At December 31, 1996 and 1995, annualized accident and health premium inforce on small group and managed care business amounted to $68.2 million and $41.7 million, respectively, consisting of approximately 36,000 and 23,000 certificate holders, respectively. The $26.5 million net increase in annualized premium resulted from an increase in new business issued in 1996 of $53.6 million ($19.9 million in 1995), plus $6.5 million of annualized premium related to the HealthQuest book acquired on May 1, plus premium rate increases of approximately $8.4 million less lapses amounting to approximately $42 million. "The Provident Solution" and HealthQuest accounted for 65% and 25% of the inforce premium at year end 1996 and 1995, respectively, of the group accident and health business.
Consolidated Statements of Cash Flows Years ended December 31, 1997, 1996 and 1995 to
Provident American Corporation ("PAMCO") is an insurance holding company. The operations of PAMCO and its subsidiaries (the "Company") are principally those of its wholly owned life insurance companies, Provident Indemnity Life Insurance Company ("PILIC") and Provident American Life and Health Insurance Company ("PALHIC").
Cash equivalents consist of highly liquid investments with maturities of three months or less from date of purchase. The Company utilizes two banking institutions for insurance and investment operations. The Company had bank deposits which exceeded federally insured limits by approximately $12,000 at December 31, 1997.
Goodwill represents the excess of the Company's purchase price over the fair value of the net assets acquired and is being amortized on a straight line basis over 10-20 years. The Company continually monitors the net realizable value of goodwill and recognizes a charge to expense when it is determined that a permanent impairment exists. During 1997 the Company determined the goodwill associated with the NIA and CSE acquisitions were impaired as a result of the outsourcing agreement with HPS described in Note R and was written off.
Effective May 1, 1996, the Company acquired all of the issued and outstanding stock of NIA Corporation ("NIA"), d/b/a National Insurance Administrators, and its wholly owned subsidiary, American Brokerage Corporation ("ABC") from MidAmerica Mutual Life Insurance Company ("MAM") for $254 of cash and 50,000 shares of PAMCO's common stock. NIA and ABC are Colorado corporations. NIA, a third party administrator, and ABC, an insurance marketer, collectively design, market and service private-label health insurance plans. As a part of this transaction, PILIC assumed approximately 3,500 in-force "HealthQuest" medical policies originally underwritten by MAM and its subsidiaries. This transaction was accounted for as a purchase and its impact on the Company's consolidated results of operations was $3,100 of net earned premium.
Bond investments on deposit as required by regulatory agencies were valued at approximately $8,200 at December 31, 1997. In addition, approximately $1,100 of bonds or other interest bearing deposits has been placed in escrow with a bank in connection with certain reinsurance agreements.
Proceeds from sales of investments in bonds during 1997, 1996 and 1995 were $35,848, $16,719 and $9,350, respectively. Gross gains of $455, $200 and $291 in 1997, 1996 and 1995, respectively, and gross losses of $92, $123 and $170 in 1997, 1996 and 1995, respectively, were realized on those sales.
In accordance with the Life Insurance Company Income Tax Act of 1959, a portion of the Insurance Subsidiaries' statutory income was not subject to current income taxation but was accumulated in an account designated Policyholders' Surplus. Under the Tax Reform Act of 1984, no further additions may be made to the Policyholders' Surplus Account for tax years ending after December 31, 1983. The balance in the account of approximately $2,400 at December 31, 1997, would result in a tax liability of $840 (at a 35% rate), only if distributed to shareholders or if the account balance exceeded a prescribed maximum. No income taxes have been provided on this account because, in management's opinion, the likelihood that these conditions will be met is remote. "Shareholders' Surplus" represents an accumulation of taxable income (net of tax thereon) plus the dividends-received deduction, tax-exempt interest, and certain other special deductions as provided by the Act. At December 31, 1997, the balance in the "Shareholders' Surplus" account amounted to approximately $3,500. There is no present intention to make distributions in excess of "Shareholders' Surplus".
As a result of entering into the Outsourcing Agreement the Company incurred transition and related expenses included in 1997's results from operations of approximately $4,185; $1,051 included in other operating expenses, net of ceding, $1,433 of accelerated depreciation included in depreciation and amortization of goodwill related to impaired computer hardware, equipment and software used in performing the outsourced activities and $1,701 of accelerated amortization of goodwill relating to NIA and CSE whose customer service and claims activities will be outsourced to HPS.