The following selected consolidated statement of operations data and balance sheet data of the Company as of and for the years ended December 31, 1993, 1994, 1995, 1996 and 1997, have been derived from the Consolidated GAAP Financial Statements of the Company, which have been audited by Coopers and Lybrand L.L.P., independent accountants.
(4) The Company adopted Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities," on January 1, 1994. For a discussion of the impact of this change on shareholders' equity, see "Management's Discussion and Analysis of Financial Condition-Liquidity and Capital Resources."
The following table sets forth the components of the Company's condensed statements of operations for the years ended December 31, 1995, 1996 and 1997, expressed as a percentage of total revenues.
1997, approximately 7.8% of the Company's invested assets were committed to high quality large capitalization common stocks. During March, 1998, the Company sold its entire equity securities portfolio, or approximately $21,000,000 of invested assets. From this sale, the Company recognized an approximate $6,500,000 capital gain, which will be included in its first quarter 1998 results.
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 $54,135,630, compared to $44,071,649 in 1996. First year long-term care premiums in 1997 increased 21.3% to $52,747,317, compared to $43,478,707 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 $1,388,313 from $592,083 in 1996. The Company uses Medicare supplement products as a marketing tool to compliment its other long-term care offerings.
In addition, ANIC, which the Company acquired on August 30, 1996, generated accident and health premiums, comprised primarily of long-term disability coverage, of $6,821,784 during 1997, up from $2,274,442 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.
Benefits to Policyholders. Benefits to policyholders in 1997 increased 47.5% to $123,865,143, compared to $83,993,132 in 1996, including ANIC expenses of $2,846,272. Accident and health benefits to policyholders in 1997 increased 45.3% to $118,942,408 compared to $81,860,045 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 persistancy upon the reserves held for future anticipated losses. In addition, the Company added approximately $12,000,000 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 $1,041,000 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 $450,000 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 $2,076,463, compared to $2,133,087 for 1996. The life loss ratio was 58.7% in 1997, compared to 60.4% in 1996.
First year commissions on accident and health business in 1997, excluding ANIC, increased 23.9% to $36,240,021, compared to $29,243,102 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 $878,961, compared to $1,083,892 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.
Net Income. Net income of $7,598,580 (including a contribution of $2,013,569 from ANIC) for 1997 was $4,561,767 or 37.5% below 1996 income of $12,160,347. Net income includes income tax provisions of $2,695,435 and $4,847,000, for the 1997 and 1996 periods, respectively. Income before federal income taxes decreased in 1997 by $6,713,332 or 39.5% to $10,294,015. This decrease was primarily attributable to the addition of approximately $12,000,000 to the Company's pending claim reserves as discussed in "Benefits to Policyholders." The Company made a 1997 provision for federal income taxes of $2,695,435 reflecting an effective rate of 26.2%, as compared to an effective 1996 tax rate of 28.5%.
In order to enhance the marketability of certain products, the Company has recently emphasized offering new policyholders a monthly premium payment plan. The Company believes that the lower monthly payment is more attractive than the historical larger annual premium payment and that offering the monthly payment option enables it to sell more policies. However, because the Company records premiums when due, and a higher percentage of new policy holders opted for the monthly payment option in 1996 compared with 1995, management believes that it has experienced a delay in premium recognition of approximately $5,000,000 throughout 1996.
For the Company, excluding ANIC, first year commissions on accident and health business in 1996 increased 17.4% to $29,243,102, compared to $24,897,878 in 1995, 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 66.4% in 1996 and 67.7% in 1995. First year commissions on life business in 1996 decreased 18.2% to $1,083,892, compared to $1,325,521 in 1995, directly reflecting the Company's reduction in first year life premiums. The ratio of first year life commissions to first year life premiums was 74.4% in 1996 compared to 78.0% in 1995.
Net Policy Acquisition Costs Deferred. The net deferred policy acquisition costs in 1996 increased 24.4% to $19,042,509 compared to $15,303,161 in 1995, consistent with the growth of the Company's business. 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 1996 increased 28.6% to $15,647,715, compared to $12,170,913 in 1995. ANIC expenses accounted for $928,385 in 1996, which includes the amortization of goodwill and the present value of future profits. Without the ANIC increase in expenses, general and administrative costs would have increased 20.9%. This amount also includes an additional $450,000 of care management charges, which will be reported as policyholder benefits in subsequent years. General and administrative expenses as a percentage of revenues were 11.1% in 1996, compared to 11.0% in 1995, which is due to the additional costs of ANIC and care management.
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.
In 1998, the FASB issued Statement 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits," which revises employers disclosures about pension and other postretirement benefits. The Company expects that the adoption of Statement 132 will have no material impact on its financial condition or results of operations.
Cash increased in 1996 by approximately $43,000,000, which was primarily due to approximately $72,000,000 in proceeds from the Company's convertible debt issuance. This increase, coupled with approximately $31,000,000 provided by operations, was more than sufficient to provide for approximately $93,000,000 of bond and equity purchases in 1996.
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, 1997, the average maturity of the Company's bond portfolio was 5.8 years, and its market value represented approximately 102.5% of its cost, with a current unrealized gain of $6,832,967. Its equity portfolio exceeded cost by $5,042,112 at December 31, 1997. The Company's equity portfolio exceeded cost by $1,604,604 in 1996 and $503,083 in 1995. On December 31, 1996, the average maturity of the Company's bond portfolio was 5.3 years, and its market value exceeded its cost by approximately $1,821,387 or .9% of its cost. On December 31, 1995, the average maturity of the Company's portfolio was 6.4 years and its market value exceeded cost by 4.1% or approximately $5,643,000.
As of December 31, 1997, shareholders' equity was increased by $7,837,550 due to unrealized gains of $11,875,079 in the investment portfolio. As of December 31, 1996, shareholders' equity was increased by $2,261,154 due to unrealized gains of $3,425,991 in the investment portfolio. As of December 31, 1995, shareholders' equity was increased by $4,055,788 due to unrealized gains of $6,145,649 in the investment portfolio.
The capital position of PTLIC and PTNA was improved by the contribution of $14,000,000 of the net proceeds of the public offering in 1995 to the capital and surplus of PTLIC and PTNA during the third quarter of 1995. In November 1996, the Company contributed an additional $5,000,000 of the net proceeds of the public offering in July 1995 to PTNA. In December, 1996, the Company contributed $20,000,000, $20,000,000, and $5,000,000 to the surplus of PTLIC, PTNA and ANIC, respectively, from the proceeds of the convertible subordinated debt. The remaining funds were retained at the parent level in order to service the future interest payments on the debt. The Company believes that its insurance subsidiaries' capital and surplus presently meet or exceed the requirements in all jurisdictions in which they are licensed.
The Company consists of the Insurers and a non-insurer parent company, Penn Treaty American Corporation ("the Parent"). The Parent directly or indirectly controls 100% of the voting stock of the
Financial Statements: Consolidated Balance Sheets as of December 31, 1997 and 1996
Consolidated Statements of Operations for the years ended December 31, 1997, 1996 and 1995
To the Board of Directors of Penn Treaty American Corporation Allentown, Pennsylvania
In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of Penn Treaty American Corporation and Subsidiaries as of December 31, 1997 and 1996, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1997, in conformity with generally accepted accounting principles.
PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets as of December 31, 1997 and 1996
The Company accounts for its investments according to the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). SFAS No. 115 requires all entities to allocate their investments among three categories as applicable: (1) trading, (2) available for sale, and (3) held to maturity. Management categorized all of its investment securities as available for sale since they may be sold in response to changes in interest rates, prepayments, and similar factors. Investments in this classification are reported at 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, 1996, shareholders' equity was increased by approximately $2,261,000 due to net unrealized gains of approximately $3,426,000 in the investment portfolio. As of December 31, 1997 shareholders' equity was increased by approximately $7,838,000 due to net unrealized gains of approximately $11,875,000.
Property and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for 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 a straight-line basis over the related asset's estimated life. 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 operations.
The present value of future profits of ANIC's acquired business is being amortized over the life of the insurance business acquired. During 1997 and 1996, approximately $415,000 and $138,000 was amortized to expense, respectively.
The Company establishes liabilities to reflect the impact of level renewal premiums and the increasing risks of claims losses as policyholders age.
The Company discounts all policy and contract claims which involve fixed periodic payments extending beyond one year. This is consistent with the method allowed for statutory reporting, the long duration of claims, and industry practice for long-term care policies. Benefits are payable over periods ranging from six months to five years, and are also available for lifetime coverage. These liabilites are discounted using an assumed rate of 6.75% for 1997, 7% for 1996, 6% for 1995, 1994, 1993 and 1992 claims and 8% for claims in 1991 and prior.
On August 30, 1996, the Company acquired ANIC. Pursuant to the merger, ANIC shareholders received stock consideration consisting of 472,644 shares of the Company's common stock and
In connection with this purchase, the Company recognized goodwill in the amount of $5,298,134, which is being amortized, straight-line, over a 25 year period. The operating results of ANIC have been included in the consolidated statement of income from the date of acquisition. Consolidated pro forma net income and earnings per share would not have been materially different from the reported amounts for fiscal 1996 and 1995.
The Company's bond investment portfolio is comprised primarily of investment grade securities at December 31, 1997. 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, 1997, the Company had on deposit bonds aggregating $8,043,843 in insurance department safekeeping accounts. The Company is not permitted to remove the bonds from these accounts without approval of the regulatory authority.
Policy reserves have been computed principally by the net level premium method based upon estimated future investment yield, mortality, morbidity, withdrawals and other benefits. The composition of the policy reserves at December 31, 1997 and 1996 and the assumptions pertinent thereto are presented below:
The amounts related to prior years' incurral of claims reflects the accretion of interest due to the discounting of pending claim reserves as well as adjustments to reflect actual versus estimated claims experience. In 1997, the Company added to claim reserves 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.
Long-term debt, at December 31, 1997 and 1996 is as follows:
The provision for Federal income taxes for the years ended December 31 consisted of:
The Company has net operation loss carry-forwards of approximately $7,8000,000, which, if unused, will expire in 2012. A reconciliation of the income tax provision computed using the Federal income tax rate of 34% to income before Federal income taxes is as follows:
At December 31, 1997, the accumulated earnings of the Company for Federal income tax purposes included $1,452,589 of "Policyholders' Surplus", a special memorandum tax account. This memorandum account balance has not been currently taxed, but income taxes computed at then-current rates will become payable if surplus is distributed. Provisions of the Deficit Reduction Act of 1984 (the "Act") do not permit further additions to the "Policyholders' Surplus" account. "Shareholders' Surplus" represents an accumulation of taxable income (net of tax thereon) plus the dividends received deduction, tax-exempt interest, and certain other special deductions as provided by the Act. At December 31, 1997, the combined balance in the "Shareholders' Surplus" account amounted to approximately $25,771,000. There is no present intention to make distributions in excess of "Shareholders' Surplus."
Under Pennsylvania and Vermont insurance law, dividends may be paid from PTLIC, PTNA or ANIC only from statutory profits of earned surplus and require Insurance Department approval if the dividend is in excess of the greater of 10% of surplus or net statutory income of the prior year. No dividendes have been declared or paid in 1997, 1996, or 1995.
Net income and capital and surplus as reported in accordance with statutory accounting principles for the Company's insurance subsidiaries are as follows:
Until August 1, 1996, the Company maintained a defined contribution pension plan covering substantially all employees. The Company contributed 3% of each eligible employee's annual covered payroll to the plan. All contributions were subject to limitations imposed by the Internal Revenue Code on retirement plans and Section 401(k) plans. Upon the termination of the plan on August 1, 1996, each participant became fully vested. A prorata portion of the 1996 scheduled contribution was put into the plan upon termination. Expense for this pension plan was $30,000 and $55,000 for the years ended December 31, 1996 and 1995, respectively.
15% of their annual salary on a pre-tax basis. The Company, under the plan, equally matches employee contributions up to the first three percent of the employee's salary. The Company and employee portion of the plan is vested immediately. The Company expense related to this 401(k) plan was $93,152 and $36,000 for the years ended December 31, 1997 and 1996, respectively. The Company may elect to make a discretionary contribution to the plan, which will be contributed proportionately to each eligible employee. The Company did not make a discretionary contribution in 1997 or 1996.
ANIC maintained a defined benefit pension plan for all ANIC employees in 1996. This plan was subsequently terminated in 1997, with all eligible employees joining the Company's 401(k) plan. There was no 1997 or 1996 contribution expense for this plan. Upon the termination of the plan, the Company completed an actuarial review of its liability to plan participants. As a result of this review, the Company recognized approximately $125,000 of reduced expense in 1997 due to the overaccrual of its liability upon the purchase of ANIC in 1996.
the plan may not be less than the fair market value of the shares on the date of grant (110% of fair market value in the case of any person who holds more than 10% of the combined voting power of all classes of outstanding stock). 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.
The total net rental expenses under all leases amounted to approximately $202,000, $174,000 and $142,000 for the years ended December 31, 1997, 1996 and 1995, respectively.
In June 1997, the Company was given an unsecured, uncommitted line of credit from a bank for up to $3,000,000, which was unused during 1997. The line of credit is renewable annually, carries no origination or carrying fees, and if used, will carry a variable rate of interest equal to the London Interbank Offering Rate (LIBOR) plus .75% annually on the outstanding balance.
The Company currently reinsures with unaffiliated companies any life insurance policy to the extent the risk on that policy exceeds $50,000.
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, 1997 and 1996 were approximately $3,427,000 and $3,862,000, 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.
IMC also received commission overrides on business written for PTLIC by certain agents, principally general agents who were IMC agents prior to January 1979 and any of their sub-agents hired prior and subsequent to January 1979. For the years ended December 31, 1997, 1996 and 1995, IMC commission overrides totaled approximately $534,000, $539,000, and $517,000, respectively.
A managing general agent accounted for approximately 27%, 21% and 18% of total premiums in 1997, 1996 and 1995, respectively.
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.
Schedule II - Condensed Financial Information of Registrant Statements of Operations
Schedule II - Condensed Financial Information of Registrant Statements of Cash Flows