Accident and health premiums $50,912 $53,749 $57,575 $57,909 Life premiums 867 854 830 996 Total premiums 51,779 54,603 58,405 58,905 Investment income, net 4,626 4,950 5,432 5,368 Net realized capital gains and losses and other income 6,791 165 607 2,531 Total revenues 63,196 59,718 64,444 66,804 Benefits to policyholders 34,282 38,093 40,535 41,390 Commissions & expenses 23,320 25,786 27,420 29,816 Net acquisition costs deferred (8,275) (12,034) (12,141) (14,465) Net income $8,371 $4,491 $5,058 $6,128 Net income per share (basic) $1.11 $0.59 $0.67 $0.79
------------------------------------------- First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (in thousands, except per share data and ratios)
Accident and health premiums $66,166 $71,212 $71,311 $80,510 Life premiums 893 930 854 640 Total premiums 67,059 72,142 72,165 81,150 Investment income, net 5,183 5,571 5,967 5,898 Net realized capital gains and losses and other income 2,056 4,884 1,833 2,917 Total revenues 74,298 82,597 79,965 89,965 Benefits to policyholders 45,404 49,305 49,623 55,996 Commissions & expenses 31,450 36,476 33,743 38,617 Net acquisition costs deferred (11,070) (12,388) (12,201) (15,475) Net income $4,904 $5,240 $5,015 $6,161 Net income per share (basic) $0.65 $0.69 $0.66 $0.83
Benefits and expenses: Benefits to policyholders 66.4% 60.7% 61.3% First year commissions 20.3% 22.9% 20.4% Renewal commissions 9.3% 8.7% 9.2% Net policy acquisition costs deferred -15.2% -18.5% -15.6% General and administrative expense 11.1% 10.3% 13.3% Interest expense 2.6% 1.9% 1.6% ----- ----- ----- Total benefits and expenses 94.5% 86.0% 90.2% ----- ----- -----
Our insurance subsidiaries are subject to the insurance laws and regulations of each state in which they are licensed to write insurance. These laws and regulations govern matters such as payment of dividends, settlement of claims and loss ratios. State regulatory authorities must approve premiums charged for insurance products. In addition, our insurance subsidiaries are required to establish and maintain reserves with respect to reported and incurred but not reported losses, as well as estimated future benefits payable under our insurance policies. These reserves must, at a minimum, comply with mandated standards.
Level of required reserves for policies in-force. The amount of reserves relating to reported and unreported claims incurred is determined by periodically evaluating historical claims experience and statistical information with respect to the probable number and nature of such claims. Claim reserves reflect actual experience through the most recent time period and policy reserves reflect expectations of claims related to a block of business over its entire life. We compare actual experience with estimates and adjust our reserves on the basis of such comparisons. Revisions to reserves are reflected in our current results of operations through benefits to policyholder's expense.
Deferred acquisition costs. In connection with the sale of our insurance policies, we defer and amortize a portion of the policy acquisition costs over the related premium paying periods of the life of the policy. These costs include all expenses directly related to the acquisition of the policy, including commissions, underwriting and other policy issue expenses. The amortization of deferred acquisition costs is determined using the same projected actuarial assumptions used in computing policy reserves. Deferred acquisition costs can be affected by unanticipated termination of policies because, upon such unanticipated termination, we are required to expense fully the deferred acquisition costs associated with the terminated policy.
Investment income. Our 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 our investment portfolio duration (approximately 5.0 years), investment interest income does not immediately reflect changes in market interest rates. However, we are susceptible to changes in market rates when cash flows from maturing investments are reinvested at prevailing market rates. As of December 31, 1999, approximately 5.1% of our invested assets were committed to high quality large capitalization common stocks and preferred stocks of smaller corporations.
Lapsation and persistency. Factors that affect our 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 our policy, is automatic if and when premiums become more than 31 days overdue; however, policies may be reinstated, if approved, within six months after the policy lapses. Persistency represents the percentage of premiums renewed, which we calculate 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 us. First year premiums are premiums covering the first twelve months a policy is in-force. Renewal premiums are premiums covering all subsequent periods.
Excluding the impact of the Reinsurance Transaction, first year long-term care premiums earned in 1999 increased 17.3% to $93,957, compared to $80,126 in 1998. We attribute our growth to continued improvements in product offerings, which competitively meet the needs of the long-term care marketplace, and expansion into new states, such as New Jersey, Connecticut and New York. In addition, we have continued to actively recruit and train agents to sell our products.
Net Investment Income. Net investment income earned for 1999 increased 11.0% to $22,619, from $20,376 for 1998. Management attributes this growth to more invested assets as a result of higher established reserves. Investment income is reduced, however, by our use of invested cash for the acquisition of United Insurance Group on January 1, 1999. Our average yield on invested balances was 5.8% in 1999, compared to 6.1% in 1998.
Net Realized Capital Gains. During 1999, we recognized capital gains of $5,393, compared to gains of $9,209 in 1998. During 1999, we recorded gains of approximately $2,800 from the sale of a portion of our equities securities portfolio. These gains were recognized as a result of our desire to offset the net income impact of our recorded expense attributable to the impairment of fixed assets. In February 1998, we recognized approximately $6,400 of capital gains from the sale of substantially all of our equities securities portfolio. Following both the 1998 and 1999 substantive sales, we replenished our equities securities portfolio in subsequent market purchases. The remainder of the gains in both periods was recorded as a result of our normal investment management operations.
Benefits to Policyholders. Total benefits to policyholders in 1999 increased 29.8% to $200,328, compared to $154,300 in 1998. Our loss ratio, or policyholder benefits to premiums, was 68.5% in 1999, compared to 69.0% in 1998.
Under the Reinsurance Transaction, we established policy and claim reserves of $2,840, for which we received cash from the reinsured party. The establishment of the reserves is included in 1999 as benefits to policyholders.
While we do not believe that either 1999 or 1998 additions represent material deviation from our estimates, we note that claims development has exceeded our expectations in both periods. Claims experience can differ from our expectations due to numerous factors, including mortality rates, duration of care and type of care utilized. When we experience deviation from our estimates, we typically seek premium rate increases that are sufficient to offset future deviation. We have been generally successful in the past in obtaining state insurance department approvals for these increases when deemed to be actuarially sound.
Commissions. Commissions to agents increased 20.5% to $96,752 in 1999, compared to $80,273 in 1998.
Commissions in 1999 include a one time ceding allowance of $1,925, which we paid to an unaffiliated third party under the Reinsurance Transaction.
Deferred costs are typically all costs that are directly related to, and vary with, with the acquisition of new premiums. These costs include the variable portion of commissions, which are defined as the first year commission rate less renewal commission rates, and variable general and administrative expenses related to policy underwriting. Deferred costs are amortized over the life of the policy based upon actuarial assumptions, including persistency of policies in-force. In the event a policy lapses prematurely due to death or termination of coverage, the remaining unamortized portion of the deferred amount is immediately recognized as expense in the current period.
During 1999, we recognized $17,722 in expense due to the amortization of prior and current deferred policy acquisition costs. We amortized $16,277 in 1998.
General and Administrative Expenses. General and administrative expenses in 1999 increased 56.3% to $40,736, compared to $26,069 in 1998. 1999 general and administrative expenses include United Insurance Group expense of $7,748, including $680 of goodwill amortization. While the remaining 1999 expense has grown over 1998 with overall premium growth, management believes that current cost savings initiatives, such as remote office consolidation and outsourcing of certain administrative functions, will reduce this growth in the future.
Loss Due to Impairment of Property and Equipment. During the second quarter 1999, we determined to discontinue our planned implementation of our LifePro computer system. At that time, we had capitalized $2,799 of expenditures related
to this project, including licensing costs and fees paid to outside parties for system development and implementation. As the system was not yet placed in service, none of these costs had previously been depreciated on our Consolidated Statements of Income and Comprehensive Income. Upon determining not to utilize these fixed assets, their value became fully impaired and we recognized the entire amount as current period expense.
Comprehensive Income. During 1999, our investment portfolio generated pre-tax, unrealized losses of $18,009 due to increased market interest rates, compared to 1998 period unrealized gains of $10,032. After accounting for deferred taxes from these gains, shareholders' equity increased by $5,875 from comprehensive income during 1999, compared to comprehensive income of $24,591 in 1998.
Twelve Months Ended December 31, 1998 and 1997 (amounts in thousands, except per share data)
Premiums. Total premium revenue earned in the twelve month period ended December 31, 1998, including long-term care disability, life and Medicare supplement increased 33.4% to $23,692, compared to $167,680 in the same period in 1997. First year long-term care premiums in 1998 increased 51.9% to $80,126, compared to $52,747 in 1997. We attribute our growth to continued improvements in product offerings that competitively meet the needs of the long-term care marketplace. In addition, we actively recruit and train agents to sell our products.
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. This deferral is net of amortization, which decreases or increases as our 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.
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. We are currently evaluating the impact of SFAS No. 133 as relates to the imbedded option value of our investments in convertible bonds.
We have not experienced any material impact from external suppliers as a result of the Y2K issue.
Our consolidated liquidity requirements have historically been created and met from the operations of our insurance subsidiaries. Our primary sources of cash are premiums, investment income and maturities of investments. We have provided, and may continue to provide, cash through public offerings of our common stock, capital markets activities or debt instruments. The primary uses of cash are policy acquisition costs (principally commissions), payments to policyholders, investment purchases and general and administrative expenses.
Statutory requirements allow insurers to pay dividends only from statutory earnings as approved by the state insurance commissioner. Statutory earnings are generally lower than publicly-reported earnings due to the immediate or accelerated recognition of all costs associated with premium growth and benefit reserves. We have not and do not intend to pay shareholder dividends in the near future due to these requirements, choosing to retain statutory surplus to support continued premium growth. See "Dividend Policy" and "Business-Government Regulation." In 1998, American Network paid us a dividend of $397 and paid us $250 in 1999, which were used for general corporate purposes.
We invest in securities and other investments authorized by applicable state laws and regulations and follow an investment policy designed to maximize yield to the extent consistent with liquidity requirements and preservation of assets. At December 31, 1999, the average maturity of our bond portfolio was 6.9 years, and our market value represented 96.7% of our cost, with a current unrealized loss of $12,013. Our equity portfolio exceeded cost by $1,310 at December 31, 1999. Our equity portfolio exceeded cost by $2,244 in 1998 and $5,042 in 1997. On December 31, 1998, the average maturity of our bond portfolio was 6.3 years, and its market value exceeded its cost by approximately $10,455.
Our company consists of the Insurers and a non-insurer parent company, Penn Treaty American Corporation (the "Parent"). The Parent directly controls 100% of the voting stock of the Insurers. In the event the Parent is unable to meet its financial obligations, becomes insolvent, or discontinues operations, the Insurers' financial condition and results of operations could be materially affected.
cash flows to make all required interest installments. Management believes that the Parent holds sufficient liquid funds from its current investments, dividend capabilities of United Insurance Group and from its line of credit to meet its obligations for the foreseeable future.