<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
| X | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
| _ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period _______________ to _____________________ .
Commission File Number: 0-22761
Pennsylvania Manufacturers Corporation
--------------------------------------
(Exact name of registrant as specified in its charter)
Pennsylvania 23-2217932
------------ ----------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
The PMA Building
380 Sentry Parkway
Blue Bell, Pennsylvania 19422-2328
----------------------------------
(Address of principal executive offices)(Zip Code)
(215) 665-5046
--------------
(Registrant's telephone number, including area code)
Indicate by a 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 | _ | NO | X |
There were 14,888,139 shares outstanding of the registrant's Common Stock, $5
par value per share, and 8,982,611 shares outstanding of the registrant's Class
A Common Stock, $5 par value per share, as of the close of business on September
30, 1997.
<PAGE>
Pennsylvania Manufacturers Corporation
Table of Contents
<TABLE>
<CAPTION>
Part I. Financial Information Page
Number
------
<S> <C>
Item 1. Financial statements
Condensed consolidated statements of operations for the three and
nine months ended September 30, 1997 (unaudited)
and 1996 (unaudited) 3
Condensed consolidated balance sheets as of
September 30, 1997 (unaudited) and December 31, 1996 4
Condensed consolidated statements of cash flows for the nine months
ended September 30, 1997 (unaudited)
and 1996 (unaudited) 5
Notes to the condensed consolidated financial statements (unaudited) 6
Item 2. Management's discussion and analysis of financial condition
and results of operations 8
Part II. Other Information
Item 6. Exhibits and reports on Form 8-K 19
</TABLE>
2
<PAGE>
Pennsylvania Manufacturers Corporation
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
(dollar amounts in thousands, except per share data) 1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues:
Net premiums written $ 104,487 $ 116,745 $ 352,758 $ 360,525
Change in net unearned premiums (41,517) (10,711) (67,387) (34,328)
--------- --------- --------- ---------
Net premiums earned 62,970 106,034 285,371 326,197
Net investment income 34,353 32,732 102,812 98,663
Net realized investment gains 5,531 5,972 3,600 5,503
Service revenues 2,674 2,642 7,712 6,654
--------- --------- --------- ---------
Total revenues 105,528 147,380 399,495 437,017
--------- --------- --------- ---------
Losses and expenses:
Losses and loss adjustment expenses 47,785 97,013 240,919 282,468
Amortization of deferred acquisition costs 20,093 19,586 66,562 66,134
Operating expenses 18,765 21,162 55,670 54,936
Dividends to policyholders 3,566 3,566 10,183 9,418
Interest expense 3,803 4,331 12,025 13,161
--------- --------- --------- ---------
Total losses and expenses 94,012 145,658 385,359 426,117
--------- --------- --------- ---------
Income before income taxes and
extraordinary item 11,516 1,722 14,136 10,900
Provision (Benefit) for income taxes:
Current (741) (84) (1,094) 2,921
Deferred 4,913 (650) 2,609 (1,222)
--------- --------- --------- ---------
Total provision (benefit) 4,172 (734) 1,515 1,699
--------- --------- --------- ---------
Income before extraordinary item 7,344 2,456 12,621 9,201
Extraordinary loss from early
extinguishment of debt (net of income
tax benefit of $2,549) -- -- (4,734) --
--------- --------- --------- ---------
Net income $ 7,344 $ 2,456 $ 7,887 $ 9,201
========= ========= ========= =========
Per Share Data:
Income before extraordinary item $ 0.30 $ 0.10 $ 0.51 $ 0.37
Extraordinary item -- -- (0.19) --
--------- --------- --------- ---------
Net income $ 0.30 $ 0.10 $ 0.32 $ 0.37
========= ========= ========= =========
Weighted average common and common
share equivalents (in thousands) 24,510 24,751 24,480 24,867
========= ========= ========= =========
</TABLE>
See accompanying notes to the condensed consolidated financial statements.
3
<PAGE>
Pennsylvania Manufacturers Corporation
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
(dollar amounts in thousands, except share data) 1997 1996
----------- -----------
<S> <C> <C>
Assets
Investments:
Fixed maturities available for sale at fair value
(amortized cost: $2,071,763 and $2,164,391) $ 2,060,521 $ 2,126,120
Common stock (cost: $255 and $259) 261 262
Short-term investments, at cost which approximates fair value 141,863 134,971
----------- -----------
Total investments 2,202,645 2,261,353
Cash 1,895 7,176
Investment income due and accrued 30,581 30,268
Uncollected premiums 295,589 285,982
Reinsurance receivables 294,506 257,983
Other assets 241,145 274,754
----------- -----------
Total assets $ 3,066,361 $ 3,117,516
=========== ===========
Liabilities
Unpaid losses and loss adjustment expenses $ 1,989,160 $ 2,091,072
Unearned premiums 239,112 205,982
Dividends to policyholders 10,704 12,524
Long-term debt 203,000 204,699
Other liabilities 178,121 177,411
----------- -----------
Total liabilities 2,620,097 2,691,688
----------- -----------
Shareholders' Equity
Common stock, $5 par value (40,000,000 shares authorized; 15,323,613
shares issued and 14,888,139 outstanding - 1997; 16,095,416 shares
issued and 15,670,052 outstanding - 1996) 76,618 80,477
Class A common stock, $5 par value (40,000,000 shares authorized;
9,019,607 shares issued and 8,982,611 outstanding - 1997; 8,247,804
shares issued and 8,173,023 outstanding - 1996) 45,098 41,239
Retained earnings 338,244 336,921
Unrealized loss on investments available for sale
(net of deferred income taxes: $3,933 and $13,394) (7,303) (24,874)
Notes receivable from officers (246) (1,162)
Treasury stock, at cost:
Common stock (shares: 435,474 - 1997 and 425,364 - 1996) (5,572) (5,408)
Class A common stock (shares: 36,996 - 1997 and 74,781 - 1996) (575) (1,365)
----------- -----------
Total shareholders' equity 446,264 425,828
----------- -----------
Total liabilities and shareholders' equity $ 3,066,361 $ 3,117,516
=========== ===========
</TABLE>
See accompanying notes to the consolidated financial statements.
4
<PAGE>
Pennsylvania Manufacturers Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
(dollar amounts in thousands)
1997 1996
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,887 $ 9,201
Adjustments to reconcile net income to net cash flows used by
operating activities:
Depreciation 7,117 5,733
Amortization 3,832 5,574
Provision (benefit) for deferred income taxes 2,609 (1,222)
Extraordinary loss from early extinguishment of debt (4,734) --
Net realized investment gains (3,600) (5,503)
Change in uncollected premiums and unearned premiums, net 23,523 2,460
Change in dividends to policyholders (1,820) (2,263)
Change in reinsurance receivables (36,523) (13,350)
Change in unpaid losses and loss adjustment expenses (101,912) (69,918)
Change in investment income due and accrued (313) 2,628
Other, net 14,275 (17,231)
----------- -----------
Net cash flows used by operating activities (89,659) (83,891)
----------- -----------
Cash flows from investing activities:
Fixed maturity investments available for sale:
Purchases (1,462,705) (994,233)
Maturities or calls 122,974 45,671
Sales 1,432,258 961,012
Equity securities:
Purchases -- (5,192)
Sales 3 15,780
Net (purchases) sales of short-term investments (7,047) 70,046
Proceeds from sale of corporate properties 7,145 --
Net purchases of furniture and equipment (2,245) (2,751)
----------- -----------
Net cash flows provided by investing activities 90,383 90,333
----------- -----------
Cash flows from financing activities:
Dividends paid to shareholders (5,966) (5,911)
Proceeds from borrowed money 210,000 --
Repayments of long-term debt (211,699) (7,234)
Repayments of notes receivable from officers 1,034 2,396
Treasury stock transactions, net 626 (2,058)
----------- -----------
Net cash flows used by financing activities (6,005) (12,807)
----------- -----------
Net decrease in cash (5,281) (6,365)
Cash January 1 7,176 9,170
----------- -----------
Cash September 30 $ 1,895 $ 2,805
=========== ===========
Supplementary cash flow information:
Cash (received) paid for income taxes $ (19,312) $ 6,190
Cash paid for interest $ 15,637 $ 12,601
</TABLE>
See accompanying notes to the consolidated financial statements.
5
<PAGE>
Pennsylvania Manufacturers Corporation
Notes to the Condensed Consolidated Financial Statements
(dollar amounts in thousands except per share data)
1. General
Pennsylvania Manufacturers Corporation (PMC) is an insurance holding company
that sells reinsurance and property and casualty insurance through its insurance
subsidiaries. PMC's reinsurance subsidiary, PMA Reinsurance Corporation (PMA
Re), emphasizes risk-exposed, excess of loss reinsurance and operates in the
brokered market. PMA Re's business is predominantly in casualty lines of
reinsurance. PMC's property and casualty insurance subsidiaries (the Property
and Casualty Group) write workers' compensation and other lines of commercial
insurance primarily in the Mid-Atlantic and Southern regions of the United
States.
The accompanying condensed consolidated financial statements include the
accounts of PMC and its wholly and majority owned subsidiaries (the Company),
and have been prepared in accordance with generally accepted accounting
principles (GAAP) for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. It is management's opinion that all
adjustments, including normal recurring accruals, considered necessary for a
fair presentation have been included. Certain reclassifications of prior year
amounts have been made to conform with the 1997 presentation.
Operating results for the three and nine months ended September 30, 1997, are
not necessarily indicative of the results to be expected for the full year. For
further information, refer to the December 31, 1996, audited consolidated
financial statements and footnotes thereto included in PMC's Registration
Statement on Form 10.
2. Per Share Data
Earnings per share data are based on weighted average common shares and common
share equivalents outstanding during the period. Common stock options are
considered common stock equivalents and are included in average share
calculations if dilutive. See footnote 3 regarding the impact of SFAS No. 128.
3. Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125, which is effective for transfers and
extinguishments occurring after December 31, 1996, provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The Property and Casualty Group's domestic
insurance subsidiaries currently participate in a transfer arrangement of
certain accounts receivable. Such arrangement has been restructured as a result
of the adoption of SFAS No. 125. The restructuring of such arrangement did not
have a material impact on the Company's financial condition or results of
operations.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," which supersedes Accounting Principles Board Opinion No.
15, "Earnings Per Share" and related interpretations. SFAS No. 128, which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997, requires presentation of earnings per share by all
entities that have issued common stock or potential common stock if those
securities trade in a public market either on a stock exchange or in the
over-the-counter market, including securities quoted only locally or regionally.
SFAS No. 128 establishes a new calculation for earnings per share showing both
basic and diluted earnings per share. Basic earnings per share will be
calculated using only weighted average shares outstanding with no dilutive
impact from common stock equivalents while diluted earnings per share will be
calculated similar to the current fully diluted earnings per share calculation.
All prior period earnings per share amounts will be restated to be consistent
with the new requirements. If earnings per share had been calculated in
accordance with SFAS No. 128, the basic earnings per share for the three and
nine months ended September 30, 1997 and 1996, would have been as follows:
6
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----- ----- ------ -----
<S> <C> <C> <C> <C>
Income before extraordinary item $0.31 $0.11 $ 0.53 $0.39
Extraordinary item -- -- (0.20) --
----- ----- ------ -----
Net income $0.31 $0.11 $ 0.33 $0.39
----- ----- ------ -----
</TABLE>
4. Long-Term Debt
On March 14, 1997, the Company refinanced substantially all of its existing
credit agreements not already maturing in 1997 through the completion of a new
$235,000 revolving credit facility (New Credit Facility). Utilizing the New
Credit Facility, the Company refinanced the following obligations:
<TABLE>
<CAPTION>
<S> <C>
Senior notes 9.60%, due 2001 $ 46,428
Senior notes 7.62%, due 2001, Series A 71,000
Senior notes 7.62%, due 2000, Series B 36,000
Revolving credit agreement, expiring in 1998 36,000
--------
Total $189,428
========
</TABLE>
The early extinguishment of the senior note agreements resulted in an
extraordinary loss of $4,734 ($7,283 pre-tax) recorded in the first quarter of
1997. The New Credit Facility bears interest at LIBOR plus .70% on the utilized
portion and carries a .275% facility fee on the unutilized portion. The spread
over LIBOR and the facility fee are adjustable downward based upon the Company's
debt to capitalization ratios in the future. As of September 30, 1997, the
interest rate on the New Credit Facility was 6.23%. The Company entered into an
interest rate swap agreement on March 14, 1997, covering $150,000 notional
principal of the New Credit Facility. The interest rate swap effectively
converts the floating rate to a fixed rate of 7.24% on such portion of the New
Credit Facility. At September 30, 1997, the Company had $203,000 outstanding
under the New Credit Facility, with $32,000 available for additional borrowings.
7
<PAGE>
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The Company consists of PMC, an insurance holding company, and its subsidiaries.
PMC operates in two principal segments, property and casualty reinsurance and
property and casualty primary insurance. PMA Reinsurance Corporation (PMA Re),
emphasizes risk-exposed, excess of loss reinsurance and operates in the brokered
market. PMA Re's business is predominantly in casualty lines of reinsurance. The
Property and Casualty Group writes workers' compensation and other lines of
commercial insurance primarily in the Mid-Atlantic and Southern regions of the
United States, utilizing The PMA Group trade name.
Results of Operations
The table below presents the major components of net income for the three and
nine months ended September 30, 1997, and September 30, 1996, respectively:
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Pre-tax operating income (loss) $ 5,985 $ (4,250) $ 10,536 $ 5,397
Net realized investment gains 5,531 5,972 3,600 5,503
-------- -------- -------- --------
Income before income taxes and
extraordinary item 11,516 1,722 14,136 10,900
Provision (benefit) for income taxes 4,172 (734) 1,515 1,699
-------- -------- -------- --------
Income before extraordinary item 7,344 2,456 12,621 9,201
Extraordinary item, net of related taxes -- -- (4,734) --
-------- -------- -------- --------
Net income $ 7,344 $ 2,456 $ 7,887 $ 9,201
======== ======== ======== ========
Per Share Data:
Income before extraordinary item $ 0.30 $ 0.10 $ 0.51 $ 0.37
Extraordinary item -- -- (0.19) --
-------- -------- -------- --------
Net income $ 0.30 $ 0.10 $ 0.32 $ 0.37
======== ======== ======== ========
</TABLE>
The following table indicates the Company's pre-tax operating income (loss) by
principal business segment for the three and nine months ended September 30,
1997, and September 30, 1996, respectively:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
PMA Re $ 11,452 $ 10,366 $ 33,546 $ 28,904
The Property and Casualty Group (680) (10,738) (9,092) (9,573)
Corporate operations (984) 453 (1,893) (773)
-------- -------- -------- --------
Pre-tax operating income before
interest expense 9,788 81 22,561 18,558
Interest expense 3,803 4,331 12,025 13,161
-------- -------- -------- --------
Pre-tax operating income (loss) $ 5,985 $ (4,250) $ 10,536 $ 5,397
======== ======== ======== ========
</TABLE>
8
<PAGE>
On a consolidated basis, the Company reported pre-tax operating income of $6.0
million and $10.5 million for the three and nine months ended September 30,
1997, respectively, compared to a pre-tax operating loss of $4.3 million for the
three months ended September 30, 1996 and pre-tax operating income of $5.4
million for the nine months ended September 30, 1996. The increases in pre-tax
operating income for the three and nine month periods ended September 30, 1997,
in comparison to the same periods in 1996 are due primarily to increased
operating income generated by PMA Re, as well as lower operating costs related
to the Property and Casualty Group's operations in the third quarter of 1997.
Interest expense decreased $528,000 and $1.1 million for the three and nine
months ended September 30, 1997, respectively, compared to the same periods in
1996. These decreases were due to the refinancing of the Company's debt with a
new $235.0 million revolving credit facility (the "New Credit Facility"). See
"Liquidity and Capital Resources" herein.
Net income on a consolidated basis, before extraordinary items, was $7.3
million, or $0.30 per share, and $12.6 million, or $0.51 per share, for the
three and nine months ended September 30, 1997, respectively, compared to net
income of $2.5 million, or $0.10 per share, and $9.2 million, or $0.37 per
share, for the three and nine months ended September 30, 1996, respectively. On
March 14, 1997, the Company refinanced substantially all of its outstanding
credit agreements not already maturing in 1997 with the New Credit Facility. In
connection with this refinancing, the Company recognized an extraordinary loss
from the early extinguishment of debt of $4.7 million, or $0.19 per share, net
of tax.
PMA Re Results of Operations
Summarized financial results of PMA Re for the three and nine months ended
September 30, 1997, are as follows:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written $ 45,019 $ 43,113 $141,298 $132,522
-------- -------- -------- --------
Net premiums earned $ 39,208 $ 39,297 $124,295 $116,313
Net investment income 13,460 12,235 38,748 34,882
-------- -------- -------- --------
Operating revenues 52,668 51,532 163,043 151,195
-------- -------- -------- --------
Losses and LAE incurred 28,512 30,755 90,743 86,825
Acquisition and operating expenses 12,704 10,411 38,754 35,466
-------- -------- -------- --------
Total losses and expenses 41,216 41,166 129,497 122,291
-------- -------- -------- --------
Pre-tax operating income $ 11,452 $ 10,366 $ 33,546 $ 28,904
======== ======== ======== ========
GAAP loss ratio 72.7% 78.3% 73.0% 74.6%
GAAP combined ratio 105.1% 104.8% 104.2% 105.1%
SAP loss ratio 72.5% 78.3% 72.9% 74.6%
SAP combined ratio 102.6% 102.7% 103.2% 104.3%
</TABLE>
9
<PAGE>
Premium Revenues
The following table indicates PMA Re's gross and net premiums written by major
category of business:
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Gross premiums written:
Casualty lines $ 34,331 $ 37,270 $117,620 $114,967
Property lines 21,789 16,452 58,705 51,021
Other lines 206 214 707 732
-------- -------- -------- --------
Total $ 56,326 $ 53,936 $177,032 $166,720
======== ======== ======== ========
Net premiums written:
Casualty lines $ 25,576 $ 32,744 $ 93,862 $ 98,271
Property lines 19,258 10,155 46,760 33,526
Other lines 185 214 676 725
-------- -------- -------- --------
Total $ 45,019 $ 43,113 $141,298 $132,522
======== ======== ======== ========
</TABLE>
Net premiums written increased $1.9 million, or 4.4%, and $8.8 million, or 6.6%,
for the three and nine months ended September 30, 1997, respectively, compared
to the same periods ended September 30, 1996. The main reasons for these
increases were new treaties resulting from a marketing program initiated in late
1996 which have resulted in increased participations on reinsurance treaties and
new programs with existing clients. These increases were partially offset by the
trend toward large ceding companies increasing their retentions, which
decreases PMA Re's subject premium, and highly competitive conditions in the
U.S. reinsurance market.
The majority of the growth in the net premiums written was in the property
lines, which increased 89.6% and 39.5% for the three and nine months ended
September 30, 1997, respectively, compared to the same periods in 1996. The net
increases in property lines primarily relate to an increased number of programs
added in the second half of 1996 and during 1997, primarily with existing
clients. The net written casualty premiums decreased 21.9% and 4.5% for the
three and nine months ended September 30, 1997, respectively, compared to the
same periods in 1996 as a result of the continuing competitive pressures. Net
premiums earned remained stable for the three months ended September 30, 1997
and increased 6.9% for the nine months ended September 30, 1997, compared to the
same periods in 1996. Net premiums earned generally follow growth patterns
similar to net premiums written with the earnings lag factored into the process.
Losses and Expenses
The following table reflects the components of PMA Re's combined ratios, as
computed under GAAP:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss ratio 72.7% 78.3% 73.0% 74.6%
------ ------ ------ ------
Expense ratio:
Amortization of deferred acquisition costs 24.5% 20.5% 24.0% 24.8%
Operating expenses 7.9% 6.0% 7.2% 5.7%
------ ------ ------ ------
Total expense ratio 32.4% 26.5% 31.2% 30.5%
------ ------ ------ ------
Combined ratio - GAAP (1) 105.1% 104.8% 104.2% 105.1%
------ ------ ------ ------
</TABLE>
10
<PAGE>
(1) The combined ratio computed on a GAAP basis is equal to losses and loss
adjustment expenses, plus amortization of deferred acquisition costs, plus
operating expenses, plus policyholders' dividends (where applicable), all
divided by net premiums earned.
PMA Re's loss ratio decreased 5.6 points and 1.6 points for the three and nine
months ended September 30, 1997, respectively, compared to the same periods in
1996. The decrease in the third quarter loss ratio in 1997 compared to the third
quarter of 1996 relates to the fact that PMA Re recorded additional favorable
development of unpaid losses and loss adjustment expenses in the third quarter
of 1997 which reduced the 1997 loss ratio.
The ratio of amortization of deferred acquisition costs to net premiums earned
(the Acquisition Expense Ratio) increased 4.0 points for the three months ended
September 30, 1997 and decreased 0.8 points for the nine months ended September
30, 1997, compared to the same periods in 1996. For the nine months ended
September 30, 1997, the ratio of amortization of deferred acquisition costs is
comparable to 1996, with a slight decrease related to the change in the mix of
business for PMA Re.
The ratio of operating expenses to net premiums earned increased 1.9 points and
1.5 points for the three and nine months ended September 30, 1997, respectively,
compared to the same periods in 1996. The increases are attributable to
increases in operating expenses, such as salaries and facility expenses, in
connection with the addition of staff and expansion of office facilities.
Net Investment Income
Net investment income increased $1.2 million and $3.9 million for the three and
nine months ended September 30, 1997, respectively, compared to the three and
nine months ended September 30, 1996. The increases are attributable to two
factors: (i) increases in the average invested assets, and (ii) changes in
portfolio holdings. During the first half of 1997, PMA Re shifted some of its
holdings from government securities to high-quality corporate securities, which
generally yield higher levels of investment income.
The Property and Casualty Group Results of Operations
Summarized financial results of the Property and Casualty Group for the three
and nine months ended September 30, 1997, are as follows:
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net premiums written:
Workers' compensation $ 43,824 $ 51,349 $ 145,611 $ 164,241
Commercial lines 15,644 22,283 65,849 63,762
--------- --------- --------- ---------
Total $ 59,468 $ 73,632 $ 211,460 $ 228,003
========= ========= ========= =========
Net premiums earned:
Workers' compensation $ 14,586 $ 45,480 $ 112,578 $ 146,299
Commercial lines 9,176 21,257 48,498 63,585
--------- --------- --------- ---------
Total $ 23,762 $ 66,737 $ 161,076 $ 209,884
Net investment income 20,304 19,823 62,206 62,225
Service revenues 2,674 2,642 7,712 6,654
--------- --------- --------- ---------
Operating revenues 46,740 89,202 230,994 278,763
--------- --------- --------- ---------
</TABLE>
11
<PAGE>
<TABLE>
<CAPTION>
(dollar amounts in thousands)
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Losses and LAE incurred 19,347 66,438 150,317 195,823
Acquisition and operating expenses 24,507 29,936 79,586 83,095
Policyholders' dividends 3,566 3,566 10,183 9,418
--------- --------- --------- ---------
Total losses and expenses 47,420 99,940 240,086 288,336
--------- --------- --------- ---------
Pre-tax operating loss $ (680) $ (10,738) $ (9,092) $ (9,573)
========= ========= ========= =========
GAAP loss ratio 81.4% 99.6% 93.3% 93.3%
GAAP combined ratio 189.3% 144.3% 144.7% 134.1%
SAP loss ratio 84.2% 77.9% 84.9% 81.1%
SAP combined ratio 120.7% 118.2% 119.3% 118.0%
</TABLE>
Premium Revenues
Direct premiums written for the Property and Casualty Group decreased $8.3
million and $2.1 million for the three months and nine months ended September
30, 1997, respectively, compared to the same periods ended September 30, 1996.
Direct premiums written for commercial lines of business other than workers'
compensation, such as commercial auto, general liability, umbrella, multi-peril
and commercial property lines (collectively, "Commercial Lines") decreased $2.8
million and increased $12.3 million for the three and nine months ended
September 30, 1997, respectively, compared to the same periods ended September
30, 1996. Direct premiums written for workers' compensation decreased $5.5
million and $14.4 million for the three and nine months ended September 30,
1997, respectively, compared to the same periods ended September 30, 1996. For
the three and nine months ended September 30, 1997, reinsurance premiums assumed
decreased $1.7 million and $2.6 million, respectively, compared to the same
periods ended September 30, 1996. Reinsurance premiums ceded increased $4.1
million and $11.8 million for the three and nine months ended September 30,
1997, respectively, compared to the same periods ended September 30, 1996.
For the three and nine months ended September 30, 1997, net premiums written
decreased $14.1 million and $16.5 million, respectively, compared to the same
periods ended September 30, 1996. Earned premiums decreased by $43.0 million and
$48.8 million for the three and nine months ended September 30, 1997,
respectively, compared to the same periods ended September 30, 1996. Net
premiums earned generally follow growth patterns similar to net premiums written
with the earnings lag factored into the process, absent any significant earned
premium adjustments as occurred in the three months ended September 30, 1997.
The primary reason for the decrease in net premiums earned relative to net
premiums written was a $37 million reduction of accrued retrospective premiums,
primarily due to commutation of claims for accident years 1991 and prior in 1997
and the re-estimation of claims liabilities for more recent accident years.
Accrued retrospective premiums were reduced approximately $9.0 million related
to policy years 1991 and prior and approximately $28.0 million for policy years
1992 to 1996. The reduction for policy years 1991 and prior primarily relates to
the commutation program for such years initiated in late 1996. In July 1997, the
Property and Casualty Group completed a formal program where it commuted a large
number of claims associated with workers' compensation claims from accident
years 1991 and prior, including loss reserves associated with retrospective
policies. The commutation program resulted in current payments to claimants
which were less than the carried reserves. As a result of the differences
between the current commutation payments to claimants and carried reserves on
such claims, management reduced its estimate of amounts recoverable under
retrospectively rated policies and also recognized a reduction in losses and LAE
associated with such policies (see "Losses and Expenses" below). The reduction
related to 1992 to 1996 policy years was primarily related to a corresponding
amount of favorable development of underlying loss reserves for such years. The
effects of the commutations on these prior loss reserves, as well as the intent
of the Property and Casualty Group to continue utilizing early intervention
techniques such as commutations on claims from more recent accident years, have
led to a re-estimation of policy liabilities for these more recent accident
years, and a re-estimation of amounts due under retrospectively rated policies
for these more recent accident years. The reduction in amounts due under
retrospectively rated policies resulting from commutation of the carried loss
reserves and re-
12
<PAGE>
estimation of more recent accident years acted to reduce the GAAP loss ratio for
the three and nine months ended September 30, 1997, as compared to the same
periods in 1996. Additionally, the reduction of earned premiums caused both the
GAAP expense ratio and the policyholder dividend ratio to increase for the three
and nine months ended September 30, 1997, as compared to the same periods in
1996. However, the impact of the reduction of the accrued retrospective premiums
(net of the adjustment to underlying loss reserves) on the Company's results of
operations was negligible.
The decrease in direct premiums written for workers' compensation was due
primarily to rate changes in Pennsylvania, the Property and Casualty Group's
principal business jurisdiction, continued changes in product mix toward
alternative market products and competitive conditions. Workers' compensation
reform laws adopted in Pennsylvania (Act 57) resulted in a reduction in manual
workers' compensation rates in excess of 25%, effective February 1997 for new
and renewal business. Act 57 is also expected to reduce the Property and
Casualty Group's loss and loss adjustment expenses for business written after
September 1996. The rate decreases resulting from these changes were partially
offset by an increase in exposures underwritten by the Property and Casualty
Group.
The Property and Casualty Group has continued its marketing of alternative
market workers' compensation products for larger accounts, including
large-deductible policies and providing excess coverage to self-insured groups.
Typically, the Property and Casualty Group receives a lower up-front premium for
these types of alternative market product plans. However, under this type of
business, the insured retains a greater share of the underwriting risk than
under rate-sensitive or loss-sensitive products, which reduces the potential for
unfavorable claim activity on the accounts and encourages loss control on the
part of the insured. A substantial portion of related revenues are recorded as
service revenues. Such service revenues increased $32,000 and $1.1 million for
the three and nine months ended September 30, 1997, respectively, compared to
the same periods in 1996.
Direct workers' compensation premiums written were also impacted by changes in
the level of premium adjustments, primarily related to audit premiums and
retrospective policies. For the three and nine months ended September 30, 1997,
such adjustments reduced premiums written by $5.1 million ($3.5 million in audit
premiums billed and $8.6 million in retrospective returns) and $6.8 million
($11.8 million in audit premiums billed and $18.6 million in retrospective
returns), respectively, while in the comparable 1996 periods, such adjustments
decreased premiums written by $3.3 million ($1.2 million in audit premiums
billed and $4.5 million in retrospective returns) and $1.2 million ($14.5
million in audit premiums billed and $15.7 million in retrospective returns),
respectively. These changes in premium adjustments billed in 1997 compared to
the same periods in 1996 were primarily due to the increase in retrospectively
rated premiums returned to insureds, resulting from the favorable loss
experience in more recent accident years in workers' compensation. These
adjustments do not impact earned premiums, as the effects of these changes have
been accrued while such policies were in force.
The Property and Casualty Group's direct writings of Commercial Lines decreased
$2.8 million for the three months ended September 30, 1997, but increased $12.3
million for the nine months ended September 30, 1997, compared to the same
periods in 1996. The increase for the nine months was primarily focused in the
property lines of business, which increased $12.6 million compared to the same
period in 1996, and was primarily due to the timing of policy renewals. The
decrease for the quarter was primarily due to a change in product mix
emphasizing the workers' compensation line of business.
For the three and nine months ended September 30, 1997, ceded premiums increased
$4.1 million and $11.8 million compared to the same periods in 1996. In 1997,
the Property and Casualty Group entered into a new reinsurance treaty that
covers substantially all Commercial Lines casualty business at a $175,000 per
risk attachment point, compared to a $500,000 per risk attachment point in 1996.
The effect of this new treaty, and the increased direct premiums written in
property lines, for which the Property and Casualty Group generally purchases
more reinsurance, caused ceded premiums to increase in the three and nine months
ended September 30, 1997, compared to the same periods in 1996.
13
<PAGE>
Losses and Expenses
The following table reflects the components of the Property and Casualty Group's
combined ratios, as computed under GAAP:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Loss ratio 81.4% 99.6% 93.3% 93.3%
------ ------ ------ ------
Expense ratio:
Amortization of deferred acquisition costs 44.1% 17.3% 22.8% 17.8%
Operating expenses 48.8% 22.1% 22.3% 18.5%
------ ------ ------ ------
Total expense ratio 92.9% 39.4% 45.1% 36.3%
------ ------ ------ ------
Policyholders' dividends 15.0% 5.3% 6.3% 4.5%
------ ------ ------ ------
Combined ratio - GAAP 189.3% 144.3% 144.7% 134.1%
------ ------ ------ ------
</TABLE>
For the three months ended September 30, 1997, the GAAP loss ratio decreased
18.2 points and for the nine months ended September 30, 1997, remained stable,
compared to the same periods in 1996. The commutation of claims from accident
years 1991 and prior and the re-estimation of claims liabilities for more recent
accident years resulting in favorable loss reserve development of $39 million,
as previously discussed, generated a decrease in the GAAP loss ratio of 11.3
points and 1.3 points for the three months and nine months ended September 30,
1997, respectively. Exclusive of the aforementioned changes, and the effect of
such changes on earned premiums and the savings on losses and expenses, the GAAP
loss ratio decreased by 6.9 points for the three months ended September 30,
1997, and increased by 1.3 points for the nine months ended September 30, 1997,
as compared to the same periods in 1996.
Excluding such effect from the commutation of claims from accident years 1991
and prior and the re-estimation of claims liabilities for more recent accident
years, the increase in the loss ratio of 1.3 points for the nine month period is
primarily due to an increase in the accretion of loss reserve discount in the
Property and Casualty Group's operations. In December 1996, the Property and
Casualty Group designated two of its insurance subsidiaries as run-off
companies, for the purpose of reinsuring the domestic property and casualty
primary insurance operations (the Pooled Companies) for substantially all of
accident years 1991 and prior workers' compensation indemnity reserves and
certain medical reserves. The domestic insurance run-off subsidiary, MASCCO,
reinsures only established Pennsylvania indemnity claims, while the offshore
insurance run-off subsidiary, PMA Cayman, reinsures both medical and indemnity
claims. The increase in accretion of discount is primarily due to the reserve
strengthening that the Property and Casualty Group recorded in December 1996.
Excluding such effect from the commutation of claims from accident years 1991
and prior and the re-estimation of claims liabilities for more recent accident
years, the decrease in the loss ratio of 6.9 points for the three month period
ended September 30, 1997, compared to the same period in 1996 is due to
environmental losses incurred in the third quarter of 1996, which increased the
loss ratio of such quarter, partially offset by the aforementioned accretion of
loss reserve discount in the Property and Casualty Group's run-off operations.
The GAAP expense ratio for the three and nine months ended September 30, 1997
was greater than that in the same periods in 1996 by 53.5 points and 8.8 points,
respectively. The aforementioned reduction of earned premiums associated with
commutations of and re-estimation of liabilities under retrospective policies
caused the expense ratio to increase by 56.6 points and 8.4 points,
respectively, for the three and nine months ended September 30, 1997, as
compared to the same periods in 1996. Excluding such effect, the GAAP expense
ratio decreased by 3.1 points for the three months ended September 30, 1997, and
increased by 0.4 points for the nine months ended September 30, 1997, as
compared to the same periods in 1996, due primarily to savings associated with
expense reduction initiatives
14
<PAGE>
implemented throughout 1997, offset by a third quarter charge of $1.0 million
and a year-to-date charge of $2.0 million associated with such initiatives
through September 1997.
The policyholder dividend ratios were 15.0% and 5.3% for the three months ended
September 30, 1997, and 1996, respectively, and 6.3% and 4.5% for the nine
months ended September 30, 1997, and 1996, respectively. Excluding the effect of
the reduction of accrued retrospective premiums previously discussed, the ratios
increased by 0.6 points for both the three and nine months ended September 30,
1997, as compared to the same periods in 1996, due to sliding-scale dividend
plans. Under such plans, the insured receives a dividend based upon the
collective loss experience of the plan. As the loss experience, as measured by
such plans, has improved in recent years, the Property and Casualty Group has
incurred higher policyholder dividends.
Net Investment Income
Net investment income was $20.3 million and $62.2 million for the three and nine
months ended September 30, 1997, respectively, compared to $19.8 million and
$62.2 million for the same periods in 1996. Net investment income remained
relatively stable primarily due to higher fixed income yields and lower
investment expenses, offset by lower average invested assets resulting from the
pay-down of loss reserves from prior accident years and decreasing premium
volume. The formal commutation program that the Property and Casualty Group
employed through July 1997 is expected to lower average invested asset balances
in 1997 relative to 1996.
Corporate Operations
The corporate segment is primarily comprised of corporate overhead and the
operations of the Company's properties. For the three and nine months ended
September 30, 1997, corporate operations experienced pre-tax operating losses
before interest expense of $1.0 million and $1.9 million, respectively, compared
to pre-tax operating income before interest expense of $453,000 for the three
months ended September 30, 1996 and pre-tax operating losses before interest
expense of $1.0 million for the nine months ended September 30, 1996. The higher
operating losses in 1997 compared to the same periods in 1996 relate to
increased operating costs related to certain corporate properties disposed of
during the third quarter of 1997. No material gain or loss was recorded with the
disposal of such properties.
Net Realized Investment Gains
The Company recorded net realized investment gains of $5.5 million for the three
months ended September 30, 1997, compared to net realized investment gains of
$6.0 million for the comparable 1996 period. Net realized investment gains for
the nine months ended September 30, 1997, were $3.6 million compared to $5.5
million for the 1996 comparable period. Gains and losses on the sale of
investments are recognized as a component of net income, but the timing and
recognition of such gains and losses are unpredictable and are not indicative of
future results.
Interest Expense and Income Taxes
Interest expense decreased $528,000 and $1.1 million for the three and nine
months ended September 30, 1997, respectively, compared to same periods in 1996.
These decreases were due to the refinancing of the Company's debt under the New
Credit Facility. See "Liquidity and Capital Resources" below. It is expected
that interest expense will decline in the fourth quarter of 1997 compared to
1996 due to the New Credit Facility. The Company's effective tax rate was 36.2%
and 10.7% for the three and nine months ended September 30, 1997, respectively,
compared to (42.6)% and 15.6% for the three and nine months ended September 30,
1996, respectively. In 1997, the tax rate was impacted by the favorable
resolution of certain tax issues, resulting in a $3.6 million reduction in the
provision for income taxes.
15
<PAGE>
Liquidity and Capital Resources
Liquidity
Liquidity is a measure of an entity's ability to secure enough cash to meet its
contractual obligations and operating needs. At the holding company level, the
Company requires cash to pay debt obligations and dividends to shareholders, pay
taxes to the federal government, as well as to capitalize subsidiaries from time
to time. The Company's primary sources of liquidity are dividends from
subsidiaries, net tax payments received from subsidiaries, and borrowings.
The Company paid interest of $3.5 million and $15.6 million for the three and
nine month periods ended September 30, 1997, respectively, compared to $4.2
million and $12.6 million for the three and nine month periods ended September
30, 1996, respectively. During the first three months of 1997, the Company made
debt repayments of $8.0 million on the revolving credit agreement before
refinancing all of its credit agreements not already maturing in 1997 with the
New Credit Facility. See "Capital Resources" below. The Company paid dividends
to shareholders of $2.0 million and $6.0 million for the three and nine months
ended September 30, 1997, compared to $2.0 million and $5.9 million for the
comparable periods in 1996, respectively.
Dividends paid from subsidiaries increased to $4.0 million and $12.0 million for
the three and nine months ended September 30, 1997, respectively, compared to no
dividends paid for the three months ended September 30, 1996, and $8.0 million
for the nine months ended September 30, 1996. Net tax cash flows from
subsidiaries were $5.5 million and $13.9 million for the three and nine months
ended September 30, 1997, respectively, compared to $5.4 million and $13.1
million for the three and nine months ended September 30, 1996, respectively.
The Company's domestic insurance subsidiaries' abilities to pay dividends to the
holding company is limited by the insurance laws and regulations of
Pennsylvania. Under such laws and regulations, dividends may not be paid without
prior approval of the Commissioner in excess of the greater of (i) 10% of
surplus as regards to policyholders as of the end of the preceding year or (ii)
statutory net income for the preceding year. Under this standard, PMA Re and the
Pooled Companies can pay an aggregate of $51.9 million of dividends, including
the $12.0 million already paid through September 30, 1997, without the prior
approval of the Commissioner, during 1997.
PMC's dividends to shareholders are restricted by its debt agreements. Based
upon the terms of the New Credit Facility, under the most restrictive debt
covenant, PMC would be able to pay dividends totaling approximately $11.0
million in 1997, including the $6.0 million already paid in 1997.
Management believes that the Company's sources of funds will provide sufficient
liquidity to meet its short-term and long-term obligations.
Capital Resources
The Company's total assets remained stable, decreasing to $3,066.4 million at
September 30, 1997, compared to $3,117.5 million at December 31, 1996. Total
investments decreased $58.7 million to $2,202.6 million at September 30, 1997.
This decrease is primarily attributable to the Property and Casualty Group's
pay-down of loss reserves from prior accident years. All other assets increased
$7.6 million, mainly due to an increase in reinsurance receivables of $36.5
million related to the new reinsurance treaty entered into by the Property and
Casualty Group (see "Premium Revenues" for the Property and Casualty Group
above) and increased ceded paid losses as of September 30, 1997, in comparison
to December 31, 1996. This increase was partially offset by a decrease in other
assets primarily related to the sale of certain corporate properties, the
collection of an outstanding federal tax refund receivable, and the reduction of
the deferred tax asset in conjunction with the reduction in unrealized
depreciation of investments during 1997.
Consolidated shareholders' equity at September 30, 1997, totaled $446.3 million
or $18.69 per share compared to $425.8 million or $17.86 per share at December
31, 1996. As a result of changes in market interest rates, the unrealized
depreciation of investments, net of tax, was $7.3 million at September 30, 1997,
compared to an unrealized
16
<PAGE>
depreciation of investments of $24.9 million at December 31, 1996, resulting in
an increase in shareholders' equity of $17.6 million or $0.74 per share.
On March 14, 1997 the Company refinanced its existing credit agreements through
the establishment of the New Credit Facility. The Company drew down $196.0
million from the New Credit Facility to pay off the following outstanding
balances:
<TABLE>
(dollar amounts in thousands)
<S> <C>
Senior notes 9.60% due 2001........................... $ 46,428
Senior notes 7.62% due 2001, Series A................. 71,000
Senior notes 7.62% due 2000, Series B................. 36,000
Revolving credit agreement, expiring 1998............. 36,000
--------
Total................................................. $189,428
========
</TABLE>
The New Credit Facility bears interest at LIBOR plus .70% on the utilized
portion, and carries a .275% facility fee on the unutilized portion. The margin
over LIBOR is adjustable downward based upon future reductions in the Company's
debt to capitalization ratio. The final expiration of the New Credit Facility
will be December 31, 2002, with level 25% reductions in availability each year
beginning December 31, 1999. At September 30, 1997, the Company had $203.0
million outstanding under the new credit facility, with $32.0 million available
for additional borrowings. Management also entered into an interest rate swap
agreement which is intended to manage the impact of the potential volatility of
the interest rate associated with the floating rates on the New Credit Facility.
The interest rate swap covers a notional principal amount of $150.0 million and
effectively converts the floating rate on such portion of the New Credit
Facility to a fixed rate of 7.24%.
The Company's interest rate swap agreement involves the exchange of interest
payment obligation without the exchange of underlying principal. The
differential to be paid or received is recognized as an adjustment of interest
expense. In the event that a counterparty fails to meet the terms of the
agreement, the Company's exposure is limited to the interest rate differential
on the notional principal amount ($150.0 million). Management believes such
credit risk is minimal and any loss would not be significant.
New Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board issued SFAS No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities." SFAS No. 125, which is effective for transfers and
extinguishments occurring after December 31, 1996, provides consistent standards
for distinguishing transfers of financial assets that are sales from transfers
that are secured borrowings. The Property and Casualty Group's domestic
insurance subsidiaries currently participate in a transfer arrangement of
certain accounts receivable. Such arrangement has been restructured as a result
of the adoption of SFAS No. 125. The restructuring of such arrangement did not
have a material impact on the Company's financial condition or results of
operations.
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128,
"Earnings Per Share," which supersedes Accounting Principles Board Opinion No.
15, "Earnings Per Share" and related interpretations. SFAS No. 128, which is
effective for financial statements for both interim and annual periods ending
after December 15, 1997, requires presentation of earnings per share by all
entities that have issued common stock or potential common stock if those
securities trade in a public market either on a stock exchange or in the
over-the-counter market, including securities quoted only locally or regionally.
SFAS No. 128 establishes a new calculation for earnings per share showing both
basic and diluted earnings per share. Basic earnings per share will be
calculated using only weighted average shares outstanding with no dilutive
impact from common stock equivalents while diluted earnings per share will be
calculated similar to the current fully diluted earnings per share calculation.
All prior period earnings per share amounts will be restated to be consistent
with the new requirements. If earnings per share had been calculated in
accordance with SFAS No. 128, the basic earnings per share for the three and
nine months ended September 30, 1997 would have been as follows:
17
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
----- ----- ------ -----
<S> <C> <C> <C> <C>
Income before extraordinary item $0.31 $0.11 $ 0.53 $0.39
Extraordinary item -- -- (0.20) --
----- ----- ------ -----
Net income $0.31 $0.11 $ 0.33 $0.39
===== ===== ====== =====
</TABLE>
18
<PAGE>
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
Exhibit 11.1: Statement of computation of earnings per share
Exhibit 27: Financial data schedule
(b) No reports on Form 8-K were filed during the quarter ended September 30,
1997.
19
<PAGE>
Signatures
Pursuant to the requirements of Section 12 of the Securities Exchange Act of
1934, the Company has duly caused this registration statement to be signed on
its behalf by the undersigned, thereunto duly authorized.
PENNSYLVANIA MANUFACTURERS
CORPORATION
Date: 11/12/97 By: /s/ Francis W. McDonnell
-------- --------------------------
Francis W. McDonnell, Senior Vice
President, Chief Financial Officer and
Treasurer
20
<PAGE>
Pennsylvania Manufacturers Corporation
Exhibit 11
Computation of Earnings Per Share
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
Years ended December 31, September 30,
(in thousands, except per share data) 1996 1995 1994 1997 1996
---------------------------------------- -----------------------------
<S> <C> <C> <C> <C> <C>
Primary:
Weighted average shares outstanding 23,800,791 23,815,871 23,808,847 23,870,089 23,772,718
Net effect of dilutive stock options - based
on the treasury stock method using average
market price -- 893,160 841,894 639,999 977,962
---------------------------------------- -----------------------------
Total primary common shares 23,800,791 24,709,031 24,650,741 24,510,088 24,750,680
======================================== =============================
Net (loss) income before extraordinary item $ (135,334) $ 24,130 $ 57,250 $ 7,344 $ 2,456
Extraordinary loss -- -- -- -- --
---------------------------------------- -----------------------------
Net (loss) income $ (135,334) $ 24,130 $ 57,250 $ 7,344 $ 2,456
======================================== =============================
Net (loss) income per common and equivalent share
before extraordinary item $ (5.68) $ 0.97 $ 2.32 $ 0.30 $ 0.10
Extraordinary item -- -- -- -- --
---------------------------------------- -----------------------------
Net (loss) income per common and equivalent share $ (5.68) $ 0.97 $ 2.32 $ 0.30 $ 0.10
======================================== =============================
Fully diluted:
Weighted average shares outstanding 23,800,791 23,815,871 23,808,847 23,870,089 23,772,718
Net effect of dilutive stock options - based
on the treasury stock method using average
market price or end of period market price -- 1,118,708 841,894 760,566 1,010,357
---------------------------------------- -----------------------------
Total fully diluted common shares 23,800,791 24,934,579 24,650,741 24,630,655 24,783,075
======================================== =============================
Net (loss) income before extraordinary item $ (135,334) $ 24,130 $ 57,250 $ 7,344 $ 2,456
Extraordinary loss -- -- -- -- --
---------------------------------------- -----------------------------
Net (loss) income $ (135,334) $ 24,130 $ 57,250 $ 7,344 $ 2,456
======================================== =============================
Net (loss) income per common and equivalent share
before extraordinary item $ (5.68) $ 0.96 $ 2.32 $ 0.30 $ 0.10
Extraordinary item -- -- -- -- --
---------------------------------------- -----------------------------
Net (loss) income per common and equivalent share $ (5.68) $ 0.96 $ 2.32 $ 0.30 $ 0.10
======================================== =============================
<CAPTION>
Nine Months Ended
September 30,
1997 1996
-----------------------------
<S> <C> <C>
Primary:
Weighted average shares outstanding 23,845,194 23,807,704
Net effect of dilutive stock options - based
on the treasury stock method using average
market price 634,572 1,058,992
-----------------------------
Total primary common shares 24,479,766 24,866,696
=============================
Net (loss) income before extraordinary item $ 12,621 $ 9,201
Extraordinary loss (4,734) --
-----------------------------
Net (loss) income $ 7,887 $ 9,201
=============================
Net (loss) income per common and equivalent share
before extraordinary item $ 0.51 $ 0.37
Extraordinary item (0.19) --
-----------------------------
Net (loss) income per common and equivalent share $ 0.32 $ 0.37
=============================
Fully diluted:
Weighted average shares outstanding 23,845,194 23,807,704
Net effect of dilutive stock options - based
on the treasury stock method using average
market price or end of period market price 760,566 1,058,992
-----------------------------
Total fully diluted common shares 24,605,760 24,866,696
=============================
Net (loss) income before extraordinary item $ 12,621 $ 9,201
Extraordinary loss (4,734) --
-----------------------------
Net (loss) income $ 7,887 $ 9,201
=============================
Net (loss) income per common and equivalent share
before extraordinary item $ 0.51 $ 0.37
Extraordinary item (0.19) --
-----------------------------
Net (loss) income per common and equivalent share $ 0.32 $ 0.37
=============================
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1997
<PERIOD-START> JAN-01-1996 JAN-01-1997
<PERIOD-END> DEC-31-1996 SEP-30-1997
<DEBT-HELD-FOR-SALE> 2,126,120 2,060,521
<DEBT-CARRYING-VALUE> 0 0
<DEBT-MARKET-VALUE> 0 0
<EQUITIES> 262 261
<MORTGAGE> 0 0
<REAL-ESTATE> 0 0
<TOTAL-INVEST> 2,261,353 2,202,645
<CASH> 7,176 1,895
<RECOVER-REINSURE> 257,983 294,506
<DEFERRED-ACQUISITION> 44,006 49,033
<TOTAL-ASSETS> 3,117,516 3,066,361
<POLICY-LOSSES> 2,091,072 1,989,160
<UNEARNED-PREMIUMS> 205,982 239,112
<POLICY-OTHER> 0 0
<POLICY-HOLDER-FUNDS> 12,524 10,704
<NOTES-PAYABLE> 204,699 203,000
0 0
0 0
<COMMON> 121,716 121,716
<OTHER-SE> 304,112 324,548
<TOTAL-LIABILITY-AND-EQUITY> 3,117,516 3,066,361
420,575 285,371
<INVESTMENT-INCOME> 133,936 102,812
<INVESTMENT-GAINS> 2,984 3,600
<OTHER-INCOME> 9,189 7,712
<BENEFITS> 536,623 240,919
<UNDERWRITING-AMORTIZATION> 90,292 66,562
<UNDERWRITING-OTHER> 114,111 65,853
<INCOME-PRETAX> (191,394) 14,136
<INCOME-TAX> (56,060) 1,515
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 (4,734)
<CHANGES> 0 0
<NET-INCOME> (135,334) 7,887
<EPS-PRIMARY> (5.68) 0.32
<EPS-DILUTED> (5.68) 0.32
<RESERVE-OPEN> 0 0
<PROVISION-CURRENT> 0 0
<PROVISION-PRIOR> 0 0
<PAYMENTS-CURRENT> 0 0
<PAYMENTS-PRIOR> 0 0
<RESERVE-CLOSE> 0 0
<CUMULATIVE-DEFICIENCY> 0 0
</TABLE>
