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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1997, OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
Commission File No.0-13591
PROVIDENT AMERICAN CORPORATION
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2214195
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2500 DeKalb Pike, Norristown, Pennsylvania 19404
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (610) 279-2500
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
------------------- -------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.10 Par Value
(Title of class)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes __X__ No _____
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the Registrant, based upon the closing sale price of the Common Stock on June
30, 1998 as reported on Standard and Poor's (S&P) ComStock system, was
approximately $ 41,070,669. Shares of Common Stock held by each officer and
director and by each person who owns 5% or more of the outstanding Common Stock
have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive determination
for other purposes.
As of June 30, 1998, Registrant had 10,173,860 shares of Common Stock
outstanding.
The Exhibit Index is located on Page 45
PROVIDENT AMERICAN CORPORATION
Table of Contents
Page
----
I. Part I.
Item 1. Business 2-15
Item 2. Properties 15
Item 3. Legal Proceedings 15
Item 4. Submission of Matters to a Vote of Security Holders 15
II. Part II.
Item 5. Market for Registrant's Common Equity
and Related Stockholder Matters 16-18
Item 6. Selected Financial Data 19-20
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations 21-28
Item 8. Financial Statements and Supplementary Data 29
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 30
III. Part III.
Item 10. Directors and Executive Officers of the Registrant 31-33
Item 11. Executive Compensation 34-39
Item 12. Security Ownership of Certain Beneficial
Owners and Management 40-41
Item 13. Certain Relationships and Related Transactions 42
IV. Part IV.
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K 43
Exhibit Index 45-52
- 1 -
PART I
Item 1. Business.
Description of the Business and Recent Significant Developments
Provident American Corporation ("PAMCO") is a Pennsylvania corporation
organized in 1982 and regulated as an insurance holding company by the 42 states
in which its wholly owned insurance subsidiaries, Provident Indemnity Life
Insurance Company ("PILIC") and Provident American Life and Health Insurance
Company ("PALHIC"), both Pennsylvania stock life insurance companies, are
licensed. PAMCO's business activities are conducted through PILIC, PALHIC,
Montgomery Management Corporation ("MMC") and NIA Corporation ("NIA").
Hereinafter, PAMCO and all of its subsidiaries are collectively referred to as
the Company. In March 1998, the Company sold 49% of MMC's outstanding common
stock along with a warrant to purchase an additional 31% of MMC's common stock
for $4 million, effective as of January 1, 1998.
The Company markets and underwrites medical insurance and life
insurance and derives a majority of its revenue from group association major
medical products sold to individuals. A smaller proportion of revenue is derived
from traditional life (whole life and limited pay) products. Recent significant
developments for the Company were the expansion of its healthcare insurance and
managed care business through the introduction of new products, alliances and
acquisitions. The impact of these events is as follows:
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Gross premiums $ 94,274 $ 68,503 $ 52,248
Total revenue $ 62,030 $ 74,147 $ 37,047
Net income (loss) $(18,425) $ 16,120 $ (3,701)
Total assets $98,365 $ 93,054 $ 67,151
Total revenue for each year is net of premium ceded to reinsurers.
Total revenues in 1996 included a litigation settlement of $22.4 million. Gross
premium growth in 1997 was the result of significant sales from two managed care
products. These product sales were made possible by alliances and acquisitions.
The change in net income from 1996 to a loss in 1997 was attributable primarily
to higher policy benefits, write off of deferred acquisition costs, impairment
of certain assets, and transition costs associated with HPS.
- 2 -
Product Profile
The following table sets forth the Company's gross earned premium by
product during each of the three years ended December 31:
(Dollars in thousands) 1997 1996 1995
----------- ------------ -----------
Managed Care:
The Provident Solution $41,199 $22,634 $3,087
HealthQuest 23,062 6,136 0
----------- ------------ -----------
64,261 28,770 3,087
----------- ------------ -----------
Non-Managed Care:
Small Group 4,784 7,258 11,778
Individual 12,414 18,463 21,359
----------- ------------ -----------
17,198 25,721 33,137
----------- ------------ -----------
Excess loss insurance 3,248 2,704 2,804
----------- ------------ -----------
Total Health Products 84,707 57,195 39,028
----------- ------------ -----------
Group Life 2,655 2,406 2,653
Individual Life 6,912 8,902 10,567
----------- ------------ -----------
Total Life Products 9,567 11,308 13,220
----------- ------------ -----------
Gross Premium $94,274 $68,503 $52,248
=========== ============ ===========
Health Products: The Company's medical insurance business has been
migrating from products designed for the small group indemnity market to
products designed for the individual and small group managed care market. This
change is being accomplished through product redesign, strategic relationships
with certain preferred provider organizations ("PPOs"), expanding distribution
channels and enhancing administrative capabilities.
- 3 -
The new managed care comprehensive major medical product designs
incorporate both freedom of choice and financial incentives to utilize network
health care providers. The Company has a long-term agreement with the largest
independent PPO in the country, First Health Group Corporation ("FHG"), and
designs and markets products utilizing that network of hospitals and physicians.
Other regional networks are used if and when the primary network is not a
practicable option. FHG also provides utilization and cost management services
such as pre-certification of hospital admissions and large case management
which, when taken together with the discounts the Company enjoys through all of
its PPO arrangements, are intended to allow for better control of claim costs
and, ultimately, competitively priced products. The Company has been active in
developing its provider network arrangements for several years. This has
resulted in increased net claim savings. It is the Company's practice to pass on
these savings to customers in the form of more competitive premium rates.
The Company distributes its managed care products through the managing
general agent ("MGA") system. At December 31, 1997, the Company had over 20,000
independent agents and brokers, organized under approximately 75 Managing
General Agents, actively selling its managed care products. In 1996, the Company
entered into a marketing agreement with the country's largest third party
administrator, HealthPlan Services, Inc. ("HPS"), with access to substantially
more independent agents. This relationship with HPS was expanded during 1997, as
discussed in greater detail below.
The Company is continuing the process of converting and expanding its
administrative infrastructure to one specifically designed to accommodate
managed care products. In October 1997, the Company announced an outsourcing
arrangement with HPS, whereby HPS provides administrative support for all of the
Company's medical products, including billing and collection of premium, claims
adjudication and ongoing policyholder services (the "HPS Outsourcing
Agreement"). This arrangement will also provide the Company with the opportunity
to grow its business and provide capable customer service while limiting capital
expenditures. The HPS Outsourcing Agreement, which commenced February 1, 1998,
is for a five-year term. The Company has agreed to pay a base monthly fee and a
sliding scale percentage of premiums, which will decrease as the volume of
business increases. The Company transitioned all functions covered by the
outsourcing agreement to HPS effective February 1998.
- 4 -
The Company's principal managed care products are "The Provident
Solution" and "HealthQuest" which together offer a variety of deductibles,
coinsurance amounts and managed care options. Minimum amounts of group term life
are required with many of the medical products. "The Provident Solution" relies
on FHG for access to network providers and advantageous fee schedules, while
"HealthQuest" relies on regional PPOs. The following table illustrates
applications received for the principal products:
1997 1996 1995
----------- ----------- -----------
HealthQuest 26,935 7,119 0
The Provident Solution 23,257 21,292 9,260
All Others 1,085 3,149 3,095
----------- ----------- -----------
51,277 31,560 12,355
=========== =========== ===========
At December 31, 1997 the Company had a total of 50,000 in-force group
medical certificates compared to 36,000 at December 31, 1996. The Company has
systematically withdrawn from the small group indemnity markets as healthcare
reform at the state level has rendered those products obsolete. The book of
small group indemnity business has been in a runoff mode since 1992 and the
Company's individual indemnity products have only generated modest sales since
1994, when "The Provident Solution" was developed.
The mix of business has changed significantly over the last three
years. The following table illustrates the composition of annualized premium
in-force for the last three years:
(Dollars in thousands) 1997 1996 1995
--------- ----------- -----------
Managed Care
The Provident Solution $43,244 $33,169 $11,124
HealthQuest (1) 34,913 12,718 0
Non-Managed Care:
Small group 5,681 7,009 10,998
Individual 12,983 17,797 21,646
--------- ----------- -----------
$96,821 $70,693 $43,768
========= =========== ===========
(1) The Company assumed in-force HealthQuest policies with the acquisition of
NIA effective May 1, 1996 consisting of approximately $6.5 million of annualized
premium.
- 5 -
The introduction of managed care products has impacted the Company's
distribution of business by state. The states which generated the largest share
of health premiums during each of the last three years were as follows:
1997 1996 1995
----- ----- -----
Georgia 28.7% 24.4% 20.3%
Florida 20.5 21.8 12.8
Louisiana 8.1 7.3 5.6
Pennsylvania 6.9 13.2 22.2
Texas 6.7 7.5 6.2
South Carolina 4.4 2.6 1.9
Colorado 2.6 0.4 0.3
Ohio 2.3 2.3 1.9
West Virginia 2.2 3.5 6.1
Virginia 2.1 2.3 2.6
All other 15.5 14.7 20.1
----- ----- -----
100.0% 100.0% 100.0%
===== ===== =====
The acquisition of PALHIC in 1996 significantly increased the number of
states within which the Company can write its insurance business. The importance
of any particular state may vary significantly from time to time as state
healthcare reforms are enacted, the managed care competitive environment changes
and the composition of the Company's distribution system evolves.
As part of its health product portfolio, the Company derived both
premiums and fees through the sale and underwriting of high-deductible medical
excess loss insurance for self-insured employers. MMC sells and services these
insurance products which are issued by unrelated insurance companies . The
Company assumes a portion of the insurance risk and earns premiums and up until
1997 earned profit sharing fees. During the first quarter of 1998 the Company
sold 80% of MMC to HPS. The sale resulted in a realized gain of $4 million in
the first quarter of 1998 which will help finance future growth in the Company's
target market. The Company continues to assume the premium administered by MMC.
Life Products: The Company's pre-need insurance products, single
premium and limited payment life insurance, provide funding in conjunction with
pre-arranged funerals. The policies sold average $2,830 of face amount and the
buyer's average age is 72. The Company's "Senior Estate Plan" is a whole life
insurance policy designed for senior citizens who have not yet pre-arranged
their funerals, but wish to plan for death-related expenses. The average policy
size is $5,000 and the buyer's average age is 65.
- 6 -
During 1997, the Company issued 1,347 pre-need and final expense
policies representing approximately $8.5 million of face value, as compared with
3,793 pre-need and final expense policies representing approximately $18.9
million of face value during 1996. Combined gross premium income for these two
products approximated $5.8 million in 1997 and $8.1 million in 1996. At December
31, 1997, the Company had 18,295 pre-need and final expense policies in-force
with a face value approximating $66.6 million. The remaining life insurance
premiums are derived from closed books of business. During 1997, the Company
expanded its life distribution to include a newly designed product for the
military marketplace.
Strategies
The Company plans to continue its growth in market share as a provider
of medical insurance through the sale of products which incorporate freedom of
choice and many elements of managed care such as cost containment. In this
regard the Company will target the one life and small employer group market. The
Company believes this segment of the market is large and under-served. In
response, the Company is designing managed care products that are responsive to
the needs of this market, and has built a marketing distribution system for the
purpose of achieving critical mass with respect to its product offerings.
The Company's strategy relies on the strategic alliances with FHG, HPS
and growing independent agent and broker distribution systems. In recruiting
agents the Company will emphasize its intention to create unique products, offer
competitive compensation arrangements, provide responsive service and allow MGAs
an opportunity to earn stock options to acquire PAMCO shares based upon sales
production. The Company believes this strategy creates the potential to
significantly increase the sales of managed care products. The Company believes
that increased sales will help build critical mass which will reduce incremental
costs.
Recent Developments
During the first half of 1998 the Company entered into various
agreements in order to sell and service insurance business via the Internet
along with related financing and start-up management. As of February 1, 1998 the
Company entered into an Amended and Restated Interactive Marketing Agreement
(the "AOL Agreement") with America Online, Inc. ("AOL"). The Company will be
AOL's exclusive third-party direct marketer for managed-care products along with
vision insurance, prescription coverage, critical care insurance and long-term
care insurance coverage for individuals and groups of less than fifty
individuals in the United States. AOL will advertise the Company's products to
its subscribers on AOL's online network under a brand name to be used
exclusively for the Company's products. This represents a new distribution
channel allowing access to customers not served by insurance agents. The Company
plans on marketing medical and related insurance products underwritten by PILIC
and PALHIC along with products underwritten by other companies.
- 7 -
The Company's new non-insurance subsidiaries, Provident Health
Services, Inc. ("PHS") and Insurion, Inc. ("Insurion"), will conduct this new
venture. It is anticipated that Internet-based sales will be tested during the
summer of 1998 and offered generally to AOL subscribers in the fall of 1998. PHS
will provide online customer service to the AOL member base in connection with
the sale of medical and related insurance products. The Company recently
expanded its outsourcing relationship with HPS whereby HPS will provide customer
service and have certain third party administrator rights over policies sold by
Insurion through its web site or other e-commerce vehicles.
The Company is considering numerous financing strategies in order to
fund Insurion's obligations including public and private financing. In addition,
the Company is seeking co-sponsor funding with regard to certain product
offerings on Insurion's web site.
Operations
The Company is organized and managed along functional lines which
include marketing, underwriting, claims, administration, investments and
finance.
Marketing: The marketing area manages MGA recruiting, training and
agent compensation plan design, and provides agents and consumers with a Company
advocate regarding product development and customer service. The Company
believes that the attractiveness of its products, its competitive compensation
arrangements for brokers and agents (including stock options), its emphasis on
personal service and accessibility to management encourages brokers and agents
to offer the Company's products to their clients.
Underwriting: All policies are fully underwritten . In some cases, the
Company may require attending physicians' statements with respect to conditions
disclosed on applications. A physician provides consulting services to the
underwriting department with respect to the evaluation of the insurability of
certain applicants and the general health prognosis for such applicants. In
connection with the HPS outsourcing agreement, the underwriting associated with
the HealthQuest products is done by HPS in accordance with pre-set standards and
all other products are underwritten by the Company's underwriting group. Prior
to 1998, essentially all policies were underwritten by the Company's
underwriting group.
Claims: The Company had augmented its core internal claims processing
with the use of selected third party claims administrators who review and pay
claims in accordance with guidelines and procedures approved and monitored by
the Company. In connection with the HPS outsourcing agreement, claims
adjudication associated with the Company's health products is provided by HPS.
Administration: This area includes customer service, premium and
commission processing and computer systems for life and group medical business
which was acquired in mid 1996. In connection with the HPS outsourcing
agreement, customer service, premium and commission processing associated with
the Company's health products is provided by HPS.
- 8 -
Investments and Finance: The majority of the Company's investments
consist of securities of the U. S. government (or its agencies ) and fixed
income securities, principally issued by public utilities and corporations. At
December 31, 1997, 100% of the Company's bond portfolio was of investment grade
quality; 40% of the Company's bonds will mature within a five-year period and
88% of the Company's bonds will mature within a ten-year period. The following
table shows the Company's market value of its total investments as of December
31, the investment income net of expenses which excludes realized gains and
losses and the weighted average annualized yield.
(Dollars in thousands) 1997 1996 1995
---- ---- ----
Total investments, valued at market $47,101 $61,942 $46,890
Net investment income (excludes realized gains (losses)) $3,487 $3,280 $2,858
Annualized yield on the market value of investments 6.8% 6.5% 6.3%
The Company utilizes both in-house actuaries and consulting actuaries
for product development, pricing and valuation.
Special Considerations and Risk Factors
All statements and information herein, other than statements of
historical fact, are forward looking statements that are based upon a number of
assumptions concerning future conditions that may ultimately prove to be
inaccurate. Many phases of the Company's operations are subject to influences
outside its control. Any one, or any combination of factors could have a
material adverse effect on the Company's results of operations. These factors
include: changes in governmental regulation, claims experience and reserve
adequacy, rating changes, competitive pressures, economic conditions, changes in
consumer spending, interest rate fluctuations, and other conditions affecting
capital markets. The following factors should be carefully considered, in
addition to other information contained in this document. This document contains
certain forward-looking statements within the meaning of section 27A of the
Securities Act of 1933 as amended ("Act") and section 21E of the Securities
Exchange Act of 1934, as amended. The Statements include among other things,
statements regarding trends, strategies, plans, beliefs, intentions,
expectations, goals and opportunities. Also they include statements regarding
migration to managed care products, greater control of costs, conversion and
expansion of administrative infrastructure and varying significance of
particular states within which the Company can write insurance; beliefs
regarding attractiveness of products; enhancements to claims system; increased
processing capacity; investments in computer hardware and funding of capital
expenditures; sufficient liquidity to fund growth fulfill statutory requirements
and meet all cash requirements, funding surrenders and benefit payments and loan
payments. Actual events, developments and results could differ materially from
those anticipated or projected in the forward looking statements as a result of
uncertainties set forth below and elsewhere in this document. Any investment in
the Company's securities involves a high degree of risk.
The following factors, in addition to the other information contained
in this report, should be considered carefully in evaluating an investment in
the Company.
- 9 -
Control of the Company: Alvin H. Clemens, Chairman and Chief Executive
Officer of the Company ("Mr. Clemens"), acquired control of the Company in
October 1989. Mr. Clemens is the largest shareholder of the Company. As of June
30, 1998, Mr. Clemens owned, either directly or beneficially, 3,813,745 shares,
or 33.2% of the Company's Common Stock, and 1,100,000 shares, or 97.3%, of the
Company's Preferred Stock. As of June 30, 1998, Mr. Clemens controled 37.1% of
the Company's outstanding voting rights and if he were to exercise all of his
outstanding options, he would control 47.4% of the Company's voting rights. In
addition, pursuant to terms of an agreement to grant options dated March 10,
1997, Mr. Clemens has the right to be granted an option to acquire 55% of the
common stock of the Company, subject to the conditions set forth therein.
Accordingly, Mr. Clemens could greatly influence the outcome of any matter
requiring shareholder approval, even if such matters were deemed by the
shareholders, other than Mr. Clemens, to be in their best interests.
A. M. Best's Insurance Ratings: The ratings assigned by A.M. Best
Company Inc. ("Best") are an important factor influencing the competitive
position of insurance companies. Best's ratings are based on an analysis of the
financial condition and operating performance of the companies rated. Best's
classifications are A++/A+ (superior), A/A- (excellent), B++/B+ (very good),
B/B- (adequate), C++/C+ (fair), C/C- (marginal), D (below minimum standards) and
E (under state supervision). Best's ratings are based upon factors of concern to
policyholders and insurance agents, and are not necessarily directed toward the
interests of investors in the rated insurance company and/or its parent and
therefore should not be relied upon as a basis for an investment decisions.
In 1997, PILIC and PALHIC Best's ratings were upgraded to a "B"
(adequate) rating, reflecting the Company's improved capital and surplus
position as a result of the Loewen settlement. This "B" (adequate) rating was
reaffirmed in February, 1998. The Company's goal is to strengthen the financial
position of PILIC and PALHIC which the Company believes will result in an
improved rating over time, but there can be no assurance that PILIC and PALHIC
can improve or maintain the current rating.
Regulation: Insurance companies are subject to supervision and
regulation in the states and jurisdictions in which they transact business, and
such supervision and regulation usually includes (1) regulating premium rates,
policy forms (coverages and terms), (2) setting minimum capital and surplus
requirements, (3) imposing guaranty fund assessments which fund insolvencies of
other insurers (4) licensing insurance companies and agents, (5) approving
accounting methods and methods of setting loss and loss-adjusted expense ("LAE")
liabilities, (6) setting requirements and limiting investments, establishing
requirements for filing of annual statements and other financial reports, (7)
approving changes in control, (8) limiting dividend payments that may be made
without regulatory approval, (9) regulating transactions with affiliated parties
and (10) regulating trade practices and market conduct. Compliance creates
additional expense and penalties may be imposed for non-compliance, which could
have a material adverse effect on the Company's business financial position and
results of operations.
- 10 -
PILIC and PALHIC are domiciled in Pennsylvania and are regulated by the
Insurance Department of Pennsylvania which recognizes as net income and surplus
those amounts determined in conformity with statutory accounting practices
prescribed or permitted by the Department which may differ in certain respects
from generally accepted accounting principles. The amounts of statutory net
income for the year ended and surplus as of December 31 were as follows:
1997 1996 1995
------ ------ ------
PILIC(1)
Net income (loss) ($10,385) $9,668 ($1,570)
Total capital and surplus 11,408 13,971 6,383
Adjusted capital and surplus 11,968 14,838 6,743
Company action level Risk Based Capital 9,303 6,569 5,190
PALHIC(2)
Net income (loss) ($862) $1,631 ($73)
Total capital and surplus 4,283 5,351 3,068
Adjusted capital and surplus 4,302 5,367 3,152
Company action level Risk Based Capital 1,730 19 235
(1) PILIC's total capital and surplus, adjusted capital and surplus and company
action level Risk Based Capital include amounts for its subsidiaries including
PALHIC. PALHIC is not included in 1995.
(2) PALHIC includes amounts prior to its acquisition by the Company.
At December 31, 1997, PILIC calculated its "Risk Based Capital" (RBC)
utilizing a formula required by the National Association of Insurance
Commissioners. The results of this computation indicate PILIC's adjusted capital
of $12.0 million exceeded the amount required by $2.7 million. PALHIC's adjusted
capital of $4.3 million exceeded its RBC requirement by $2.6 million. In
concept, RBC standards are designed to measure the acceptable amounts of capital
an insurer should have based on inherent and specific risks of an insurer's
business. Insurers failing to meet the benchmark capital level may be subject to
remedial action by the insurance department having jurisdiction over its
business and, ultimately, rehabilitation or liquidation.
The Company's business is subject to a changing legislative and
regulatory environment. Some of the proposed changes include initiatives to
restrict insurance pricing and the application underwriting standards, reform
health care and restrict investment practices. Proposals relating to national
health care reform have been under consideration, and could significantly change
the way health care is financed and provided. The effect on the Company of
comprehensive health care reforms, if enacted, could have a material adverse
impact upon the ability of the Company to achieve profitability and engage in
the writing of health insurance.
- 11 -
All of the states in which PILIC and PALHIC do business have life and
health guaranty fund laws under which insurers doing business in such states can
be assessed in order to fund policyholder liabilities of insurance companies
that may become insolvent. Under these laws, an insurer is subject to
assessment, depending upon its market share of a given line of business, to
assist in the payment of policyholder claims against insolvent insurers.
Although recent assessments have not been material, no assurances can be given
that such will be the case in the future.
Dividends: Dividends paid by the Company over and above the financial
assets of PAMCO are dependent on the ability of PILIC to pay dividends to the
Company and the ability of PALHIC to pay dividends to PILIC. The payment of
dividends by PILIC and PALHIC is dependent upon a number of factors including
earnings and financial condition, business needs and capital and surplus
requirements as well as applicable regulatory restrictions. Under Pennsylvania
law, PILIC and PALHIC are currently unable to pay dividends without the prior
approval of the Pennsylvania Insurance Commissioner as a result of PILIC's and
PALHIC's statutory unassigned deficit of $13,538,000 and $4,147,000,
respectively, which excludes common stock and additional paid-in capital
amounts. The Company has not paid a cash dividend on its common stock since its
inception in 1982 and intends on using retained earnings to fund its growth and
liquidity needs.
Possible Adverse Impact of Inadequate Loss Reserves or Deferred
Acquisition Costs: Policy claims and the related policy benefit expenses are
based upon a variety of estimation methods which are continually revised,
incorporating the Company's benefit experience. Health benefits related to the
Company's managed care products introduced in 1995 represent approximately 72%,
37% and 4% of 1997, 1996 and 1995 amounts, respectively. Since the Company's
experience with these products has been limited and continues to emerge, no
assurances can be given that policy benefit liabilities will ultimately be
deemed adequate. Accordingly, the need for increased reserves could have a
materially adverse affect on the Company's results of operations.
The Company deferred policy acquisition costs for its managed care
products are based on management's estimation that these costs are recoverable
against future profits on these products. Increased lapsation over current
levels or unprofitability in these products could result in an increase in the
amortization rate of deferred acquisition costs which could have a material
adverse impact.
- 12 -
Reinsurance: The Company's principal reinsurer, Swiss Re Life & Health
Limited ("Swiss Re"), notified the Company in 1997 that the Quota Share
Reinsurance Agreement would not be renewed effective January 1, 1998. Swiss Re's
obligation to assume paid losses incurred prior to January 1, 1998 remains in
effect. The Company notified Swiss Re that it would not be renewing the Excess
of Loss Agreement. The Company is currently in negotiation with a group of
reinsurers and has placement slips regarding a replacement Quota Share Agreement
and Excess of Loss Agreement to be effective January 1, 1998. Effective January
1, 1998, the Company's new reinsurance will be on a no loss, no gain basis for
all policies in force as of December 31, 1997 until those policies are rate
increased. The new agreements, when executed, may not be as comprehensive as the
old agreement. Policies are generally rate increased on their six-month or
twelve-month anniversary. Once policies in force as of December 31, 1997 have
been rate increased, and for all policies sold during 1998, the Company will
cede approximately 47.5% of group medical benefits. Furthermore, the Company
will retain any profit in excess of 3% of ceded premium. Since the terms of the
new reinsurance are effective January 1, 1998 and the terms of the old
reinsurance remain in effect after December 31, 1997 for losses incurred prior
to December 31, 1997, management believes that the effect of changes in
reinsurance, if any, would not be material to the Company's financial position,
results of operations and cash flow. The Company's 1998 results may be adversely
impacted by loss experience on certain policies inforce as of December 31, 1997.
The Company's 1998 results may be favorably impacted if quota share cessions
result in a profit in excess of 3% of ceded premium on policies sold during 1998
and certain policies inforce as of December 31, 1997. The potential effect of
any differences between old and new reinsurance on future results has not been
determined; however, the impact could be significant.
Highly Competitive Nature of the Insurance Industry: The Company
operates in a competitive industry with regard to products, prices and services.
Many competitors have considerably greater financial resources than the Company.
In the United States more than 2,200 life insurance companies compete for life
and health insurance business, and no one company dominates the marketplace.
Most of the Company's direct competitors are small to medium sized life
insurance companies and regional Blue Cross/Blue Shield organizations.
Additionally, competition in the insurance industry may affect the Company's
ability to achieve greater critical mass in its chosen product lines, while
remaining competitive in compensation and product pricing.
Reliance on Existing Management and Consultants: The Company has been
largely dependent on existing management and certain consultants whose expertise
and relationships have brought about recent alliances and acquisitions. The loss
to the Company of one or more of its current existing executive officers or
consultants could have a material adverse effect on the business and operations
and results of operations of the Company. The Company has entered into
employment agreements with certain officers which have non-compete and
confidentiality provisions, and the Company maintains key man insurance with
regard to Mr. Clemens. The Company has entered into consulting agreements with
certain consultants which have non-compete and confidentiality provisions.
Inability to Migrate Computer Infrastructure: The Company has
contracted with consultants for the purpose of migrating the Company's computer
systems from mid-range computers to client-server technology supported by
well-known hardware and software suppliers. No assurances can be given that the
new computer system will meet the Company's expectations and that the migration
of administrative systems will contain costs and improve efficiency.
- 13 -
Year 2000 Compliance: In 1997 the Company began implementing its year
2000 Compliance Plan. In 1997 the Company installed a new general ledger and
accounts payable system that would be year 2000 compliant. In addition, HPS, the
Company's outsourcing vendor, has begun the transition of HPS's billing and
administrative systems for fully insured products and will continue to work on
this project in 1998. HPS has received the new release of its ERISCO ClaimsFacts
claims management system, which the Company understands is Year 2000 compliant,
and intends to implement this release in 1998. The Company's health and group
life products are administered by HPS. The Company's and HPS's Year 2000
Compliance Plan also provides for updating interfaces between the Company and
HPS. The Company continues to evaluate alternatives for its life administration
hardware and software used in administering its individual life and annuity
policy billing, account values, loans, claims and commission activities. The
Company's life administration system is not Year 2000 Compliant but the Company
is evaluating a wide range of alternatives and expects to be Year 2000 Compliant
by mid 1999. Although the costs associated with becoming Year 2000 compliant
cannot be precisely predicted, management does not expected such costs to have a
material effect on the Company's results. There can be no assurance that HPS or
other third parties with whom the Company does business will achieve Year 2000
Compliance. As a result, the Company's business could be adversely affected.
HPS Outsourcing: The Company's group medical and life billing and
collection, customer service, claims processing and commission accounting are
now being performed by HPS. Further, information needed for the Company to
administer reinsurance and manage loss experience and premium rates are
dependent upon HPS. The Company's funds are retained in separate bank accounts
held in trust administered by HPS. The inability of HPS to perform under its
Agreement could have a material adverse impact on the Company's business and
results of operations.
Internet Venture: The Company, through Insurion, Inc. is developing
online sales and service capabilities utilizing internal and external resources.
Various agreements require Insurion to launch an Internet WEB site no later than
October 1, 1998. Insurion has retained outside consultants and vendors to
develop the Internet WEB site and oversee the development of the overall sales
process, the cost of which is significant. No assurance can be made that the
site will be operational on time, that the cost associated therewith will not
exceed the Company's estimates, or that the Company may be able to meet its
contractual obligations under the above agreements. The sale of medical and
other insurance via the Internet WEB is a new and unproven marketing channel and
there is no assurance that Insurion will be able to sell a sufficient volume of
new business on the Internet WEB during the initial term of the AOL Interactive
Marketing Agreement to make the venture viable. HPS paid the Company $0.75
million in March 1998 to be the exclusive administrator of this business.
Insurion privately placed $5 million of convertible debt in May 1998 to
partially fund future obligations. In addition, financing must be secured from
external sources to support the obligations and funding of Insurion. There can
be no assurance that the Company's efforts will be successful, or if successful,
that the terms will be favorable to the Company.
- 14 -
Number of Employees
The Company, including its subsidiaries, currently employs
approximately 100 people, a decrease from 221 for the prior year, primarily as a
result of the HPS arrangement, which outsourced the Company's administration and
claims. None of the employees is represented by a collective bargaining
representative. The Company believes that its employee relations are excellent.
Item 2. Properties.
The Company's principal office, located at 2500 DeKalb Pike,
Norristown, Pennsylvania, is owned by PILIC. This property is comprised of
approximately 6.5 acres of land and buildings containing approximately 44,000
square feet of space. PILIC also owns a three-story office building located in
Abington, Pennsylvania, which is leased to unaffiliated third parties. NIA, a
wholly owned subsidiary of PILIC, leases commercial office space in Lakewood,
Colorado for the operation of a regional sales office. NIA's lease is for 3,300
square feet. The Company believes its existing facilities are suitable to
conduct its present business.
Item 3. Legal Proceedings.
The Company is involved in normal litigation in the settlement of
insurance claims. Management is of the opinion that neither the litigation nor
these claims will have a material adverse effect on the results of operations or
financial position of the Company.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of holders of the Company's common
stock during the fourth quarter of 1997 or the first quarter of 1998.
- 15 -
PART II
Item 5. Market For Registrant's Common Equity and Related Shareholder Matters.
Price Range of Common Stock
The following table shows the range of quarterly high and low sale
prices for the Company's common stock. The Company's common stock was listed on
the NASDAQ National Market until its delisting on June 12, 1998 due to the
delayed filing of the Company's December 31,1997 Annual Report on Form 10-K and
the March 31, 1998 Quarterly Report on Form 10-Q. The Company's common stock
does not currently trade on any exchange. Recent trading activity of the
Company's common stock since June 12, 1998 has occurred on Instinet
Corporation's online trading service.
1998 1997 1996
---------------------- --------------------- ---------------------
High Low High Low High Low
---------------------- --------------------- ---------------------
First Quarter 6-15/16 2-1/4 14-3/8 8-5/8 9-3/8 5-3/4
Second Quarter 6-15/16 3-5/16 10-1/2 3-3/4 10-5/8 5-1/8
Third Quarter 5-1/8 3 15-7/8 8-1/2
Fourth Quarter 3-7/8 2-1/8 14-1/2 10-5/8
On June 30, 1998, the closing price of the Company's common stock was
$5.75. On that same date, there were approximately 2,650 shareholders.
Dividends
The Company has not paid a cash dividend on its Common Stock since its
inception in 1982, except for dividends paid for an acquired subsidiary. The
Company currently intends to retain all earnings to finance the expansion of its
business and does not anticipate paying cash dividends in the foreseeable
future.
Dividends paid by the Company over and above the financial assets of
PAMCO are dependent upon the ability of PILIC to pay dividends to PAMCO and the
ability of PALHIC to pay dividends to its parent, PILIC. Dividend payments by
PILIC and PALHIC are dependent upon a number of factors, including earnings and
financial condition, business needs and capital and surplus requirements, as
well as applicable regulatory restrictions. Under Pennsylvania law, PILIC and
PALHIC are currently unable to pay dividends without the prior approval of the
Pennsylvania Insurance Commissioner as a result of PILIC's and PALHIC's
statutory unassigned deficit of $13,538,000 and $4,147,000, respectively, which
excludes common stock and additional paid-in capital amounts.
The Company paid cash dividends on the Series A and Series B Preferred
Stock at the rate of $0.0636363 and $0.109090, respectively, per quarter from
1993 to the present. All Series B Preferred Stock was converted into common
stock in 1996.
- 16 -
Recent Sales of Unregistered Securities
On November 1, 1995, the Company granted warrants to purchase 50,000
shares of the Company's common stock at $5.00 per share and are exercisable
through November 1, 1998 to a consultant in consideration for services rendered.
On June 6, 1996, 100,000 warrants were granted to an investment banking firm in
consideration for services rendered at $9.00 per share and are exercisable
through June 6, 2001.
Effective as of January 1, 1996, the Company granted a warrant and an
amended warrant to a consultant for services rendered to purchase 100,000 shares
of the Company's common stock per year for each of three years at the market
price per share as of January 1, 1996, January 1, 1997, and January 1, 1998,
provided PILIC has achieved new annualized premium sales production of at least
$35,000,000, $45,000,000 and $50,000,000, respectively, for each of these
calendar years. PILIC has realized the annualized premium threshold for the
years ended December 31, 1996 and December 31, 1997, and accordingly, the
consultant is entitled to exercise 200,000 warrants for 1996 and 1997.
Effective as of October 6, 1997, the Company granted warrants to
purchase 25,000 shares of its common stock to an employee for services rendered.
The exercise price was $4.00 per share, the fair market value on the date of the
grant. The option expires on October 6, 2000, and is exercisable in three equal
installments, one-third upon issuance, an additional one-third October 6, 1998,
and the remaining balance on October 6, 1999.
Effective in November, 1997, the Company granted warrants to purchase
25,000 shares of its common stock each to two of the Company's exclusive agents
engaged in selling life insurance to members of the U.S. Armed Forces and
government employees for services rendered at an exercise price of $5.00 per
share. These warrants expire in November 2002.
The Company and AOL entered into the AOL Agreement, dated as of
February 1, 1998. In connection therewith, warrants were granted to AOL as
follows: (a) for the purchase of 300,000 shares of the Company's common stock at
an exercise price of $4.48 (based on the average NASDAQ closing prices for the
last 20 days preceding the determination date as defined in the agreement) per
share, exercisable at anytime during the five-year term ending January 31, 2003;
(b) a performance warrant representing the right for a seven-year term to
purchase up to an additional 150,000 shares of the Company's common stock at an
exercise price of $5.15, which vests quarterly in accordance with the terms and
conditions of the warrant; and (c) in the event that the Company exercises its
right to renew the AOL Agreement for an additional two-year term following the
initial 20-month term, an additional warrant representing the right for a
seven-year term to purchase up to 300,000 shares of the Company's common stock
at an exercise price of $5.15, which vests quarterly in accordance with the
terms and conditions of the performance warrant.
Effective February 24, 1998, the Company agreed to issue warrants to
purchase 50,000 shares of the Company's common stock to an investment banking
firm at an exercise price of $9.00 per share and expiring April 30, 2005 for
services rendered.
- 17 -
Effective March 31, 1998, the Company entered into a Consulting
Agreement with Lynx Capital Group, L.L.C., a California corporation (the
"Consultant"), which provides for retention of Lynx as a consultant with respect
to the development and marketing of health insurance products over the Internet
and the establishment of a web site for the Company. The Consultant is
compensated by the payment of a consulting fee of $10,000 per month. The Company
agreed to issue to Consultant (a) options to purchase 150,000 shares of the
Company's common stock upon the closing of an agreement with AOL at per share
exercise price equal to $3.57, exercisable within three years; (b) options to
purchase 100,000 shares of the Company's common stock upon securing equity
funding for the venture in an amount not less than $10,000,000, at a price equal
to the closing price of the Company's common stock during the sixty days
immediately preceding the closing of such financing, to expire three years from
the date of the grant; (c) options to purchase 50,000 shares of the Company's
common stock upon the internet based retailing venture and web site established
for the Company becoming operational at an exercise price equal to the average
closing price of the Company's common stock during the thirty business days
immediately preceding the date on which the web site becomes operational, the
options to be exercised within three years of the grant; (d) options to purchase
50,000 shares of the Company's common stock upon the conclusion of interactive
advertising/marketing agreements with internet service providers and search
engine specialty content providers at an exercise price equal to the average
closing price of the Company's common stock during the thirty business days
preceding conclusion of the interactive advertising/marketing agreements, the
option to be exercised within three years of the grant; and (d) options to
purchase 50,000 shares of the Company's common stock provided that Consultant
obtains funding for the Company in an amount not less than $5,000,000 from HPS,
FHG, or any other insurance company whose products are sold through Provident's
Internet WEB sites thirty business days from the date that financing is
completed, the options to be exercised within three years of the grant.
Effective May 29, 1998, the Company granted warrants to purchase
100,000 shares of the Company's common stock to a service provider to the
Company at an exercise price of $9.00 per share expiring May 29, 2003 in
consideration for entering into the HPS E-Commerce Agreement described in Note
S- Subsequent Events of the financial statements.
Effective May 29, 1998 Insurion, Inc. issued a $5,000,000 Convertible
Note due June 30, 2003 to a service provider to the Company. Interest on the
Convertible Note is accrued at an annual rate of 5.5% and is payable on
conversion or June 30, 1999, whichever occurs first. Insurion may repay the
Convertible Note before the due date in part or in full without penalty and in
that event the holder has the right to exercise the conversion privileges for a
period of 90 days prior to prepayment. The Convertible Note is convertible into
Insurion, Inc. Class A Common Stock, at the holder's option, in whole or in
part, 1 day prior to any of the following: 1) the sale of all or substantially
all of Insurion's business or assets, 2) the sale or transfer of 50% or more of
Insurion's outstanding capital stock owned by the Company, 3) the acquisition of
80% or more 's of Insurion's outstanding capital stock by an unaffiliated third
party, 4) May 29,1999 or 5) Insurion's first public offering of its common stock
which offering is underwritten on a firm commitment or best efforts basis and
produces gross proceeds in excess of $25,000,000.
All warrants issued in 1997 and 1998 and the Convertible Note issued in
1998, and the option issued in 1997, were issued in reliance upon the exemption
provided by Section 4(2) of the Securities Act of 1933, as amended.
- 18 -
Item 6. Selected Financial Data.
The following selected consolidated financial information has been
derived from the consolidated financial statements of the Company and should be
read in conjunction with the Consolidated Financial Statements and notes thereto
included elsewhere in this report has been audited by BDO Seidman, LLP for 1997,
and by Coopers and Lybrand, LLP for all prior years.
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except for per share data)
Statement of Operations Data:
Premiums earned excluding HealthQuest $ 43,083 $ 41,656 $ 32,709 $ 36,395 $ 40,634
Premiums earned - HealthQuest 11,170 3,050
Net investment and other income 7,027 4,941 4,127 3,736 3,782
Realized gains (losses) on investments 750 2,100 211 (89) 1,575
Litigation settlement, net 22,400
--------------------------------------------------------------
Total revenues 62,030 74,147 37,047 40,042 45,991
Benefits and expenses 85,044 51,630 40,728 41,026 44,694
--------------------------------------------------------------
Income (loss) before income taxes and
cumulative effect of accounting change (23,014) 22,517 (3,681) (984) 1,297
Income taxes (benefit) (4,589) 6,397 20 13 99
--------------------------------------------------------------
Income (loss) before cumulative
effect of accounting change (18,425) 16,120 (3,701) (997) 1,198
Cumulative effect of accounting change (294)
--------------------------------------------------------------
Net income (loss) (18,425) 16,120 (3,701) (997) 904
Dividends on preferred stock 148 194 334 334 192
--------------------------------------------------------------
Net income (loss) applicable to common stock $ (18,573) $ 15,926 $ (4,035) $ (1,331) $ 712
==============================================================
Per share data, Basic
Before cumulative effect of accounting change ($1.84) $1.66 ($0.44) ($0.16) $0.10
Cumulative effect of accounting change (0.03)
--------------------------------------------------------------
Earnings (loss) per share of common stock ($1.84) $1.66 ($0.44) ($0.16) $0.07
Per share data, Diluted
Before cumulative effect of accounting change ($1.84) $1.36 ($0.44) ($0.16) $0.10
Cumulative effect of accounting change (0.03)
--------------------------------------------------------------
Earnings (loss) per share of common stock ($1.84) $1.36 ($0.44) ($0.16) $0.07
Per share dividends paid on common stock, basic $0.00 $0.00 $0.02 $0.00 $0.00
Per share dividends paid on common stock, diluted $0.00 $0.00 $0.02 $0.00 $0.00
Shares outstanding, basic 10,090 9,610 9,100 8,421 9,511
Shares outstanding, diluted 10,090 11,674 9,100 8,421 9,511
- 19 -
Years Ended December 31,
1997 1996 1995 1994 1993
---- ---- ---- ---- ----
(in thousands, except for per share data)
Balance Sheet Data:
Investments $ 47,101 $ 61,942 $ 46,890 $ 39,467 $ 42,413
Total assets 98,365 93,054 67,151 60,586 62,934
Loans payable 5,077 298 830 1,166 182
Stockholders' equity 4,009 22,053 3,424 4,530 8,623
Stockholders' equity
per common share (1) $ 0.38 $ 2.08 $ 0.34 $ 0.48 $ 0.92
(1) Assumes conversion of Series A and Series B Cumulative Convertible Preferred
stock into common stock of the Company on a share-for-share basis in years 1995,
1994 and 1993 and conversion of Series A Cumulative Convertible Preferred stock
in 1997 and 1996 on a share-for-share basis.
- 20 -
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
Results of Operations
1997 Results compared to 1996 Results
Net loss applicable to common stock was $18.6 million or $1.84 per
diluted share for 1997 compared to net income of $15.9 million or $1.36 per
diluted share for 1996. The 1997 results were unfavorably impacted by higher
health policy benefits, write-off of deferred acquisition costs, and transition
costs associated with the HPS outsourcing. The 1996 results were primarily the
result of a litigation settlement representing $14.6 million of net income plus
related realized gains on the sale of stock received as a result of the
settlement.
Policy claims are based on a variety of estimation methods, which are
continually revised incorporating the Company's most recent benefit experience.
As a result of higher than expected out-of-network claim utilization and greater
than expected claim frequency, the Company increased its loss ratio assumptions
during the year, which, in turn, resulted in an underwriting loss for 1997. In
reaction to these items, the Company began a series of corrective actions,
including premium rate increases, more stringent underwriting and revised policy
designs providing for more severe penalties for those policyholders who elect to
receive medical treatment outside of the authorized PPO networks. Although the
Company believes policy claim liabilities are adequate, experience with these
newer managed care products is limited and continues to evolve. A greater than
anticipated claim experience could have a materially adverse impact on the
financial position and results of operations.
Accident and health gross premium was $84.7 million for 1997 compared
to $57.2 million for 1996. Accident and health ceded premium was $39.5 million
for 1997 compared to $25.7 for 1996. These increases were the result of
increased new business relating to the Company's managed care health insurance
products. The Company has expanded its group medical business through recent
alliances and acquisitions. The Company has agreements with FHG for managed care
cost containment and HPS for policy administration services which were effective
in 1998. The Company outsourced its policy administration and claims to HPS in
1998 in an effort to achieve economies of scale and to provide enhanced
policyholder services.
At December 31, 1997 and 1996, gross annualized accident and health
premium inforce on small group and managed care business amounted to $96.8
million and $68.2 million, respectively, consisting of approximately 50,000 and
36,000 certificate holders, respectively. The $28.6 million net increase in
annualized premium resulted from new business issued in 1997 of $68.1 million,
plus premium rate increases of approximately $10.0 million less lapses amounting
to approximately $49.5 million. Managed care products accounted for 82% and 65%
of the inforce premium at year end 1997 and 1996, respectively, of the group
accident and health business.
- 21 -
The lapse ratio on small group and managed care accident and health
insurance business based on annualized premium was 45% for 1997 compared to 38%
for 1996. 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. In an effort to improve 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 policyholders have switched to lower premium
insurance plans, the Company does not believe the plans are less profitable.
Life and annuity premium of $9.6 million for 1997 declined from $11.3
million for 1996 due to reduced pre-need premium. Individual life insurance
lapse ratios for 1997 and 1996 were 11% and 10%, respectively. Life and annuity
reinsurance ceded was $0.5 million for 1997 compared to $1.9 million recaptured
for 1996, due to the Company's 1996 recapture of reinsurance originally ceded in
1995 on certain multi-pay pre-need life insurance policies.
Net investment income of $3.5 million for 1997 increased modestly
compared to $3.3 million for 1996, primarily due to an increase in bond
investments. Net realized gains on investments of $0.8 million for 1997
decreased from $2.1 million for 1996, and reflect the sale of the Company's
remaining holdings of Loewen stock.
Accident and health policy benefits ratio net of reinsurance increased
to 86.3% for 1997 compared to 60% for 1996 as a result of higher than expected
claim experience on the Company's managed care products.
1997 1996
---- ----
Accident and health policy claims, net of reinsurance $38,981 $18,963
Accident and health premiums, net of reinsurance
Gross before reinsurance ceded $84,719 $57,195
Less reinsurance ceded (39,548) (25,670)
------- -------
Premiums, net of reinsurance $45,171 $31,325
Accident and health policy benefit ratio 86.3% 60.2%
- 22 -
Commissions, net of ceding allowance and deferred acquisition costs of
$7.1 million for 1997 decreased from $7.9 million from 1996 due to the increased
deferral of acquisition costs related to the Company's one-life managed-care
products 1997. These costs were written-off in 1997 as amortization of deferred
policy acquisition costs.
Other operating expenses of $16 million for 1997 increased from $11.7
million for 1996, due to increased policy administration expenses caused by
increased sales volume and transition expenses associated with the HPS
outsourcing.
Amortization of deferred policy acquisition costs of $10.9 million for
1997 increased from $0.6 million for 1996 primarily due to accelerated
amortization in 1997 due to higher than expected lapses and worse than expected
loss ratios. Increased lapsation over current levels or future unprofitability
in managed care and certain life products could result in an increase in the
amortization rate of unamortized deferred policy acquisition costs, which would
adversely impact future earnings.
1996 Results compared to 1995 Results
Net income applicable to common stock was $15.9 million or $1.36 per
diluted share in 1996 compared to a loss of $4.0 million or $.44 per diluted
share for 1995. The Company's 1996 net income was primarily the result of a
litigation settlement, representing $14.6 million of net income plus related
realized gains on the sale of stock received as a result of the settlement. 1996
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 $1.0 million.
Accident and health gross premium for 1996 was $57.2 million compared
to $39.0 million for 1995. Accident and health ceded premium in 1996 was $25.7
million compared to $15.9 in 1995. These increases are as a result of increased
new business from managed care health insurance products.
The Company has expanded its group medical business through alliances
and acquisitions. The Company has agreements with FHG for managed care cost
containment and HPS for certain policy administration services. The Company
acquired all of the outstanding shares of REF and Associates, Inc. ("REF") in
order to obtain full control and the rights to the Company's "The Provident
Solution" plan and eliminates future commission expense between the Company and
REF.
1996 results were not materially impacted as a result of the Company's
acquisition of PALHIC, acquired for the purpose of expanding the number of
available states which the Company is licensed to sell life and health
insurance. PALHIC is licensed in 40 states while PILIC is licensed in 25 states
and the District of Columbia. Together, the Company is licensed in 42 states and
the District of Columbia.
- 23 -
With the NIA acquisition the Company acquired 3,500 policyholders
representing approximately $6.5 million of annualized premium at the date of
acquisition. This business consists primarily of the "HealthQuest" product, a
managed care one-life PPO product similar to "The Provident Solution" plan. The
NIA Acquisition and the HealthQuest business accounted for the following during
1996; accident and health premiums, gross before reinsurance ceded of $6.1
million; accident and health premiums, net of reinsurance ceded of $3.1 million;
total revenue of $3.6 million; benefits, net of reinsurance of $1.7 million;
total expenses of $3.5 million; and pre-tax income of $0.1 million. These
amounts represent the business acquired on May 1, 1996 together with
post-acquisition HealthQuest sales and lapses and NIA's operations.
At December 31, 1996 and 1995, annualized accident and health premium
inforce on small group and managed care business amounted to $68.2 million and
$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 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.
Life and annuity premium of $11.3 million for 1996 declined from $13.2
million in 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 10%
and 9%, 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 from 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 from $2.9
million in 1995, primarily due to an increase in bond investments in late 1996.
- 24 -
The Company realized $2.1 million in capital gains in 1996 as a result of
selling Loewen stock received in connection with the litigation settlement.
Accident and health policy benefits ratio improved in 1996 compared to
1995 as the result of more first duration business where underwriting and policy
provisions tend to produce loss ratios that are lower than subsequent durations.
1996 1995
-------- --------
Accident and health policy claims,net of reinsurance $18,963 $14,458
Accident and health premiums
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%
"The Provident Solution" and HealthQuest products, introduced in 1995
represented 37% and 4% of accident and health policy benefits in 1996 and 1995,
respectively.
Other operating expenses of $11.7 million in 1996 increased from $11.6
million in 1995, due to increased policy administration expenses resulting from
increased sales volume and expenses associated with the acquired HealthQuest
book of business. With the CSE acquisition, the Company insourced its accident
and health policy and claims administration functions in order to better control
costs and service levels. The Company acquired CSE's staff and administration
systems. The acquired administration system supported the Company's managed care
products and alliances with managed care networks. The Company later determined
that it was advantageous to outsource these functions to HPS effective in 1998.
Amortization of deferred policy acquisition costs of $0.6 million for
1996 increased $0.5 million from 1995 primarily due to $0.4 million of managed
care amortization in the second half of 1996 relating to deferrals in the third
and fourth quarters of 1996.
Liquidity and Capital Resources
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.
- 25 -
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. Starting in 1998, Insurion's sources of cash will be primarily
private placements, a public offering and to a lessor extent marketing fee
income. Insurion's primary uses of cash will be fee payments to AOL and other
Internet sites, WEB site development and start-up expenses.
Cash and investments carried at market value at December 31, 1997 of
$63.9 million. This included $45.1 million of bonds issued by the U.S.
Government, government agencies, public utilities and other corporations, $2.0
million invested in policy loans, real estate and other invested assets and
$16.8 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, 1997, 1996 and 1995
was 6.8%, 6.5% and 6.3%, respectively. The Company's investment policy is to buy
medium term U.S. government direct and agency bonds. All bonds are considered to
be "available for sale". The Company and its subsidiaries invest in neither
high-yield debt instruments, defined as securities below investment grade with
interest rates or yields significantly above market rates, nor derivative
financial instruments.
The Company entered into a line of credit with a bank during 1997 in
the amount of $1 million with interest at 1% above the prime rate. The
outstanding borrowing at December 31, 1997 amounted to $1.0 million. The Company
anticipates repaying this amount in 1998.
The Loewen settlement, described in Note K to the financial statements,
provided a significant source of cash and invested assets in 1996. The
settlement contributed approximately $22.4 million of pre-tax income,
represented by $3 million of cash and 718,519 shares of Loewen common stock
valued at $19.4 million. The Company sold 85% of its Loewen stock representing
$18.5 million of equity investments, which included a realized pre-tax gain of
$2 million, in 1996. The Company sold its remaining Loewen shares during the
first quarter of 1997 that resulted in $4.1 million of cash from sale of
investments and included a corresponding pre-tax gain of $1 million.
Net cash used in operating activities of $5.4 million in 1997 reflects
higher than expected paid claims on the Company's managed care products. Change
in future policy benefits and claims of $17 million increased in 1997 compared
to 1996 due to managed care health insurance product sales at higher than
expected loss ratios. The Company anticipates the majority of its unpaid
accident and health claims incurred during 1997 will be paid during 1998. The
Company has sufficient cash available at December 31, 1997 to adequately fund
these claim payments as they arise in 1998.
Change in amounts due from reinsurers of $7.5 million in 1997 increased
from $2.1 million in 1996, due to higher than expected claim payments which are
recoverable from reinsurers in proportion to the percentage of risk they
reinsure.
- 26 -
In connection with the HPS Outsourcing Agreement, the Company received
a $5.0 million cash advance in 1997 to be repaid over the 60-month term of the
agreement at the rate of $85,000 per month.
The Company has entered into agreements pursuant to which options to
purchase shares of the Company's common stock will be granted to various agents
as they achieve certain production quotas and performance levels. The Company
also initiated a "1996 Employee Incentive Plan," granting options to purchase
shares of the Company's common stock to key employees whom the Company believes
are critical to the future success of the Company.
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.
The statutory capital and surplus of PILIC which includes amounts
related to its subsidiary PALHIC, was $11.4 million at December 31, 1997. At
December 31, 1997, PILIC calculated its "Risk Based Capital" utilizing a formula
required by the National Association of Insurance Commissioners. The results of
this computation indicate PILIC's adjusted capital of $12.0 million exceeds the
Company Action Level amount required by $2.7 million. PALHIC's results of this
computation indicate PALHIC's adjusted capital of $4.3 million exceeds the
Company Action Level amount required by $2.6 million. In concept, Risk Based
Capital standards are designed to measure the acceptable amounts of capital an
insurer should have based on inherent and specific risks of the insurers
business. This formula is a primary measurement as to the adequacy of total
capital and surplus of life insurance companies. Administrative rules and legal
restrictions of state insurance departments presently prevent payment of
dividends by PILIC and PALHIC to their parent companies without regulatory
approval.
Impact of Inflation
Inflation increases the need for insurance. Many policyholders who once
had adequate insurance programs increase their life insurance coverage to
provide the same relative financial benefits and protection. The effect of
inflation on medical costs leads to accident and health policies with higher
benefits. Thus, inflation has increased the need for life and accident and
health products.
The higher interest rates which have traditionally accompanied
inflation also affect the Company's investment operation. The market value of
the Company's fixed rate long-term investments decreases as interest rates
increase.
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.
- 27 -
The Company's pre-need products include periodic adjustments to the
face amount of the policy for increases in the consumer price index.
Capital Expenditures and Commitments
The Company announced an interactive marketing agreement with AOL in
March 1998. This agreement provides the Company with an exclusive agreement to
market health insurance products through AOL. The Company has agreed to pay AOL
a $8 million cash of which the Company paid AOL $4 million as of June 30, 1998
with $4 million due on September 1, 1998. Additionally, the Company expects to
incur certain initial operating costs which will require funding before the
AOL-related venture becomes operational in October 1998. HPS paid the Company
$0.750 million in March 1998 to be the exclusive administrator of this business.
Insurion privately placed $5 million of convertible debt in May 1998 to
partially fund these obligations.
- 28 -
Item 8. Financial Statements and Supplementary Data.
Report of Current Independent Accountants F-1
Report of Previous Independent Accountants F-2
Consolidated Balance Sheets - December 31, 1997 and 1996 F-3
Consolidated Statements of Operations
Years ended December 31, 1997, 1996 and 1995 F-4
Consolidated Statements of Changes in Stockholders' Equity
Years ended December 31, 1997, 1996 and 1995 F-5
Consolidated Statements of Cash Flows
Years ended December 31, 1997, 1996 and 1995 F-6 to F-7
Notes to Consolidated Financial Statements F-8 to F-37
- 29 -
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders and Board of Directors of Provident American Corporation
We have audited the accompanying consolidated balance sheet of Provident
American Corporation and Subsidiaries as of December 31, 1997 and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. We have also audited the financial statement schedules as
of and for the year ended December 31, 1997 listed in the accompanying index.
These financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements and schedules are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation of the financial statements and schedules. We
believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Provident American
Corporation and Subsidiaries as of December 31, 1997, and the results of its
operations and its cash flows for the year then ended in conformity with
generally accepted accounting principles.
Also, in our opinion, the financial statement schedules present fairly, in all
material respects, the information set forth therein.
BDO Seidman LLP
Philadelphia, Pennsylvania
July 10, 1998
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
Board of Directors and Shareholders
Provident American Corporation
Norristown, Pennsylvania
We have audited the consolidated financial statements and the financial
statement schedules of Provident American Corporation and Subsidiaries as of
December 31, 1996 and for each of the two years in the period ended December 31,
1996. These financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements and financial statement schedules based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Provident American
Corporation and Subsidiaries as of December 31, 1996, and the results
of their operations and their cash flows for each of the two years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles. In addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the information
required to be included therein.
Coopers & Lybrand, LLP
2400 Eleven Penn Center
Philadelphia, Pennsylvania
March 11, 1997
F-2
Provident American Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands except Preferred and Common Stock Data) December 31, December 31,
1997 1996
-------- ------------
Assets
Investments:
Bonds $ 45,134 $ 54,985
Equity securities, cost $12 and $3,901 8 4,930
Real estate less accumulated depreciation of $182 and $158 918 942
Policy loans 498 526
Other invested assets 543 559
--------- ----------
Total Investments 47,101 61,942
Cash and cash equivalents 16,767 6,218
Premiums due and uncollected 2,106 1,318
Amounts due from reinsurers 16,092 9,240
Loans receivable from officer, director and stockholder 1,243 461
Accrued investment income 610 836
Federal income taxes receivable 3,325 90
Property and equipment, less accumulated depreciation of $2,751 and $1,261 6,804 4,711
Deferred tax asset 0 154
Unamortized deferred policy acquisition costs 1,499 3,140
Goodwill, less accumulated amortization of $150 and $1,973 1,193 3,166
Other assets 1,625 1,778
--------- ----------
Total Assets $ 98,365 $ 93,054
========= ==========
Liabilities and Stockholders' Equity
Future policy benefits:
Life $ 40,665 $ 38,459
Annuity and other 5,428 6,354
Policy claims 31,109 15,438
Premiums received in advance and unearned 2,677 2,348
Amounts due to reinsurers 37 705
Accrued commissions and expenses 5,451 4,179
Loans payable 5,077 298
Capital equipment leases 1,151 0
Income taxes payable 0 463
Deferred income taxes 100 0
Other liabilities 2,661 2,757
--------- ----------
Total Liabilities 94,356 71,001
Stockholders' Equity
Preferred stock, par value $1: authorized 20,000,000 shares:
Series A Cumulative Convertible, issued 580,250 580 580
Series B Cumulative Convertible, none issued
Common stock, par value $.10: authorized 50,000,000, issued 10,209,160 and 10,078,710 1,021 1,008
Common stock, Class A, par value $.10: authorized 20,000,000, none issued
Additional paid-in capital 13,767 12,945
Net unrealized appreciation (depreciation) of bonds 188 (177)
Net unrealized appreciation (depreciation) of equity securities (3) 668
Retained earnings (11,468) 7,105
--------- ----------
4,085 22,129
Less common stock held in treasury, at cost, 36,300 shares (76) (76)
--------- ----------
Total Stockholders' Equity 4,009 22,053
--------- ----------
Total Liabilities and Stockholders' Equity $ 98,365 $ 93,054
========= ==========
See notes to consolidated financial statements.
F-3
Provident American Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollars in thousands, except per share data) Years Ended December 31,
1997 1996 1995
----------- ------------ ------------
Revenue:
Premium: Accident and health, gross $84,719 $57,195 $39,028
Life and annuity, gross 9,555 11,308 13,220
----------- ------------ ------------
Total gross premium 94,274 68,503 52,248
----------- ------------ ------------
Accident and health reinsurance ceded 39,548 25,670 15,882
Life and annuity reinsurance ceded 473 (1,873) 3,657
----------- ------------ ------------
Total reinsurance ceded 40,021 23,797 19,539
----------- ------------ ------------
Net premium 54,253 44,706 32,709
Net investment income 3,487 3,280 2,858
Realized gains (losses) on investments 750 2,100 211
Processing fees and other revenue 3,540 1,661 1,269
Litigation settlement, net of expenses 0 22,400 0
----------- ------------ ------------
Total revenue 62,030 74,147 37,047
----------- ------------ ------------
Benefits and expenses:
Death and other policy benefits:
Life 6,112 4,396 4,568
Accident and health, net of reinsurance 38,981 18,963 14,458
Annuity contracts and other considerations 737 1,137 892
Increase in liability for future policy benefits 1,896 6,474 2,243
Commissions, net of ceding allowance and
deferred acquisition costs 6,813 7,855 6,054
Other operating expenses, net of ceding allowance
and deferred acquisition costs 15,301 11,716 11,561
Amortization of deferred policy acquisition costs 10,943 584 103
Depreciation and amortization of goodwill 4,261 505 849
----------- ------------ ------------
Total benefits and expenses 85,044 51,630 40,728
----------- ------------ ------------
Income (loss) before income taxes (23,014) 22,517 (3,681)
Provision (benefit) for income taxes:
Current (5,205) 6,816 (131)
Deferred 616 (419) 151
----------- ------------ ------------
Total income taxes (4,589) 6,397 20
----------- ------------ ------------
Net income (loss) (18,425) 16,120 (3,701)
Dividends on preferred stock 148 194 334
----------- ------------ ------------
Net income (loss) applicable to common stock ($18,573) $15,926 ($4,035)
=========== ============ ============
Income (loss) per share of common stock
Basic $ (1.84) $ 1.66 $ (0.44)
=========== ============ ============
Diluted $ (1.84) $ 1.36 $ (0.44)
=========== ============ ============
Common shares and equivalents used in computing income (loss) per share
Basic 10,090 9,610 9,100
Diluted 10,090 11,674 9,100
See notes to consolidated financial statements.
F-4
Provident American Corporation and Subsidiaries
Consolidated Statements of Changes in Stockholders' Equity
(Dollars in thousands)
Net Unrealized Net Unrealized
Additional Appreciation Appreciation
Preferred Stock Common Stock Paid-In (Depreciation) of Marketable
Shares Amount Shares Amount Capital of Bonds Securities
-------- -------- -------- -------- ---------- --------------- ----------------
BALANCE, DECEMBER 31, 1994.......... 1,006 $1,006 8,628 $ 863 $10,130 $(2,563)
Pooling of interests with REF &
Associates (in 1996)............... 610 61 (61)
Stock options exercised............. 22 2 79
Compensation expense on stock option
grants............................. 18
Cash dividends declared on preferred
and common stock...................
Net unrealized appreciation of
bonds.............................. 3,030
Net loss............................
----- ------ ------ ------ ------- -------
BALANCE, DECEMBER 31, 1995.......... 1,006 1,006 9,260 926 10,166 467
Conversion of Series B Cumulative
Preferred stock.................... (426) (426) 426 43 383
Retirement of treasury stock........ (100) (10) (234)
Stock options and warrants
exercised.......................... 204 20 625
Compensation expense on stock
issuance and stock option grants... 15 2 153
Issuance of common stock in
connection with acquisition of
businesses......................... 274 27 1,852
Net unrealized depreciation of
bonds.............................. (644)
Net unrealized appreciation of
equity securities.................. $ 668
Cash dividends declared on preferred
stock..............................
Net income..........................
----- ------ ------ ------ ------- ------- -----
BALANCE, DECEMBER 31, 1996.......... 580 $ 580 10,079 $1,008 $12,945 $ (177) $ 668
Stock options and warrants
exercised.......................... 30 2 96
Compensation expense on stock
issuance........................... 100 11 478
Compensation expense on stock
option grants...................... 248
Net unrealized depreciation of
bonds.............................. 365
Net unrealized appreciation of
equity securities.................. (671)
Cash dividends declared on preferred
stock..............................
Net loss............................
----- ------ ------ ------ ------- ------- -----
BALANCE, DECEMBER 31, 1997.......... 580 $ 580 10,209 $1,021 $13,767 $ 188 $ (3)
===== ====== ====== ====== ======= ======= =====
Retained Treasury
Earnings Stock
(Deficit) (at cost) Total
----------- --------- --------
BALANCE, DECEMBER 31, 1994.......... $ (4,586) $(320) $ 4,530
Pooling of interests with REF &
Associates (in 1996)...............
Stock options exercised............. 81
Compensation expense on stock option
grants............................. 18
Cash dividends declared on preferred
and common stock................... (534) (534)
Net unrealized appreciation of
bonds.............................. 3,030
Net loss............................ (3,701) (3,701)
-------- ----- -------
BALANCE, DECEMBER 31, 1995.......... (8,821) (320) 3,424
Conversion of Series B Cumulative
Preferred stock.................... 0
Retirement of treasury stock........ 244 0
Stock options and warrants
exercised.......................... 645
Compensation expense on stock
issuance and stock option grants... 155
Issuance of common stock in
connection with acquisition of
businesses......................... 1,879
Net unrealized depreciation of
bonds.............................. (644)
Net unrealized appreciation of
equity securities.................. 668
Cash dividends declared on preferred
stock.............................. (194) (194)
Net income.......................... 16,120 16,120
-------- ----- -------
BALANCE, DECEMBER 31, 1996.......... $ 7,105 $ (76) $22,053
Stock options and warrants
exercised.......................... 98
Compensation expense on stock
issuance........................... 489
Compensation expense on stock
option grants...................... 248
Net unrealized depreciation of
bonds.............................. 365
Net unrealized appreciation of
equity securities.................. (671)
Cash dividends declared on preferred
stock.............................. (148) (148)
Net loss............................ (18,425) (18,425)
-------- ----- -------
BALANCE, DECEMBER 31, 1997.......... $(11,468) $ (76) $ 4,009
======== ===== =======
See notes to consolidated financial statements.
F-5
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands) Years Ended December 31,
1997 1996 1995
-------- -------- --------
Cash flows from operating activities
Net income (loss) $(18,425) $ 16,120 $ (3,701)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depreciation, amortization and in 1997 and 1995
asset impairment 4,286 515 2,934
Equity securities received from litigation settlement (19,400)
Net realized (gain) on investments (750) (2,100) (211)
Changes in assets and liabilities
Premium due and uncollected, unearned
premium and premium received in advance 130 971 237
Due to/from reinsurers (7,520) (2,112) 3,050
Accrued investment income 226 (186) 3
Other assets, current and deferred income
taxes and other liabilities (3,222) (969) 81
Deferred policy acquisition costs, net 1,641 (2,154) (676)
Accrued commissions and expenses 1,272 1,906 74
Future policy benefits and policy claims 16,951 8,528 1,743
-------- -------- --------
Net cash provided by (used in) operating activities (5,411) 1,119 3,534
-------- -------- --------
Cash flows from investing activities
Purchases of bonds (25,128) (24,861) (13,747)
Purchases of equity securities and other investments (100) (1,194) (246)
Sale of bonds 35,879 16,719 9,350
Sale of equity securities 4,420 18,504
Maturity of investments and loans 645 328
Repayments of loans receivable 250 738
Loans to officer, director and shareholder (1,032) (461)
Purchases of property and equipment (3,206) (745) (76)
Acquisition of businesses, net (3,745)
Sale of business, net 1,756
-------- -------- --------
Net cash provided by (used in) investing activities 11,083 4,862 (1,897)
-------- -------- --------
See notes to consolidated financial statements.
F-6
Provident American Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollars in thousands) Years Ended December 31,
1997 1996