The Company's principal office is located at 3220 Tillman Drive, Bensalem, Pennsylvania. This property, which is owned by an unrelated third party, consists of approximately 150,000 square feet of space of which the Company leases approximately 52,000 square feet. The Company also leases space for its VFW operations in Kingston, Pennsylvania, and for its Southeastern Regional Office in Sarasota, Florida, from unrelated third parties. In addition, the Company owns its former principal office in Warrington, Pennsylvania.
Per Share Amounts: Primary: Net Income 1.45 1.14 .92(4) .68 .71 Weighted average number of shares Primary 16,316 16,133 15,804 15,617 15,549 Fully Diluted: Net Income 1.36 1.14 .92 .68 .71 Weighted average number of shares Fully Diluted 18,362 16,133 15,804 15,617 15,549
(1) Includes amortization of value of business acquired and premium taxes. (2) Represents deferred policy acquisition costs, net of amortization. (3) Restated to reflect adoption of Statement of Financial Accounting Standards No.109. (4) Includes $702, or $.07 per share, deferred tax adjustment for the years 1992 and prior, to reflect the change during 1993 in the corporate income tax rate.
All share and per share amounts have been adjusted to reflect a 3-for-2 stock split payable on April 10, 1996.
December 31, Percentage Change 1995 1994 1993 1995 v.1994 1994 v.1993
Total premiums in force $ 371.8 $240.9 $ 183.6 54.3% 31.2%
Nursing home $42.6 $40.2 $39.6 6.0% 1.5% Home health care 20.7 20.3 17.7 2.0% 14.7% Total long term care 63.3 60.5 57.3 4.6% 5.6%
Investment income, including securities gains (losses), increased $12.4 million or 112.4% in 1995, and increased $1.4 million or 14.5% in 1994. This reflects the availability of additional cash for investment principally from premium growth, the $103.5 million 6.5% Convertible Subordinated Debenture offering in September 1995, the Transport acquisition in 1995 and the JCP acquisition in 1994. As a result of these transactions, investment income in future years will be a more significant component of the Company's revenues and operating income.
The Company invests in investment grade debt instruments. It does not invest in high-yield debt securities, equities or real estate, and has historically held its investment portfolio at amortized cost. Although the Company's investment policy was to hold its investments until maturity, in the fourth quarter of 1995, the Company changed its investment strategy and made its entire portfolio available for sale. This will provide the Company with the flexibility to adjust its investment holdings in response to changing market conditions and other factors. During 1995, the Company increased its holdings in mortgage- backed securities to $183.9 million as compared to $10.0 million for the year ended 1994.
Year ended December 31, Percentage Change 1995 1994 1993 1995 v.1994 1994 v.1993
Paid claims $112.4 $78.0 $66.1 44.0% 18.1% Change in Claim Reserves 32.6 18.1 12.6 80.7% 42.8% Change in Benefit Reserves 27.9 18.1 9.6 54.1% 88.6%
Paid claims 41.0% 38.7% 39.7% Change in Claim Reserves 11.9% 8.9% 7.6% Change in Benefit Reserves 10.2% 9.0% 5.8%
The provision for income taxes increased $2.4 million or 28.7% in 1995, and increased $0.6 million or 6.8% in 1994 (excluding the effect of the additional provision of 1993). The components of the income tax provisions are as follows:
Effective Tax Rate (As a % of income before provision for taxes)
The 1993 tax provisions included a one-time tax adjustment of $0.7 million, reflecting an increase in deferred tax liabilities due to the change in corporate federal income tax rates from 34.0% to 35.0% during that year. Excluding this tax adjustment, taxes increased over each of the prior periods. The increased tax provision is directly attributable to the increase in the Company's pre-tax earnings. The Company's effective tax rate for financial reporting purposes was 31.7% for 1995 and 1994. The reduction in the effective tax rate in 1994 as compared to 1993 was primarily the result of a higher percentage of income derived from municipal bonds. However, the Company intends to sell its municipal bonds in 1996 resulting in the elimination of this tax free income.
The Company's primary sources of cash are premiums and investment income. Its primary uses of cash are payments of benefits, policy acquisition costs, operating costs and income taxes. In December 1993 the Company utilized its revolving credit line to make a $12.0 million surplus contribution to ATL. In the third quarter of 1994, this credit facility was increased to $20.0 million and an additional $8.0 million was borrowed and utilized to make an additional surplus contribution to ATL. In September 1995, the Company issued $103.5 million in convertible subordinated debentures. $20.0 million of the proceeds were used to pay down the Company's outstanding borrowings under this credit facility. The Company intends to keep its credit facility available. The credit facility is secured by the common stock of ATL and ATIS. There are no other lines of credit currently in place. The Company will be dependent on dividends from ATL to meet its debt service requirements after the cash at the holding company is exhausted. There are no other lines of credit currently in place. As of December 31, 1995, the Company had no material commitments for any capital expenditures.
In December 1995, the Company received net cash of $253.3 million as a result of the Transport acquisition. The transaction consisted of the acquisition of approximately 97,000 policies with annualized premiums of approximately $96 million at the date of acquisition. This transaction had the effect of significantly increasing cash and invested assets in support of the policy liabilities assumed. In future years investment income will be a more significant component of the Company's revenues and operating income.
Management believes that the effect of inflation is insignificant to its insurance operations, except with respect to its Medicare supplement product line.
In March 1995, the FASB issued SFAS 121, Accounting for the Impairment of Long-Lived Assets and for Long Lived Assets to be Disposed of. This statement, which must be adopted by March 31, 1996 establishes accounting standards for the impairment of long lived assets, certain identifiable intangibles and goodwill related to (1) those assets to be held and used in the business, and (2) assets to be disposed of. The Company does not anticipate a material effect on its financial statements from this new accounting standard.
Consolidated Financial Statements Consolidated Balance Sheets as of December 31, 1995 and 1994 30
Consolidated Statements of Income for the three years ended December 31, 1995 31
Consolidated Statements of Shareholder's Equity for the three years ended December 31, 1995 32
Consolidated Statements of Cash Flows for the three years ended December 31, 1995 33
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of American Travellers Corporation and subsidiaries as of December 31, 1995 and 1994, and the 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.
AMERICAN TRAVELLERS CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (In thousands, except share data) December 31, 1995 1994 ASSETS Investments:
Bonds, Available for Sale, at fair value (Cost $566,859) $ 582,621 $ - Bonds, Held to Maturity, at amortized cost (Market $228,971) - 238,198 Mortgage Loan 447 - Total investments 583,068 238,198 Cash and cash equivalents 70,214 9,133 Accrued investment income 6,781 4,192 Premiums due and deferred 7,027 5,518 Deferred policy acquisition costs 144,767 122,070 Value of business acquired (net of accumulated amortization $12,619 and $10,603) 12,846 14,316 Property and equipment, at cost (net of accumulated depreciation of $3,682 and $4,192) 4,176 5,168 Other assets 7,262 2,209 Total assets $836,141 $400,804
Benefits and expenses: Benefits to policyholders 172,903 114,200 88,347 Commissions 76,080 63,819 56,728 General and administrative 25,071 22,831 22,086 Premium taxes 6,007 4,187 4,231 Amortization of deferred policy acquisition costs 20,687 19,815 18,298 Amortization of value of business acquired 2,014 2,122 2,987 Less-policy acquisition costs deferred (43,384) (42,045) (40,036) Interest expense 3,260 990 32
Weighted average common shares and common equivalents: Primary 16,316 16,133 15,804 Fully diluted 18,362 16,133 15,804
Balance, 12/31/92 15,438 $103 $57,342 $ - $44,466 $(749) $101,162 Net income - - - 14,608 - 14,608 Exercise of stock options 226 1 404 - - 405
Balance, 12/31/93 15,664 104 57,746 - 59,074 (749) 116,175 Net income - - - 18,428 - 18,428 Exercise of stock options 299 2 939 - - 941 Tax benefit from exercise of stock options - - 795 - - 795
Share and per-share amounts have been adjusted to reflect the three-for- two stock split payable on April 10, 1996.
AMERICAN TRAVELLERS CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)
Cash flows-investing activities Proceeds from sales of investments 16,615 156 3,910 Proceeds from calls and maturities of investments 33,037 15,295 24,275 Purchase of investments (380,116) (99,551) (63,282) Purchase of fixed assets (352) (626) (693) Proceeds from acquisitions 249,969 29,186 -
The preparation of financial statements in conformity with GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management does not anticipate that actual results will differ significantly from these estimates.
Premiums are reflected as revenues primarily on a pro-rata basis as the premiums are earned. Expenses are associated with earned premiums, resulting in a recognition of profits over the lives of the contracts. This association is accomplished by providing liabilities for future policy benefits and by deferring, and then amortizing, policy acquisition costs.
Property and equipment are stated at cost. Improvements which materially increase the estimated useful life of the asset are capitalized. Expenditures for repairs and maintenance are charged to operations as incurred. Depreciation is provided principally on the straight-line method over the related estimated lives of the assets which range from 3 to 40 years. Upon sale or retirement, the cost of the asset and the related accumulated depreciation are removed from the accounts and the resulting gain or loss, if any, is included in income.
Primary earnings per common share are based on the weighted average number of shares outstanding during the period and the dilutive effect of stock options and other common stock equivalents. Fully diluted earnings per share are based on the weighted average number of shares outstanding, dilutive effect of common stock equivalents, and the assumed conversion of the 6.5% convertible subordinated debenture. Net income is increased by the interest on the debenture, net of related income taxes.
On March 4, 1996, the board of directors declared a three-for-two stock split for securityholders of record as of March 20, 1996, payable on April 10, 1996. Share and per share amounts have been retroactively adjusted to reflect this split for all years presented.
"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.
As further discussed in Note 3 to the financial statements, the Company has classified all of its investments as "available for sale" at December 31, 1995 and as "Held to maturity" at December 31, 1994.
The Company holds no derivative financial instruments subject to the provisions of SFAS No. 119, "Disclosure About Derivative Financial Instruments and Fair Value of Financial Instruments."
(a) Costs which vary with and are directly related to the writing of new insurance policies are deferred and then amortized over the anticipated period the policies will be in force in relation to the premiums expected to be earned on the policies. Under statutory accounting practices such costs are charged to expense as incurred.
(b) The accounts of wholly-owned subsidiaries are consolidated. Under statutory accounting practices such subsidiaries are carried at cost adjusted for subsequent operating results as determined under statutory accounting practices.
(l) GAAP basis-Future policy benefits are provided on the net level premium method which provides for anticipated rates of morbidity, mortality, interest and the Company's termination experience. Accident and health insurance future policy benefits are primarily calculated using morbidity based on the Company's experience. The future policy benefits on ordinary life insurance are calculated using the 1965-70 Intercompany male mortality rates. Unearned premium reserve is the gross unearned premium reserve less the portion of the premium for expenses, overhead and profit. Investment income is assumed at rates between 6.25% and 8.00%. Termination rates, exclusive of mortality, have been assumed to be between 17.5% and 33.0% in the first year decreasing to between 5.0% and 10.0% of the renewing policies after the fifteenth year. These assumptions vary by plan, year of issue and duration.
(2) Statutory basis-Future policy benefits on accident and health insurance consist primarily of unearned premium reserves. Future policy benefits on ordinary life insurance have been computed using the l958 and 1980 Commissioners' Standard Ordinary Mortality Table with interest assumed at rates between 3% and 5% applied on the Commissioners' Reserve Valuation Method basis with grading to the net level premium method.
(3) Claim reserves (both on a GAAP and Statutory basis) include provisions for reported claims in process of settlement as well as claims incurred but not reported based on prior experience of the Company. Interest is assumed at rates between 5.0% and 7.5%.
(e) Deferred income taxes, which for statutory purposes are not recognized, are provided as appropriate for temporary differences.
Pursuant to the requirements of SFAS 115, "available for sale" securities are reported at fair value with unrealized gains and losses reported net of tax as a separate component of shareholders' equity. As a result of this change the reported value of the investment portfolio, at December 31,1995, increased $15,762 with corresponding increases in shareholders' equity of $10,245 and deferred income taxes of $5,517.
The amortized cost and market values of investments in debt securities are as follows:
December 31, 1995 U.S. Government Obligations $ 133,703 2,836 (83) 136,456 Mortgage-backed Securities 180,926 2,995 (4) 183,917 States and Political Subdivisions 78,915 1,497 (62) 80,350 Corporate Securities 173,315 8,695 (112) 181,898
Amortized Market Cost Value December 31, 1994 Due in one year or less $26,840 $26,693 Due after one year through five years 123,997 118,809 Due after five years through ten years 70,134 66,378 Due after ten years 7,252 7,152 Mortgage-backed securities 9,975 9,939
At December 31, 1995 and 1994, bonds with an amortized cost of $7,669 and $9,153, respectively, are on deposit with various regulatory departments pursuant to statutory requirements.
ATC and its direct subsidiaries file a consolidated Federal income tax return. UGL files a separate Federal income tax return. ATL and UGL are taxed as life insurance companies under the Tax Reform Act of 1986 and Revenue Reconciliation Act of 1990. The 1990 Act requires life insurance companies to capitalize costs of acquiring certain insurance contracts and to amortize such costs over specified periods. The 1986 Act taxes life insurance companies at general corporate rates.
The components of deferred tax assets and liabilities, measured under SFAS 109 as of December 31, 1995 and 1994 are as follows:
1995 1994 Deferred tax liabilities Deferred policy acquisition cost and other intangibles $34,934 $37,288 Unrealized gain on investments available for sale 5,517 - Other 1,106 1,532
Net deferred tax liability 34,401 31,539 Current tax liability 1,538 3,323
The provision for Federal income taxes are comprised of the following:
A reconciliation between the Federal statutory tax rate and the Company's effective tax rate is as follows:
Statutory tax rate 35.0% 35.0% 35.0% Increase in taxes resulting from: Effect of tax rate increase on temporary differences as of January 1, 1993 - - 3.0% Decrease in taxes resulting from: Tax free investment income (3.3)% (3.3)% (0.6)%
ATC has $1,569 in non-life net operating loss carryforwards available for tax purposes, and has capital loss carryforwards of approximately $375 expiring in 1997.
Prior to 1984, ATL had accumulated $170 in a special policyholders' surplus account which has been excluded from taxation. These amounts will become taxable only when distributed to shareholders. No provision for deferred income taxes has been made for these amounts since the Company does not anticipate any transactions that would cause any part of the account to become taxable.
The Internal Revenue Service is conducting a review of the Company's federal income tax returns for the years ended December 31, 1993, 1992, 1991, and 1990. Management believes that the ultimate outcome of the review will not have any material adverse effect on the financial condition or results of operation of the Company.
ATC has adopted several stock option plans (the "Plans"). The Plans permit grants of options covering a maximum of 3,495,000 shares of common stock. Under the Plans, options may be issued as incentive stock options in the case of key employees and/or as non-qualified stock options in the case of persons with managerial, professional or supervisory responsibilities, including but not limited to, directors, officers and consultants to ATC, who, in the opinion of the Committee administering the Plans, have a capacity to make a substantial contribution to ATC. One of the Plans also provides for the issuance of up to 50,000 shares of the Company's common stock upon the exercise of stock options granted as formula awards pursuant to the plan.
Stock Options (The following table summarizes data relating to the stock options, as restated for the stock split.)
Each right, when exercisable, entitles the registered holder to purchase one one-hundredth of a share of Series A preferred stock at an exercise price of $50 subject to certain adjustments. In addition, if a person or group acquires 20% or more of the outstanding shares of the Company's common stock, subject to certain exceptions, or a person is declared an adverse person, each right will then entitle its holder (other than such persons or members of any such group) to purchase, at the right's then current exercise price, a number of shares of the Company's common stock having a total market value of twice the right's exercise price.
In addition, at any time after a person acquires 20% of the outstanding shares of common stock and prior to the acquisition by such person of 50% or more of the outstanding shares of common stock, the Company may change the rights (other than the rights which have become null and void), in whole or in part, at an exchange ratio of one share of common stock or equivalent share of preferred stock, per right.
Activity in the liability for policy claim reserves is summarized as follows for the years ended December 31:
The development of prior year claims reserves reflects normal changes in actuarial estimates. The Company utilizes case reserves that are considered fixed and determinable and discounts such reserves using an interest rate of 6.25% for financial statements prepared in accordance with GAAP and 5.0% discount rate for statutory purposes.
Effective January 1, 1984, ATC initiated a defined benefit pension plan (the "Plan") for all employees over the age of 2l years who have worked for ATC for a period of one year. ATC makes annual contributions to the Plan based upon amounts required to fund such plan as determined by a consulting actuary. Pension expense was $203, $181 and $154, for the years ended December 31, 1995, 1994 and 1993, respectively. The following table sets forth the plan's funded status at December 31, 1995 and 1994. 1995 1994 Actuarial present value of benefit obligations: Vested benefits $ 733 $ 593 Non-vested benefits 124 99
Projected benefit obligation $1,270 $ 1,052 Plan assets at fair value (750) (614)
Projected benefit obligation in excess of plan assets 520 438 Unrecognized net loss (276) (292) Unrecognized transition obligation (89) (92) Unrecognized prior service cost (64) (70)
Commissions paid to agencies controlled by certain directors amounted to $136 in 1995, $140 in 1994 and $104 in 1993.
At December 31, 1994, $20,000 in borrowings were outstanding. Proceeds from these borrowings were used to fund surplus contributions to ATL during 1994 and 1993. Such borrowings were repaid with the proceeds from the Debentures discussed in Note 12.
The Agreement contains restricted covenants. The more significant covenants require the company maintain a specified amount of net worth and statutory surplus and meet certain financial ratios, and restricts mergers and acquisitions, future indebtedness and commitments, and types of investments. The Company was in compliance with all of the covenants as amended as of December 31, 1995. (14) Leases:
Value of business acquired consists of the excess of the purchase price over the estimated fair value of net assets acquired in connection with the purchase of common stock and the present value of expected future profits associated with blocks of business purchased prior to 1992. Value of business acquired related to the purchased blocks of business is being amortized over the respective lives of the blocks, which are estimated at approximately 5 to 7 years.
Total Benefits and Expenses 57,740 57,424 59,962 87,512 Income before Provision for Income Tax 7,574 8,052 8,316 10,752 Provision for Income Taxes 2,350 2,544 2,589 3,526
Net Income Per Share Primary $ .27 $ .27 $ .29 $ .31 Fully Diluted $ .27 $ .27 $ .29 $ .31
CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS (In thousands except per share data)
Cash $ 1,077 $ 919 Bonds 21,710 50 Accrued interest 452 - Property and equipment, at cost(net of accumulated depreciation of $1,133 and $2,477) 2,367 4,205 Investment in subsidiaries * 291,426 179,286 Other assets 4,253 482
* Eliminated in consolidation The condensed financial information should be read in conjunction with the American Travellers Corporation and Subsidiaries December 31, 1995 consolidated financial statements and notes thereto.
Income (loss) before equity in undistributed net earnings of subsidiaries (1,694) 200 (625)
Retained earnings, beginning of year $ 77,502 $ 59,074 $ 44,466
SCHEDULE II AMERICAN TRAVELLERS CORPORATION(PARENT COMPANY) CONDENSED FINANCIAL INFROMATION OF REGISTRANT STATEMENTS OF CASH FLOWS (In thousands) Years ended December 31, 1995 1994 1993 Cash flows-operating activities Net income $ 23,685 $ 18,428 $ 14,608 Adjustments to reconcile net income to net cash provided by operating activities Depreciation and amortization (71) 594 816 Realized investment (gains) losses Equity in undistributed net earnings of subsidiaries (36,388) (26,782) (23,839) Increase (decrease) in other liabilities 1,818 (673) 70 (Increase) decrease in other assets (502) 123 (78) Current and deferred income tax 10,874 8,547 8,521 Total adjustments (24,269) (18,191) (14,510)
Cash flows-investing activities Purchase of investments (21,660) - - (Purchase)/sale of property and equipment (7) (425) (692)
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 borrowing (20,000) - - Increase in investment of subsidiary (58,000) (8,000) (12,000) Increase (decrease) in payable to subsidiary 169 (19) 273 Net cash provided by financing activities 22,409 920 678
Net increase (decrease) in cash $ 158 $ 732 $ 84
Cash and cash equivalent, beginning $ 919 $ 187 $ 103 Cash and cash equivalent, ending $ 1,077 $ 919 $ 187
* Eliminated in consolidation The condensed financial information should be read in conjunction with the American Travellers Corporation and Subsidiaries December 31, 1995, consolidated financial statements and notes thereto.
The condensed financial statements of American Travellers Corporation (the parent company) should be read in conjunction with the American Travellers Corporation and Subsidiaries December 31, 1995 consolidated financial statements and notes thereto.
The accompanying parent company financial statements reflect only those accounts of American Travellers Corporation, The parent company's investment in its directly owned subsidiaries, American Travellers life Insurance Company, American Travellers Insurance Company of New York, and American Travellers Insurance Services Company, Inc., are reflected on the equity basis. Intercompany accounts and transactions have not been eliminated since consolidated financial statements are not presented.
Under Pennsylvania insurance law, dividends may be paid by ATL only from statutory profits or surplus and require Insurance Department approval if the dividend is in excess of the greater of 10% of surplus or net statutory income of prior year. The Insurance Department must be notified of any dividend in excess of one-half of 1% of admitted assets of ATL.
The parent company utilized the proceeds of the 6.5% Convertible Subordinated Debenture offering to make an investment in ATL of $58,000 in 1995. The parent company also made a non-monetary contribution to surplus of $1,990 in 1995. The Company utilized proceeds of a bank credit facility to make investments of $8,000 in 1994 and $12,000 in 1993.
A tax sharing agreement , effective January 1, 1995, among ATC, ATL, ATICNY, UGL AND ATIS, has been implemented to allocate Federal income taxes.
In September 1995, effective January 1, 1995, ATIS paid a non-monetary dividend to ATC in the amount of $249.