The following selected financial information was derived from the financial statements of the Company which have been audited by Arthur Andersen LLP, independent public accountants. The report of Arthur Andersen LLP for the years 1995, 1994, and 1993, is included as Item 8 herein. The table should be read in conjunction with the Consolidated Financial Statements and the Notes thereto. Certain reclassifications have been made to the 1991 and 1992 amounts to conform with 1995, 1994 and 1993 presentations. Year Ended December 31, 1995 1994 1993 1992 1991 (In thousands except per data share) Income Statement Data- Revenues: Premium Earned:		 Accident and health $265,732 $195,024 $162,322 $135,833 $115,048 Life 8,235 6,864 4,052 2,468 1,911 Investment Income 23,190 11,023 9,395 8,718 8,092 Securities gains(losses) 175 (10) 227 344 (76) Total Revenues 297,332 212,901 175,996 147,363 124,975 Benefits and Expenses: Benefits to policyholders 172,903 114,200 88,347 75,074 64,698 Commissions 76,080 63,819 56,728 43,634 41,305 General and administrative (1) 33,092 29,140 29,304 27,090 21,070 Net deferred policy acquisition costs (2) (22,697) (22,230) (21,738) (14,841) (18,976) Interest Expense 3,260 990 32 230 186 Total benefits and expenses 262,638 185,919 152,673 131,187 108,283 Income before income taxes 34,694 26,982 23,323 16,176 16,692 Income taxes 11,009 8,554 8,715(4) 5,500(3) 5,675(3) Net income 23,685 18,428 14,608(4) 10,676 11,017(3)
Balance Sheet Data- Total Assets 836,141 400,804 298,991 240,905 219,729 Total Liabilities 665,336 264,465 182,816(3) 139,743 129,277(3) Shareholders' Equity 170,805 136,339 116,175(3) 101,162 90,452(3)
Premiums increased by $72.2 million or 35.7% in 1995, and $35.4 million or 21.2% in 1994. These increases reflect the continued expansion of the Company's policyholder base, as well as the acquisition of the J.C. Penney Insurance Companies ("JCP") long term care insurance business in 1994 and the acquisition of the Transport Holdings Inc. ("Transport") long term care insurance business in 1995. Premiums include $22.6 million attributable to JCP and $24.6 million attributable to Transport for 1995, and $6.1 million attributable to JCP for 1994.
The year-to-year changes in the various components of annualized premiums in force, including JCP and Transport, are summarized in the schedule below:
Nursing home $ 257.1 $149.4 $101.4 72.1% 47.3% Home health care 75.0 49.1 35.4 52.7% 38.7% Total long term care 332.1 198.5 136.8 67.3% 45.1%
Medicare supplement 22.2 25.8 32.0 (13.0)% (19.4)% Other accident and health 8.7 9.3 10.5 (6.5)% (11.4)% Life insurance 8.8 7.3 4.3 20.5% 69.8%
The Company's annualized long term care premiums in force have grown significantly over the periods presented. Long term care insurance in force includes $24.9 million related to JCP for 1994, and $96.5 million related to Transport and $21.4 million related to JCP for 1995. As of December 31, 1995, the Company had $371.8 million of annualized premiums in force, a 54.3% increase from 1994. As of December 31, 1994, the Company had $240.9 of annualized premium in force, a 31.2% increase from 1993. Partially offsetting the growth in long term care premiums is a reduction in the Company's Medicare supplement business. New sales of Medicare supplement policies have been negligible since 1992 when management decided to de-emphasize this product line.
Total internally generated new business premiums, which excludes JCP and Transport, are summarized by line of business below:
Medicare supplement 0.1 0.1 0.6 0.0% (83.3)% Other accident and health 1.7 1.8 2.1 (6.0)% (14.3)% Life insurance 3.4 3.6 2.1 (5.6)% 71.4%
Benefits to policyholders (the sum of claims paid and changes in reserves for claims and future policy benefits) increased $58.7 million or 51.4% in 1995, and increased $25.9 million or 29.3% in 1994. The year-to-year changes in the components of benefits to policyholders are as follows: Benefits to Policyholders (Dollars in millions)
The continuing increases in the change in reserves to total premiums ratio corresponds to the growth in the Company's long term care business, for which it holds higher levels of reserves. The Company actively monitors claims and has its reserves reviewed annually by an independent actuarial firm to ensure that claim and benefit reserves are adequate and to make appropriate adjustments, if necessary, in marketing strategy, product design and product rates.
Commission expense increased $12.3 million or 19.2% in 1995, and increased $7.1 million or 12.5% in 1994. As a percentage of total premiums, commission expense decreased to 27.8% in 1995, from 31.6% in 1994, and from 34.1% for 1993. These changes in the effective commission rate are directly related to changes in the relative levels of new business (for which a higher commission rate is payable) and renewal business. An increase in renewal business relative to total business resulted in a decrease in commission expense as a percentage of total premiums in 1995 relative to 1994, as well as in 1994 relative to 1993.
General and administrative expenses increased $2.2 million or 9.8% in 1995, and increased by $0.7 million or 3.4% in 1994. As a percentage of total premiums, general and administrative expenses have decreased to 9.2% in 1995 from 11.3% in 1994 and 13.3% in 1993. The general and administrative expense increases are due primarily to the incremental costs in servicing a larger in force policyholder base. However, as a percentage of premiums, general and administrative costs have decreased as the Company has been able to realize economies of scale.
Interest expense increased significantly in 1995, as a result of the Company's issuance of $103.5 million of 6.5% Convertible Subordinated Debentures due in 2005. The proceeds were used to make a $58 million surplus contribution to ATL, to pay down the $20 million revolving credit facility and for general corporate purposes. Interest expense in 1994 reflects borrowings on the revolving credit facility only.
Amortization of deferred policy acquisition costs increased $0.9 million or 4.4% in 1995, and increased $1.5 million or 8.3% in 1994. These increases reflect the higher levels of deferred policy acquisition costs, which have increased by $22.7 million in 1995, and increased $22.2 million in 1994. Amortization of deferred policy acquisition costs varies with, and is directly related to, the lapse rates of premiums in force. Improved persistency has resulted in decreased amortization of deferred policy acquisition cost in relation to the average deferred policy acquisition cost asset during the periods when compared with prior periods.
Amortization of the value of business acquired varies with and is directly related to premiums in force on acquired business. The amortization of the value of business acquired has decreased as the lapse rates on the Company's acquired business, primarily relating to acquisitions made in 1991 and prior, have declined.
Policy acquisition costs deferred increased $1.3 million or 3.2% in 1995, and increased $2.0 million or 5.0% in 1994. Policy acquisition costs, which consist of principally excess first year commissions and policy issue and underwriting costs, vary with and are directly related to new business premiums.
Income before taxes $34.7 $27.0 $23.3 Tax-free income (3.7) (2.5) (0.4) Taxable income 31.0 24.5 22.9 Provision for income taxes 11.0 8.6 8.0 Additional provision - - 0.7 Total provision for income taxes $11.0 $8.6 $8.7
The Company's current tax provision was $12.0 million, $7.9 million and $1.0 million for years 1995, 1994 and 1993, respectively. The significant increase in taxes currently payable is the result of the Company's continued growth which limits the availability of the small life company deduction, while at the same time increasing other temporary differences. These temporary differences may grow during 1996 and 1997. Although these differences will not increase the Company's effective tax rate for financial reporting purposes, they will result in a greater amount of taxes which are currently payable.
In October 1994, the Company received net cash of $29.2 million as a result of the JCP Acquisition. The transaction consisted of the acquisition of approximately 20,000 policies with annualized premiums of approximately $25.0 million at the date of acquisition. The effect of this acquisition on the 1994 results of operations was not material.
State insurance laws and regulations require the insurance company subsidiaries to maintain capital and surplus at specific levels. During 1993, regulators began to utilize a "risk-based" capital and surplus analysis as a guide to determine the appropriate level of capital and surplus. As of December 31, 1995, the "adjusted" statutory capital and surplus for the insurance company subsidiaries was above all required capital levels. The Company must continue, however, to increase its insurance subsidiaries' statutory capital and surplus to support significant increases its sales of new policies or acquisitions of other blocks of business. The Company has available a revolving credit facility and other funding sources to support future growth.
The Company adopted the provisions of Statement of Financial Accounting Standards No.115, "Accounting for Certain Investments in Debt & Equity Securities" (SFAS 115) as of at January 1, 1994. Under SFAS 115 investments in debt and equity securities are accounted as follows:
"Held to maturity" securities are securities that the Company has the positive intent and ability to hold to maturity and are reported at amortized cost. Securities that are brought and held principally for the purpose of selling in the near term are classified as "trading securities" and reported at fair value, with unrealized gains and losses included in earnings. Securities not classified in these two categories are classified as "available for sale" and reported at fair value, with unrealized gains and losses reported, net of tax, in a separate component of shareholders' equity.
We have audited the accompanying consolidated balance sheets of American Travellers Corporation (a Pennsylvania corporation) and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits.
Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the index of the financial statements are presented for purposes of complying with the Securities and Exchange Commission's rules and are not a required part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in our audits of the basic financial statements and, in our opinion, are fairly stated in all material respects in relation to the basic financial statements taken as a whole.
LIABILITIES AND SHAREHOLDERS' EQUITY Policy liabilities: Future policy benefits $247,562 $83,995 Claim Reserves 210,073 85,290 Unearned premium reserve 60,477 35,133 Total policy liabilities 518,112 204,418 Other liabilities 7,785 5,185 Bank Borrowings - 20,000 Current and deferred income taxes 35,939 34,862 6.5% convertible subordinated debentures 103,500 - Total liabilities 665,336 264,465 Shareholders' equity: Preferred stock, $.0l par value; 5,000,000 shares authorized; no shares issued - - Common stock, $.01 par value; 37,500,000 shares authorized; 16,053,105 and 15,962,268 shares issued 107 106 Capital in excess of par value 60,015 59,480 Net Unrealized gain on investments 10,245 - Retained earnings 101,187 77,502 Less-Shares of common stock held in treasury, at cost (200,159 shares) (749) (749) Total shareholders' equity 170,805 136,339
The accompanying notes are an integral part of these statements. AMERICAN TRAVELLERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (In thousands, except per share data) Year ended December 31, 1995 1994 1993 Revenues: Accident and health premiums $265,732 $195,024 $162,322 Life premiums 8,235 6,864 4,052 Investment income 23,190 11,023 9,395 Securities gains (losses) 175 (10) 227
Income before provision for income taxes 34,694 26,982 23,323 Provision for income taxes 11,009 8,554 8,715
Net income per share: Primary $1.45 $1.14 $.92 Fully diluted $1.36 $1.14 $.92
AMERICAN TRAVELLERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (In thousands)
Balance, 12/31/94 15,963 106 59,480 - 77,50 (749) 136,339 Net income 23,685 23,685 Exercise of stock option 90 1 400 401 Tax benefit from exercise of stock options 135 135 Unrealized Gain Investments $10,245 10,245
Cash flows-financing activities Debenture issue costs (3,796) - - Proceeds from issuance of Subordinated Debentures 103,500 - - Bank borrowings - 8,000 12,000 Exercise of options 536 939 405 Repayment of Bank borrowings (20,000) - -
Net increase (decrease) in cash and cash equivalents 61,081 (1,153) 6,946 Cash and cash equivalents, beginning of year 9,133 10,286 3,340
Supplemental disclosure of cash flow information Cash paid during the year for: Interest $ 1,319 $ 990 $ - Income taxes $15,300 $3,465 $ 970
AMERICAN TRAVELLERS CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1995 (In Thousands, except share data)
The Company adopted the provisions of Statement of Financial Accounting Standards ("SFAS"), Accounting for Certain investments in Debt and Equity Securities (SFAS 115), as of January 1, 1994. Under SFAS 115, investments in equity and debt securities are classified in three categories and accounted for based upon the classification. In December 1995, the Company transferred its investments from the "held to maturity" classification to the "available for sale" classification pursuant to SFAS 115 and has recorded such investments at fair value with unrealized gains and losses reported as a component of shareholders' equity, net of tax. See Note 3.
Policy acquisition costs, which vary with and are directly related to the production of new business, are deferred. The costs deferred, consisting principally of commissions and policy issuance costs, are being amortized with interest in accordance with actuarial assumptions which consider the anticipated period the policy will be in force in relation to the premiums expected to be earned. These assumptions are consistent with those used in developing policy reserves.
Future policy benefits and claim reserves are determined based upon generally accepted actuarial methods. Unpaid claim reserves are based upon the aggregate of claim estimates for reported and unreported losses based upon experience. While the ultimate amount of claims incurred and the related expenses are dependent on future developments, in management's opinion, the reserves for future policy benefits and claims are adequate to cover anticipated losses and expenses.
SFAS 123, Accounting for Stock-Based Compensation, will be adopted by the Company in 1996. This statement provides alternative methods for accounting for employee stock compensation plans. A company can elect to use the new fair-value-based method of accounting for employee stock compensation plans, under which compensation cost is measured and recognized in results of operations, or continue to account for these plans under the current accounting standards. Entities electing to remain with the present accounting method must make disclosures of what net income and earnings per share would have been if the fair-value- based method of accounting had been applied. The Company plans to continue to account for employee stock options using the present accounting method and include the required disclosures in the financial statements.
Financial statements for 1993 and 1994 have been reclassified to conform with the 1995 presentation.
The consolidated financial statements have been prepared in accordance with GAAP; these principles differ from practices prescribed or permitted by insurance regulatory authorities (statutory accounting practices) in the following material respects-
1995 1994 1993 Fixed maturity investments $15,308 $10,185 $8,926 Mortgage-backed securities 3,076 223 28 Cash and short-term investments 1,613 437 342 Mortgage loan and other 3,193 178 99
December 31, 1994 U.S. Government Obligations $52,190 $134 $(2,582) $49,742 Mortgage-backed securities 9,975 16 (52) 9,939 States and Political Subdivisions 95,194 6 (3,822) 91,378 Corporate Securities 80,839 135 (3,062) 77,912
The amortized cost and market value of debt securities at December 31, 1995 and 1994, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Market Cost Value December 31, 1995 Due in one year or less $46,383 $46,425 Due after one year through five years 103,326 104,890 Due after five years through ten years 138,634 145,181 Due after ten years 97,590 102,208 Mortgage-backed securities 180,926 183,917
As of December 31, 1995 and 1994, the company did not have any individual investments in corporate securities which exceeded 10% of shareholders' equity. There were no non-income producing investments during the year ended December 31, 1995 and 1994.
1995 1994 1993 Statutory net income (loss) $(43,287) $ 2,232 $ 4,065
In 1995, ATL acquired the long term care business of an unrelated insurer, for which it paid a $40,000 ceding allowance. See Note 15. The cost of this acquisition, and its related tax consequences, are primarily responsible for the 1995 statutory loss.
ATL is required by insurance laws and regulations to maintain minimum capital and surplus, determined in accordance with statutory accounting regulations. Under Pennsylvania insurance law, dividends may be paid by ATL only from statutory profits or surplus and require Pennsylvania Insurance Department approval if the dividend is in excess of the greater of l0% of surplus or net statutory income of the prior year. The Department must be notified of any dividend in excess of one-half of l% of admitted assets of ATL.
The Company adopted the accounting and disclosure rules of SFAS 109, "Accounting for Income Taxes," effective January 1, 1993, under which the tax benefit of the small life insurance company deduction cannot be anticipated for purposes of offsetting a deferred tax liability for taxable temporary differences at the end of the current year. As a result, the adoption of SFAS 109 resulted in an increase in the deferred tax liability of $5,500 based on taxable temporary differences and the net deferred tax liability at January 1, 1993. The Company has restated as permitted under SFAS 109, prior years' financial statements to record the effect of the adoption of this pronouncement.
Deferred tax assets Policy liabilities 6,031 5,869 Net operating loss carry forward 575 670 Capital loss carryforward 47 185 Alternative minimum tax credit carry forward - 6 Other 503 551
Deferred taxes relating to: Deferred policy acquisition costs (2,597) 4,848 7,622 Future policy benefits, claims and unearned premium reserves 2,154 (1,619) (323) Amortization of intangibles (705) (643) (884) Net operating loss for tax purposes (518) 118 199 Tax rate increase on prior year temporary differences - - 702 Other, net 614 (2,032) 309
The per share exercise price may not be less than 100% of the fair market value of the common stock on the date of grant, or 1l0% of the fair market value in the case of incentive stock options issued to an employee owning, at the time the option is granted, more than 10% of the outstanding common stock of ATC. Options cannot be exercised more than ten years after the date of grant. Incentive stock options held by shareholders owning more than 10% of the outstanding common stock of ATC cannot be exercised more than five years after the date of grant.
Number of Shares 1995 1994 1993 Outstanding at beginning of year 1,234,788 1,390,788 1,341,774 Granted 564,375 142,500 276,000 Exercised (90,837) (298,500) (226,266) Canceled - - (720)
At December 31, 1995, the number of shares exercisable and options available for additional granting for all plans was 1,444,503 and 259,698, respectively. The exercise price of options outstanding at December 31, 1995, ranged from $1.46 to $15.75 per share. The average exercise price at December 31, 1995, is $8.44 per share. During 1995, options for 90,837 shares were exercised at a range of $1.58 to $8.66 per share.
On April 25, 1990, the Company declared a dividend distribution in the form of preferred stock purchase rights (the "rights"). The rights become exercisable if a person or group acquires or announces a tender offer to acquire 20% or more of the Company's common stock. The rights also become exercisable if the Board of Directors declares a person to be an "adverse person" and that person has obtained more than 10% of the outstanding shares of the Company's common stock.
The Board of Directors can redeem the rights for $.01 per right at any time prior to the acquisition by a person or group of beneficial ownership of 20% or more of the Company's common stock or a person being declared an adverse person. Until a right is exercised, the holder thereof will have no rights as a shareholder of the Company, including without limitation, the right to vote or to receive dividends. Unless earlier redeemed or exchanged, the rights will expire on May 14, 2000.
1995 1994 1993 Claim reserves-beginning of year: $ 85,290 $ 55,958 $ 43,315
Add claims incurred during the year related to- Current year: 133,221 91,831 73,398 Prior years: 6,327 3,131 5,213
The assumed rate of increase in future compensation levels used in determining the actuarial present value of the projected benefit obligation is 5% in 1995 and 1994. The expected rate of return on assets is 8% in 1995 and 1994. The discount rate used is 7% in 1995 and 1994.
The Company is a defendant in various legal proceedings and litigation arising in the ordinary course of business. In management's opinion, based on discussions with counsel, the resolution of such proceedings will not have a material adverse effect on the Company's consolidated financial condition and results of operations.
A civil shareholders' class action suit filed against the Company and certain of its officers in March 1992 was settled during the second quarter of 1993. Under the terms of the settlement, class members were paid $1,500, of which $1,000 was paid by the Company's liability carrier. While the Company believed the suit was without merit, a settlement was reached to avoid internal distraction, ongoing professional fees and other potential costs and uncertainties of continued litigation.
The Company has employment contracts with certain key employees. These contracts provide for, among other things, certain severance payments in the case of termination.
In September 1995 the Company issued $103,500 of 6.5% Convertible Subordinated Debentures (the "Debentures") due October 1, 2005. The proceeds were used to finance an additional surplus contribution to ATL, prepay $20 million in outstanding borrowings under the Company's Revolving Credit Facility and for general corporate purposes.
Interest on the debentures is payable semi-annually on April 1 and October 1, commencing on April 1, 1996. The Debentures are redeemable at the Company's option at a price equal to 103.25% after October 1998, declining to 100% if redeemed after October 2001.
The Debentures are convertible into ATC common stock anytime prior to maturity at a conversion price equal to $15.17 per share (equivalent to a conversion rate of 65.94 shares per $1,000 principal amount of debentures). The conversion price has been adjusted to reflect the 3- for-2 stock split discussed in Note 1, and is subject to further adjustment under certain events including dividends distributions and common stock issuances, among others.
Debt issue costs incurred in connection with the Debentures totaling $3,796 are included in other assets and are being amortized over the term of the Debentures. Accumulated amortization is $74 at December 31, 1995.
Borrowings are secured by the common stock of ATL and ATIS. Interest is payable at 0.25% over the bank's base rate, at 1.625% over the London interbank Eurodollar rate or 1.75% over the bank's certificate of deposit rate, at the Company's option. The average interest rate for amounts borrowed was 8.35% and 8.44% for 1995 and 1994, respectively. A commitment fee is payable to the bank based on the average daily unused portion of the credit.
Operating lease expenses for the years ended December 31, 1995, 1994, and 1993 were $1,670, $1,607 and $1,734, respectively.
Net Income Per Share Primary $ .32 $ .34 $ .35 $ .44 Fully Diluted $ .32 $ .34 $ .34 $ .36
Total Revenues $ 49,610 $ 50,605 $ 52,043 $ 60,643 Total Benefits and Expenses 43,439 44,205 45,149 53,126 Income before provision for income tax 6,171 6,400 6,894 7,517 Provision for Income Taxes 1,929 2,010 2,178 2,437 Net Income $ 4,242 $ 4,390 $ 4,716 $ 5,080
Per share amounts have been adjusted to reflect the three-for-two stock split payable on April 10, 1996.
Government issues $133,703 $136,456 Mortgage-backed securities 180,926 183,917 State & political subdivisions 78,915 80,350 Public utilities 18,061 19,133 All other corporate bonds 155,229 162,740
Preferred stock, $.01 par value;5,000,000 shares authorized; no shares issued - - Common stock, $.01 par value; 37,500,000 shares authorized, 16,053,105 and 15,962,268 shares issued) 107 106 Capital in excess of par value 60,015 59,480 Net unrealized gains on investments 10,245 - Retained earnings 101,187 77,502 Less - shares of common stock held in treasury at cost (200,159) (749) (749)
Share amounts have been adjusted to reflect the three-for-two stock split payable on April 10, 1996.
SCHEDULE II(Continued) AMERICAN TRAVELLERS CORPORATION (PARENT COMPANY) CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF INCOME AND RETAINED EARNINGS (In thousands)
Schedule II (Continued) AMERICAN TRAVELLERS CORPORATION AND SUBSIDIARIES NOTES CONSOLIDATED FINANCIAL STATEMENTS