=================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------------
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1995
Commission File Number 1-7461
ACCEPTANCE INSURANCE COMPANIES INC.
(Exact Name of Registrant As Specified in Its Charter)
DELAWARE 31-0742926
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
222 S. 15th Street, Suite 600 North
Omaha, Nebraska 68102
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code:
(402) 344-8800
________
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
------------------- ---------------------
Common Stock $.40 Par Value New York Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act:
None
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or 15(d) of
the Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the Registrant has been
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent
filers pursuant to Item 405 of Regulation S-K is not contained
herein, and will not be contained, to the best of Registrant's
knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the Registrant's voting
stock held by non-affiliates (10,289,522 shares) on March 25,
1996 was $14.625.
The number of shares of each class of the Registrant's
common stock outstanding on March 25, 1996 was:
Class of Common Stock No. of Shares Outstanding
--------------------- -------------------------
Common Stock, $.40 Par Value 15,143,470
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's
1996 Annual Meeting of Shareholders are incorporated by reference
into Part III.
<PAGE>
GLOSSARY OF INSURANCE TERMS
Admitted insurer: An insurance company licensed by a
state regulatory authority to transact insurance business in that
state. An admitted insurer is subject to the rules and
regulations of each state in which it is licensed governing
virtually all aspects of its insurance operations and financial
condition. A non-admitted insurer, also known as an excess and
surplus lines insurer, is not licensed to transact insurance
business in a given state but may be permitted to write certain
business in that state in accordance with the provisions of
excess and surplus lines insurance laws which generally involve
less rate, form and operational regulation.
Basic Coverage: The minimum available level of Multi-
Peril Crop Insurance, providing coverage for 50% of a farmer's
historical yield for eligible crops at 60% of the price per
bushel for such crop set by the CFSA. This coverage is offered
through private insurers and USDA field offices.
Buy-up Coverage: Multi-Peril Crop Insurance policy
providing coverage in excess of that provided by Basic Coverage.
Buy-up Coverage is offered only through private insurers.
Case Reserve: The estimated liability for loss
established by a claims examiner for a reported claim.
Combined ratio: The sum of the expense ratio and the
loss ratio determined in accordance with GAAP or SAP.
Consolidated Farm Service Agency ("CFSA"): A division
of the USDA which administers and provides reinsurance for the
federally-regulated MPCI program, formerly known as the Federal
Crop Insurance Corporation.
Direct written premiums: Total premiums collected in
respect of policies issued by an insurer during a given period
without any reduction for premiums ceded to reinsurers.
Excess and surplus lines insurance: The business of
insuring risks for which insurance is unavailable from admitted
insurers in whole or in part. Such business is placed by the
broker or agent with nonadmitted insurers in accordance with the
excess and surplus lines provisions of state insurance laws.
Excess of loss reinsurance: A form of reinsurance
whereby the reinsurer, subject to a specified limit, agrees to
indemnify the ceding company for the amount of each loss, on a
defined class of business, that exceeds a specified retention.
Expense ratio: Under statutory accounting, the ratio
of underwriting expenses to net premiums written. Under GAAP
accounting, the ratio of underwriting expenses to net premiums
earned.
Generally Accepted Accounting Principles ("GAAP"):
Accounting practices as set forth in opinions and pronouncements
of the Accounting Principles Board of American Institute of
Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board and which are applicable
in the circumstances as of the date in question.
Gross written premiums: Direct written premiums plus
premiums collected in respect of policies assumed, in whole or in
part, from other insurance carriers.
Incurred but not reported ("IBNR") reserves: The
liability for future payments on losses which have already
occurred but have not yet been reported to the insurer. IBNR
reserves include LAE (as hereinafter defined) related to such
losses and may also provide for future adverse loss development
on reported claims.
Insurance Regulatory Information System ("IRIS"): A
system of ratio analysis developed by the NAIC primarily intended
to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of
insurance companies.
Loss adjustment expenses ("LAE"): Expenses incurred in
the settlement of claims, including outside adjustment expenses,
legal fees and internal administrative costs associated with the
claims adjustment process, but not including general overhead
expenses.
Loss ratio: The ratio of losses and LAE incurred to
premiums earned.
Loss reserves: Liabilities established by insurers to
reflect the ultimate estimated cost of claim payments as of a
given date.
MPCI Imputed Premium: For purposes of the profit/loss
sharing arrangement with the federal government, the amount of
premiums credited to the Company for all Basic Coverages it
sells, as such amount is determined by formula.
MPCI Premium: For purposes of the profit/loss sharing
arrangement with the federal government, the amount of premiums
credited to the Company for all Buy-up Coverages paid by farmers,
plus the amount of any related federal premium subsidies.
MPCI Retention: The aggregate amount of MPCI Premium
and MPCI Imputed Premium on which the Company retains risk after
allocating farms to the three federal reinsurance pools.
Multi-Peril Crop Insurance ("MPCI"): A federally-
regulated subsidized crop insurance program that insures a
producer of crops with varying levels of protection against
substantially all natural perils to growing crops.
NAIC: The National Association of Insurance
Commissioners.
Net earned premiums: The portion of net written
premiums applicable to the expired period of policies and,
accordingly, recognized as income during a given period.
Net written premiums: Total premiums for insurance
written (less any return premiums) during a given period, reduced
by premiums ceded in respect to liability reinsured by other
carriers.
Policyholders' or Statutory surplus: As determined
under SAP (hereinafter defined), the excess of total admitted
assets over total liabilities.
Quota share reinsurance: A form of reinsurance whereby
the reinsurer agrees to indemnify the cedent for a stated
percentage of each loss, subject to a specified limit the cedent
pays, on a defined class of business.
Reinsurance: The practice whereby a company called the
"reinsurer" assumes, for a share of the premium, all or part of a
risk originally undertaken by another insurer called the "ceding"
company or "cedent." Reinsurance may be affected by "treaty"
reinsurance, where a standing agreement between the ceding and
reinsuring companies automatically covers all risks of a defined
category, amount and type, or by "facultative" reinsurance where
reinsurance is negotiated and accepted on a risk-by-risk basis.
Retention: The amount of liability, premiums or losses
which an insurance company keeps for its own account after
application of reinsurance.
Stop loss reinsurance: A form of reinsurance, similar
to Excess of Loss Reinsurance, whereby the primary insurer caps
its loss on a particular risk by purchasing in excess of such
cap.
Statutory Accounting Principles ("SAP"): Accounting
practices which consist of recording transactions and preparing
financial statements in accordance with the rules and procedures
prescribed or permitted by state regulatory authorities.
Statutory accounting emphasizes solvency rather than matching
revenues and expenses during an accounting period.
<PAGE>
PART I
Item 1. BUSINESS.
Company Strategy
Acceptance underwrites and sells specialty property and
casualty insurance coverages that serve niche markets or
programs. The Company selects niche markets or programs for
which the Company believes that its expertise affords it a
competitive advantage and which integrate into a diversified-risk
portfolio of coverages. The Company's goal is to achieve
underwriting results better than the industry average, while
managing its investment portfolio to maximize after-tax yield and
at the same time emphasize stability and capital preservation
while maintaining adequate liquidity to meet all cash needs.
The Company believes that its success in niche markets
and programs requires that it be opportunistic. The Company
believes its position as both an admitted (licensed) and non-
admitted (excess and surplus lines) carrier provides the
versatility to respond when different market conditions and
opportunities are presented. At the same time, the Company
manages loss exposure by diversifying its portfolio of coverages
and maintaining reinsurance programs with the goal of reducing
volatility as well as mitigating catastrophic or large loss
exposure.
The Company has experienced significant revenue growth
over the last five years through growth in existing programs and
through acquisition of insurance operations or books of business.
The Company regularly explores new opportunities where it has or
can acquire experienced underwriters and other managers with a
long and successful operating history in a particular line of
business. A significant acquisition in July 1993 was The Redland
Group, Inc., a leading writer of crop insurance, and crop
insurance has become one of the Company's major operating
divisions.
Organization
The Company underwrites its insurance products through
six wholly-owned insurance company subsidiaries; Acceptance
Insurance Company ("Acceptance Insurance"), Acceptance Indemnity
Insurance Company ("Acceptance Indemnity"), Acceptance Casualty
Insurance Company ("Acceptance Casualty"), American Growers
Insurance Company ("American Growers"), Redland Insurance Company
("Redland"), and Phoenix Indemnity Insurance Company ("Phoenix
Indemnity") (collectively referred to herein as the "Insurance
Companies").
Collectively, the Insurance Companies are admitted in
45 states and the District of Columbia, and operate on a non-
admitted basis in 42 states, the District of Columbia and the
Virgin Islands. Each of the Insurance Companies is rated A-
(Excellent) by A.M. Best, with the exception of American Growers
to which the A.M. Best rating system does not apply and
Acceptance Casualty to which the A.M. Best rating has not yet
been assigned. A.M. Best bases its ratings upon factors that
concern policyholders and agents, and not upon factors concerning
investor protection.
The Company's insurance agency and insurance service
subsidiaries principally write and service insurance coverages
placed with one of the Insurance Companies, while one agency
writes truck insurance coverages for other insurers.
Business Segments
The Company has organized its insurance underwriting
and marketing business by product line into four divisions,
General Agency, Crop Insurance, Program Insurance and Non-
Standard Automobile.
General Agency
Specialty insurance coverages written by the General
Agency Division include the following principal lines:
Specialty Automobile, including liability and
physical damage coverages for local haulers of specialized
freight, and other classes of motor vehicles not normally
underwritten by standard carriers.
Excess and Surplus Lines Liability and Substandard
Property Coverages, including general liability, garage
excess liability, liquor liability, property and commercial
multi-peril coverages for small businesses which normally do
not satisfy the underwriting criteria of standard carriers.
Complex General Liability Risks, including
products and professional liability.
Crop Insurance
The two principal lines of the Company's crop insurance
division are Multi-Peril Crop Insurance or MPCI, and crop hail
insurance. MPCI is a federally-subsidized program which provides
farmers with coverage for crop damage from substantially all
natural perils. For the year ended December 31, 1995, the
Company was the fourth largest writer of MPCI business in the
United States with a market share of approximately 14%.
The Company offers stand alone crop hail insurance,
which insures growing crops against damage resulting from hail
storms and which involves no federal participation. The Company
also sells a small volume of insurance against damage to specific
crops from other named perils.
Program Insurance
This division writes a number of diversified coverages,
including coverages for transportation risks, focused workers'
compensation, standard property and casualty coverages for the
rural market, temporary help agencies, greyhound race tracks,
condominiums, fine arts risks, auto daily rental and auto
dealers.
Transportation coverages insure long haul truckers and
upper Midwest regional and national trucking companies hauling
rural products. The workers' compensation program is based
principally in Minnesota, Illinois, Iowa, and Maine and focuses
principally on medium and larger risks where specialized
underwriting and claims techniques can be effectively implemented
to reduce loss ratios.
Non-Standard Automobile
The Company writes non-standard private passenger
automobile coverages principally in the southwestern United
States. The Company has designed this product for drivers who
are unable to obtain coverage from standard carriers due to prior
driving records, other underwriting criteria or market
conditions. Such drivers normally are charged higher premium
rates than the rates charged for preferred or standard risk
drivers and usually purchase only basic limits of liability in
order to meet state financial responsibility laws.
The following table reflects the amount of net written
premium for these four insurance segments for the periods set
forth below.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1995 1994 1993(1)
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
General Agency $135,125 $114,635 $ 75,613
Crop Insurance(2) 46,950 34,592 4,581
Program Insurance 75,279 50,070 26,108
Non-Standard Auto 28,829 29,879 31,203
-------- -------- --------
Total $286,183 $229,176 $137,505
======== ======== ========
<FN>
- ---------------
(1) Crop insurance and certain rural property and casualty
premiums are included beginning July 1, 1993, with the
acquisition of Redland.
(2) For a discussion of the accounting treatment of MPCI
premiums, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - General."
</FN>
</TABLE>
Marketing
The Company markets its property and casualty insurance
products through a network of independent general agents who, in
turn, process and accept applications for insurance coverages
from retail agents who sell insurance to insurance buyers. The
Company also markets a portion of its property and casualty
insurance products and its crop insurance products through a
network of retail agents which specialize in the lines of
insurance marketed by them.
Combined Ratios
The statutory combined ratio, which reflects
underwriting results before taking into account investment
income, is a traditional measure of the underwriting performance
of a property and casualty insurer. A combined ratio of less
than 100% indicates underwriting profitability whereas a combined
ratio in excess of 100% indicates unprofitable underwriting. The
following table reflects the loss ratios, expense ratios and
combined ratios of the Company (separately stated to include and
exclude MPCI and other crop insurance) and the property and
casualty insurance industry, computed in accordance with SAP, for
the periods shown.
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1995 1994 1993
------ ------ ------
<S> <C> <C> <C>
The Company (including crop insurance)
Loss Ratio 78.2%(1) 70.8% 78.4%
Expense Ratio 26.1 25.6 28.8
----- ----- -----
Combined Ratio 104.3% 96.4% 107.2%
===== ===== =====
The Company (excluding crop insurance)
Loss Ratio 80.6%(2) 72.2% 74.9%
Expense Ratio 31.2 30.4 30.1
----- ----- -----
Combined Ratio 111.8% 102.6% 105.0%
===== ===== =====
Industry Average(3)
Loss Ratio 78.8% 81.1% 79.5%
Expense Ratio 27.6 27.3 27.4
----- ----- -----
Combined Ratio 106.4% 108.4% 106.9%
===== ===== =====
<PAGE>
<FN>
- ---------------
(1) The $22.3 million loss reserve strengthening taken by the
Company in 1995 accounts for 8.2% of the loss ratio for
1995. See "Loss and Loss Adjustment Expense Reserves."
(2) The $22.3 million loss reserve strengthening taken by the
Company in 1995 accounts for 9.9% of the loss ratio for
1995. See "Loss and Loss Adjustment Expense Reserves."
(3) Source: Best's Aggregates & Averages - Property Casualty
(1995 Edition). Ratios for 1995 are from A.M. Best.
</FN>
</TABLE>
Underwriting
The Company's goal is to yield underwriting results
better than industry averages. To accomplish this, the Company
organizes its underwriting staff by product line, enabling
underwriters to focus on the unique risks associated with the
specialty coverages written by the Company. The Company seeks to
ensure that each specialty product or program fits into the
Company's goal through a strategic planning process whereby
divisional managers evaluate the historical and expected levels
of underwriting profitability of the coverages written by such
division. The Company then allocates its capital among product
lines where it believes the best underwriting opportunities
exist.
Within each division, each underwriter is required to
comply with risk parameters, retention limits and rates and forms
prescribed by the Company. All underwriting operations of the
Company are subject to special periodic audit by the Company's
home office personnel and the reinsurers which accept a portion
of these risks.
Generally, the Company grants general agents the
authority to sell and bind insurance coverages in accordance with
detailed procedures and limitations established by the Company.
The Company promptly reviews coverages bound by agents, decides
whether the insurance is written in accordance with such
procedures and limitations, and, subject to state law limits and
policy terms, may cancel coverages that are not in compliance.
Within the General Agency Division, Acceptance Risk
Managers and Professional Liability Insurance Managers, who write
more difficult casualty and professional lines business, grant no
authority to general agents but rather each risk must be
submitted to the underwriter for individual consideration.
The Company grants limited binding authority to certain
independent agents in certain lines of business, and provides
that all other agents submit all quotes to the Company's
underwriting staff in order for such coverages to be bound.
Business that is outside an agent's binding authority must be
submitted to the Company's underwriting staff to obtain approval
to bind such coverages.
Claims
The Company's claims department administers all claims
and directs all legal and adjustment aspects of the claims
handling process. To assist in settling claims the Company
regularly uses independent adjusters, attorneys and
investigators. Recently, the Company reorganized its claims
department under two recently appointed senior claims vice
presidents. The first, employed in 1993, supervises litigation
claims files and other complex and serious claims; the second,
employed in 1996, administers the other claim files and
supervises the claims handlers. Under the new structure, the
Company will emphasize the use of internal staff rather than
independent adjusters, improving claims processing systems and
rapid response mechanisms. The Company believes that the new
structure will help to reduce loss adjustment expense, shorten
the life of open claim files and permit the Company to estimate
more rapidly and consistently future claim liabilities.
Loss and Loss Adjustment Expense Reserves
In the property and casualty insurance industry, it is
not unusual for significant periods of time, ranging up to
several years, to elapse between the occurrence of an insured
loss, the report of the loss to the insurer and the insurer's
payment of that loss. The liability for losses and loss
adjustment expenses is determined by management based on
historical patterns and expectations of claims reported and paid,
losses which have occurred but which are not yet reported, trends
in claim experience, information available on an industry-wide
basis, changes in the Company's claim handling procedures and
premium rates. The Company's lines of specialty insurance
business are considered less predictable than standard insurance
coverages. The effects of inflation are implicitly reflected in
these loss reserves through the industry data utilized in
establishing such reserves. The Company does not discount its
reserves to estimated present value for financial reporting
purposes.
In examining reserve adequacy, historical data is
reviewed, and, as additional experience and other data become
available and is reviewed, these estimates and judgments are
revised, resulting in increases or decreases to reserves for
insured events of prior years. In 1995, the Company made an
additional provision through a charge to earnings of $22.3
million for its reestimated liability for losses and loss
adjustment expenses for 1994 and prior accident years. The
liability established represents management's best estimate and
is based on sources of currently available evidence including an
analysis prepared by an independent actuary engaged by the
Company. Even with such extensive analyses, the Company believes
it is reasonably possible that its ultimate liability may vary by
five percent.
The Company annually obtains an independent review of
its loss reserving process and reserve estimates by a independent
professional actuary as part of the annual audit of its financial
statements.
The following table presents an analysis of the
Company's reserves, reconciling beginning and ending reserve
balances for the periods indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1995 1994 1993
-------- -------- --------
<S> <C> <C> <C>
Net loss and loss adjustment
expense reserves at beginning
of year $141,514 $115,714 $ 77,627
-------- -------- --------
Net loss and loss adjustment
expense reserves of Redland
at date of acquisition -- -- 13,499
-------- -------- --------
Provisions for net losses and
loss adjustment expenses for
claims occurring in the current
year 190,019 137,881 90,250
Increase in net reserves for
claims occurring in prior years 22,318 5,070 2,555
-------- -------- --------
212,337 142,951 92,805
-------- -------- --------
Net losses and loss adjustment
expenses paid for claims
occurring during:
The current year (80,281) (60,375) (40,209)
Prior years (72,214) (56,776) (28,008)
-------- -------- --------
(152,495) (117,151) (68,217)
-------- -------- --------
Net loss and loss adjustment
expense reserves at end of year 201,356 141,514 115,714
Reinsurance recoverable on unpaid
losses and loss adjustment
expenses 167,888 79,811 95,886
-------- -------- --------
Gross loss and loss adjustment
expense reserves $369,244 $221,325 $211,600
======== ======== ========
</TABLE>
The following table presents the development of balance
sheet net loss reserves from calendar years 1985 through 1995.
The top line of the table shows the loss reserves at the balance
sheet date for each of the indicated years. These amounts are
the estimates of losses and loss adjustment expenses for claims
arising in all prior years that are unpaid at the balance sheet
date, including losses that had been incurred but not yet
reported to the Company. The middle section of the table shows
the cumulative amount paid, expressed as a percentage of the
initial reserve amount, with respect to previously recorded
reserves as of the end of each succeeding year. The lower
section of the table shows the reestimated amount, expressed as a
percentage of the initial reserve amount, of the previously
recorded reserves based on experience as of the end of each
succeeding year. The estimate changes as more information
becomes known about the frequency and severity of claims for
individual years. The "Net cumulative redundancy (deficiency)"
caption represents the aggregate percentage increase (decrease)
in the initial reserves estimated. It should be noted that the
table presents "run off" of balance sheet reserves, rather than
accident or policy year loss development. The Company computes
the cumulative redundancy (deficiency) annually on a calendar
year basis.
The establishment of reserves is an inherently
uncertain process. The Company underwrites both property and
casualty coverages in a number of specialty areas of business
which may involve greater risks than standard property and
casualty lines. These risk components may make more difficult
the task of estimating reserves for losses, and cause the
Company's underwriting results to fluctuate. Further, conditions
and trends that have affected the development of loss reserves in
the past may not necessarily occur in the future. Accordingly,
it may not be appropriate to extrapolate future redundancies or
deficiencies based on this information.
The Company adopted Statement of Financial Accounting
Standards No. 113 ("SFAS #113"), "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts,"
effective January 1, 1993. The effect of the application of SFAS
#113 resulted in the reclassification of amounts ceded to
reinsurers, which amounts were previously reported as a reduction
in unearned premium and unpaid losses and loss adjustment
expenses, to assets on the consolidated balance sheet. The table
below includes a reconciliation of net loss and loss adjustment
expense reserves to amounts presented on the consolidated balance
sheet after reclassifications related to the adoption of SFAS
#113. The gross cumulative deficiency is presented for 1992
through 1994, the only years on the table for which the Company
has restated amounts in accordance with SFAS #113.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------------------------
1985 1986 1987 1988 1989 1990
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net reserves for unpaid
losses and loss
adjustment expenses $ 7,894 $17,373 $27,730 $34,092 $43,380 $58,439
Cumulative amount of net
liability paid through:
One year later 48.9% 32.5% 30.6% 30.5% 30.0% 40.6%
Two years later 81.2% 63.1% 56.7% 52.1% 59.5% 70.8%
Three years later 109.1% 84.7% 72.9% 68.7% 76.1% 88.5%
Four years later 125.0% 93.4% 81.8% 77.0% 84.5% 101.2%
Five years later 126.3% 100.1% 84.7% 81.5% 89.2% 107.5%
Six years later 128.2% 100.5% 87.1% 85.3% 93.4%
Seven years later 128.1% 100.9% 88.2% 89.8%
Eight years later 128.4% 102.2% 95.0%
Nine years later 128.8% 112.4%
Ten years later 142.2%
Net reserves reestimated as of:
One year later 110.5% 99.3% 96.6% 97.9% 99.1% 100.3%
Two years later 120.2% 104.7% 97.6% 92.3% 95.2% 102.3%
Three years later 134.1% 107.3% 91.3% 87.3% 91.4% 107.4%
Four years later 134.4% 103.0% 89.7% 84.9% 92.5% 110.7%
Five years later 129.5% 103.6% 88.1% 85.3% 94.0% 112.7%
Six years later 129.9% 102.5% 88.8% 86.6% 95.9%
Seven years later 129.0% 102.7% 88.9% 91.0%
Eight years later 128.9% 103.0% 95.4%
Nine years later 129.6% 112.7%
Ten years later 142.9%
Net cumulative redundancy
(deficiency) -42.9% -12.7% 4.6% 9.0% 4.1% -12.7%
<PAGE>
Gross reserves for unpaid loss and
loss adjustment expenses
Reinsurance recoverable on unpaid
loss and loss adjustment expenses
Net reserves for unpaid loss and
loss adjustment expenses
Reestimated gross reserves for unpaid
loss and loss adjustment expenses
Reestimated reinsurance recoverable
on unpaid loss and loss adjustment
expenses
Reestimated net reserves for unpaid
loss and loss adjustment expenses
Gross cumulative redundancy (deficiency)
<PAGE>
<CAPTION>
Years Ended December 31,
--------------------------------------------------------
1991 1992 1993 1994 1995
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net reserves for unpaid
losses and loss
adjustment expenses $ 66,132 $ 77,627 $115,714 $141,514 $201,356
Cumulative amount of net
liability paid through:
One year later 45.7% 36.1% 49.1% 51.0%
Two years later 72.3% 73.6% 80.5%
Three years later 96.6% 94.5%
Four years later 108.1%
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Net reserves reestimated as of:
One year later 103.5% 103.3% 104.4% 115.8%
Two years later 109.9% 109.7% 114.5%
Three years later 116.9% 117.9%
Four years later 120.1%
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Net cumulative redundancy
(deficiency) -20.1% -17.9% -14.5% -15.8%(1)
<PAGE>
Gross reserves for unpaid loss and
loss adjustment expenses $127,666 $211,600 $221,325 $369,244
Reinsurance recoverable on unpaid
loss and loss adjustment expenses 50,039 95,886 79,811 167,888
------- ------- ------- -------
Net reserves for unpaid loss and
loss adjustment expenses 77,627 115,714 $141,514 $201,356
=======
Reestimated gross reserves for unpaid
loss and loss adjustment expenses 110.4% 113.8% 115.1%
Reestimated reinsurance recoverable on
unpaid loss and loss adjustment
expenses 98.9% 112.9% 114.0%
------- ------- -------
Reestimated net reserves for unpaid loss
and loss adjustment expenses 117.9% 114.5% 115.8%
------- ------- -------
Gross cumulative redundancy (deficiency) -10.4% -13.8% -15.1%
======= ======= =======
<PAGE>
<FN>
- ---------------
(1) Cumulative deficiencies appearing in the Company's reserve estimates for 1994 resulted from
adverse development of losses occurring in 1994 and prior accident years primarily in its
commercial automobile, general liability and commercial multi-peril lines of business. The
actual loss experience of these lines differed from estimated losses. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations - Year Ended December
31, 1995 Compared To Year Ended December 31, 1994".
</FN>
</TABLE>
<PAGE>
Reinsurance
A significant component of the Company's business
strategy involves the structuring of reinsurance to reduce
volatility in its business segments as well as to avoid large or
catastrophic loss exposure. Reinsurance involves an insurance
company transferring, or ceding, all or a portion of its exposure
on insurance to a reinsurer. The reinsurer assumes the ceded
exposure in return for a portion of the premium received by the
insurance company. Reinsurance does not discharge the insurer
from its obligations to its insured. If the reinsurer fails to
meet its obligations, the ceding insurer remains liable to pay
the insured, but the reinsurer is liable to the ceding insurer to
the extent of the reinsured portion of any loss.
The Company limits its exposure under individual
policies by purchasing excess of loss and quota share
reinsurance, as well as maintaining catastrophe reinsurance to
protect against catastrophic occurrences where claims can arise
under several policies from a single event, such as a hurricane,
earthquake, wind storm, riot, tornado or other extraordinary
event.
The Company generally retains the first $500,000 of
risk under its casualty lines, ceding the next $2,500,000 to
reinsurers; and 25% of the first $500,000 of risk under its
property lines, ceding the other 75% to reinsurers and the next
$500,000 per risk to other reinsurers. The Company maintains a
separate 70% quota share treaty for the complex general liability
and products and professional liability lines it writes. To the
extent that individual policies in any line exceed reinsurance
treaty limits, the Company purchases reinsurance on a facultative
(specific policy) basis.
The Company maintains catastrophe reinsurance for its
casualty lines which provides coverages of $7 million in excess
of $3 million of aggregate risk per occurrence, and for its
property lines, which provides catastrophe coverage of 95% of
$18,750,000 in excess of $5,000,000 per catastrophe.
In its Minnesota workers' compensation business, the
Company buys catastrophe coverage on an unlimited basis from the
Minnesota Workers Compensation Reinsurance Association in excess
of $450,000 retention per occurrence. In other states the
Company purchases $9.5 million of coverage in excess of $500,000
per person and $49.5 million in excess of $500,000 per occurrence
from private insurers.
The Company reinsures its MPCI business with various
federal reinsurance pools administered by the CFSA. In 1995, the
Company ceded to the CFSA an aggregate of 43% of its gross MPCI
premium. The Company's net exposure on MPCI business is further
reduced by excess of loss reinsurance purchased from private
carriers.
Approximately 35% of the Company's crop hail business
is reinsured through quota share agreements, supplemented by
surplus and excess of loss contracts. Surplus agreements
generally limit the Company's quota share exposure to $1,500,000
per county or township. Excess of loss reinsurance is purchased
to cover 96.25% of net retained losses exceeding 77% up to 98% of
retained premiums and 95% of net retained losses exceeding 98% up
to 105.5% of retained premiums.
At December 31, 1995, 96% of the Company's outstanding
reinsurance recoverables were from domestic reinsurance companies
or the federal government, 96% of which was from reinsurance
companies rated A- (excellent) or better by A.M. Best or from the
federal government. The balance was primarily placed with major
international reinsurers.
Investments
The Company's investment policy is to maximize the
after-tax yield of the portfolio while emphasizing the stability
and preservation of the Company's capital base. Further, the
portfolio is invested in types of securities and in an aggregate
duration which reflect the nature of the Company's liabilities
and expected liquidity needs. The Company manages its portfolio
internally. Effective January 1, 1994, all of the Company's
fixed maturity securities were classified as available for sale
and carried at market value. The investment portfolio at
December 31, 1995 and December 31, 1994, consisted of the
following:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1995 December 31, 1994
------------------- -------------------
Amortized Fair Amortized Fair
Type of Investment Cost Value Cost Value
- ------------------ --------- -------- --------- --------
<S> <C> <C> <C> <C>
Fixed maturity securities
U.S. Treasury and government securities $ 51,022 $ 51,689 $ 68,308 $ 66,087
States, municipalities and political
subdivisions 69,433 71,194 39,544 37,595
Other debt securities 27,484 28,197 28,199 27,423
Mortgage-backed securities 72,359 67,220 73,024 59,075
-------- -------- -------- --------
Total fixed maturity securities 220,298 218,300 209,075 190,180
Common stocks 15,211 17,929 5,960 5,772
Preferred stocks 31,299 30,608 7,803 6,758
Commercial mortgages 11,290 11,290 1,869 1,869
Real estate 3,354 3,354 3,891 3,891
Short-term investments(1) 86,520 86,520 56,273 56,273
-------- -------- -------- --------
Total $367,972 $368,001 $284,871 $264,743
======== ======== ======== ========
<FN>
- ---------------
(1) Due to the short-term nature of crop insurance, the Company must maintain short-term
investments to fund amounts due to pay losses. Historically, these short-term funds
are highest in the fall corresponding to the cash flow in the agricultural industry.
</FN>
</TABLE>
<PAGE>
The following table sets forth, as of December 31,
1995, the composition of the Company's fixed maturity securities
portfolio by time to maturity:
<TABLE>
<CAPTION>
Carrying
Maturity Value Percent
-------- -------- -------
<S> <C> <C>
1 year or less $ 14,918 6.8%
More than 1 year through 5 years 45,949 21.1%
More than 5 years through 10 years 40,688 18.6%
More than 10 years 49,525 22.7%
Mortgage-backed securities 67,220 30.8%
------- -----
Total $218,300 100.0%
======= =====
</TABLE>
The Company's investment results for the periods
indicated are set forth below:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1995 1994 1993
-------- -------- --------
(in thousands, except percentages)
<S> <C> <C> <C>
Net investment income $ 20,651 $ 13,276 $ 10,844
Average investment
portfolio(1) 321,251 220,125 173,182
Pre-tax return on average
investment portfolio 6.4% 6.0% 6.3%
Net realized gains $ 2,707 $ 554 $ 2,250
<FN>
- ---------------
(1) Average investment portfolio represents the average of the
beginning and ending investment portfolio (excluding real
estate) computed on a quarterly basis.
</FN>
</TABLE>
Regulation
As a general rule, an insurance company must be
licensed to transact insurance business in each jurisdiction in
which it operates, and almost all significant operations of a
licensed insurer are subject to regulatory scrutiny. Licensed
insurance companies are generally known as "admitted" insurers.
Most states provide a limited exemption from licensing for
insurers issuing insurance coverages that generally are not
available from admitted insurers. Their coverages are referred
to as "surplus lines" insurance and these insurers as "surplus
lines" or "non-admitted" companies.
The Company's admitted insurance business is subject to
comprehensive, detailed regulation throughout the United States,
under statutes which delegate regulatory, supervisory and
administrative powers to state insurance commissioners. The
primary purpose of such regulations and supervision is the
protection of policyholders and claimants rather than
stockholders or other investors. Depending on whether the
insurance company is domiciled in the state and whether it is an
admitted or non-admitted insurer, such authority may extend to
such things as (i) periodic reporting of the insurer's financial
condition; (ii) periodic financial examination; (iii) approval of
rates and policy forms; (iv) loss reserve adequacy; (v) insurer
solvency; (vi) the licensing of insurers and their agents; (vii)
restrictions on the payment of dividends and other distributions;
(viii) approval of changes in control; and (ix) the type and
amount of permitted investments.
The Company also is subject to laws governing insurance
holding companies in Nebraska, Iowa, Arizona and Texas, where the
Insurance Companies are domiciled. These laws, among other
things, require the Company to file periodic information with
state regulatory authorities including information concerning its
capital structure, ownership, financial condition and general
business operations; regulate certain transactions between the
Company, its affiliates and the Insurance Companies, including
the amount of dividends and other distributions and the terms of
surplus notes; and restrict the ability of any one person to
acquire certain levels of the Company's voting securities without
prior regulatory approval.
Except for interest on surplus notes issued by the
Insurance Companies, Acceptance is dependent for funds to pay its
operating and other expenses upon dividends and other
distributions from its subsidiaries, the payment of which are
subject to review and authorization by state insurance regulatory
authorities. The laws of such states generally restrict
dividends from the Insurance Companies to Acceptance to certain
statutorily approved limits. During 1996, the statutory
limitations on dividends from the Insurance Companies to
Acceptance without further Insurance Department approval are
approximately $10.5 million.
Other regulatory and business considerations may
further limit the willingness of the Insurance Companies to pay
dividends. For example, the impact of dividends on surplus could
affect an insurers' competitive position, the amount of premiums
that it can write and its ability to pay future dividends.
Further, the insurance laws and regulations of Nebraska, Iowa,
Arizona and Texas require that the statutory surplus of an
insurance company domiciled therein, following any dividend or
distribution by such company, be reasonable in relation to its
outstanding liabilities and adequate for its financial needs.
While the non-insurance company subsidiaries are not
subject directly to the dividend and other distribution
limitations, insurance holding company regulations govern the
amount which a subsidiary within the holding company system may
charge any of the Insurance Companies for services (e.g., agents'
commissions).
The Company's MPCI program is federally-regulated and
supported by the federal government by means of premium subsidies
to farmers and expense reimbursement and federal reinsurance
pools for private insurers. Consequently, the MPCI program is
subject to oversight by the legislative and executive branches of
the federal government, including the CFSA. The MPCI program
regulations generally require compliance with federal guidelines
with respect to underwriting, rating and claims administration.
The Company is required to perform continuous internal audit
procedures and is subject to audit by several federal government
agencies.
During the past several years, various regulatory and
legislative bodies have adopted or proposed new laws or
regulations to deal with the cyclical nature of the insurance
industry, catastrophic events and insurance capacity and pricing.
These regulations include (i) the creation of "market assistance
plans" under which insurers are induced to provide certain
coverages, (ii) restrictions on the ability of insurers to cancel
certain policies in mid-term, (iii) advance notice requirements
or limitations imposed for certain policy non-renewals and (iv)
limitations upon or decreases in rates permitted to be charged.
The NAIC recently approved and recommended that states
adopt and implement several regulatory initiatives designed to be
used by regulators as an early warning tool to identify
deteriorating or weakly capitalized insurance companies and to
decrease the risk of insolvency of insurance companies. These
initiatives include the implementation of the Risk Based Capital
("RBC") standards for determining adequate levels of capital and
surplus to support four areas of risk facing property and
casualty insurers: (a) asset risk (default on fixed income assets
and market decline), (b) credit risk (losses from unrecoverable
reinsurance and inability to collect agents' balances and other
receivables), (c) underwriting risk (premium pricing and reserve
estimates), and (d) off-balance sheet/growth risk (excessive
premium growth and unreported liabilities). At December 31, 1995
the Insurance Companies meet the RBC requirements as promulgated
by the domiciliary states of the Insurance Companies and the
NAIC.
The eligibility of the Insurance Companies to write
insurance on a surplus lines basis is dependent on their
compliance with certain financial standards, including the
maintenance of a requisite level of capital and surplus and the
establishment of certain statutory deposits. State surplus lines
laws typically: (i) require the insurance producer placing the
business to show that he or she was unable to place the coverage
with admitted insurers; (ii) establish minimum financial
requirements for surplus lines insurers operating in the state;
and (iii) require the insurance producer to obtain a special
surplus lines license. In recent years, many jurisdictions have
increased the minimum financial standards applicable to surplus
lines eligibility.
The Insurance Companies also may be required under the
solvency or guaranty laws of most states in which they are
licensed to pay assessments (up to certain prescribed limits) to
fund policyholder losses or liabilities of insolvent or
rehabilitated insurance companies. These assessments may be
deferred or forgiven under most guaranty laws if they would
threaten an insurer's financial strength and, in certain
instances, may be offset against future premium taxes. Some
state laws and regulations further require participation by the
Insurance Companies in pools or funds to provide types of
insurance coverages which they would not ordinarily accept.
Uncertainties Affecting the Insurance Business
The property and casualty insurance business is highly
competitive, with over 3,000 insurance companies in the United
States, many of which have substantially greater financial and
other resources, and may offer a broader variety of coverages
than those offered by the Company. Beginning in the latter half
of the 1980s, there has been severe price competition in the
insurance industry which has resulted in a reduction in the
volume of premiums written by the Company in some of its lines of
businesses, because of its unwillingness to reduce prices to meet
competition. The specialty property and casualty coverages
underwritten by the Company may involve greater risks than more
standard property and casualty lines. These risks may include a
lack of predictability, and in some instances, the absence of a
long-term, reliable historical data base upon which to estimate
future losses.
Pricing in the property and casualty insurance industry
is cyclical in nature, fluctuating from periods of intense price
competition, which led to record underwriting losses during the
early 1980's, to periods of increased market opportunity as some
carriers withdrew from certain market segments. Despite
increased price competition in recent years, the Company has
maintained consistent earned premium income during such periods,
principally through geographic expansion, acquisitions and
implementation of new insurance programs.
The Company's results also may be influenced by factors
influencing the insurance industry generally and which are
largely beyond the Company's control. Such factors include (a)
weather related catastrophes; (b) taxation and regulatory reform
at both the federal and state level; (c) changes in industry
standards regarding rating and policy forms; (d) significant
changes in judicial attitudes towards liability claims; (e) the
cyclical nature of pricing in the industry; and (f) changes in
the rate of inflation, interest rates and general economic
conditions. The Company's crop insurance results are
particularly subject to wide fluctuations because of weather
factors influencing crop harvests. Crop insurance results are
not generally known until the last half of the year. See
"Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General."
The insurance business is highly regulated and
supervised in the states in which the Insurance Companies conduct
business. The crop insurance lines are subject to significant
additional federal regulation. The regulations relating to the
property and casualty and crop insurance business at both the
state and federal level are frequently modified and such
modifications may impact future insurance operations. See
"Regulation."
Adverse loss experience for 1994 and prior years
resulted in a strengthening of loss reserves at December 31,
1995, in the amount of $22.3 million. The establishment of
appropriate loss reserves is an inherently uncertain process,
and, it has been necessary, and over time may continue to be
necessary, to revise estimated loss reserve liabilities. See
"Loss and Loss Adjustment Reserves," for a further discussion of
the impact of the loss reserve strengthening done in 1995 and
other factors which may, in the future, influence loss reserve
estimates.
Property and casualty insurance is a capital intensive
business and the Company is obliged to maintain minimum levels of
surplus in the Insurance Companies in order to continue writing
insurance at current levels or to increase its writings, and also
to meet various operating ratio standards established by state
insurance regulatory authorities and by insurance rating bureaus.
Without additional capital, the Company could be required to
curtail growth or even to reduce its volume of premium writings
in order to satisfy state regulations or to maintain its current
A- (excellent) rating from A.M. Best. The Company's history is
one of continuing premium growth, and it may be expected to
require additional capital from time to time, through additional
offerings of its securities, increase in its debt or otherwise.
The Company continually reviews the surplus needs of the
Insurance Companies, and may, from time-to-time, need to seek
additional funding.
Employees
At March 13, 1996 the Company and its subsidiaries
employed 20 salaried executives and 1,029 other personnel.
Acceptance believes that relations with its employees are good.
<PAGE>
Item 2. Properties.
The following table sets forth certain information
regarding the principal properties of the Company.
<TABLE>
<CAPTION>
General Leased/
Location Character Size Owned(1)
- -------- --------- ---- --------
<S> <C> <C> <C>
Omaha, NE Office 80,000 sq. ft. Leased
Council Bluffs, IA-A Office 76,000 sq. ft. Leased
Council Bluffs, IA-B Office 33,000 sq. ft. Leased
Council Bluffs, IA-C Office 28,000 sq. ft. Leased
Burlington, NC Office 18,000 sq. ft. Leased
Phoenix, AZ Office 33,000 sq. ft. Leased
Scottsdale, AZ Office 20,000 sq. ft. Leased
<FN>
- ---------------
(1) The range of expiration dates for these leases is
November 30, 2001 (Omaha), December 31, 1996 with five year
option (Council Bluffs-A), June 30, 1997 (Council Bluffs-B),
November 30, 1996 (Council Bluffs-C), December 31, 2000
(Burlington), February 21, 2000 (Phoenix), and December,
1998 (Scottsdale).
</FN>
</TABLE>
Item 3. Legal Proceedings.
Other than as set forth in Note 9 to the consolidated
financial statements, there are no material legal proceedings
pending involving the Company or any of its subsidiaries which
require reporting pursuant to this Item.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended December 31,
1995.
<PAGE>
PART II.
Item 5. Market for Registrant's Equity and Related Stockholder
Matters.
The Common Stock is listed and traded on the NYSE. The
following table sets forth the high and low sales prices per
share of Common Stock as reported on the NYSE Composite Tape for
the fiscal quarters indicated.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
Year Ended December 31, 1994
First Quarter $13 3/4 $11 1/8
Second Quarter 13 5/8 11 3/8
Third Quarter 15 1/8 12 3/4
Fourth Quarter 18 12 5/8
Year Ended December 31, 1995
First Quarter 16 5/8 14 1/8
Second Quarter 16 13 1/2
Third Quarter 17 1/2 13 1/2
Fourth Quarter 15 3/4 13 1/8
Year Ending December 31, 1996
First Quarter 15 1/2 13 7/8
(through March 25, 1996)
</TABLE>
The closing sales price of the Common Stock on
March 25, 1996, as reported on the NYSE Composite Tape, was
$14.625 per share. As of March 25, 1996, there were
approximately 1,850 holders of record of the Common Stock.
The Company has not paid cash dividends to its
shareholders during the periods indicated above and does not
anticipate that it will pay cash dividends in the foreseeable
future. The Revolving Credit Facility prohibits the payment of
cash dividends to shareholders. See "Regulation" for a
description of restrictions on payment of dividends to the
Company from the Insurance Companies.
Item 6. Selected Consolidated Financial Data.
The following table sets forth certain selected
consolidated financial data and should be read in conjunction
with, and is qualified in its entirety by, the Consolidated
Financial Statements and the notes thereto and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein. This selected
consolidated financial data has been derived from the audited
Consolidated Financial Statements of the Company and its
subsidiaries.
<PAGE>
<TABLE>
<CAPTION>
Years Ended
December 31,
-----------------------------------------------------------
1995(1) 1994(1) 1993(1) 1992 1991
--------- --------- --------- ---------- ----------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Insurance Revenues:
Gross premiums written $537,349 $447,483 $256,042 $152,091 $104,853
======= ======= ======= ======= =======
Net premiums written $286,183 $229,176 $137,505 $ 84,085 $ 62,982
======= ======= ======= ======= =======
Net premiums earned $271,584 $202,659 $128,082 $ 79,164 $ 65,164
Net investment income 19,851 12,864 10,467 8,220 6,103
Net realized capital gains 2,531 554 2,250 1,046 1,953
Agency income 2,863 3,629 4,119 3,992 1,645
------- ------- ------- ------- -------
Insurance revenues 296,829 219,706 144,918 92,422 74,865
Non-insurance revenues 976 412 377 2,610 5,824
------- ------- ------- ------- -------
Total revenues 297,805 220,118 145,295 95,032 80,689
Insurance expenses:
Losses and loss adjustment
expenses 212,337 142,951 92,805 60,025 46,917
Underwriting and other expenses 72,602 52,627 36,905 23,523 19,433
Agency expenses 2,596 3,180 3,794 3,736 1,624
------- ------- ------- ------- -------
Insurance expenses 287,535 198,758 133,504 87,284 67,974
Non-insurance expenses 2,165 1,684 1,225 3,107 11,533
------- ------- ------- ------- -------
Total expenses 289,700 200,442 134,729 90,391 79,507
------- ------- ------- ------- -------
Operating profit (loss) 8,105(2) 19,676 10,566 4,641(3) 1,182
<PAGE>
Other income (expense):
Interest expense (2,591) (1,693) (2,235) (4,428) (5,712)
Other income (expense), net (171) (271) (340) (823) (18,728)(6)
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes
and minority interests 5,343 17,712 7,991 (610) (23,258)(6)
Provision (benefit) for income
taxes(4) 1,188 (3,443) 167 -- --
Minority interests in net income
(loss) of consolidated
subsidiaries -- 80 238 216 (148)
------- ------- ------- ------- -------
Net income (loss) from
continuing operations(5) $ 4,155(2) $ 21,075 $ 7,586 $ (826)(3) $(23,110)(6)
======= ======= ======= ======= =======
Net income (loss) from
continuing operations
per share:
- Primary $ .28 $ 1.71 $ 0.86 $ (0.24) $ (6.78)
- Fully diluted .27 1.68 0.85 (0.24) (6.78)
GAAP Ratios:
Loss ratio 78.2% 70.5% 72.5% 75.8% 72.0%
Expense ratio 26.7% 26.0% 28.8% 29.7% 29.8%
------- ------- ------- ------- -------
Combined loss and expense ratio 104.9% 96.5% 101.3% 105.5% 101.8%
======= ======= ======= ======= =======
<PAGE>
<CAPTION>
December 31,
---------------------------------------------------------
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investments $368,001 $264,743 $187,986 $124,311 $114,187
Total assets 781,034 543,087 409,385 257,734 207,532
Loss and loss adjustment
expense reserves 369,244 221,325 211,600 127,666 66,132
Unearned premiums 124,122 97,170 60,114 41,709 19,958
Borrowings and term debt 69,000 29,000 18,951 33,567 55,473
Stockholders' equity 177,787 159,754 95,717 34,523 35,042
Other Data:
Statutory Surplus of Insurance
Companies 169,628 126,272 73,910 34,527 27,693
<PAGE>
<FN>
__________________
(1) For a discussion of the accounting treatment of the Company's MPCI business, the results of
which are included beginning July 1, 1993, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
(2) Net income was reduced in 1995 by the strengthening of loss reserves in the amount of
approximately $22.3 million relating principally to 1994 and prior year losses in the
commercial auto liability and general liability and commercial multi-peril lines of insurance.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations --
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994."
(3) Net Income was reduced in 1992 by the strengthening of loss reserves in the amount of
approximately $2.1 million on two lines of insurance and $1.7 million of incurred losses
relating to two hurricanes.
(4) Results for 1994 and 1993 reflect the utilization of tax loss carryforwards and other temporary
differences resulting from prior non-insurance operations.
(5) In 1991 the Company sold its citrus operations and reported such operations for 1991 and prior
years as discontinued operations. Accordingly information regarding the citrus operations is
excluded from this table. The Company recorded a provision for the expected loss on disposal
of its investment in the citrus operations of approximately $19,600,000, or $5.75 per share, in
1991 which is excluded from loss and loss per share from continuing operations.
(6) Included in other income (expense), net and loss from continuing operations for the year ended
December 31, 1991, is a non-cash charge of $15.3 million, or $4.49 per share, to reduce the
Company's equity investment in real estate operations to estimated net realizable value
incurred as a part of the restructuring of certain prior non-insurance operations.
(7) Statutory data has been derived from the separate financial statements of the Insurance
Companies prepared in accordance with SAP.
</FN>
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis of financial
condition and results of operations of the Company and its
consolidated subsidiaries should be read in conjunction with the
Company's Consolidated Financial Statements and the notes thereto
included elsewhere herein.
General
Over the past five years, premiums written in the
Company's insurance operations have consistently increased, both
as the result of acquisitions and through internal growth. In
the third quarter of 1995, the Company's decision to strengthen
loss reserves resulted in a loss for that quarter of $5,961,000.
Otherwise, the Company has reported operating profits in each
quarter beginning with the third quarter of 1992, when the
phasing out of its prior non-insurance operations was
substantially completed.
Increased premium volume in recent periods has been the
result of the Company's strategy of acquiring niche businesses
and increasing premiums written in selected lines. The Company's
most significant recent acquisition was its purchase in July 1993
of The Redland Group, Inc., which provides MPCI, crop hail and
other named peril crop insurance and certain standard property
and casualty coverages to the rural market. Following its
acquisition by the Company, Redland has increased the volume of
its MPCI Premium, and was the fourth largest MPCI writer in the
United States in 1995.
MPCI is a government-sponsored program with accounting
treatment which differs from more traditional property and
casualty insurance lines. For income statement purposes, gross
premiums written consist of the aggregate amount of MPCI premiums
paid by farmers, and does not include any related federal premium
subsidies or expense reimbursement. The Company's profit or loss
from its MPCI business is determined after the crop season ends
on the basis of a profit sharing formula established by law and
the CFSA. For income statement purposes, any such profit share
earned by the Company, net of the cost of third party
reinsurance, is shown as net premiums written, which equals net
premiums earned for MPCI business; whereas, any share of losses
payable by the Company is charged to losses and loss adjustment
expenses. Due to various factors, including timing and severity
of losses from storms and other natural perils and crop
production cycles, the profit or loss on MPCI premiums is
primarily recognized in the second half of the calendar year.
The Company relies on loss information from the field to
determine (utilizing a formula established by the CFSA) the level
of losses that should be considered in estimating the profit or
loss during this period. Based upon available loss information,
the Company records an estimate of the profit or loss during the
third quarter and then re-evaluates the estimate using additional
loss information available at year-end to determine any remaining
portion to be recorded in the fourth quarter. All expense
reimbursements received are credited to underwriting expenses.
Certain other characteristics of the Company's crop
business also may affect comparisons, including: (i) the seasonal
nature of the business whereby profits or losses are generally
recognized predominantly in the second half of the year; (ii) the
short-term nature of crop business whereby losses are known
within a short time period; and (iii) the limited amount of
investment income associated with crop business. In addition,
cash flows from such business differ from cash flows from certain
more traditional lines. See "- Liquidity and Capital Resources"
below. The seasonal and short term nature of the Company's crop
business, as well as the impact on such business of weather and
other natural perils, may produce more volatility in the
Company's operating results on a quarter to quarter or year to
year basis than has historically been present in the operations
of the Company.
Forward-Looking Information
Except for the historical information contained in this
Annual Report on Form 10-K, matters discussed herein are forward-
looking. Such forward-looking information reflects the Company's
current best estimates regarding future operations, but, since
these are only estimates, actual results may differ materially
from such estimates.
A variety of events, most of which are outside the
Company's control, cannot be accurately predicted and may
materially impact estimates of future operations. Important
among such factors are adverse weather conditions, natural
disasters, changes in state and federal regulations, price
competition impacting premium levels, changes in tax laws,
financial market performance, changes in court decisions
effecting coverages, and adverse general economic conditions.
The Company's results are significantly impacted by its
crop business, particularly its MPCI line. Results from the crop
lines are not generally known until the third and fourth quarters
of the year, after crops are harvested. Crop results are
particularly dependent on events beyond the Company's control,
notably weather conditions during the crop growing seasons in the
states where the Company writes a substantial amount of its crop
insurance. Additionally, federal regulations governing aspects
of crop insurance are frequently modified, and any such changes
may impact crop insurance results.
Forward-looking information set forth herein does not
take into account any impact from adverse weather conditions
during the 1996 crop season, or the various other factors noted
above which may adversely affect crop and non-crop operating
results.
Results of Operations
Year Ended December 31, 1995
Compared to Year Ended December 31, 1994
The Company's net income fell 80.3% for the year ended
December 31, 1995 from $21.1 million in 1994 to $4.2 million in
1995. This reduction in net income resulted as premium growth in
the Company's general agency and program divisions, an increase
in investment income and an increase in underwriting profits from
the Company's crop division were offset by higher than expected
losses in the general agency and program divisions, an increase
in the Company's expense ratio and a change in the Company's tax
status.
The Company experienced strong premium growth in its
general agency division as direct premiums written increased
26.5% for the year ended December 31, 1995 as compared to the
year ended December 31, 1994, and net premiums earned grew 39.8%
from 1994 to 1995. Earned premiums grew more rapidly than direct
premiums as premium growth slowed progressively in each quarter
of 1995. The growth in this division came from the continued
growth in new business produced from the Company's Scottsdale
office which was established in late 1993. The rate of premium
growth in 1995 slowed due to an increase in the competitive
environment for lines of business written in the general agency
division. The Company expects the competitive marketplace to
continue unabated, and therefore, is expecting a more modest
growth rate during 1996.
The Company's program division also experienced
excellent premium growth during 1995 as direct premiums written
increased from $83.9 million in 1994 to $115.4 million in 1995,
an increase of 37.5%. Net earned premium increased at a rate of
50.8% from $42.6 million in 1994 to $64.3 million in 1995. This
premium growth was principally from new programs established
during 1994 and 1995. The Company continues to seek and
establish new lines of business within the program division but
competitive factors in the marketplace have resulted in somewhat
lower growth rates than expected in many of these new programs.
The Company continues to emphasize the production of new business
within this division as programs within this division typically
operate at underwriting expense levels approximately 20% below
the general agency division, and therefore, continued growth is
expected during 1996.
The Company's non-standard auto division did not grow
during 1995 as premiums remained relatively stable with $29.3
million in direct written premium during 1995 as compared to
$29.4 million during 1994. This lack of growth during 1995
resulted primarily from the Company's desire to establish new
computer software for its principal programs before seeking
additional growth opportunities. The new computer software is
now operational in most states, and the Company expects to expand
its premium writings as a result of the beneficial marketing
impact of this new software and through expansion into new states
in 1996.
The Company's crop division also experienced strong
premium growth in 1995 as direct written premiums and net earned
premiums increased 21.9% and 30.1% respectively from 1994 to
1995. This premium growth resulted from an increase in the
Federal MPCI program, and increases in premium levels under the
Company's crop hail insurance program resulting from an increase
in rates and the writing of more exposure units in certain
states. In late 1994, Congress expanded the MPCI program by
enacting the Reform Act. The Act seeks to encourage farmers to
participate in the MPCI program and thereby reduce dependencies
on traditional disaster relief measures (see the discussion under
"General" above). As a result, the Company's MPCI premium
increased 42.8% from $128.4 million in 1994 to $183.3 million in
1995. In addition, the Company's MPCI retention also increased
from $77.4 million in 1994 to $104.3 million in 1995. The crop
industry had experienced several years of adverse experience in
the crop hail business prior to 1995, and as a result, crop hail
rates have increased while capacity has decreased. Therefore,
the Company was able to increase its crop hail writings from
$46.5 million in direct written premiums in 1994 to $62.8 million
in direct written premiums for 1995.
The Company's investment income increased 55.6% from
$13.3 million in 1994 to $20.7 million in 1995 while the
Company's net realized capital gains increased 388.6% from $0.6
million in 1994 to $2.7 million 1995. Investment income
increased from both an increase in the average size of the
Company's investment portfolio as well as an increase in the
average yield on the Company's fixed income investments. The
average size of the investment portfolio increased from $220.1
million in 1994 to $321.3 million in 1995 while the Company's
pre-tax yield on its portfolio increased from 6.0% in 1994 to
6.4% in 1995. The Company's investment portfolio increased from
additional borrowings under the Company's credit facility,
positive cash flows from operations, funds from the exercise of
warrants in December of 1994 as well as retained earnings.
Investment yields increased as the overall interest rate
environment provided higher yields during 1995 as compared to
1994.
While 1995 was a difficult growing season, the
Company's underwriting income within its crop division increased
from $12.3 million in 1994 to $14.9 million in 1995. This
increase was a result of the growth in the MPCI premium and
better results in the Company's hail division, offsetting
negative results in the Company's named peril crop programs
principally from an active storm season in California during
1995. The 1995 growing season in the upper midwest was afflicted
with wet weather during the planting season resulting in delayed
planting of crops, followed by periods of severe heat in July,
stressing newly emerging crops, and an early frost in September
of 1995. No such adverse activity occurred in 1994. In
addition, the Reform Act changed the profit sharing matrix for
participants in the MPCI program providing a higher degree of
profit sharing, particularly for companies accepting risks in the
commercial underwriting pool. These two factors combined to
change the percentage of the Company's profit sharing under the
MPCI program from 22.0% in 1994 to 13.4% in 1995. This decrease
in the profit sharing percentage was more than offset by the
described increase in MPCI premiums and improved crop hail
results. The Reform Act was not passed until October of 1994,
and therefore, the Federal agencies charged with the oversight of
the program had a limited time frame in which to enact guidelines
and administrative rules and procedures for changes brought about
by the Reform Act. In addition, the wet planting season created
additional stress on the MPCI program which required further
administrative changes by the Federal Government. As a result,
exact results of the MPCI program were more difficult to estimate
at December 31, 1995 than they had been in previous years. Any
change in the Company's estimate of results in the MPCI program
will be recorded in future periods.
The aforementioned positive factors were offset by
higher than expected losses in the Company's general agency and
program division, including losses resulting from the
strengthening of reserves during 1995 for prior year losses.
During the second quarter of 1995, the Company experienced a
deterioration in the loss ratio of its commercial automobile
liability business. At that time, this was principally
attributable to a more rapid emergence of losses from the 1994
year than had been expected by the Company. This trend continued
in the third quarter of 1995, and while the noted deterioration
was principally in the automobile liability business, the Company
believed that similar deviations were likely to appear in other
lines of business which develop more slowly than automobile, and
therefore, the Company chose in the third quarter to evaluate all
major lines of business. After an extensive study by the Company
in consultation with its independent actuaries, a pre-tax charge
of $17.5 million was made in the third quarter for prior year
losses. For the year, the Company increased its reserves for
1994 and prior year losses by $22.3 million pre-tax.
After the Company completed its review of prior year
losses, the new development pattern assumptions were used to
estimate ultimate losses for the current 1995 accident year.
These new assumptions, severe wind and hail storms in Texas
during the second quarter of the year, and adverse results in a
few of the Company's business lines such as nursing home
liability, homeowners business in South Carolina and used car
dealer business in California, combined to create a $5.7 million
underwriting loss in the property and casualty divisions of the
Company for the 1995 accident year. For the accident year 1995,
the Company's accident year loss ratio was 70.7% for the property
and casualty division. The Company's underwriting results in the
non-standard automobile division were fairly consistent from 1994
to 1995 with this division experiencing a loss ratio of 66.8% in
1995 as compared to 68.9% in 1994. The Company believes that its
loss reserves are adequate, but will continue to monitor such
reserves closely as new development patterns are verified over
time. The Company has curtailed or terminated the programs which
experienced the highest loss ratios during 1995. Therefore, the
Company would expect property and casualty operation loss ratios
to return to a level more similar to 1994 during 1996.
Underwriting expenses for 1995 increased as a
percentage of earned premium from 26.0% during 1994 to 26.7%
during 1995. General and administrative expenses also increased
by $0.5 million from 1994 to 1995, and expenses in the Company's
crop division net of ceding commissions from reinsurers and
expense reimbursements from the Federal Government under the MPCI
program decreased slightly from $0.8 million in 1994 to $0.7
million in 1995. The increase in the underwriting expense levels
were principally attributable to increases in non-standard
automobile division expenses related to the implementation of new
computer software programs designed to make the Company's product
more saleable in the marketplace and to reduce expenses in future
years as the division grows. In addition, the Company sought to
strengthen its information systems and audit procedures within
the program and general agency divisions. The cost of
implementation of several new programs in the program division
also added to the higher expense ratio for 1995 as compared to
1994. The Company expects the implementation of the new computer
program for the non-standard automobile program as well as the
investments in systems for the general agency and program
divisions to begin to slowly reduce its expense ratio over the
next few years. Offsetting these internal expense reductions,
the Company is experiencing intense competition in the area of
agent's commissions as capacity in the insurance marketplace
continues to exceed demand.
The Company's net income during 1995 was also effected
by the impact of income taxes. The Company received a benefit of
$3.4 million from income taxes in 1994 as opposed to an expense
of $1.2 million from income taxes in 1995. As a result of prior
noninsurance operations, the Company generated significant tax
loss carryforwards and other temporary differences, all of which
were used by the end of 1994. The Company does not expect any
further tax benefits during 1996, and therefore, would expect its
tax rate to normalize at a percentage rate in the low thirties of
net income before income taxes.
<PAGE>
Year Ended December 31, 1994
Compared To Year Ended December 31, 1993.
The Company's net premiums earned increased 58.2% for
the year ended December 31, 1994 to $202.7 million from $128.1
million in 1993. The principal components of this increase were
an increase of $30.0 million and $14.4 million in earned premium
in Redland's crop and standard property and casualty lines of
business, respectively, following the acquisition of Redland in
the third quarter of 1993, and an increase of $32.9 million in
general agency earned premium primarily resulting from the
expansion of this segment following the hiring of four new
managers in August 1993.
Included in the $30.0 million increase in net earned
premiums for crop business for 1994 was $17.0 million in profit
sharing (before deducting the cost of third party reinsurance)
earned on the Company's MPCI business, compared to no profit
sharing earned for such business for 1993 when the Company
recorded a loss share of $0.9 million (net of recoveries from
third party reinsurers). Because of its accounting treatment,
such 1993 loss share is not reflected as a reduction in net
premiums earned but instead as an increase in the Company's
losses and loss adjustment expenses for the 1993 period. The
1994 profit resulted primarily from increases in the Company's
MPCI Premiums and MPCI Retention (as defined herein) after ceding
risk to federal reinsurance pools, as well as the occurrence of
fewer insured losses, as adverse weather conditions in 1993 gave
way to favorable weather conditions in 1994.
The Company's net investment income increased 22.4% to
$13.3 million in 1994 versus $10.8 million during the prior year.
The average size of the investment portfolio increased from
approximately $173 million during the year ended December 31,
1993 to approximately $220 million during 1994. This increase
resulted primarily from internally-generated cash flows and the
ownership of Redland for a full year. The investment yield
decreased from 6.3% to 6.0% primarily as a result of Redland's
portfolio generally being invested in short-term investments due
to the nature of its business.
Net realized capital gains were approximately $0.6
million for 1994 versus $2.3 million for 1993. The higher amount
in 1993 resulted from the Company's decision to reposition its
portfolio in a higher concentration of tax-exempt securities
during 1993 when market values of the Company's fixed income
securities in many cases exceeded cost due to lower prevailing
interest rates.
Losses and loss adjustment expenses increased to $143.0
million versus $92.8 million in 1993 or a 54.0%, increase,
consistent with the increase in net premiums earned. The 1994
results were affected by adverse loss and loss adjustment expense
development of approximately $5.1 million, primarily from the
Company's general liability and commercial multi-peril lines.
This adverse development principally related to the 1990 and 1991
accident years, and to a lesser extent to the 1992 and 1993
years, when actual experience differed from historical patterns.
In mid 1993, the Company hired a Senior Vice President of Claims
to oversee claims operations for all of the insurance
subsidiaries. Subsequently, the Company established new
policies, procedures, and standards for claims handling. As a
result of these changes, the Company experienced an increase in
its average reported case reserves during 1994. Accordingly, the
Company and its actuaries have placed more emphasis on
methodologies, such as, paid loss development and incurred loss
development adjusted for increases in its average case reserves.
The Company's underwriting and other expenses increased
42.6% to $52.6 million in 1994 versus $36.9 million in 1993. The
primary causes for this increase were the increase in premium
volume, and to a lesser extent, the need to increase the staff
and systems at the Insurance Companies in order to monitor the
larger operations of the Company during 1994 and the expenses
associated with the establishment of an office for general agency
business in Scottsdale, Arizona. Partially offsetting this
increase was the full year impact of the Company's book of crop
insurance, which typically has a lower expense ratio than most of
the Company's other businesses.
The Company's interest expense for the year decreased
24.3% to $1.7 million versus $2.2 million in the prior year.
This decrease in interest expense was principally caused by the
retirement during 1993 of $16.5 million of higher interest rate
debt issued in connection with the restructuring in 1992, which
was partially offset by a $10.0 million increase in the
outstanding debt of the Company during 1994.
The Company's net income benefitted from the
recognition during the year ended December 31, 1994 of a deferred
tax benefit of $9.5 million, which offset taxes that otherwise
would have been accrued and resulted in a net income tax benefit
of $3.4 million. This net income benefit resulted from the
release of a valuation allowance established for a deferred tax
asset upon the Company meeting the realizability tests for such
asset under Statement of Financial Accounting Standards ("SFAS")
#109, "Accounting for Income Taxes", adopted by the Company in
January 1993. A valuation allowance was recorded for the full
amount of the deferred tax asset at December 31, 1993 because the
Company had reported pretax losses from 1989 through 1992.
Although the circumstances that generated these losses were not
indicative of operating income, management was uncertain of
future earnings. As of December 31, 1994, the Company has
reported ten consecutive quarters with pre-tax earnings and the
Company has used all of its net operating loss carryforwards.
Accordingly, management believes it is more likely than not that
the Company will realize a portion of the deferred tax asset.
The valuation allowance at December 31, 1994 primarily relates to
capital loss items whose realization is uncertain due to
insufficient carryforwards of capital gains.
The Company's net income increased 177.8% to $21.1
million for the year ended December 31, 1994 compared to $7.6
million for the year ended December 31, 1993 because of the
factors discussed above.
Liquidity and Capital Resources
The Company has included a discussion of the liquidity
and capital resources requirements of the Company and the
Insurance Companies.
The Company - Parent Only
As an insurance holding company, the Company's assets
consist primarily of the capital stock of its subsidiaries, $40
million in surplus notes issued by Acceptance Insurance and
investment assets held at the holding company level. The
Company's primary sources of liquidity are the receipt of
dividends or other distributions from subsidiaries, interest
payments on such surplus notes, tax sharing payments from its
subsidiaries and net investment income from, and proceeds from
the sale of, holding company investments. The Company needs
liquidity primarily to service debt, pay operating expenses and
taxes and make investments in subsidiaries.
The four domiciliary states of the Insurance Companies
limit the payment of dividends and other distributions by such
companies. Under these laws, the maximum aggregate amount of
dividend payments permitted to be made by the Insurance Companies
in 1996 without prior regulatory approval is approximately $10.5
million, none of which has been paid.
In addition to dividends from the Insurance Companies,
the Company also may receive distributions from its non-insurance
subsidiaries which are engaged in agency, premium finance and
claims service operations.
The Company is currently a party to a tax sharing
agreement with its subsidiaries, under which such subsidiaries
pay the Company amounts in general equal to the federal income
tax that would be payable by such subsidiaries on a stand-alone
basis.
The Company is also a party to a $90 million Credit
Agreement with a group of bank lenders, secured by substantially
all of the Company's assets. The Credit Agreement provides for a
three-year Revolving Credit Facility in amounts not exceeding $75
million and a one-year Term Loan Facility in amounts not
exceeding $15 million. Interest is payable quarterly at a rate
selected by the Company equal to either the prime rate or LIBOR
plus a margin which varies depending on the Company's
debt-to-equity ratio and whether funds have been borrowed under
the Line of Credit Facility. At December 31, 1995, the
outstanding balance under the facility was $69 million, bearing
interest at 6.54%. Borrowings under the facility were used to
provide capital for the Insurance Companies and to repay other
debt. The Revolving Credit Facility expires on July 26, 1998,
and may be extended annually for additional one-year periods with
the consent of the lenders. The Term Loan Facility expires to
the extent not drawn upon on July 26, 1996, and the balance due
thereunder must be re-paid July 26, 1997. The Company is
currently negotiating with its banks to extend the expiration
date of the Term Loan Facility or to increase the Revolving
Credit Facility to include amounts expiring under the Term Loan
Facility.
The Company's history is one of continuing premium
growth as a result both of acquisitions and other equity
investments and of internal growth, and it intends to continue to
pursue additional opportunities in the insurance business. Such
growth requires capital, and as a result the Company may seek
additional debt or equity financing in the future to provide
capital for the Insurance Companies, to fund further acquisitions
or for other purposes. There can be no assurance that the
Insurance Companies will have access to sufficient capital in
future periods to continue their growth and also satisfy the
capital requirements of rating agencies and regulators.
Insurance Companies
The principal liquidity needs of the Insurance
Companies are to fund losses and loss adjustment expense payments
and to pay underwriting expenses, including commissions and other
expenses. The available sources to fund these requirements are
net premiums received and, to a lesser extent, cash flows from
the Company's investment activities, which together have been
adequate to meet such requirements on a timely basis. The
Company monitors the cash flows of the Insurance Companies and
attempts to maintain sufficient cash to meet current operating
expenses, and to structure its investment portfolio at a duration
which approximates the estimated cash requirements for the
payment of loss and loss adjustment expenses.
Cash flows from the Company's MPCI and crop hail
businesses differ in certain respects from cash flows associated
with more traditional property and casualty lines. MPCI premiums
are not received from farmers until the covered crops are
harvested, and when received are promptly remitted by the Company
in full to the government. Covered losses are paid by the
Company during the growing season as incurred, with such
expenditures reimbursed by the government within three business
days. Policy acquisition and administration expenses are paid by
the Company as incurred during the year. The Company
periodically throughout the year receives a payment in
reimbursement of its policy acquisition and administration
expenses.
The Company's profit or loss from its MPCI business is
determined after the crop season ends on the basis of a profit
sharing formula established by law and the CFSA. At such time,
the Company receives a profit share in cash, with any amount in
excess of 15% of its MPCI Retention in any year carried forward
to future years, or it must pay its share of losses. The Company
recognized $14.2 million, before private reinsurance, in profit
sharing earned on the MPCI business during 1995.
In the crop hail insurance business, premiums are
generally not received until after the harvest, while losses and
other expenses are paid throughout the year.
Changes in Financial Condition
The NAIC has released its Risk Based Capital ("RBC")
formula for property and casualty insurance companies. The RBC
initiative is designed to enhance the current regulatory
framework for the evaluation of the capital adequacy of a
property and casualty insurer. The formula requires an insurer
to compute the amount of capital necessary to support four areas
of risk facing property and casualty insurers: (a) asset risk
(default on fixed income assets and market decline), (b) credit
risk (losses from unrecoverable reinsurance and inability to
collect agents' balances and other receivables), (c) underwriting
risk (premium pricing and reserve estimates), and (d) off balance
sheet/growth risk (excessive premium growth and unreported
liabilities). The Insurance Companies have reviewed and applied
the RBC formula for the 1995 year and have exceeded these
requirements.
The Company's unrealized gain or loss on marketable
equity securities and fixed maturities available for sale, net of
tax, changed from a $13.7 million loss as of December 31, 1994 to
an approximate $19,000 gain as of December 31, 1995. Such change
was caused by lower interest rates which prevailed in 1995.
Consolidated Cash Flows
Cash flows from operations for the year ended
December 31, 1995 were a positive $46.5 million as compared to a
positive $42.7 million for the 1994 year. Cash flows from
financing activities for 1995 were positively impacted primarily
by the restructuring of the Company's bank borrowings upon its
entering into the Credit Agreement in July 1995.
Inflation
The Company does not believe that inflation has had a
material impact on its financial condition or results of
operations.
Recent Statements of Financial Accounting Standards
In 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 121,
Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed Of. This statement establishes
accounting standards for the recognition and measurement of the
impairment of long-lived assets and goodwill and is effective in
1996. Management believes adoption of this statement will have
no material effect on the Company's financial statements.
In October 1995, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 123
(SFAS No. 123), "Accounting for Stock-Based Compensation," which
is effective for the Company on January 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to
continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity
instruments awarded. The Company intends to apply APB No. 25 to
its stock based compensation awards to employees and/or directors
and will disclose the required proforma effect on net income and
earnings per share.
Item 8. Financial Statements and Supplementary Data.
See Item 14 hereof and the Consolidated Financial
Statements attached hereto.
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
There have been no disagreements with the Registrant's
independent accountants of the nature calling for disclosure
under Item 9.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 with respect to the
Registrant's executive officers and directors will be set forth
in the Company's 1996 Proxy Statement included as Exhibit 99.6
hereto and incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 will be set forth
in the Company's 1996 Proxy Statement included as Exhibit 99.6
hereto and incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and
Management.
The information required by Item 12 will be set forth
in the Company's 1996 Proxy Statement included as Exhibit 99.6
hereto and incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The Company beneficially owns 33.1% of the common stock
of Major Realty Corporation ("Major Realty"). Messrs. Bielfield,
Coon, McCarthy & Treadwell are directors of both the Company and
Major Realty. George F. Valassis, beneficial owner of
approximately 13% of the Company's common stock, owns
beneficially approximately 9.8% of the Major Realty common stock.
Mr. Valassis is the father of Doug T. Valassis, a director of the
Company. In October 1995, the Company loaned $5.1 million to
Major Realty, collateralized by real estate, and bearing interest
at prime plus 1.5%.
During the fiscal year ended December 31, 1995, the
Company employed McCarthy & Co., d/b/a/ Long View Capital
Management, a wholly-owned subsidiary of McCarthy Group, Inc., to
furnish investment advisory services to the Company and paid
McCarthy & Co., approximately $243,000 for such services.
Michael R. McCarthy, a director of the Company, is Chairman and a
principal shareholder of McCarthy Group, Inc.
The Company contracts with Redland & Associates, Inc.
and its affiliates to administer health insurance benefits for
its employees and to place property and casualty coverage on
behalf of the Company whereby Redland & Associates receives
commissions from the insurance providers, which totalled $241,000
in 1995. In addition, the Company pays commissions and fees to
Redland & Associates in connection with insurance written and
loss control activities, which totalled $149,000 in 1995.
Redland & Associates reimburses the Company for an allocable
share of certain office occupancy expenses, $192,000 in 1995.
John P. Nelson, President and Chief Operating Officer, and a
director of the Company, is Chairman of the Board and a principal
shareholder of Redland & Associates.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K.
(a) The following documents are filed as a part of this
Report:
1. Financial Statements. The Company's audited
Consolidated Financial Statements for the years ended
December 31, 1995 and 1994 consisting of the following:
Reports of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders'
Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II. Condensed Financial Information
of Registrant
Schedule V. Valuation Accounts
3. The Exhibits filed herewith are set forth in
the Exhibit Index attached hereto.
(b) No Current Reports on Form 8-K have been filed
during the last fiscal quarter of the period covered by this
Report.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Audited Consolidated Financial Statements for the
Years Ended December 31, 1995 and December 31,
1994:
Independent Auditors' Report F-1
Consolidated Balance Sheets F-2
Consolidated Statements of Operations F-3
Consolidated Statement of Stockholders' Equity F-4
Consolidated Statements of Cash Flows F-5
Notes to Consolidated Financial Statements F-6
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this Report to be signed on its behalf by the undersigned,
thereunto duly authorized.
ACCEPTANCE INSURANCE COMPANIES INC.
/s/ Kenneth C. Coon
By _____________________________________ Dated: March 19, 1996
Kenneth C. Coon
Chairman and Chief Executive Officer
/s/ Georgia M. Mace
By _____________________________________ Dated: March 19, 1996
Georgia M. Mace
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
/s/ Jay A. Bielfield
Dated: March 19, 1996 ______________________________
Jay A. Bielfield, Director
/s/ Kenneth C. Coon
Dated: March 19, 1996 ______________________________
Kenneth C. Coon, Director
/s/ Edward W. Elliott, Jr.
Dated: March 19, 1996 ______________________________
Edward W. Elliott, Jr., Director
/s/ Robert LeBuhn
Dated: March 19, 1996 ________________________________
Robert LeBuhn, Director
/s/ Michael R. McCarthy
Dated: March 19, 1996 ________________________________
Michael R. McCarthy, Director
/s/ John P. Nelson
Dated: March 19, 1996 ________________________________
John P. Nelson, Director
/s/ R. L. Richards
Dated: March 19, 1996 ________________________________
R. L. Richards, Director
<PAGE>
/s/ David L. Treadwell
Dated: March 19, 1996 ________________________________
David L. Treadwell, Director
/s/ Doug T. Valassis
Dated: March 19, 1996 ________________________________
Doug T. Valassis, Director
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1995
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
3.1 Restated Certificate of Incorporation of Acceptance
Insurance Companies Inc. Incorporated by reference to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1993.
3.1(a) Amendment to the Registrant's Restated Certificate of
Incorporation. Incorporated by reference to Exhibit
3.(i) to the Registrant's Quarterly Report on Form 10-Q
for the period ended June 30, 1995.
3.2 Restated By-laws of Acceptance Insurance Companies Inc.
Incorporated by reference to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1993.
4.1 Form of Stock Certificate representing shares of
Acceptance Insurance Companies Inc., Common Stock, $.40
par value. Incorporated by reference to Exhibit 4.1 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
10.1 Office Building Lease dated July 19, 1991, between State
of California Public Employees' Retirement System and
Acceptance Insurance Company. Incorporated by reference
to Exhibit 10.7 to Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
10.2 Intercompany Federal Income Tax Allocation Agreement
between Acceptance Insurance Holdings Inc. and its
subsidiaries and Registrant dated April 12, 1990, and
related agreements. Incorporated by reference to
Exhibit 10i to Registrant's Annual Report on Form 10-K
for the fiscal year ended August 31, 1990.
10.3 Employment Agreement dated February 19, 1990 between
Acceptance Insurance Holdings Inc., Registrant and
Kenneth C. Coon. Incorporated by reference to Exhibit
10.65 to Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1991.
10.4 Employment Agreement dated July 2, 1993, between Redland
Insurance Group, Inc., and John P. Nelson. Incorporated
by reference to Exhibit 2 to Registrant's Current Report
on Form 8-K dated July 2, 1993.
10.5 Employment Agreement dated July 2, 1993, between Redland
Insurance Group, Inc., and Richard C. Gibson.
Incorporated by reference to Exhibit 2 to Registrant's
Current Report on Form 8-K dated July 2, 1993.
10.6 $90,000,000 Credit Agreement By and Among the
Registrant, NBD Bank, N.A., First National Bank of
Omaha, FirsTier Bank, N.A., Comerica Bank, First
Interstate Bank of Arizona and NBD Bank, N.A., As Agent,
dated as of July 26, 1995. Incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly Report on
Form 10-Q for the period ended June 30, 1995.
10.7 Employment Agreement dated July 2, 1993 between the
Registrant and Richard C. Gibson. Incorporated by
reference to Exhibit 10.6 to the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30,
1994.
10.8 Warrants to purchase a total of 389,507 shares of common
stock ($.10 par value) of the Registrant dated April 10,
1992, issued by the Registrant to the various purchasers
of the Floating Rate Secured Subordinated Notes, due
1993, Series A and B. Incorporated by reference to
Exhibit 10.41 to the Registrant's Annual Report on Form
10-K for the fiscal year ended December 31, 1991.
11 Computation of Income (Loss) per share.
21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Report on schedules of Deloitte & Touche LLP.
27 Financial Data Schedule.
28P Schedule P -- Analysis of Losses and Loss Expenses of
Consolidated Annual Statement for the year 1993. Filed
in paper format pursuant to S-T Regulation 311.
99.1 Acceptance Insurance Companies Inc., 1992 Incentive
Stock Option Plan effective as of December 22, 1992.
Incorporated by reference to Exhibit 10.1 to
Registrant's Registration Statement on Form S-1,
Registration No. 33-53730.
99.2 Acceptance Insurance Companies Inc., Employee Stock
Purchase Plan, effective as of December 22, 1992.
Incorporated by reference to Exhibit 10.2 to
Registrant's Registration Statement on Form S-1,
Registration No. 33-53730.
99.3 Acceptance Insurance Companies Inc., Employee Stock
Ownership and Tax Deferred Savings Plan as merged,
amended and restated effective October 1, 1990.
Incorporated by reference as Exhibit 10.4 to
Registrant's Quarterly Report on Form 10-Q for the
quarter ended November 30, 1990.
99.4 First Amendment to Acceptance Insurance Companies Inc.
Employee Stock Ownership and Tax Deferred Savings Plan.
Incorporated by reference to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1993.
99.5 Second Amendment to Acceptance Insurance Companies Inc.
Employee Stock Ownership and Tax Deferred Savings Plan.
Incorporated by reference to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1993.
99.6 Proxy Statement for 1996 Annual Meeting of Shareholders
filed on or prior to April 29, 1996.
99.7 Acceptance Insurance Companies Inc. Amended 1992
Incentive Stock Option Plan. Incorporated by reference
to Registrant's Proxy Statement for 1995 Annual Meeting
of Shareholders filed on or prior to April 30, 1996.
99.8 Acceptance Insurance Companies Inc. 1996 Incentive Stock
Option Plan. Incorporated by reference to Registrant's
Proxy Statement for 1996 Annual Meeting of Shareholders
filed on or prior to April 29, 1996.
99.9 Acceptance Insurance Companies Inc. Amended Employee
Stock Purchase Agreement. Incorporated by reference to
Registrant's Proxy Statement for 1995 Annual Meeting of
Shareholders filed on or prior to April 30, 1995.
ACCEPTANCE INSURANCE COMPANIES INC.
Consolidated Financial Statements for the
Years Ended December 31, 1995 and 1994
and Independent Auditors' Report
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Acceptance Insurance Companies Inc.
We have audited the accompanying consolidated balance sheets of
Acceptance Insurance Companies Inc. and subsidiaries as of December
31, 1995 and 1994, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1995. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present
fairly, in all material respects, the financial position of
Acceptance Insurance Companies Inc. and subsidiaries as of December
31, 1995 and 1994, and the results of their operations and their cash
flows for each of the three years in the period ended December 31,
1995, in conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements,
effective January 1, 1994 the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 12, 1996
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED BALANCE SHEETS (dollars in thousands except per share data)
DECEMBER 31, 1995 AND 1994
ASSETS 1995 1994
<S> <C> <C>
Investments:
Fixed maturities available for sale (Note 2) $218,300 $190,180
Marketable equity securities (Note 2) 48,537 12,530
Mortgage loans and other investments 11,290 1,869
Real estate 3,354 3,891
Short-term investments, at cost, which approximates market 86,520 56,273
-------- --------
368,001 264,743
Cash 7,648 9,339
Investment in Major Realty Corporation (Note 4) 9,878 5,079
Receivables, net (Note 5) 106,246 76,993
Reinsurance recoverable on unpaid loss and loss adjustment expenses 167,888 79,811
Prepaid reinsurance premiums 38,341 25,988
Property and equipment, net of accumulated depreciation of
$5,167 and $2,830, respectively 5,284 4,572
Deferred policy acquisition costs 24,585 19,834
Excess of cost over acquired net assets 37,003 38,142
Deferred income tax (Note 6) 9,403 13,025
Other assets 6,757 5,561
-------- --------
$781,034 $543,087
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses (Note 7) $369,244 $221,325
Unearned premiums 124,122 97,170
Amounts payable to reinsurers 18,161 19,309
Accounts payable and accrued liabilities 22,720 16,529
Bank borrowings, term debt and other borrowings (Note 8) 69,000 29,000
-------- --------
Total liabilities 603,247 383,333
-------- --------
Contingencies (Note 9)
Stockholders' equity (Notes 8 and 10):
Preferred stock, no par value, 5,000,000 shares authorized,
none issued - -
Common stock, $.40 par value, 20,000,000 shares authorized; 15,141,220 and
15,128,846 shares issued 6,057 6,052
Capital in excess of par value 194,823 194,674
Unrealized gain (loss) on available-for-sale securities, net of tax 19 (13,705)
Accumulated deficit (18,848) (23,003)
-------- --------
182,051 164,018
Less:
Treasury stock, at cost, 35,559 shares (1,564) (1,564)
Contingent stock, 240,000 shares (Note 11) (2,700) (2,700)
-------- --------
Total stockholders' equity 177,787 159,754
-------- --------
$781,034 $543,087
======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
<S> <C> <C> <C>
Revenues:
Insurance premiums earned (Note 7) $271,584 $202,659 $128,082
Insurance agency commissions 2,863 3,629 4,119
Net investment income (Note 2) 20,651 13,276 10,844
Net realized capital gains 2,707 554 2,250
-------- -------- --------
297,805 220,118 145,295
-------- -------- --------
Costs and expenses:
Cost of revenues:
Insurance losses and loss adjustment expenses (Note 7) 212,337 142,951 92,805
Insurance agency costs 2,596 3,180 3,794
Insurance underwriting expenses 72,602 52,627 36,905
General and administrative expenses 2,165 1,684 1,225
-------- -------- --------
289,700 200,442 134,729
-------- -------- --------
Operating profit 8,105 19,676 10,566
-------- -------- --------
Other income (expense):
Interest expense (2,591) (1,693) (2,235)
Share of net loss of investee (Note 4) (265) (297) (301)
Other, net 94 26 (39)
-------- -------- --------
(2,762) (1,964) (2,575)
-------- -------- --------
Income before income taxes and minority interests 5,343 17,712 7,991
Income tax expense (benefit) (Note 6):
Current 4,002 2,487 167
Deferred (2,814) (5,930) -
-------- -------- --------
1,188 (3,443) 167
Minority interests in net income of consolidated
subsidiaries - (80) (238)
-------- -------- --------
Net income $ 4,155 $ 21,075 $ 7,586
======== ======== ========
Net income per share:
Primary $ 0.28 $ 1.71 $ 0.86
======== ======== =======
Fully diluted $ 0.27 $ 1.68 $ 0.85
======== ======== ========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
Retained
Capital in Unrealized Earnings Total
Common Excess of Gain (Accumulated Treasury Contingent Stockholders'
Stock Par Value (Loss) Deficit) Stock Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1993 $1,407 $ 86,527 $ (183) $(51,664) $(1,564) $ - $ 34,523
Issuance of common stock from
rights offering 1,597 29,568 - - - - 31,165
Issuance of common stock from
note payable conversion 350 6,650 - - - - 7,000
Issuance of common stock in
connection with Redland
acquisition 632 17,132 - - - (2,700) 15,064
Issuance of common stock under
employee benefit plans 5 125 - - - - 130
Change in unrealized gain (loss)
on marketable equity securities - - 249 - - - 249
Net income - - - 7,586 - - 7,586
------ -------- -------- -------- ------- ------- --------
Balance at December 31, 1993 3,991 140,002 66 (44,078) (1,564) (2,700) 95,717
Issuance of common stock on
exercise of warrants 1,946 51,467 - - - - 53,413
Issuance of common stock in
connection with Statewide
acquisition 107 2,993 - - - - 3,100
Issuance of common stock under
employee benefit plans 8 212 - - - - 220
Change in unrealized gain (loss)
on available-for-sale securities,
net of income taxes of $6,424 - - (13,771) - - - (13,771)
Net income - - - 21,075 - - 21,075
------ -------- -------- --------- ------- ------- --------
Balance at December 31, 1994 6,052 194,674 (13,705) (23,003) (1,564) (2,700) 159,754
Issuance of common stock under
employee benefit plans 5 149 - - - - 154
Change in unrealized gain (loss)
on available-for-sale securities,
net of income taxes of $(6,435) - - 13,724 - - - 13,724
Net income - - - 4,155 - - 4,155
------ -------- -------- -------- ------- ------- --------
Balance at December 31, 1995 $6,057 $194,823 $ 19 $(18,848) $(1,564) $(2,700) $177,787
====== ======== ======== ======== ======= ======= ========
<FN>
The accompanying notes are an integral part of the consolidated financial statements.
</FN>
<PAGE>
</TABLE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,155 $ 21,075 $ 7,586
Adjustments to reconcile net income to net cash
provided by (used for) operating activities:
Depreciation and amortization 3,821 3,522 3,533
Deferred tax benefit (2,814) (5,930) -
Share of net loss of investee 265 297 301
Minority interests - 80 238
Policy acquisition costs incurred (62,171) (55,234) (37,147)
Amortization of policy acquisition costs 57,420 47,215 31,484
Gain on sale of investments (2,707) (554) (2,250)
Increase (decrease) in cash attributable to changes in assets
and liabilities, net of effects of purchase of companies:
Receivables (29,253) (28,855) 8,138
Net losses and loss adjustment expenses 59,842 25,800 24,588
Net unearned premiums 14,599 26,515 9,424
Amounts payable to reinsurers (1,148) 12,123 (25,600)
Accounts payable and accrued 6,191 (2,402) 3,137
Other, net (1,674) (978) 1,141
--------- --------- --------
Net cash from operating activities 46,526 42,674 24,573
--------- --------- --------
Cash flows from investing activities:
Proceeds from sales of investments - 640 22,230
Proceeds from sales of investments available-for-sale 135,820 24,179 115,339
Proceeds from maturities of investments 42,938 37,483 13,441
Proceeds from maturities of investments available-for-sale 10,306 15,437 17,906
Proceeds from maturities of investments held-to-maturity - - 6,507
Purchases of investments (51,233) (48,162) (36,124)
Purchases of investments available-for-sale (187,575) (101,243) (173,695)
Purchase of companies, net of cash and short-term investments acquired - - (4,165)
Other, net (2,432) (2,022) (794)
--------- --------- --------
Net cash from investing activities (52,176) (73,688) (39,355)
--------- --------- --------
Cash flows from financing activities:
Proceeds from bank borrowings 40,000 29,000 6,597
Repayments of bank borrowings - (18,597) (8,086)
Repayments of term debt, other borrowings and notes
payable to affiliates - (354) (10,764)
Proceeds from issuance of common stock 154 53,633 31,295
Minority interests - 7 830
--------- --------- ---------
Net cash from financing activities 40,154 63,689 19,872
--------- --------- ---------
Net increase in cash and short-term investments 34,504 32,675 5,090
Cash and short-term investments at beginning of period 50,236 17,561 12,471
--------- --------- ---------
Cash and short-term investments at end of period $ 84,740 $ 50,236 $ 17,561
========= ========= =========
Non-cash financing activities:
Note payable to affiliate converted to equity $ 7,000
=========
Issuance of common stock for acquisition of Redland $ 15,064
=========
Issuance of common stock for acquisition of Statewide $ 3,100
=========
<FN>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations - Acceptance Insurance Companies Inc.
(the "Company") is primarily engaged in the specialty property and
casualty insurance business through its wholly-owned subsidiaries,
Acceptance Insurance Holdings Inc. ("Acceptance") and The Redland
Group, Inc. ("Redland"), which the Company acquired on April 11,
1990 and August 13, 1993, respectively.
The Company concentrates on writing specialty coverages not
generally emphasized by standard insurance carriers. These
specialty coverages primarily include specialty automobile lines,
surplus lines liability and substandard property coverages,
complex general liability risks, workers' compensation, and crop
insurance. Insurance is marketed through both general agents and
independent agents. The Company writes business as both an
admitted (licensed) and non-admitted (excess and surplus lines)
carrier in most of the United States.
Principles of Consolidation - The Company's consolidated financial
statements include the accounts of its majority-owned
subsidiaries. All significant intercompany transactions have been
eliminated.
Insurance Accounting - Generally, premiums are recognized as
income ratably over the terms of the related policies. The crop
hail premiums are recorded utilizing historical loss activity to
match premiums earned with estimated loss exposure. Insurance
costs are associated with premiums earned, resulting in the
recognition of profits over the term of the policies. This
association is accomplished through amortization of deferred
policy acquisition costs and provisions for unearned premiums and
loss reserves.
The Company writes multi-peril crop insurance ("MPCI") pursuant
to terms established by the federal Consolidated Farm Service
Agency ("CFSA"). The Company issues and administers policies,
for which it receives administrative fees and the Company
participates in a profit sharing arrangement in which it
receives from the government a portion of the aggregate profit, or
pays a portion of the aggregate loss, with respect to the business
it writes. The Company's share of the profit or loss on the MPCI
business it writes is determined under a formula established by
the CFSA. The Company records an estimate of its share of the
profit or loss based upon available loss information. The Company
receives a profit share in cash, with any amount in excess of 15%
of its MPCI Retention (as defined in the profit sharing agreement)
in any year carried forward to future years, or it must pay its
share of losses. The Company recognizes as income in the current
year these amounts which are carried forward as a receivable. The
amounts carried forward as a receivable are received in future
years in cash or as a reduction of losses due the CFSA. MPCI
premiums received during the year which correspond to next year's
crop season are deferred until the next year. Insurance
underwriting expenses are presented net of administrative fees
received from the CFSA for reimbursement of costs incurred by the
Company.
The liability for unearned premiums represents the portion of
premiums written which relates to future periods and is calculated
generally using the pro rata method. The Company also provides a
liability for policy claims based on its review of individual
claim cases and the estimated ultimate settlement amounts. This
liability also includes estimates of claims incurred but not
reported based on Company and industry paid and reported claim and
settlement expense experience. Differences which arise
between the ultimate liability for claims incurred and the
liability established will be reflected in the statement of
operations of future periods as additional claim information
becomes available.
Certain costs of acquiring new insurance business, principally
commissions, premium taxes, and other underwriting expenses, have
been deferred. Such costs are being amortized as related premiums
are earned. Anticipated investment income is considered in
evaluating recoverability of deferred acquisition costs.
Use of Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results may differ from those
estimates.
Estimates made by management include the liability for losses and
loss adjustment expenses and recoverability of deferred policy
acquisition costs. The Company underwrites property and casualty
coverages in a number of specialty areas of business which may
involve greater risks than standard property and casualty lines,
including the risks associated with the absence of a long-term,
reliable historical claims experience. These risk components may
make more difficult the task of estimating reserves for
losses, and cause the Company's underwriting results to fluctuate.
Due to the inherent uncertainty of estimating reserves, it has
been necessary, and may over time continue to be necessary, to
revise estimated liabilities as reflected in the Company's loss
and loss adjustment expense reserves. Additionally, conditions
and trends that have affected the development of loss reserves in
the past may not necessarily occur in the future.
<PAGE>
Statements of Cash Flows - The Company aggregates cash and
short-term investments with maturity dates of three months or less
from the date of purchase for purposes of reporting cash flows.
As of December 31, 1995 and 1994, approximately $9,428,000 and
$15,376,000 of short-term investments had maturity dates at
acquisition of greater than three months.
Investments - On January 1, 1994, the Company adopted Statement of
Financial Accounting Standards No. 115 ("SFAS 115"), Accounting
for Certain Investments in Debt and Equity Securities. As a
result of adoption of this statement, $2,912,000 was credited to
stockholders' equity at January 1, 1994. Since the adoption of
SFAS 115, all debt and equity securities have been classified as
available-for-sale. Available-for-sale securities are stated at
fair value with the unrealized gains and losses reported as a
separate component of stockholders' equity, net of tax.
Mortgage loans are carried at the lower of their unpaid principal
balance or if impaired, their estimated net realizable value.
Real estate is stated at the lower of cost or estimated net
realizable value and is non-income producing.
Property and Equipment - Property and equipment are stated at
cost, net of accumulated depreciation. Depreciation is recognized
principally using the straight-line method over a period of five
to ten years.
Excess of Cost Over Acquired Net Assets - The excess of cost over
equity in acquired net assets is being amortized principally using
the straight-line method over periods not exceeding 40 years.
Accumulated amortization approximated $4,439,000 and $3,299,000 at
December 31, 1995 and 1994, respectively.
Recoverability of this asset is evaluated periodically based on
management's estimate of future undiscounted earnings of the
businesses acquired.
Stock Options - The Company recognizes compensation cost relating
to stock options based upon the difference between the market
price of the stock at the date of grant, and the option exercise
price.
New Accounting Pronouncements - In 1995, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards
121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of". This statement establishes
accounting standards for the recognition and measurement of the
impairment of long-lived assets and goodwill and is effective in
1996. Management believes adoption of this statement will have
no material effect on the Company's financial statements.
Per Share Data - Primary and fully diluted earnings per share are
based on weighted average shares outstanding of approximately 15.0
million and 15.2 million, respectively, for the year ended
December 31, 1995; 13.4 million and 13.6 million, respectively,
for the year ended December 31, 1994; and approximately 11.6
million and 11.9 million, respectively, for the year ended
December 31, 1993. Included in weighted average shares
outstanding in 1993 and 1994 is the assumed conversion of all
outstanding options and warrants utilizing the modified treasury
stock method, since average outstanding options and warrants
during those periods exceeded 20% of the outstanding stock. Under
this method, appropriate adjustment to net income is made to
reflect the assumed use of the proceeds of the conversion. In
1995, the treasury stock method was used without modification.
Reclassifications - Certain prior period accounts have been
reclassified to conform with current year presentation.
2. INVESTMENTS
A summary of net investment income earned on the investment
portfolio for the years ended December 31 is as follows (in
thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Interest on fixed maturities $14,913 $10,357 $ 9,177
Interest on short-term investments 5,461 2,101 711
Other 829 1,420 1,338
------- ------- -------
21,203 13,878 11,226
Investment expenses (552) (602) (382)
------- ------- -------
Net investment income $20,651 $13,276 $10,844
======= ======= =======
</TABLE>
The amortized cost and related fair values of investments in the
accompanying balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1995:
Fixed maturities available for sale:
U.S. Treasury and government
securities $ 51,022 $ 684 $ 17 $ 51,689
States, municipalities and
political subdivisions 69,433 1,991 230 71,194
Mortgage-backed securities 72,359 407 5,546 67,220
Other debt securities 27,484 1,060 347 28,197
-------- ------ ------- --------
$220,298 $4,142 $ 6,140 $218,300
======== ====== ======= ========
Marketable equity securities -
preferred stock $ 31,299 $ 266 $ 957 $ 30,608
======== ====== ======= ========
Marketable equity securities -
common stock $ 15,211 $3,302 $ 584 $ 17,929
======== ====== ======= ========
December 31, 1994:
Fixed maturities available for sale:
U.S. Treasury and government
securities $ 68,308 $ 4 $ 2,225 $ 66,087
States, municipalities and
political subdivisions 39,544 8 1,957 37,595
Mortgage-backed securities 73,024 - 13,949 59,075
Other debt securities 28,199 100 876 27,423
-------- ------ ------- --------
$209,075 $ 112 $19,007 $190,180
======== ====== ======= ========
Marketable equity securities -
preferred stock $ 7,803 $ 4 $ 1,049 $ 6,758
======== ====== ======= ========
Marketable equity securities -
common stock $ 5,960 $ 530 $ 718 $ 5,772
======== ====== ======= ========
</TABLE>
The amortized cost and related fair values of the fixed maturity
securities as of December 31, 1995 are shown below by stated
maturity dates. Actual maturities may differ from stated
maturities because the borrowers may have the right to call or
pay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Carrying
Cost Value
(in thousands)
<S> <C> <C>
Fixed maturities available for sale:
Due in one year or less $ 14,898 $ 14,918
Due after one year through five years 45,144 45,949
Due after five years through ten years 39,806 40,688
Due after ten years 48,091 49,525
-------- --------
147,939 151,080
Mortgage-backed securities 72,359 67,220
-------- --------
$220,298 $218,300
======== ========
</TABLE>
<PAGE>
The Company's collateral backed securities portfolio consists of
mortgage- backed securities, all of which are collateralized
mortgage obligations ("CMOs"). The following table sets forth as
of December 31, 1995 the categories of the Company's CMOs, which
at such date had an average expected life of approximately six
years (in thousands):
<TABLE>
<CAPTION>
Par Amortized
Value Cost Carrying
Type of CMO (1) (1) Value
<S> <C> <C> <C>
Fixed coupon $16,838 $16,738 $17,024
Floating rate (2) 23,192 22,822 22,720
Inverse floating rate (2) 34,274 32,799 27,476
------- ------- -------
Total CMOs (3) $74,304 $72,359 $67,220
======= ======= =======
<FN>
(1) Par value is the face amount of the underlying mortgage
collateral. Any cost in excess of par value is a "premium"
whereas cost lower than par value is a "discount". The
Company's aggregate CMO portfolio has been purchased at a
discount.
(2) Floating rate CMOs provide an increased interest rate when a
specified index interest rate increases and a lower interest
rate when such index rate decreases, while inverse floating
rate CMOs provide a lower interest rate when the index
increases and a higher rate when the index rate decreases.
Generally, the Company's floating rate and inverse floating
rate securities are tied to the one month LIBOR. The market
values of the Company's floating rate and inverse rate CMOs
are significantly impacted by various factors, including the
outlook for future interest rate changes and such securities'
relative liquidity under current market conditions.
(3) All of the CMO portfolio collateral is guaranteed by
government agencies.
</FN>
</TABLE>
Proceeds from sales of fixed maturity securities during the years
ended December 31, 1995, 1994 and 1993 were approximately
$113,523,000, $21,729,000 and $115,339,000, respectively. Gross
realized gains on sales of fixed maturity securities were
approximately $1,421,000, $55,000 and $2,023,000, and gross
realized losses on sales of fixed maturity securities were
approximately $499,000, $13,000 and $17,000 during the years ended
December 31, 1995, 1994 and 1993, respectively.
As required by insurance regulatory laws, certain bonds with an
amortized cost of approximately $18,596,000 and short-term
investments of approximately $376,000 at December 31, 1995 were
deposited in trust with regulatory agencies.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" ("SFAS 107"), requires
fair value disclosures for financial instruments. Certain
financial instruments, including insurance contracts, were
excluded from SFAS 107 disclosure requirements due to perceived
difficulties in measuring fair value.
In determining fair value, the Company used quoted market prices
when available. For instruments where quoted market prices were
not available, the Company used independent pricing services or
appraisals by the Company's management. Those services and
appraisals reflected the estimated present values utilizing
current risk adjusted market rates of similar instruments.
Considerable judgment is necessarily required in interpreting
market data to develop the estimates of fair value. Accordingly,
the estimates presented herein are not necessarily indicative of
the amounts the Company could realize in a current market
exchange. The use of different market assumptions and/or
estimation methodologies may have a material effect on the
estimated fair value.
The carrying values of cash and short-term investments,
receivables and accounts payable, and accruals are deemed to be
reasonable estimates of their fair values due to their short-term
nature. The estimated fair values of the Company's other
financial instruments as of December 31, 1995 and 1994, are as
follows (in thousands):
<TABLE>
<CAPATION>
Carrying Value Estimated Fair Value
1995 1994 1995 1994
<S> <C> <C> <C> <C>
Investments in fixed
maturity securities $218,300 $190,180 $218,300 $190,180
Investments in marketable
equity securities 48,537 12,530 48,537 12,530
Mortgage loans and other
investments 11,290 1,869 11,290 1,869
Investment in Major Realty
Corporation 9,878 5,079 9,878 5,079
Bank borrowings, term debt
and other borrowings 69,000 29,000 69,000 29,000
Financial guarantees (Note 9) - - - -
</TABLE>
4. INVESTMENT IN MAJOR REALTY CORPORATION
As of December 31, 1995 and 1994, the Company held an approximate
33% equity investment in Major Realty Corporation, a publicly
traded real estate company engaged in the ownership and
development of its undeveloped land in Orlando, Florida.
At December 31, 1995, the carrying value of the Company's equity
investment in Major Realty approximated $4.8 million or $2.11 per
share. At that date, Major Realty had a stockholders' equity of
approximately $6.9 million and the quoted market price of Major
Realty was $2.00 per share. The Company expects to realize a
minimum of its carrying value in Major Realty based on the
estimated net realizable values of Major Realty's underlying
assets. The Company's estimate of net realizable value is based
upon several factors including estimates from Major Realty's
management, asset appraisals and sales to date of Major Realty's
assets. Commencing in 1992, the Company has not recognized its
share of net gains realized by Major Realty on sales of real
estate but continues to recognize its share of general and
administrative expenses recorded by Major Realty.
During 1995, the Company loaned Major Realty $5.1 million,
collateralized by real estate. Terms of the note call for
interest payable quarterly at prime plus 1.5%. Principal is
payable as real estate is sold with a final maturity on May 1,
1998. The note is convertible into Major Realty stock at the
option of the Company at the prevailing market price at
conversion. Interest income during 1995 of $106,000, is included
in net investment income.
The following summary financial data for Major Realty as of and
for the years ended December 31, 1995 and 1994 was obtained from
Major Realty's consolidated financial statements (in thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Land held for sale or development $ 4,577 $ 7,038
Mortgage note receivable 6,107 2,750
Other assets 1,851 964
------- -------
Total assets $12,535 $10,752
======= =======
Mortgage and other notes payable $ 5,064 $ 8,038
Other liabilities 876 1,611
Stockholders' equity 6,595 1,103
------- -------
Total liabilities and
stockholders' equity $12,535 $10,752
======= =======
Total revenues $10,611 $ 4,087
Gross profit 6,849 2,697
Net income 5,492 1,089
</TABLE>
<PAGE>
5. RECEIVABLES
The major components of receivables at December 31 are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Insurance premiums and agents' balances due $ 60,602 $40,308
Amounts recoverable from reinsurers 20,379 16,036
Profit sharing gain due from the CFSA 19,616 17,022
Accrued interest 4,023 2,648
Installment notes receivable 3,207 1,916
Other 851 384
Less allowance for doubtful accounts (2,432) (1,321)
-------- -------
$106,246 $76,993
======== =======
</TABLE>
6. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes", effective
January 1, 1993. The prospective application of SFAS No. 109
resulted in no effect upon net income for the year ended
December 31, 1993.
SFAS No. 109 requires that the Company recognize a net deferred
tax asset or liability for all temporary differences and a related
valuation allowance when realization of the asset is uncertain.
Management believes it is more likely than not that the Company
will realize a portion of the deferred tax asset. The valuation
allowance at December 31, 1995 and 1994 primarily relates to
capital loss items whose realization is uncertain due to
insufficient carryforwards of capital gains. The net deferred tax
asset is as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994
<S> <C> <C>
Unpaid losses and loss adjustment expenses $ 10,701 $ 7,263
Unearned premiums 6,004 4,840
Allowances for doubtful accounts 869 449
Other 1,443 2,018
Unrealized loss on fixed maturities available-for-sale 699 6,424
Major Realty basis difference 7,950 7,632
-------- -------
Deferred tax asset 27,666 28,626
-------- -------
Deferred policy acquisition costs (8,605) (6,744)
Unrealized gain on marketable equity securities (710) -
Other (888) (681)
-------- -------
Deferred tax liability (10,203) (7,425)
-------- -------
17,463 21,201
Valuation allowance (8,060) (8,176)
-------- -------
Net deferred tax asset $ 9,403 $13,025
======== =======
</TABLE>
Income taxes computed by applying statutory rates to income before
income taxes are reconciled to the provision for income taxes set
forth in the consolidated financial statements as follows (in
thousands):
<TABLE>
<CAPTION>
December 31,
1995 1994
<S> <C> <C>
Computed U.S. federal income taxes $ 1,870 $ 6,022
Nondeductible amortization of goodwill and
other intangibles 541 514
Tax-exempt interest income (1,049) (400)
Dividends received deduction (390) (217)
Recognition of a portion of the deferred - (9,469)
tax asset
Other 216 107
------- -------
Income tax (benefit) expense $ 1,188 $(3,443)
======= =======
</TABLE>
The Company recognized a current tax expense of approximately
$167,000 for the year ended December 31, 1993 as a result of
amounts due under alternative minimum taxable income provisions
which limit net operating loss carryforwards.
Cash payments for income taxes were approximately $4,253,000,
$1,478,000, and $232,000 during the years ended December 31, 1995,
1994, and 1993.
7. INSURANCE PREMIUMS AND CLAIMS
Insurance premiums written and earned by the Company's insurance
subsidiaries for the years ended December 31, 1995, 1994 and 1993
are as follows (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Direct premiums written $ 514,241 $ 410,228 $ 253,359
Assumed premiums written 23,108 37,255 2,683
Ceded premiums written (251,166) (218,307) (118,537)
--------- --------- ---------
Net premiums written $ 286,183 $ 229,176 $ 137,505
========= ========= =========
Direct premiums earned $ 489,834 $ 376,624 $ 250,074
Assumed premiums earned 20,563 33,802 3,642
Ceded premiums earned (238,813) (207,767) (125,634)
--------- --------- ---------
Net premiums earned $ 271,584 $ 202,659 $ 128,082
========= ========= =========
</TABLE>
Included in ceded premiums written and earned is $95.4 million,
$92.7 million, and $40.1 million of MPCI premiums ceded to the
CFSA for the years ended December 31, 1995, 1994, and 1993,
respectively. Included in assumed premiums written and earned in
1995 and 1994 is $14.2 million and $17.0 million of MPCI profit
share.
Five insurance agencies produced direct premiums written
aggregating approximately 15%, 18% and 30% of total direct
premiums during the years ended December 31, 1995, 1994 and 1993,
respectively.
The following table presents an analysis of the Company's reserves
for losses and loss adjustment expenses, reconciling beginning and
ending balances for the years ended December 31 (in thousands):
<TABLE>
<CAPTION>
1995 1994 1993
<S> <C> <C> <C>
Net loss and loss adjustment expense
reserves at beginning of year $ 141,514 $ 115,714 $ 77,627
--------- --------- --------
Net loss and loss adjustment expense
reserves of Redland at date of
acquisition - - 13,499
--------- --------- --------
Provisions for net losses and loss
adjustment expenses for claims
occurring in the current year 190,019 137,881 90,250
Increase in net reserves for claims
occurring in prior years 22,318 5,070 2,555
--------- --------- --------
212,337 142,951 92,805
--------- --------- --------
Net losses and loss adjustment expenses
paid for claims occurring during:
Current year (80,281) (60,375) (40,209)
Prior years (72,214) (56,776) (28,008)
--------- --------- --------
(152,495) (117,151) (68,217)
--------- --------- --------
Net loss and loss adjustment expense
reserves at end of year 201,356 141,514 115,714
Reinsurance recoverable on unpaid loss
and loss adjustment expenses 167,888 79,811 95,886
--------- --------- --------
Gross loss and loss adjustment reserves $ 369,244 $ 221,325 $211,600
========= ========= ========
</TABLE>
<PAGE>
Insurance loss and loss adjustment expenses have been reduced by
recoveries recognized under reinsurance contracts of $300.9
million, $145.5 million, and $216.2 million for the years ended
December 31, 1995, 1994, and 1993, respectively, of which
approximately $204.6 million, $65.8 million, and $156.3 million,
respectively, relate to recoveries on the MPCI business from
the CFSA.
The liability for losses and loss adjustment expenses is
determined by management based on historical patterns and
expectations of claims reported and paid, trends in claim
experience, information available on an industry-wide basis, as
well as changes in the Company's claim handling procedures and
premium rates. The Company's lines of business are considered
less predictable than standard insurance coverages. In 1995, the
Company determined that its liability was understated and made an
additional provision through a charge to earnings of $22.3
million. The liability established represents management's best
estimate and is based on sources of available evidence including
an analysis prepared by an actuary engaged by the Company. The
Company believes it is reasonably possible that such liability may
vary by five percent.
8. BANK BORROWINGS, TERM DEBT AND OTHER BORROWINGS AND NOTES PAYABLE
TO AFFILIATES
On July 26, 1995, the Company amended its borrowing arrangements
with its bank lenders providing a $75 million three year revolving
line of credit which, with the consent of the banks, can be
renewed annually for three years, and a $15 million line of credit
with a maturity of the earlier of July 1997 or one year from the
date of the borrowing. Further, the Company may select its
interest rate as either the prime rate or LIBOR plus a margin
of .75% to 1.5% and 1.5% to 2.25% for the $75 million revolving
line of credit and $15 million line of credit, respectively,
depending on the Company's debt to equity ratio. Interest is
payable quarterly. At December 31, 1995 and 1994, the Company had
$69 million and $29 million outstanding under this arrangement at
a weighted average interest rate of 6.54% and 7.375%,
respectively.
At December 31, 1995, the line of credit was collateralized by the
Company's Acceptance and Redland common stock. Borrowings and
interest on the line of credit averaged $34,315,000 and 7.0%
during 1995 and $20.9 million and 6.3% during 1994. The line of
credit contains covenants which do not permit the payment of
dividends by the Company, requires the Company to maintain certain
operating and debt service coverage ratios, requires maintenance
of specified levels of surplus and requires the Company to meet
certain tests established by regulatory authorities.
The Company issued $9.5 million of Secured Subordinated Notes to
certain directors or stockholders in April 1992 through the
exchange of previously issued secured and unsecured notes
aggregating approximately $8.3 million and cash. Additionally,
the Company issued to the holders of the Secured Subordinated
Notes approximately 97,500 common stock warrants exercisable
for five years at a price of $9.50 per share, of which 86,101
warrants remained outstanding at December 31, 1995. In January
1993, these notes were redeemed.
Cash payments for interest were approximately $2.3 million, $1.5
million and $2.5 million during the years ended December 31, 1995,
1994 and 1993, respectively.
9. CONTINGENCIES
The Company is subject to a lawsuit in the State of California
alleging unfair competition, the outcome of which is not determinable
at the present time, but an adverse outcome is reasonably possible.
No liabilities have been accrued with respect to this litigation at
December 31, 1995.
The Company is involved in various insurance related claims and
other legal actions arising from the normal conduct of business.
Management believes that the outcome of these proceedings will not
have a material effect on the consolidated financial statements of
the Company.
At December 31, 1995, Acceptance Premium Finance Company, Inc., an
affiliate, had a revolving line of credit agreement which provided
for borrowings up to $8,000,000 maturing in September, 1996.
Borrowings under this agreement are guaranteed by the Company.
Acceptance Premium Finance Company, Inc. had $7,200,000 and
$500,000 outstanding under this line of credit at December 31,
1995 and 1994, respectively.
A subsidiary of the Company has guaranteed debt of $775,000
relating to a real estate partnership in which the subsidiary has
a limited partnership interest.
10.COMMON STOCK ISSUED
On January 27, 1993, the Company completed a Common Stock Rights
Offering to raise equity capital resulting in the issuance of
3,992,480 units, at $8.00 per unit, consisting of one share of
common stock and a warrant for the purchase of one share of common
stock exercisable at $11.00. Net proceeds of approximately $31.2
million were used in part to retire $9.5 million of Secured
Subordinated Notes (see Note 8).
Effective April 15, 1993, the holder of a $7,000,000 Secured
Subordinated Note of one of the Company's subsidiaries, which had
been assumed by the Company, exchanged such note for 875,000
shares of common stock and warrants to purchase 875,000 additional
shares of common stock. The shares of common stock and warrants
were identical to the shares and warrants issued in the
Company's Rights Offering.
On December 1, 1994, pursuant to a call by the Company to redeem
outstanding warrants, approximately 4.85 million of such warrants
were exercised to purchase shares of common stock, resulting in
net proceeds to the Company of approximately $53.4 million.
11.ACQUISITIONS
On March 31, 1994, the Company entered into an Agreement and Plan
of Merger with Statewide Insurance Corporation (Statewide), the
exclusive general agent for the Company's non-standard automobile
insurance program underwritten by Phoenix Indemnity Insurance
Company (Phoenix Indemnity), pursuant to which the Company
acquired Statewide. Statewide owned 20% of the outstanding common
stock of Phoenix Indemnity which was a previously 80% owned
subsidiary of the Company. The acquisition was effective April 1,
1994 and was accounted for as a purchase.
The purchase price of approximately $3.1 million, comprised of
approximately 266,000 shares of the Company's common stock, was
allocated based upon the estimated fair market value of assets
acquired and liabilities assumed. The purchase price in excess of
the fair market value of the net assets acquired is being
amortized using the straight-line method over 40 years.
On August 13, 1993, the Company acquired all of the outstanding
common stock, warrants to purchase common stock, and preferred
stock of Redland pursuant to an Exchange Agreement. Redland
underwrites multi-peril crop, crop hail, specialty automobile, and
farmowner insurance coverages. The acquisition of Redland was
accounted for as a purchase transaction. The purchase price of
approximately $15.4 million, comprised of 1,339,000 shares
of the Company's common stock and acquisition related costs of
$306,000, was allocated based upon the estimated fair market value
of assets acquired and liabilities assumed. The purchase price in
excess of the fair market value of the net assets acquired is
being amortized using the straight-line method over 40 years.
The results of operations for Redland are included in the
accompanying financial statements effective July 1, 1993. The
purchase price does not reflect 240,000 shares issued by the
Company and held in escrow pursuant to the Exchange Agreement, as
a fund against which the Company may assert certain claims. The
primary contingency under which claims may be asserted is the
ultimate development of Redland's liability for losses and loss
adjustment expenses. Upon resolution of contingencies related to
the acquisition, such shares will be returned to the Company or
released to former Redland stockholders.
The pro forma financial data, which gives effect to the
acquisition of Redland as though it had been completed January 1,
1993, for the year ended December 31, 1993, includes revenues of
$157.3 million, net loss of $1.3 million and net loss per share of
$.14.
<PAGE>
12.OPERATING LEASES
The Company leases office space and certain furniture and
equipment under operating leases. Future minimum obligations
under these operating leases are as follows at December 31, 1995
(in thousands):
<TABLE>
<S> <C>
1996 $ 3,024
1997 2,383
1998 2,034
1999 1,813
2000 1,722
Thereafter 1,118
-------
$12,094
=======
</TABLE>
Rental expense totaled approximately $3,286,000, $2,529,000 and
$1,169,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
13.STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
The Company's incentive stock option plan provides for options
granted to employees which vest over the four years following the
date of grant and options granted to non-employee directors which
vest one year from the date of grant. All options terminate ten
years from the date of grant. A maximum of 1,000,000 shares are
available for the plan and 223,000, 125,500, and 94,500 options
were granted during 1995, 1994, and 1993, respectively.
In 1993, certain executive officers of the Company were awarded
non-qualified options entitling these officers to purchase a total
of 72,500 shares of the Company's Common Stock at market value on
the date of grant, $8.75 per share, which are currently
exercisable through January 27, 1998.
Changes in stock options are as follows:
<TABLE>
<CAPTION>
Number of Option
Shares Price
Granted Per Share
<S> <C> <C> <C> <C>
Balance at January 1, 1993 194,731 $12.76 - $38.50
Granted 167,000 8.75 - 13.00
Canceled (87,500)
-------
Balance at December 31, 1993 274,231 8.75 - 38.50
Granted 125,500 11.38 - 12.50
-------
Balance at December 31, 1994 399,731 8.75 - 38.50
Granted 223,000 13.88 - 14.50
-------
Balance at December 31, 1995 622,731 8.75 - 38.50
</TABLE>
At December 31, 1995, 271,481 shares were issuable pursuant to the exercise
of stock options.
The Company's employee stock purchase plan gives eligible
employees the opportunity to subscribe for the purchase of the
Company's common stock at 85% of its fair market value as defined.
During 1995, 1994, and 1993, 12,374, 19,722, and 12,639 shares
were issued under this plan, respectively.
The Company has a defined contribution plan for which related
expense for 1995 and 1994 was approximately $263,000 and $167,000,
respectively.
14.RELATED PARTY TRANSACTIONS
During October 1995, Major Realty issued a promissory note bearing
interest at prime plus 1.5% for $5,064,144 to the Company (see
Note 4). Four members of the Board of Directors of the Company
also serve on the Board of Directors of Major Realty.
The Company contracts with a related party to administer health
insurance benefits for its employees and to place property and
casualty coverage on behalf of the Company whereby the related
party receives commissions from the insurance providers which
totalled $241,000 in 1995. In addition, the Company pays
commissions and fees in connection with insurance written and
loss control activities, which totalled $149,000 in 1995. This
related party reimburses the Company for an allocable share of
certain office occupancy expenses, $192,000 in 1995.
The Company made payments during 1995 and 1994 totalling
approximately $243,000 and $132,000, respectively, to a related
party to provide investment related services.
15.REINSURANCE
The Company's insurance subsidiaries cede insurance to other
companies under quota share, excess of loss and facultative
treaties. The insurance subsidiaries also maintain catastrophe
reinsurance to protect against catastrophic occurrences where
claims can arise under numerous policies due to a single event.
The reinsurance agreements are tailored to the various programs
offered by the insurance subsidiaries. The largest amount
retained in any one risk by the insurance subsidiaries during 1995
was $500,000. The methods used for recognizing income and
expenses related to reinsurance contracts have been applied in a
manner consistent with the recognition of income and expense on
the underlying direct and assumed business (See Note 1).
Three reinsurers, who have an A.M. Best rating of A- (excellent)
or better, accounted for approximately 26% of the reinsurance
recoverables and prepaid reinsurance premiums at December 31,
1995. No other reinsurer, except for the CFSA accounted for more
than 5% of these balances.
16.DIVIDEND RESTRICTIONS AND REGULATORY MATTERS
Dividends from the insurance subsidiaries of the Company are
regulated by the state regulatory authorities of the states in
which each subsidiary is domiciled. The laws of such states
generally restrict dividends from insurance companies to certain
statutorily approved limits. During 1996, dividends from
insurance company subsidiaries to the Company without further
insurance department approval are limited to approximately $10.5
million.
The Company's insurance subsidiaries reported to regulatory
authorities total policyholders' surplus of approximately
$169,628,000 and $126,272,000 at December 31, 1995 and 1994,
respectively, and total statutory net income/(loss) of $(247,000),
$6,659,000, and $682,000 for the years ended December 31, 1995,
1994, and 1993, respectively.
17.INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Fully
Primary Diluted
Under- Net Net
writing Net Income Income
Income Income (Loss) (Loss)
Quarters Ended Revenues (Loss) (Loss) Per Share Per Share
(1) (1) (1)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1995:
December 31 $ 75,070 $ 2,629 $ 5,634 $ 0.38 $ 0.37
September 30 97,133 (14,546) (5,961) (0.40) (0.40)
June 30 68,598 (1,992) 1,499 0.10 0.10
March 31 57,004 554 2,983 0.20 0.20
-------- -------- ------- ------ ------
$297,805 $(13,355) $ 4,155 $ 0.28 $ 0.27
======== ======== ======= ====== ======
1994:
December 31 $ 59,631 $ 3,236 $ 7,826 $ 0.59 $ 0.58
September 30 67,916 3,684 6,326 0.51 0.50
June 30 50,866 300 4,954 0.41 0.40
March 31 41,705 (139) 1,969 0.20 0.19
-------- -------- ------- ------ ------
$220,118 $ 7,081 $21,075 $ 1.71 $ 1.68 (2)
======== ======== ======= ====== ======
<FN>
(1) As a result of the acquisition of Redland in July 1993, the
Company became significantly involved in crop insurance
programs, including the federal Multi-Peril Crop Insurance
program and the crop hail business. The Company's operating
results from its crop program can vary substantially from
quarter to quarter as a result of various factors, including
timing and severity of losses from storms and other natural
perils and crop production cycles. Therefore, the results
for any quarter are not necessarily indicative of results for
any future period. The results of the crop program business
primarily are recognized in the second half of the calendar
year.
(2) Quarterly net income per share numbers do not add to the
annual net income per share.
</FN>
</TABLE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1995 AND 1994
BALANCE SHEETS (Parent Company Only)
(In Thousands)
ASSETS 1995 1994
<S> <C> <C>
Fixed maturities available-for-sale $ 3,047 $ 2,968
Cash and short-term investments 3,444 6,516
Receivables, net 4,497 3,618
Surplus note receivable from subsidiary 40,000 20,000
Investments in subsidiaries 196,268 158,531
Other assets 1,922 1,143
-------- --------
$249,178 $192,776
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 664 $ 374
Intercompany payables 1,727 3,648
Term debt and other borrowings 69,000 29,000
-------- --------
Total liabilities 71,391 33,022
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized,
none issued
Common stock, $.40 par value, 20,000,000 shares authorized;
15,141,220 and 15,128,846 shares issued 6,057 6,052
Capital in excess of par value 194,823 194,674
Unrealized gain (loss) on available-for-sale securities,
net of tax 19 (13,705)
Accumulated deficit (18,848) (23,003)
-------- --------
182,051 164,018
Less:
Treasury stock, at cost, 35,559 shares (1,564) (1,564)
Contingent stock, 240,000 shares (2,700) (2,700)
-------- --------
Total stockholders' equity 177,787 159,754
-------- --------
$249,178 $192,776
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
STATEMENTS OF OPERATIONS (Parent Company Only)
(In Thousands)
1995 1994 1993
<S> <C> <C> <C>
Revenues $ - $ - $ -
Costs and expenses:
General and administrative expenses 2,225 1,878 1,209
------- ------- -------
Operating loss (2,225) (1,878) (1,209)
Other income (expense):
Interest expense (2,651) (1,434) (973)
Share of net income of subsidiaries 5,254 19,203 9,257
Other 3,323 724 465
------- ------- -------
5,926 18,493 8,749
------- ------- --------
Income before
income taxes 3,701 16,615 7,540
Income tax benefit:
Current 382 734 46
Deferred 72 3,726 -
------- ------- -------
Net income $ 4,155 $21,075 $ 7,586
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
STATEMENTS OF CASH FLOWS (Parent Company Only)
(In Thousands)
1995 1994 1993
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 4,155 $ 21,075 $ 7,586
Adjustments to reconcile net income from continuing
operations to net cash used for operating activities:
Deferred tax benefit (72) (3,726) -
Share of net income of subsidiaries (5,254) (19,203) (9,257)
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Receivables (879) (572) (577)
Payables (1,631) (4,564) (1,140)
Other, net (927) 291 849
-------- -------- --------
Net cash used for operating activities (4,608) (6,699) (2,539)
Cash flows from investing activities:
Contributions to investments in subsidiaries (38,803) (66,679) (18,489)
Purchases of investment - (972) -
Purchases of investment available-for-sale (6,030) (2,977) -
Costs of acquiring Redland - - (306)
Proceeds from maturities of investments 1,000 - -
Proceeds from sale of investments available-for-sale 6,187 - -
________ ________ ________
Net cash used for investing activities (37,646) (70,628) (18,795)
Cash flows from financing activities:
Proceeds from bank borrowings 40,000 29,000 -
Repayments of term debt, other borrowings and notes payable
to affiliates - - (9,996)
Proceeds from issuance of common stock 154 53,633 31,295
________ ________ ________
Net cash provided by financing activities 40,154 82,633 21,299
________ ________ ________
Net increase (decrease) in cash and short-term investments (2,100) 5,306 (35)
Cash and short-term investments at beginning of year 5,544 238 273
________ ________ ________
Cash and short-term investments at end of year $ 3,444 $ 5,544 $ 238
======== ======== ========
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
On December 1, 1994, pursuant to a call by the Company to redeem
certain outstanding warrants, approximately 4.85 million of such
warrants were exercised to purchase shares of common stock,
resulting in net proceeds to the Company of approximately $53.4
million.
In January 1993, the Company assumed a $7 million note from one of
its subsidiaries. In April 1993, this note was exchanged for
875,000 shares of common stock and warrants to purchase common
stock. (See Note 10 to the Consolidated Financial Statements.)
On March 31, 1994, the Company entered into an Agreement and Plan
of Merger with Statewide Insurance Corporation (Statewide), the
exclusive general agent for the Company's non-standard automobile
insurance program underwritten by Phoenix Indemnity Insurance
Company (Phoenix Indemnity), pursuant to which the Company acquired
Statewide. Statewide owned 20% of the outstanding common stock of
Phoenix Indemnity which was a previously 80% owned subsidiary of
the Company. The acquisition was effective April 1, 1994 and was
accounted for as a purchase.
In August 1993, the Company acquired Redland and the purchase price
of $15.4 million was comprised of 1,339,000 shares of the Company's
common stock and acquisition related costs of $306,000. (See Note
11 to the Consolidated Financial Statements.)
The Company aggregates cash and short-term investments with
maturity dates of three months or less from the date of purchase
for purposes of reporting cash flows. As of December 31, 1994,
approximately $972,000 of short-term investments had maturity dates
at acquisition of greater than three months.
The deferred tax benefit for the year ended December 31, 1994 is
mainly comprised of $3.6 million of realized net operating loss
carryforwards, which at December 31, 1993 had a valuation allowance
for the same amount.
Cash payments for interest were $2,337,000, $1,272,000 and
$1,019,000 during the years ended December 31, 1995, 1994 and 1993,
respectively.
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE V
VALUATION ACCOUNTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
(In Thousands)
Column A Column B Column C Column D Column E
Balance
at Balance
Beginning at
of End of
Period Additions Deductions Period
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1995 $1,321 $1,304 $ 193 $2,432
Year ended December 31, 1994 $2,093 $ 656 $1,428 $1,321
Year ended December 31, 1993 $1,207 $1,000 (A) $ 114 $2,093
<FN>
(A) Includes allowance for doubtful accounts related to Redland of $663 at date of acquisition.
</FN>
</TABLE>
<TABLE>
<CAPTION>
EXHIBIT 11
ACCEPTANCE INSURANCE COMPANIES INC.
COMPUTATION OF INCOME (LOSS) PER SHARE
Years Ended December 31, 1995, 1994, and 1993
(in thousands, except per share data)
(unaudited)
Years Ended December 31,
----------------------------------
1995 1994(1) 1993(1)
-------- --------- ---------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Income (loss) from continuing operations $ 4,155 $21,075 $ 7,586
Adjustment for interest expense reduction
and interest income from assumed
proceeds -- 1,826 2,403
------ ------ ------
Adjusted income (loss) from continuing
operations 4,155 22,901 9,989
Loss on discontinued operations -- -- --
------ ------ ------
Adjusted net income (loss) 4,155 22,901 9,989
====== ====== ======
Weighted average number of shares
outstanding 14,858 10,351 8,335
Adjustment for effect of outstanding
options and warrants 144 -- --
Adjustment for shares issuable -- 3,069 3,227
------ ------ ------
Adjusted weighted average number of
shares outstanding 15,002 13,420 11,562
====== ====== ======
<PAGE>
Continuing operations $ 0.28 $ 1.71 $ 0.86
Discontinued operations -- -- --
------ ------ ------
Net income (loss) per share $ 0.28 $ 1.71 $ 0.86
====== ====== ======
FULLY DILUTED EARNINGS PER SHARE:
Income (loss) from continuing operations $ 4,155 $21,075 $ 7,586
Adjustment for interest expense reduction
and interest income from assumed
proceeds -- 1,757 2,483
Adjustment for addback of interest on
convertible notes -- -- 239(2)
------ ------ ------
Adjusted income (loss) from continuing
operations 4,155 $22,832 $10,308
Loss on discontinued operations -- -- --
------ ------ ------
Adjusted net income (loss) $ 4,155 $22,832 $10,308
====== ====== ======
Weighted average number of shares
outstanding 15,098 10,591 8,427
Adjustment for effect of outstanding
options and warrants 145 -- --
Adjustment for shares issuable -- 3,025 3,426
Adjustment for convertible notes -- -- 249(2)
------ ------ ------
Adjusted weighted average number of shares
outstanding 15,243 13,616 12,102
====== ====== ======
Continuing operations $ 0.27 $ 1.68 $ 0.85
Discontinued operations -- -- --
------ ------ ------
Net income (loss) per share $ 0.27 $ 1.68 $ 0.85
====== ====== ======
<PAGE>
<FN>
- ---------------
(1) For the years ended December 31, 1994 and 1993 the number of shares of the Company's
common stock obtainable on exercise of outstanding options and warrants in the
aggregate exceeds 20% of the common shares outstanding. Therefore, the method of
calculating earnings per share has been adjusted accordingly as provided by APB
Opinion No. 15.
(2) This calculation is submitted in accordance with Regulation S-K Item 601 (b)(11)
although it is contrary to paragraph 40 of APB Opinion No. 15 because it produces an
anti-dilutive result.
</FN>
</TABLE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
The following is a list of subsidiaries of Registrant as of
March 31, 1996, other than subsidiaries which, considered in the
aggregate as a single subsidiary, would not constitute a
significant subsidiary as defined by Securities and Exchange
Commission Regulation S-X
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION
<S> <C>
Acceptance Insurance Holdings Inc. (1) Nebraska
Radice Lands, Inc. (1) Florida
The Redland Group, Inc. (1) Iowa
Acceptance Insurance Services, Inc. (2) Nebraska
Acceptance Insurance Company (2) Nebraska
Seaboard Underwriters, Inc. (2) North Carolina
Acceptance Indemnity Insurance Company (3) Nebraska
Phoenix Indemnity Insurance Company (4) Arizona
Major Realty Corporation (5) Delaware
American Agrisurance Inc. (6) Iowa
Redland Insurance Company (7) Iowa
Agro International, Inc. (8) Iowa
Crop Insurance Marketing, Inc. (9) Iowa
American Agrijusters, Co. (10) Iowa
American Growers Ins. Company (10) Nebraska
U.S. Ag Insurance Services Inc. (11) Texas
Acceptance Casualty Insurance Company (10) Texas
PRSCI, Inc. (10) Texas
Acceptance Premium Finance Company (12) Arizona
<FN>
_______________
(1) A wholly owned subsidiary of Acceptance Insurance Companies
Inc.
(2) A wholly owned subsidiary of Acceptance Insurance Holdings
Inc.
(3) A wholly owned subsidiary of Acceptance Insurance Company.
(4) An 80% owned subsidiary of Acceptance Insurance Company, 20%
of which is owned by the Registrant.
(5) An approximately 33.1% owned subsidiary of Acceptance
Insurance Company.
(6) A wholly owned subsidiary of The Redland Group, Inc.
(7) An approximately 99.99% owned subsidiary of The Redland
Group, Inc.
(8) An approximately 80% owned subsidiary of The Redland Group,
Inc.
(9) A wholly owned subsidiary of American Agrisurance Inc.
(10) A wholly owned subsidiary of Redland Insurance Company.
(11) An approximately 60% owned subsidiary of Redland Insurance
Company.
(12) A 50% owned subsidiary of Registrant.
</FN>
</TABLE>
EXHIBIT 23.1
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Acceptance Insurance Companies Inc.
We consent to the incorporation by reference in Registration
Statement No. 33-53730 and No. 33-68856 on Form S-3 and in
Registration Statement No. 33-67180 and No. 33-51441 on Form S-8
of Acceptance Insurance Companies Inc. of our reports dated
March 12, 1996 in this Annual Report on Form 10-K of Acceptance
Insurance Companies Inc. for the year ended December 31, 1995.
Our report referred to above includes an explanatory paragraph
regarding the change in accounting method as described in Note 1
to the consolidated financial statements.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
April 11, 1996
EXHIBIT 23.2
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors and Stockholders
Acceptance Insurance Companies Inc.
We have audited the consolidated financial statements of
Acceptance Insurance Companies Inc. as of December 31, 1995 and
1994, and for each of the three years in the period ended
December 31, 1995, and have issued our report thereon dated
March 12, 1996 which includes an explanatory paragraph regarding
a change in accounting method as described in Note 1 to the
consolidated financial statements; such report is included
elsewhere in this Form 10-K. Our audits also included the
financial statement schedules of Acceptance Insurance Companies
Inc., listed in Item 14. These financial statement schedules are
the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated financial
statements taken as a whole, present fairly in all material
respects the information set forth therein.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 12, 1996
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITED
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K AND
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 218,300
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 48,537
<MORTGAGE> 11,290
<REAL-ESTATE> 3,354
<TOTAL-INVEST> 368,001
<CASH> 7,648
<RECOVER-REINSURE> 20,379
<DEFERRED-ACQUISITION> 24,585
<TOTAL-ASSETS> 781,034
<POLICY-LOSSES> 369,244
<UNEARNED-PREMIUMS> 124,122
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 69,000
0
0
<COMMON> 6,057
<OTHER-SE> 171,730
<TOTAL-LIABILITY-AND-EQUITY> 781,034
271,584
<INVESTMENT-INCOME> 20,651
<INVESTMENT-GAINS> 2,707
<OTHER-INCOME> 2,863
<BENEFITS> 212,337
<UNDERWRITING-AMORTIZATION> 57,420
<UNDERWRITING-OTHER> 15,182
<INCOME-PRETAX> 5,343
<INCOME-TAX> 1,188
<INCOME-CONTINUING> 4,155
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,155
<EPS-PRIMARY> .28
<EPS-DILUTED> .27
<RESERVE-OPEN> 141,514
<PROVISION-CURRENT> 190,019
<PROVISION-PRIOR> 22,318
<PAYMENTS-CURRENT> 80,281
<PAYMENTS-PRIOR> 72,214
<RESERVE-CLOSE> 201,356
<CUMULATIVE-DEFICIENCY> 22,318
</TABLE>
