Accident and health premiums$659,180 $601,684 $559,894 $593,236 $508,957 Life and annuity premiums and policy charges 44,929 39,282 35,219 33,321 30,693 Net investment income 42,786 40,242 43,555 47,974 48,416 Other income and realized
investment gains/losses 27,260 17,920 17,305 34,207 22,951 ------- ------- ------- ------- ------- Total revenues 774,155 699,128 655,973 708,738 611,017
Income (loss) applicable to common stockholders $15,245 $ 10,124 $(18,998) $ 6,833 $(11,510) ======= ======== ========= ======== =========
Total investments $723,837 $674,206 $568,349 $528,725 $563,807 Deferred policy acquisition costs 225,618 260,432 269,674 313,453 309,016 Total assets 1,075,700 1,108,271 978,689 969,190 990,560 Policy liabilities 868,608 903,105 805,696 776,571 739,845 Short-term notes payable 20,093 5,575 12,931 6,371 16,218 Long-term notes payable 2,520 1,125 25,170 21,600 27,000 Subordinated Debentures 57,427 57,477 - - - Redeemable Preferred Stock 21,682 23,675 23,990 23,990 23,990 Stockholders' equity 68,328 68,872 62,732 75,470 64,738 Stockholders' equity per common share $ 11.55 $ 10.86 $ 9.21 $ 11.39 $ 9.77
The income (loss) before income taxes by Division for 1994 and 1993 is as follows (in thousands):
The Division incurred a pre-tax charge of $1,700,000 in the third quarter of 1994 which was the net effect of a $16,700,000 adjustment to the deferred acquisition cost (DAC) asset and a reduction of group medical claim reserve margins of $15,000,000. Through its periodic review of the DAC asset, the Company recognized the impact of state healthcare reforms on the future profitability of certain of its group medical products. These reforms include mandated benefits, guaranteed issue requirements and limitations on premium rate increases. The Company identified blocks of this business that are not anticipated to achieve the future profit margins originally assumed.
The Company has also historically held margins in its group accident and health claim reserves to provide for potential adverse deviation. The claim reserve estimates are continually reviewed and adjusted as necessary. Based on payments through the first nine months of 1994, the Company determined that claim reserves contained significantly higher margins than originally projected. As a result, claim reserve margins of $15,000,000 were released in the third quarter of 1994. The Company continues to hold additional margins which it considers to be reasonable in its group medical claim reserves.
The improvement in pre-tax profitability of this Division in 1994 compared to losses experienced in 1993 was due to the elimination of an unprofitable operating subsidiary in the fourth quarter of 1993 and a significant increase in new sales to unaffiliated customers. The revenue from unaffiliated customers increased 131% to $10,416,000 in 1994 of which 53% or $5,498,000 was related to the 1993 acquisition of Healthcare Review Corporation. The consolidation of certain operations in July 1994 resulted in reduced expense levels the second half of the year.
Total revenues increased $75,027,000 or 11% for the twelve month period in 1994 as compared to 1993. The increase in revenue is primarily due to the increase in premiums and policy charges of $63,143,000.
Accident and health insurance premiums increased $57,496,000, or 10% in 1994 as compared to 1993. Premiums from major hospital plans increased $81,472,000 in 1994 as compared to 1993 primarily due to the acquisition of CLAC completed in August 1993. Total premiums attributable to the remaining mix of Medicare supplement and long-term care products decreased $23,976,000 or 4%.
Other income and realized investment gains and losses increased $9,340,000 or 52% in 1994 compared to 1993. The increase in other income was due to the acquisitions of Healthcare Review Corporation (HRC) and CLAC in August 1993. In addition, the Company realized increased sales to unaffiliated customers in the Medical Utilization Management Division and by its marketing subsidiaries. Realized investment losses were $383,000 in 1994 compared to $1,336,000 in 1993. The remaining other income generated by the Company's other non-insurance subsidiaries remained relatively unchanged.
--------------------- * Percent of total estimated savings from managed healthcare efforts.
The Company expects to continue to emphasize medical utilization management procedures to control claim costs. Although the Company cannot accurately determine the amount of savings which may be realized from such efforts in the future, the Company believes that it will be increasingly difficult to maintain this level of growth in cost savings due to the efficiencies that have already been achieved.
General expenses as a percent of premiums decreased in 1994 as compared to 1993 due to the continued emphasis on cost reduction in the Health and Life Insurance Divisions. However, insurance and general expenses (which include commission compensation to agents) increased $29,979,000 or 18% in 1994 compared to 1993. The increase was primarily caused by the increase in premium and policy charges and the acquisitions of HRC and CLAC.
Interest expense increased in 1994 due to the issuance of the convertible subordinated debentures in July 1993 and the increase in other notes payable in 1994.
The Company acquired the building containing its corporate headquarters in Schaumburg, Illinois, in January 1994 resulting in the increase in investment real estate. Cash decreased due to increased investment in short- term investments. Reinsurance receivables decreased due to the timing of payments due from reinsurers. Deferred policy acquisition costs decreased as a result of the third quarter write-down and the decrease in new business issues in 1994. General expenses and other liabilities decreased due to the timing of payments for federal income taxes and amounts due to reinsurers. Notes payable increased due to the utilization of the line of credit by the Company.
The Company reported net income of $12,145,000 for the twelve months ended December 31, 1993, compared to a net loss of $16,959,000 for the comparable period in 1992. The net loss for 1992 was primarily attributable to a $30,000,000 pre-tax write-down of deferred policy acquisition costs. The remaining increase was due to improved loss ratios on the Medicare supplement business, expense reductions in the Life Insurance Division and increased revenue and margins in the Group Medical Division.
Total benefits increased $26,310,000 or 6% in 1993 as compared to 1992. Life and annuity benefits decreased $3,607,000 or 8% due to the general decline in credited rates during 1993 and improved mortality over the higher levels experienced during 1992. Accident and health benefits, which includes the change in unearned premiums, increased $29,917,000 or 8% in 1993 as compared to 1992. The change was primarily due to the 7% increase in accident and health premiums. The Company's accident and health loss ratios were unchanged over 1992 at 66%. The improved loss ratios on the Medicare supplement business were offset by the fourth quarter loss ratio on Continental Life & Accident business of 79%. The Company is attempting to control claim costs on this block of business by implementing additional managed healthcare efforts.
In 1993 and 1992, managed healthcare efforts resulted in estimated net savings to the Company's Health Insurance Unit of $41,000,000 and $27,000,000, respectively. These savings were primarily used to lower the amount of premium increases for policyholders, which the Company believes generally has the effect of decreasing lapse rates of these policies. The principal efforts and their approximate relative contributions to these estimated savings were as follows:
1993* 1992* ---- ---- PPOs (preferred provider organization) networks 49% 64% Precertification 5 17 Large case management 32 11 Other 14 8 ___ ___ 100% 100% === ===
Effective January 1, 1993, the Company adopted Financial Accounting Standards Board (FASB) Statement No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." FASB Statement No. 113 requires that reinsurance receivables, including amounts related to claims incurred but not reported, and prepaid insurance premiums, be reported as assets as opposed to reductions in the related liabilities. As a result of the adoption of FASB Statement No. 113, amounts on deposit and due from reinsurers and policy liabilities each increased $19,453,000 at December 31, 1993.
Effective January 1, 1993, the Company also changed its method of accounting for income taxes from the deferred method to the liability method required by FASB Statement No. 109 "Accounting For Income Taxes." The cumulative effect of adopting FASB Statement No. 109 was not significant.
The Company's consolidated liquidity requirements are created and met primarily by operations of its insurance subsidiaries. The insurance subsidiaries' primary sources of cash are premiums, investment income, and investment sales and maturities. The primary uses of cash are operating
In addition, liquidity requirements of the Company are created by the dividend requirements of the $2.125 Preferred Stock, common stock dividends, interest payments on the Convertible Subordinated Debentures and other debt service requirements. The Company's liquidity requirements are met primarily by dividends declared by its subsidiaries. Payments of dividends by the insurance subsidiaries to the Company is subject to certain regulatory restrictions. (See Note 11 of the consolidated financial statements).
The Company has offered agent commission financing to certain of its agents and marketing organizations which consists primarily of annualization of first year commissions. This means that when the first year premium is paid in installments, the Company will advance a percentage of the commissions that the agent would otherwise receive over the course of the first policy year. The Company through a subsidiary has entered into agreements with an unaffiliated corporation to provide financing for its agent commission financing program through the sale of agent receivables. Proceeds from such sales during 1994 and 1993 were $24,393,0l00 and $25,376,000, respectively. The termination date of the current program is December 31, 1997, subject to extension or termination as provided therein.
In July 1993 the Company issued $57,477,000 of 8% convertible subordinated debentures due 2000. Net proceeds from the offering totaled $54,000,000. The debentures are convertible into the Company's common stock at any time prior to maturity, unless previously redeemed, at a conversion price of $11.75 per share.
In March, June, September and December 1994, the Company's Board of Directors announced a quarterly Common Stock dividend of $.0375 per share, for a total of 15 cents per share to be paid for 1994.
Authorized Adjusted Control Company Capital Level RBC RBC Ratio ------ -------- ---------- --------- (Dollars in thousands) Pioneer Life Insurance Company of Illinois $87,591 $25,595 342%
Interest paid amounted to $4,950,000, $1,023,000 and $2,274,000 for 1994, 1993, and 1992, respectively.
Management believes that the diversity of the Company's investment portfolio and the liquidity attributable to the large concentration of investments in highly liquid United States government agency securities provide sufficient liquidity to meet foreseeable cash requirements. Prior to January 1, 1994, the Company's fixed maturity portfolio was segregated into two components: fixed maturities held-to-maturity and fixed maturities available-for-sale. Fixed maturities, where the intent was to hold to maturity, were carried at amortized cost, adjusted for other-than-temporary impairments. Fixed maturities that were available for sale were carried, on an aggregate basis, at the lower of amortized cost or fair value.
In 1993, the Financial Accounting Standards Board (FASB) issued Statement 115, "Accounting for Certain Investments in Debt and Equity Securities." Statement 115 requires that fixed maturity securities are to be classified as either held-to-maturity, available-for-sale, or trading. The Company adopted Statement 115 as of January 1, 1994, with no effect on net income and a $3,605,000 increase in stockholders' equity.
At January 1, 1994, the remainder of the Company's portfolio of fixed maturity investments was classified as held-to-maturity. Although the Company has the ability and intent to hold those securities to maturity, there could occur infrequent and unusual conditions under which it would sell certain of those securities. Those conditions would include unforeseen changes in asset quality, significant changes in tax law affecting the taxation of securities, a significant business acquisition or disposition, and changes in regulatory capital requirements or permissible investments.
Life insurance and annuity liabilities are generally long term in nature although subject to earlier surrender as a result of the policyholder's ability to withdraw funds or surrender the policy, subject to surrender and withdrawal penalties. The Company believes its policyholder liabilities should be backed by an investment portfolio that generates predictable investment returns. The Company seeks to limit exposure to risks associated with interest rate fluctuations by concentrating its invested assets principally in high quality, readily marketable debt securities of intermediate duration and by attempting to balance the duration of its invested assets with the estimated duration of benefit payments arising from contract liabilities.
Fixed Maturity Investments. With the adoption of risk based capital rules and consumer concerns over insurance company solvency and financial stability, the asset quality of insurance companies' investment portfolios has become of greater concern to policyholders and has come under closer scrutiny by insurance regulators and investors. In response, the Company holds investments in below-investment grade fixed maturity securities in an amount less than 1% of its invested assets at December 31, 1994. This reduction resulted from sales and writedowns of the carrying value of such securities in prior periods, and the elimination of new purchases. The Company has a policy not to invest more than 4% of its admitted assets in securities below investment grade.
Investments in below-investment grade fixed maturity securities generally have greater risks (and potentially greater returns) than other corporate fixed maturity investments. Risk of loss upon default by the issuer is significantly greater for these securities because they are generally unsecured and are often subordinated to other creditors of the issuer, and because these issuers usually have high levels of indebtedness and are more sensitive to adverse economic conditions, such as recession or increasing interest rates, than are investment grade issuers. Also, the market for below-investment grade securities is less liquid and not as
The Company continually evaluates the creditworthiness of each issuer of securities held in its portfolio. When the fair value of an individual security declines materially, or when the Company's ongoing evaluation indicates that it may be likely that the Company will be unable to realize the carrying value of its investment, significant review and analytical procedures are increased to determine the extent to which such declines are attributable to changing market expectations regarding general interest rates and inflation and other factors, such as a perceived increase in the credit risk of the issuer, a general decrease in a particular industry sector or an overall economic decline.
Declines in fair value attributable to factors other than market expectations regarding general interest rates and inflation are reviewed and analyzed in further detail to determine if the decline in value is other than temporary, and the carrying amount of the investment is reduced to its fair value based principally on available market prices. The amount of the reduction is reported as a realized loss on investments and the net fair value becomes the new cost basis of the investment. In addition, the Company reverses any accrued interest income previously recorded for the investment and records future interest income only when cash is received.
Mortgage-Related Securities. At December 31, 1994, the Company had $293,481,000, or 49%, of its fixed maturities portfolio in mortgage-related securities ($324,127,000 at December 31, 1993). The yield characteristics of mortgage-related securities differ from those of traditional fixed income securities. The major differences typically include more frequent interest and principal payments, usually monthly, and the possiblity that prepayments of principal may be made at any time. Prepayment rates are influenced by changes in current interest rates and a variety of economic, geographic, social and other factors and cannot be predicted with certainty. The yields to maturity of the mortgage-related securities will be affected by the actual rate of payment (including prepayments) of principal of the underlying mortgage loans.
Derivative securities were acquired to protect the Company in the event of adverse interest rate fluctuations. The yields and fair values of the derivative securities are generally more sensitive to changes in interest rates and prepayments than other mortgage-related securities.
The Company's mortgage-related securities portfolio at December 31, 1994, included $84,016,000 of CMOs and pass-through certificates issued by non-government agencies ($37,049,000 at December 31, 1993). The Company's holdings consist solely of senior securities in the CMO structures which are collateralized by first mortgage liens on single family residences. These securities are rated AAA or AA by Standard & Poor's, or the comparable equivalent rating by another independent nationally recognized rating agency.
The creditworthiness of these securities is based solely on the underlying mortgage loan collateral and credit enhancements in the form of senior/subordinated structures, letters of credit, mortgage insurance or surety bonds. The underlying mortgage loan collateral principally consists of whole loan mortgages that exceed the maximum imposed by both the Federal National Mortgage Associaton and the Federal Home Loan Mortgage Corporation and, as such, the collateral tends to be concentrated in states with the greatest number of higher priced single family residences, including California, New York, New Jersey, Maryland, Virginia and Illinois. The maximum average loan-to-value ratio for the collateral is 80%.
U.S. government agency pass-through 42,807 39,414 73,285 74,004 Non-government agency pass-through 54,637 50,555 15,895 16,041 -------- ------- -------- -------- Total mortgage-backed securities $293,481 $263,451 $324,127 $323,042 ======== ======== ======== ========
For a discussion of a new investments accounting standard, a new income tax accounting standard and a new reinsurance accounting standard and the