The Company's principal offices in Allentown, Pennsylvania, occupy approximately 30,000 square feet of office space in a 40,000 square foot building, owned by the Company. The Company also leases additional office space in Florida, California, Vermont and New York.
The Company owns a 2.42 acre parcel of land, which remains vacant, and an 8,000 square foot facility used for printing, mail processing and supply warehousing, both located across the street from its home office.
(1) The Company adopted Statement of Financial Accounting Standards No. 128, "Earnings Per Share," which requires retroactive restatement of basic and diluted earnings per share.
Net income 8.6% 4.1% 9.5% ----- ----- ----- ----- ----- -----
The number of years a policy has been in effect. Claims costs tend to be higher on policies that have been in-force for a longer period of time. As the policy ages, it is more likely that the insured will have need for services covered by the policy. However, the longer the policy is in effect, the more premium the Company will receive.
Invesment income. The Company's investment portfolio consists primarily of high-grade fixed income securities. Income generated from this portfolio is largely dependent upon prevailing levels of interest rates. Due to the longevity of the Company's investment portfolio duration (approximately 4.5 years), investment interest income does not immediately reflect changes in market interest rates. However, the Company is susceptible to changes in market rates
Other factors which affect the Company's results of operations are lapsation and persistency, both of which relate to the renewal of insurance policies, and first year compared to renewal premiums. Lapsation is the termination of a policy by nonrenewal and, pursuant to the Company's policy, is automatic if and when premiums become more than 31 days overdue; however, policies may be reinstated, if approved by the Company, within six months after the policy lapses. Persistency represents the percentage of premiums renewed, which the Company calculates by dividing the total annual premiums at the end of each year (less first year business for that year) by the total annual premiums in-force for the prior year. For purposes of this calculation, a decrease in total annual premiums in-force at the end of any year would be a result of non-renewal of policies, including those policies that have terminated by reason of death, lapse due to nonpayment of premiums, and/or conversion to other policies offered by the Company. First year premiums are premiums covering the first twelve months a policy is in-force. Renewal premiums are premiums covering all subsequent periods.
Renewal accident and health premiums earned by the Company in 1998 increased 27.6% to $131,669, compared to $103,185 in 1997. Renewal long-term care premiums in 1998 increased 27.4% to $128,258, compared to $100,674 in 1997. This increase reflects higher persistency and growth of in-force premiums. Renewal Medicare supplement premiums earned by the Company in 1998 increased 35.8% to $3,411, compared to $2,511 in 1997.
Commissions. Commissions to agents increased 45.3% to $80,273 in 1998 compared to $55,240 in 1997. Included are ANIC commissions on long-term disability policies, which generated $1,084 of expenses in 1998.
First year commissions on total accident and health business in 1998 increased 56.2% to $56,594, compared to First year commissions on total accident and health business in 1998 increased 56.2% to $56,594, compared to $36,240 in 1997, corresponding to the increase in first year accident and health premiums. The ratio of first year accident and health commissions to first year accident and health premiums was 69.2% in 1998 and 66.9% in 1997. The commission ratio increased in 1998 as a result of the increased sale of policies to younger individuals. The Company pays higher first year commissions on younger policies due to its expectation that these policies will generate revenues for more years
than at older issue ages. First year commissions on life business in 1998 decreased 17.4% to $726, compared to $879 in 1997, directly reflecting the Company's reduction in first year life premiums. The ratio of first year life commissions to first year life premiums was 86.8% in 1998 compared to 83.2% in 1997 due to an increase in single premium policies sold.
Renewal commissions on accident and health business in 1998 increased 28.0% to $21,226, compared to $16,580 in 1997, remaining consistent with the increase in renewal premiums discussed above. The ratio of renewal accident and health commissions to renewal accident and health premiums was 16.1% in 1998 and 16.1% in 1997. This ratio fluctuates in relation to the age of the policies in-force and the rates of commissions paid to the producing agents.
Net Policy Acquisition Costs Deferred. The net deferred policy acquisition costs in 1998 increased 65.8% to $46,915 compared to $28,294 in 1997, primarily due to higher commission rates paid for first year premiums as a result of the sale of younger age policies, which pay a higher commission percentage in the first year. The result of higher persistency incorporated into reserve factors is lengthier amortization of expenses and reduced net expenses in earlier periods. This deferral is net of amortization, which decreases or increases as the Company's actual persistency is higher or lower than the persistency assumed for reserving purposes. The deferral of policy acquisition costs has remained consistent with the growth of premiums, and the growth in amortization of policy acquisition costs has been modified by improved persistency.
General and Administrative Expenses. General and administrative expenses in 1998 increased 26.5% to $26,069, compared to $20,614 in 1997. General and administrative expenses, excluding goodwill and convertible debt cost amortization, as a percentage of premiums were 11.3% in 1998, compared to 11.9% in 1997. Also, the Company incurred approximately $100 of expense related to its original listing on the New York Stock Exchange. Economies of scale recognized from premium growth were partially offset by consulting expenses of approximately $300,000 from the Company's Y2K readiness projects and new systems conversions.
Comprehensive Income. During 1998, the Company's investment portfolio generated increases in unrealized gains of $10,032, compared to 1997 gains of $9,867. After accounting for deferred taxes from these gains, shareholders' equity increased by $24,591 from comprehensive income during 1998, compared to $13,176 in 1997, or an increase of $11,415 or 86.6%.
Accident and Health Premiums. First year accident and health premiums earned by the Company, excluding the contribution of ANIC, in the twelve month period ended December 31, 1997, increased 22.8% to $54,136, compared to $44,072 in 1996. First year long-term care premiums in 1997 increased 21.3% to $52,747, compared to $43,479 in 1996. The Company attributes its growth to continued improvements in product offerings, which competitively meet the needs of the long term care marketplace. In addition, the Company actively recruits and trains agents to sell its products. Management believes that it is no longer relevant to measure separate growth for nursing home and home health care policies given the Company's sale of comprehensive coverage plans and plans with attached riders. First year Medicare supplement premiums earned by the Company in 1997 increased to $1,388 from $592 in 1996. The Company uses Medicare supplement products as a marketing tool to compliment its other long-term care offerings.
Renewal accident and health premiums earned by the Company in 1997 increased 28.5% to $103,185, compared to $80,311 in 1996. Renewal long-term care premiums in 1997 increased 29.5% to $100,674, compared to $77,734 in 1996. This increase reflects higher persistency and growth of in-force premiums. Renewal Medicare supplement premiums earned by the Company in 1997 decreased 2.6% to $2,511 compared to $2,577 in 1996. This trend is consistent with the Company's decision not to actively pursue Medicare supplement business.
In addition, ANIC, which the Company acquired on August 30, 1996, generated accident and health premiums, comprised primarily of long-term disability coverage, of $6,822 during 1997, up from $2,274 recognized in 1996. Due to the accounting of the ANIC acquisition as a purchase, only four months of 1996 income and expense were recognized by the Company.
Life Premiums. First year life premiums earned by the Company decreased 27.5% to $1,056, in 1997, compared to $1,457 in 1996. The Company's life business has remained stable as the Company is focusing its marketing efforts on its long-term care products. Renewal life premiums in 1997 increased to $2,482, compared to $2,077 in 1996. This increase was primarily the result of renewals of first-year policies written in 1996.
Net Investment Income. Net investment income earned by the Company for 1997 increased 54.9% to $17,009 from $10,982 for 1996. This increase was primarily the result of growth in the Company's investment assets due to continued premium growth, and additional funds of approximately $72,000 obtained from the issuance of convertible debt late in 1996. From this sale, the Company recognized an approximate $6,500 capital gain, which is reportable in the first quarter of 1998. The Company recognized $1,417 of capital gains in 1997 due primarily to its desire to bolster investment earnings, which are reduced by the Company's investments in equity securities. Fixed income levels are lower from dividends received rather than interest from bonds.
Benefits to Policyholders. Benefits to policyholders in 1997 increased 47.5% to $123,865, compared to $83,993 in 1996, including ANIC expenses of $2,846. Accident and health benefits to policyholders, excluding disability, in 1997 increased 45.3% to $118,942 compared to $81,860 in 1996. The Company's accident and health loss ratio was 75.6% in 1997, compared to 64.9% in 1996. The increase in the Company's loss ratio is attributable in part to the impact of improved persistency upon the reserves held for future anticipated losses. In addition, the Company added approximately $12,000 to this reserve as a result of its reassessment of assumptions utilized in the actuarial determination of reserves for current claims liabilities and incurred but unreported liabilities for nursing home and home health care claims. The Company reviewed the assumptions underlying its reserves in connection with its recent employment of a new long-term care consulting actuary. The review encompassed certain actuarial assumptions related to the Company's products' benefit utilization and duration. During 1997, expenses for care management services of approximately $1,041 were classified as benefits to policyholders. The Company utilizes care management services in order to attempt to reduce overall claims expense. In 1996, the Company included approximately $450 of care management expenses as general and administrative expenses. Had this expense been classified as benefits to policyholders during 1996, the total 1996 loss ratio would have increased by .35% of premiums to 64.9%. The ANIC loss ratio was 41.7% in 1997 and 47.4% in 1996.
Life benefits to policyholders, including paid claims and reserve increases in 1997 decreased to $2,076, compared to $2,133 for 1996. The life loss ratio was 58.7% in 1997, compared to 60.4% in 1996.
Commissions. Commissions to agents increased 27.6% to $55,240 in 1997 compared to $43,305 in 1996. Included are ANIC commissions on long-term disability policies, which generated $1,251 of expenses in 1997.
First year commissions on accident and health business in 1997, and ANIC, increased 23.9% to $36,240, compared to $29,243 in 1996, corresponding to the increase in first year accident and health premiums. The ratio of first year accident and health commissions to first year accident and health premiums was 66.9% in 1997 and 66.4% in 1996. First year commissions on life business in 1997 decreased 18.9% to $879, compared to $1,084 in 1996, directly reflecting the Company's reduction in first year life premiums. The ratio of first year life commissions to first year life premiums was 83.2% in 1997 compared to 74.4% in 1996 due to an increase in single premium policies sold.
Renewal commissions on accident and health business in 1997 increased 34.7% to $16,580, compared to $12,313 in 1996, remaining consistent with the increase in renewal premiums discussed above. The ratio of renewal accident and health commissions to renewal accident and health premiums was 16.1% in 1997 and 15.4% in 1996. This ratio fluctuates in relation to the age of the policies in-force and the rates of commissions paid to the producing agents.
Net Policy Acquisition Costs Deferred. The net deferred policy acquisition costs in 1997 increased 48.6% to $28,294 compared to $19,043 in 1996, primarily due to an increase in policyholder persistency used in the establishment of deferred acquisition cost reserve factors. The result of higher persistency incorporated into reserve factors is lengthier amortization of expenses and reduced net expenses in earlier periods. This deferral is net of amortization, which decreases or increases as the Company's actual persistency is higher or lower than the persistency assumed for reserving purposes. The deferral of policy acquisition costs has remained consistent with the growth of premiums, and the growth in amortization of policy acquisition costs has been modified by improved persistency.
General and Administrative Expenses. General and administrative expenses in 1997 increased 31.7% to $20,614, compared to $15,648 in 1996. ANIC expenses accounted for $2,317 in 1997, which includes the amortization of goodwill and the present value of future profits. In addition, the Company recognized approximately $400 in non-recurring settlement charges in 1997 due to the consolidation of certain ANIC operations at the Company's headquarters. The settlement charges stemmed from severance costs, contract terminations and movement of operations. General and administrative expenses, excluding goodwill and convertible debt cost amortization, as a percentage of revenues were 11.9% in 1997, compared to 12.5% in 1996, which is due in part to the inclusion of approximately $450 of care management expenses in general and administrative expense in 1996 (.39% of premiums). Economies of scale achieved in 1997 were offset by ANIC consolidation charges and additional actuarial, compliance and legal fees associated with the duplicate filings of tax qualified plans in many states.
Net Income. Net income of $7,599 (including a contribution of $2,014 from ANIC) for 1997 was $4,562 or 37.5% below 1996 income of $12,160. Net income includes income tax provisions of $2,695 and $4,847 for the 1997 and 1996 periods, respectively. Income before federal income taxes decreased in 1997 by $6,713 or 39.5% to $10,294. This decrease was primarily attributable to the addition of approximately $12,000 to the Company's pending claim reserves as discussed in "Benefits to Policyholders." The Company made a 1997 provision for federal income taxes of $2,695, reflecting an effective rate of 26.2%, as compared to an effective 1996 tax rate of 28.5%.
Comprehensive Income. During 1997, the Company's investment portfolio generated increases in unrealized gains of $9,867, compared to a $2,699 decrease in 1996. After accounting for deferred taxes on these gains, shareholders' equity increased due to comprehensive income by $13,176 and $12,160 in 1997 and 1996, respectively.
In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share, and simplifies the standards for computing earnings per share previously found in Accounting Principles Board Opinion No. 15, "Earnings per Share." SFAS 128 prescribes that for all financial statements with effective dates after December 31, 1997, primary and fully diluted earnings per share will be replaced with basic and diluted earnings per share, and these amounts are required to be shown on the face of the income statement. Prior year per share amounts must also be restated if applicable. The Company adopted SFAS 128.
The FASB recently issued Statement 130, "Reporting Comprehensive Income," which requires that changes in comprehensive income be shown in a financial statement that is displayed with the same prominence as other financial statements. While not mandating a specific financial statement format, Statement 130 requires that an amount representing total comprehensive income be reported for fiscal years beginning after December 15, 1997. Restatement for earlier years is required for comparative purposes. The Company has no material effect on its financial condition or results of operations due to the adoption of Statement 130.
Because of the reliance upon new application systems to alleviate the risk of business operations due to the Y2K issue, the Company cannot guarantee that these systems will be implemented successfully or in a timely fashion. In the event that one or all of these new system conversions are unsuccessful, the Company could experience interruptions in its business operations, which are critical to its ongoing profitability and sustainability. However, the Company believes that its efforts in converting to new systems will be successful, and does not anticipate any failures or unnecessary delays in its critical functions as a result of the Y2K issue. By the end of the second quarter, 1999, the Company will review its progress in the completion of Y2K preparedness, both on in-house systems and external vendors. In the event either is not expected to be completed prior to January 1, 2000, the Company will correct its existing systems (which are substantially Y2K compliant already) and/or seek other vendors which are compliant.
The Company has spent approximately $300,000 to date related to modifying existing systems to become Y2K compliant, and anticipates the expenditure of approximately $100,000 more before the end of the third quarter, 1999. The Company estimates that this amount represents approximately 15% of its total information technology budget. The majority of the Company's efforts and expenditures have related to the installation of a new computer system, which, although correcting for Y2K issues, is being implemented for normal processing reasons rather than for Y2K. The Company expects the impact of Y2K to have no material impact upon its financial condition and results of operations.
The Company's cash flows were attributable to cash provided by operations, cash used in investing, and cash provided by financing. The Company's cash increased $27,161 in 1998 primarily due to the sale of $92,860 in bonds and equity securities and the maturity of $31,640 of bonds. These sources of funds coupled with $55,126 from operations more than offset $154,544 used to acquire bonds and equity securities. The major provider of cash from operations was premium revenue used to fund reserve increases of $78,915.
The Company's cash decreased by $40,373 in 1997 primarily due to the purchase of $134,199 in bonds, which more than offset cash provided by operations and $44,080 in proceeds from the sale of bonds. The major provider of cash from operations was additions to reserves of $59,038 in 1997.
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, 1998, the average maturity of the Company's bond portfolio was 6.3 years, and its market value represented 103.4% of its cost, with a current unrealized gain of $10,455. Its equity portfolio exceeded cost by $2,244 at December 31, 1998. The Company's equity portfolio exceeded cost by $5,042 in 1997 and $1,605 in 1996. On December 31, 1997, the average maturity of the Company's bond portfolio was 5.8 years, and its market value exceeded its cost by approximately $1,605 or 102.5% of its cost.
During 1998, the Company evaluated and changed its investment policy to allow for the acquisition of debt and equity securities rated "B" or better by bond rating agencies. Included in the Company's investment strategy was the decision to purchase convertible or preferred securities. The Company hired an investment management firm that specializes in convertible securities to manage this portfolio, The management firm is also a principle shareholder of the Company's common stock.
The Company's debt currently consists primarily of a mortgage note in the approximate amount of $1,800 and $74,750 in convertible subordinated debt. The convertible debt, issued in November 1996, is convertible at $28.44 per share until November 2003. The debt carries a fixed interest coupon of 6.25%, payable semi-annually. The mortgage note is currently amortized over 15 years, and has a balloon payment due on the remaining outstanding balance in December 2003. Although the note carries a variable interest rate, the Company has entered into an amortizing swap agreement with the same bank, with a notional amount equal to the outstanding debt, which has the effect of converting the note to a fixed rate of interest.
On December 31, 1997, PTLIC dividended its common stock ownership of PTNA to the Company. At that time, PTNA assumed substantially all of the assets, liabilities and premium in-force of PTLIC through a purchase and assumption reinsurance agreement. On December 30, 1998, the Company sold its common stock interest in PTLIC to an unaffiliated insurer. All remaining policies in-force were assumed by PTNA through a 100% quota share agreement.
In the event (i) the Company fails to maintain minimum loss ratios calculated in accordance with statutory guidelines, (ii) the Company fails to meet other requirements mandated and enforced by regulatory authorities, (iii) the Company has adverse claims experience in the future, (iv) the Company is unable to obtain additional financing to support future growth, or (v) the economy continues to affect the buying powers of senior citizens, the Company's results of operations, liquidity and capital resources could be adversely affected.
CERTAIN INFORMATION PRESENTED IN THIS FILING CONSTITUTES FORWARD LOOKING STATEMENTS WITHIN THE MEANING OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995. ALTHOUGH THE COMPANY BELIEVES THAT ITS EXPECTATIONS ARE BASED ON REASONABLE ASSUMPTIONS WITHIN THE BOUNDS OF ITS KNOWLEDGE OF ITS BUSINESS AND OPERATIONS, THERE CAN BE NO ASSURANCE THAT ACTUAL RESULTS OF THE COMPANY'S OPERATIONS WILL NOT DIFFER MATERIALLY FROM ITS EXPECTATIONS. FACTORS WHICH COULD CAUSE ACTUAL RESULTS TO DIFFER FROM EXPECTATIONS INCLUDE, AMONG OTHERS, THE ADEQUACY OF THE COMPANY'S LOSS RESERVES, THE COMPANY'S ABILITY TO QUALIFY NEW INSURANCE PRODUCTS FOR SALE IN CERTAIN STATES, THE COMPANY'S ABILITY TO COMPLY WITH GOVERNMENT REGULATIONS, THE ABILITY OF SENIOR CITIZENS TO PURCHASE THE COMPANY'S PRODUCTS IN LIGHT OF THE INCREASING COSTS OF HEALTH CARE AND THE COMPANY'S ABILITY TO EXPAND ITS NETWORK OF PRODUCTIVE INDEPENDENT AGENTS.
Financial Statements: Consolidated Balance Sheets as of December 31, 1998 and 1997
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996
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.
As of December 31, 1998, shareholders' equity was increased by approximately $8,381 due to net unrealized gains of approximately $12,699. As of December 31, 1997, shareholders' equity was increased by approximately $7,838 due to net unrealized gains of approximately $11,875 in the investment portfolio.
The costs primarily related to and varying with the acquisition of new business, principally commissions, underwriting and policy issue expenses, have been deferred. These deferred costs are amortized over the related premium-paying periods utilizing the same projected premium assumptions used in computing reserves for future policy benefits. Net policy acquisition costs deferred, on the consolidated statements of operations, are net of amortization of $16,277, $11,977 and $13,678 for the years ended December 31, 1998, 1997, and 1996, respectively. Recoverability of deferred acquisition costs, in certain instances, may be dependent upon the Company's ability to obtain future rate increases. The ability to obtain these increases is subject to regulatory approval, but is not guaranteed.
The present value of future profits of ANIC's acquired business is being amortized over the life of the insurance business acquired. During 1998, 1997 and 1996, approximately $415, $415 and $138 was amortized to expense, respectively.
Deferred income taxes relate principally to temporary differences in reporting policy acquisition costs and policy reserves for financial statement and income tax purposes. Deferred income tax assets and liabilities have been recorded for temporary differences between the reported amounts of assets and liabilities in the accompanying financial statements and those in the Company's income tax return.
Premiums on accident and health insurance, the majority of which is guaranteed renewable, and life insurance are recognized when due. Estimates of premiums due but not yet collected are accrued.
The present value of estimated future policy benefits to be paid to or on behalf of policyholders less the present value of estimated future net premiums to be collected from policyholders is accrued when premium revenue is recognized. Those estimates are based on assumptions, such as estimates of expected investment yield, mortality, morbidity, withdrawals and expenses, applicable at the time insurance contracts are made, including a provision for the risk of adverse deviation. These reserves differ from policy and contract claims, which are recognized when insured events occur.
Policy and contract claims reserves include amounts representing: (1) an estimate, based upon prior experience, for accident and health claims reported, and incurred but unreported losses; (2) the actual in force amounts for reported life claims and an estimate of incurred but unreported claims; (3) an estimate of future administrative expenses, which would be utilized to adjudicate existing claims. The methods for making such estimates and establishing the resulting liabilities are continually reviewed and updated and any adjustments resulting therefrom are reflected in earnings currently.
The establishment of appropriate reserves is an inherently uncertain process, including estimates for amounts of benefits and length of benefit period for each claim, and there can be no assurance that the ultimate liability will not materially exceed the Company's claim and policy reserves and have a material adverse effect on the Company's results of operations and financial condition. Due to the inherent uncertainty of estimating reserves, it has been necessary, and may over time continue to be necessary, to revise estimated future liabilities as reflected in the Company's policy reserves and policy and contract claims.
health care rider policy. In 1998, the Company introduced its Secured Risk policy, a limited benefit plan made available to higher risk applicants. Because of the Company's relatively limited claims experience with these products, the Company may incur higher than expected loss ratios and may be required to adjust further its reserve levels with respect to these products.
In February 1997, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 128, "Earnings per Share" ("SFAS 128"). SFAS 128 establishes standards for computing and presenting earnings per share, and simplifies the standards for computing earnings per share previously found in Accounting Principles Board Opinion No. 15, "Earnings per Share." SFAS 128 prescribes that for all financial statements with effective dates after December 31, 1997, primary and fully diluted earnings per share will be replaced with basic and diluted earnings per share, and these amounts are required to be shown on the face of the income statement. Prior year per share amounts must also be restated if applicable. Diluted earnings per share for 1996 is increased $.02 from previously reported fully diluted earnings per share due to the use of the average market price of Company shares in utilizing the treasury stock methodology to account for the dilutive nature of outstanding stock options.
A reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation follows. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock.
SFAS 128, however, prescribes that if the components of diluted earnings per share are anti-dilutive, then diluted earnings per share will not differ from basic earnings per share. In 1997, the Company reported basic and diluted earnings per share of $1.01 and $.98, respectively. Since the exclusion of the impact of interest expense from the Company's convertible debt would be anti-dilutive, the future anticipated conversion of the debt into additional shares is not included in the calculation of diluted earnings per share.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives") and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. While the Company is presently evaluating
the impact of SFAS No. 133, the adoption of SFAS No. 133 is not expected to have a material impact on the Company's financial condition or results of operations.
On December 30, 1998, the Company sold all of the common stock of PTLIC to an unaffiliated insurance company. The Company received approximately $3,300 in cash representing the final value of PTLIC's' statutory capital and surplus at December 30, 1998 and a purchase premium. All policies in-force were reinsured through a 100% quota share agreement to PTNA. PTLIC was sold as a nameless corporate entity, licensed to sell life and health products in 12 states.
The Company's bond and equity securities investment portfolio is comprised primarily of investment grade securities at December 31, 1998. Securities are classified as "investment grade" by utilizing ratings furnished by independent bond rating agencies.
Pursuant to certain statutory licensing requirements, as of December 31, 1998, the Company had on deposit bonds aggregating $7,145 in insurance department safekeeping accounts. The Company is not permitted to remove the bonds from these accounts without approval of the regulatory authority.
Amount of Policy Reserves as of December 31, 1998 1997 ---- ---- Accident and health $ 190,819 $ 139,963 Annuities and other 136 141 Ordinary life, individual 9,298 7,976
Years of Issue Discount Rate -------------- ------------- Accident and health 1976 to 1986 7.0% 1987 7.5% 1988 to 1991 8.0% 1992 to 1995 6.0% 1996 7.0% 1997 to 1998 6.8% Annuities and other 1977 to 1983 6.5% & 7.0% Ordinary life, individual 1962 to 1998 3.0% to 5.5%
Accident and health Morbidity and withdrawals based on actual and projected experience.
Annuities and other Primarily funds on deposit inclusive of accrued interest.
Ordinary life, individual Mortality based on 1955-60 Intercompany Mortality Table Combined Select and Ultimate.
Policy and contract claims include approximately $83,631 and $65,143 at December 31, 1998 and 1997, respectively, that are discounted at varying interest rates. The amount of discount was $2,284 and $4,101 at December 31, 1998 and 1997, respectively.
December 31, 1998, the combined balance in the "Shareholders' Surplus" account amounted to approximately $74,569. There is no present intention to make distributions in excess of "Shareholders' Surplus."
The Company's insurance subsidiaries (PTNA, ANIC and AINIC) are required by insurance laws and regulations to maintain minimum capital and surplus. At December 31, 1998 and 1997, the subsidiaries' capital and surplus exceeded the minimum required capital and surplus in all states in which they are licensed to conduct business.
Under Pennsylvania and Vermont insurance law, dividends may be paid from PTNA, ANIC or AINIC only from statutory profits of earned surplus and require Insurance Department approval if the dividend is in excess of the lesser of 10% of surplus or net statutory income of the prior year. In 1998, ANIC paid a dividend to the Company in the amount of $397.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas.
The Pennsylvania Insurance Department has adopted the Codification guidance, effective January 1, 2001. The Company has not estimated the effect of the Codification guidance upon its financial condition or results of operations.
At December 31, 1998, the Company had three stock-based compensation plans which are described below. The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, ("SFAS No. 123"), and applies APB Opinion No. 25 "Accounting for Stock Issued to Employees" and related Interpretations in accounting for its plans. Accordingly, no compensation cost has been recognized for its fixed employee stock option plans. Had compensation cost for the Company's employee stock-based compensation plans been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated below. The effects of applying the SFAS No. 123 proforma disclosure are not indicative of future amounts.
The Company's 1987 Employee Incentive Stock Option Plan, which provided for the granting of options to purchase up to 1,200 shares of common stock. This plan expired in 1997 and was subsequently replaced by the 1998 Employee, Non-Qualified Incentive Stock Option Plan. The 1998 Plan allows for the grant of options to purchase up to 600,000 shares of common stock. No new options may be granted under the 1987 Plan. 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.
PTNA is party to a reinsurance agreement to cede 100% of certain whole life and deferred annuity policies to be issued by PTNA to a third party insurer. These policies are intended for the funeral arrangement or "pre-need" market. Total reserve credits taken related to this agreement as of December 31, 1998 and 1997 were approximately $3,223 and $3,427, respectively. The third party reinsurer maintains securities at least equal to the statutory reserve credit in escrow with a bank. Effective January 1, 1996, this Agreement was modified, and as a result, no new business is reinsured under this facility.
PTNA 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, 1998 and 1997, reserve credits taken related to this treaty were approximately $1,852 and $1,947, respectively.
December 31, 1997 - - ----------------- Ordinary Life Insurance In-Force $65,964 $16,636 $ 0 $49,328 Premiums: Accident and health 167,187 3,546 501 164,142 Life 4,044 506 0 3,538 Benefits to Policyholders: Accident and health 86,829 2,770 258 84,317 Life 1,790 523 0 1,267 Inc (dec) in Policy Reserves: Accident and health 37,743 260 (11) 37,472 Life (407) (1,216) 0 809 Commissions $56,193 $1,028 $ 75 $55,240
December 31, 1996 - - ----------------- Ordinary Life Insurance In-Force $66,932 $18,004 $ 0 $48,928 Premiums: Accident and health 130,551 4,438 544 126,657 Life 4,147 612 0 3,535 Benefits to Policyholders: Accident and health 54,824 1,170 419 54,073 Life 1,632 477 0 1,155 Inc (dec) in Policy Reserves: Accident and health 28,568 764 (17) 27,787 Life 1,404 426 0 978 Commissions $44,770 $1,547 $ 82 $43,305
Long-term debt -- The statement value approximates the fair value of mortgage debt and capitalized leases, since the instruments carry interest rates, which approximate market value. The convertible, subordinated debt, as a publicly traded instrument, has a readily accessible fair market value, and, as such is reported at that value.
On November 25, 1998, the Company entered a purchase agreement to acquire all of the common stock of United Insurance Group Agency, Inc., a Michigan based consortium of long-term care insurance agencies. The acquisition was effective January 1, 1999 for the amount of $18,192, of which $8,078 was in the form of a three year installment note.The acquisition was effective January 1, 1999. The Company expects that the proforma effect of consolidating the financial results of UIG prior to 1999 would be immaterial to the Company's financial condition and results of operations.
Schedule II -- Condensed Financial Information of Registrant S-3 - S-5
In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein.