurred, the Company establishes
reserves that are actuarially determined to be the present value of all
future payments required for that claim. The Company assumes that
current reserve amounts and interest income earned on invested reserves
will be sufficient to make all future payments.
The Company measures the validity of prior year assumptions by
reviewing the development of reserves fo the prior period (i.e.,
incurred from prior years). This amount, $10,064 and $9,016 in 1999
and 1998, respectively, includes imputed interest from prior
year-end reserve balances of $5,085 and $3,913, respectively, plus
adjustments to reflect actual versus estimated claims experience.
These adjustments, particularly as a percentage of the prior year-end
reserve balance, yield a relative measure of deviation in actual
performance to initial assumptions. In 1999, the Company added
approximately $4,100 or 3.9% of prior year-end reserves to claim
reserves for 1998 and prior claim incurrals. In 1998, the Company
added approximately $5,100 or 6.4% of prior year-end reserves to claim
reserves for 1997 and prior claim incurrals. While the Company does
not believe that either 1999 or 1998 additions represent material
deviation from its estimates, claims development has exceeded its
expectations in both periods.
6. Long-Term Debt:
Long-term debt at December 31, 1999 and 1998 is as follows:
<TABLE>
<CAPTION>
1999 1998
---- ----
<S> <C> <C>
Convertible, subordinated debt issued in November 1996,
with a 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 per share. $74,750 $74,750
Mortgage loan with interest rate fixed for five years at 6.85%
effective September 1998, which repriced from 7.3% in 1997.
Although carrying a variable rate of LIBOR + 90 basis points, the
loan has an effective fixed rate due to an offsetting swap with the
same institution. Current monthly payment of $16 based on a fifteen
year amortization schedule with a balloon payment due September
2003; collateralized by property with depreciated cost of $2,422
and $2,493 as of December 31, 1999 and 1998, respectively.
1,739 1,800
Installment note for purchase of United Insurance Group, Inc.,
payable in annual installments at 0% interest. (imputed at 6%) 6,372 -
------- -------
$82,861 $76,550
======= =======
</TABLE>
Principal repayment of mortgage and other debt are as follows:
2000 $ 911
2001 2,778
2002 2,946
2003 76,226
2004 -
---------
$ 82,861
7. Federal Income Taxes:
The provision for Federal income taxes for the years ended December 31
consisted of:
1999 1998 1997
---- ---- ----
Current $ 1,974 $ 3,152 $ 514
Deferred 8,863 8,426 2,181
-------- -------- --------
$ 10,837 $ 11,578 $ 2,695
======== ======== ========
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. Management believes the existing net
deductible temporary differences are realizable on a more likely than
not basis. The sources of these differences and the approximate tax
effect are as follows for the years ended December 31:
1999 1998
---- ----
Net operating loss carryforward $ 3,794 $ 1,932
Policy reserves 19,321 14,469
Unrealized losses on investments 3,639 -
Alternative minimum tax carryforward - 192
-------- --------
Total deferred tax assets $ 26,754 $ 16,593
======== ========
Deferred policy acquisition costs $(58,136) $(42,799)
Present value of future profits acquired (968) (1,082)
Premiums due and unpaid (984) (932)
Other (125) (18)
Unrealized appreciation on investments - (4,318)
-------- --------
Total deferred income taxes $(60,213) $(49,149)
======== ========
Net deferred income tax (liability) $(33,459) $(32,556)
Financial Pages (F) 16
<PAGE>
The Company has net operating loss carry-forwards of approximately
$10,840, which have been generated by taxable losses at the Company's
non-life parent, and if unused will expire during 2012, 2013 and 2014.
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:
1999 1998 1997
---- ---- ----
Computed Federal income tax (benefit)
provision at statutory rate $ 10,933 $ 12,113 $ 3,500
Small life insurance company
deduction (120) (376) -
Tax-exempt interest and dividends (96) (336) (501)
Other 120 177 (304)
-------- -------- --------
$ 10,837 $ 11,578 $ 2,695
======== ======== ========
At December 31, 1999, the accumulated earnings of the Company
for Federal income tax purposes included $1,451 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 do not permit further
additions to the "Policyholders' Surplus" account.
8. Statutory Information:
The Company's insurance subsidiaries (PTNA, ANIC and AINIC) are
required by insurance laws and regulations to maintain minimum capital
and surplus. At December 31, 1999 and 1998, the subsidiaries' capital
and surplus exceeded the minimum required capital and surplus in all
states in which they are licensed to conduct business.
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.
Under Pennsylvania, Vermont and New York insurance law, dividends may
be paid from PTNA, ANIC or AINIC only from statutory profits of earned
surplus and require insurance department approval if the dividend is in
excess of the lesser of 10% of surplus or net statutory income of the
prior year. ANIC paid a dividend to the Company in the amount of $250
and $397 in 1999 and 1998, respectively.
Net income and capital and surplus as reported in accordance with
statutory accounting principles for the Company's insurance
subsidiaries are as follows:
1999 1998 1997
---- ---- ----
Net income (loss) $ (6,826) $ 7,507 $(10,287)
Capital and surplus $ 66,872 $ 76,022 $ 73,400
Total reserves, including policy and contract claims, reported to
statutory authorities were approximately $166,829 and $159,861 less
than those recorded for GAAP as of December 31, 1999 and 1998,
Financial Pages (F) 17
<PAGE>
respectively. This difference is primarily attributable to funds
withheld financial reinsurance agreements in force on December 31, 1998
and 1999. For further discussion, see Note 12.
The differences in statutory net income compared to GAAP are primarily
due to the immediate expensing of acquisition costs, reserving
methodologies, reinsurance 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 1998, the NAIC adopted the Codification of Statutory Accounting
Principles guidance which will replace the current Accounting Practices
and Procedures manual as the NAIC's primary guidance on statutory
accounting. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory
accounting in some areas.
The Pennsylvania and Vermont insurance departments have adopted the
Codification guidance, effective January 1, 2001. The New York
insurance department has not adopted the Codification guidance. The
Company has not estimated the effect of the Codification guidance upon
its financial condition or results of operations.
9. 401(k) Retirement Plan:
The Company has 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 3% of the employee's salary. The Company
and employee portion of the plan is vested immediately. The Company's
expense related to this 401(k) plan was $129, $98 and $93 for the years
ended December 31, 1999, 1998 and 1997, respectively. 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 1999, 1998 or 1997.
10. Stock Option Plans:
At December 31, 1999, the Company had three 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 employee stock option plans. Had compensation
cost for the Company's employee 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 SFAS No. 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.
Financial Pages (F) 18
<PAGE>
1999 1998 1997
---- ---- ----
Net Income As reported $ 21,320 $ 24,048 $ 7,599
Proforma $ 21,030 $ 23,758 $ 7,407
Basic Earnings Per Share As reported $ 2.83 $ 3.17 $ 1.01
Proforma $ 2.79 $ 3.14 $ 0.98
Diluted Earnings Per Share As reported $ 2.40 $ 2.64 $ 0.98
Proforma $ 2.37 $ 2.61 $ 0.95
Compensation cost is estimated using an option-pricing model with the
following assumptions for options granted in 1997: an expected life
ranging from 5.3 to 8.3 years, volatility of 26.4% for 1997 and a risk
free rate ranging from 5.71% to 6.35%. The weighted average fair value
of those options granted in years prior to and including 1997 was
$12.24. No options were granted under these plans in 1998 or 1999. No
compensation expense is calculated for those options granted prior to
1995.
The Company's 1987 Employee Incentive Stock Option Plan provided for
the granting of options to purchase up to 1,200 shares of common stock.
This plan expired in 1997 and was subsequently replaced by the 1998
Employee, Non-Qualified Incentive Stock Option Plan. The 1998 Plan
allows for the grant of options to purchase up to 600 shares of common
stock. No new options may be granted under the 1987 Plan. The maximum
allowable term of each option is ten 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 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.
SFAS No. 123 requires that the deemed value of options granted to
non-employees be recognized as compensation expense over the estimated
life of the option. The estimated fair value of these options was
$11.56 for options granted in 1997. No agent options were granted in
1998 or 1999. The Company recognized $108 and $183, in 1999 and 1998,
respectively as a result of these grants.
Financial Pages (F) 19
<PAGE>
The following is a summary of the Company's option activity, including
grants, exercises, forfeitures and weighted average price information:
<TABLE>
<CAPTION>
Options Per Option Options Per Option Options Per Option
----------------------- -------------------------- -----------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 554 $ 19.62 574 $ 19.22 510 $ 14.84
Granted 0 $ - 0 $ - 125 $ 32.57
Exercised 2 $ 13.38 11 $ 14.91 61 $ 11.04
Canceled 0 $ - 9 $ 16.03 0 $ -
----------- -------------- ------------
Outstanding at end of year 552 $ 19.64 554 $ 19.62 574 $ 19.22
=========== ============== ============
Exercisable at end of year 404 $ 16.20 305 $ 15.47 218 $ 12.63
=========== ============== ============
</TABLE>
Outstanding Remaining Exercisable
at December Contractual at December
Range of Exercise Prices 31, 1999 Life (Yrs) 31, 1999
----------------------------------------
8.71 5 1 5
8.92 24 3 24
9.81 45 3 45
11.17 14 2 14
12.28 26 2 26
12.38 79 6 79
12.63 15 6 15
13.61 48 6 28
20.50 125 7 92
22.55 48 7 21
32.25 94 8 47
35.48 29 8 8
-------------- ------------
552 404
============== ============
11. Commitments and Contingencies:
Operating Lease Commitments:
The total net rental expenses under all leases amounted to
approximately $629, $260 and $202 for the years ended December 31,
1999, 1998 and 1997, respectively.
The Company's required payments due under non-cancelable leases in each
of the next five years are as follows:
Years Amount
----- ------
2000 $634
2001 482
2002 337
2003 273
2004 254
Financial Pages (F) 20
<PAGE>
During May 1987, the Company assigned its rights and interests in a
land lease to a third party for $175. 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 per year, the
amount being adjustable based upon changes in the consumer price index
since 1987, through the year 2063.
Line of Credit:
In June 1997, the Company was given an unsecured, uncommitted line of
credit from a bank for up to $3,000, which was unused at December 31,
1999. The line of credit is renewable annually, carries no origination
or carrying fees, and if used, will carry a variable rate of interest
equal to the London Interbank Offering Rate (LIBOR) plus .75% annually
on the outstanding balance.
Letter of Credit:
As part of the Company's financial reinsurance agreement at December
31, 1999, it received an unsecured letter of credit from a bank for
$25,000, which serves to allow the Company to receive reserve credit
for its financial reinsurance with state insurance departments.
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 material effect on the financial
condition or results of operations of the Company.
12. Reinsurance:
The Company currently reinsures with unaffiliated companies any life
insurance policy to the extent the risk on that policy exceeds $50.
Effective January 1994, PTNA entered into a reinsurance agreement 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, 1999, 1998 and 1997 were
approximately $456, $533 and $569, respectively.
PTNA is party to a reinsurance agreement to cede 100% of certain whole
life and deferred annuity policies to be issued by PTNA 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, 1999, 1998 and 1997 were approximately
$4,569, $3,223 and $3,427, 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.
PTNA 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, 1999, 1998 and 1997, reserve credits taken related to this
treaty were approximately $2,065, $1,852 and $1,947, respectively.
Effective December 31, 1998, PTNA entered a funds withheld financial
reinsurance agreement with an unaffiliated reinsurer. Under the
agreement, PTNA ceded the claims risk of a material portion of its
long-term care policies. This transference of risk qualifies the
agreement for statutory treatment as reinsurance. PTNA exercised its
option to recapture the ceded policies and their cumulative profits
during 1999. The agreement was not considered reinsurance under FASB
Statement 113 "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts", due to a lack of material
probability of loss to the reinsurer. As a result of this agreement,
Financial Pages (F) 21
<PAGE>
1998 statutory surplus was increased by $14,700. Statutory surplus is
unaffected by this agreement at December 31, 1999.
Effective December 31, 1999, PTNA entered a separate funds withheld
financial reinsurance agreement with an unaffiliated reinsurer. Under
the agreement, PTNA ceded the claims risk of a material portion of its
long-term care policies. This transference of risk qualifies the
agreement for statutory treatment as reinsurance. PTNA has the option,
but is not obligated, to recapture the ceded policies and their
cumulative profits at its discretion. The agreement is not considered
reinsurance under FASB Statement 113 "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts", due to a
lack of material probability of loss to the reinsurer. As a result of
this agreement, 1999 statutory surplus was increased by $24,775.
ANIC reinsures approximately $500 of its risk with three reinsuring
companies, all of which are authorized to do business in the State of
Vermont.
Financial Pages (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:
Ceded to Assumed
Gross Other from Other Net
Amount Companies Companies Amount
------- --------- ---------- ------
December 31, 1999
- - -----------------
Ordinary Life Insurance
In-Force $ 61,522 $ 14,009 $ 0 $ 47,513
Premiums:
Accident and health 289,396 2,935 2,738 289,199
Life 3,664 348 1 3,317
Benefits to Policyholders:
Accident and health 133,188 2,265 161 131,084
Life 2,117 14 0 2,103
Inc (dec) in Policy Reserves:
Accident and health 65,725 360 (14) 65,351
Life 2,733 943 0 1,790
Commissions $ 95,376 $ 621 $ 1,997 $ 96,752
December 31, 1998
- - -----------------
Ordinary Life Insurance
In-Force $ 66,644 $ 14,848 $ 0 $ 51,796
Premiums:
Accident and health 222,895 3,294 544 220,145
Life 3,970 425 2 3,547
Benefits to Policyholders:
Accident and health 78,179 1,625 297 76,851
Life 2,005 22 0 1,983
Inc (dec) in Policy Reserves:
Accident and health 75,356 940 (20) 74,396
Life 1,248 178 0 1,070
Commissions $ 80,929 $ 739 $ 83 $ 80,273
December 31, 1997
- - -----------------
Ordinary Life Insurance
In-Force $ 65,964 $ 16,636 $ 0 $ 49,328
Premiums:
Accident and health 167,187 3,546 501 164,142
Life 4,044 506 0 3,538
Benefits to Policyholders:
Accident and health 86,829 2,770 258 84,317
Life 1,790 523 0 1,267
Inc (dec) in Policy Reserves:
Accident and health 37,743 260 (11) 37,472
Life (407) (1,216) 0 809
Commissions $ 56,193 $ 1,028 $ 75 $ 55,240
The Company remains contingently liable in the event that the
reinsuring companies are unable to meet their obligations.
13. Transactions with Related Parties:
Irv Levit Insurance Management Corporation ("IMC"), an insurance agency
which is owned by the President of the Company, produced approximately
$34, $41 and $50 of renewal premiums for PTLIC and PTNA, for the years
Financial Pages (F) 23
<PAGE>
ended December 31, 1999, 1998 and 1997, respectively, for which it
received commissions of approximately $8, $10 and $13 respectively.
IMC also received commission overrides on business written for PTNA and
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, 1999, 1998
and 1997, IMC commission overrides totaled approximately $543, $559 and
$534, respectively.
As of December 31, 1999, Palisade Capital Management owned in excess of
5% of the Company's common stock. Palisade Capital Management also
manages a portion of the Company's investment portfolio for which it
received fees of $170 and $19 as of December 31, 1999 and 1998,
respectively.
14. Operations:
The Company recognized premium revenue from its various product lines
as follows:
1999 1998 1997
---- ---- ----
Long-Term Nursing Home Care $229,549 $ 163,570 $ 112,439
Long-Term Home Health Care 47,669 44,815 40,982
Other 15,298 15,307 14,259
A managing general agent accounted for approximately 16%, 17% and 18%
of total premiums in 1999, 1998 and 1997, respectively. In 2000, the
Company purchased a division of this managing agent, which serves to
reduce its dependence upon this agency in future periods.
15. Concentrations of Credit Risk:
Financial instruments that 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, 1999, and at other times during
the year, amounts in any one institution exceeded the Federal Deposit
Insurance Corporation limits. The Company is also party to certain
reinsurance transactions whereby the Company remains ultimately liable
for claims exposure under ceded policies in the event the assuming
reinsurer is unable to meet its commitments due to default or
insolvency.
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:
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.
Financial Pages (F) 24
<PAGE>
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, 1999 December 31, 1998
---------------------- ---------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
<S> <C> <C> <C> <C>
Financial assets:
Investments
Bonds, available for sale $ 353,688 $ 353,688 $ 321,448 $ 321,448
Equity securities 19,163 19,163 17,334 17,334
Policy loans 150 150 107 107
Cash and cash equivalents 17,347 17,347 38,402 38,402
Financial liabilities:
Convertible debt $ 74,750 $ 98,355 $ 74,750 $ 69,133
Mortgage and other debt 8,111 8,111 1,800 1,800
</TABLE>
17. Condensed Financial Statements:
The following lists the condensed financial information for the
parent company as of December 31, 1999 and 1998 and for the years ended
December 31, 1999, 1998 and 1997.
Financial Pages (F) 25
<PAGE>
<TABLE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES (PARENT COMPANY)
Balance Sheets
as of December 31, 1999 and 1998
($000)
<CAPTION>
ASSETS 1999 1998
---- ----
<S> <C> <C>
Bonds, available for sale at market (amortized cost
$3,697 and $4,402, respectively) $ 3,550 $ 4,452
Equity securities at market (cost $1,055 and
$1,055, respectively) 986 994
Cash and cash equivalents 1,082 15,275
Investment in subsidiaries* 238,326 211,524
Other assets 1,849 3,351
--------- ---------
Total assets $ 245,793 $ 235,596
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Long-term debt $ 81,122 $ 74,750
Accrued interest payable 580 389
Accounts payable 136 189
Due to subsidiaries* 5,270 2,598
--------- ---------
Total liabilities 87,108 77,926
Shareholders' equity
Preferred stock, par value $1.00; 5,000 shares
authorized, none outstanding - -
Common stock, par value $.10; 25,000 shares
authorized, 8,191 and 8,189 shares
issued, respectively 819 819
Additional paid-in capital 53,655 53,516
Unrealized appreciation, net of deferred taxes (7,064) 8,381
Retained earnings 117,980 96,660
--------- ---------
165,390 159,376
Less 915 and 606, respectively of common
shares held in treasury, at cost (6,705) (1,706)
--------- ---------
Total shareholders' equity 158,685 157,670
--------- ---------
Total liabilities and shareholders' equity $ 245,793 $ 235,596
========= =========
* Eliminated in consolidation.
</TABLE>
Financial Pages (F) 26
<PAGE>
<TABLE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES (PARENT COMPANY)
Statements of Operations
for the years ended December 31, 1999, 1998, and 1997
($000)
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Management fees* $ - $ 296 $ 56
Investment income 300 2,426 1,818
General and administrative expense 1,379 1,032 1,295
Loss due to impairment of property
and equipment 2,799 - -
Interest on convertible debt 4,672 4,672 4,672
--------- --------- ---------
Loss before equity in undistributed
net earnings of subsidiaries* (8,550) (2,982) (4,093)
Equity in undistributed net earnings of
subsidiaries* 29,870 27,030 11,692
--------- --------- ---------
Net income 21,320 24,048 7,599
Retained earnings, beginning of year 96,660 72,612 65,013
--------- --------- ---------
Retained earnings, end of year $ 117,980 $ 96,660 $ 72,612
========= ========= =========
*Eliminated in consolidation.
</TABLE>
Financial Pages (F) 27
<PAGE>
<TABLE>
PENN TREATY AMERICAN CORPORATION
AND SUBSIDIARIES (PARENT COMPANY)
Statements of Cash Flows
for the years ended December 31, 1999, 1998, and 1997
<CAPTION>
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net Income $ 21,320 $ 24,048 $ 7,599
Adjustments to reconcile net income to cash
provided by (used in) operations:
Equity in undistributed earnings of subsidiaries (29,870) (27,030) (11,692)
Depreciation and amortization 397 464 425
Net realized losses (gains) 48 (791) (103)
Loss due to impairment of property and equipment 2,799 - -
Increase (decrease) due to change in:
Due to/from subsidiaries 2,672 130 1,067
Other, net (515) (365) 13
-------- -------- --------
Net cash used in operations (3,149) (3,544) (2,691)
-------- -------- --------
Cash flows from investing activities:
Cash purchase of subsidiary (10,113) - -
Sales and maturities of investments 4,063 25,790 14,202
Purchase of investments (3,406) 4,682) (27,470)
Acquisition of property and equipment (1,614) (32) (39)
-------- -------- --------
Net cash (used in) provided by
investing activities (11,070) 21,076 (13,307)
-------- -------- --------
Cash flows from financing activities:
Contribution to subsidiary (1,000) (7,056) -
Dividend from subsidiary 1,039 397 -
Proceeds from exercise of stock options 31 140 673
Proceeds from note payable to subsidiary 750 - -
Repayment of mortgages and other borrowings (794) - (88)
Proceeds from sale of insurance charter - 3,300 -
-------- -------- --------
Net cash provided by (used in)
financing activities (26) (3,219) 585
-------- -------- --------
(Decrease) increase in cash and
cash equivalents (14,193) 4,313 (15,413)
Cash and cash equivalents balances:
Beginning of year 15,275 962 16,375
-------- -------- --------
End of year $ 1,082 $ 15,275 $ 962
======== ======== ========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest $ 4,887 $ 4,672 $ 4,674
======== ======== ========
Acquisition of subsidiary with note payable $ 7,167 $ - $ -
======== ======== ========
</TABLE>
Financial Pages (F) 28
<PAGE>
18. Subsequent Event:
On January 10, 2000, PTNA entered a purchase agreement to acquire all
of the common stock of Network Insurance Senior Health Division
(NISHD), a Florida brokerage insurance agency. The acquisition was
effective January 1, 2000, for cash of $6,000. The acquisition will be
accounted for as a purchase, for which the Company anticipates
recording $6,000 of goodwill, to be amortized over 20 years. The
proforma effect of consolidating the financial results of NISHD prior
to 2000 would be immaterial to the Company's financial condition or
results of operations.
Financial Pages (F) 29
<PAGE>
(2) Exhibits.
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).
10.1 Penn Treaty American Corporation 1987 Employee Incentive Stock
Option Plan. (incorporated by reference to Exhibit 99.1 to
Registrant's Registration Statement on Form S-8, No.333-89927,
Filed October 29,1999.
10.2 Penn Treaty American Corporation 1995 Participating Agent
Stock Option Plan. (incorporated by reference to Exhibit
10.2 to Registrant's Annual Report on Form 10-K for the year
ended December 31, 1997.
10.3 Penn Treaty American Corporation Employees' Pension Plan. *
10.4 Penn Treaty American Corproation 1998 Employee Incentive Stock
Option Plan (incorporated by reference to Exhibit 99.1 to
Registrant's Registration Statement on Form S-8, No.333-89927,
filed October 29, 1999.
10.5 Form of General Agent's Contract of Network America Life
Insurance Company. ****
10.6 Form of Managing General Agency Agreement. ****
10.7 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. ***
10.8 Commission Supplement to General Agent's Contract dated
December 7, 1993 between Network America Life Insurance
Company and Network Insurance. ****
10.9 Mortgage in the amount of $2,450,000 dated September 13, 1988
between Penn Treaty Life Insurance Company and Merchants Bank,
N.A. **
10.10 Amendments to Mortgage dated September 24, 1991, October 13,
1992 and September 2, 1993. ****
10.30 Loan and Security Agreement by and between Penn Treaty
American Corporation and CoreStates Bank, N.A. dated December
28, 1994.****
37
<PAGE>
10.31 Form of Investment Counseling Agreement dated May 3, 1995
between Penn Treaty American Corporation and James M. Davidson
& Company.****
10.32 Assumption and Reinsurance Agreement dated December 22, 1997,
between Penn Treaty Life Insurance Company and Network America
Life Insurance Company.
10.33 Quota Share Reinsurance Agreement between Penn Treaty Life
Insurance Company and Penn Treaty Network America.
10.34 Quota Share Reinsurance Agreement between Penn Treaty Network
America and Cologne Reinsurance.
10.35 Form of Employment Agreements with Executives
10.36 Penn Treaty American Corporation 1998 Incentive Stock Option
Plan
10.37 Employment Contract with Executive Vice President
11. Earnings Per Share. See Notes to Consolidated Financial
Statements, "Note 1."
21. Subsidiaries of the Registrant. ****
23. Consent of PricewaterhouseCoopers, LLP
(b) Reports on Form 8-K:
We filed no reports on Form 8-K during the quarter ended December 31, 1999.
* Incorporated by reference to the Registrant's Registration Statement on
Form S-1 dated May 12, 1987, as amended.
** Incorporated by reference to the Registrant's Registration Statement on
Form S-1 dated November 17, 1989, as amended.
*** Incorporated by reference to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1998.
**** Incorporated by reference to the Registrant's Registration Statement on
Form S-1 dated June 30, 1995, as amended.
***** Incorporated by reference to the Registrant's Registration Statement on
Form S-3 dated February 19, 1999.
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 28, 2000 By: /s/ Irving Levit
-----------------------------------------------
Irving Levit, Chairman of the Board,
Chief Executive Officer and President
(principal executive officer)
Date: March 28, 2000 By: /s/ Cameron B. Waite
-----------------------------------------------
Cameron B. Waite, Chief Financial Officer
(principal financial officer)
Date: March 28, 2000 By: /s/ Michael F. Grill
-----------------------------------------------
Michael F. Grill, Treasurer
(principal accounting officer)
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 28, 2000 By: /s/ Irving Levit
---------------------------------
Irving Levit, Chairman of the
Board and President
Date: March 28, 2000 By: /s/ A.J. Carden
---------------------------------
A.J. Carden, Executive Vice
President and Director
Date: March 28, 2000 By: /s/ Michael F. Grill
---------------------------------
Michael F. Grill, Treasurer
and Director
Date: March 28, 2000 By: /s/ Domenic P. Stangherlin
---------------------------------
Domenic P. Stangherlin,
Director
Date: March 28, 2000 By: /s/ Glen A. Levit
---------------------------------
Glen A. Levit, Senior Vice
President, and Director
Date: March 28, 2000 By: /s/ Jack D. Baum
---------------------------------
Jack D. Baum, Vice President,
Director
Date: March 28, 2000 By: /s/ Francis R. Grebe
---------------------------------
Francis R. Grebe, Director
Date: March 28, 2000 By: /s/ Alexander M. Clark
---------------------------------
Alexander M. Clark, Director
Date: March 28, 2000 By: /s/ David B. Trindle
---------------------------------
David B. Trindle, Director
Date: March 28, 2000 By: /s/ Sandra A. Kotsch
---------------------------------
Sandra A. Kotsch, Secretary
39
<PAGE>
Exhibit 23
Consent of Independent Accountants
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-38330, No.333-89927 and No. 333-89929) and the
Registration Statement on Form S-3 (No. 333-72649) of Penn Treaty American
Corporation of our report dated March 17, 2000 relating to the financial
statements, which appears in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
- - ------------------------------
PricewaterhouseCoopers LLP
Philadelphia, Pennsylvania
March 28, 2000
40
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292,516
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