<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A
AMENDMENT NO. 1
Amendment No. 1 to quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended March 31, 1995.
Commission file number 33-17017
--------
PROVIDENT LIFE CAPITAL CORPORATION
------------------------------------------------------
(Exact name of registrant as specified in its charter)
TENNESSEE 62-1321628
------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Fountain Square, Chattanooga, Tennessee 37402
-----------------------------------------------
(Address of principal executive offices)
(Zip Code)
(615) 755-1011
----------------------------------------------------
(Registrant's telephone number, including area code)
None
--------------------------------------------------------------------------------
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Registrant meets the conditions set forth in General Instructions H(1)(a) and
(b) of Form 10-Q and is filing this form with the reduced disclosure format.
CLASS OUTSTANDING AT MARCH 31, 1995
----------------------------- -----------------------------
Common Stock, $1.00 Par Value 1,000
Total number of pages included are 23
<PAGE> 2
PROVIDENT LIFE CAPITAL CORPORATION
INDEX
<TABLE>
<CAPTION>
Page
----
<S> <C>
AMENDMENT No. 1 1-a
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial 2
Condition at March 31, 1995 and December 31, 1994
Condensed Consolidated Statements of Income for the 4
Three Months Ended March 31, 1995 and 1994
Condensed Consolidated Statements of Cash Flows for the 5
Three Months Ended March 31, 1995 and 1994
Notes to Condensed Consolidated Financial Statements 6
Independent Auditors' Report on Review of Interim 10
Financial Information
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11
PART II. EXHIBITS AND REPORTS ON FORM 8-K
Exhibit Index
</TABLE>
1
<PAGE> 3
AMENDMENT No. 1
This Amendment No. 1 modifies the quarterly report filed on Form 10-Q by the
registrant for the period ended March 31, 1995 as follows: Part I, Item 1,
Financial Statements (Unaudited), and Item 2, Management's Discussion and
Analysis of Financial Condition and Results of Operations have been replaced in
their entirety.
1-a
<PAGE> 4
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
(in millions of dollars)
--------------------------------------
(Unaudited)
Restated - Note 5
-----------------
<S> <C> <C>
ASSETS
Investments
Fixed Maturity Securities
Available-for-Sale $11,838.6 $11,585.1
Held-to-Maturity 45.4 10.7
Equity Securities 6.2 7.3
Mortgage Loans 1,423.7 1,502.5
Real Estate 231.3 243.5
Policy Loans 1,376.6 1,361.5
Other Long-term Investments 10.5 10.1
Short-term Investments 29.2 296.9
--------- ---------
Total Investments 14,961.5 15,017.6
Cash and Bank Deposits 25.9 35.3
Accounts Receivable 93.3 72.8
Premiums Receivable 69.3 62.7
Reinsurance Receivable 315.6 300.1
Accrued Investment Income 306.6 281.8
Deferred Policy Acquisition Costs 618.0 638.2
Deferred Federal Income Tax Asset 36.9 172.6
Property and Equipment 108.2 103.2
Miscellaneous 152.5 152.6
Separate Account Assets 332.4 313.0
--------- ---------
TOTAL ASSETS $17,020.2 $17,149.9
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
-2-
<PAGE> 5
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - CONTINUED
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
<TABLE>
<CAPTION>
March 31 December 31
1995 1994
(in millions of dollars)
--------------------------------------
(Unaudited)
Restated - Note 5
-----------------
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy and Contract Benefits $ 356.8 $ 354.1
Reserves for Future Policy and Contract Benefits
and Unearned Premiums 7,032.5 6,861.5
Policyholders' Funds and Experience Rating Refunds 7,189.4 7,707.7
Current Federal Income Tax Liability 19.4 33.4
Short-term Debt 18.2 14.4
Long-term Debt 207.1 202.5
Other Liabilities 466.0 499.5
Separate Account Liabilities 332.4 313.0
--------- ---------
TOTAL LIABILITIES 15,621.8 15,986.1
--------- ---------
COMMITMENTS AND CONTINGENT LIABILITIES - NOTE 3
STOCKHOLDER'S EQUITY
Common Stock, $1.00 Par; Authorized and
Issued--1,000 shares - -
Additional Paid-in Capital 189.0 189.0
Net Unrealized Loss on Securities (68.9) (302.3)
Foreign Currency Translation Adjustment (5.1) (5.4)
Retained Earnings 1,283.4 1,282.5
--------- ---------
TOTAL STOCKHOLDER'S EQUITY 1,398.4 1,163.8
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $17,020.2 $17,149.9
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
-3-
<PAGE> 6
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended March 31
1995 1994
(in millions of dollars)
--------------------------------------
Restated - Note 5
-----------------
<S> <C> <C>
REVENUE
Premium Income $361.0 $348.8
Net Investment Income 313.0 304.7
Net Realized Investment Losses (3.9) (4.3)
Other Income 43.7 40.2
------ ------
TOTAL REVENUE 713.8 689.4
BENEFITS AND EXPENSES
Policy and Contract Benefits 394.7 387.8
Change in Reserves for Future Policy and Contract Benefits 152.2 98.1
Change in Policyholders' Funds 3.4 5.9
Amortization of Policy Acquisition Costs 17.1 16.0
Other Operating Expenses 126.8 127.0
------ ------
TOTAL BENEFITS AND EXPENSES 694.2 634.8
INCOME BEFORE FEDERAL INCOME TAXES 19.6 54.6
FEDERAL INCOME TAXES 7.3 19.0
------ ------
NET INCOME $ 12.3 $ 35.6
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
-4-
<PAGE> 7
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended March 31
1995 1994
(in millions of dollars)
--------------------------------------
<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 121.3 $ 106.2
------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investments 344.6 77.6
Proceeds from Maturities of Investments 251.7 936.7
Purchase of Investments (425.7) (1,324.2)
Net Sales of Short-term Investments 267.7 274.0
Other (52.0) 54.4
------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES 386.3 18.5
------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Deposits to Policyholder Accounts 165.3 542.2
Maturities and Benefit Payments from Policyholder Accounts (674.3) (670.0)
Net Short-term Borrowings 3.8 58.8
Dividends Paid to Stockholder (11.4) (11.8)
Other (0.4) (42.5)
------- -----------
NET CASH USED BY FINANCING ACTIVITIES (517.0) (123.3)
------- -----------
NET INCREASE (DECREASE) IN CASH AND BANK DEPOSITS (9.4) 1.4
CASH AND BANK DEPOSITS AT BEGINNING OF PERIOD 35.3 32.0
------- -----------
CASH AND BANK DEPOSITS AT END OF PERIOD $ 25.9 $ 33.4
======== ===========
</TABLE>
See notes to condensed consolidated financial statements.
-5-
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
MARCH 31, 1995
NOTE 1--BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and with the instructions to Form 10-Q and
Article 10 of Regulation S-X. Accordingly, they do not include all of the
information and footnotes required by generally accepted accounting principles
for complete financial statements. In the opinion of management, all
adjustments (consisting of normal recurring accruals) considered necessary for
a fair presentation have been included. Operating results for the three month
period ended March 31, 1995 are not necessarily indicative of the results that
may be expected for the year ended December 31, 1995. For further information,
refer to the consolidated financial statements and footnotes thereto included
in the Company's annual report on Form 10-K for the year ended December 31,
1994.
-6-
<PAGE> 9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
MARCH 31, 1995
NOTE 2--SEGMENT INFORMATION
A summary by segment of the Company's revenue and income before federal income
taxes, excluding and including net realized investment gains and losses,
follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
1995 1994
(in millions of dollars)
--------------------------------------
Restated - Note 5
-----------------
<S> <C> <C>
Revenue (Excluding Net Realized Investment Gains and Losses)
Individual Life and Disability $250.4 $233.8
Employee Benefits 150.7 140.8
Other Operations 208.9 212.2
Medical Services 107.7 106.9
------ ------
Total $717.7 $693.7
====== ======
Income (Loss) Before Net Realized Investment
Gains and Losses and Federal Income Taxes
Individual Life and Disability $(16.8) $ 14.2
Employee Benefits 12.4 17.0
Other Operations 25.8 19.2
Medical Services 2.1 8.5
------ ------
Total $ 23.5 $ 58.9
====== ======
</TABLE>
-7-
<PAGE> 10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
MARCH 31, 1995
NOTE 2--SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Three Months Ended March 31
1995 1994
(in millions of dollars)
--------------------------------------
Restated - Note 5
-----------------
<S> <C> <C>
Revenue (Including Net Realized Investment Gains and Losses)
Individual Life and Disability $251.1 $236.8
Employee Benefits 151.0 140.8
Other Operations 204.0 204.9
Medical Services 107.7 106.9
------ ------
Total $713.8 $689.4
====== ======
Income (Loss) Before Federal Income Taxes
Individual Life and Disability $(16.1) $ 17.2
Employee Benefits 12.7 17.0
Other Operations 20.9 11.9
Medical Services 2.1 8.5
------ ------
Total $ 19.6 $ 54.6
====== ======
</TABLE>
Total revenue includes premium income, net investment income, realized
investment gains and losses, and other income.
-8-
<PAGE> 11
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
MARCH 31, 1995
NOTE 3--COMMITMENTS AND CONTINGENT LIABILITIES
In December 1994, the Provident Companies, which includes Provident Life and
Accident Insurance Company of America and its wholly-owned direct and indirect
subsidiaries, entered into an Asset and Stock Purchase Agreement (the
Agreement) with Healthsource, Inc. under which Healthsource will acquire the
Provident Companies' medical services business for $310.0 million ($210.0
million in cash and $100.0 million in a new issue of Healthsource 6.25%
Convertible Preferred Stock). The Agreement is subject to regulatory approvals
and purchase price adjustments in certain circumstances. The parties are
currently negotiating certain matters relating to the purchase price
adjustments and other aspects of the Agreement in an effort to resolve open
issues and close the transaction. It is unclear whether the resolution of
those matters will have a material effect on the transaction. Under the
Agreement, disagreements unresolved by the parties are submitted to
arbitration. The transaction is expected to close in the second quarter of
1995.
Various lawsuits against the Company have arisen in the normal course of
business. Contingent liabilities that might arise from litigation are not
deemed likely to materially affect the financial position or results of
operations of the Company.
NOTE 4--SUBSEQUENT EVENTS
On May 10, 1995, the Company sold restructured mortgage loans with a principal
amount of $147.5 million and a book value of $122.6 million. The Company
received $99.5 million in cash for these restructured loans, which resulted in
a realized investment loss of $23.1 million.
NOTE 5--RESTATEMENT
The Company restated its first quarter results to correct premium income and
related expenses. During the process of separating the group business between
the product lines retained by the Company and the product lines sold as part of
the Medical Services business, an error occurred which resulted in the
overstatement of premium income by $6.3 million, of income before federal
income taxes by $6.1 million, and of net income by $4.0 million.
-9-
<PAGE> 12
INDEPENDENT AUDITORS' REPORT ON REVIEW
OF INTERIM FINANCIAL INFORMATION
Board of Directors and Shareholder
Provident Life Capital Corporation
We have reviewed the accompanying condensed consolidated statement of financial
condition of Provident Life Capital Corporation (a wholly-owned subsidiary of
Provident Life and Accident Insurance Company of America) and Subsidiaries as
of March 31, 1995, the related condensed consolidated statements of income for
the three month periods ended March 31, 1995 and 1994, and the condensed
consolidated statements of cash flows for the three month periods ended March
31, 1995 and 1994. These financial statements are the responsibility of the
Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted
in accordance with generally accepted auditing standards, which will be
performed for the full year with the objective of expressing an opinion
regarding the financial statements taken as a whole. Accordingly, we do not
express such an opinion.
Based on our reviews, we are not aware of any material modifications that
should be made to the accompanying condensed consolidated financial statements
referred to above for them to be in conformity with generally accepted
accounting principles.
We have previously audited, in accordance with generally accepted auditing
standards, the consolidated statement of financial condition of Provident Life
Capital Corporation and Subsidiaries as of December 31, 1994, and the related
consolidated statements of operations, stockholder's equity and cash flows for
the year then ended, not presented herein, and in our report dated February 6,
1995, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated statement of financial condition as of December 31,
1994, is fairly stated in all material respects in relation to the consolidated
statement of financial condition from which it has been derived.
ERNST & YOUNG LLP
Chattanooga, Tennessee
May 11, 1995, except for Note 5,
as to which the date is August 9, 1995
-10-
<PAGE> 13
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
NOTE: This Management's Discussion and Analysis of Financial Condition
and Results of Operations reflects the restatement of the Company's net income
for the first quarter of 1995 as a result of changes to the interperiod
allocation of premiums and expenses in the Employee Benefits and Medical
Services segments between the first and second quarters of 1995. During the
first and second quarters of 1995, the Company separated its medical services
business segment (which was sold by Provident Life and Accident Insurance
Company of America ("America"), the Company's parent, to Healthsource, Inc., in
a transaction that closed effective May 1, 1995), from its other employee
benefits lines of business. The separation involved a complex process of
allocating premiums and expenses between the two business segments. During the
transition period, an error occurred in the premium and expense allocation
process between reporting periods.
Revenue excluding net realized investment gains and losses ("revenue")
increased $24.0 million, or 3.5 percent, to $717.7 million in the first quarter
of 1995 from $693.7 million in the first quarter of 1994. The increase was the
result of increases in revenue in the individual life and disability segment
($16.6 million), employee benefits segment ($9.9 million), and medical services
segment ($0.8 million), which more than offset lower revenue in the other
operations segment ($3.3 million).
Income before net realized investment gains and losses and federal
income taxes ("income") declined $35.4 million, or 60.1 percent, to $23.5
million in the first quarter of 1995 from $58.9 million in the first quarter of
1994. The decline was the result of lower income in the individual life and
disability segment ($31.0 million), employee benefits segment ($4.6 million) and
medical services segment ($6.4 million), which was partly offset by increased
income in the other operations segment ($6.6 million).
INDIVIDUAL LIFE AND DISABILITY
Revenue in this segment increased $16.6 million, or 7.1 percent, to
$250.4 million in the first quarter of 1995 from $233.8 million in the first
quarter of 1994. Increases in both premium income and net investment income
contributed to the higher revenue. Premium income increased $2.0 million, or
1.3 percent, to $160.4 million in the first quarter of 1995 from $158.4 million
in the first quarter of 1994. The increase was the result of higher direct
premium income in the individual disability income line of business, which
increased $5.2 million, or 3.8 percent, to $143.8 million in the first quarter
of 1995 from $138.6 million in the first quarter of 1994. Net investment income
increased $12.8 million, or 17.5 percent, to $86.1 million in the first quarter
of 1995 from $73.3 million in the first quarter of 1994. The increase was the
result of increased capital and surplus allocated to the individual disability
line of business, the normal growth in reserve
-11-
<PAGE> 14
liabilities and related assets held on individual life and disability
contracts, and the growth in investment income related to the deferred deposits
in the annuity line of business.
In November 1994, the Company announced its intention to discontinue
selling individual non-cancellable disability income contracts with long-term
own-occupation provisions (other than conversion policies available under
existing contractual arrangements). The Company will focus on replacing the
traditional non-cancellable, long-term own-occupation contracts with "loss of
earnings" contracts which insure income rather than occupation and require the
insured to participate in occupational rehabilitation as appropriate.
During this product transition period, premium income in the individual
disability line is expected to decline as a result of a period of lower sales
and the premium differential that exists between the traditional
non-cancellable, own-occupation contracts and the new loss of earnings
contracts. The magnitude and duration of the expected decline are dependent on
the response of customers and competitors in the industry.
This segment reported a loss of $16.8 million in the first quarter of
1995 compared to income of $14.2 million in the first quarter of 1994. The
individual disability line of business produced a loss of $20.5 million in the
first quarter of 1995 compared to income of $7.4 million in the first quarter of
1994. This line was negatively affected in the first quarter of 1995 by adverse
claim activity on individual non-cancellable disability income contracts with
own-occupation provisions which were issued from 1983 through 1989.
Specifically, the severity of the new claims in the first quarter was higher
than the average levels experienced in the 1994 first quarter and for all of
1994, and the level of claim terminations was lower relative to both periods.
A loss recognition deficiency of $423.0 million on a pre-tax basis was
recorded as an increase in "policy and contract benefits" and "change in
reserves for future policy and contract benefits" in the third quarter of 1993
to reflect the lower interest rates available at the time of the charge compared
to the interest rate assumptions used in pricing the business at earlier dates.
Higher than expected claim experience, caused by the general economic recession
and trends in particular regions of the country toward increasing claims for
certain occupations and types of disabilities, also contributed to the
requirement under generally accepted accounting principles to record the
deficiency. Although interest rates are currently consistent with those
projected at the time of the charge, it is not reasonably possible to determine
at this time exactly what the trends in interest rates will be.
Besides movement of interest rates, changes in expenses and morbidity
can affect results. The loss recognition study performed as of September 30,
1993, also projected that morbidity would improve over time as a result of
stricter policy provisions, tighter underwriting requirements, improved claim
handling procedures (consisting of centralization of the claims-paying function
in the home office and the availability of additional technical resources), the
effects of anti-selection wearing off over time, and
-12-
<PAGE> 15
general improvement in the economy. Incidence and termination rate studies
have been performed as of December 31, 1994, to evaluate actual morbidity
experience. Morbidity experience was at somewhat higher levels than expected
for 1994, and also the first quarter of 1995. It is not possible at this time
to predict whether this adverse experience is a trend or a short-term
fluctuation. However, if morbidity experience does not improve to the levels
assumed in the loss recognition studies, a further adjustment might be
required. Since the study in 1993, expenses have been lower than projected in
that study, primarily as a result of expense control efforts and centralization
of the claims-paying function into the home office.
The Company considers its individual disability income business to be
one block or line of business for purposes of conducting a loss recognition
study. The individual disability income business is analyzed on an ongoing
basis to determine particular geographic areas, occupations, policy provisions,
etc. which may be a factor in the results being experienced. Such reviews have
shown that policies written for medical professionals and for residents of
California and south Florida are more likely to result in claims than those
written on other professionals or in other areas of the United States or
Canada. Additionally, policies written during the period 1983 through 1989 have
a higher claim rate than those policies written before or after this time
period. The Company, in intense competition with other companies in this line
of business during this time period, liberalized underwriting standards and
policy provisions without a corresponding increase in premium rates to offset
the increased risk undertaken. Since 1989, however, the Company has been
strengthening its underwriting and policy provisions and adjusting the price on
its new business written to better reflect the risks in this line of business.
Because individual disability income policies are long-term contracts
(with typical effective terms of five to forty years, depending upon the age of
the insured at the time of issue), assumptions as to interest rates and
morbidity, as well as expenses, lapse rates and other variables, used to price
the product and to calculate policyholder liabilities during the term of the
contracts, must be made with a long-term perspective. Fluctuations in actual
experience from such assumptions are normal, especially since these assumptions
are a long-term prediction of future events and conditions. These assumptions
are long-term averages of the experience that the Company expects to realize
over the duration of the policies and do not attempt to predict each short-term
rise or decline in interest rates, morbidity, or other factors. Variations
between actual experience and such long-term averages are monitored through a
variety of ongoing statistical studies. Such variations over a one or two year
period do not necessarily indicate that a change in the long-term assumptions
is necessary or that higher or lower reserves are required. Normally, such
fluctuations between actual experience and assumed experience are included in
income or loss in the current year. However, when these deviations occur in a
magnitude and/or over a time period such that if they continued the sufficiency
of reserves and the recoverability of deferred policy acquisition costs is
questionable, it is prudent to perform a loss recognition study.
-13
<PAGE> 16
In a loss recognition study, the Company uses its best estimates as to
future experience with regard to interest rates, morbidity rates, lapse rates,
expenses, and other factors to update its assumptions. These revised
assumptions are then used to determine if reserves currently held plus the
present value of future cash inflows (primarily from premiums and investment
income) are projected to be sufficient to meet the present value of future cash
outflows (primarily for benefits and expenses) and the amortization of deferred
policy acquisition costs. If they are not sufficient, an additional provision
must be recorded either as a reduction of deferred policy acquisition costs or
as an increase in reserve liabilities.
While claims were higher and interest rates generally lower in 1991 than
in previous years, at that time the Company believed these fluctuations to be
short-term and acceptable variations from the assumptions underlying these
long-term policies. However, in light of a continuing decline in interest rates
and deterioration of morbidity experience during 1992, the Company began such a
loss recognition study on its individual disability income business in December
1992 to determine whether or not a loss recognition deficiency existed at
December 31, 1992. An independent actuarial consulting firm was engaged to
assist in the development of a gross premium valuation model appropriate to the
Company's business, to review the reasonableness of the assumptions used by the
Company at the time of the study, and to work with Company employees in the
actual performance of the calculations. The loss recognition study completed in
February 1993 showed that no loss recognition deficiency existed at December 31,
1992, using the assumptions with respect to morbidity, interest rates, and
expenses that reflected management's best estimates as of that date. Although
there is always uncertainty as to the direction of future morbidity experience
and interest rates, the Company believed the results of the study indicated that
reserves were sufficient as of that date. The Company also believed at that
time that, under its "most likely case" scenario, interest rates would rise in
1993 and morbidity rates would do no worse than remain at 1988-1992 levels.
Through the first half of 1993, however, the interest rates continued to
decline, and the Company experienced further morbidity deterioration related to
this business. As a result, reserves were increased during the first two
quarters of 1993. Also, as part of its normal, ongoing reserve analysis, the
Company performs several detailed actuarial studies, including measuring
morbidity experience over a run-off period of several years. Increased claim
activity experienced in the first two quarters of 1993 and studies performed in
the second and third quarters of 1993, which reflected 1992 morbidity
experience, caused management to revise its December 31, 1992, estimate of
long-term morbidity rates. At the same time, the portfolio of assets related to
this line of business experienced a significant decline in long-term interest
rates combined with increased prepayment of fixed maturity securities, resulting
in a significant decline in the portfolio's future investment returns. The
yields on assets supporting the individual disability business declined to 9.32
percent at the end of the first quarter and to 9.17 percent at the end of the
second quarter, compared to an aggregate yield of 9.57 percent at the end of
1992.
-14-
<PAGE> 17
Because of these developments during the first half of 1993, the Company
again evaluated the sufficiency of reserves and the recoverability of deferred
policy acquisition costs. Although a loss recognition study had been scheduled
for year-end 1993 as a follow-up to the study at December 31, 1992, the
deviations between actual experience and assumptions were widening rapidly
enough to warrant accelerating the study to the third quarter of 1993 to
determine if reserves continued to be sufficient in light of these fluctuations.
The specific conditions that precipitated the third quarter 1993 loss
recognition study were:
1. A sharp drop in interest rates as evidenced by the decline in the
rate on 10-year U.S. Treasury Notes from 6.93 percent in December
1992, to 5.23 percent in September 1993. This drop of 170 basis
points was a 25 percent decline in nine months.
2. Prepayment of many fixed maturity securities during this nine-month
period, brought about primarily by the lower interest rate levels,
caused the yield on the portfolio supporting the individual
disability income business to decline 59 basis points in only nine
months.
3. Morbidity studies covering the first and second quarters of 1993
reflected further deterioration in morbidity experience during this
part of 1993 compared with previous morbidity experience.
The September 30, 1993, loss recognition study followed the same
principles as the study performed as of December 31, 1992. The independent
actuarial consulting firm, which assisted in conducting the December 1992 study,
served in a review capacity (rather than as an active participant) in the
performance of the study. Based upon the revised assumptions, which represented
management's best estimates at the time of the study, a loss recognition
deficiency of $423.0 million on a pre-tax basis was required to be recognized
under generally accepted accounting principles. Management believes that the
required charge taken in the third quarter was a prompt and appropriate response
to these previously unforeseen changes.
The December 31, 1994, study again followed the same principles as the
previous two studies. Based upon the revised assumptions, which represented
management's best estimates at the time of the study, reserves were adequate at
the end of 1994.
The following table shows the new money interest rate assumptions on a
net effective yield rate basis and the portfolio yield interest rate assumptions
which were used in the December 31, 1992, September 30, 1993, and December 31,
1994, loss recognition studies.
-15-
<PAGE> 18
The interest rate assumptions in each of the loss recognition studies
represented management's best estimates at the time the studies were performed.
The equivalent level portfolio net effective yield rate represents the
effective yield on the portfolio over a thirty year period, using the actual
portfolio yield at the date of the loss recognition study and the assumed yield
rates at which new money will be invested.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------
December 31 , 1992 September 30, 1993 December 31, 1994
------------------------------------------------------------------------------------------------------
New New New
Money Portfolio Money Portfolio Money Portfolio
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1993 8.19% 9.38%
1994 8.92 9.33 6.53% 8.57%
1995 8.92 9.27 6.51 8.46 7.95% 8.40%
1996 8.92 9.24 6.82 8.43 7.64 8.29
1997 8.92 9.21 7.07 8.45 7.64 8.20
1998 8.92 9.18 7.13 8.42 7.64 8.13
Ultimate 8.92 8.92 7.13 7.13 7.64 7.64
Equivalent Level Portfolio
Net Effective Yield Rate: 9.27% 9.27% 7.91% 7.91% 8.19% 8.19%
------------------------------------------------------------------------------------------------------
</TABLE>
Annual net effective interest rates at which new money was actually
invested for the individual disability income business for the year 1992, the
first nine months of 1993, and the year 1994 were 8.82 percent, 7.59 percent,
and 8.17 percent, respectively. The net effective interest rate at which new
money was invested for this line in the first quarter of 1995 was 8.78 percent.
The overall net effective portfolio yield rates for invested assets supporting
the individual disability income business were 9.57 percent, 8.98 percent, and
8.64 percent as of December 31, 1992, September 30, 1993, and December 31, 1994,
respectively. The overall net effective portfolio yield for invested assets
supporting this line was 8.58 percent at March 31, 1995. The September 1993
loss recognition study projected that morbidity would improve as a result of
improved claim handling procedures (consisting of centralization of the
claims-paying function in the home office and the availability of additional
technical resources), the effects of anti-selection wearing off over time, and
general improvement in the economy. The December 1994 study also projected
improved morbidity, with reduced or delayed improvement, but projected no
improvement in the economy.
In performing a loss recognition study the Company is required to use
its best estimates with regard to assumptions used in the calculation. Using
"best estimates" means that no provision for adverse deviation is included in
the assumptions and the expectation is for a break-even outcome, that is, there
is about an even chance that experience will be better than or worse than the
assumptions. If future experience conforms to assumptions used in the loss
recognition study, no gain or loss would be expected from the line of business
other than (i) investment income relative to the capital and surplus allocated
to that line, and (ii) profit from new individual disability income
-16-
<PAGE> 19
policies. If actual experience in a future period is worse than assumed and is
expected to continue, an additional loss would have to be recognized. If
actual experience is better than assumed, the resulting gain will be recognized
over future years as it is actually realized.
On a pre-tax basis, approximately 51 percent of the difference between
the results of the December 1992 and September 1993 loss recognition studies
related to the effects of rapidly declining interest rates during 1993,
including prepayment of fixed maturity securities as well as lower portfolio
yields on both new and reinvested money. Approximately 26 percent of the
difference related to higher morbidity costs and the associated claim
administration expenses. Approximately 11 percent of the difference was related
to the inclusion in the September 1993 loss recognition study of guaranteed
increases in coverage on existing policies. The remaining amount was primarily
attributable to differences in assumptions with respect to expenses, other than
claim administration expenses, and to persistency.
Based on the assumptions used in the September 1993 loss recognition
study, a ten basis point change in the equivalent level interest rates would
result in approximately a $22 million change in reserves, and a one percent
change in actual to assumed morbidity would result in approximately a $29
million change in reserves. Based on the assumptions used in the December 1994
study, a ten basis point change in the equivalent level interest rates would
result in approximately a $29 million change in reserves, and a one percent
change in actual to assumed morbidity would result in approximately a $28
million change in reserves.
It is not possible to predict with certainty whether morbidity, interest
rates and fixed maturity securities prepayments will continue at a level
consistent with the Company's assumptions, improve, or deteriorate; however, the
current assumptions as to these factors represent management's best estimates in
light of present circumstances. Additional increases to reserves would be
required if there is further material deterioration in morbidity, interest
rates, and fixed maturity securities prepayments from current assumptions. As
part of its ongoing management of this line of business, the Company will
conduct a gross premium valuation annually to validate the continued adequacy of
current reserves.
Income from the individual life line of business declined to $3.7
million in the first quarter of 1995, compared to $6.3 million in the first
quarter of 1994. The decline was primarily attributable to a $1.9 million
non-recurring expense item recorded in the first quarter of 1995 pertaining to
reinsurance reserves.
EMPLOYEE BENEFITS
Revenue in the employee benefits segment increased $9.9 million, or 7.0
percent, to $150.7 million in the first quarter of 1995 from $140.8 million in
the first quarter of 1994. This increase was primarily the result of an
increase in premium income of $10.6
-17-
<PAGE> 20
million, or 9.0 percent, to $128.3 million in the first quarter of 1995 from
$117.7 million in the first quarter of 1994. Increased premium income in the
packaged products, group life, and voluntary benefits lines of business
contributed to this increase. Net investment income declined by $1.0 million,
or 4.5 percent, to $21.1 million in the first quarter of 1995 from $22.1
million in the first quarter of 1994.
Income in this segment declined $4.6 million, or 27.1 percent, to $12.4
million in the first quarter of 1995 from $17.0 million in the first quarter of
1994. Increased income in the medical stop-loss, voluntary benefits, and
packaged products lines of business only partially offset lower income in the
group life and group LTD lines of business. The group LTD line of business
produced a loss of $3.5 million in the first quarter of 1995 compared to income
of $1.6 million in the first quarter of 1994 due to higher claim incidence and
severity. The Company has notified the existing group LTD customers in the
medical and legal occupational classes that coverages will be terminated under
the terms of the existing contracts, and the Company will no longer accept
proposals for group disability coverage of new medical or legal groups. This
action will impact approximately 15 percent of the group LTD block of business,
which produced $58.9 million of direct premium income in 1994. The group life
line of business produced a decline in income to $3.6 million in the first
quarter of 1995 from $7.3 million in the first quarter of 1994 due primarily to
less favorable loss ratios in this line.
OTHER OPERATIONS
Revenue in the other operations segment declined $3.3 million, or 1.6
percent, to $208.9 million in the first quarter of 1995 from $212.2 million in
the first quarter of 1994. Net investment income declined $2.1 million, or 1.0
percent, to $202.2 million in the first quarter of 1995 from $204.3 million in
the first quarter of 1994. This was a result of the lower investment income
from the corporate (unallocated) capital and assets, which are included in this
segment, due to additional capital being allocated to the individual disability
line of business and from lower investment income in the group pension line due
to a decrease in funds under management. Premium income declined $1.8 million
to $4.9 million in the first quarter of 1995 from $6.7 million in the first
quarter of 1994 due to the discontinuation of the sale of group single premium
annuities.
Income in this segment increased $6.6 million, or 34.4 percent, to $25.8
million in the first quarter of 1995 from $19.2 million in the first quarter of
1994. Within this segment, the group pension line of business produced income
of $19.2 million in the first quarter of 1995, compared to $11.4 million in the
first quarter of 1994. This line of business benefited from an improvement in
the spread between interest credited on contracts and the interest earned on the
invested assets as well as lower expenses. The Company announced in December
1994, that it would discontinue the sale of traditional guaranteed investment
contracts (GICs). Traditional GICs under management declined $633.4 million, or
8.9 percent, to $6.49 billion at March 31, 1995, from $7.12 billion at March 31,
1994. Total funds under management and equivalents increased $234.7 million, or
2.4 percent, to $9.95 billion at March 31, 1995 from $9.72 billion at March 31,
-18-
<PAGE> 21
1994. Included in this total are accumulated funds from the sale of synthetic
GICs which totaled $1.83 billion at March 31, 1995 compared to $951.4 million
at March 31, 1994. Deposits of synthetic GICs totaled $202.6 million in the
first quarter of 1995, $323.9 million in the first quarter of 1994, and $114.7
million in the fourth quarter of 1994.
Income from the block of corporate-owned life insurance, included in the
other operations segment, improved to $5.0 million in the first quarter of 1995
from $4.1 million in the first quarter of 1994. Improved mortality experience
was a primary source of the higher income in this line of business.
MEDICAL SERVICES
Revenue in this segment increased $0.8 million, or 0.7 percent, to
$107.7 million in the first quarter of 1995 from $106.9 million in the first
quarter of 1994. The increase was the result of higher premium income, which
increased $1.4 million, or 2.1 percent, to $67.4 million in the first quarter of
1995 from $66.0 million in the first quarter of 1994. Administrative services
only (ASO) fees declined slightly to $28.5 million in the first quarter of 1995
from $28.9 million in the first quarter of 1994. Premium equivalents declined
$3.9 million, or 0.6 percent, to $630.6 million in the first quarter of 1995
from $634.5 million in the first quarter of 1994.
Income in this segment declined $6.4 million, or 75.3 percent, to $2.1
million in the first quarter of 1995 from $8.5 million in the first quarter of
1994. The results were primarily attributable to higher loss ratios on the
small case group health market in the first quarter of 1995 relative to the
first quarter of 1994, as well as losses associated with the HMO initiative and
expenses related to separation pay for terminated employees.
In December 1994, America entered into an Asset and Stock Purchase
Agreement (the "Agreement") with Healthsource, Inc. under which Healthsource
will acquire America's medical services business for $310 million ($210 million
in cash and $100 million in a new issue of Healthsource 6.25% Convertible
Preferred Stock). The Agreement is subject to regulatory approvals and purchase
price adjustments in certain circumstances. The parties are currently
negotiating certain matters relating to the purchase price adjustments and other
aspects of the Agreement in an effort to resolve open issues and close the
transaction. It is unclear whether the resolution of those matters will have a
material effect on the transaction. Under the Agreement disagreements
unresolved by the parties are submitted to arbitration. The transaction is
expected to close in the second quarter of 1995.
REVIEW BY INDEPENDENT AUDITORS
The condensed consolidated financial statements, as restated, at March
31, 1995, and for the three month period then ended have been reviewed, prior to
filing, by Ernst & Young LLP, the Company's independent auditors, and their
report is included herein.
-19-
<PAGE> 22
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(b) Exhibit 27 Financial Data Schedule (for SEC use only)
-20-
<PAGE> 23
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this Form 10-Q/A (Amendment No. 1 to its quarterly
report on Form 10-Q for the quarter ended March 31, 1995) to be signed on its
behalf by the undersigned thereunto duly authorized.
Provident Life Capital Corporation
Date: August 10, 1995 /s/ J. Harold Chandler
-------------------------------------
J. Harold Chandler
President and Chief Executive Officer
Date: August 10, 1995 /s/Thomas R. Watjen
-------------------------------------
Thomas R. Watjen
Executive Vice President and
Chief Financial Officer
-21-
<PAGE> 24
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM 10-Q
PROVIDENT LIFE CAPITAL CORPORATION
Exhibit 27 Financial Data Schedule (for SEC use only)
- 22 -
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PROVIDENT LIFE CAPITAL CORPORATION FOR THE THREE MONTHS
ENDED MARCH 31, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<DEBT-HELD-FOR-SALE> 11,838,600
<DEBT-CARRYING-VALUE> 45,400
<DEBT-MARKET-VALUE> 45,900
<EQUITIES> 6,200
<MORTGAGE> 1,423,700
<REAL-ESTATE> 231,300
<TOTAL-INVEST> 14,961,500
<CASH> 25,900
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 618,000
<TOTAL-ASSETS> 17,020,200
<POLICY-LOSSES> 7,032,500<F1>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 356,800
<POLICY-HOLDER-FUNDS> 7,189,400
<NOTES-PAYABLE> 225,300
<COMMON> 0
0
0
<OTHER-SE> 1,398,400
<TOTAL-LIABILITY-AND-EQUITY> 17,020,200
361,000
<INVESTMENT-INCOME> 313,000
<INVESTMENT-GAINS> (3,900)
<OTHER-INCOME> 43,700
<BENEFITS> 546,900
<UNDERWRITING-AMORTIZATION> 17,100
<UNDERWRITING-OTHER> 126,800
<INCOME-PRETAX> 19,600
<INCOME-TAX> 7,300
<INCOME-CONTINUING> 12,300
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 12,300
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>"POLICY - LOSSES" INCLUDES RESERVES FOR FUTURE POLICY AND CONTRACT BENEFITS OF
$6,973,600 AND UNEARNED PREMIUM OF $58,900.
</FN>
</TABLE>
