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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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SCHEDULE TO
(RULE 14D-100)
Tender Offer Statement under Section 14(d)(1) or 13(e)(1)
of the Securities Exchange Act of 1934
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PENN TREATY AMERICAN CORPORATION
(Name of Subject Company)
PENN TREATY AMERICAN CORPORATION
(Issuer)
61/4% CONVERTIBLE SUBORDINATED NOTES DUE 2003
(Title of Class of Securities)
707 874 AC7
(CUSIP Number of Class of Securities)
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Irving Levit
Chairman of the Board and Chief Executive Officer
Penn Treaty American Corporation
3440 Lehigh Street
Allentown, Pennsylvania 18103
(610) 965-2222
(Name, address and telephone number of person
authorized to receive notices and
communications on behalf of Filing
Person)
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Copies to:
Justin P. Klein, Esq.
Ballard Spahr Andrews & Ingersoll, LLP
1735 Market Street, 51st Floor
Philadelphia, Pennsylvania 19103
(215) 665-8500
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Calculation Of Filing Fee
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Transaction Valuation Amount Of Filing Fee
N/A N/A
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[ ] Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form
or Schedule and the date of its filing.
AMOUNT PREVIOUSLY PAID: N/A
FILING PARTY: N/A
FORM OR REGISTRATION NO.: N/A
DATE FILED: N/A
[X] Check the box if the filing relates solely to preliminary communications
made before the commencement of a tender offer.
Check the appropriate boxes below to designate any transactions to which the
statement relates:
[ ] Third-party tender offer subject to Rule 14d-1.
[X] Issuer tender offer subject to Rule 13e-4.
[ ] Going-private transaction subject to Rule 13e-3.
[ ] Amendment to Schedule 13D under Rule 13d-2.
Check the following box if the filing is a final amendment reporting the results
of the tender offer: [ ]
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The following is a transcript of Penn Treaty American Corporation's Second
Quarter 2002 Conference Call, dated August 1, 2002, and was prepared in a good
faith effort to fairly and accurately reflect the audio material from the
conference call. During the call, Mr. William Hunt inadvertently stated that our
outstanding 6 1/4% convertible subordinated notes become due in December 2004.
The 6 1/4% convertible notes become due in December 2003.
Statements made during the conference call concerning Penn Treaty's planned
offer of up to $74,750,000 in aggregate principal amount of 6-1/4% Convertible
Subordinated Notes due 2008 in exchange for up to all of its outstanding 6-1/4%
Convertible Subordinated Notes due 2003 are for informational purposes only and
do not constitute an offer to purchase nor a solicitation of an offer to sell
6-1/4% Convertible Subordinated Notes due 2003 of Penn Treaty American
Corporation. At the time the offer is commenced, Penn Treaty American
Corporation will file a Tender Offer Statement with the U.S. Securities and
Exchange Commission. The Tender Offer Statement (including the Offering Circular
attached as an exhibit thereto, a related Letter of Transmittal and other offer
documents) will contain important information which should be read carefully
before any decision is made with respect to the offer. The Offering Circular,
the related Letter of Transmittal and certain other offer documents will be made
available to all holders of the 6 1/4% Convertible Subordinated Notes due 2003
at no expense to them. The Tender Offer Statement (including the Offering
Circular, the related Letter of Transmittal and all other offer documents filed
with the Securities and Exchange Commission) will also be available for free at
the Securities and Exchange Commission's web site at www.sec.gov.
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Transcript of Penn Treaty American Corporation's
Second Quarter 2002 Conference Call
August 8, 2002
1:00 p.m. CDT
-----------------------------------
Moderator Ladies and gentlemen, thank you for standing by and welcome to
the Penn Treaty American Corporation Second Quarter Earnings
Release conference call. All lines are now fully interactive.
Later there will be a question and answer session with
instructions given at that time. As a reminder, this conference
is being recorded.
I would now like to turn the conference over to our host,
Executive Vice President and Chief Financial Officer, Mr. Cameron
Waite. Please go ahead.
C. Waite Before we start our usual openings, certainly any statements
that you hear that may be considered to be forward looking should
be considered in terms of the risk factors that we put out with
every press release and also with the filings that we make with
the SEC. Just one add on, by way of any conversation that should
take place about our convertible debt today, I do want to make
sure everyone is aware that anything that's said is obviously
neither an offer to purchase nor a solicitation I've been offered
to sell those funds. With that being said, let me talk briefly
for a moment about our financial information for the quarter.
Before, I'll make a couple of introductions. Joining us on the
call is Irving Levit, Chairman and CEO of Penn Treaty American
Corporation, and also William Hunt, President and COO of Penn
Treaty American.
The quarter itself produced net income that frankly was very
nice. It was $11.9 million versus a year ago of $2.4 million.
That translated to net operating income when we exclude the
benefit of what we'll all refer to as security gains from now,
but I'll talk more about in a moment. Net operating income of
$473,000 versus a year ago of $1.7 million. This represented
$0.02 on a diluted earnings per share basis for the quarter from
a net operating basis and we're pleased that in spite of not
having sales growth taking place yet, we have seen positive
earnings for the quarter. We're pleased to be able to see that
type of response on the financials.
In addition to net income, just some pieces of that. Premium
revenue while down slightly, down about 7%, came in at $83.9
million for the quarter. Year to date we produced $168.1 million.
Net investment income was up considerably and this is
predominantly because of our additional funds from equity
offerings over the last year, but also a combination of our
experience account, which is crediting us with a significantly
higher overall rate than we have experienced in the past,
especially in today's interest rate environment and also the fast
that the majority of our funds are now earning current yields as
opposed to being invested in non-interest bearing items such as
cash and/or stock as the case may be.
Net investment income for the quarter was $1.2 million versus a
year ago of $7.2 million. This is up 41% year over year. Total
revenue itself was $116.5 million versus a year ago of $100.7. On
the expense side, benefits to policyholders grew only by 3.8%
year over year from second quarter of last year to second quarter
of this year with benefits being $62.5 million this year, $60.2
million in the same quarter last year. For the six months
benefits were $142.7 million versus a year ago for six months of
$132.4 million. I'll talk about the loss ratio in just a moment.
Overall our general and administrative expenses have continued to
drop from last year, down 16% for the quarter and down nearly 16%
on the year to date basis. That is excluding our expense in risk
charges and exercise taxes for our reinsurance agreement, which
weren't in existence this time last year.
Other items on the balance sheet. Total assets grew at June 30th
to $960.5 million. This is compared to the end of the year at
$940 million. Likewise our book value per share is at $9.20
currently. Some ratios. Our loss ratio for the quarter was a
little bit higher than we've seen typically, but again it's more
the math than anything else. It's 74.5%. We traditionally have
seen this range in the 68% to 70% range. It is down from the
first quarter. The reason it's higher in the second quarter
compared to a year ago when that number was around 67% is
primarily as a result of two things. Number one, clearly earned
premiums has reduced since a year ago as I mentioned. It's down
about 7%, which is in and of itself going to take the loss ratio
up.
The other is that we continue to do a couple of things in terms
of refinement on our claim reserve. This number has become
significantly better for us. Our analytics are better. We found
that there were cases where on our pending reserves for those
claims that we know about we indeed wanted. We saw a little bit
longer duration on some of those and felt that is was appropriate
when we refine that data to hold a little bit higher reserve. On
the other side of it though, we also found that because of the
rate increases that have come into play of late and particularly
in the second quarter, we have seen persistency drop a little
bit. It was about 89% and this was at the end of the first
quarter. It dropped to 85% in the second quarter. In and of
itself this is exactly what we expected.
Shock lapses will occur when you put that type of rate increase
in. That was built into our modeling and we did expect that. The
short-term result was favorable to us in terms of our loss ratio.
That actually releases reserves when you drop those
policyholders, although I don't think any of us will sit on this
call and tell you that we would not prefer to have policyholders
stay with us. Ultimately we're in business to do business and so
we think that persistency going up in the long run is a good
thing. We expect that it will rebound and we think that the 85%
is very typical of what we would have expected for the shock
lapses as I mentioned from the rate increases.
In addition to the loss ratio, we also have our G&A ratio as I
mentioned before, our expense ratio as a percentage of premium.
If we exclude that of our agencies, it's really just looking at
our insurance companies, subsidiaries. It's doing very well.
Although premium has come down, so have our expense and our ratio
is about 11.1% for the quarter. This compares to a year ago at
12.5% on premium. While we've been slowing down in terms of new
business sales as we get geared up and ready to ramp up again,
we've done an extremely good job of containing the costs here.
We've been very careful not to be penny wise and pound foolish,
and cut our significantly well-trained personnel and staff for
example in the underwriting area. We want to make that we keep
the expertise and help so that we are geared up and ready to go
forward. Mr. Levit and Bill will talk about that a little bit
more. When we include our agencies in our expense structure,
we're about 12.9% as a percentage of premium on expenses versus a
year ago of 14.4%. Again, on all counts we really have done a
nice job of thinking in terms of containing the expense structure
itself.
One piece that's new for all of you and it's not in the quarter,
but it is reflected on a year to date basis. It's something that
you may have seen with other companies. There is a new FASB or a
new accounting rule that's out and it was new for this year. It
required every company to evaluate their goodwill by the end of
June, which we did. We took a look at that and there are a couple
of rules that you're required to follow. It's very
straightforward. First of all, if in fact your market value of
the company is below that of your book value, which ours was at
January 1st and had carried that way throughout the rest of the
six months. If that value was lower than your book value, then
you're required to actually look at your goodwill on the step or
at the reporting unit level, which we did, which our reporting
units will be summarized as two parts.
One is the agency purchases that we've made. The other are the
insurance subsidiaries that we've bought in the past. While on a
stand alone basis we feel confident that all that goodwill would
be recoverable, we certainly determined that the agency purchases
were well advised and the earning stream coming out of those
purchases is more than sufficient to be able to handle the
goodwill and to be able to continue to carry those values. We
were however forced under the accounting rule to apply the
negative value, the difference between book value and fair market
value or our stock price, down to one of those units. We applied
that to the insurance subsidiary level basically because we
assumed that the price trade is under book value, mostly because
of the capital issues and constraints that the company faced over
the last year.
While we applied that it does indeed require then that we would
write-off in the current year or as of January 1st, we would
write-down all that goodwill, which we equated to a below the
line adjustment of about $5.1 million. That is a direct impact to
book value, but it is once done. It is non-recurring and it is
classified merely as a change in accounting principles. Again, it
is not in the second quarter results. It's on a year to date
basis, but it is important to point out for you.
Secondly, from our last conference call back at the end of the
first quarter we also talked extensively about our experience
account and the investment credit that we received on that
experience account. We realize that it's incredibly valuable to
be able to separate the difference between what would normally be
considered an interest component of that investment credit and
what would be considered to be a market value change of that. We
have found under FASB 133 that indeed the appropriate accounting
there is to split that apart and so we're able to report to our
investors on a regular basis those items that could be considered
to be normally recurring and those items that would be outside of
that. It would literally be just a matter of the market value
change.
It's extremely important to point out that there will be
volatility on this portfolio. We are required since we don't have
technical control of those assets and the pure accounting
definition to report any market value change or that market value
component through our income statement as a current period gain
or loss. This is very similar to the bond market and that is that
as interest rates go up the value is going to drop and we would
recognize a loss. Similarly market values would go up if interest
rates in general went done. That's a one time phenomenon, but the
benefit that we have is that we instantly start receiving the
benefit of the higher rate or the lower rate, whatever the
prevailing effective rate or yield of maturity is for those
similar portfolios. That's what we now received henceforward on
the new market value.
The economics of the transactions are just again as I said. It
would be similar to us having the ability to constantly sell our
portfolio and reinvest it at the current rate. You'll always be
recognized in a gain or loss as of the time you sell it, but
you'll also be getting the most up to date rates in the future.
The economics of it is that you eventually have no inherent gain
or loss as a result. You're getting the rate that you intended to
be getting all along and so now we'll be able to show that under
this accounting treatment and it should provide much more stable
review if you will of what our true performance is, because with
a net operating income calculation we can exclude that gain or
loss and take some of the noise out of this calculation. So we're
pleased that that accounting turned out the way it was. There was
an awful lot of research out into it. We felt that it would be
inappropriate and not financially sound to put on a hedge just to
take care of the volatility when in fact long run we don't
anticipate any shareholder impact because of it.
With that, let me turn things over to talk about the marketing
side of things. There's been a lot of news out of the company
lately. I'd like to ask Irving Levit, Chairman and CEO, if he
could bring us up to speed as far as the marketing side of the
business.
I. Levit I have this little saying. "Just when I was getting used to
yesterday, along came today." And along came today in a good way.
We have gotten back in business in the sate of Florida. Florida
was 25% of our business some years back and we intend to make it
the good part of our business going forward. That's one thing;
one of those stars that go up. The second star is our reinsurer.
We've had an agreement to reinsure a percentage of our new
business, if necessary. This is a very, very wonderful thing for
us, because the growth of the company can go flying pretty good
and we have to have the reserved money. There's a statutory
capital strain associated with new business. Having that there
for us if we need it, it's up to 50% of new business, gives us a
tremendous advantage going forward. Getting together and trying
to making the bond issue complete.
Most of you or some of you are aware of is also on the ... and
we're getting close to getting the thing done, getting it done
proper. Of course the big thing is we have a good company, but we
want it to be the greatest company and we want to do things
exactly the way they have to be done, which is a task today.
Today it's a different world we live in, a lot of difference as
you see it. You see it with the President talking about people in
business and getting the job done and handling money and so on
and so forth. Some are absolutely in a bad position that they
didn't ask for, but everything we do today will be done 100%
correct to the best of our ability. I am as many of you a
shareholder. Most of my money is invested in Penn Treaty, so you
know I'm going to keep going at this job the best way that I can.
Saying that, I'd like to turn you over to our President, Bill
Hunt, who is doing a great job for us. Bill.
B. Hunt It has been a very busy and a very fruitful three months
since we last had our prior conference call back in May. After
the corrective action plan was approved back in February I made
mention that the company was then on a very strong foundation for
future profitable growth. I can say right now that with the
events of the past couple of weeks we are vastly stronger now
than we were back in February and we are really ready to get back
in the marketplace and begin to grow again. As Cam reported,
considering that we have really begun growing in the second
quarter, our financial results were as expected with a slight
gain. The rate increases that we have been busily putting into
effect are just beginning to be applied to the in force business.
As we move forward in upcoming quarters I anticipate that net
operating income will grow as sales grow. We're on a solid
foundation for the future. Management has achieved as I mentioned
several key goals in the execution of our corrective action plan.
It's very important for the world to realize that we laid these
goals out months ago and we've been knocking these goals off one
at a time. In the business of day to day we just knock them off
and keep moving, but when you sit back and you reflect upon
what's actually been accomplished, a lot has happened here over
the past several months. I just want to review those
accomplishments real quickly.
The first one, back on July 30th we announced an agreement with
the Florida Insurance Department to recommend sales of our
long-term care insurance. As you all know we've been opened in 26
states for the past several months and we've seen a steady flow
of business throughout that time without any type of major ramp
up. It's been steady though. We realized that getting opened in
Florida was really the critical path if we were to get nationwide
recommencement of our sales. During this timeframe over the past
several weeks and months we here have developed an excellent
relationship with the Florida Insurance Department. They're one
of the strictest regulators in the country, but they're also one
of the most fair.
I'd like to thank the Florida Insurance Department, Commissioner
Gallagher, Deputy Commissioner McCarty, and their staff for the
time and energy and resources they applied to reviewing our
corrective action plan and working with us to establish our
agreements to allow us to move forward. They recognize the
important coverage and service that this company provides to
residents of the state of Florida and they want us to be there
and they want us to be successful. Again, we really appreciate
the work that they put in over the past several weeks to get us
up and running again.
We were allowed to sell through our largest insurance subsidiary,
Penn Treaty Network America. That's very important, because
that's where our brand is. We plan over the next several weeks to
be meeting with our top MGAs in Florida and we'll be setting up
seminars in all of our major agencies down in Florida over the
next several weeks to kick off our sales process. Our sales and
marketing team internally have been really chomping at the bits
over the past several months working for this time. They're going
to be unleashed and they're going to do a great job. We're really
looking forward to getting back up and running in Florida again.
We agreed to keep our growth in the balance of our current and
our anticipated statutory capital position. This is all based
upon our corrective action plan, so we are very, very pleased
with our agreement. We are conducting weekly discussions and
updates with the Florida Insurance Department to keep the abreast
of what's happening and we're providing them with monthly
reporting so they can monitor our progress as we go over the next
several months. We welcome that. We welcome their support and we
welcome their encouragement as we move forward. Our fourth
Florida application actually came in the door yesterday, so the
process has already begun.
Once we received permission from the Florida Insurance Department
to move forward we worked very feverously to get on the phone and
start calling the other states in which we currently are not
running business to let them know the news. We have received
excellent feedback from each of the regulatory departments in the
22 other states which we are currently not writing at. We
anticipate that over the couple of weeks we will be back up and
running in a lot of those states. States like Texas and Arizona,
Ohio and Tennessee; we provide them additional information and we
feel very confident we'll be back up and running there soon.
We've also corresponded with another one of our large states,
California. We are aware of some additional items they need to
see. We are providing that information for them in the next week
and we understand what their game plan is and the amount of time
it's going to take them to finalize their review of our company.
All in all, as you all know, ... the regulatory process, but I'm
pretty confident in saying that we should be back up in a vast
majority of our states sometime within the next quarter. That's
good, because as we begin to ramp up sales we begin to grow. This
is going to be controlled growth. It's not going to be out of
control.
Being able to have states come online a week or two at a time and
getting our sales and marketing teams out in the marketplace and
getting our agencies the material they need and the education
they need to get reengaged will support that controlled growth.
This is all falling with in line with what we've modeled and so
we're very happy about where we are right now and the prospects
of moving forward. That's the update when it comes to states and
our ability to grow the business. Growing the business now is the
key thing. The key aspect of managing this business going forward
and we will be successful.
The second announcement, which came out about a week or so about
was the announcement that stated that our reinsurance partner
Centre Solutions of Bermuda Limited, the subsidiary of their
financial services has exercised its option to reinsure a portion
of our newly issues long-term care insurance policies. This is
all subject to finalization of terms. As you recalled we were
granted Centre its option as part of the agreement entered into
back in February of 2002 to reinsure our in force business. This
is a key feature of our future capital management strategy. We
want to be able to optimize the value creation we anticipate
coming in the future from sales and we have to manage our capital
base accordingly.
Our two tools from ... capital base is number one is reinsurance
and number two, our ability to go back out in the marketplace and
write capital sometime in the future. This particular reinsurance
Treaty will allow our management, will allow us to be able to
manage our growth and be able to monitor very closely our ...
capital position. We can ramp up sales much quicker with this
reinsurance agreement than without it. What this is going to do
in my opinion. It will definitely increase agent or regulator
confidence in Penn Treaty and will have a positive impact on
sales. When our agents go out in the marketplace they are
constantly and this goes back into the past as well as currently,
they're constantly in competitive situations with agents
representing much larger companies. They try to put Penn Treaty
not to be a small company.
By having a reinsurance agreement with a company the size of
Centre that takes that argument out of the way. Penn Treaty is
going to be there to support our policy ... in the future and now
with additional reinsurance from Centre, they will be there also
to support claims in the future. We view this as a very, very
positive tool for us to be able to get out and ... sales process.
We've agreed to ... to all the terms of the agreement. We just
need a little bit of time to dot some i's and cross some t's, and
I fully anticipate that we'll have the final terms completed by
the end of the month. We'll announce that accordingly.
The third item I want to comment upon was on the press release,
which came out yesterday evening, where the company announced a
planned exchange offer to the holders of our convertible debt,
which become due December of 2004. Our Board of Directors
authorized yesterday the planned exchange offer after receiving
expressions of interest and good ... terms from our current
policyholders. The announced exchange offer is designed to
maximize participation by the current bondholder base. It's very
important that be the case. They will have a par piece of paper
and they're going to have potential upside going down the road.
So we feel very good about the opportunity for them.
Our board believes that the exchange offer provides a long-term
solution to Penn Treaty's liquidity challenges while also
providing value for both our bondholders and our stockholders.
Value is created for several reasons. Number one; the enhanced
credit profile of the company with Standard & Poor's ... All of
our goals as you all know have been run past our rating agencies.
Everything that we're doing, that we have done, and we continue
to do are done with an eye on improving our ratings and getting
our ratings back up to where we want them to be. But value is
also created by improving regulatory relations. Again, all of our
plans have been ... through with all of our key regulators and
every regulator we have spoken to speaks very highly and us very
supportive of this restructure. This will also increase agent
confidence and the financial stability of the company. Again,
that too will also have a positive impact on sales.
This also removed the refinancing concerns, which in my opinion
have to press our share price. There's been overhang in our share
price. The certainty of whether we're going to be able to write
$75 million and what we're going to do with this debt offering.
This removes that uncertainty. Most importantly it really knocks
this out of the way and allows our management team to focus on
growing our long-term care insurance business, which is really
what we're in the market to do and really wouldn't you all want
to see it be able to be successful ... This is a key part of the
restructuring of our balance sheet. After this is over with we
become a growth story and we'll be able to grow this business
very successfully.
Let me review very briefly the terms of the exchange offer. To
the holders of our current $74.75 million convertible debt,
they'll be able to convert that into convertible notes due in
October of 2008. That date wasn't just randomly chosen. That date
was chosen based upon the fact that it'll be a year after our
planned commutation of the reinsurance of our in force book of
business, which is currently with Centre Solutions. At that point
in time as you've heard us mention we anticipate that the
business will be at a four to one statutory capital of the risk
base capital ratio and will possibly be in the dividend paying
mode. Thus, allowing the liquidity to be able to possibly pay off
the debt at that point in time.
The notes have two-year ... protection with a mandatory
conversion feature after two years if the shares have a 15-day
trading average at 10% above the conversion price. The goal for
us is to become debt free at some time. There's a possibility
that we cam become debt free sooner than October of 2008 and we
think this provides that opportunity. Now for our shareholders we
feel there's a tremendous value being created here for them as
well. We do recognize there is a dilutive effect to what we're
proposing here. The dilutive effect of this offer is about 17%
off of our current book value per share, which as Cam mentioned
is $9.20 a share. The book value when doing the math comes out to
be about $7.62, but this offer will unlock value.
It'll unlock value by positioning our company to grow and the
value will be created by being able to drive off our ability to
generate sales for the long-term care insurance. Keep in mind
that $7.62 is accretive to our market value right now. Quite
frankly this company for years, the stock of this company for
years has been trading at a discount of the book value. What
we're doing right now through this restructuring is recalibrating
book value of the company. The goal is to have the stock of this
company trading at a multiple of book value and not at discounted
book value. This restructuring gives us this opportunity, so I
feel very, very good about this opportunity and what this does
for our shareholders as well as our bondholders.
The other thing is that we know the cost of the restructuring
today. I personally feel it was very important for us to come up
with this solution now instead of waiting another quarter or two
quarters or three quarters, because the longer this would drag
on, the more uncertainty would be ... into our share price and
the share price would languish. Again, my opinion. We feel very
good about this.
It's a great foundation for our future and we
hope that we get full participation by our bondholders over the
next 30 days.
A couple of other items I want to touch upon real quickly we are
working on in between all these other items. We are working on a
couple of new sales and marketing opportunities to expand our
distribution and I would expect that there's a possibility that
in one or two ... they come to fruition sometime within the next
quarter. We're not standing still. We are moving forward and
we're thinking about growth. We are also in the process of
recruiting additional management talent to help supplement the
very strong management team we have here right now. As you look
to reemerge back in the marketplace there will be needs and
opportunities to bring in talented people from outside the
organization with other experiences to help supplement the
management team we have here. We are in the process of recruiting
those folks now.
Another item I want to touch upon very quickly is our rate
increases. As we've been reporting the past several quarters, we
have been in the process of implementing rate increases. We
currently have 91% of the premium that we're hoping to get rate
increases on have been approved. Over 50% of our policyholders
have received their notices and it's been applied into our
system. To give you a sense of what's happening with that, 71% of
the policyholder base we've notified have taken their rate
increases out to the post, 20% have modified their benefits, but
have kept their coverage.
As we mentioned before, we felt giving our policyholders options
to keep their coverage even though they may not be able to afford
some of the rate increases was very important, because we feel
it's important to provide coverage for our policyholders when
they need that coverage most. So 20% of our policyholder base who
have received their notifications have modified their benefits.
Roughly 9% have lapsed and that 9% number is up a little bit from
where we were a few months ago, but well within the parameters of
what we ... and what we expect. So we feel very good about that.
There's still an additional I feel 2% to 3% upside possibility in
getting additional premium rate increases approved. We have a
couple of states we're still working with. I feel confident we'll
be able to get their approvals over the upcoming weeks.
Those are all the most current issues that are occurring and most
current events. As I was sitting last night thinking about what's
happened here, I want to focus my final comments here over the
next couple of minutes on really reviewing over the last 15
months. It's really been dramatic what's happened here at Penn
Treaty over the last 15 months. It's been a complete turnaround.
What I want to do very briefly is to recap the accomplishments of
our management team, because as I said before the point of what
we're doing here is reestablishing credibility for this
management team. I knew when I first came onboard that we had a
lot of challenges financially with our balance sheet and trying
to get company righted to be able to move forward, but I also
understood the great challenge of trying to restore credibility
to our management team.
This management team here has done a great job or reestablishing
that credibility based upon the accomplishments of the past 15
months. Real briefly let me run through those. Back in May of
last year we have a successful rights offering. We raised $26
million of capital at the time at $2.20 a share. What that ...
was time to develop our corrective action plan. The backbone of
that corrective action plan came through our greatly enhanced
financing modeling capability; a capability the company wouldn't
have that sophistication before. That's through our relationship
now with the internationally renowned ... firm, Milman, who is
with us every step of the way as we move forward. From that
modeling we were able to determine the proper pricing of our in
force business. We've gone forward and filed for and are
receiving as I just mentioned the rate increases we needed to be
able to properly calibrate the in force business to generate
value for our shareholders. One of the myths that was dispelled
from that entire process was the myth that Penn Treaty was a
substandard company who under-priced products just to gain market
share. That's been completely blown out the window. We're here to
fulfill .... We always will be. We were in the past and will
continue to be. We arranged capital through the fall of last year
through the disposition of non-core assets.
We greatly enhanced our policyholder protection by developing a
creative reinsurance relationship with a global financial
services leader, Centre Solutions. That's the cornerstone of our
corrective action plan. We got that corrective action plan
approved by our domestic regulatory, the Pennsylvania insurance
department. How very important is that? At that time our risk
base capital ratio were 750%, stronger than they've even been
here over the past several years. We placed the company on a very
strong platform for future growth and we got a ratings upgrade
right away, a very important event.
Moving forward from there we removed the going concern opinion
and I don't have to tell this audience that in this environment
today for a company to receive a going concern opinion and to
get that removed within one year is a monumental event and so
we're very happy about that. We did that by improving our
liquidity position, by being able to raise capital again at
$4.75, almost double when we raised capital at the rights
offering. Through the process we've established very strong
relationships with key regulators and accordingly we gained the
approval to reconnect sales in Florida as I just mentioned. As
Mr. Levit mentioned, Florida represents 25% of our past sales
volume in a given year. That was a key event and we're looking
forward to being able to optimize that opportunity going forward.
We've solidified our relationship with Centre with the exercise
of their option to provide us ... insurance on a perspective
business. That's a very key event, because it again reemphasized
to the world that our value proposition here at Penn Treaty, our
business plans are being validated by someone much bigger than
us, someone who wants to be with us to support us as we grow to
penetrate the long-term care insurance marketplace, and we will
be successful. Finally, with the exchange offer being out there
for our convertible debt we're now in the process of finalizing
the restructuring of our balance sheet. My hat's off to this
management team and to all of our advisors who assisted us along
the way. It's been a true team effort. We're only just begun now
and I'm looking forward to taking Penn Treaty to new highs.
As we emerge in the future we're going to take the best from the
past, the fact that we are a product innovator of long-term care
insurance, that we have underwriting excellence second to none,
that we have service second to none to both our agents and to our
policyholders, and that we are a sales driven organization. We're
taking all those aspects from the past and we're coupling that
now with greatly enhanced financial discipline to be able to
drive value to all of our stakeholders. I'm very excited about
our future. We are the long-term care insurance superstore.
You've heard Mr. Levit say that for years and years now. We still
are. Guess what? We're back open for business. We're very happy
and very confident about our future.
At this point I'd like to turn it over for questions and answers.
Thank you.
Moderator Our first question today comes from the line of Lee Calful from
Macadia. Please go ahead.
E. Jacobs This is actually Eric Jacobs. I work with Lee here in at Macadia
Research Group. Let me just get this straight. Right now pro
forma if we were just to take care of all this dilution. You guys
came out at $7.62. I have about $7.58 in terms of current book
value with all that dilution baked in. Is that about right?
C. Waite That's about right.
E. Jacobs Can you just talk briefly about your outlook once we get all
states online. Once we get all the states on, can you talk about
what you think premium growth will be over the next say two
quarters? Then that'll give me a flavor and feel as to how much I
think book can actually grow over the next year in addition to
this and the stock is still trading at $4.00. I'm interested in
your talking me through what kind of growth prospects you think
you have once you have all your states online. Then also, Cam, if
you could just talk a little bit about how that affects the DAC.
C. Waite You said a very key word there, Eric, and that is what are the
growth prospects. Clearly with not only the states that have been
open for the last several months, but now with Florida. Florida
is highly respected, particularly given its regulatory
environment, the people that are there, but also the high
concentration of long-term care policyholders that are in that
state. There are an awful lot of states that look to Florida to
really watch to see what they do and how they proceed forward.
Obviously that was a clear signal from Florida that things were
ready to move forward, but Florida saw the same things that we
did. That is while the prospects are extremely good, especially
as more and more states come on.
The prospects for growth literally ramp back up very, very
quickly. However, with that being said, the company clearly and
Florida recognized this too; the company clearly has a model in
mind in terms of what that growth will be. While we're not going
to lab numbers out there necessarily, the answer is it will take
there is no question in our mind that we will ramp up. We're not
going to be back to full run rate within two months. That's just
not going to happen and quite frankly we don't want it to happen
either. We want to be able to grow in synch with our capital
support that we have on a statutory basis. This is something that
now we have the analytics available to us.
We have the actual modeling available to us to be able to foresee
ahead of time what that surplus strain is going to be from that
new business and be able to handle it accordingly. On a GAAP
basis it's going to be just fine. Our expectations is that the
profitability will merge as it always had and quite frankly based
upon the pricing that we have on our new product line we
anticipate that nay growth that's ... is going to be quite
profitable. We're very pleased with the margins that are in
there. We can back to our full run rate and likely over about a
12 month to 15 month time period. That's probably the most
reasonable expectation. To suggest otherwise would probably not
be the most financially prudent thing that the company could do.
It's going to be conservative when we first start out. Florida
expects that and we expect that.
I. Levit Cam, may I just interrupt for one second. The thing about the
growth of the company is we have a lot of people that have been
waiting for us to get our product back to them. The reason is
really it's one of the top products on the street today and we
have people that have been with the company a long time. None of
the agents have lost their commissions through this whole problem
that we had, this situation that we had. To actually tell you in
dollars and cents exactly what that growth will be is not a
possible choice, but it will be good. It will be good. More
important it will be top, top business and that's the most
important. Go ahead, Cam.
C. Waite That's a very good input on that. Also, Eric, you asked about
what the impact would be on DAC. Just for everybody's
education, DAC literally is the deferral of the portion of
commissions and operating expenses that are considered to be a
variable component of new business production. In other words,
GAAP is designed to spread the profitability or have the level
emergence of profits from business come through over the length
of the policy. From a DAC perspective the more business you write
if you think about it easily, the more business you write you're
going to have higher for sure commissions. You're going to show a
higher commission percentage of premium.
In turn your DAC allows you to defer that expense or that
commission, and put it onto your balance sheet to be amortized on
a level basis over the remaining life of the policy. What that
means from a DAC perspective and hopefully I'm addressing the
question properly for you is that when you start writing a lot
more new business you start generating more DAC. When you have
less new business you start to recognize more amortization of
your existing DAC. In our particular case if you look over the
last year you've seen more DAC coming back onto the income
statement by way of expense and bringing that DAC asset down over
time.
Again, what you really need to be able to do is look at a
combination of your commission expense and your DAC, which will
generally be fairly level. You'll see anywhere from 25% to 33%
let's say on a net basis between those two. Again, the higher
your commissions are as a percentage of premium, generally
speaking the higher of a credit you're going to have on a DAC
basis having more deferral than you do amortization and vise
versa. The lower your commissions are you're generally are going
to recognize or be able to see through and see more amortization
of the existing DAC asset as expense is coming in.
E. Jacobs Then with regard to as you guys were hedging the potential for
growth, because I understand you're trying to work within
statutory guidelines, you could support maybe $95 to $100 million
in premium growth a quarter. Correct?
C. Waite I'll tell you what. If we announce that we're doing $100 in
premium growth a quarter we're going to have a lot of regulators
talking to us. In our hay day, in our biggest production point,
we've had a little shy of $100 million worth of new production
annually, which I think is what you meant.
E. Jacobs You had said over the course of 12 months or so.
C. Waite What I mean by that is in order to get back up to an annual run
rate equal to what we used to be I would envision that that would
take at least 12 months. It'll likely take a little longer than
that.
E. Jacobs Because of the statutory limitations?
C. Waite Yes, because of the statutory limitations. As Mr. Levit just
mentioned, you have agents out there that are very eager, have
been very loyal to the company and are excited. Frankly the
reinsurance agreement with Centre exercising their option, we're
pleased about that because we don't need to say to the agents
hold back. We can let agents go out and do what they're best at
and we'll manage the capital side. Part of managing that capital
is this reinsurance agreement. It provides a valuable outlet to
us.
E. Jacobs I was just trying to clarify that, because you don't need to get
back to that level to start putting up some pretty nice numbers
and growing book value actually.
C. Waite That's absolutely right and our modeling suggests just that. It's
not about just grow, grow, grow. It's about put it on profitably
and manage your capital base, and provide a good return to your
shareholders while making sure you don't get into water on the
statutory side. You're right.
E. Jacobs It sounds like all you need is the states to clear and it sounds
like you're on your way. I look forward to hearing more good news
come out, and good luck getting over the hurdles you've gotten
over so far.
Moderator Our next question is from the line of Ellis Smith with Mesner and
Smith.
E. Smith My question has a little conjecture in it, but with the
possibility of Conseco entering bankruptcy during the next few
months, what effect would such a filing have on the other
insurers in the long-term care market?
I. Levit I don't think it should affect the marketplace. Conceso had other
problems and not the insurance. From what I understand the
insurance business was okay with them. They have other problems
and that put them in the position they were in. Is that what you
understand, Cam?
B. Hunt Their challenge is really as everyone knows revolves around their
capital structure and a heavy debt burden they have at the parent
company level. Having said that, though, you never want to see
any competitor fall into bad times. Having said that though, we
as other competitors have to be aware of what's happening and be
ready to capitalize on opportunities. We'll be monitoring the
Conseco situation very closely over the next several weeks and
months. The same way this company fell on some tough times just
15, 18 months ago, that shakes the confidence of agents. A lot of
agents who are affiliated with Conseco are calling us... about
our organization's ability to be around. We have to be cognizant
of that and be ready to look at opportunities to expand our
distribution with being able to position distribution out there.
We're monitoring it very closely.
E. Smith Second question. What percentage of the long-term care market
from your viewpoint does Conseco have?
C. Waite What we'd probably like to do is to turn this back a little bit
towards Penn Treaty. Conseco has traditionally been one of the
largest players, as has Penn Treaty. Conseco has a book of
business that is about twice the size of ours. They are about one
half the size of GE who is the industry's largest player. Again,
while Conseco has items about it in the news constantly, the
impact on the insurance market we hope will certainly not be
adverse to the industry as a whole, as Bill said, just as ours
wasn't in the last year. I'm sure Conseco is working hard o take
care of their issues and we'll obviously try to capitalize on
opportunities to show that Penn Treaty is the best player in the
marketplace as we always have.
I. Levit Conseco has about $900 million of annualized premium in force
right now. As Cam said, they're probably the number two player
out there. In terms of sales last year they were the number two
player behind GE Capital. They wrote about just under $100
million of business last year. There are opportunities for
consolidation in the business and we'll keep our eyes open on
those opportunities as time goes on.
Moderator We have a question from the line of Seth Homit from RRH. Please
go ahead.
S. Homit I own some bonds. Have we determined how many people are
committed to this deal already?
C. Waite No. We have not. Like Bill mentioned before, it's our hope and I
know the board intentionally ticked the offer, the exchange rate,
in a way that they felt that it would be an extremely high
participation rate. Over the course of the next 30 days as we
prepare the SEC required filings we'll certainly be able to start
compiling much more of what the general interest level is, but
again we expect from the information that's been shared with us
and people's feelings along the way is that these are very
powerful numbers.
B. Hunt Just an update on that, because Cam may not be aware. I was in
contact this morning with our financial advisor from Philadelphia
Brokerage, Bob Fisk. Bob did make mention to me that he has
received several phone calls today so far from bondholders
expressing great interest and expressing somewhat happiness of
the terms that are out there. Again to reiterate what we've said
before, we anticipate strong participation and from what we're
seeing at least early that could come to fruition.
S. Homit For those who don't participate in this process, do you have any
plan on how to deal with the few bondholders out there who don't?
C. Waite Certainly we have considered that. We prefer not to comment along
that at this point other than to say that we personally think
they'd miss out on a great opportunity.
Moderator Our next question is from the line of Peter Morgantini who is a
private investor. Please go ahead.
P. Morgantini A couple of quick questions. You mentioned that you know what
California's timeframe is, but you didn't say what that timeframe
is. Can you just elaborate a little bit on that? For the bond
re-issuance in the press release it mentions a two-year call. Can
you elaborate on the terms of the two-year call please?
C. Waite I'll cover the second question. I'll let Bill talk about
California in a moment. In terms of the two-year call the
expectation is that we wanted to be able to offer call protection
to the bondholders. We clearly recognize that the premium on the
stock especially when you compare it to book value should be
quite appetizing if you will. Secondly, we thought that the
coupon rate especially in today's environment is appealing to
people. We believe that the two year opportunity or two year call
protection provides an awful lot of incentive to bondholders to
recognize that it's likely for the stock to appreciate in value,
at least we expect that it will over that timeframe. That
mandatory conversion after that point in time provides the
company fairly good expectations that this will indeed convert.
Frankly that is our expectation. We want that to occur. We tried
to balance everything there, but the two-year call protection is
there literally to entice bondholders to see the value of this
offer and to partake if you will.
B. Hunt With regard to California, as I've mentioned, we're conducting
dialogue with them for months now, getting the information,
answering questions, getting them additional information based
upon their requests. Based upon our most recent correspondence,
which was the same day in which Florida provided us with their
agreement to recommence sales, I believe California regulators
were very happy to see that. We had some additional things that
we had to get to them. We have committed internally to get those
items to the California department by around the 15th, which is a
week from today I believe. From that point we're going to work as
hard as we can to provide the California department everything
they need and answer their questions, and to be able to get them
comfortable to allow is to return there.
Again, it's tough to prognosticate this, but we can probably get
through ... within about maybe a 48-week process beyond the 15th.
Could it be a little bit sooner? It could. Could it be a little
bit longer? It could. The one thing I've learned after being in
this business for 17 or 18 years is that when you're working with
a regulatory environment there are 50 independent regulators out
there. They all have their laws. They supply mandatory statues.
They all have their processes. You work very patiently with them.
You help them get to where they're going, because they're
providing a very valuable service to the public and you want to
have the regulators on your side and supporting you as you go
forward. That's the bottom line. We're going to do whatever it
takes to get California back as soon as possible, because
California is a very important marketplace for us. We have a lot
of great agents out there who have been very, very patient, very
supportive of us. So we want to get them back in business as soon
as possible.
P. Morgantini I think you guys are doing a great job and keep the good news
coming.
Moderator We have a question from the line of Tyson Housley from Healthy
Advisory Management. Please go ahead.
T. Housley You mentioned that you thought going forward that your stock
would create at a premium to book and assuming of course that
sales do come back and earnings, etc., can you explain why you
thin that would be the case again?
B. Hunt I anticipate that it will and again that's all...continue to
execute our business plan. As we're able to ramp up sales and
sales of products which have the problem margins based into them
as we know they're there and the marketplace gains more
confidence in our management team at being able to execute our
plans on a quarter to quarter basis, and we can show good growth
and earnings per share, the opportunity to be trading at a
multiple of book is very, very feasible. There are other
comparables out in the marketplace who I feel do a very good job
in some cases who are trading at a multiple of book right now. We
have the characteristics to do much better than those companies.
The opportunities to trade at a multiple of book are there. It's
just a question of executing your business plan, making sure that
the business you're putting on the books is profitable, and you
gain the credibility and the confidence of the marketplace that
when we put a plan together we're going to execute it. That's
what this whole process has been for the past 15 months is
credibility building, getting ourselves in a platform so that we
can go out and do what we do best and that is sell service to
administer long-term care insurance. We do that to the volumes in
which we did in the past, the multiple of book I anticipate that
to be a reality.
I. Levit From being in the business since 1972 we've also learned a lot
about it. I would say we're better today regarding the premiums
that we have to take and so on and so forth than we've ever been
in the past. We have the top actuaries with us and that goes a
great way into making this thing work.
Moderator Gentlemen, there are no further questions at this time. Please
continue.
C. Waite If there aren't any additional questions we certainly thank you
for joining us today. On behalf of Irv Levit and Bill Hunt and
myself, we certainly appreciate the support that's been shown to
us by our shareholders, by our bondholders, and by our
policyholders and agents. The company has a great story to tell.
We are acting on that plan and we will continue to do so for you.
Thank you and have a great afternoon.
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