The Company's main offices occupy approximately 25,500 square feet of office space in a 40,000 square foot building located in Allentown, Pennsylvania which the Company acquired in September 1988 and which is subject to a mortgage in the amount of $2,060,069. The Company currently leases out approximately 10,500 square feet of this building to third parties. The Company also rents approximately 5,516 square feet of office space in Sarasota, Florida, and 1,000 square feet of office space in Stockton, California, which are used as field offices.
The Company owns a 2.42 acre parcel of land located across the street from its home office held as a possible site for future expansion or relocation of its home office. The Company has received the zoning and other approvals necessary to develop this property.
The following selected consolidated statement of operations data and balance sheet data of the Company as of and for the years ended December 31, 1991, 1992, 1993, 1994 and 1995, have been derived from the Consolidated GAAP Financial Statements of the Company which have been audited by Coopers and Lybrand L.L.P., independent accountants.
Management's Discussion and Analysis of Financial Condition and Results - ------ ----------------------------------------------------------------------- of Operations -------------
Deferred acquisition costs. In connection with the sale of its insurance policies, the Company defers and amortizes a portion of the policy acquisition costs over the related premium paying periods of the life of the policy. These costs include all expenses directly related to the acquisition of the policy, including commissions, underwriting and other policy issue expenses. The amortization of deferred acquisition costs is determined using the same projected actuarial assumptions used in computing policy reserves. Deferred acquisition costs can be affected by unanticipated termination of policies because, upon such
unanticipated termination, the Company is required to expense fully the deferred acquisition costs associated with the terminated policy.
The following table presents unaudited quarterly data for the Company for each quarter of 1994 and 1995.
(1) Adjusted to give effect to a 50% stock dividend on the Common Stock declared on April 19, 1995, payable to shareholders of record on May 3, 1995 and distributed on May 15, 1995.
First year long-term care premiums earned by the Company in 1995 increased 36.9% to $36,507,436, compared to $26,669,960 in the same period in 1994. This increase was attributable to increased sales of home health care policies, which increased to $14,560,437 in 1995 from $4,771,366 in 1994 and continued strong sales of nursing home care policies, which increased from $21,898,594 in 1994 to $21,946,999 in 1995. These results reflect increasing market demand for the Company's home health care policies relative to its nursing home policies and the Company's marketing focus on its home health care Independent Living policy first introduced in the fourth quarter of 1994. Independent Living policy sales were $10,643,354 in 1995. First year Medicare supplement premiums earned by the Company in 1995 decreased 12.0% to $262,399, compared to $298,013 in 1994. This decrease was due to the Company's continued de-emphasis of its Medicare supplement products because of lower profit margins associated with this line of business.
Renewal accident and health premiums earned by the Company in 1995, including long-term care and Medicare supplement, increased 19.5% to $62,402,068, compared to $52,236,980 in 1994.
public offering in July, 1995. Refer to "Liquidity and Capital Resources" for a discussion of the public offering. The average yield on the Company's investments was 6.5% in 1995 compared to 6.5% in 1994.
Benefits to Policyholders. Accident and health benefits to policyholders in 1995 increased 33.0% to $63,175,068, compared to $47,497,004 in 1994. The Company's accident and health loss ratio (the ratio of benefits to policyholders to total accident and health premiums) was 63.7% in 1995, compared to 60.0% in 1994. This increase in loss ratio was due to (i) refinement of actuarial data used to calculate return of premium benefits and (ii) modification of assumptions used to reflect benefit payment frequency. The refinement of actuarial data and modification of assumptions were recommended by the Company's actuarial consultant. Reserves are increased on the anniversary date of the policy.
First year commissions on life business decreased to $1,325,521, compared to $1,670,785 in 1994, corresponding to a decrease in first year life premiums. The ratio of first year life
Renewal long-term care premiums earned by the Company in 1994 increased 22.3% to $49,054,157, compared to $40,095,519 in 1993. This reflects increases in premiums from policies written in previous years which were enhanced by an improvement in persistency from 70.0% in 1993 to 75.4% in 1994 and, to a lesser extent, the effect of rate increases the Company received in various states. Renewal medicare supplement premiums earned by the Company in 1994 decreased 9.6% to $3,182,823, compared to $3,519,227 in 1993,
Renewal life premiums earned by the Company in 1994 increased 183.7% to $480,842, compared to $169,486 in 1993. This increase was the result of the increase in life premiums from policies introduced in 1993.
Net Investment Income. Net investment income earned by the Company in 1994 increased 19.4% to $5,946,034, compared to $4,979,068 in 1993. This increase was primarily the result of growth in the Company's investment assets due to continued premium growth during 1994. The average yield on the Company's investments was 6.5% in 1994 compared to 6.8% in 1993.
Benefits to Policyholders. Accident and health benefits to policyholders in 1994 increased 17.2% to $47,497,004, compared to $40,535,046 in 1993, consistent with the growth in business. The Company's accident and health loss ratio was 60.0% in 1994 compared to 58.4% in 1993. This increase was due to (i) refinement of actuarial data used to reflect policy benefit terms and (ii) the increase in claim reserves inherent in the Company's business as it matures, offset in part by a corresponding decrease in policy reserves. There are timing differences between these components of the loss ratio, as the claim reserve reflects actual experience through the most recent quarter, while the policy reserve reflects expectations regarding the block of business over its entire life.
Net Policy Acquisition Costs Deferred. The net deferred policy acquisition costs in 1994 increased 15.1% to $7,642,875 compared to $6,639,551 in 1993, consistent with the growth of the Company's business. This deferral is net of amortization, which decreases or increases as the Company's actual persistency is better or worse than the persistency assumed for reserving purposes.
Renewal Commissions. Renewal commissions on accident and health business increased 11.1% to $7,840,877, compared to $7,057,477 in 1993. The increases in commissions are consistent with the growth of the business in previous years. The ratio of renewal accident and health commissions to renewal accident and health premiums was 15.0% in 1994 compared to 16.0% in 1993. This ratio decrease reflects lapsation of older policies which paid a higher renewal commission rate, and premium rate increases which do not require additional commissions.
Provision for Federal Income Taxes. The provision for federal income taxes recorded by the Company in 1994 increased 19.9% to $2,562,000, compared to $2,137,000 in 1993. The effective tax rate increased to 27.5% in 1994 from 26.9% in 1993. The Company's effective tax rate was below the normal federal corporate rate as a result of credits from the small life insurance company deduction as well as the Company's investments in tax-exempt bonds.
Changes in Accounting Principles. In the first quarter of 1993 -------------------------------- the Company retroactively adopted Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes" (SFAS 109). Under the asset and liability method provided for by SFAS 109, deferred tax assets and liabilities are recognized for the tax consequences of temporary differences between the financial statement carrying amounts and the tax basis of existing assets and liabilities by applying enacted statutory tax rates.
In 1993, the Company adopted Statement of Financial Accounting Standards No. 113 (SFAS No. 113), "Accounting and Reporting of Short-Duration and Long-Duration Contracts." This Statement established the conditions a reinsurance contract must meet in order to be accounted for as such. In addition, it eliminates the industry practice of reporting financial statement items, net of the effects of reinsurance. SFAS 113 did not impact the Company's results of operations, other than the financial statement presentation.
New Accounting Principles. In October 1995, Statement of Financial -------------------------- Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation," was issued. SFAS No. 123, which is effective January 1, 1996, provides an alternative method of accounting for stock-based compensation arrangements, based on fair value of the stock-based compensation determined by an option pricing model utilizing various assumptions regarding the underlying attributes of the options and the Company's stock. The accounting under SFAS No. 123 differs from the existing method of accounting for stock-based compensation which is provided in Accounting Principles Board Opinion No. 25 (APB No. 25), "Accounting for Stock Issued to Employees." The Financial Accounting Standards Board encourages entities to adopt the fair value based method, but does not require the adoption of this method. For those entities that continue to apply APB 25, pro forma disclosure of the effects, if adopted, of SFAS No. 123 on net income and earnings per share would be required in the 1996 financial statements. The Company will continue to apply APB No. 25 and, therefore, there will be no impact on the financial position and results of operation.
Impact of Increases in Cost of Medical Care. Increases in the cost of ------------------------------------------- medical care tend to increase the need for insurance. Many policyholders who once had adequate insurance coverage increased their insurance coverage to provide the same relative financial benefit and protection. The increases in medical costs lead to accident and health policies requiring higher benefits and an increased need for the products. Consequently, the Company offers riders to its insurance policies which provide for increases in policyholder benefits each year in the amount of 5% compounded annually on the anniversary date of the policy for 20 years or to age 85, whichever occurs first, or for the lifetime of the policyholder, as is mandated in certain states.
The adequacy of premium rates in relation to the level of health claims is constantly monitored by the Company and, where
The Company invests in securities and other investments authorized by applicable state laws and regulations and follows an investment policy designed to maximize yield to the extent consistent with liquidity requirements and preservation of assets. At December 31, 1995, the average maturity of the Company's bond portfolio was 6.4 years, and its market value exceeded cost by 4.1% or $5,642,566. At December 31, 1994, the average maturity of the Company's portfolios was 6.9 years and its market value was below cost by 4.4% or approximately $4,165,000. The Company's equity portfolio exceeded costs by $503,083 or 23.9% in 1995 and $52,780 or 6.0% in 1994.
On January 1, 1994, the Company adopted SFAS 115. The cumulative effect of adoption of SFAS 115 was an increase in shareholders' equity of $3,528,512, net of taxes, for unrealized gains of $5,040,731 in the investment securities available for sale portfolio. During the year ended December 31, 1994, the Company experienced a decrease in unrealized gains of $9,205,393. As of December 31, 1995, shareholders' equity was increased by $4,055,788 due to unrealized gains of $6,145,649 in the investment portfolio. As of December 31, 1994 shareholders' equity was decreased by $2,713,842 due to unrealized losses of $4,111,882 in the investment portfolio.
The Company's continued growth is dependent upon its ability to (i) continue marketing efforts to expand its historical markets, (ii) continue to expand its network of agents and effectively market its products in states where the Insurers are currently licensed and (iii) fund such marketing and expansion while at the same time maintaining minimum statutory levels of capital and surplus required to support such growth. Management believes that the funds necessary to accomplish the foregoing, including funds required to maintain adequate levels of statutory surplus in the Insurers, can be met for at least the next 24 months by funds generated from the Company's recent public offering and from operations.
The Company regularly evaluates potential acquisition opportunities and often makes preliminary inquiries to determine whether potential acquisition candidates might by interested in being acquired by the Company. The Company periodically enters into negotiations with respect to such potential acquisition opportunities. On March 15, 1996, the Company signed an agreement with Health Insurance of Vermont, Inc. ("HIVT") providing that the Company will acquire HIVT by means of a statutory merger with a subsidiary of the Company. Completion of the merger is subject to approval of regulatory authorities, and to certain other conditions. HIVT is licensed to conduct business in 46 states, including New Jersey, West Virginia, Kansas, Maine and Massachusetts. Upon completion of the merger the Company would be licensed in all states with the exception of New York. The Company currently has a license application pending in New York.
In the event the Company (i) fails to maintain minimum loss ratios calculated in accordance with statutory guidelines, (ii) fails to meet other requirements mandated and enforced by regulatory authorities, (iii) has adverse claim experience in the future, (iv) is unable to obtain additional financing to support future growth, or (v) the economy continues to effect the buying
REPORT ON AUDITS OF CONSOLIDATED FINANCIAL STATEMENTS as of December 31, 1995 and 1994 and for the years ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993 6
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Penn Treaty American Corporation and Subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, the Company changed its method of accounting for investments in 1994.
* Restated to reflect a 50% stock dividend, see Note 13. See accompanying notes to consolidated financial statements.
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities as of December 31, 1995 and 1994 and the reported amounts of revenues and expenses during 1995, 1994 and 1993. Actual results could differ from those estimates.
The Company sells both accident and health and life insurance through its wholly-owned subsidiaries. The Company's principal lines of business are long-term care products and home health care products. The Company distributes its products principally through managing general agents and independent agents. The Company operates its home office in Allentown, Pennsylvania and has satellite offices in California and Florida, whose principal functions are to market and underwrite new business. The Company is licensed to operate in 44 states. State regulatory authorities have powers relating to granting and revoking licenses to transact business, the licensing of agents, the regulation of premium rates and trade practices, the form and content of insurance policies, the content of advertising material, financial statements and the nature of permitted practices. Sales in 11 states accounted for approximately 87% of the Company's premiums for the year ended December 31, 1995.
On January 1, 1994, the Company adopted the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115 requires all entities to allocate their investments among three categories as applicable: (1) trading, (2) available for sale, and (3) held to maturity. Management categorized all of its investment securities as available for sale since they may be sold in response to changes in interest rates, prepayments, and similar factors. Investments in this classification are reported at the current market value with net unrealized gains or losses, net of the applicable deferred income tax effect, being added to or deducted from the Company's total shareholders' equity on the balance sheet.
In accordance with SFAS No. 115, prior period financial statements have not been restated to reflect the change in accounting principle. The cumulative effect of adopting SFAS No. 115 as of January 1, 1994 was an increase in the balance of shareholders' equity of $3,528,500 to reflect the net unrealized gain (net of $1,512,000 in deferred income taxes) on investment securities classified as available for sale. As of December 31, 1994, shareholders' equity was decreased by $2,714,000 due to net unrealized losses of $4,112,000 in the investment portfolio. As of December 31, 1995 shareholders' equity was increased by $4,056,000 due to net unrealized gains of $6,146,000.
Cash and cash equivalents include highly liquid debt instruments purchased with a maturity of three months or less
Deferred income taxes relate principally to temporary differences in reporting policy acquisition costs and policy reserves for financial statement and income tax purposes.
The liability for reported accident and health claims for which payments will be made over an extended period has been discounted using an assumed rate of 7% for 1995 and 1994 claims, 6% for 1993 and 1992 claims and 8% for claims 1991 and prior.
Primary earnings per share amounts have been computed by dividing the applicable amounts by the weighted average common shares outstanding.
The amortized cost and estimated market value of investments in debt securities as of December 31, 1995 and 1994 are as follows:
The amortized cost and estimated market value of debt securities at December 31, 1995 by contractual maturity, are shown below. Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Pursuant to certain statutory licensing requirements, as of December 31, 1995, the Company had on deposit bonds aggregating $4,850,404 in insurance department safekeeping accounts. The Company is not permitted to remove the bonds from these accounts without approval of the regulatory authority.
The Company has a mortgage and other debt outstanding as of December 31, 1995. Management believes that the book value of these financial instruments approximates their fair values since both instruments carry interest rates which approximate market.
Policy reserves have been computed principally by the net level premium method based upon estimated future investment yield, mortality, morbidity, withdrawals and other benefits. The composition of the policy reserves at December 31, 1995 and 1994 and the assumptions pertinent thereto are presented below:
Total reserves, including policy and contract claims, reported to statutory authorities were approximately $3,077,000 and $1,612,000 less than those recorded for GAAP as of December 31, 1995 and 1994, respectively.
Deferred income taxes result from temporary differences between the recognition of certain expenses for tax and financial statement purposes. The sources of these differences and the approximate tax effect are as follows for the years ended December 31:
A reconciliation of the income tax provision computed using the Federal income tax rate of 34% to income before Federal income taxes is as follows:
The Company maintains a defined contribution pension plan covering substantially all employees. The Company contributes 3% of each eligible employee's annual covered payroll to the plan. All contributions are subject to limitations imposed by the Internal Revenue Code on retirement plans and Section 401(k) plans.
The Company has an Incentive Stock Option Plan which provides for the granting of options to purchase up to 600,000 shares of common stock. The exercise price of all options granted under the plan may not be less than the fair market value of the shares on the date of grant (110% of fair market value in the case of any person who holds more than 10% of the combined voting power of all classes of outstanding stock). The maximum allowable term of each option is ten years (five years in the case of holders of more than 10% of the combined voting power of all classes of outstanding stock), and the options become exercisable in four equal, annual installments commencing one year from the option grant date.
The Stock Option Plan Committees have granted options to eligible employees and agents as follows:
The total net rental expenses under all leases amounted to approximately $142,000, $148,000 and $129,000 for the years ended December 31, 1995, 1994 and 1993, respectively.
Effective October, 1994, PTLIC and Network America entered into reinsurance agreements to cede 100% of benefits exceeding 36 months on certain home health care policies. Total reserve credits taken related to this agreement as of December 31, 1995 were approximately $391,000. There were no reserve credits taken in 1994.
Network America is party to a coinsurance agreement on a previously acquired block of long term care business whereby 66% is ceded to a third party. At December 31, 1995 and 1994, reserve credits taken related to this treaty were approximately $2,130,000 and $1,581,000, respectively.
IMC also received commission overrides on business written for PTLIC by certain agents, principally general agents who were IMC agents prior to January 1979 and any of their sub-agents hired prior and subsequent to January 1979. For the years ended December 31, 1995, 1994 and 1993, IMC commission overrides totalled approximately $517,000, $520,000, and $495,000, respectively.
On April 19, 1995, the Board of Directors of the Company declared a 50% stock dividend payable to the shareholders of record on May 3, 1995. The dividend was distributed on May 15, 1995. Certain amounts comprising shareholders' equity in these financial statements, weighted average shares outstanding and earnings per share have been restated to reflect this dividend.