<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
______________
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 1996 Commission File Number 1-12266
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES AND
EXCHANGE ACT OF 1934
THE PAUL REVERE CORPORATION
(Exact name of registrant as specified in its charter)
Massachusetts 04-3176707
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification no.)
18 Chestnut Street, Worcester, Massachusetts 01608-1528
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code: (508) 799-4441
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No
--- ---
The number of shares of common stock outstanding as of July 31, 1996, was
45,000,000.
<PAGE>
THE PAUL REVERE CORPORATION
INDEX TO FORM 10-Q
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1996 and 1995 3
Consolidated Balance Sheets -
June 30, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 7 - 12
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
2
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE PAUL REVERE CORPORATION
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
1996 1995 1996 1995
--------- -------- ------- ------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Premiums, policy and contract charges and fees $ 279,764 $ 262,278 $ 561,042 $ 516,184
Net investment income 100,427 99,155 198,538 197,472
Net realized investment gains 25,899 15,728 30,149 21,871
----------- ----------- ----------- -----------
Total revenues 406,090 377,161 789,729 735,527
----------- ----------- ----------- -----------
Benefits, claims and expenses:
Benefits to policyholders 274,543 247,761 530,452 490,786
Commissions and other expenses 77,931 71,963 155,600 141,591
Amortization of deferred costs:
Deferred policy acquisition costs 14,558 13,070 28,781 27,122
Value assigned purchased insurance in force 596 1,655 2,339 3,274
Goodwill amortization 2,070 2,070 4,140 4,140
----------- ----------- ----------- -----------
Total benefits, claims and expenses 369,698 336,519 721,312 666,913
----------- ----------- ----------- -----------
Income before income taxes 36,392 40,642 68,417 68,614
Income taxes 13,731 15,248 25,903 25,973
----------- ----------- ----------- -----------
Net income $22,661 $25,394 $42,514 $42,641
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Net income per common share $ 0.50 $ 0.56 $ 0.94 $ 0.95
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Weighted average number of
common shares outstanding 45,000,000 45,000,000 45,000,000 45,000,000
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
Dividends paid per common share $ 0.06 $ 0.06 $ 0.12 $ 0.12
----------- ----------- ----------- -----------
----------- ----------- ----------- -----------
</TABLE>
See accompanying notes to consolidated financial statements.
3
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
THE PAUL REVERE CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
JUNE 30, DECEMBER 31,
1996 1995
---------- ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments:
Available for sale:
Fixed maturities - at fair value
(cost: $4,639,211 in 1996 and
$4,218,437 in 1995) $4,670,235 $4,619,841
Equity securities - at market (cost:
$38,954 in 1996 and $28,370 in 1995) 46,091 32,744
Investment in Textron common stock - at market
(cost: $9,795 in 1996 and $19,811 in 1995) 33,877 57,257
Short-term investments 35,486 71,326
Mortgage loans 332,900 309,046
Real estate 4,519 9,291
Policy loans 73,689 73,933
Other invested assets 31,339 31,604
---------- ----------
Total investments 5,228,136 5,205,042
Cash - 14,970
Accrued investment income 88,313 80,993
Premiums due 21,191 21,396
Deferred policy acquisition costs 949,442 775,651
Value assigned purchased insurance in force 63,401 66,894
Reinsurance recoverable 482,429 494,313
Goodwill, net of accumulated amortization
of $95,132 in 1996 and $90,992 in 1995 111,668 115,808
Property and equipment, net of accumulated
depreciation of $69,233 in 1996 and
$66,612 in 1995 34,009 35,386
Other assets 90,082 190,031
Assets held in separate account 24,465 43,201
---------- ----------
Total assets $7,093,136 $7,043,685
---------- ----------
---------- ----------
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $1,400,746 $1,371,297
Unpaid claims and claim expenses 2,023,985 1,852,298
Other policyholder funds 1,909,554 1,876,324
Securities sold under agreements to repurchase 52,928 -
Notes payable 18,722 38,020
Income taxes 271,915 366,094
Other liabilities 120,815 103,072
Liabilities related to separate account 24,465 43,201
---------- ----------
Total liabilities 5,823,130 5,650,306
Shareholders' equity:
Common stock, par value $1.00 per share,
100,000,000 shares authorized; 45,000,000
shares issued and outstanding 45,000 45,000
Additional paid-in capital 560,134 560,134
Securities valuation adjustment 37,291 197,090
Foreign currency translation adjustment (12,375) (11,687)
Retained earnings 639,956 602,842
---------- ----------
Total shareholders' equity 1,270,006 1,393,379
---------- ----------
Total liabilities and shareholders' equity $7,093,136 $7,043,685
---------- ----------
---------- ----------
</TABLE>
See accompanying notes to consolidated financial statements.
4
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
THE PAUL REVERE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
(UNAUDITED)
SIX MONTHS ENDED JUNE 30,
-------------------------
1996 1995
----------- -----------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 42,514 $ 42,641
Adjustments to reconcile net income to net
cash provided by operating activities:
Increase in future policy benefits,
unpaid claims and other policyholder funds 297,746 269,524
Amortization and depreciation 11,009 14,127
Additions to deferred policy acquisition costs (75,128) (88,672)
(Decrease) increase in income tax liability (5,398) 17,188
Decrease in other assets/liabilities (7,762) (3,971)
Net realized investment gains (30,149) (21,870)
Increase in accrued investment income (7,349) (4,001)
Other, net 698 1,426
--------- ---------
Net cash provided by operating activities 226,181 226,392
--------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturities held to maturity:
Proceeds from sales - -
Proceeds from maturities and calls - 13,508
Purchases - (126,004)
Fixed maturities, marketable equity securities
and short-term investments available for sale:
Proceeds from sales 432,168 255,891
Proceeds from maturities and calls 103,401 56,123
Purchases (789,052) (481,172)
Increase in other, net (18,610) (19,081)
Decrease (increase) in policy loans, net 244 (2,050)
Capital expenditures (1,924) (1,321)
--------- ---------
Net cash used in investing activities (273,773) (304,106)
--------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in cash overdraft 28,772 18,747
Dividends to shareholders (5,400) (5,400)
Decrease in notes payable (19,500) (15,079)
Securities sold under agreements to repurchase 52,928 -
Receipts from interest-sensitive products 96,889 162,676
Return of account balances on interest-
sensitive products (113,458) (84,151)
--------- ---------
Net cash provided by financing activities 40,231 76,793
Effect of foreign exchange rate changes on cash (7,609) 921
--------- ---------
Net change in cash (14,970) -
Cash at beginning of period 14,970 -
--------- ---------
Cash at end of period $ - $ -
--------- ---------
--------- ---------
</TABLE>
See accompanying notes to consolidated financial statements.
5
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
THE PAUL REVERE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
JUNE 30, 1996
NOTE 1. BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Paul
Revere Corporation ("the Company") have been prepared in accordance with
generally accepted accounting principles applicable to stock life insurance
companies for interim financial information and with the requirements of Form
10-Q. Accordingly, they do not include all of the information and footnotes
required for complete financial statements. In the opinion of management,
all adjustments (consisting only of normal recurring adjustments) considered
necessary for a fair presentation of the Company's consolidated financial
position at June 30, 1996 and December 31, 1995 and its consolidated
statements of income for each of the respective three and six month periods
ended June 30, 1996 and June 30, 1995 and consolidated cash flows for each of
the respective six month periods ended June 30, 1996 and June 30, 1995, have
been included. Certain 1995 amounts have been reclassified to conform to the
current year's presentation. Interim results for the three and six month
periods ended June 30, 1996 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1996. The financial
statements should be read in conjunction with the financial statements
included in the Company's Annual Report on Form 10-K, for the year ended
December 31, 1995 and its Quarterly Report on Form 10-Q, for the quarter
ended March 31, 1996.
NOTE 2. LITIGATION AND CONTINGENCIES
In the normal course of its business operations, the Company is involved in
litigation from time to time with claimants, beneficiaries and others, and a
number of lawsuits were pending at June 30, 1996. In the opinion of
management, the ultimate liability, if any, arising from this litigation is
not expected to have a material adverse effect on the consolidated net income
or financial condition of the Company.
The laws of many states in which the Company's insurance subsidiaries are
admitted to do business require as a condition of admission that all
insurance companies so admitted collectively guarantee to policyholders the
benefits payable under policies issued by other insurance companies admitted
in the particular state up to statutory levels. While the amount of any
assessments which may be made in the future cannot be predicted, the Company
does not believe the total assessments, if any, will be material to its
operating results or financial position.
NOTE 3. MERGER AGREEMENT
On April 29, 1996, the Company and Provident Companies, Inc. ("Provident")
announced they had signed a definitive merger agreement. The transaction,
valued at approximately $1.2 billion, has been approved by boards of
directors of both companies. Under the agreement, the Company's shareholders
may elect to receive a) $26.00 per share in cash; or b) a combination of
$20.00 in cash and a number of shares of Provident common stock equal to the
product of $6.00 and the exchange ratio; or c) a number of shares of
Provident common stock equal to the product of $26.00 and the exchange ratio.
The exchange ratio is based on the Provident common stock price during a
defined period prior to closing and is subject to certain maximum and minimum
share amounts. Textron, which owns approximately 83% of the Company's
outstanding common shares, has agreed to support the merger. The transaction
is subject to state regulatory approvals, approval of Provident and the
Company's shareholders, and compliance with customary conditions. Early
termination of the Hart-Scott-Rodino pre-merger notification period was
received from the Federal Trade Commission.
NOTE 4. EARNINGS PER SHARE
A separate computation of earnings per share is made for each quarter
presented and for the year to date. Accordingly, the sum of the quarterly
earnings per share will not necessarily equal the earnings per share
calculation for the year to date.
6
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
THE PAUL REVERE CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Revenues for the quarter ended June 30, 1996 were $406.1 million as compared
to $377.2 million for the same period in 1995, an increase of 7.7%. Net
income for the quarter ended June 30, 1996 was $22.7 million or $0.50 per
share as compared to $25.4 million or $0.56 per share for the second quarter
of 1995, a decrease of 10.8%. For the six months ended June 30, 1996,
revenues were $789.7 million as compared to $735.5 million for the six months
ended June 30, 1995, an increase of 7.4%. Net income for the six months
ended June 30, 1996 was $42.5 million or $0.94 per share as compared with
$42.6 million or $0.95 per share.
INCOME BEFORE INCOME TAXES
Income before income taxes for the business segments of the Company for the
three and six months ended June 30, 1996 and 1995, respectively, was as
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- -------------------------
1996 1995 CHANGE 1996 1995 CHANGE
---- ---- ------ ---- ---- ------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Individual Disability
Insurance $ 9,807 $22,361 ($12,554) $22,451 $34,158 ($11,707)
Group Insurance 6,388 4,263 2,125 10,520 9,042 1,478
Individual Life Insurance 3,742 3,408 334 9,946 6,195 3,751
Financial Products 16,440 10,563 5,877 25,287 18,994 6,293
Corporate 15 47 (32) 213 225 (12)
------- ------- ------- ------- ------- -------
$36,392 $40,642 ($4,250) $68,417 $68,614 ($ 197)
------- ------- ------- ------- ------- -------
------- ------- ------- ------- ------- -------
</TABLE>
PREMIUMS, POLICY AND CONTRACT CHARGES AND FEES
Premiums, policy and contract charges and fees for the business segments of
the Company for the three and six months ended June 30, 1996 and 1995,
respectively, were as follows:
7
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30 SIX MONTHS ENDED JUNE 30
-------------------------- -------------------------
1996 1995 CHANGE 1996 1995 CHANGE
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Individual Disability
Insurance $193,965 $183,421 $10,544 $390,283 $361,725 $28,558
Group Insurance 74,837 67,517 7,320 148,178 131,611 16,567
Individual Life Insurance 8,539 9,532 (993) 18,552 18,502 50
Financial Products 2,423 1,808 615 4,029 4,346 (317)
Corporate - - - - - -
-------- -------- ------- -------- -------- -------
$279,764 $262,278 $17,486 $561,042 $516,184 $44,858
-------- -------- ------- -------- -------- -------
-------- -------- ------- -------- -------- -------
</TABLE>
INDIVIDUAL DISABILITY INSURANCE SEGMENT
In the quarter ended June 30, 1996, the Individual Disability Insurance
segment reported income before income taxes of $9.8 million, compared to
$22.4 million during the comparable quarter in 1995. These results include
net realized investment gains, before income taxes, of $16.9 million during
the second quarter of 1996 and $10.0 million in the same period of 1995. For
the six months ended June 30, 1996, the Individual Disability Insurance
segment reported income before income taxes of $22.5 million, compared to
$34.2 million during the comparable period in 1995. These results include
net realized investment gains, before income taxes, of $19.5 million during
the first six months of 1996 and $13.2 million in the same period in 1995.
The lower second quarter earnings in 1996 are primarily related to the
benefit ratio, which at 95.5% is higher than the ratio reported in the
quarterly periods ended March 31, 1996 (84.0%), and June 30, 1995 (87.2%).
The deterioration in the benefit ratio is primarily attributable to the
Company's strengthening claim reserves for the quarter ended June 30, 1996 by
$17 million. New claims and claim terminations performed at levels
substantially consistent with those experienced in the first quarter of 1996
and the second quarter of 1995, however, the reserve strengthening reflects
that claims trends have not improved to the levels projected at the time the
reserves were originally established. United States morbidity continues to
be adversely impacted by policies issued during the period between 1985 and
1989, especially in Florida and California. In addition, business issued to
physicians has performed below expectations. To address the current claim
environment, the Company is continuing remedial actions which include
introducing new products, initiating pricing and underwriting adjustments and
emphasizing claims management. It is uncertain if the adverse experience
will continue or how long it will take for the remedial actions to have any
effect.
As disclosed in the Company's Annual Report on Form 10-K for the year ended
December 31, 1995, the Company's reserve adequacy analysis at December 31,
1995 was predicated on the Company's anticipation of an improvement in
morbidity. If the recent deterioration in morbidity experience continues,
the Company would need to increase reserves and/or write-off deferred policy
acquisition costs and value assigned purchased insurance in-force, and the
effect thereof could be material to the Company's financial position, results
of operations and liquidity. The Company will continue to monitor actual
experience compared to assumptions used to estimate policyholder liabilities.
The Company has initiated a comprehensive reserve study to be completed by
the end of the current year which will consider the effect of 1996 experience
on recorded reserves. This study is a complex process which will consider
historical experience, secular trends and the Company's remedial actions,
among other factors, to project future expectations of morbidity,
persistency, interest and expenses, and use these assumptions to evaluate
reserves.
GROUP INSURANCE SEGMENT
For the three and six months ended June 30, 1996, the Group Insurance
segment reported increased income before income taxes over the corresponding
periods of the prior year. These results were driven by increased premium
volume, particularly in the disability line of business, reflecting
management's continued emphasis on this product, improved expense ratios and,
in the quarter to quarter comparison, improved benefit ratios.
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
For the quarter ended June 30, 1996, the benefit ratio for this segment
improved to 72.9% from 75.4% during the corresponding period in the prior
year due in part to the significant changes which have been made to the
products and pricing, more aggressive underwriting and active claims
management. The segment's expense ratio was 30.1% for each of the quarters
ended June 30, 1996 and 1995.
For the six months ended June 30, 1996, the segment's benefit ratio
deteriorated slightly to 75.1% as compared to 74.8% for the comparable period
of the prior year. The segment's expense ratio for the six months ended June
30, 1996 decreased to 29.8% from 30.2% for the comparable period of the prior
year.
INDIVIDUAL LIFE INSURANCE SEGMENT
The Individual Life Insurance segment's income before income taxes for the
three and six months ended June 30, 1996 increased as compared to the same
periods of 1995. These increases were primarily attributable to decreased
benefits to policyholders and an improvement in expense ratios due to various
initiatives implemented to reduce home office and field expenses.
Additionally, results for the six months ended June 30, 1996 were positively
impacted by the recording of a $1.6 million gain in U.S. dollars, before
income taxes, in connection with the sale of the Company's Canadian
individual life insurance portfolio to Imperial Life Assurance of Canada.
FINANCIAL PRODUCTS SEGMENT
The increases in the Financial Products segment's income before income taxes
for the three and six months ended June 30, 1996, as compared to the same
periods in the prior year, are primarily attributable to higher gross margins
and increased net realized investment gains. The gross margin on financial
products is calculated to be the spread between investment income, including
earnings on assets representing surplus, and interest credited to
policyholders. The financial products' segment gross margin for the second
quarter of 1996 was approximately 213 basis points which compares to an
annual spread of 184 basis points for 1995 and 164 basis points for the
second quarter of 1995. The gross margin for the six months ended June 30,
1996 was 211 basis points as compared to 171 basis points for the comparable
period of the prior year. This segment's results were positively impacted by
net realized investment gains, before income taxes, of $8.5 million during
the second quarter of 1996 and $5.0 million in the same period of 1995. For
the six months ended June 30, 1996, net realized investment gains, before
income taxes, totaled $9.3 million, compared to $7.0 million during the same
period in the prior year. Policyholder funds on deposit increased
approximately $33.2 million since December 31, 1995, to $1.9 billion at June
30, 1996.
NET INVESTMENT INCOME
Net investment income increased by $1.3 million or 1.3% for the quarter
ended June 30, 1996 as compared to the same period last year, as yields
remained relatively constant. Net investment income totaled $198.5 million
for the six months ended June 30, 1996, an increase of $1.1 million, or 0.5%
over the comparable period in the prior year. The average yield on the
Company's portfolio of invested assets was 7.7% during each of the quarters
ended June 30, 1996 and 1995 and 7.8% and 7.9% for the six months ended June
30, 1996 and 1995, respectively.
NET REALIZED INVESTMENT GAINS
Net realized investment gains totaled $25.9 million and $30.1 million for
the three and six months ended June 30, 1996 respectively, as compared to
$15.7 million and $21.9 million during the comparable periods in the prior
year. In April 1996, in connection with a previously approved commitment,
Textron Inc. ("Textron") purchased 424,125 shares of its common stock from
the Company. This purchase, which represented the third of four such annual
installments, was made at $78.623 per share, resulting in realized investment
gains to the Company of $23.3 million, before income taxes, during the second
quarter of 1996. $15.5 million of these gains were allocated to the
Individual Disability Insurance segment and $7.8 million were allocated to
the Financial Products segment.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
INCOME TAXES
Income taxes decreased for the three and six months ended June 30, 1996, as
compared with the same periods last year due to the decline in pretax income.
INVESTMENTS
The Company's investment portfolio is segmented by product line, with
specific investment policies tailored to each product line and developed
within the overall corporate investment policy. Within each investment
segment, the Company attempts to select investments with expected cash flows
that will match as closely as possible the expected cash flow requirements of
the related insurance or annuity products. The Company's investment strategy
is to maintain a predominantly investment grade, fixed maturity portfolio of
diversified investments, to provide liquidity for insurance obligations and
to maximize total return through prudent investment management.
The composition of the Company's $5,228.1 million of
investments was as follows:
INVESTMENT COMPOSITION
JUNE 30, 1996
(DOLLARS IN THOUSANDS)
Available for sale:
Fixed maturities $4,670,235 89.3%
Equity securities 79,968 1.5
Short-term investments 35,486 0.7
Mortgage loans 332,900 6.4
Real estate 4,519 0.1
Policy loans 73,689 1.4
Other invested assets 31,339 0.6
---------- -----
$5,228,136 100.0%
---------- -----
---------- -----
AVAILABLE FOR SALE. The fair value of fixed maturities available for sale
was $4,670.2 million at June 30, 1996, or $31.0 million above the aggregate
amortized cost of these securities. This compares to securities with a fair
value of $4,619.8 million at December 31, 1995, which were $401.4 million
above their aggregate amortized cost. At June 30, 1996, $96.2 million of
fixed maturities available for sale were below investment grade. These
securities represented 1.8% of the Company's total investments. This
compares to $114.2 million of securities at December 31, 1995, or 2.2% of the
Company's total investments.
The fair value of equity securities was $80.0 million and $90.0 million at
June 30, 1996 and December 31, 1995, respectively. Fair values of those
securities exceeded cost by $31.2 million and $41.8 million at June 30, 1996
and December 31, 1995, respectively.
The Company's largest single equity investment, 424,125 shares and 848,250
shares of the common stock of Textron at June 30, 1996 and December 31, 1995,
respectively, represented $24.1 million and $37.4 million of the excess over
cost at June 30, 1996 and December 31, 1995, respectively. The Company has
an agreement with Textron whereby these shares are redeemable at any time, at
the Company's option, at the quoted market price of Textron's registered
common stock at the redemption date. The Company and Textron entered into a
stock purchase agreement pursuant to which Textron is purchasing all of the
shares of Textron common stock owned by the Company in four annual
installments of 424,125 shares each, beginning on April 10, 1994, at a share
price to be equal to the average closing price of Textron's stock over the
quarter preceding each such purchase. The third of these purchases occurred
as scheduled in April 1996 at $78.623 per share, resulting in realized
investment gains to the Company of $23.3 million, before income taxes.
Textron intends to repurchase the Company's remaining 424,125 shares of
Textron common stock prior to the closing date of the merger agreement (see
Note 3 to the financial statements included in Item 1 of this Quarterly
Report on Form 10-Q) at a price equal to the average closing price for
Textron common stock over the 90-day period immediately preceding the date of
such repurchase (net of taxes), or such other period not less than thirty
days.
10
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONT.)
MORTGAGE LOANS AND REAL ESTATE. The book value of the Company's mortgage
loans was $332.9 million and $309.0 million, respectively, at June 30, 1996
and December 31, 1995. The book value of the Company's real estate was $4.5
million and $9.3 million, respectively, at June 30, 1996 and December 31,
1995. In light of the size of the Company's mortgage and direct real estate
portfolios, adequate diversification and low level of historical losses, the
Company believes its allowance for other than temporary declines in value of
mortgages and real estate of $5.9 million at June 30, 1996, makes adequate
provision for potential losses.
LIQUIDITY AND CAPITAL RESOURCES
HOLDING COMPANY STRUCTURE. The Paul Revere Corporation is a holding company
the principal asset of which is the common stock of The Paul Revere Life
Insurance Company, which in turn owns all the common stock of The Paul Revere
Protective Life Insurance Company and The Paul Revere Variable Annuity
Insurance Company.
As a holding company, the Company's principal source of cash needed to meet
its obligations and to pay dividends is the receipt of dividends from The
Paul Revere Life Insurance Company (a Massachusetts-domiciled insurance
company). The maximum annual dividend which The Paul Revere Life Insurance
Company is permitted to pay without the prior approval of the Massachusetts
Insurance Commissioner is the greater of (a) 10% of The Paul Revere Life
Insurance Company's surplus to policyholders as of the thirty-first day of
December next preceding or (b) The Paul Revere Life Insurance Company's
statutory net gain from operations for the twelve-month period ending the
thirty-first day of December next preceding. Legislation enacted in
Massachusetts during 1993 further provides that any dividend not paid out of
earned surplus be made only with prior approval of the Massachusetts
Insurance Commissioner. Up to $37.6 million is available for the payment of
dividends by The Paul Revere Life Insurance Company without regulatory
approval in 1996.
The Company paid cash dividends of $0.06 per share on March 29, 1996 and
June 28, 1996 to shareholders of record on March 8, 1996 and June 14, 1996,
respectively.
OTHER SOURCES AND USES OF FUNDS. The Company's principal uses of funds are
to pay benefits to policyholders (including benefits paid and surrenders),
returns of account balances on interest-sensitive products (including
withdrawals of policyholder account balances on interest-sensitive life and
financial products), operating expenses, debt obligations and dividends to
its shareholders. In September 1994, the Company restructured its existing
$75 million bankers acceptance credit facility into a $100 million multi-bank
revolving credit facility, consisting of a bankers acceptance portion as well
as revolving loans at either a prime or Eurodollar rate of interest. In
September 1995, the limit of the facility was extended through September 30,
1998, with a single one-year option remaining. The facility limit is
permanently reducible at the Company's option. The proceeds of borrowings
under the agreement have generally been contributed to the Company's
operating subsidiaries as statutory capital to support the subsidiaries'
business growth.
Under the terms of the bankers acceptance portion, the operating
subsidiaries may invest in bankers acceptances of the bank group and may, at
their sole discretion, hold such investments to maturity. As long as the
Company and its subsidiaries elect to make and hold such investments, the
Company is permitted to offset obligations to and from the bank group, and
there is no net increase in the Company's consolidated liquidity or its
consolidated debt. While individual borrowings by the Company have interim
maturities of $70.4 million in 1996, the credit facility guarantees the
Company the right to renew these borrowings up to the limit of the facility.
In addition, under the terms of the revolving loan portion of this agreement,
at June 30, 1996, the Company had outstanding borrowings of $17.2 million,
including accrued interest. These borrowings are unsecured and bear interest
at the Eurodollar rate.
In addition to its multi-bank revolving credit facility, in November 1995,
the Company established a $25.0 million revolving credit agreement with a
single bank. Borrowings of $1.5 million including accrued interest were
outstanding at June 30, 1996. These borrowings are unsecured and bear
interest at the Eurodollar rate.
The Company maintains additional lines of credit totaling $35.0 million for
short-term funding of investment purchases and other short-term cash
requirements against which no borrowings were outstanding at June 30, 1996.
11
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONT.)
During the quarter ended June 30, 1996, the Company sold U. S. Treasury
obligations under repurchase agreements involving broker and dealer
counterparties. The repurchase agreements are accounted for as financing
transactions and the related obligations, together with accrued interest,
have been included as securities sold under agreements to repurchase in the
liability section in the accompanying consolidated balance sheet.
Principal sources of funds at the insurance companies are premiums and
policy charges and deposits on interest-sensitive insurance policies and
annuities, net investment income and proceeds from investments sold, called
or matured. Given The Paul Revere Life Insurance Company's historically
adequate cash flow and current financial results, management of the Company
believes that the cash flow from operating activities will continue to
provide sufficient liquidity for the operations of both the insurance
companies and the holding company, so that the Company will be able to meet
its obligations and pay dividends to its shareholders. The ability of the
Company to pay its operating expenses, meet debt service obligations and pay
dividends in future years will depend upon the availability to the Company of
sufficient funds from its subsidiary insurance companies.
RATINGS
In March 1996, the A. M. Best Company rating service reaffirmed the A
(Excellent) rating for the Company's primary insurance subsidiary, The Paul
Revere Life Insurance Company and other insurance subsidiaries, The Paul
Revere Variable Annuity Insurance Company and The Paul Revere Protective Life
Insurance Company.
In December 1995, the Standard and Poor's ("S & P") rating service
reaffirmed the AA- (Excellent) claims-paying ability rating to the Company's
primary insurance subsidiary, The Paul Revere Life Insurance Company and
other insurance subsidiaries, The Paul Revere Variable Annuity Insurance
Company and The Paul Revere Protective Life Insurance Company. In April
1996, S & P placed these claims-paying ability ratings on CreditWatch with
developing implications.
Also in December 1995, Moody's Investors Service Inc. ("Moody's") assigned
the A2 insurance financial strength rating to The Paul Revere Life Insurance
Company, The Paul Revere Variable Annuity Insurance Company and The Paul
Revere Protective Life Insurance Company. In April 1996, Moody's put these
financial strength ratings under review for possible upgrade.
12
<PAGE>
THE PAUL REVERE CORPORATION
JUNE 30, 1996
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
27 Financial Data Schedule (filed electronically only)
(B) REPORTS ON FORM 8-K
During the quarter ended June 30, 1996, the Company filed
the following report on Form 8-K:
Current Report on Form 8-K filed with the Securities and
Exchange Commission on April 29, 1996, reporting, under Item 5
(Other Events) and Item 7 (Exhibits), information regarding the
proposed sale to Provident Companies, Inc. of all the outstanding
shares of The Paul Revere Corporation.
13
<PAGE>
THE PAUL REVERE CORPORATION
JUNE 30, 1996
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.
The Paul Revere Corporation
---------------------------
(Registrant)
Date August 13, 1996 /s/ James A. Hilbert
--------------- ----------------------------
James A. Hilbert
Senior Vice President,
Chief Financial Officer and Treasurer
(principal financial and accounting
officer)
14
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