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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act
of 1934 for the quarterly period ended September 30, 1995.
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Commission file number 33-17017
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PROVIDENT LIFE CAPITAL CORPORATION
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(Exact name of registrant as specified in its charter)
DELAWARE 62-1321628
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 Fountain Square, Chattanooga, Tennessee 37402
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(Address of principal executive offices)
(Zip Code)
(615) 755-1011
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(Registrant's telephone number, including area code)
None
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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
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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.
Indicate the number of shares outstanding for each of the issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT September 30, 1995
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Common Stock, $1.00 Par Value 1,000
Total number of pages included are 23
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PROVIDENT LIFE CAPITAL CORPORATION
<TABLE>
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Page
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited):
Condensed Consolidated Statements of Financial
Condition at September 30, 1995, and December 31, 1994 . . . . . . . . . . . . . . 3
Condensed Consolidated Statements of Income
for the Three Months and Nine Months Ended
September 30, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5
Condensed Consolidated Statements of Cash Flows
for the Nine Months Ended September 30, 1995 and 1994 . . . . . . . . . . . . . . . 6
Notes to Condensed Consolidated Financial Statements . . . . . . . . . . . . . . . . 7
Independent Auditors' Report on Review of Interim
Financial Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations . . . . . . . . . . . . . . . . . . . . . . . . 11
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
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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>
September 30 December 31
1995 1994
(in millions of dollars)
--------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed Maturity Securities
Available-for-Sale $12,229.3 $11,585.1
Held-to-Maturity 293.3 10.7
Equity Securities 8.4 7.3
Mortgage Loans 1,100.3 1,502.5
Real Estate 224.1 243.5
Policy Loans 1,509.9 1,361.5
Other Long-term Investments 20.4 10.1
Short-term Investments 55.7 296.9
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Total Investments 15,441.4 15,017.6
Cash and Bank Deposits 45.7 35.3
Accounts Receivable 32.5 72.8
Premiums Receivable 71.7 62.7
Reinsurance Receivable 405.5 300.1
Accrued Investment Income 296.7 281.8
Deferred Policy Acquisition Costs 435.9 638.2
Deferred Federal Income Tax Asset - 172.6
Property and Equipment 46.6 103.2
Miscellaneous 19.5 152.6
Separate Account Assets 347.0 313.0
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TOTAL ASSETS $17,142.5 $17,149.9
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION - CONTINUED
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
<TABLE>
<CAPTION>
September 30 December 31
1995 1994
(in millions of dollars)
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(Unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDER'S EQUITY
Policy and Contract Benefits $ 365.3 $ 354.1
Reserves for Future Policy and Contract Benefits
and Unearned Premiums 7,528.6 6,861.5
Policyholders' Funds and Experience Rating Refunds 6,066.6 7,707.7
Federal Income Tax Liability 71.8 33.4
Short-term Debt 533.8 14.4
Long-term Debt 200.3 202.5
Other Liabilities 408.8 499.5
Separate Account Liabilities 347.0 313.0
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TOTAL LIABILITIES 15,522.2 15,986.1
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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 Gain (Loss) on Securities 98.9 (302.3)
Foreign Currency Translation Adjustment (4.3) (5.4)
Retained Earnings 1,336.7 1,282.5
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TOTAL STOCKHOLDER'S EQUITY 1,620.3 1,163.8
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $17,142.5 $17,149.9
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
1995 1994 1995 1994
(in millions of dollars)
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<S> <C> <C> <C> <C>
REVENUE
Premium Income $292.0 $344.4 $ 966.1 $1,039.6
Net Investment Income 301.6 313.5 924.4 924.0
Net Realized Investment Losses (0.9) (5.5) (29.4) (13.1)
Gain on Sale of a Portion of a
Line of Business - Note 4 - - 21.8 -
Other Income 10.0 40.8 77.7 120.7
------ ------ -------- --------
TOTAL REVENUE 602.7 693.2 1,960.6 2,071.2
------ ------ -------- --------
BENEFITS AND EXPENSES
Policy and Contract Benefits 336.5 386.5 1,084.2 1,146.4
Change in Reserves for Future Policy and
Contract Benefits 113.2 109.0 384.4 319.0
Change in Policyholders' Funds 3.8 5.0 14.3 16.4
Amortization of Policy Acquisition Costs 16.5 14.3 51.7 45.8
Salaries 15.6 40.9 78.1 120.4
Other Operating Expenses 66.0 89.5 225.3 263.6
------ ------ -------- --------
TOTAL BENEFITS AND EXPENSES 551.6 645.2 1,838.0 1,911.6
------ ------ -------- --------
INCOME BEFORE FEDERAL INCOME TAXES 51.1 48.0 122.6 159.6
FEDERAL INCOME TAXES 18.2 16.1 42.4 54.5
------ ------ -------- --------
NET INCOME $ 32.9 $ 31.9 $ 80.2 $ 105.1
====== ====== ======== ========
</TABLE>
See notes to condensed consolidated financial statements.
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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
<TABLE>
<CAPTION>
Nine Months Ended September 30
1995 1994
(in millions of dollars)
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<S> <C> <C>
NET CASH PROVIDED BY OPERATING ACTIVITIES $ 515.4 $ 434.9
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CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Sales of Investments 1,172.0 657.6
Proceeds from Maturities of Investments 811.0 1,644.9
Purchase of Investments (1,572.8) (3,179.2)
Net Sales of Short-term Investments 233.9 176.8
Disposition of Group Medical Business (48.9) -
Other (41.0) 44.8
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NET CASH PROVIDED (USED) BY INVESTING ACTIVITIES 554.2 (655.1)
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CASH FLOWS FROM FINANCING ACTIVITIES
Deposits to Policyholder Accounts 429.3 1,499.9
Maturities and Benefit Payments from Policyholder Accounts (1,976.2) (1,413.8)
Net Short-term Borrowings 519.4 230.0
Dividends Paid to Stockholder (31.0) (47.1)
Other (0.7) (43.6)
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NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES (1,059.2) 225.4
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NET INCREASE IN CASH AND BANK DEPOSITS 10.4 5.2
CASH AND BANK DEPOSITS AT BEGINNING OF PERIOD 35.3 32.0
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CASH AND BANK DEPOSITS AT END OF PERIOD $ 45.7 $ 37.2
========= =========
</TABLE>
See notes to condensed consolidated financial statements.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
SEPTEMBER 30, 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 and
nine month periods ended September 30, 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.
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 September 30 Nine Months Ended September 30
1995 1994 1995 1994
(in millions of dollars)
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<S> <C> <C> <C> <C>
Revenue (Excluding Net Realized
Investment Gains and Losses)
Individual Life and Disability $258.2 $241.7 $ 759.7 $ 710.1
Employee Benefits 146.7 139.5 444.1 420.7
Other Operations 198.7 317.5 786.2 953.5
------ ------ -------- --------
Total $603.6 $698.7 $1,990.0 $2,084.3
====== ====== ======== ========
Income Before Net Realized
Investment Gains and Losses and
Federal Income Taxes
Individual Life and Disability $ 17.0 $ 12.2 $ 17.5 $ 42.2
Employee Benefits 11.8 13.0 32.3 52.0
Other Operations 23.2 28.3 102.2 78.5
------ ------ -------- --------
Total $ 52.0 $ 53.5 $ 152.0 $ 172.7
====== ====== ======== ========
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
SEPTEMBER 30, 1995
NOTE 2--SEGMENT INFORMATION - CONTINUED
<TABLE>
<CAPTION>
Three Months Ended September 30 Nine Months Ended September 30
1995 1994 1995 1994
(in millions of dollars)
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<S> <C> <C> <C> <C>
Revenue (Including Net Realized
Investment Gains and Losses)
Individual Life and Disability $258.1 $242.3 $ 759.0 $ 715.8
Employee Benefits 147.1 139.7 445.2 422.0
Other Operations 197.5 311.2 756.4 933.4
------ ------ -------- --------
Total $602.7 $693.2 $1,960.6 $2,071.2
====== ====== ======== ========
Income Before Federal Income Taxes
Individual Life and Disability $ 16.9 $ 12.8 $ 16.8 $ 47.9
Employee Benefits 12.2 13.2 33.4 53.3
Other Operations 22.0 22.0 72.4 58.4
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Total $ 51.1 $ 48.0 $ 122.6 $ 159.6
====== ====== ======== ========
</TABLE>
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
PROVIDENT LIFE CAPITAL CORPORATION (A WHOLLY-OWNED SUBSIDIARY) AND SUBSIDIARIES
SEPTEMBER 30, 1995
NOTE 3--COMMITMENTS AND CONTINGENT LIABILITIES
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--SALE OF A PORTION OF A LINE OF BUSINESS
On December 20, 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. (Healthsource) whereby Healthsource agreed
to acquire certain assets and assume certain liabilities of the Provident
Companies' group medical business. The sale was completed on May 31, 1995
effective April 30, 1995. The Provident Companies received $131.0 million in
cash and $100.0 million of a new issue of Healthsource 6.25% preferred stock
which is redeemable at par for two years or exchangeable for marketable
securities under certain circumstances. Pursuant to the Agreement, assets were
transferred to Healthsource which had a carrying value of approximately $297.5
million. Liabilities assumed by Healthsource in connection with the
transferred business totaled $221.5 million. Total revenue and income before
federal income taxes for the group medical business were $146.2 million and
$3.3 million, respectively, for the four month period ended April 30, 1995.
The gain on sale of the Provident Companies' group medical business increased
year-to-date operating earnings by $21.8 million before taxes and $14.2 million
after taxes.
NOTE 5--SUBSEQUENT EVENTS
On October 20, 1995, the Company completed the sale of $962.4 million of
commercial mortgage loans through a securitization collateralized by 366 loans.
The transaction will result in a realized investment gain of approximately $9
million which will be recorded in the fourth quarter of 1995. The transaction
also increased the liquidity of the investment portfolio and facilitated the
move to a cash flow-matching strategy for the guaranteed investment contract
(GIC) portfolios. The proceeds from the mortgage sale were reinvested in fixed
maturity securities and were used to fund a limited-time offer to GIC contract
holders to surrender their contracts on a more favorable basis than would
otherwise be available to them.
The reinvestment of a portion of the proceeds was begun prior to the closing of
the transaction in order to provide an orderly selection of securities which
met the Company's investment criteria. As a result, the Company had $533.8
million in short-term debt as of September 30, 1995, which was repaid on
October 20, 1995.
The surrender offer was available to GIC contract holders for a brief period of
time which ended on October 31,1995. The offer was for a maximum of $600.0
million of book value, with surrenders being accepted on a
first-come-first-served basis until the maximum was met. Only $291.7 million
of book value was surrendered under the offer. The surrender values were paid
October 20 through November 3, 1995. The Company has no plans for another
offer of this kind.
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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 September 30, 1995, the related condensed consolidated statements of income
for the three and nine month periods ended September 30, 1995 and 1994, and the
condensed consolidated statements of cash flows for the nine month periods
ended September 30, 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
November 6, 1995
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Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Revenue excluding net realized investment gains and losses ("revenue")
decreased $95.1 million, or 13.6 percent, to $603.6 million in the third
quarter of 1995 from $698.7 million in the third quarter of 1994. The decline
was the result of a decrease in revenue in the other operations segment ($118.8
million), which more than offset higher revenue in the individual life and
disability segment ($16.5 million) and employee benefits segments ($7.2
million).
For the first nine months of 1995, revenue decreased $94.3 million, or
4.5 percent to $1,990.0 million from $2,084.3 million in the first nine months
of 1994. Revenue in the other operations segment declined $167.3 million,
which was offset by increased revenue in the individual life and disability
segment ($49.6 million) and employee benefits segment ($23.4 million).
Income before net realized investment gains and losses and federal
income taxes ("income") decreased $1.5 million, or 2.8 percent, to $52.0
million in the third quarter of 1995 from $53.5 million in the third quarter of
1994. The decrease was the result of lower income in the employee benefits
segment ($1.2 million) and other operations segment ($5.1 million), which was
partly offset by increased income in the individual life and disability segment
($4.8 million).
For the first nine months of 1995, income declined $20.7 million, or
12.0 percent, to $152.0 million from $172.7 million in the first nine months of
1994. Lower income in the individual life and disability segment ($24.7
million) and employee benefits segment ($19.7 million) was partly offset by
increased income in the other operations segment ($23.7 million).
INDIVIDUAL LIFE AND DISABILITY
Revenue in this segment increased $16.5 million, or 6.8 percent, to
$258.2 million in the third quarter of 1995 from $241.7 million in the third
quarter of 1994. Increases in both premium income and net investment income
contributed to the higher revenue. Premium income increased $0.5 million, or
0.3 percent, to $163.3 million in the third quarter of 1995 from $162.8 million
in the third quarter of 1994. The increase was the result of higher premium
income in the individual disability income line of business, which increased
$1.6 million, or 1.1 percent, to $147.8 million in the third quarter of 1995
from $146.2 million in the third quarter of 1994. Net investment income
increased $16.2 million, or 21.2 percent, to $92.7 million in the third quarter
of 1995 from $76.5 million in the third quarter of 1994. The increase was the
result of increased capital allocated to the individual disability income line
of business, the normal growth in reserve liabilities and related assets held
for individual life and disability contracts, and the growth in investment
income related to the funds held under annuity contracts.
For the first nine months of 1995, revenue increased $49.6 million, or
7.0 percent, to $759.7 million from $710.1 million in the first nine months of
1994. Premium income increased $2.7 million, or 0.6 percent, to $483.5 million
in the first nine months of 1995 from $480.8 million in the first nine months
of 1994. Increased premium income in the individual disability income line
offset a decline in premium income from the individual life line of business.
Net investment income increased $44.2 million, or 19.8 percent, to $267.3
million in the first nine months of 1995 from $223.1 million in the first nine
months of 1994. The increase was the result of increased capital allocated to
the individual disability income line of business, the normal growth in reserve
liabilities and related assets held for individual life and disability
contracts, and the growth in investment income related to the funds held under
annuity contracts.
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
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conversion policies available under existing contractual arrangements). The
Company is focusing on issuing "loss of earnings" contracts which insure income
protection rather than occupation instead of traditional non-cancellable
long-term own-occupation contracts.
During this product transition, new premium income in the individual
disability income 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. During the third
quarter of 1995, annualized new premiums for individual disability have
declined $5.8 million, or 33.7 percent, to $11.4 million, from $17.2 million in
the third quarter of 1994.
This segment reported income of $17.0 million in the third quarter of
1995 compared to $12.2 million in the third quarter of 1994, an increase of
$4.8 million, or 39.3 percent. The individual disability income line of
business produced income of $9.6 million in the third quarter of 1995 compared
to income of $6.6 million in the third quarter of 1994. This line benefited
from a higher level of net investment income in the third quarter of 1995 due
to increased capital allocated to this line of business. Claim experience for
the third quarter of 1995 was relatively flat compared to the third quarter of
1994.
For the first nine months of 1995, the segment reported income of
$17.5 million compared to $42.2 million in the first nine months of 1994. The
decline is primarily due to the individual disability income line, which
produced a loss of $0.7 million in the first nine months of 1995 compared to
income of $22.1 million in the first nine months of 1994. The loss was a
result of poor results in the first quarter of 1995 from adverse claim
experience on individual non-cancellable disability income contracts with
own-occupation provisions which were issued between 1983 and 1989.
Specifically, the average size of the new claims in the first quarter of 1995
was higher than the average level experienced for all of 1994, and the level of
claim terminations was lower relative to 1994.
Following a loss recognition study performed as of September 30, 1993,
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. Under a previous loss recognition study completed in February 1993
no loss recognition deficiency existed as of December 31, 1992, using the
assumptions with respect to morbidity, interest rates, and expenses that
reflected management's best estimates as of that date.
Besides movement of interest rates, changes in expenses and morbidity
can affect results. The loss recognition study performed as of September 30,
1993, 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 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 during 1994, and also
during the first quarter of 1995. In the second and third quarter of 1995,
however, actual morbidity experience was more in line with expected experience.
It is not possible at this time to predict whether this experience indicates a
trend or short-term fluctuations. Since the loss recognition 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.
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<PAGE> 13
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 for 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.
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.
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. 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.
-13-
<PAGE> 14
<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 third quarter of 1995 was 7.91 percent
and 8.08 percent for the first nine months of 1995. 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 8.48 percent at September 30, 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 allocated to that
line, and (ii) profit from new individual disability income 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.
-14-
<PAGE> 15
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. 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.
Income from the individual life line of business increased to $7.0
million in the third quarter of 1995, compared to $4.5 million in the third
quarter of 1994. The increase was primarily the result of increased investment
income and favorable mortality experience. For the first nine months of 1995,
income from this line was $16.5 million compared to $18.0 million in the first
nine months of 1994. The decline in the first nine months was primarily
attributable to a $1.9 million non-recurring expense item recorded in the first
quarter of 1995 pertaining to reinsurance reserves, as well as higher mortality
experience in the second quarter of 1995.
Deposits on deferred annuities totaled $11.7 million in the third
quarter of 1995 compared to $44.3 million in the third quarter of 1994. For
the first nine months of 1995, deposits totaled $73.8 million compared to $87.0
million for the first nine months of 1994.
EMPLOYEE BENEFITS
Revenue in the employee benefits segment increased $7.2 million, or 5.2
percent, to $146.7 million in the third quarter of 1995 from $139.5 million in
the third quarter of 1994. Premium income increased $2.8 million, or 2.4
percent, to $120.6 million in the third quarter of 1995 from $117.8 million in
the third quarter of 1994. Increased premium income in the group long-term
disability (LTD), voluntary benefits, medical stop-loss, and group life lines
of business contributed to this increase. Net investment income also increased
by $4.1 million, or 19.7 percent, to $24.9 million in the third quarter of 1995
from $20.8 million in the third quarter of 1994.
For the first nine months of 1995, revenue increased $23.4 million, or
5.6 percent, to $444.1 million from $420.7 million in the first nine months of
1994. This increase was primarily the result of an increase in premium income
of $18.8 million, or 5.3 percent, to $372.1 million in the first nine months of
1995 from $353.3 million in the first nine months of 1994. Increased premium
income in the voluntary benefits, packaged products, group life, and group LTD
lines of business contributed to this increase. Net investment income
increased $2.9 million, or 4.5 percent, to $67.3 million in the first nine
months of 1995 from $64.4 million in the first nine months of 1994.
Income in this segment decreased $1.2 million to $11.8 million in the
third quarter of 1995 from $13.0 million in the third quarter of 1994. The
decline is primarily attributable to a decline in income from the medical
stop-loss line of business from $8.4 million in the third quarter of 1994 to
income of $3.3 million in the third quarter of 1995. Higher loss ratios are
the primary reason for
-15-
<PAGE> 16
the income decline in this line of business. Income from the group life line
of business improved relative to the year ago quarter and second quarter of
1995 due to improved loss ratios. Income from group life was $6.7 million in
the third quarter of 1995, compared to $3.8 million in the third quarter of
1994 and $4.2 million in the second quarter of 1995.
For the first nine months of 1995, income in this segment declined
$19.7 million to $32.3 million from $52.0 million in the first nine months of
1994. The decline is primarily attributable to a decline in income in the
group LTD, group life, and medical stop-loss lines of business. Losses in the
group LTD line were $12.9 million in the first nine months of 1995 compared to
income of $0.2 million in the first nine months of 1994 due to higher claim
incidence and severity. During the first quarter of 1995, the Company notified
the existing group LTD customers in the medical and legal occupational classes
that coverages would be terminated under the terms of the existing contracts,
and the Company would no longer accept proposals for group disability coverage
of new medical or legal groups. This action impacts approximately 15 percent
of the group LTD block of business, which produced $58.9 million of direct
premium income in 1994. Income in the group life line of business declined to
$14.5 million in the first nine months of 1995 from $19.6 million in the first
nine months of 1994. An increase in the loss ratio in the second quarter of
1995 was the primary reason for the decline in income. Income in the medical
stop-loss line of business declined to $15.0 million in the first nine months
of 1995 from $20.1 million in the first nine months of 1994 primarily due to
the higher loss ratios experienced in the third quarter of 1995 relative to the
third quarter of 1994.
OTHER OPERATIONS
Revenue in the other operations segment declined $118.8 million, or
37.4 percent, to $198.7 million in the third quarter of 1995 from $317.5
million in the third quarter of 1994. Net investment income declined $32.2
million, or 14.9 percent, to $184.0 million in the third quarter of 1995 from
$216.2 million in the third 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 income line of business, lower investment income in the
group pension line due to a decrease in funds under management, and the
reduction resulting from the sale of the medical services business to
Healthsource, Inc. Premium income declined $55.7 million to $8.1 million in
the third quarter of 1995 from $63.8 million in the third quarter of 1994 due
to the sale of the medical services business. The historical results of the
medical services business are included in this segment. This line produced
revenue of $95.5 million and premium income of $56.0 million in the third
quarter of 1994. The sale of this line was effective May 1, 1995.
For the first nine months of 1995, revenue declined $167.3 million, or
17.5 percent, to $786.2 million from $953.5 million in the first nine months of
1994. Net investment income declined $46.7 million, or 7.3 percent, to $589.8
million in the first nine months of 1995 from $636.5 million in the first nine
months of 1994. This was a result of lower investment income from the
corporate (unallocated) capital and assets, lower investment income in the
group pension line, and the inclusion of only four months of net investment
income for the medical services business. Premium income in this segment
declined $95.0 million, or 46.2 percent, to $110.5 million in the first nine
months of 1995 from $205.5 million in the first nine months of 1994. The
decline was primarily the result of the sale of the medical services business
which became effective May 1, 1995. The medical services line produced $90.9
million of premium income in the first four months of 1995, compared to $183.5
million in the first nine months of 1994. Premium income in this segment was
also impacted by the discontinuation of the sale of group single premium
annuities which produced $1.6 million of premium income in the first nine
months of 1995, compared to $3.9 million in the first nine months of 1994.
-16-
<PAGE> 17
Income in this segment decreased $5.1 million, or 18.0 percent, to
$23.2 million in the third quarter of 1995 from $28.3 million in the third
quarter of 1994. Within this segment, the group pension line of business
produced income of $20.0 million in the third quarter of 1995, compared to
$12.3 million in the third 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 income from bond call
premiums and early surrender penalties. The other line, included in this
segment, produced a loss of $1.7 million in the third quarter of 1995, compared
to income of $2.6 million in the third quarter of 1994. The decline was the
result of higher corporate expenses and lower net investment income.
During the first nine months of 1995, income in this segment increased
$23.7 million, or 30.2 percent to $102.2 million from $78.5 million in the
first nine months of 1994. The increase is primarily due to the gain from the
medical services sale and the improved results in the group pension line. This
segment includes a before-tax gain of $21.8 million from the sale of the
medical services business to Healthsource during the second quarter of 1995.
The group pension line of business reported income of $56.7 million in the
first nine months of 1995, compared to $35.6 million in the first nine months
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 income from bond call premiums and early surrender
penalties.
The Company announced in December 1994, that it would discontinue the
sale of traditional guaranteed investment contracts (GICs). Traditional GICs
under management declined $1.85 billion, or 25.4 percent, to $5.42 billion at
September 30, 1995, from $7.27 billion at September 30, 1994. Total funds
under management and equivalents decreased $0.90 billion, or 8.7 percent, to
$9.49 billion at September 30, 1995 from $10.39 billion at September 30, 1994.
Included in this total are accumulated funds from the sale of synthetic GICs
which totaled $2.43 billion at September 30, 1995 compared to $1.49 billion at
September 30, 1994. Deposits of synthetic GICs totaled $189.7 million in the
third quarter of 1995, compared to $269.1 million in the third quarter of 1994.
Deposits of synthetic GICs totaled $810.3 million in the first nine months of
1995 compared to $843.8 million in the first nine months of 1994.
Early surrenders of traditional GICs totaled $309.9 million in the
third quarter of 1995 and $342.2 million in the first nine months of 1995.
These surrenders produced income of $1.05 million in the third quarter of 1995
and $1.09 million for the first nine months of 1995. In early October, 1995,
the Company extended an offer to GIC contract holders to surrender their
contracts on a more favorable basis than would otherwise be available to them.
The offer ended October 31, 1995. Contracts with a book value of $291.7
million were surrendered under the offer. The Company has no plans for another
offer of this kind.
Income from the block of corporate-owned life insurance, included in
the other operations segment, declined to $14.2 million in the first nine
months of 1995 from $14.9 million in the first nine months of 1994. The
decline in income was primarily attributable to a decline in premium income in
this line of business, which is not actively marketed at this time.
REVIEW BY INDEPENDENT AUDITORS
The condensed consolidated financial statements at September 30,
1995, and for the three month and nine month periods then ended have been
reviewed, prior to filing, by Ernst & Young LLP, the Company's independent
auditors, and their report is included herein.
-17-
<PAGE> 18
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 Financial Data Schedule (for SEC use only)
(b) Reports on Form 8-K None
-18-
<PAGE> 19
SIGNATURES
Pursuant to the requirements 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.
Provident Life Capital Corporation
Date: November 10, 1995 /s/ J. Harold Chandler
-------------------------------------
J. Harold Chandler
President and Chief Executive Officer
Date: November 10, 1995 /s/ Thomas R. Watjen
-------------------------------------
Thomas R. Watjen
Executive Vice President and
Chief Financial Officer
-19-
<PAGE> 20
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM 10-Q
PROVIDENT LIFE CAPITAL CORPORATION
-20-
<PAGE> 21
INDEX OF EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT PAGE
------- ----
<S> <C> <C>
Exhibit 27 Financial Data Schedule (for SEC use only)
</TABLE>
-21-
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF PROVIDENT LIFE CAPITAL CORPORATION FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1995, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 12,229,300
<DEBT-CARRYING-VALUE> 293,300
<DEBT-MARKET-VALUE> 307,900
<EQUITIES> 8,400
<MORTGAGE> 1,100,300
<REAL-ESTATE> 224,100
<TOTAL-INVEST> 15,441,400
<CASH> 45,700
<RECOVER-REINSURE> 0
<DEFERRED-ACQUISITION> 435,900
<TOTAL-ASSETS> 17,142,500
<POLICY-LOSSES> 7,528,600<F1>
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 365,300
<POLICY-HOLDER-FUNDS> 6,066,600
<NOTES-PAYABLE> 734,100
<COMMON> 0
0
0
<OTHER-SE> 1,620,300
<TOTAL-LIABILITY-AND-EQUITY> 17,142,500
966,100
<INVESTMENT-INCOME> 924,400
<INVESTMENT-GAINS> (29,400)
<OTHER-INCOME> 99,500
<BENEFITS> 1,468,600
<UNDERWRITING-AMORTIZATION> 51,700
<UNDERWRITING-OTHER> 303,400
<INCOME-PRETAX> 122,600
<INCOME-TAX> 42,400
<INCOME-CONTINUING> 80,200
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 80,200
<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
$7,471,900 and Unearned Premiums of $56,700.
</FN>
</TABLE>
