<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 Commission File Number 1-12266
September 30, 1996
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 October 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 Operations -
Three and Nine Months Ended September 30, 1996 and 1995 3
Consolidated Balance Sheets -
September 30, 1996 and December 31, 1995 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1996 and 1995 5
Notes to Consolidated Financial Statements 6 - 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8 - 18
PART II. OTHER INFORMATION
Item 6. EXHIBITS AND REPORTS ON FORM 8-K 19
SIGNATURES 20
-2-
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE PAUL REVERE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(UNAUDITED)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 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 $ 285,912 $ 269,108 $ 846,954 $ 785,292
Net investment income 102,820 91,511 301,359 288,983
Net realized investment gains 9,699 7,150 39,848 29,021
---------- ---------- ---------- -----------
Total revenues 398,431 367,769 1,188,161 1,103,296
---------- ---------- ---------- -----------
Benefits, claims and expenses:
Benefits to policyholders 649,049 244,479 1,179,501 735,265
Commissions and other expenses 79,036 71,598 234,636 213,189
Amortization of deferred costs:
Deferred policy acquisition costs 14,039 13,150 42,820 40,272
Value assigned purchased insurance in force 1,752 1,386 4,091 4,660
Goodwill amortization 2,070 2,070 6,210 6,210
---------- ---------- ---------- -----------
Total benefits, claims and expenses 745,946 332,683 1,467,258 999,596
---------- ---------- ---------- -----------
Income (loss) before income tax expense (benefit) (347,515) 35,086 (279,097) 103,700
Income tax expense (benefit) (123,324) 13,265 (97,421) 39,238
---------- ---------- ---------- -----------
Net income (loss) ($224,191) $ 21,821 ($181,676) $ 64,462
========== ========== ========== ===========
Net income (loss) per common share $ (4.98) $ 0.48 $ (4.04) $ 1.43
========== ========== ========== ===========
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 $ 0.18 $ 0.18
========== ========== ========== ===========
</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)
SEPTEMBER 30, DECEMBER 31,
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Investments:
Available for sale:
Fixed maturities - at fair value (cost: $4,784,075
in 1996 and $4,218,437 in 1995) $ 4,834,596 $ 4,619,841
Equity securities - at market (cost: $35,879 in 1996
and $28,370 in 1995) 42,651 32,744
Investment in Textron common stock - at market
(cost: $9,795 in 1996 and $19,811 in 1995) 36,051 57,257
Short-term investments 69,132 71,326
Mortgage loans 311,742 309,046
Real estate 4,001 9,291
Policy loans 73,505 73,933
Other invested assets 31,815 31,604
------------ ------------
Total investments 5,403,493 5,205,042
Cash - 14,970
Accrued investment income 84,227 80,993
Premiums due 21,851 21,396
Deferred policy acquisition costs 939,860 775,651
Value assigned purchased insurance in force 61,669 66,894
Reinsurance recoverable 484,069 494,313
Goodwill, net of accumulated amortization of $97,202 in
1996 and $90,992 in 1995 109,598 115,808
Property and equipment, net of accumulated depreciation of
$70,747 in 1996 and $66,612 in 1995 32,839 35,386
Other assets 84,884 190,031
Assets held in separate account 22,695 43,201
------------ ------------
Total assets $ 7,245,185 $ 7,043,685
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Future policy benefits $ 1,631,641 $ 1,371,297
Unpaid claims and claim expenses 2,286,785 1,852,298
Other policyholder funds 1,931,418 1,876,324
Securities sold under agreements to repurchase 53,619 -
Notes payable 21,729 38,020
Income taxes 135,996 366,094
Other liabilities 124,071 103,072
Liabilities related to separate account 22,695 43,201
------------ ------------
Total liabilities 6,207,954 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 30,871 197,090
Foreign currency translation adjustment (11,840) (11,687)
Retained earnings 413,066 602,842
------------ ------------
Total shareholders' equity 1,037,231 1,393,379
------------ ------------
Total liabilities and shareholders' equity $ 7,245,185 $ 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>
<CAPTION>
(UNAUDITED)
NINE MONTHS ENDED SEPTEMBER 30,
1996 1995
------------ ------------
(IN THOUSANDS)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($181,676) $ 64,462
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Increase in future policy benefits, unpaid claims and
other policyholder funds 781,498 409,222
Amortization and depreciation 13,358 18,056
Additions to deferred policy acquisition costs (110,538) (132,812)
(Decrease) increase in income tax liability (137,773) 37,427
Increase (decrease) in other assets/other liabilities 41,107 (66,269)
Net realized investment gains (39,848) (29,021)
(Increase) decrease in accrued investment income (3,245) 10,039
Other, net (166) 318
------------ ------------
Net cash provided by operating activities 362,717 311,422
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Fixed maturities held to maturity:
Proceeds from sales - 8,768
Proceeds from maturities and calls - 30,009
Purchases - (146,227)
Fixed maturities, marketable equity securities and short-term
investments
available for sale:
Proceeds from sales 547,924 587,527
Proceeds from maturities and calls 217,190 94,414
Purchases (1,172,218) (839,899)
Decrease (increase) in other, net 3,591 (83,998)
Decrease (increase) in policy loans, net 428 (3,184)
Capital expenditures (2,384) (2,304)
------------ ------------
Net cash used in investing activities (405,469) (354,894)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Increase in cash overdraft 25,362 22,433
Dividends to shareholders (8,100) (8,100)
Decrease in notes payable (16,500) (10,080)
Securities sold under agreements to repurchase 53,619 -
Receipts from interest-sensitive products 147,011 230,738
Return of account balances on interest-sensitive products (167,921) (193,455)
------------ ------------
Net cash provided by financing activities 33,471 41,536
Effect of foreign exchange rate changes on cash (5,689) 1,936
------------ ------------
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)
SEPTEMBER 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 ("GAAP") 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 September 30, 1996 and December 31, 1995
and its consolidated statements of operations for each of the respective
three and nine month periods ended September 30, 1996 and September 30, 1995
and consolidated cash flows for each of the respective nine month periods
ended September 30, 1996 and September 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 nine month periods ended
September 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 quarters ended March 31, 1996
and June 30, 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 September 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. On
November 6, 1996, the Company and Provident announced that they had amended
and restated the merger agreement to, among other things, extend the date as
of which the parties would be entitled to terminate the agreement and to
adjust the exchange ratio to be used in determining the number of shares of
Provident common stock that Textron Inc. ("Textron"), which owns
approximately 83% of the Company's outstanding common shares, will receive in
the transaction. 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 other than Textron 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 and an exchange
ratio applicable to shareholders of the Company other than Textron; or c) a
number of shares of Provident common stock equal to the product of 26 and the
exchange ratio applicable to shareholders of the Company other than Textron.
The exchange ratio applicable to shareholders of the Company other than
Textron 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.
The exchange ratio applicable to Textron will be similarly determined,
except that it will be subject to a lower minimum share amount. Under the
merger agreement, Textron, which has agreed to support the merger, will
receive for each share of Company common stock owned by it a combination of
$20.00 and a number of shares of Provident common stock equal to the product
of 6 and the exchange ratio applicable to Textron. The transaction remains
subject to the regulatory review process relating to the joint
proxy/prospectus being prepared for the required vote of the shareholders of
Provident and the Company, and remains subject to the approval of the
Commonwealth of Massachusetts Division of Insurance ("the Division"). The
transaction is presently targeted to close early in the first quarter of
1997.
-6-
<PAGE>
ITEM 1. FINANCIAL STATEMENTS (CONTINUED)
THE PAUL REVERE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 1996
NOTE 4. RESERVE STRENGTHENING
As a result of a previously announced comprehensive reserve study
completed in October 1996, the Company has strengthened policy and claim
reserves in the individual disability insurance segment by $380.0 million,
before income taxes, during the quarter ended September 30, 1996. The
reserve strengthening reflects a change in the Company's long-term view of
morbidity trends from an assumption of gradual improvement to one of
generally level morbidity trends.
NOTE 5. 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.
-7-
<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
The net loss for the quarter ended September 30, 1996 was $224.2 million
or $4.98 per share as compared to net income of $21.8 million or $0.48 per
share for the third quarter of 1995. The loss was attributable to reserve
strengthening of $244.3 million, after income taxes, recorded in the third
quarter of 1996. Revenues for the third quarter of 1996 were $398.4 million
as compared to $367.8 million for the same period in 1995, an increase of
8.3%. For the nine months ended September 30, 1996, the net loss was $181.7
million or $4.04 per share as compared to net income of $64.5 million or
$1.43 per share for the nine months ended September 30, 1995. Revenues for
the nine months ended September 30, 1996 were $1,188.2 million as compared to
$1,103.3 million for the nine months ended September 30, 1995, an increase of
7.7%.
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT)
Income (loss) before income tax expense (benefit) for the third quarter
decreased $382.6 million to a loss of $347.5 million from income of $35.1
million for the third quarter of 1995. For the nine months ended September
30, 1996, income (loss) before income taxes decreased $382.8 million to a
loss of $279.1 million from income of $103.7 million in the same period in
1995. The loss was attributable to reserve strengthening of $380.0 million,
before income taxes, recorded in the third quarter of 1996. Income (loss)
before income tax expense (benefit) for the business segments of the Company
for the three and nine months ended September 30, 1996 and 1995,
respectively, was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1996 1995 CHANGE 1996 1995 CHANGE
--------- --------- ----- --------- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Individual Disability Insurance ($365,745) $ 14,300 NMF ($343,294) $ 48,458 NMF
Group Insurance 5,941 6,789 (12.5%) 16,461 15,831 4.0%
Individual Life Insurance 3,353 4,326 (22.5) 13,299 10,521 26.4
Financial Products 8,935 9,647 (7.4) 34,222 28,641 19.5
Corporate 1 24 (95.8) 215 249 (13.7)
--------- --------- ----- --------- -------- -----
($347,515) $ 35,086 NMF ($279,097) $103,700 NMF
========= ========= ===== ========= ======== =====
</TABLE>
NMF - Not meaningful
PREMIUMS, POLICY AND CONTRACT CHARGES AND FEES
Premiums, policy and contract charges and fees for the third quarter
increased $16.8 million, or 6.2%, to $285.9 million from $269.1 million for
the third quarter of 1995. For the nine months ended September 30, 1996,
premiums, policy and contract charges and fees increased $61.7 million, or
7.9%, to $847.0 million from $785.3 million in the same period in 1995.
Premiums, policy and contract charges and fees for the business segments of
the Company for the three and nine months ended September 30, 1996 and 1995,
respectively, were as follows:
-8-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30 NINE MONTHS ENDED SEPTEMBER 30
1996 1995 CHANGE 1996 1995 CHANGE
--------- --------- ----- --------- -------- -----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Individual Disability Insurance $199,112 $187,953 5.9% $589,395 $549,678 7.2%
Group Insurance 76,400 68,526 11.5 224,578 200,137 12.2
Individual Life Insurance 8,572 9,403 (8.8) 27,124 27,905 (2.8)
Financial Products 1,828 3,226 (43.3) 5,857 7,572 (22.6)
Corporate - - - - - -
--------- --------- ----- --------- -------- -----
$285,912 $269,108 6.2% $846,954 $785,292 7.9%
========= ========= ===== ========= ======== =====
</TABLE>
INDIVIDUAL DISABILITY INSURANCE SEGMENT
The Company's individual disability insurance segment reported a loss
before income taxes of $343.3 million for the nine months ended September 30,
1996 as compared to income before income taxes of $48.5 million during the
comparable period of the prior year. This loss was attributable to reserve
strengthening of $380.0 million, before income taxes, recorded in the third
quarter of 1996. The reserve strengthening recorded was prompted by the
results of a previously announced comprehensive reserve study completed in
October 1996.
INDIVIDUAL DISABILITY INSURANCE RESERVES - GENERALLY ACCEPTED ACCOUNTING
PRINCIPLES. Under GAAP, a liability for future policy benefits relating to
individual disability insurance policies is established when premium revenue
is recognized. The liability, which represents the present value of future
benefits to be paid and related expenses less the present value of future net
premiums, is estimated using actuarial methods that include assumptions, such
as expected investment yields, morbidity (the incidence of claims and the
rate of recovery, including the effects thereon of inflation, and other
societal and economic factors), lapse rates, expenses and margins for adverse
deviation and future profits, applicable at the time the insurance contracts
are made. Individual disability insurance policies are complex long-term
contracts with typical effective terms of 30 years or more, depending upon
the age of the insured at the time of issue. As such, the effort required to
establish and support the original set of reserve assumptions (i.e., those
established when the policy is issued) is extensive.
GAAP requires that original assumptions continue to be used in subsequent
accounting periods to determine changes in the liability for future policy
benefits unless a premium deficiency exists. However, actual experience with
respect to investment yields, morbidity, lapse rates or expenses may indicate
that the recorded contract liabilities are not sufficient. In such
circumstances, a reserve study is conducted to determine the extent, if any,
of the premium deficiency and whether the original assumptions should be
changed, or "unlocked."
In a reserve study, current best estimates as to future experience with
regard to investment yields, morbidity, lapse rates and expenses are used to
determine if reserves currently held plus the present value of future cash
inflows are projected to be sufficient to meet the present value of future
cash outflows and the amortization of deferred policy acquisition costs. The
effort required to support a change in reserve assumptions is at least as
extensive and comprehensive as the process to establish the original
assumptions.
-9-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
If a premium deficiency exists, GAAP requires that it be recorded as a
reduction in unamortized deferred acquisition costs and value assigned
purchased insurance business in force or an increase in the liability for
future policy benefits. Future changes in the liability are then based on
the revised assumptions. A premium deficiency reserve represents a provision
for the present value of future losses, and therefore, no premium deficiency
should be recorded currently if it would result in creating future income.
Claim reserves are established for future payments not yet due on claims
already incurred. These reserves are based on the estimated ultimate cost of
settling the claims and the rate of interest used to discount future claim
payments. The ultimate cost of the adjudication process is primarily
affected by the rate of recovery, which depends on inflation, other societal
and economic factors and the effectiveness of the claim adjudication process.
The assumptions are based upon past experience adjusted for current trends,
and any other factors that would modify past experience. Changes in
estimates of claim costs resulting from the continuous review process and
differences between estimates and payments for claims are recognized in
income during the period in which the estimates are changed or payments are
made.
THE COMPANY'S RESERVE PRACTICES. The Company has traditionally
maintained two separate lines of business within the individual disability
insurance segment, the core individual disability insurance line of business
(which generated 1995 premiums of $711.0 million) and the excess-risk
reinsurance line of business (which generated 1995 premiums of $28.0
million). The core line of business includes products sold through a
brokerage system, the Company's own career agency system and its National
Accounts program.
On an ongoing basis, actual and originally expected experience are
compared and an assessment is made regarding the continued appropriateness of
the underlying policy and claim reserve assumptions. As a result of this
ongoing analysis, the Company commenced a comprehensive reserve study in the
fourth quarter of 1995. The study, which was completed in late January 1996,
resulted in a $59 million reserve strengthening in the Company's excess-risk
line of business which was reflected in the Company's financial statements
for the period ended December 31, 1995.
Consistent with its practice of ongoing analysis, the Company considered
the deteriorating morbidity experience in 1996, as compared to the
assumptions used in the 1995 study. Based on this ongoing analysis, the
Company determined in June 1996 to update the comprehensive reserve study
using detailed experience data through June 30, 1996, and considering
experience and trends during the third quarter of 1996 and, if necessary, the
fourth quarter of 1996.
The core individual disability insurance line's results have been
severely affected by a higher incidence of new claims and lower claim
recovery rates on policies issued from 1985 through 1989. In addition,
business in the core line issued to physicians has performed below
expectations. The quarterly benefit ratios (benefits divided by premiums
earned) for the core disability insurance line of business were as follows
for 1993, 1994 and 1995:
DISABILITY INSURANCE LINE BENEFIT RATIOS 1993-1995
1993 1994 1995
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3* Q4
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
70.9 74.3 71.9 70.9 70.9 77.5 84.1 88.6 88.0 85.3 78.9 78.4
* During the third quarter of 1995, the Company entered into a
reinsurance agreement providing for the coinsurance of certain individual
disability claims. Under the agreement, effective July 1, 1995, 80% of the
Company's liability on United States claims open as of June 30, 1995 with
dates of disability prior to July 1, 1993 was reinsured with an unaffiliated
reinsurer on a quota share basis. This transaction results in reducing both
benefit expense and investment income for the policies and related assets
affected by the reinsurance agreement beginning in the third quarter of 1995.
The effect for the third quarter of 1995 was to reduce the benefit ratio by
4 points.
-10-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
Excess-risk reinsurance includes business assumed from other insurers
relating to individual, non-cancellable disability insurance products issued
by them, including coinsurance, extended elimination period and yearly
renewable term. The underlying products in this line of business are
designed, distributed and administered by other companies. The quarterly
benefit ratios (benefits divided by premiums earned) for the excess-risk
reinsurance line of business were as follows for 1993, 1994 and 1995:
EXCESS RISK REINSURANCE LINE BENEFIT RATIOS 1993-1995
1993 1994 1995
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3* Q4
----- ---- ---- ----- ----- ----- ----- ----- ----- ----- ----- -----
107.8 48.4 88.0 126.6 201.2 172.1 112.3 178.3 124.7 137.3 187.1 169.4*
* Exclusive of $59 million of reserve strengthening.
The Company conducted a comprehensive reserve study as of December 31,
1995 of both its excess-risk reinsurance and its core disability lines of
business. As a result of the 1995 reserve study, the Company concluded that a
$59 million reserve strengthening adjustment was warranted in the excess-risk
reinsurance line of business and that no reserve adjustments were warranted
in the core individual disability insurance line of business. At December
31, 1995 these conclusions were based upon the following factors:
- The Company's assessment that the morbidity experience for the
excess-risk line of business would continue to perform worse than
originally expected at the time the reserves were established.
- The Company's belief that the improving morbidity trend on a
quarter-by-quarter basis of the core individual disability line of
business experienced during 1995 would continue into the future,
but at a more modest level. This was predicated on (i) extensive
measures undertaken by the Company, including more restrictive
product provisions and underwriting practices implemented during
the period 1990-1995, (ii) improvements in claims management
processes and staffing and (iii) the Company's belief that changes
in economic factors affecting physician experience would cause that
experience to improve.
- The Company's view that reinvestment yields would generally be more
reflective of current portfolio yields.
- The Company's expectation that it would continue to realize economies
of scale and productivity enhancements.
During the first quarter of 1996, in connection with the potential sale
of the Company, Textron retained the actuarial consulting firm of Milliman &
Robertson, Inc. ("M&R") to serve as Textron's actuarial advisor. In this
capacity, M&R was requested to prepare an appraisal of the Company's
business, evaluate the Company's reserving practices, identify potential
issues which might be raised by prospective buyers and generally assist
Textron in the course of negotiating the transaction. M&R summarized its
work for Textron in a report dated April 23, 1996, which included an estimate
of a reserve deficiency on a GAAP basis with respect to the Company's
disability business of $110 million as of December 31, 1995. (This figure
excludes the present value of projected overhead costs of $54 million which,
in accordance with GAAP, are excluded in determining reserve deficiencies.
Overhead costs are general corporate costs not attributable to policy
acquisition, maintenance or claims adjudication.) The Company was aware of
M&R's work and reconciled M&R's results to the Company's 1995 comprehensive
reserve study. The principal differences between the Company's 1995 study,
which produced an estimated reserve sufficiency of $252 million, and the M&R
analysis resulted from differing views regarding future trends in morbidity
(a difference of $334 million) and interest rates (a difference of $50
million), partially offset by more favorable expense levels (a difference of
$22 million). These differences resulted primarily from differing judgments
regarding the following factors:
-11-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
- M&R generally assumed that morbidity in the foreseeable future would
be level with that experienced during 1995. The Company assumed that
the gradual quarter-by-quarter improvement experienced in 1995 would
continue into the foreseeable future, but at a more modest level.
Factors that the Company utilized in developing its assumptions
included (i) that experience for business issued in 1985-1989 would
begin to improve and (ii) that the extensive measures undertaken by
the Company, including more restrictive product provisions and
underwriting practices implemented during the period 1990-1995, and
improvements in claims management processes and staffing, had a
positive effect contributing to the quarter-by-quarter trend in 1995
and that this would continue into the foreseeable future.
Additionally, the Company believed that physician experience would
gradually improve as a result of an improvement in physicians' outlook
with respect to their professional prospects, which previously had
been adversely affected by the federal healthcare reform initiatives
and the move toward managed care and industry consolidation.
- While both M&R and the Company assumed an investment strategy
consistent with the Company's historical investment policy, M&R
assumed a net new investment rate of a level 6.9% while the Company
assumed a new investment rate which increased from 7% to 8% over ten
years. M&R assumed a beginning portfolio yield of 7.85% and the
Company assumed a beginning portfolio yield of 8.25%.
- M&R assumed slightly lower expenses as compared to the Company.
Based on its analysis of the results of M&R's work, the Company concluded
that its views regarding the future trends in morbidity, expense levels and
interest rates continued to be reasonable and that the results of its 1995
reserve study continued to be appropriate. Although M&R's judgments,
primarily as to future morbidity, were different from those of the Company,
the M&R study was based on the same historical morbidity experience and
utilized the same projection methodology as employed by the Company. As a
result, the Company determined that it was not appropriate to initiate a new
reserve study and unlock the original reserve assumptions. However, the
Company determined that it would continue to closely monitor morbidity and
interest experience, as well as other factors.
In connection with the pending merger of the Company with a wholly-owned
subsidiary of Provident ("the merger"), Provident retained the actuarial
consulting firm of Tillinghast - Towers Perrin ("Tillinghast") to assist
Provident's management in its due diligence investigation of the Company and
to develop information to assist Provident in refining its bid and enhancing
its negotiating position. On April 28, 1996, Tillinghast presented its
conclusions to the Provident Board of Directors, based upon its review of
information provided by the Company to Provident during due diligence as well
as Provident's independently derived assumptions about future experience,
which conclusions included Tillinghast's estimate that the Company's
statutory reserves should be increased by approximately $161 million.
Provident has informed the Company that Tillinghast's conclusions concerning
statutory reserves assumed that such conclusions would be used by Provident
as a basis for developing GAAP benefit reserves in Provident's GAAP PRO FORMA
financials to be included in the Joint Proxy Statement/Prospectus of the
Company and Provident to be delivered to the companies' respective
shareholders in connection with the merger. See "Liquidity and Capital
Resources section". Tillinghast noted for the Provident Board of Directors
that it relied upon financial information as of December 31, 1995 furnished
by the Company without independent verification, that the work was developed
using a limited amount of data and that a more complete analysis could change
its conclusions and that its estimate was not intended to be a GAAP valuation
of the Company's reserves. The Company subsequently became aware of
Tillinghast's conclusions, but was not provided sufficient information to
understand the assumptions or methodologies employed by Tillinghast in
arriving at its conclusions, which would be necessary for the Company to make
an informed evaluation of the reasonableness of Tillinghast's conclusions.
For these reasons, the Company could not utilize Tillinghast's conclusions
regarding the Company's statutory reserves in determining the reasonableness
of the reserves recorded for GAAP reporting purposes.
During the first two quarters of 1996, the Company experienced a
deterioration in core individual disability insurance benefit ratios (88.2%
for the six months ended June 30, 1996, and 82.7% and 93.9% for the first and
second quarters, respectively), in contrast with quarter-by-quarter
improvements in benefit ratios experienced in 1995 and with the assumed
improvement in benefit ratios anticipated in the 1995 reserve study.
-12-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
The Company closely monitored this morbidity experience and carefully
considered its potential impact on reserve adequacy in connection with the
preparation of both the first and second quarter financial statements. The
Company considered, among other factors: (i) the long-term nature of this
product; (ii) the results of the 1995 reserve study completed in January
1996; (iii) the volatility of recent quarterly results and the difficulty of
predicting future morbidity trends therefrom; (iv) the impact of the pending
merger on the effectiveness of the claims operation and implementation of the
extensive measures undertaken by the Company, including more restrictive
product provisions and underwriting practices implemented during the period
1990-1995, and improvements in claims management processes and staffing; and
(v) the impact of the addition of 1996 business to the block of business
being analyzed. After considering the foregoing and the recent experience
with respect to benefit ratios, the Company did not believe that the first
six months' results were conclusive enough to warrant an adjustment to the
long-term trends encompassed in the Company's 1995 comprehensive reserve
study completed in January 1996.
Although the Company concluded that the reserves at June 30, 1996 were
fairly stated, the deterioration in morbidity experience in 1996, due
primarily to lower than expected claim recovery rates, led to a determination
by the Company in June 1996 to initiate a comprehensive reserve study to
consider the effect of experience through September 30, 1996 on recorded
reserves. As a result of the interrelationship of the morbidity assumptions
underlying both the claim and policy reserves, the comprehensive reserve
study would consider both policy and claim reserves.
The Company completed the comprehensive reserve study in October 1996.
The continued adverse morbidity experience of the core individual disability
insurance line of business through the end of the third quarter of 1996 led
the Company to revise its outlook for morbidity trends in the future from
those which were used in the 1995 study, particularly with respect to
business issued to physicians and business underwritten from 1985 through
1989.
As a result of the 1996 comprehensive reserve study, the Company has
strengthened policy and claim reserves by $380 million. The differences
between the 1995 reserve study, which produced a reserve sufficiency of $252
million, and the 1996 reserve study, which produced a reserve deficiency of
$380 million, include $577 million derived from a change in the morbidity
assumptions, $48 million derived from a change in the interest rate
assumptions and an aggregate of $7 million from changes in other assumptions.
The change in morbidity assumptions, including claim recovery rates,
resulted in revised estimates of future benefit ratios for the core
individual disability insurance line of business. The 1995 study assumptions
resulted in a future benefit ratio in the first year (i.e., 1996) of 78.9%
and the 1996 study assumptions resulted in a future benefit ratio in the
first year (i.e., 1997) of 84.9%. The 1995 study also differed from the 1996
study in that it resulted in an approximate 2.4% compound annual rate of
improvement in benefit ratios for the first nine years after the first year,
after adjustment for interest (a continuation of the improving trend in
benefit ratios actually experienced in 1995), while the 1996 study resulted
in relatively flat benefit ratios for the first nine years after the first
year, after adjustment for interest. Both the 1995 and 1996 reserve studies
assumed gradual, moderate improvement after ten years. The 1995 study also
assumed claim recovery rates at levels experienced on the average for the
past four years which anticipated improved recovery rates relative to the
most recently observed experience. The 1996 study eliminated this
anticipated improvement, giving greater weight to experience in the past year.
Following is a summary of the most significant factors considered by the
Company in determining to change its morbidity assumptions:
- Through the end of the third quarter of 1996, despite the 1995-1996
claims management initiatives, there had been a general
deterioration in claim recovery rates.
- Through the end of the third quarter of 1996, physician experience and
experience for policies issued in 1985-1989 deteriorated rather
than improved as assumed in the 1995 comprehensive reserve study.
-13-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
This additional experience is reflected in the 1996 study, which assumes
generally level morbidity experience, in contrast to the 1995 study, which
assumed moderate improvement in morbidity. These revised assumptions as to
future trends are based upon the fact that uncertainties regarding changes in
the healthcare industry and physician prospects continue in the near-term,
and that the Company's claims management initiatives have not materially
decreased claim recovery rates.
The 1995 study assumed a beginning portfolio yield of 8.25% and a new
investment rate which increased from 7% to 8% over ten years, while the 1996
study assumed a beginning portfolio yield of 7.8% and a new investment rate
of a level 7.8%.
In August 1996, the Company engaged M&R to provide assistance in its
actuarial studies, including the analysis of the adequacy of the Company's
benefit and claim reserves with respect to its individual disability
business. M&R concluded in its actuarial report dated November 6, 1996, that
the net individual disability reserves of $2.2 billion reported by the
Company at September 30, 1996, which reflect a reserve strengthening
adjustment of $380 million, were adequate. M&R's actuarial report dated
November 6, 1996, which contains numerous explanations and limitations, must
be read in its entirety to be understood and relied upon. This report may be
obtained upon request from the Clerk of the Company.
While the Company believes that, after the reserve strengthening referred
to above, its policy and claim reserves are adequate, there can be no
assurance that the Company's reserves will be sufficient to fund future
liabilities in all circumstances. The establishment of insurance reserves
requires making assumptions relating to expected investment yields, morbidity
(the incidence of claims and the rate of recovery, including the effects
thereon of inflation, and other societal and economic factors), lapse rates,
expenses and margins for adverse deviation and future profits, applicable at
the time the insurance contracts are made. These estimates are made when the
policy is issued or when a claim is incurred or subsequent to recognition of
a premium deficiency, based on the facts and circumstances then known.
Because of the long-term nature of these products and the significance of the
assumptions selected, reserve estimates are highly sensitive to slight
changes in reserve assumptions. For example, if the Company assumed an
increase of five percentage points in projected benefit ratios each year into
the future, a decrease of 100 basis points in assumed new investment rate or
an increase of five percent in future expenses, then the required reserve
strengthening would be increased by $229 million, $50 million or $22 million,
respectively.
Although the Company believes the assumptions which form the basis of the
1996 reserve study are reasonable, there can be no assurance that actual
experience will conform to these assumptions. The Company believes it is
highly probable that actual experience will differ from that assumed. If
actual experience develops on a less favorable basis than that assumed,
reserve deficiencies will result and additional reserve strengthening may be
necessary. If actual experience develops on a more favorable basis than that
assumed, reserve sufficiencies will result.
GROUP INSURANCE SEGMENT
For the three months ended September 30, 1996, the Group Insurance
segment reported income before income taxes of $5.9 million, a 12.5% decrease
as compared to $6.8 million in the third quarter of 1995, primarily
attributable to an elevated benefit ratio in the segment's non-disability
line of business. The group disability line of business benefit ratio
improved to 76.0% during the quarter ended September 30, 1996 as compared to
78.1% during the comparable quarter of 1995. Sales within the group
disability line improved 26.8% to $13.2 million in the third quarter of 1996,
from $10.4 million in the third quarter of 1995.
For the nine months ended September 30, 1996, the segment reported income
before income taxes of $16.5 million, a 4.0% increase over the corresponding
period 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, and improved benefit ratios
and higher net realized investment gains. Premiums during the period
increased $24.4 million or 12.2% over the comparable period of the prior
year. The group disability benefit ratio was 77.0% for the nine months ended
September 30, 1996 as compared to 76.4% for the comparable period of the
prior year.
-14-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
INDIVIDUAL LIFE INSURANCE SEGMENT
The Individual Life Insurance segment income before income taxes for the
three months ended September 30, 1996 was lower than in the same period of
1995, while higher in the nine month period to period comparison. The
decrease for the quarter is primarily attributable to lower net realized
investment gains, partially offset by reduced benefits to policyholders. Net
realized investment gains decreased 84.7% during the quarter, to $0.2 million
as compared to $1.6 million in the same period in 1995. Premiums and policy
charges totaled $8.6 million for the quarter ended September 30, 1996, as
compared to $9.4 million in the comparable period of the prior year, a
decrease of 8.8%.
For the nine month period ended September 30, 1996, income before income
taxes increased $2.8 million to $13.3 million as compared to $10.5 million
during the comparable period of the prior year. This increase is primarily
attributable to decreased benefits to policyholders partially offset by a
combination of decreased premiums and policy charges and net realized
investment gains. Premiums and policy charges decreased 2.8% to $27.1
million, as compared to $27.9 million in the comparable period of the prior
year.
FINANCIAL PRODUCTS SEGMENT
The increases in the Financial Products segment's income before income
taxes (excluding the $2.0 million impact in 1995, of exercising a liquidation
option of the insurance contract underlying the home office employees pension
plan) for the three and nine months ended September 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 third quarter of 1996 was approximately 198 basis points which
compares to an annual spread of 184 basis points for 1995 and 190 basis
points for the third quarter of 1995. The gross margin for the nine months
ended September 30, 1996 was 206 basis points as compared to 180 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
$1.6 million during the third quarter of 1996 and $0.6 million in the same
period of 1995. For the nine months ended September 30, 1996, net realized
investment gains, before income taxes, totaled $11.0 million, compared to
$7.6 million during the same period in the prior year. Policyholder funds on
deposit increased approximately $55.1 million since December 31, 1995, to
$1.9 billion at September 30, 1996.
CORPORATE SEGMENT
The Corporate segment is utilized to segregate investment income
generated by the holding company.
NET INVESTMENT INCOME
Net investment income increased 12.4% and 4.3%, respectively, during the
three and nine month periods ended September 30, 1996 as compared to the same
period last year, as the growth in invested assets more than offset declining
portfolio yields. Net investment income totaled $102.8 million and $91.5
million, respectively, for the three months ended September 30, 1996 and 1995
and $301.4 million and $289.0 million, respectively for the nine months ended
September 30, 1996 and 1995. The average yield on the Company's portfolio of
invested assets was 7.7% and 7.8% for the quarters ended September 30, 1996
and 1995, respectively and 7.8% and 7.8% for the nine months ended September
30, 1996 and 1995, respectively.
NET REALIZED INVESTMENT GAINS
Net realized investment gains were $2.5 million and $10.8 million higher
for the three and nine months ended September 30, 1996 respectively, as
compared to 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
-15-
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
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.
INCOME TAXES
Income taxes decreased for the three and nine months ended September 30,
1996, as compared with the comparable period in the prior year in accordance
with corresponding decreases 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 $5,403.5 million of investments was as
follows:
INVESTMENT COMPOSITION
SEPTEMBER 30, 1996
----------------------
(DOLLARS IN THOUSANDS)
Available for sale:
Fixed maturities $4,834,596 89.5%
Equity securities 78,702 1.4
Short-term investments 69,132 1.3
Mortgage loans 311,742 5.8
Real estate 4,001 0.1
Policy loans 73,505 1.3
Other invested assets 31,815 0.6
---------- ------
$5,403,493 100.0%
========== ======
AVAILABLE FOR SALE. The fair value of fixed maturities available for
sale was $4,834.6 million at September 30, 1996, or $50.5 million above the
aggregate 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 September 30, 1996, $80.8 million
of fixed maturities available for sale were below investment grade. These
securities represented 1.5% 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 $78.7 million and $90.0 million
at September 30, 1996 and December 31, 1995, respectively. Fair values of
those securities exceeded cost by $33.0 million and $41.8 million at
September 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 September 30, 1996 and
December 31, 1995, respectively, represented $26.3 million and $37.4 million
of the excess over cost at September 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. As discussed
above, the third of these purchases occurred as scheduled in April 1996.
-16-
<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 $311.7 million and $309.0 million, respectively, at September 30,
1996 and December 31, 1995. The book value of the Company's real estate was
$4.0 million and $9.3 million, respectively, at September 30, 1996 and
December 31, 1995. The Company believes its allowance for other than
temporary declines in value of mortgages and real estate of $3.7 million at
September 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 ("PRL"), which in turn owns all the common stock of
The Paul Revere Protective Life Insurance Company ("PRP") and The Paul Revere
Variable Annuity Insurance Company ("PRV").
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
PRL (a Massachusetts-domiciled insurance company). The maximum annual
dividend which PRL is permitted to pay without the prior approval of the
Massachusetts Insurance Commissioner is the greater of (a) 10% of PRL's
surplus to policyholders as of the thirty-first day of December next
preceding or (b) PRL'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 PRL without regulatory approval in 1996. No
dividend payments have been made by PRL during the nine months ended
September 30, 1996.
The Company paid cash dividends of $0.06 per share on March 29, 1996, June
28, 1996 and September 30, 1996 to shareholders of record on March 8, 1996, June
14, 1996 and September 13, 1996, respectively.
CAPITAL ADEQUACY. During 1995 and 1996, the Division conducted a
quadrennial examination of PRL and PRV for the period ended December 31,
1994. In connection with this examination, as well as in consideration of the
Company's 1995 comprehensive study of its statutory reserves, PRL and PRP
strengthened their individual disability statutory reserves by a combined
total of $35 million and reflected this strengthening in the annual statutory
financial statements for the year ended December 31, 1995. During the third
quarter of 1996, the Company initiated a comprehensive study of the adequacy
of its individual disability statutory reserves to consider experience
through September 30, 1996. The Division has determined to update its
quadrennial examination of PRL and PRV to review the results of the statutory
reserve study. The statutory reserve study, and consequently the Division's
review, has not yet been completed. In connection with the merger, Textron
has agreed to provide additional capital to the Company prior to the
effective time of the merger, based on a final determination of the required
levels of the Company's statutory reserves, subject to certain limits.
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.
-17-
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONT.)
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 $75.1 million in 1997, 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 September 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 $4.5 million including accrued interest were
outstanding at September 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 September 30,
1996.
During the nine months ended September 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, 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 November 1996, the Standard and Poor's ("S & P") rating service
lowered the claims-paying ability 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 from AA- to A+. Additionally, these
claims-paying ability ratings have been placed on CreditWatch with negative
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.
-18-
<PAGE>
THE PAUL REVERE CORPORATION
SEPTEMBER 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
The Company filed no reports on Form 8-K with the Securities and
Exchange Commission during the quarter ended September 30, 1996.
-19-
<PAGE>
THE PAUL REVERE CORPORATION
SEPTEMBER 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 November 13, 1996 ---------------------------
----------------- James A. Hilbert
Senior Vice President,
Chief Financial Officer and
Treasurer
(principal financial and accounting
officer)
-20-
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<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 4,834,596
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 78,702
<MORTGAGE> 311,742
<REAL-ESTATE> 4,001
<TOTAL-INVEST> 5,403,493
<CASH> 0
<RECOVER-REINSURE> 484,069
<DEFERRED-ACQUISITION> 939,860
<TOTAL-ASSETS> 7,245,185
<POLICY-LOSSES> 1,631,541
<UNEARNED-PREMIUMS> 0
<POLICY-OTHER> 2,286,785
<POLICY-HOLDER-FUNDS> 1,931,418
<NOTES-PAYABLE> 21,729
0
0
<COMMON> 45,000
<OTHER-SE> 1,004,071
<TOTAL-LIABILITY-AND-EQUITY> 7,245,185
285,912
<INVESTMENT-INCOME> 102,820
<INVESTMENT-GAINS> 9,699
<OTHER-INCOME> 0
<BENEFITS> 649,049
<UNDERWRITING-AMORTIZATION> 14,039
<UNDERWRITING-OTHER> 79,036
<INCOME-PRETAX> (347,515)
<INCOME-TAX> (123,324)
<INCOME-CONTINUING> (224,191)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (224,191)
<EPS-PRIMARY> (4.98)
<EPS-DILUTED> 0
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