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 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.
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 operating cash flow.
Inflation has significantly increased the cost of health care. The adequacy of premium rates in relation to the level of health claims is constantly monitored and, where appropriate, premium rates are increased as policy benefits increase. Failure to make such increases commensurate with health care cost increases may result in a loss from health insurance operations.
Investments in bonds are classified as available for sale and consisted of the following.
(2) PALHIC includes amounts prior to its acquisition by the Company.
Legal fees to the law firm of a director and general counsel and secretary of the Company in 1997, 1996 and 1995, amounted to approximately $282, $298 and $225, respectively.
The accompanying financial statements are prepared in conformity with GAAP which differ in some respects from the statutory accounting practices prescribed or permitted by insurance regulatory authorities. The Pennsylvania Department of Insurance (the "Department") permitted PILIC the following statutory accounting practices: (1) since 1989, the statutory carrying value of the home office at the value transferred from PAMCO to PILIC in 1988 in satisfaction of intercompany debt, less depreciation since that time; and (2) to continue PILIC's statutory reserve methodology which, up until January 1, 1996, had not considered the impact of policy provisions pertaining to increasing the face amount of pre-need life insurance for anticipated future Consumer Price Index increases. Starting in 1996 PILIC modified its statutory reserve methodology on 1996 issued business which now considers the impact of policy provisions pertaining to increasing the face amount of pre-need life insurance for anticipated future Consumer Price Index increases. Furthermore, PILIC increased reserves by $200 in 1997 and 1996 for 1995 and prior issues in recognition of the increasing face amount of pre-need life insurance for anticipated future Consumer Price Index increases as required by the Department. The Department will require PILIC to increase reserves in future years by the greater of $200 or the statutory profits on the block of business. The potential effects of this permitted practice has not been determined but could be material to statutory surplus.
The combined reconciliations of net income (loss) and stockholders' equity prepared in conformity with statutory reporting practices to that reported in the accompanying consolidated financial statements are as follows:
AOL Interactive Marketing Agreement: In March 1998, the Company's wholly owned subsidiary, Provident Health Services, Inc. ("PHS"), entered into an Interactive Marketing Agreement (the "AOL Agreement") with America Online, Inc. ("AOL"). The AOL Agreement provides that PHS will be the exclusive third-party direct marketer of certain managed-care and health insurance policies ("the Products") for individuals and groups of less than fifty individuals in the United States. Additionally AOL will advertise the Products to its subscribers on AOL's online network under a brand name to be used exclusively for the Products. The Products will be sold on-line through a PHS web-site linked to the AOL service. It is anticipated that Internet-based sales of the Products will be tested in the third quarter of 1998 and offered generally to AOL subscribers in the fourth quarter of 1998.
PHS will pay additional administrative fees to AOL if applications exceed certain levels for the initial and renewal terms of the AOL Agreement.