The selected consolidated financial information set forth below has been derived from the consolidated financial statements of the Company and should be read in conjunction the Consolidated Financial Statements and notes thereto included elsewhere in this report, which have been audited by Coopers and Lybrand, LLP and "Management's Discussion and Analysis of Financial Condition and Results of Operations".
(1) Restated for the acquisition of REF Associates, Inc. accounted for as a "pooling of interests".
1996's results were favorably impacted by improved overall average accident and health policy benefits ratio offset by the Company's decision to recapture reinsurance ceded on certain multi-pay pre-need life insurance policies which resulted in a non recurring pre-tax charge in 1996 of $1 million.
Accident and health premium: Accident and health gross premium for 1996 was $57.2 million compared to $39 million for 1995 and accident and health ceded premium in 1996 was $25.7 million compared to $15.9 in 1995, both of which increased as a result of increased new business from "The Provident Solution" and HealthQuest one life managed care health insurance products.
$41.7 million, respectively, consisting of approximately 36,000 and 23,000 certificate holders, respectively. The $26.5 million net increase in annualized premium resulted from an increase in new business issued in 1996 of $53.6 million ($19.9 million in 1995), plus $6.5 million of annualized premium related to the HealthQuest book acquired on May 1, plus premium rate increases of approximately $8.4 million less lapses amounting to approximately $42 million. "The Provident Solution" and HealthQuest accounted for 65% and 25% of the inforce premium at year end 1996 and 1995, respectively, of the group accident and health business.
The lapse ratio on small group and managed care accident and health insurance business based on annualized premium of 38% in 1996 declined from 41% in 1995. The lapse ratios to reflect the results of premium rate increases as well as the Company's continued shift toward managed care plans and away from traditional healthcare insurance. The Company's traditional healthcare insurance plans have higher premiums and higher policy benefits than its managed care plans. The accident and health lapse ratios include small group medical plans which by their nature have high lapsation. In order to further reduce the lapse ratio, the Company continues to follow the practice of pooling claim experience for re-rating of all cases with less than 25 participants. In addition, the Company has a conservation program which, as part of the renewal process, offers alternatives such as increased deductibles and different benefit structures designed to enable policyholders to maintain insurance protection without increased premium rates. While some policy-holders have switched to lower premium insurance plans, the Company does not believe the plans are less profitable.
Life and annuity premium of $11.3 million for 1996 declined from 1995 due to reduced new premium growth caused by refinements in pre-need product and the Company's elimination of certain unprofitable marketing relationships selling the Company's pre-need products. The individual life insurance premium lapse ratios on an annualized basis for 1996 and 1995 were 9.7% and 9.1%, respectively.
Life and annuity reinsurance ceded of ($1.9 million) was $5.5 million higher compared to 1995 due to the Company's 1996 recapture of reinsurance originally ceded in 1995 on certain multi-pay pre-need life insurance policies. The Company recaptured this business as a result of the availability of additional capital resulting form the Litigation Settlement. The recapture impact on 1996 results accounted for the following amounts; Premium - Life and annuity reinsurance ceded of $2.4 million, Death and other life policy benefits of $3.1 million and Commissions, net of ceding allowance of $0.3 million. The cession impact on 1995 results accounted for the following amounts; Premium - Life and annuity reinsurance ceded of $3.2 million, Death and other policy benefits of $3.2 million and Commissions, net of ceding allowance of ($1.0) million.
Net investment income of $3.3 million for 1996 increased modestly compared to 1995 primarily due to an increase in bond investments which occurred in late 1996.
Accident and health premiums, net of reinsurance Gross before reinsurance ceded $57,195 $39,028 Less reinsurance ceded (25,670) (15,882) ---------------------------- Premiums, net of reinsurance $31,525 $23,146 ============================ Accident and health policy benefit ratio 60.2% 62.5%
Net loss: The Company's 1995 Net loss applicable to common stock was $4.0 million or ($0.44) per share compared to a loss of $1.3 million or ($.16) per share for 1994. The Company's 1995 Net loss was unfavorably impacted by a non recurring expense charge (write-off) of $2.2 million of intangible assets and certain property and equipment, and a decreased amount of accident and health premium, without a corresponding reduction of other operating expenses. 1995 has been restated for the acquisition of REF accounted for as a pooling of interests.
Life and annuity premium of $13.2 million for 1995 increased compared to $10.7 million for 1994 due to increased pre-need sales. Life and annuity reinsurance ceded of $3.7 million was $3.2 million higher compared to $0.4 million for 1994 due to the Company's 1995 reinsurance of certain multi-pay pre-need life insurance policies. The individual life insurance premium lapse ratios on an annualized basis for 1995 and 1994 were 9.1% and 7.8%, respectively. The higher 1995 lapse ratio results primarily from final expense policies.
Accident and health policy benefits ratio improved in 1995 compared to 1994 as a result of improved experience in the Company's high deductible medical excess loss insurance for self insured employers.
Accident and health premiums, net of reinsurance Gross before reinsurance ceded $39,028 $46,164 Less reinsurance ceded (15,882) (20,043) ----------------------- Premiums, net of reinsurance $23,146 $26,121 ======================= Accident and health policy benefit ratio 62.5% 63.5%
Commissions, net of ceding allowance of $4.5 million in 1995 increased compared to $4.2 million in 1994 primarily due a reduction in the amount of accident and health reinsurance ceding allowances of $1 million which resulted from a decreased amount of accident and health premium, partially offset by lower paid accident and health commissions paid to agents. Ceding allowances are a reduction to commission expense.
Other operating expenses of $12.2 million in 1995 increased $2.5 million compared to $9.7 million in 1994 primarily due to a one time expense charge (write-off) in 1995 of $2.2 million. In 1995 the Company adopted Statement of Financial Accounting Standards (SFAS) No. 121 "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to be Disposed of". This standard requires that long-lived assets and certain identifiable intangibles held and used by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. At the time of adoption, management determined that certain intangible assets and equipment should be written off. Approximately $2.2 million was charged against operations in 1995. The assets related to systems development and hardware costs are being replaced with systems being acquired through acquisitions and will no longer be used. In addition, the carrying value of goodwill and value of insurance in force purchased was reevaluated considering the Company's historical results.
Excluding the write-off in 1995, other operating expenses were 19.1% of total gross earned premium in 1995, up from 17% in 1994 due to a decreased amount of accident and health premium, without a corresponding reduction of other operating expenses.
A major objective of the Company is to maintain sufficient liquidity to fund growth, fulfill statutory requirements and meet all cash requirements with cash and short term equivalents plus funds generated from the cash flow from operations.
The primary sources of cash are premiums, investment income and investment sales and maturities. The primary uses of cash are benefit payments to insureds, operating costs including policy acquisition costs and investment purchases. The Company's liquidity requirements are primarily created and met by PILIC and PALHIC.
Cash and investments carried at market value at December 31, 1996 amounted to $68.2 million which consisted of $55 million of bonds issued by the U.S. Government, government agencies, public utilities and other corporations, $4.9 million of equity securities, $2.1 million invested in policy loans, real estate and other invested assets and $6.2 million in cash and cash equivalents. Bonds are investment grade securities with fixed incomes ranging in maturity from one to 30 years. The gross average yield on fixed income bonds as of December 31, 1996, 1995 and 1994 was 6.5%, 6.3% and 7%, respectively. The Company's investment policy is to buy medium term U.S. government direct and agency bonds which may require periodic sales of securities prior to maturity when cash flow from operations is not sufficient to meet current obligations. All bonds are considered to be "available for sale". The Company and its subsidiaries do not invest in high yield debt instruments, defined as securities below investment grade with interest rates or yields significantly above market rates.
Net cash from operating activities of $1.1 million in 1996 excludes stock received from Loewen but includes cash received from Loewen and the Company's federal income tax payments which largely relate to the settlement and subsequent realized gain on the sale of Loewen stock.
Withdrawals from contractual deposit funds of $2.3 million, $1.8 million and $1.5 million for 1996, 1995 and 1994, respectively represented withdrawals from PILIC's deposit administration group annuities which were originally sold in the late 1970s and may be surrendered by contractholders. Practically all these contracts are subject to a 5% surrender charge, a six month waiting period, a maximum withdrawal of $50,000 per month and reduction to 3% in the amount of interest which is credited during the termination phase. Surrender benefits on all other insurance products over the past several years have not been significant and are not expected to be in the future. The pre-need and final expense life products are relatively small and do not accumulate significant surrender benefits.
PAMCO's assets consist primarily of the stock of its direct subsidiaries. PAMCO's principal sources of funds in 1996 were PAMCO's portion of the Loewen settlement and the issuance of stock. In 1995 and 1994 principal sources were bank borrowings and borrowings from its direct and indirect subsidiaries. Cash requirements consist of payment of interest and principal on its outstanding debt, preferred dividends and the expenses of its corporate activities. PAMCO sold its portion of Loewen stock in the first quarter of 1997 which the Company believes will provide sufficient funds to meet its current obligations.
The Company anticipates that it will fund surrenders and benefit payments along with other operating expenses through Net cash from operating activities, scheduled investment maturities, and the liquidation of short-term investments. Excess cash flow from operations and financing are transferred to the investment portfolio where it is available for investment and future cash needs. Anticipated capital expenditures are discussed later.
Capital commitments in 1997 are anticipated to be approximately $1 million for computer hardware and software equipment which is expected to be leased over a period of four years with a one dollar buyout at the end of the lease. The Company anticipates purchasing in 1997 a parcel of land adjacent to the Company's existing office and spending approximately $2.5 million for an approximate 18,000 square foot addition to the Company's principal office located in Norristown, Pennsylvania.
Consolidated Statements of Cash Flows - Years ended December 31, 1996, 1995 and 1994