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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996 Commission file number 1-11834
PROVIDENT COMPANIES, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 62-1598430
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1 FOUNTAIN SQUARE
CHATTANOOGA, TENNESSEE 37402
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (423) 755-1011
Securities registered pursuant to
Section 12(b) of the Act:
COMMON STOCK, PAR VALUE $1.00 PER SHARE
(Title of Class)
8.10% CUMULATIVE PREFERRED STOCK, LIQUIDATION VALUE $150 PER SHARE
(Title of Class)
Securities registered pursuant to
Section 12(g) of the Act: None
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
As of March 10, 1997, there were 45,685,191 shares of the registrant's Common
Stock, and 1,041,534 shares of the registrant's 8.10% Cumulative Preferred Stock
outstanding. The aggregate market value of the shares of Common Stock and the
Depositary shares representing the Preferred Stock based on the closing price of
those shares on the New York Stock Exchange, Inc., held by non-affiliates was
approximately $ 1,246.0 million and $161.7 million, respectively.
Selected material from the Annual Report to Stockholders for the year ended
December 31, 1996 and Proxy Statement for the Annual Meeting of Stockholders
scheduled for May 7, 1997, have been incorporated by reference into Parts I, II,
and III of this Form 10-K.
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. [ X ]
PART I
ITEM 1. BUSINESS
INTRODUCTION
Provident Companies, Inc. (the "Company") is a Delaware business
corporation that serves as a holding company of Provident Life and Accident
Insurance Company ("Accident"), Provident Life and Casualty Insurance Company
("Casualty"), and Provident National Assurance Company ("National") (hereinafter
collectively "Provident").
Provident does business in the 50 states, the District of Columbia,
Puerto Rico, and ten provinces and two territories of Canada. Provident
operates principally in the life and health insurance business. Individual
disability income products, individual life products, and individual annuities
are reported in the Individual Life and Disability segment and are marketed
primarily through personal producing general agents, brokerage offices, and
corporate marketing arrangements. Individual annuities and individual
disability products are also marketed through financial institutions. The
Employee Benefits segment contains products that are sold to or through
corporate customers and certain affinity groups, including permanent and term
life insurance, disability, cancer, accident and sickness, accidental death and
dismemberment protection, and medical stop-loss. The Other Operations segment
reports corporate results, primarily investment earnings on capital not
specifically allocated to a line of business, and also includes results from
products no longer actively marketed, including guaranteed investment contracts
("GICs"), group single premium annuities, and corporate-owned life insurance.
This segment also includes the results of the group medical business which was
sold effective April 30, 1995. See "Note 13 of the Notes to Consolidated
Financial Statements" on page 65 of the Annual Report to Stockholders for the
year ended December 31, 1996, incorporated herein by reference.
The Company does not conduct any other significant business except for
its receipt of dividends from Provident and the payment of dividends to its
stockholders (see Item 7 below).
The acquisition of The Paul Revere Corporation ("Paul Revere") by the
Company is currently pending and is expected to close in the first quarter of
1997. The acquisition is to be effected pursuant to a merger of a newly formed,
wholly-owned subsidiary of the Company with and into Paul Revere with Paul
Revere becoming a wholly-owned subsidiary of the Company (the "Paul Revere
Merger"). The Paul Revere Merger will be accounted for under the purchase
method of accounting, pursuant to which the assets and liabilities of Paul
Revere will be recorded at their respective fair values and added to those of
the Company. Paul Revere is a Massachusetts corporation organized in 1992 as an
insurance holding company. Paul Revere's principal operations in the United
States and Canada are conducted through its wholly-owned subsidiary, The Paul
Revere Life Insurance Company ("Paul Revere Life"), a Massachusetts-domiciled
life insurance company licensed in all 50 states, the District of Columbia, and
Canada. Paul Revere Life has two wholly-owned subsidiaries, The Paul Revere
Variable Annuity Insurance Company ("Paul Revere Variable"), a Massachusetts-
domiciled life insurance company licensed in 48 states and the District of
Columbia, and The Paul Revere Protective Life Insurance Company ("Paul Revere
Protective"), a Delaware-domiciled life insurance company licensed in 40 states
and the District of Columbia. Disability insurance has been Paul Revere's
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primary product line since Paul Revere Life's founding. In addition to its
individual and group disability insurance products, Paul Revere also markets
individual life insurance, group life insurance, dental insurance, and annuity
products.
In connection with the Paul Revere Merger, the stockholders of the
Company approved issuing up to 14,406,000 shares of the Company's Common Stock
to the stockholders of Paul Revere and issuing 9,523,810 to Zurich Insurance
Company in connection with financing the Merger. They also approved amending
the Company's Certificate of Incorporation to increase from 65,000,000 to
150,000,000 the number of shares of the Company's Common Stock which the Company
is authorized to issue.
In February 1997, the Company acquired GENEX Services, Inc. and GENEX
Services of Canada, Inc. ("GENEX") at a price of approximately $70 million.
GENEX is a provider of case management, vocational rehabilitation, and related
services to corporations, third party administrators, and insurance companies.
These services are utilized in the management of disability and worker's
compensation claims. The results of the GENEX operations will be reported in
the Employee Benefits segment in future filings.
Unless the context otherwise indicates, references in this report to
the "Company" include Provident Companies, Inc., and its direct subsidiaries,
including Accident, National, and Casualty. Unless the context otherwise
indicates, the discussion of the business of the Company will refer to the
business and activities of Provident because all of the material business
activities of the Company are conducted by Provident.
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SELECTED DATA OF SEGMENTS
The following table reflects for the indicated years selected financial data for
the Company's segments.
Year Ended December 31 1996 1995 1994
(in millions of dollars)
-------------------------------
Revenue (Excluding Net Realized
Investment Gains and Losses)
Individual Life and Disability $ 1,047.6 $ 1,019.3 $ 956.6
Employee Benefits 606.1 582.7 555.3
Other Operations 646.8 985.0 1,280.4
--------- --------- ---------
Total $ 2,300.5 $ 2,587.0 $ 2,792.3
========= ========= =========
Income Before Net Realized Investment
Gains and Losses and Federal Income Taxes
Individual Life and Disability $ 117.3 $ 36.5 $ 53.2
Employee Benefits 56.3 48.6 71.8
Other Operations 61.2 122.6 106.0
--------- --------- ---------
Total $ 234.8 $ 207.7 $ 231.0
========= ========= =========
Revenue (Including Net Realized
Investment Gains and Losses)
Individual Life and Disability $ 1,056.1 $ 1,024.0 $ 962.4
Employee Benefits 606.2 586.6 556.9
Other Operations 629.6 944.7 1,242.9
--------- --------- ---------
Total $ 2,291.9 $ 2,555.3 $ 2,762.2
========= ========= =========
Income Before Federal Income Taxes
Individual Life and Disability $ 125.8 $ 41.2 $ 59.0
Employee Benefits 56.4 52.5 73.4
Other Operations 44.0 82.3 68.5
--------- --------- ---------
Total $ 226.2 $ 176.0 $ 200.9
========= ========= =========
Assets
Individual Life and Disability $ 6,051.3 $ 5,746.1 $ 4,597.1
Employee Benefits 1,505.8 1,426.5 1,238.3
Other Operations 7,435.4 9,128.7 11,314.5
--------- --------- ---------
Total $14,992.5 $16,301.3 $17,149.9
========= ========= =========
Total revenue (excluding net realized investment gains and losses) includes
premium income, net investment income, and other income. Total revenue
(including net realized investment gains and losses) includes premium income,
net investment income, net realized investment gains and losses, and other
income. Assets have been allocated to the segments based upon identifiable
liabilities and allocated stockholders' equity.
Additional information regarding the operations of these segments may be
found under the caption "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 26-35 of the Annual Report to
Stockholders for the year ended December 31, 1996, incorporated herein by
reference.
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CONSOLIDATED LIFE INSURANCE IN FORCE
The following table sets forth the changes to life insurance in force and the
number of policies in force for the Company's business segments. Reinsurance
assumed has been included in these figures. Reinsurance ceded has not been
deducted.
NUMBER OF
FACE AMOUNT POLICIES
------------------------------------------------------------------------------------------- ----------
(in millions of dollars)
In force Lapses In force In force
Beginning Other and Other End End
of Year Sales Increases Deaths Surrenders Decreases of Year of Year
--------- --------- --------- ------ ---------- --------- ---------- ----------
1996
Individual Life
and Disability $12,709.1 $1,109.2 $239.6 $48.5 $1,109.9 $314.3 $12,585.2 173,330
Employee Benefits 83,276.3 13,664.0 2,011.8 201.1 11,558.2 113.1 87,079.7 415,394
Other Operations 2,967.2 4.2 66.2 28.8 5.0 4.2 2,999.6 25,597
--------- --------- --------- ------ --------- ------ --------- -------
Total $98,952.6 $14,777.4 $2,317.6 $278.4 $12,673.1 $431.6 $102,664.5 614,321
========= ========= ======== ====== ========= ====== ========== =======
1995
Individual Life
and Disability $12,683.6 $1,062.7 $260.3 $45.8 $1,050.4 $201.3 $12,709.1 179,310
Employee Benefits 71,460.5 9,133.1 6,287.9 193.6 3,324.3 87.3 83,276.3 367,601
Other Operations 2,641.5 8.9 344.6 12.3 12.2 3.3 2,967.2 25,844
--------- --------- --------- ------ --------- ------ --------- -------
Total $86,785.6 $10,204.7 $6,892.8 $251.7 $4,386.9 $291.9 $98,952.6 572,755
========= ========= ======== ====== ========= ====== ========== =======
1994
Individual Life
and Disability $12,877.4 $1,299.6 $210.0 $50.9 $1,406.7 $245.8 $12,683.6 185,440
Employee Benefits 68,064.8 7,027.2 1,214.5 188.2 4,342.3 315.5 71,460.5 340,110
Other Operations 2,351.7 5.7 307.0 12.1 10.2 0.6 2,641.5 25,995
--------- --------- --------- ------ --------- ------ --------- -------
Total $83,293.9 $8,332.5 $1,731.5 $251.2 $5,759.2 $561.9 $86,785.6 551,545
========= ========= ======== ====== ========= ====== ========== =======
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INDIVIDUAL LIFE AND DISABILITY
The Individual Life and Disability segment offers a variety of disability
and life and annuity products to individuals.
For a discussion of operating results for the Individual Life and
Disability segment, see "Management's Discussion and Analysis of Financial
Condition and Results of Operations," pages 27-28, of the Annual Report to
Stockholders for the year ended December 31, 1996, incorporated herein by
reference.
Historically, individual disability income insurance has been a significant
contributor to Provident's net income, although in 1993, 1994, and 1995 net
income from this line was down materially from earlier years. In 1996, results
in this line improved significantly.
Provident is among the largest underwriters of individual disability income
insurance in the United States based on annualized premiums in force. Until
1995 almost all of Provident's individual disability income insurance was sold
on a noncancelable basis. Under a noncancelable policy, as long as the insured
continues to pay the fixed annual premium for the policy's duration, the policy
cannot be canceled by Provident nor can the premium be raised. Historically,
Provident marketed individual disability income insurance primarily to upper
income professionals, small business owners, and business executives. As
discussed below, Provident has changed the types of policies which it is
offering and broadened the market focus for these products.
Individual disability income insurance provides the insured with a portion
of earned income lost as a result of sickness or injury. Under an individual
disability income policy, monthly benefits generally are fixed at the time the
policy is written. The benefits typically range from 30 percent to 75 percent
of the insured's monthly earned income. Various options with respect to length
of benefit periods and waiting periods before payment begins are available and
permit tailoring of the policy to a specific policyholder's needs. Provident
also markets individual disability income policies which include payments for
transfer of business ownership and business overhead expenses. Individual
disability income products do not provide for the accumulation of cash values.
Premium rates for these products are varied by age, sex, and occupation
based on assumptions concerning morbidity, persistency, policy related expenses,
and investment income. Provident develops its assumptions based on its own
claim experience and published industry tables. Due to the noncancelable, fixed
premium nature of the policies marketed in the past, profitability of this part
of the business is largely dependent upon achieving the morbidity and interest
rate assumptions set in the loss recognition study of the business written in
1993 and prior and in the pricing of business written after 1993. Provident's
underwriters evaluate the medical and financial condition of prospective
policyholders prior to the issuance of a policy.
The Company performed a loss recognition study on its individual disability
income business as of September 30, 1993. The study resulted in a $423.0
million pre-tax or $275.0 million after-tax charge to operating earnings. The
charge was required under generally accepted accounting principles due to the
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significant decline in interest rates in 1993 and the increased level of
morbidity experienced by the Company. Since 1993, the Company has performed
annual loss recognition studies to determine the continued adequacy of the
reserves that were established. Based upon the December 1996 loss recognition
study, which incorporates management's best estimate for the assumptions used,
reserves were adequate at December 31, 1996.
To better understand and analyze this business, Provident segments the
business by state, branch office, policy form, and occupation and uses the
information in the pricing, risk selection, and morbidity control processes as
more fully discussed below. Provident has also tightened its underwriting
requirements, discontinued sale of noncancelable long-term own-occupation
policies with certain exceptions, and issued a new series of loss of earnings
("LE") policies. All claim payments are centralized in the home office for
greater control and consistency. Specialization is being emphasized for specific
types of claims, such as mental and nervous and orthopedic claims; early
intervention in the claim process has been emphasized; and, the number and
qualifications of the claims adjudication staff have been increased.
The management of the Company initiated a comprehensive analysis of its
overall corporate strategy in 1994. An important conclusion related to the
individual disability income line was that the combination of noncancelable
pricing guarantees and long-term own-occupation coverage is a risk which is very
difficult to manage in today's environment. Therefore, in 1995, Provident
discontinued selling individual noncancelable contracts with the long-term own-
occupation provision (other than conversion policies available under existing
contractual arrangements). Additionally, after January 1, 1995, lifetime
benefits were not available on any basis, and maximum issue and participation
limits of $10,000 were applied to all physicians and dentists.
Consistent with the product development strategy begun in 1994, Provident
is offering LE contracts instead of the traditional noncancelable long-term own-
occupation contracts. The LE contract insures income rather than occupation.
Eligibility for benefits under the new LE policy is not based on whether the
insured can work in his or her original occupation. Instead, a claimant must
satisfy two conditions for benefits to begin: reduced ability to work due to
accident or sickness and earnings loss of at least 20 percent. These policies
are aimed at repositioning the individual disability income product by making it
more attractive to a broader market of individual consumers, including middle to
upper income individuals and corporate benefit buyers.
These product decisions are an integral part of an intensive, broad-based
effort to enhance the profitability and improve the growth prospects of the
individual disability line. This effort involves many separate improvement
initiatives implemented in 1995 which fall into four main categories. The first
major area of emphasis focuses on thoroughly understanding the risk
characteristics of the current individual disability income block of business.
The second major area of emphasis includes improvements to the claims management
process including the addition of resources, the creation of dedicated specialty
claim units (including mental and nervous and orthopedic), and enhancements to
rehabilitation capabilities. Management believes these efforts will enable the
Company to enhance service to its customers by providing a better understanding
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of the disability underlying the claims and improving further the Company's
ability to thoroughly and effectively adjudicate a claim. Through the
acquisition of GENEX and the important disability management and rehabilitation
skill sets available from its personnel, the Company will be able to provide
additional service and benefits to its disability customers. A third category is
a complete reengineering of the new-business process in order to achieve a more
efficient application and policy issue process. Through the utilization of
improved technology and work processes, Provident began the implementation of
its refocused customer strategy in 1995. Finally, the fourth area focuses on
expanded future product offerings with product modifications continuing to be
developed in 1996 as a result of the initiatives outlined above.
These strategic actions were expected to result in a period of lower
premium income from new sales of individual disability income products, due to
the product transition and the premium differential that exists between the new
LE contracts and the old noncancelable long-term own-occupation contracts.
Although sales declined in the early part of 1996, in the second half of the
year annualized new premium exceeded that of the first six months of 1996 and
that of the last six months of 1995. Management believes this indicates
improving market acceptance of the new products.
Provident markets individual disability income insurance primarily through
independent agents and brokers who are served by a network of 45 sales offices
in the United States (service offices have been consolidated into the home
office in Chattanooga, Tennessee) and 4 sales offices and 1 Canadian home office
in Canada. The sales offices are staffed with approximately 175 management,
sales, and clerical employees. Provident has 8 United States marketing regions
which provide support and services to branch and district managers.
Also included in this segment is a variety of individual life products
offered to the middle and upper income market historically through a
distribution system of approximately 700 personal producing general agents
("PPGAs") throughout the United States. These products are also available
through the individual brokerage offices.
Provident's life insurance offerings include term insurance, universal
life, and interest-sensitive life insurance products. Universal life products
provide permanent life insurance with adjustable interest rates applied to the
cash value and are designed to achieve specific policyholder objectives such as
higher accumulation values and/or flexibility with respect to amount of coverage
and premium payments. The principal difference between fixed premium and
universal life insurance policies centers around policy provisions affecting the
amount and timing of premium payments. Under universal life policies,
policyholders may vary the frequency and size of their premium payments, and
policy benefits may fluctuate accordingly. Premium payments under the fixed
premium policies are not variable by the policyholder and, as a result,
generally reflect lower administrative costs than universal life products for
which extensive monitoring of premium payments and policy benefits is required.
The largest number of ordinary life policies sold in 1995 and 1996 were the
ten-year level term policies. These products have level premiums for an initial
ten-year period after which the policyholder may resubmit to the underwriting
process and possibly qualify for a new ten year period at the attained age
premiums; otherwise, premiums revert to a yearly renewable term premium which
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increases annually. When measured by annualized premiums, universal life with
the flexibility and features described above was the largest product category
sold by Provident in this segment in recent years.
Premium rates for Provident's life insurance products are based on
assumptions as to future mortality, investment yields, expenses, and lapses.
Although a margin for profit is included in setting premium rates, the actual
profitability of products is significantly affected by the variation of actual
experience from assumed experience. Profitability of fixed premium products is
also dependent upon investment income on reserves. The profitability of
interest-sensitive products is determined primarily by the ultimate underwriting
experience and the ability to maintain anticipated investment spreads.
Provident believes that the historical claim experience for these products has
been satisfactory.
From Provident's viewpoint, the risks involved with interest-sensitive
products include actual versus assumed mortality, achieving investment returns
that at least equal the current declared rate, competitive position of declared
rates on the policies, meeting the contractually guaranteed minimum crediting
rate, and recovery of policy acquisition costs. From the policyholder's
perspective, the risk involved with interest-sensitive products is whether or
not the declared rates on the policy will compare favorably with the returns
available elsewhere in the marketplace.
In 1994, Provident began distributing individual single premium deferred
annuities through banks and other financial institutions using third party
marketers specializing in this type of distribution. Provident generated $8.1
million in single premium deferred annuity deposits sold through this channel in
1996 and expects to expand the distribution of these products in 1997. Deposits
on annuities sold through other distribution channels were $13.1 million in
1996.
Management has created a significant initiative to expand its offering of
each of its individual products through each of its marketing channels,
including its individual brokerage system, the PPGAs, and its alternative
markets group which focuses on sales through non-traditional channels including
banks and other financial institutions, affinity groups, and associations. This
expansion should further enhance the Company's ability to serve a broader
market.
EMPLOYEE BENEFITS
The Employee Benefits segment offers a variety of group related products
such as voluntary benefits, group disability, group life insurance, medical
stop-loss insurance, and other products marketed to certain associations and
employee groups. These products are sold through consultants, brokers, agents
and directly to corporate customers.
For a discussion of operating results for the Employee Benefits segment,
see "Management's Discussion and Analysis of Financial Condition and Results of
Operations" on pages 29-30 of the Annual Report to Stockholders for the year
ended December 31, 1996, incorporated herein by reference.
In recent years, Provident has increased its emphasis on marketing group
disability income insurance as a separate coverage, primarily on a fully-insured
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basis to employers with fewer than 1,000 employees. Disability income insurance
provides employees with insurance coverage for loss of income in the event of
extended work absences due to sickness or injury. Services are offered to
employers and insureds to encourage and facilitate rehabilitation, retraining,
and re-employment. Premiums for this product are based on expected claims of a
pool of similar risks plus provisions for administrative expenses and profit.
Premiums for existing experience rated group disability business are based
on the specific claim experience of the client with some credibility for the
experience of the specific group. A few accounts are handled on an
administrative services only basis with responsibility for funding claim
payments remaining with the customer.
Profitability of group disability insurance is affected by deviations of
actual claims experience from expected claims experience and the ability of
Provident to control its administrative expenses. Morbidity is an important
factor in disability claim experience. Also important is the general state of
the economy; for example, during a recession the incidence of claims tends to
increase under this type of insurance.
In general, experience rated disability coverage for large groups has
narrower profit margins and represents less risk to Provident than business of
this type sold to small employers. This is because Provident must bear all of
the risk of adverse claim experience in small case coverages while larger
employers bear much of this risk themselves. For disability coverages, case
management and rehabilitation activities with regard to claims, along with
appropriate pricing and expense control, are important factors contributing to
profitability.
These products are sold by a dedicated field sales organization through
consultants and brokers. Successful sales of these products depend upon
rehabilitation programs and quality claim servicing which is perceived by
customers as justifying a fair price.
Group life insurance is marketed by Provident to both large and small
employers. The coverage offered consists primarily of renewable term life
insurance with the coverages frequently linked to employees' wages.
Profitability in group life is affected by deviations of actual claim experience
from expected claim experience and the ability of Provident to control
administrative expenses. Field sales representatives sell large case group life
to employers through consultants, brokers, and independent general agents.
Some employers protect themselves against significant adverse claim
experience with respect to medical coverage through stop-loss arrangements.
Under a variety of stop-loss arrangements, Provident charges a premium in
exchange for an obligation that it will absorb (or reimburse the employer or
plan) for claims in excess of a stated amount on an aggregate or individual
basis. Profitability in medical stop-loss arrangements depends upon the ability
of Provident to accurately predict actual claim trends relative to expected
trends, predict rates of medical cost inflation, and analyze the claim practices
of the underlying plan.
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To complement its employer paid programs Provident also offers voluntary
benefits products through employer-sponsored payroll deduction programs. In
addition to universal life and interest-sensitive life products, Provident
offers health products, principally intermediate disability income policies.
These payroll deduction health products are an integral and growing part of the
current marketing efforts in the Employee Benefits segment. Payroll deduction
individual life and health insurance is sold through salaried field
representatives, who call on large employers, and through independent general
agents and brokers. When employer sponsorship is achieved, either independent
enrollment specialists or Provident's enrollment team solicits employee
participation. Using employer-sponsored payroll deduction methods to distribute
life insurance products typically means lower acquisition costs than traditional
distribution methods.
OTHER OPERATIONS
The Other Operations segment consists of GICs, group single premium
annuities ("SPAs"), a closed block of corporate-owned life insurance, the
medical services business sold in 1995, and any capital and assets that are not
allocated to the business segments.
GIC products include synthetic GICs, traditional GICs, and separate account
GICs. In December 1994, the Company discontinued the sale of traditional GICs,
but continues to service its block of existing business. Sales of separate
account GICs and synthetic GICs were discontinued in 1996. Sales of group SPAs
were also discontinued.
Information with respect to the Other Operations segment is included in the
Annual Report to Stockholders for the year ended December 31, 1996, under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 30-31, incorporated herein by reference.
Traditional GICs have comprised a major portion of this segment's products
sold since 1982. Under traditional GICs, Provident guarantees the principal and
interest to the contract holder for a specified period, generally three to five
years. Provident marketed GICs for use in corporate tax-qualified retirement
plans and derives profits from GICs on the spread between the amount of interest
earned on invested funds and the fixed rate guaranteed in the GIC. Provident
introduced its separate account GIC product in late 1992 and its synthetic GIC
in mid-1993. Separate account GICs differ from traditional GICs in that the
assets underlying the contract are segregated from the general account of
Provident and held solely for the benefit of the specific contract involved.
Funds under management for separate account GICs were $68.3 million at December
31, 1996.
The synthetic GIC differs from the traditional GIC in that the assets
underlying the contract are owned and retained by the trustee of the contract
holder. These assets are held in a custodial account in the name of the trustee
and are not included in the Company's consolidated statements of financial
condition. Under the contract, if the trustee requests a benefit payment be
made under the plan, Provident guarantees to provide the benefit payment at book
value and, in return for this service, Provident receives a premium calculated
primarily with respect to benefit payment exposure and contract size. Funds
under management for synthetic GICs at December 31, 1996, were $2,176.6 million.
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In January 1997, the Company signed a letter of understanding to sell the block
of business through an assumptive reinsurance transaction.
Group SPAs are used as funding vehicles primarily when defined benefit
pension plans are terminated. Provident also offers annuities as an employer-
sponsored option for retirees receiving their distributions from 401(k) plans.
Pursuant to a group SPA contract, Provident receives a one-time premium payment
and in turn agrees to pay a fixed monthly retirement benefit to specified
employees.
Provident believes that there are three primary sources of risk associated
with traditional GICs and group SPAs, assuming that the business has been
properly capitalized. Underwriting risk covers the risk that a GIC has been
priced properly to reflect the risk of withdrawal and for group SPAs, that the
mortality rates and the ages and frequency at which annuitants will retire have
been accurately projected. Asset/liability risk covers the risk that the
investments purchased to back the GIC or group SPA will adequately match the
future cash flows. Investment risk covers the risk that the underlying
investments backing the GICs and group SPAs will perform according to the
expectations of Provident at the time of purchase.
Provident has historically managed its investment risk by investing in
quality assets which have an aggregate duration that closely matches the
expected duration of the GICs and group SPAs. In late 1994, with Provident's
decision to stop marketing traditional GICs, it became necessary to change its
investment strategy from a duration matching approach to a cash flow matching
approach. More information on the investment portfolio is included under the
caption "Management's Discussion and Analysis of Financial Condition and Results
of Operations" on pages 34-35 of the Annual Report to Stockholders for the year
ended December 31, 1996, incorporated herein by reference.
The corporate-owned life insurance ("COLI") product included in this
segment is another product no longer actively marketed. In 1983, Provident was
among the first insurance companies to market tax-leveraged products for the
COLI market. Beginning in 1986, Congress began to enact tax legislation that
significantly reduced the ability of policyholders to deduct policy loan
interest on these products which detracted from the internal rate of return
which heretofore had been available. In 1988, Congress went further by enacting
legislation that had adverse tax consequences for distributions/policy loans
from modified endowment contracts. Under this legislation, new sales of the
majority of Provident's corporate-owned products would have been subject to
adverse tax treatment as modified endowment contracts due to their high premium
level. As a consequence, many of these products were withdrawn, and revised
products which would not be considered modified endowment contracts were
introduced. Policies issued prior to June 21, 1986, however, were grandfathered
from the modified endowment provisions. In 1996, Congress enacted tax
legislation which generally eliminates tax deductions for policy loan interest
on COLI products issued on or after June 21, 1986. This legislation is not
expected to have a material impact on Provident, since most of Provident's
premiums on this business are attributable to policies issued prior to June 21,
1986.
This segment also includes the results of the group medical business which
was sold effective April 30, 1995. See "Note 13 of the Notes to Consolidated
Financial Statements" on page 65 of the Annual Report to Stockholders for the
year ended December 31, 1996, incorporated herein by reference.
-12-
INVESTMENTS
Information concerning this part of Provident's business is included under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 34-35 of the Annual Report to Stockholders for
the year ended December 31, 1996, incorporated herein by reference.
REINSURANCE
Provident routinely reinsures portions of its business with other insurance
companies. In a reinsurance transaction a reinsurer agrees to indemnify another
insurer for part or all of its liability under a policy or policies it has
issued for an agreed upon premium. The maximum amount of risk retained by
Provident and not reinsured is $1 million on any individual life insured and
$150,000 on individual accidental death insurance. The amount of risk retained
by Provident on individual disability income products varies by policy type and
year of issue. Provident also reinsures against catastrophic losses in the
Employee Benefits segment. Since the ceding of reinsurance by Provident does
not discharge its primary liability to the policyholder, Provident has control
procedures with regard to reinsurance ceded. These procedures include the
exchange and review of financial statements filed with regulatory authorities,
exchange of Insurance Regulatory Information System results, review of ratings
by A.M. Best Co., determination of states in which the reinsurer is licensed to
do business, on-site visits before entering a contract to assess the operations
and management of the reinsurer, consideration of the need for collateral, such
as letters of credit, and audits of Provident's reinsurance activities by its
Internal Audit staff.
Provident also assumes reinsurance from other insurers. See "Note 10 of the
Notes to Consolidated Financial Statements" on page 63 of the Annual Report to
Stockholders for the year ended December 31, 1996, incorporated herein by
reference.
RESERVES
The applicable insurance laws under which insurance companies operate
require that they report, as liabilities, policy reserves to meet future
obligations on their outstanding policies. These reserves are the amounts
which, with the additional premiums to be received and interest thereon
compounded annually at certain assumed rates, are calculated to be sufficient to
meet the various policy and contract obligations as they mature. These laws
specify that the reserves shall not be less than reserves calculated using
certain specified mortality and morbidity tables, interest rates, and methods of
valuation. The reserves reported in the Company's financial statements
incorporated herein by reference are calculated based on generally accepted
accounting principles and differ from those specified by the laws of the various
states and carried in the statutory financial statements of the life insurance
subsidiaries. These differences arise from the use of mortality and morbidity
-13-
tables and interest assumptions which are believed to be more representative of
the actual business than those required for statutory accounting purposes and
from differences in actuarial reserving methods. See "Note 1 of the Notes to
Consolidated Financial Statements" on pages 44-48 of the Annual Report to
Stockholders for the year ended December 31, 1996, incorporated herein by
reference, for more information.
The consolidated statements of income include the annual change in reserves
for future policy and contract benefits. The change reflects a normal accretion
for premium payments and interest buildup and decreases for policy terminations
such as lapses, deaths, and annuity benefit payments.
Traditional GICs are over 85 percent of Provident's policyholders' funds
balance at December 31, 1996. They are structured with a specific maturity and
provide for withdrawals for payment of benefits to contract holders or other
beneficiaries.
Policyholders' Funds, as shown on the Company's consolidated statements of
financial condition as of December 31, 1996, were $3,717.1 million. Of this
amount, $3,204.3 million reflected the Company's outstanding GICs, the maturity
of which is as follows (in millions of dollars):
1 year or less $1,453.8
Over 1 year but less than 2 years 997.5
Over 2 years but less than 3 years 567.9
Over 3 years but less than 4 years 155.6
Over 4 years but less than 5 years 22.7
Over 5 years 6.8
--------
Total $3,204.3
========
COMPETITION
There is intense competition among insurance companies for the individual
and group insurance products of the types sold by Provident. At the end of
1996, there were over 2,000 legal reserve life insurance companies in the United
States, many offering one or more insurance products similar to those marketed
by Provident. Provident's principal competitors in the employee benefits market
include the largest insurance companies in the United States, many of which have
substantially greater financial resources and larger staffs than Provident. In
addition, in the individual life and annuities markets, Provident competes with
banks, investment advisers, mutual funds, and other financial entities for
investment of savings and retirement funds in general. In the individual and
group disability markets, Provident competes in the United States and Canada
with a limited number of major companies and regionally with other companies
offering specialty products.
All areas of the employee benefits markets are highly competitive due to the
yearly renewable term nature of the products and the large number of insurance
companies offering products in this market. Provident competes with other
companies in attracting and retaining independent agents and brokers to actively
market its products. The principal competitive factors affecting Provident's
business are price and quality of service.
-14-
EMPLOYEES
At March 20, 1997, Provident had approximately 1,964 full-time employees,
including approximately 1,652 at its headquarters in Chattanooga, Tennessee, and
GENEX had approximately 1,300 full time employees, including approximately 190
in its home office in Wayne, Pennsylvania.
REGULATION
The Company and its insurance subsidiaries are subject to detailed
regulation and supervision in the jurisdictions in which each does business.
With respect to the insurance subsidiaries, such regulation and supervision is
primarily for the protection of policyholders rather than for the benefit of
investors or creditors. Although the extent of such regulation varies, state
insurance laws generally establish supervisory agencies with broad
administrative powers.
These supervisory and administrative powers relate chiefly to the granting
and revocation of the licenses to transact business, the licensing of agents,
the approval of policy forms, reserve requirements, and the form and content of
required financial statements. As to the type and amounts of its investments,
the Company's insurance subsidiaries must meet the standards and tests
promulgated by the insurance laws and regulations of Tennessee, New York, and
certain other states in which they conduct business. Once the Paul Revere
acquisition is completed, Massachusetts and Delaware will also regulate certain
of the Company's insurance subsidiaries.
The Company and its insurance subsidiaries are required to file various,
usually quarterly and/or annual, financial statements and are subject to
periodic and intermittent review with respect to their financial condition and
other matters by the various departments having jurisdiction in the states in
which they do business. The field work related to the last such examination of
the insurance subsidiaries was completed on February 4, 1992, and covered
operations for the five-year period ending December 31, 1990. No objections
were raised by the reviewing authorities as a result of that examination. The
examination for the five year period ending December 31, 1995, began in February
1996 and should be completed during the second quarter of 1997.
The laws of the states of Tennessee and New York require the registration of
and periodic reporting by insurance companies domiciled within their
jurisdiction which control or are controlled by other corporations or persons so
as to constitute a holding company system. The Company is registered as a
holding company system in Tennessee and New York. Following the Paul Revere
acquisition, the Company will also be subject to regulation under the holding
company laws of Massachusetts and Delaware, the domiciliary states of the Paul
Revere insurance subsidiaries. The holding company statutes require periodic
disclosure concerning stock ownership and prior approval of certain intercompany
transactions within the holding company system. The Company may from time to
time be subject to regulation under the insurance and insurance holding company
statutes of one or more additional states. Further information is included under
the caption "Management's Discussion and Analysis of Financial Condition and
Results of Operations" on pages 32-33 of the Annual Report to Stockholders for
the year ended December 31, 1996, incorporated herein by reference.
-15-
The National Association of Insurance Commissioners ("NAIC") and insurance
regulators are re-examining existing laws and regulations and their application
to insurance companies. In particular, this re-examination has focused on
insurance company investment and solvency issues and, in some instances, has
resulted in new interpretations of existing law, the development of new laws,
and the implementation of non-statutory guidelines. The NAIC has formed
committees and appointed advisory groups to study and formulate regulatory
proposals on such diverse issues as the use of surplus notes, accounting for
reinsurance transactions, and the adoption of risk-based capital rules. The
NAIC is currently in the process of recodifying statutory accounting practices,
the result of which is expected to standardize prescribed statutory accounting
practices. Accordingly, this project, which is expected to be completed in
1997, will likely change, to some extent, prescribed statutory accounting
practices and may result in changes to the accounting practices that the
Company's insurance subsidiaries use to prepare their statutory financial
statements.
ITEM 2. PROPERTIES
The Company's home office property consists of two connected office
buildings totaling 840,000 square feet at 1 Fountain Square, Chattanooga,
Tennessee. The office buildings and substantially all of the surrounding 25
acres of land, used primarily as parking lots, are owned by Provident in fee.
Provident also leases office space and minor storage space at approximately 66
locations in 32 states and 3 Canadian provinces for its sales and service force.
Provident's real property lease payments for 1996 were approximately $3.6
million (net of rents received on subleased property).
Management of the Company believes that Provident's properties and the
properties which it leases are in good condition and are suitable and adequate
for Provident's current business operations.
ITEM 3. LEGAL PROCEEDINGS
In the ordinary course of its business operations, Provident is involved in
routine litigation with policyholders, beneficiaries, and others, and a number
of such lawsuits were pending as of the date of this filing. In the opinion of
management, the ultimate liability, if any, under these suits would not have a
material adverse effect on the consolidated financial condition or the
consolidated results of operations of Provident or the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 31, 1996, a special meeting of stockholders was held to consider
three proposals related to the acquisition by the Company of The Paul Revere
Corporation:
(1) The issuance of shares of common stock, par value $1.00 per share of
the Company ("Provident Common Stock") pursuant to an Amended and Restated
Agreement and Plan of Merger, dated as of April 29, 1996 (the "Merger
Agreement"), by and among the Company, Patriot Acquisition Corporation, a
wholly-owned subsidiary of the Company, ("Newco") and The Paul Revere
-16-
Corporation ("Paul Revere"), which provides for the merger of Newco with and
into Paul Revere. This proposal received the following votes: 39,904,584 FOR,
30,917 AGAINST, and 142,862 ABSTENTIONS or Broker Non-Votes.
(2) The issuance of shares of Provident Common Stock pursuant to an
Amended and Restated Common Stock Purchase Agreement dated as of May 31, 1996
between the Company and Zurich Insurance Company ("Zurich"), which provides for
the purchase of 9,523,810 shares of Provident Common Stock by Zurich. This
proposal received the following votes: 39,899,119 FOR, 30,779 AGAINST, and
146,465 ABSTENTIONS or Broker Non-Votes.
(3) An amendment to the Company's Amended and Restated Certificate of
Incorporation to increase from 65,000,000 to 150,000,000 the number of shares of
Provident Common Stock which the Company is authorized to issue. This proposal
received the following votes: 39,807,411 FOR, 155,790 AGAINST, and 113,162
ABSTENTIONS or Broker Non-Votes.
(4A) EXECUTIVE OFFICERS OF THE REGISTRANT
The executive officers of the Company, all of whom are also executive
officers of one or more of its subsidiaries, were elected to serve in their
respective offices for one year or until their successors are chosen and
qualified.
Name Age Position
- ---------------------- --- ------------------------------------
J. Harold Chandler 47 Chairman, President, Chief Executive
Officer, and Director
Thomas R. Watjen 42 Executive Vice President and Chief
Financial Officer
Robert O. Best 47 Senior Vice President and Chief
Information Officer
Timothy C. Gartland 45 Senior Vice President,
Human Resources
Thomas B. Heys, Jr. 50 Senior Vice President, Corporate
Risk Management
Peter C. Madeja 38 Senior Vice President
Jeffrey F. Olingy 47 Senior Vice President, Sales
and Marketing
Ralph A. Rogers, Jr. 48 Vice President and Controller
Mr. Chandler became President and Chief Executive Officer of the Company on
November 8, 1993. He was elected Chairman of the Board on April 28, 1996.
Immediately prior to his employment with the Company, he served as President of
NationsBank Mid-Atlantic Banking Group which includes the NationsBank and
Maryland National Corporation entities in the District of Columbia, Maryland,
and northern Virginia. He formerly served as President of the Citizen and
Southern National Bank of South Carolina, a predecessor of NationsBank.
-17-
Mr. Watjen became Executive Vice President and Chief Financial Officer of
the Company on July 1, 1994. He is also a director of National. Prior to
joining the Company, he served as a Managing Director of the investment banking
firm, Morgan Stanley & Co., which he joined in 1987.
Mr. Best became Senior Vice President and Chief Information Officer of the
Company on July 11, 1994. He was previously Senior Vice President and Chief
Information Officer at UNUM, which he joined in 1993 following UNUM's
acquisition of Colonial Life and Accident Insurance Company. At Colonial, he
served as Vice President, Operations and Information Systems, until 1992 when he
was named Executive Vice President.
Mr. Gartland became Senior Vice President, Human Resources, on August 30,
1996. Prior to joining the Company, he was President of Corporate Insights and
Development, Inc., a management consulting firm which he co-founded in 1993. He
served as Executive Vice President, Executive and Organizational Development,
with NationsBank prior to that time.
Mr. Heys became Senior Vice President, Corporate Risk Management, of the
Company in August 1994. He served as Vice President and Chief Officer of the
Life Department from May 1992 until August 1994. He served as Vice President
and Chief Officer, Select Group Benefits, of Accident from November 1990 until
May 1992.
Mr. Madeja became Senior Vice President of the Company in February 1997 when
the Company acquired GENEX Services, Inc. He continues to serve as President
and Chief Executive Officer of GENEX, which he joined in 1982.
Mr. Olingy became Senior Vice President, Sales and Marketing, of the Company
on April 3, 1996. Prior to joining the Company, he was a Retail Banking
Director with Bank of Boston which he joined in 1993. He served as Executive
Vice President of NationsBank from 1991 to 1993.
Mr. Rogers has served as Vice President and Controller of the Company since
1984.
-18-
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
The information required by this Item is included on page 68 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1996,
under the caption "Common Stock Information" and is incorporated herein by
reference. As of March 10, 1997, there were 1,299 holders of Common Stock and
438 holders of the Depositary Shares.
For information on restrictions relating to Provident's ability to pay
dividends to the Company see "Management's Discussion and Analysis of Financial
Condition and Results of Operations" on pages 32-33 and "Note 15 of the Notes to
Consolidated Financial Statements" on page 66 of the Annual Report to
Stockholders for the year ended December 31, 1996, incorporated herein by
reference.
ITEM 6. SELECTED FINANCIAL DATA
The information required by this Item is included on pages 36-37 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1996,
under the caption "Selected Financial Data" and is incorporated herein by
reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information required by this Item is included on pages 26-35 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1996,
under the caption "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The information required by this item is included on pages 38-67 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1996,
under the captions "Report of Ernst & Young LLP, Independent Auditors,"
"Consolidated Statements of Income," "Consolidated Statements of Financial
Condition," "Consolidated Statements of Stockholders' Equity," "Consolidated
Statements of Cash Flows," and "Notes to Consolidated Financial Statements," and
is incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
-19-
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
DIRECTORS
The information required by this Item with respect to directors is included
under the caption "Information Concerning the Nominees" of the Registrant's
Proxy Statement for the Annual Meeting of Stockholders to be held May 7, 1997,
and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is included under the captions
"Compensation of Directors" and "Executive Compensation" of the Registrant's
Proxy Statement for the Annual Meeting of Shareholders to be held May 7, 1997,
and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is included under the caption
"Beneficial Ownership of Company Securities" and under the caption "Security
Ownership of Directors and Officers" of the Registrant's Proxy Statement for
the Annual Meeting of Stockholders to be held May 7, 1997, and is incorporated
herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is included under the caption "Certain
Transactions" of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held May 7, 1997, and is incorporated herein by reference.
-20-
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) List of Documents filed as part of this report
(1) Financial Statements
The following report and consolidated financial statements of Provident
Companies, Inc. and Subsidiaries, included in the Registrant's Annual Report to
Stockholders for the year ended December 31, 1996, are incorporated by reference
in Item 8:
Report of Ernst and Young LLP, Independent Auditors
Consolidated Statements of Income for the three years ended December 31,
1996
Consolidated Statements of Financial Condition at December 31, 1996 and
1995
Consolidated Statements of Stockholders' Equity for the three years
ended December 31, 1996
Consolidated Statements of Cash Flows for the three years ended December
31, 1996
Notes to Consolidated Financial Statements
(2) Schedules Supporting Financial Statements
The following financial statement schedules of Provident Companies, Inc. and
Subsidiaries are included in Item 14(d):
Page
----
I. Summary of Investments - Other Than Investments
in Related Parties (Consolidated) 26
II. Condensed Financial Information of Registrant 27
III. Supplementary Insurance Information
(Consolidated) 32
IV. Reinsurance (Consolidated) 34
V. Valuation and Qualifying Accounts (Consolidated) 35
Schedules not referred to have been omitted as inapplicable or because they
are not required by Regulation S-X.
-21-
(3) Exhibits
(2.1) Agreement and Plan of Share Exchange between Provident Companies, Inc.
and Provident Life and Accident Insurance Company of America
(incorporated by reference to Exhibit 2.1 to the Company's Form 10-K
filed for fiscal year ended 1995).
(2.2) Amended and Restated Agreement and Plan of Merger dated as of April 29,
1996 by and among Patriot Acquisition Corporation, The Paul Revere
Corporation and the Company (including exhibits thereto), (incorporated
by reference to Exhibit 2.1 of the Company's Form 10-Q and Form 10-Q/A
filed for fiscal quarter ended September 30, 1996).
(3.1) Amended and Restated Certificate of Incorporation, incorporated by
reference to Exhibit 3.1 of the Company's Form 10-K for fiscal year
ended 1995, as amended by Certificate of Amendment.
(3.2) Bylaws of the Company (incorporated by reference to Exhibit 3.2 to the
Company's Form 10-K filed for fiscal year ended 1995).
(4.1) Form of Preferred Stock Certificate relating to the registration of
6,000,000 Depositary Shares each representing a one-sixth interest in a
share the 8.10% Cumulative Preferred Stock of America (incorporated by
reference to America's Registration Statement on Form S-3, Registration
No. 33-5612).
(4.2) Form of Depositary Agreement relating to the registration of 6,000,000
Depositary Shares each representing a one-sixth interest in a share the
8.10% Cumulative Preferred Stock of America (incorporated by reference
to America's Registration Statement on Form S-3, Registration No. 33-
5612).
(4.3) Form of Depositary Receipt relating to the registration of 6,000,000
Depositary Shares each representing a one-sixth interest in a share the
8.10% Cumulative Preferred Stock of America (incorporated by reference
to America's Registration Statement on Form S-3, Registration No. 33-
5612).
(4.4) Certificate of Amendment of Restated Charter relating to the
registration of 6,000,000 Depositary Shares each representing a one-
sixth interest in a share the 8.10% Cumulative Preferred Stock of
America (incorporated by reference to Exhibit 3.1 in America's Form 10-K
filed for the fiscal year ended December 31, 1992 and to America's
Registration Statement on Form S-3, Registration No. 33-5612).
(4.5) Articles of Share Exchange (incorporated by reference to the Company's
Form 10-K filed for fiscal year ended 1995).
(10.1) Reinsurance and Administration Agreement by and between Transamerica
Occidental Life Insurance Company of Illinois and Accident dated March
18, 1987 (incorporated by reference to Exhibit 10.3 of Capital's
Registration Statement on Form S-1, Registration No. 33-17017).
-22-
(10.2) Tax Indemnification and Guaranty Agreement by and among Transamerica
Occidental, Transamerica Corporation and Accident dated March 18, 1987
(incorporated by reference to Exhibit 10.4 to Capital's Registration
Statement on Form S-1, Registration No. 33-17017).
(10.3) Asset and Stock Purchase Agreement by and between Healthsource and
America and its subsidiaries dated December 21, 1994. (incorporated by
reference to Exhibit 10.3 to America's Form 10-K filed for fiscal year
ended December 31, 1995).
(10.4) Annual Management Incentive Compensation Plan (MICP), adopted by
stockholders May 4, 1994 (incorporated by reference to Exhibit 10.5 to
America's Form 10-K filed for fiscal year ended December 31, 1994), and
amended by stockholders May 1, 1996 (incorporated by reference to
Exhibit 10.1 of Company's Form 10Q filed for fiscal quarter ended June
30, 1996.
(10.5) Stock Option Plan, adopted by stockholders May 3, 1989, as amended by
the Compensation Committee on January 10, 1990, and October 29, 1991
(incorporated by reference to Exhibit 10.6 to America's Form 10-K filed
for the fiscal year 1991); and as amended by the Compensation Committee
on March 17, 1992 and by the stockholders on May 6, 1992 (incorporated
by reference to registrant's Form 10-K filed for the fiscal year ended
December 31, 1992). Terminated effective December 31, 1993.*
(10.6) Accident and Subsidiaries Supplemental Executive Retirement Plan
(incorporated by reference to Exhibit 10.8 to Capital's Registration
Statement on Form S-1, Registration No. 33-17017).*
(10.7) Form of Surplus Note, dated December 1, 1996, in the amount of $150
million executed by Accident in favor of the Company.
(10.8) Reinsurance and Administration Agreement by and between Transamerica
Occidental and Accident dated March 18, 1987 (incorporated by reference
to Exhibit 10.15 to Capital's Registration Statement on Form S-1,
Registration No. 33-17017).
(10.9) Form of Severance Agreement offered to selected executive officers
(incorporated by reference to Exhibit 10.14 to Capital's Form 10-K filed
for fiscal year ended December 31, 1990), revised February 8, 1994
(incorporated by reference to Exhibit 10.14 to registrant's Form 10-K
filed for fiscal year ended December 31, 1993).
(10.10) Description of Compensation Plan for Non-Employee Directors
(incorporated by reference to Amendment No. 1 to registrant's Form 10-K
filed January 27, 1993 on Form 8), and amended by the Board of Directors
on February 8, 1994 (incorporated by reference to Exhibit 10.15 to
America's Form 10-K filed for fiscal year ended December 31, 1993).
-23-
(10.11) Stock Option Plan, originally adopted by stockholders May 5, 1993, as
amended by stockholders on May 1, 1996 (incorporated by reference to
Exhibit 10.2 of Company's Form 10-Q for fiscal quarter ended June 30,
1996).
(10.12) Employment contract between America and J. Harold Chandler, President
and Chief Executive Officer, dated November 8, 1993 (incorporated by
reference to Exhibit 10.17 to America's Form 10-K filed for fiscal year
ended December 31, 1993).*
(10.13) Employee Stock Purchase Plan (of 1995) adopted by stockholders June 13,
1995 (incorporated by reference to the Company's Form 10-K filed for
fiscal year ended 1995).*
(10.14) Credit Agreement between Provident and a consortium of financial
institutions with The Chase Manhattan Bank as Administrative Agent,
relating to a revolving loan in the aggregate amount of $800 million
maturing on July 30, 2001.
(10.15) Amended and Restated Common Stock Purchase Agreement between Provident
Companies, Inc. and Zurich Insurance Company dated as of May 31, 1996.
(10.16) Amended and Restated Relationship Agreement between Provident Companies,
Inc. and Zurich Insurance Company dated as of May 31, 1996.
(10.17) Amended and Restated Registration Rights Agreement between Provident
Companies, Inc. and Zurich Insurance Company dated as of May 31, 1996.
(11) Statement re computation of per share earnings (incorporated herein by
reference to "Note 1 of the Notes to Consolidated Financial Statements"
on pages 44-48 of the Annual Report to Stockholders for the year ended
December 31, 1996).
(13) Portions of the Annual Report to Stockholders for year ended December
31, 1996, incorporated by reference as described in Items 1, 5, 6, 7, 8,
10 and 14 hereof, which portions shall be deemed filed as a part hereof.
(19) Previously unfiled documents filed herewith include Exhibits 3.1, 10.7,
10,14, 10.15, 10.16, and 10.17.
(21) Subsidiaries of the Company.
(23) Consent of Independent Auditors.
(24) Powers of Attorney.
(27) Financial Data Schedule.
*Management contract or compensatory plan required to be filed as an exhibit to
this form pursuant to Item 14(c) of Form 10-K.
-24-
(b) Reports on Form 8-K
No reports were filed by the registrant during the fourth quarter of 1996.
(c) Exhibits
See "Item 14(a)(3)" above.
(d) Financial Statement Schedules
See "Item 14(a)(2)" above.
-25-
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
Date: March 24, 1997 PROVIDENT COMPANIES, INC.
(Registrant)
By: /s/ J. Harold Chandler
------------------------------
J. Harold Chandler
Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities indicated on March 24, 1997
/s/ J. Harold Chandler
- ------------------------------------
J. Harold Chandler
Chairman, President and Chief Executive Officer
and a Director
(Principal Executive Officer)
/s/ Thomas R. Watjen /s/ Ralph A. Rogers, Jr.
- ------------------------------------- -----------------------------
Thomas R. Watjen Ralph A. Rogers, Jr.
Executive Vice President and Vice President and Controller
Chief Financial Officer
Signature Title
--------- -----
* Director
- ------------------------------
WILLIAM L. ARMSTRONG
* Director
- ------------------------------
CHARLOTTE M. HEFFNER
* Director
- ------------------------------
HUGH B. JACKS
(REMAINDER ON FOLLOWING PAGE)
-26-
(REMAINDER ON PRECEDING PAGE)
* Director
- ------------------------------
WILLIAM B. JOHNSON
* Director
- ------------------------------
HUGH O. MACLELLAN, JR.
* Director
- ------------------------------
A.S. MACMILLAN
* Director
- ------------------------------
C. WILLIAM POLLARD
* Director
- ------------------------------
SCOTT L. PROBASCO, JR.
* Director
- ------------------------------
STEVEN S REINEMUND
*By /s/ Susan N. Roth For all of the Directors
----------------------------
Susan N. Roth
Attorney-in-Fact
-27-
SCHEDULE I--SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
December 31, 1996
Amount at which
shown in the
Fair statement of
Type of Investment Cost Value financial position
(in millions of dollars)
- ---------------------------------------------------------------------------------------------------------------
Available-for-Sale Fixed Maturity Securities:
Bonds
United States Government and Government
Agencies and Authorities $ 6.4 $ 7.2 $ 7.2
Foreign Governments 156.5 176.4 176.4
Public Utilities 2,421.5 2,620.5 2,620.5
Mortgage-backed Securities 2,156.9 2,152.0 2,152.0
Convertible Bonds 16.7 16.5 16.5
All Other Corporate Bonds 5,578.9 5,858.5 5,858.5
Redeemable Preferred Stocks 47.4 49.0 49.0
--------- --------- ---------
Total 10,384.3 $10,880.1 10,880.1
--------- ========= ---------
Held-to-Maturity Fixed Maturity Securities:
Bonds
United States Government and Government
Agencies and Authorities 13.5 $ 15.0 13.5
States, Municipalities, and Political Subdivisions 3.2 3.4 3.2
Mortgage-backed Securities 234.9 230.1 234.9
All Other Corporate Bonds 12.9 14.6 12.9
--------- --------- ---------
Total 264.5 $ 263.1 264.5
--------- ========= ---------
Equity Securities:
Nonredeemable Preferred Stocks 7.2 $ 4.9 4.9
--------- --------- ---------
Total 7.2 $ 4.9 4.9
--------- ========= ---------
Real Estate
Investment Properties 149.0 143.8 *
Acquired in Satisfaction of Debt 23.9 7.3 *
Policy Loans 1,749.0 1,749.0
Other Long-term Investments 15.5 15.5
Short-term Investments 252.3 252.3
--------- ---------
$12,845.7 $13,317.4
========= =========
* Difference between cost and carrying values results from certain valuation
allowances and other temporary declines in value.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
PROVIDENT COMPANIES, INC. (Parent Company)
STATEMENTS OF FINANCIAL CONDITION
December 31
1996 1995
(in millions of dollars)
---------------------------
ASSETS
Fixed Maturity Securities
Available-for-Sale--at fair value
(cost: $9.6; $ -) $ 10.3 $ -
Short-term Investments 121.5 -
Surplus Note of Subsidiary 150.0 -
Investment in Subsidiaries 1,659.9 1,652.3
Other Assets 18.2 -
---------- ----------
Total Assets $ 1,959.9 $ 1,652.3
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Long-term Debt $ 200.0 $ -
Other Liabilities 21.3 -
---------- ----------
Total Liabilities 221.3 -
---------- ----------
STOCKHOLDERS' EQUITY
Preferred Stock 156.2 156.2
Common Stock 45.6 45.4
Additional Paid-in Capital 11.4 5.8
Net Unrealized Gain on Securities, net of
deferred federal income taxes ($0.2 ; $ -) 0.5 -
Net Unrealized Gain on Investment of Subsidiaries 85.2 97.1
Retained Earnings 1,439.7 1,347.8
---------- ----------
Total Stockholders' Equity 1,738.6 1,652.3
---------- ----------
Total Liabilities and Stockholders' Equity $ 1,959.9 $ 1,652.3
========== ==========
See notes to condensed financial information.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PROVIDENT COMPANIES, INC. (Parent Company)
STATEMENTS OF NET INCOME
Year Ended December 31
1996 1995 1994
(in millions of dollars)
--------------------------------
Dividends from Subsidiaries $ 52.6 $ - $ 70.3
Interest from Subsidiaries 12.3 - -
Other Income 1.7 - 1.4
----- ------- ------
Total Revenue 66.6 - 71.7
----- ------- ------
Interest Expense on Debt 10.2 - -
Other Expenses 1.2 - 1.1
----- ------- ------
Total Expenses 11.4 - 1.1
----- ------- ------
Income Before Federal Income Taxes and Equity in
Undistributed Earnings of Subsidiaries 55.2 - 70.6
Federal Income Taxes (Credit) 1.1 - (0.1)
----- ------- ------
Income Before Equity in Undistributed Earnings
of Subsidiaries 54.1 - 70.7
Equity in Undistributed Earnings of Subsidiaries 91.5 115.6 64.6
----- ------- ------
Net Income $145.6 $115.6 $135.3
====== ======== =======
See notes to condensed financial information.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PROVIDENT COMPANIES, INC. (Parent Company)
STATEMENTS OF CASH FLOWS
Year Ended December 31
1996 1995 1994
(in millions of dollars)
------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES $ 69.7 $ - $ 59.0
-------- --------- -------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Fixed Maturity Securities 0.2 - 0.6
Net Purchases of Short-term Investments (120.8) - (1.8)
Cash Distribution from Subsidiary 100.0 - -
Surplus Note Issued to Subsidiary (3.0) - -
Other (2.7) - -
-------- --------- -------
CASH USED BY INVESTING ACTIVITIES (26.3) - (1.2)
-------- --------- -------
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Common Stock 5.8 - 1.9
Dividends Paid to Stockholders (45.5) - (59.8)
Other (3.6) - -
-------- --------- -------
CASH USED BY FINANCING ACTIVITIES (43.3) - (57.9)
-------- --------- -------
INCREASE (DECREASE) IN CASH $ 0.1 $ - $ (0.1)
======== ========= =======
See notes to condensed financial information.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PROVIDENT COMPANIES, INC. (Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION
The accompanying condensed financial statements should be read in conjunction
with the consolidated financial statements and notes thereto of Provident
Companies, Inc. and Subsidiaries.
Corporate Reorganization
Effective December 27, 1995, Provident Life and Accident Insurance Company of
America completed a step in a corporate reorganization which created a new
parent holding company, Provident Companies, Inc., a non-insurance holding
company incorporated in Delaware. In accordance with the Plan of Share Exchange
approved by shareholders at the 1995 annual meeting, each share of Class A and
Class B common stock of Provident Life and Accident Insurance Company of America
was exchanged for a single class of common stock of Provident Companies, Inc.,
with each share entitled to one vote. Each depositary share of cumulative
preferred stock of Provident Life and Accident Insurance Company of America was
also exchanged for an equivalent depositary share of cumulative preferred stock
of Provident Companies, Inc.
In March 1996, Provident Life and Accident Insurance Company of America and
Provident Life Capital Corporation were dissolved and their respective assets
and liabilities were distributed to and assumed by Provident Companies, Inc.
Assets transferred to the Company had a carrying value of approximately $187.3
million. Liabilities assumed by the Company in connection with the transfer
totaled $205.0 million. Provident Life and Accident Insurance Company, Provident
National Assurance Company, and Provident Life and Casualty Insurance Company
are now direct subsidiaries of Provident Companies, Inc.
Basis of Presentation
The condensed financial statements represent the top tier company's statements
of financial condition and the related statements of income and cash flows. In
1996 and 1995, the top tier company was Provident Companies, Inc. In 1994, the
top tier company was Provident Life and Accident Insurance Company of America.
Debt
During 1996, the Company entered into an $800.0 million five-year revolving
credit facility with various domestic and international banks. Interest is
variable based upon a London Interbank Offered Rate (LIBOR) plus a margin. At
December 31, 1996, the outstanding borrowing under the revolving credit facility
was $200.0 million.
During 1996, the Company repaid the $200.0 million bank term notes assumed from
Provident Life Capital Corporation which were due on or before December 1, 1996.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
PROVIDENT COMPANIES, INC. (Parent Company)
NOTES TO CONDENSED FINANCIAL INFORMATION - CONTINUED
Preferred Stock
In a public offering completed on February 24, 1993, the Company issued
1,041,667 shares of 8.10% cumulative preferred stock, liquidation preference
$150 per share evidenced by depositary receipts for 6,250,002 depositary shares
each representing a one-sixth interest of a preferred share, of which 6,249,202
were issued and outstanding as of December 31, 1996. The preferred stock is
redeemable at a redemption price of $150 per share (equivalent to $25 per
depositary share) at the option of the Company in 1998.
Commitment to Acquire The Paul Revere Corporation
On April 29, 1996, the Company entered into a definitive agreement to acquire
The Paul Revere Corporation, a provider of life and disability insurance
products, at a price of approximately $1.2 billion. The transaction is subject
to regulatory approval and is expected to close during the first quarter of
1997. For additional information, see Note 14 of the Notes to Consolidated
Financial Statements.
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Future Other
Policy Policy
Deferred Benefits, Claims
Policy Losses, and
Acquisition Claims, and Unearned Benefits Premium
Segment Costs Loss Expenses Premiums Payable Revenue
(in millions of dollars)
- --------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Individual Life and Disability $ 377.4 $ 4,236.9 $ 52.5 $ 179.9 $ 646.3
Employee Benefits 44.4 777.0 4.1 158.6 501.4
Other Operations 3,037.4 2.2 73.2 28.0
--------- ---------- ------ --------- ----------
Total $ 421.8 $ 8,051.3 $ 58.8 $ 411.7 $ 1,175.7
========= ========== ====== ========= ==========
Year Ended December 31, 1995
Individual Life and Disability $ 227.6 $ 4,098.3 $ 53.1 $ 151.3 $ 647.4
Employee Benefits 44.2 713.7 3.7 152.1 485.9
Other Operations 2,944.2 1.6 80.3 118.6
--------- ---------- ------ --------- ----------
Total $ 271.8 $ 7,756.2 $ 58.4 $ 383.7 $ 1,251.9
========= ========== ====== ========= ==========
Year Ended December 31, 1994
Individual Life and Disability $ 644.9
Employee Benefits 465.6
Other Operations 272.1
----------
Total $ 1,382.6
==========
(CONTINUED ON FOLLOWING PAGE)
SCHEDULE III--SUPPLEMENTARY INSURANCE INFORMATION
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
(CONTINUED FROM PRECEDING PAGE)
Benefits, Amortization
Claims, of Deferred
Net Losses and Policy Other
Investment Settlement Acquisition Operating Premiums
Segment Income* Expenses Costs Expenses Written
(in millions of dollars)
-------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Individual Life and Disability $ 393.6 $ 697.6 $ 55.6 $ 177.1 $ 581.9
Employee Benefits 97.9 436.6 8.4 104.8 238.6
Other Operations 598.6 527.0 58.6 2.8
--------- --------- ------- --------
Total $ 1,090.1 $ 1,661.2 $ 64.0 $ 340.5
========= ========= ======= ========
Year Ended December 31, 1995
Individual Life and Disability $ 361.3 $ 747.3 $ 59.0 $ 176.5 $ 583.9
Employee Benefits 90.6 430.2 12.0 91.8 240.2
Other Operations 769.4 727.1 135.4 83.1
--------- --------- ------- --------
Total $ 1,221.3 $ 1,904.6 $ 71.0 $ 403.7
========= ========= ======= ========
Year Ended December 31, 1994
Individual Life and Disability $ 302.4 $ 679.0 $ 53.0 $ 171.5 $ 578.3
Employee Benefits 85.5 388.2 6.4 88.8 218.3
Other Operations 850.7 914.0 260.4 228.0
--------- --------- ------- --------
Total $ 1,238.6 $ 1,981.2 $ 59.4 $ 520.7
========= ========= ======= ========
*Net investment income is allocated based upon segmentation. In other words, as cash flow from operations and
assigned capital is generated by a segment, the cash is invested in assets with the appropriate characteristics
for that segment's liabilities and operating structure. Thus, each segment has its own specifically identified
assets and receives the investment income generated by those assets.
SCHEDULE IV--REINSURANCE
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Percentage
Ceded Assumed Amount
Gross to Other from Other Net Assumed
Amount Companies Companies Amount to Net
(in millions of dollars)
- ----------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Life Insurance in Force $102,227.5 $4,347.9 $ 437.0 $98,316.6 0.4%
========== ======== ======== ========= ===
Premium Income:
Individual Life and Disability $ 659.2 $ 48.2 $ 35.3 $ 646.3 5.5%
Employee Benefits 517.1 31.9 16.2 501.4 3.2%
Other Operations 253.4 225.4 28.0
---------- -------- -------- ---------
Total $ 1,429.7 $ 305.5 $ 51.5 $ 1,175.7
========== ======== ======== =========
Year Ended December 31, 1995
Life Insurance in Force $ 98,492.4 $4,258.5 $ 460.2 $94,694.1 0.5%
========== ======== ======== ========= ===
Premium Income:
Individual Life and Disability 658.3 $ 47.8 $ 36.9 $ 647.4 5.7%
Employee Benefits 500.4 29.9 15.4 485.9 3.2%
Other Operations 290.1 171.5 118.6
---------- -------- -------- ---------
Total $ 1,448.8 $ 249.2 $ 52.3 $ 1,251.9
========== ======== ======== =========
Year Ended December 31, 1994
Life Insurance in Force $ 86,286.4 $4,202.6 $ 499.2 $82,583.0 0.6%
========== ======== ======== ========= ===
Premium Income:
Individual Life and Disability $ 646.8 $ 41.0 $ 39.1 $ 644.9 6.1%
Employee Benefits 484.1 18.9 0.4 465.6 0.1%
Other Operations 273.5 1.4 272.1
---------- -------- -------- ---------
Total $ 1,404.4 $ 61.3 $ 39.5 $ 1,382.6
========== ======== ======== =========
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
PROVIDENT COMPANIES, INC. AND SUBSIDIARIES
Additions Deductions for
Charged to Amounts Applied
Balance at Realized to Specific Loans Balance at
Beginning Investment at Time of Sale/ End of
Description of Period Losses Foreclosure Period
(in millions of dollars)
- ------------------------------------------------------------------------------------------------------------
Year Ended December 31, 1996
Mortgage loan loss reserve $12.0 $ - $11.0 $ 1.0
Real estate reserve $19.1 $ 2.4 $21.5
Year Ended December 31, 1995
Mortgage loan loss reserve $49.0 $ 3.0 $40.0 $12.0
Real estate reserve $18.3 $ 0.8 $19.1
Year Ended December 31, 1994
Mortgage loan loss reserve $55.3 $11.2 $17.5 $49.0
Real estate reserve $12.7 $ 5.6 $18.3
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
EXHIBITS
to
FORM 10-K
PROVIDENT COMPANIES, INC.
INDEX OF EXHIBITS
EXHIBIT PAGE
------- ----
(3.1) Certificate of Incorporation of the Company, as amended........
(10.7) Form of Surplus Note, dated December 1, 1996...................
(10.14) Credit Agreement between Provident and a consortium of financial
institutions with The Chase Manhattan Bank as Administrative Agent,
relating to a revolving loan in the aggregate amount of $800 million
maturing on July 30, 2001.
(10.15) Amended and Restated Common Stock
Purchase Agreement between Provident
Companies, Inc. and Zurich Insurance
Company dated as of May 31, 1996...............................
(10.16) Amended and Restated Relationship Agreement
between Provident Companies, Inc. and
Zurich Insurance Company dated as of May 31, 1996..............
(10.17) Amended and Restated Registration Rights
Agreement between Provident Companies, Inc. and
Zurich Insurance Company dates as of May 31, 1996..............
(13) Portions of the Annual Report to Stockholders for year ended
December 31, 1996..............................................
(21) Subsidiaries of the Company....................................
(23) Consent of Independent Auditors................................
(24) Powers of Attorney.............................................
(27) Financial Data Schedule........................................
All other Exhibits are incorporated by reference as explained in the list in
Item 14(a)(3).