-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, R3SWOytY8JOJkrR6Fl0hOd+GY0ZecZTJBgkFDG4sVSj8imFrByHnIClyJSfT79ka n/jezDUW8zc/uHJ4pzKcXA== 0000814181-99-000016.txt : 19990517 0000814181-99-000016.hdr.sgml : 19990517 ACCESSION NUMBER: 0000814181-99-000016 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990514 FILER: COMPANY DATA: COMPANY CONFORMED NAME: PENN TREATY AMERICAN CORP CENTRAL INDEX KEY: 0000814181 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 231664166 STATE OF INCORPORATION: PA FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-14681 FILM NUMBER: 99623447 BUSINESS ADDRESS: STREET 1: 3440 LEHIGH ST CITY: ALLENTOWN STATE: PA ZIP: 18103 BUSINESS PHONE: 6109652222 MAIL ADDRESS: STREET 1: 3440 LEHIGH ST STREET 2: 3440 LEHIGH ST CITY: ALLENTOWN STATE: PA ZIP: 18103 10-Q 1 FIRST QUARTER 1999 10-Q FORM 10-Q SECURITIES AND EXCHANGE COMMISSION WASHINGTON, DC 20549 [X] Quarterly Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1999 or [ ] Transition Report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from ______________________________ to __________________________ Commission file number 0-13972 PENN TREATY AMERICAN CORPORATION (Exact name of registrant as specified in its charter) PENNSYLVANIA 23-1664166 ------------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation of organization) Identification No.) 3440 LEHIGH STREET, ALLENTOWN, PA 18103 --------------------------------------- (Address, including zip code, of principal executive offices) (610) 965-2222 -------------- (Registrant's telephone number, including area code) NOT APPLICABLE -------------- (Former name,former address and former fiscal year, if change since last report) 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 [ ] The number of shares outstanding on the Registrant's common stock, par value $.10 per share, as of May 6, 1999 was 7,807,589. PART I FINANCIAL INFORMATION ITEM 1. Financial Statements The registrant's Unaudited Consolidated Balance Sheets, Statements of Operations and Comprehensive Income and Statements of Cash Flows and Notes thereto required under this item are contained on pages 3 through 7 of this report, respectively. These financial statements represent the consolidation of the operations of the registrant, and its subsidiaries, Penn Treaty Network America Insurance Company ("PTNA"), American Network Insurance Company ("ANIC"), American Independent Network Insurance Company of New York ("AINIC")(collectively, the "Insurers"), United Insurance Group Agency, Inc. ("UIG") and Senior Financial Consultants (collectively the "Agencies"), which are underwriters and marketers of long-term care insurance products. PTNA is also an underwriter of life insurance products. 2 PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES Condensed Balance Sheets (amounts in thousands)
March 31, December 31, 1999 1998 ---- ---- (unaudited) ASSETS Investments: Bonds, available for sale at market (cost of $328,396 and $310,993, respectively) $ 330,455 $ 321,448 Equity securities at market value (cost of $15,728 and $15,090, respectively) 18,399 17,334 Policy loans 118 107 --------- --------- Total investments 348,972 338,889 Cash and cash equivalents 30,244 38,402 Property and equipment, at cost, less accumulated depreciation of $3,249 and $3,033, respectively 10,329 9,635 Unamortized deferred policy acquisition costs 168,455 157,385 Receivables from agents, less allowance for uncollectable amounts of $166 and $166, respectively 1,708 1,804 Accrued investment income 5,176 4,889 Cost in excess of fair value of net assets acquired, less accumulated amortization of $1,287 and $1,029, respectively 23,091 6,349 Present value of future profits acquired 3,078 3,181 Receivable from reinsurers 12,632 12,288 Federal income tax recoverable 804 1,741 Other assets 7,907 5,989 --------- --------- Total assets $ 612,396 $ 580,552 --------- --------- --------- --------- LIABILITIES Policy reserves: Accident and health $ 205,713 $ 190,036 Life 9,707 9,434 Policy and contract claims 111,323 105,667 Accounts payable and other liabilities 14,012 8,639 Note payable 7,167 - Long-term debt 76,527 76,550 Deferred income taxes 30,600 32,556 --------- --------- Total liabilities 455,049 422,882 --------- --------- Commitments and contingencies SHAREHOLDERS' EQUITY Preferred stock, par value $1.00; 5,000 shares authorized, none outstanding - - Common stock, par value $.10; 10,000 shares authorized, 8,189 and 8,189 shares issued 819 819 Additional paid-in capital 53,548 53,516 Net unrealized appreciation of securities 3,122 8,381 Retained earnings 101,564 96,660 --------- --------- 159,053 159,376 Less 606 common shares held in treasury, at cost (1,706) (1,706) --------- --------- 157,347 157,670 --------- --------- Total liabilities and shareholders' equity $ 612,396 $ 580,552 --------- --------- --------- --------- See accompanying notes to consolidated financial statements
3 PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations and Comprehensive Income (unaudited) (amounts in thousands, except per share data)
Three Months Ended March 31, ---------------------------- 1999 1998 ---- ---- Revenue: Accident and health premiums $ 66,166 $ 50,912 Life premiums 893 867 -------- -------- 67,059 51,779 Net investment income 5,183 4,626 Net realized capital gains 616 6,715 Other income 1,440 76 -------- -------- 74,298 63,196 Benefits and expenses: Benefits to policyholders 45,404 34,282 Commissions 21,608 17,365 Net policy acquisition costs deferred (11,070) (8,275) General and administrative expense 9,842 5,955 Interest expense 1,195 1,213 -------- -------- 66,979 50,540 -------- -------- Income before federal income taxes 7,319 12,656 Provision for federal income taxes 2,415 4,285 -------- -------- Net income 4,904 8,371 -------- -------- Other comprehensive income: Unrealized holding gain (loss) arising during period (7,353) 1,697 Income (tax) benefit from unrealized holdings 2,500 (577) Reclassification adjustment for (gain) loss included in net income (616) (6,715) Income (tax) benefit from reclassification adjustment 210 2,283 -------- -------- Comprehensive income $ (355) $ (5,059 -------- -------- -------- -------- Basic earnings per share $ 0.65 $ 1.11 Diluted earnings per share $ 0.56 $ 0.88 Weighted average number of shares outstanding 7,583 7,572 Weighted average number of shares outstanding (diluted) 10,355 10,418 See accompanying notes to consolidated financial statements
4 PENN TREATY AMERICAN CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows for the Three Months Ended March 31, (unaudited) (amounts in thousands)
1999 1998 ---- ---- Net cash flow from operating activities: Net income $ 4,904 $ 8,371 Adjustments to reconcile net income to cash provided by operations: Amortization of intangible assets 452 272 Policy acquisition costs, net (11,070) (8,275) Deferred income taxes 807 5,224 Depreciation expense 216 89 Compensation expense for agent options 27 - Net realized capital gains (616) (6,715) Increase (decrease) due to change in: Receivables from agents 96 (31) Receivable from reinsurers (344) (889) Policy and contract claims 5,656 5,811 Policy reserves 15,950 11,457 Accounts payable and other liabilities 3,730 2,505 Federal income taxes recoverable 937 (1,229) Accrued investment income (287) (118) Other, net (1,457) (1,752) -------- -------- Cash provided by operations 19,000 14,720 Cash flow from (used in) investing activities: Net cash purchase of subsidiary (9,194) - Proceeds from sales of bonds 12,190 6,224 Proceeds from sales of equity securities 3,236 22,045 Maturities of investments 2,869 2,995 Purchase of bonds (32,282) (2,355) Purchase of equity securities (3,352) (193) Acquisition of property and equipment (608) (238) -------- -------- Cash provided by (used in) investing (27,141) 28,478 Cash flow from (used in) financing activities: Proceeds from exercise of stock options 6 11 Repayments of long-term debt (23) (192) -------- -------- Cash used in financing (17) (181) -------- -------- Increase (decrease) in cash and cash equivalents (8,158) 43,017 Cash balances: Beginning of period 38,402 11,241 -------- -------- End of period $ 30,244 $ 54,258 -------- -------- -------- -------- Acquisition of subsidiary with note payable $ (7,167) $ - -------- -------- -------- -------- See accompanying notes to consolidated financial statements.
5 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS March 31, 1999 (unaudited) (amounts in thousands, except per share data) The Consolidated Financial Statements should be read in conjunction with these notes and with the Notes to Consolidated Financial Statements included in the Annual Report on Form 10-K for the year ended December 31, 1998 of Penn Treaty American Corporation (the "Company"). In the opinion of management, the summarized financial information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the financial position and results of operations for the interim periods. Certain prior period amounts have been reclassified to conform to current period presentation. 1. Investments Management has categorized all of its investment securities as available for sale since they may be sold in response to changes in interest rates, prepayments, and similar factors. Investments in this classification are reported at their current market value with net unrealized gains and losses, net of the applicable deferred income tax effect, being added to or deducted from the Company's total shareholders' equity on the balance sheet. As of March 31, 1999, shareholders' equity was increased by $3,122 due to unrealized gains of $4,730 in the investment portfolio. As of December 31, 1998, shareholders' equity was increased by $8,381 due to unrealized gains of $12,699 in the investment portfolio. The amortized cost and estimated market value of investments available for sale as of March 31, 1999 and December 31, 1998 are as follows:
March 31, 1999 December 31, 1998 -------------- ----------------- Amortized Estimated Amortized Estimated Cost Market Value Cost Market Value ---- ------------ ---- ------------ U.S. Treasury securities and obligations of U.S Government authorities and agencies $ 118,149 $ 121,075 $ 124,664 $ 132,031 Obligations of states and political sub-divisions 571 627 2,660 2,864 Mortgage backed securities 49,099 46,007 10,368 10,407 Debt securities issued by foreign governments 11,411 11,668 2,974 3,109 Corporate securities 149,166 151,078 170,327 173,037 Equities 15,728 18,399 15,090 17,334 Policy Loans 118 118 107 107 --------- --------- --------- --------- Total Investments $ 344,242 $ 348,972 $ 326,190 $ 338,889 --------- --------- --------- --------- --------- --------- --------- --------- Net unrealized gain 4,730 12,699 --------- --------- $ 348,972 $ 338,889 --------- --------- --------- ---------
6 2. New Accounting Principles: Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" (SOP 97-3) was issued by the American Institute of Certified Public Accountants in December 1997 and provides guidance for determining when an insurance or other enterprise should recognize a liability for guaranty-fund assessments and guidance for measuring the liability. The statement is effective for 1999 financial statements with early adoption permitted. The Company has adopted SOP 97-3, and established a gross liability of $1,066 for future assessments and a gross asset of $1,046 for premium tax offsets related to those assessments during the 1999 quarter. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives") and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. While the Company is presently evaluating the impact of SFAS No. 133, the adoption of SFAS No. 133 is not expected to have a material impact on the Company's financial condition or results of operations. 3. Statutory Regulation: In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. The Pennsylvania Insurance Department has adopted the Codification guidance, effective January 1, 2001. The Company has not estimated the effect of the Codification guidance upon its financial condition or results of operations. 4. Acquisition of Business: On November 25, 1998, the Company entered a purchase agreement to acquire all of the common stock of United Insurance Group Agency, Inc., a Michigan based consortium of long-term care insurance agencies. The acquisition was effective January 1, 1999, for the amount of $18,192, of which $8,078 was in the form of a three-year zero-coupon installment note. The installment note, after discounting for imputed interest, is recorded as a note payable of $7,167. The acquisition is accounted for as a purchase, for which the Company recognized goodwill of $17,000 that is being amortized over 25 years. The Company expects that the proforma effect of consolidating the financial results of UIG prior to 1999 would be immaterial to the Company's financial condition or results of operations. 5. Reconciliation of Earnings Per Share: A reconciliation of the numerator and denominator of the basic earnings per share computation to the numerator and denominator of the diluted earnings per share computation follows. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflect the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock. 7 STATEMENT RE: COMPUTATION OF PER SHARE EARNINGS (amounts in thousands, except per share data) (unaudited) Three Months Ended Mar 31, -------------------------- 1999 1998 ---- ---- Net income $ 4,904 $ 8,371 Weighted average common shares outstanding 7,583 7,572 Basic earnings per share $ 0.65 $ 1.11 ------- ------- ------- ------- Net income $ 4,904 $ 8,371 Adjustments net of tax: Interest expense on convertible debt 783 773 Amortization of debt offering costs 61 60 ------- ------- Diluted net income $ 5,748 $ 9,204 ------- ------- ------- ------- Weighted average common shares outstanding 7,583 7,572 Common stock equivalents due to dilutive effect of stock options 144 218 Shares converted from convertible debt 2,628 2,628 ------- ------- Total outstanding shares for diluted earnings per share computation 10,355 10,418 Diluted earnings per share $ 0.56 $ 0.88 ------- ------- ------- ------- 8 ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. THREE MONTHS ENDED MARCH 31, 1999 AND 1998: (amounts in thousands, except per share data) Accident and Health Premiums. First year accident and health premiums earned in the three month period ended March 31, 1999 (the "1999 quarter"), including long-term care and Medicare supplement, increased 24.6% to $21,320, compared to $17,106 in the same period in 1998 (the "1998 quarter"). First year long-term care premiums earned in the 1999 quarter increased 28.3% to $21,150, compared to $16,491 in the 1998 quarter. The Company attributes its growth to continued improvements in product offerings, which competitively meet the needs of the long term care marketplace. In addition, the Company actively recruits and trains agents to sell its products. The Company has expanded its sales force through the appointment and licensing of new, national general agencies. Also, management has actively recruited new agents and filed new products in states other than in its normal geographic concentration. Renewal accident and health premiums earned by the Company in the 1999 quarter increased 35.2% to $43,214, compared to $31,950 in the 1998 quarter. Renewal long-term care premiums earned in the 1999 quarter increased 34.7% to $41,919, compared to $31,119 in the 1998 quarter. This increase reflects renewals of a larger base of in-force policies. Renewal Medicare supplement premiums in the 1999 quarter increased 55.8% to $1,295, compared to $831 in the 1998 quarter. Net Investment Income. Net investment income earned by the Company for the 1999 quarter increased 12.0% to $5,183, from $4,626 for the 1998 quarter. The Company also earned $616 in capital gains during the 1999 quarter. These gains were primarily attributable to the sale from the Company's investment portfolio of convertible securities and preferred equity securities. This portfolio is managed in order to maximize investment income. In the 1998 quarter, the Company recognized approximately $6,400 in capital gains due to the sale of its common stock portfolio. Other Income. The Company recognized $1,440 of other income in the 1999 quarter, compared to $76 in the 1998 quarter. The 1999 increase was primarily attributable to the acquisition of United Insurance Group Agency, Inc. (UIG) during 1999, which as a sales agency recorded $1,382 in commission income in the 1999 quarter. Benefits to Policyholders. Total benefits to policyholders in the 1999 quarter increased 32.4% to $45,404 compared to $34,282 in the 1998 quarter. In addition to paid claims, benefits to policyholders increased $15,950 in the 1999 quarter due to increases in policy reserves (the actuarial reserve established for the future incurral of claims) and $5,656 in policy and contract claim reserves (the reserve established for current claims incidence). The Company's loss ratio, or benefits to premiums, was 67.7% in the 1999 quarter, compared to 66.2% in the 1998 quarter. The Company uses independent care managers to monitor claims and to ensure proper utilization of policyholder benefits in its home health care coverage. The expenses related to care management included in benefits to policyholders were approximately $450 or .7% and $300 or .6% of premiums in the 1999 and 1998 quarters, respectively. 9 Commissions. Commissions to agents increased 24.4% to $21,608 in the 1999 quarter compared to $17,365 in the 1998 quarter. First year commissions on accident and health business in the 1999 quarter increased 23.1% to $14,446, compared to $11,739 in the 1998 quarter, corresponding to the increase in first year accident and health premiums. The ratio of first year accident and health commissions to first year accident and health premiums was 67.8% in the 1999 quarter and 68.6% in the 1998 quarter. Renewal commissions on accident and health business in the 1999 quarter increased 34.2% to $6,679, compared to $4,976 in the 1998 quarter, consistent with the increase in renewal premiums discussed above. The ratio of renewal accident and health commissions to renewal accident and health premiums was 15.5% in the 1999 quarter and 15.6% in the 1998 quarter. This ratio fluctuates in relation to the age of the policies in force and the rates of commissions paid to the agents. Commission expense in the 1999 quarter was reduced by $550 due to the elimination of commissions paid to UIG by Company subsidiaries. Net Policy Acquisition Costs Deferred. The net deferred policy acquisition costs in the 1999 quarter increased 33.8% to $11,070 compared to $8,275 in the 1998 quarter, consistent with the growth of the Company's business. This deferral is net of amortization, which decreases or increases as the Company's actual persistency is higher or lower than the persistency assumed for reserving purposes. Generally, the deferral of policy acquisition costs remained consistent with the growth of premiums. Deferred costs are typically all costs deemed to vary with the acquisition of new premiums. These costs include the variable portion of commissions, which are defined as the first year commission rate less the renewal commission rates, and variable general and administrative expenses related to policy underwriting. General and Administrative Expenses. General and administrative expenses in the 1999 quarter increased 65.3% to $9,842, compared to $5,955 in the 1998 quarter. This increase is due to variable expense growth, management additions, information technology expenditures and support staff additions. UIG costs added $1,910 to general and administrative expenses in the 1999 quarter, including amortization of goodwill of $180 from the purchase. Provision for Federal Income Taxes. The provision for federal income taxes recorded by the Company for the 1999 quarter was $2,415, compared to $4,285 for the 1998 quarter. The effective tax rates of approximately 33% and 34% in the 1999 and 1998 quarters, respectively, are below the normal federal corporate rate as a result of of small life deductions and dividend received deductions attributable to equity investments. Comprehensive Income. During the 1999 quarter, the Company's investment portfolio generated unrealized losses of $7,353 due to higher market interest rates, compared to 1998 quarter gains of $1,696. After accounting for deferred taxes from these gains, shareholders' equity decreased by $356 from comprehensive losses during the 1999 quarter, compared to comprehensive income of $5,059 in the 1998 quarter. 10 YEAR 2000 As many computer systems and other equipment with embedded chips or processors use only two digits to represent the year, they may be unable to accurately process certain data before, during or after the year 2000. As a result, business and governmental entities are at risk for possible miscalculations or systems failures causing disruptions in their business operations. This is commonly known as the Year 2000 ("Y2K") issue. The Y2K issue can arise at any point in the Company's supply, billing, processing, sales or financial chains. The Company and each of its subsidiaries are in the process of implementing a Y2K readiness program with the objective of having all of their significant operations functioning properly with respect to Y2K before January 1, 2000. The first component of the Y2K project was to identify all systems and hardware, which would be impacted by the Y2K issue. This portion of the project has been completed for the Company and for all of its subsidiaries. The second component of the Y2K project involves the actual remediation and replacement of various systems and hardware, which will be affected by the Y2K issue. The Company and its insurance subsidiaries are using both internal and external resources to complete this process. Each system has been assigned a priority for Y2K completion, beginning with the most critical projects. All application systems that are not Y2K compliant have been slated for replacement with a new Y2K compliant system. The Company expects to complete the installation and conversion to these new systems by the summer of 1999. As part of the Y2K project, significant service providers, vendors, suppliers, and customers that are believed to be critical to business operations after January 1, 2000, have been identified and steps are being undertaken in an attempt to reasonably ascertain their level of readiness through questionnaires, interviews, on-site visits and other available means. Because of the reliance upon new application systems to alleviate the risk of business operations due to the Y2K issue, the Company cannot guarantee that these systems will be implemented successfully or in a timely fashion. In the event that one or all of these new system conversions are unsuccessful, the Company could experience interruptions in its business operations, which are critical to its ongoing profitability and sustainability. However, the Company believes that its efforts in converting to new systems will be successful, and does not anticipate any failures or unnecessary delays in its critical functions as a result of the Y2K issue. By the end of the second quarter 1999, the Company will review its progress in the completion of Y2K preparedness, both on in-house systems and external vendors. In the event either is not expected to be completed prior to January 1, 2000, the Company will correct its existing systems (which are substantially Y2K compliant ) and/or seek other vendors which are compliant. Since January 1999, the Company has been testing its system using Y2K dates and has not experienced any difficulties or problems. Any policy written with an annual collection of premium has been successfully processed since January 1999, with no interruption of services. The Company has spent approximately $300,000 to date related to modifying existing systems to become Y2K compliant, and anticipates the expenditure of approximately $100,000 more before the end of the third quarter 1999. The Company estimates that this amount represents approximately 15% of its total information technology budget. The majority of the Company's efforts and expenditures have related to the installation of a new computer system, which, although correcting for Y2K issues, is being implemented for normal processing 11 reasons rather than for Y2K. The Company expects the impact of Y2K to have no material impact upon its financial condition and results of operations. LIQUIDITY AND CAPITAL RESOURCES The Company's consolidated liquidity requirements have historically been created and met from the operations of its insurance subsidiaries. The Company's primary sources of cash are premiums, investment income and maturities of investments. The Company has provided, and may continue to provide, cash through public offerings of its common stock, capital markets activities or debt instruments. The primary uses of cash are policy acquisition costs (principally commissions), payments to policyholders, investment purchases and general and administrative expenses. Statutory requirements allow insurers to pay dividends only from statutory earnings as approved by the state insurance commissioner. Statutory earnings are generally lower than publicly reported earnings due to the immediate or accelerated recognition of all costs associated with premium growth and benefit reserves. The Company has not and does not intend to pay shareholder dividends in the near future due to these requirements, choosing to retain statutory surplus to support continued premium growth. The Company's cash flows in the 1999 quarter were attributable to cash provided by operations, cash used in investing, and cash provided by financing. The Company's cash decreased by $8,158 in the 1999 quarter primarily due to the purchase of UIG for $9,194 in net cash and a note payable for $8,078. The major provider of cash from operations was premiums used to fund additions to reserves of $21,606 in the 1999 quarter. The primary uses of cash, other than the UIG acquisition were to policy acquisition costs of $11,070 and the purchase of bonds of $32,282. The Company's cash increased by $43,017 in the 1998 quarter primarily due to the sale of $22,045 of its equity securities portfolio and cash from operations of $14,720. The major provider of cash from operations was premiums used to fund additions to reserves of $17,210 in the 1998 quarter. The Company invests in securities and other investments authorized by applicable state laws and regulations and follows an investment policy designed to maximize yield to the extent consistent with liquidity requirements and preservation of assets. The market value of the Company's bond portfolio represented approximately 100.6% of its cost at March 31, 1999, compared to 103.4% on December 31, 1998, with a current unrealized gain of $2,059 at March 31, 1999, compared to $10,455 on December 31, 1998. Its equity portfolio, which consisted of common and preferred stock at March 31, 1999, exceeded cost by $2,671, compared to $2,244 on December 31, 1998. As of March 31, 1999, shareholders' equity was increased by $3,122 due to unrealized gains of $4,730 in the investment portfolio. As of December 31, 1998, shareholders' equity was increased by $8,381 due to unrealized gains of $12,699 in the investment portfolio. The Company's debt currently consists primarily of a mortgage note in the approximate amount of $1,800 and $74,750 in convertible subordinated debt and a note payable of $7,167 for the purchase of UIG. The convertible debt, issued in November 1996, is convertible at $28.44 per share until November 2003. The debt carries a fixed interest coupon of 6.25%, payable semi-annually. The mortgage note is currently amortized over 15 years, and has a balloon payment due on the remaining outstanding balance in September 2003. Although the note carries a variable interest rate, the Company has entered into an amortizing swap agreement with the same bank, with a notional amount equal to the outstanding 12 debt, which has the effect of converting the note to a fixed rate of interest. The note payable, although carrying a zero percent coupon, is discounted at six percent and is payable in installments over three years. The Company consists of the Insurers, the Agencies and a non-insurer parent company, Penn Treaty American Corporation (the "Parent"). The Parent controls 100% of the voting stock its subsidiaries insurers. In the event the Parent is unable to meet its financial obligations, becomes insolvent, or discontinues operations, its subsidiaries financial condition and results of operations could be materially affected. The Parent currently has the obligation of making semi-annual interest payments attributable to the Company's convertible debt. In that the dividend ability of the subsidiaries is restricted, the Parent must rely on its own liquidity and cash flows to make all required interest installments. Management believes that the Parent holds sufficient liquid funds to meet its obligations for the foreseeable future. The Company's continued growth is dependent upon its ability to (i) continue marketing efforts to expand its historical markets, (ii) continue to expand its network of agents and effectively market its products and (iii) fund such marketing and expansion while at the same time maintaining minimum statutory levels of capital and surplus required to support such growth. Management believes that the funds necessary to accomplish the foregoing, including funds required to maintain adequate levels of statutory surplus in the Company's insurance subsidiaries can be met for the foreseeable future from current funds. In the event (i) the Company fails to maintain minimum loss ratios calculated in accordance with statutory guidelines, (ii) the Company fails to meet other requirements mandated and enforced by regulatory authorities, (iii) the Company has adverse claims experience in the future, (iv) the Company is unable to obtain additional financing to support future growth, or (v) the economy adversely affect the buying power of senior citizens, the Company's results of operations, liquidity and capital resources could be adversely affected. Some of the information presented in this report constitutes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Although the Company believes that its expectations are based on reasonable assumptions within the bounds of its knowledge of its business and operations, there can be no assurance that actual results of the Company's operations will not differ materially from its expectations. Factors which could cause actual results to differ from expectations include, among others, the adequacy of the Company's loss reserves, the Company's ability to qualify new insurance products for sale and the acceptance of such products, the Company's ability to comply with government regulations, the ability of senior citizens to purchase the Company's products in light of the increasing costs of health care, the Company's ability to expand its network of productive independent agents and the performance of the Company's investment portfolio. NEW ACCOUNTING PRINCIPLES Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" (SOP 97-3) was issued by the American Institute of Certified Public Accountants in December 1997 and provides guidance for determining when an insurance or other enterprise should recognize a liability for guaranty-fund assessments and guidance for measuring the liability. The statement is effective for 1999 financial statements with early 13 adoption permitted. The Company has adopted SOP 97-3, and established a gross liability of $1,066 for future assessments and a gross asset of $1,046 for premium tax offsets related to those assessments during the 1999 quarter. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as "derivatives") and for hedging activities. SFAS No. 133 requires an entity to recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. While the Company is presently evaluating the impact of SFAS No. 133, the adoption of SFAS No. 133 is not expected to have a material impact on the Company's financial condition or results of operations. ITEM 3. Quantitative and Qualitative Disclosures About Market Risk The Company invests in securities and other investments authorized by applicable state laws and regulations and follows an investment policy designed to maximize yield to the extent consistent with liquidity requirements and preservation of assets. A significant portion of assets and liabilities are financial instruments, which are subject to the market risk of potential losses from adverse changes in market rates and prices. The Company's primary market risk exposures relate to interest rate risk on fixed rate domestic medium-term instruments and, to a lesser extent, domestic short- and long-term instruments. The company has established strategies, asset quality standards, asset allocations and other relevant criteria for its portfolio to manage its exposure to market risk. In addition, maturities are structured after projecting liability cash flows with actuarial models. The Company currently has only one derivative instrument outstanding, an interest rate swap on its mortgage, with the same bank, which is used as a hedge to convert the mortgage to a fixed interest rate. All of the Company's financial instruments are held for purposes other than trading. The Company's portfolio does not contain any significant concentrations in single issuers (other than U.S. treasury and agency obligations), industry segments or geographic regions. Caution should be used in evaluating overall market risk from the information below, since actual results could differ materially because the information was developed using estimates and assumptions as described below, and because insurance liabilities and reinsurance receivables are excluded in the hypothetical effects (insurance liabilities represent 71.8% of total liabilities and reinsurance receivables on unpaid losses represent 2.1% of total assets). The hypothetical effects of changes in market rates or prices on the fair values of financial instruments as of March 31, 1999, excluding insurance liabilities and reinsurance receivables on unpaid losses because such insurance related assets and liabilities are not carried at fair value, would have been as follows: If interest rates had increased by 100 basis points, there would have been an approximate $10,000,000 increase in the net fair value of the Company's investment portfolio less its long-term debt or the related swap agreement. The change in fair values was determined by estimating the present value of future cash flows using models that measure the change in net present values arising from selected hypothetical changes in market interest rate. A 200 basis point increase in market rates at March 31, 1999 would have resulted in an approximate $19,000,000 increase in the net fair value. If interest rates had decreased by 100 and 200 basis points, there would have been an approximate $11,000,000 and $23,000,000 net decrease, respectively, in the net fair value of the Company's total investments and debt. 14 PART II OTHER INFORMATION ITEM 1. Legal Proceedings The Insurers are parties to various lawsuits generally arising in the normal course of their insurance business. The Company does not believe that the eventual outcome of any of the suits to which the Insurers are currently a party will have a material effect on the financial condition or result of operations of the Company. ITEM 2. Changes in Securities Not Applicable ITEM 3. Defaults Upon Senior Securities Not Applicable ITEM 4. Submission of Matters to a Vote of Security Holders Not Applicable ITEM 5. Other Information Not Applicable ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits: Exhibit 11 - Earnings Per Share Calculation Exhibit 27 - Financial Data Schedule (b) Reports on Form 8-K: United Insurance Group Agency, Inc. Stock Purchase and Employment Agreements. 15 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant had duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. PENN TREATY AMERICAN CORPORATION -------------------------------- Registrant Date: May 14, 1999 /s/ Irving Levit ------------------- ---------------------------------------- Irving Levit Chairman of the Board, President and Chief Executive Officer Date: May 14, 1999 /s/ Cameron B. Waite ------------------- ---------------------------------------- Cameron B. Waite Chief Financial Officer 16 EX-27 2 FDS FOR FIRST QUARTER 1999 10-Q
7 1,000 JAN-01-1999 3-MOS DEC-31-1999 MAR-31-1999 330,455 0 0 18,399 0 0 348,972 30,244 12,632 168,455 612,396 215,420 0 111,323 0 76,527 0 0 819 156,528 612,396 67,059 5,183 616 1,440 45,404 (11,070) 32,645 7,319 2,415 4,904 0 0 0 4,904 0.65 0.56 0 0 0 0 0 0 0
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