=================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q/A-1
AMENDMENT NO. 1
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
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 Number)
222 South 15th St., Suite 600 N.
Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(402) 344-8800
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES XX NO
----- -----
The number of shares of each class of the Registrant's common
stock outstanding on November 3, 1995 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 15,101,236
=================================================================
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1995 (unaudited) and December 31, 1994
(audited)
Consolidated Statements of Operations (unaudited)
Three Months and Nine Months Ended September 30, 1995
and 1994
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 1995 and 1994
Notes to Interim Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1995 1994
------------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale $228,830 $190,180
Marketable equity securities -
preferred stock 24,939 6,758
Marketable equity securities -
common stock 11,951 5,772
Mortgage loans and other investments 1,705 1,869
Real estate 3,881 3,891
Short-term investments, at cost,
which approximates market 74,379 56,273
-------- --------
345,685 264,743
Cash 2,707 9,339
Equity investment in Major
Realty Corporation 4,843 5,079
Receivables, net 160,113 76,993
Reinsurance recoverable on unpaid
loss and loss adjustment expenses 175,673 79,811
Prepaid reinsurance premiums 37,793 25,988
Property and equipment, net 5,102 4,572
Deferred policy acquisition costs 24,243 19,834
Excess of cost over acquired net
assets 37,287 38,142
Deferred income tax 10,350 13,025
Other assets 6,107 5,561
-------- --------
Total assets $809,903 $543,087
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses $368,514 $221,325
Unearned premiums 124,294 97,170
Amounts payable to reinsurers 67,155 19,309
Accounts payable and accrued
liabilities 30,813 16,529
Bank borrowings 49,000 29,000
-------- --------
Total liabilities 639,776 383,333
Contingencies -- --
Stockholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized,
none issued -- --
Common stock, $.40 par value,
20,000,000 shares authorized;
15,135,795 and 15,128,846
shares issued 6,055 6,052
Capital in excess of par value 194,769 194,674
Unrealized gain (loss) on
available-for-sale securities,
net of tax (1,951) (13,705)
Accumulated deficit (24,482) (23,003)
-------- --------
174,391 164,018
Less:
Treasury stock, at cost, 35,559
shares (1,564) (1,564)
Contingent stock, 240,000 shares (2,700) (2,700)
-------- --------
Total stockholders' equity 170,127 159,754
-------- --------
Total liabilities and stockholders'
equity $809,903 $543,087
======== ========
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements.
</FN>
/TABLE
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months and nine months ended
September 30, 1995 and 1994
(in thousands, except per share data)
(unaudited)
Three Months Nine Months
---------------- ------------------
1995 1994 1995 1994
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums earned $ 90,373 $63,425 $204,062 $148,119
Insurance agency
commissions 574 837 2,216 2,639
Net investment income 5,407 3,553 14,645 9,230
Net realized capital gains 779 101 1,812 499
-------- ------- -------- --------
97,133 67,916 222,735 160,487
-------- ------- -------- --------
Costs and expenses:
Cost of revenues:
Insurance losses and loss
adjustment expenses 85,744 45,207 164,863 105,790
Insurance agency costs 615 755 2,067 2,422
Insurance underwriting
expenses 19,175 14,530 55,183 38,483
General and administrative
expenses 437 561 1,685 1,253
-------- ------- -------- --------
105,971 61,053 223,798 147,948
-------- ------- -------- --------
Operating profit (loss) (8,838) 6,863 (1,063) 12,539
-------- ------- -------- --------
Other income (expense):
Interest expense (563) (461) (1,607) (1,160)
Share of net loss of
investee (79) (65) (236) (219)
Other, net (5) (11) 76 34
-------- ------- -------- --------
(647) (537) (1,767) (1,345)
Income (loss) before
income taxes and
minority interests (9,485) 6,326 (2,830) 11,194
Income tax expense
(benefit):
Current (344) 1,301 1,346 1,366
Deferred (3,180) (1,301) (2,697) (3,501)
Minority interests in net
income of consolidated
subsidiaries -- -- -- 80
-------- ------- -------- -------
Net income (loss) $ (5,961) $ 6,326 $(1,479) $ 13,249
======== ======= ======= ========
Net income (loss) per
share:
Primary $ (.40) $ .51 $ (.10) $ 1.12
======== ======= ======= ========
Fully diluted $ (.40) $ .50 $ (.10) $ 1.09
======== ======= ======= ========
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements.
</FN>
/TABLE
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1995 and 1994
(in thousands)
(unaudited)
1995 1994
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income (loss) $ (1,479) $13,249
Net adjustment to reconcile net income
(loss) to net cash provided by
operating activities 38,846 35,785
--------- -------
Net cash provided by operating activities 37,367 49,034
--------- -------
Cash flows from investing activities:
Proceeds from sales of investments -- 641
Proceeds from sales of investments
available for sale 82,527 22,151
Proceeds from maturities of investments 38,228 6,545
Proceeds from maturities of investments
available for sale 8,126 13,828
Purchases of investments (41,092) (29,508)
Purchases of investments available for
sale (134,087) (57,285)
Purchases of property and equipment (1,748) (1,172)
--------- -------
Net cash used for investing activities (48,046) (44,800)
--------- -------
Cash flows from financing activities:
Repayments of bank borrowing -- (18,597)
Proceeds from bank borrowings 20,000 29,000
Repayments of other borrowings -- (354)
Minority interests -- 7
Proceeds from issuance of common stock 98 236
Other -- (340)
--------- -------
Net cash provided by financing activities 20,098 9,952
--------- -------
Net increase in cash and
short-term investments 9,419 14,186
Cash and short-term investments at
beginning of period 50,236 17,561
--------- -------
Cash and short-term investments at end
of period $ 59,655 $31,747
========= =======
<PAGE>
Supplemental disclosure of cash
flow information:
Cash paid during the period for interest $ 1,404 $ 1,018
========= =======
Cash paid during the period for income
taxes $ 4,253 $ 78
========= =======
Non-cash financing activities:
Issuance of common stock for merger
with Statewide $ -- $ 3,100
========= =======
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements.
</FN>
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies:
Principles of Consolidation
The Company's consolidated financial statements include the
accounts of Acceptance Insurance Companies Inc. and its
majority owned subsidiaries (the "Company"). All significant
intercompany transactions have been eliminated.
Management's Opinion
The accompanying consolidated financial statements reflect all
adjustments, consisting only of normal recurring adjustments
except as otherwise disclosed, which in the opinion of
management are considered necessary to fairly present the
Company's financial position as of September 30, 1995 and
December 31, 1994, and the results of operations for the three
months and nine months ended September 30, 1995 and 1994 and
cash flows for the nine months ended September 30, 1995 and
1994.
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
September 30, 1995 approximately $17,431,000 of short-term
investments had a maturity date at acquisition of greater than
three months.
Recent Statements of Financial Accounting Standards
On January 1, 1995 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114 and 118, "Accounting by
Creditors for Impairment of a Loan." As of January 1, 1995
and September 30, 1995 the Company has no material loans that
are considered impaired. Accordingly, the adoption of SFAS
No. 114 and 118 had no effect on the Company's financial
statements.
Reclassifications
Certain prior year accounts have been reclassified to conform
with current period presentation.
<PAGE>
2. Per Share Data:
Primary and fully diluted earnings per share are based on the
weighted average shares outstanding of approximately 14.9
million and 15.1 million, respectively, for the three months
ended September 30, 1995 and approximately 13.5 million and
13.7 million, respectively, for the three months ended
September 30, 1994. Primary earnings per share and fully
diluted earning per share are based on the weighted average
shares outstanding of approximately 14.9 million and 15.1
million, respectively, for the nine months ended September 30,
1995 and approximately 13.4 million and 13.6 million,
respectively, for the nine months ended September 30, 1994.
Included in weighted average shares outstanding in 1994 is the
assumed exercise of all outstanding options and warrants
utilizing the modified treasury stock method, since average
outstanding options and warrants during the period 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 exercise.
3. Investments:
The amortized cost and related market values of debt and
equity securities in the accompanying balance sheets are as
follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- ---------- ------
<S> <C> <C> <C> <C>
September 30, 1995:
Fixed maturities available
for sale:
U.S. Treasury and
government securities $ 62,664 $ 533 $ 133 $ 63,064
States, municipalities and
political subdivisions 70,402 1,154 371 71,185
Mortgage-backed securities 73,587 338 6,757 67,168
Other debt securities 27,075 762 424 27,413
-------- -------- -------- --------
$233,728 $ 2,787 $ 7,685 $228,830
======== ======== ======== ========
Marketable equity
securities - preferred
stock $ 25,008 $ 377 $ 446 $ 24,939
======== ======== ======== ========
Marketable equity
securities - common
stock $ 9,987 $ 2,455 $ 491 $ 11,951
======== ======== ======== ========
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
<PAGE>
4. Insurance Premiums and Claims
Insurance premiums written and earned by the Company's
insurance subsidiaries for the three months and nine months
ended September 30, 1995 and 1994 are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
------------------ -------------------
1995 1994 1995 1994
-------- -------- -------- ----------
<S> <C> <C> <C> <C>
Direct premiums written $205,982 $168,170 $419,081 $336,517
Assumed premiums written 12,343 18,235 12,888 24,630
Ceded premiums written (124,065) (117,792) (212,588) (187,415)
-------- -------- -------- --------
Net premiums written $ 94,260 $ 68,613 $219,381 $173,732
======== ======== ======== ========
Direct premiums earned $200,355 $160,549 $392,470 $305,036
Assumed premiums earned 10,577 18,401 12,375 24,560
Ceded premiums earned (120,559) (115,525) (200,783) (181,477)
======== ======== ======== ========
Net premiums earned $ 90,373 $ 63,425 $204,062 $148,119
======== ======== ======== ========
</TABLE>
Insurance loss and loss adjustment expenses have been reduced
by recoveries recognized under reinsurance contracts of
approximately $140,754,000 and $53,416,000 for the three
months ended September 30, 1995 and 1994, respectively.
Insurance loss and loss adjustment expenses have been reduced
by recoveries recognized under reinsurance contracts of
approximately $219,584,000 and $101,378,000 for the nine
months ended September 30, 1995 and 1994, respectively.
5. Bank Borrowings, Term Debt and Other Borrowings:
The Company's borrowing arrangements with its bank lenders as
of September 30, 1995 provide 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
will 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 will be payable quarterly. The
Company borrowed $20 million on September 29, 1995 of which
the proceeds were contributed to the capital of one of the
insurance subsidiaries. On September 30, 1995 the Company had
elected LIBOR plus .75% or a weighted average rate of 6.69%.
On September 30, 1995, the Company had $49 million outstanding
under this arrangement.
6. Income Taxes:
As of September 30, 1995, management believes it is more
likely than not that the Company will realize a portion of the
deferred tax asset. The valuation allowance at September 30,
1995 primarily relates to capital loss items whose realization
is uncertain. The net deferred tax asset is as follows (in
thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
------------- ------------
<S> <C> <C>
Unpaid losses and loss adjustment
expenses 9,670 7,263
Unearned premiums 6,055 4,840
Allowances for doubtful accounts 916 449
Other 2,146 1,599
Unrealized loss on marketable
equity securities -- 419
Unrealized loss on fixed maturities
available for sale 1,714 6,424
Major Realty basis difference 7,939 7,632
------- -------
Deferred tax asset 28,440 28,626
Deferred policy acquisition costs (8,485) (6,744)
Other (886) (681)
Unrealized gain on marketable
equity securities (663) --
------- -------
Deferred tax liability (10,034) (7,425)
------- -------
18,406 21,201
Valuation allowance (8,056) (8,176)
------- -------
Net deferred tax asset $10,350 $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 for the nine months ended September 30, 1995 (in
thousands):
<TABLE>
<S> <C>
Computed U.S. federal income taxes $ (990)
Nondeductible amortization of goodwill and
other intangibles 404
Tax-exempt interest income (752)
Dividends received deduction (257)
Other 244
-------
Income taxes provided $(1,351)
=======
</TABLE>
<PAGE>
PART 1.
- -------
ITEM 2.
ACCEPTANCE INSURANCE COMPANIES INC.
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 is based upon the Company's interim consolidated
financial statements and the notes thereto included in this report.
GENERAL
Loss Reserve Development
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
estimates of the liability for losses and loss adjustment expenses
are determined by management based on its analysis of historical
trends, patterns and expectations of reported claims and paid
claims, 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.
In examining reserve adequacy, historical data is reviewed, and, as
additional experience and other data become available and is
reviewed, these estimates and judgments may be revised, resulting
in increases or decreases to reserves for insured events of prior
years.
Company Experience
In the second half of 1993, the Company's senior management, in its
effort to develop improved reported loss information enabling it to
react more quickly to unforeseen loss experience, directed a
comprehensive review of claim handling practices. In 1994, claims
personnel began implementing new claims handling standards and
procedures designed to (i) create case loss reserve adequacy as
soon as possible, and (ii) reduce loss adjustment expense. These
new case reserving practices eventually resulted in new development
trends for reported loss information.
The Company has historically established its estimates of loss
reserves in large part utilizing historical patterns and trends in
both reported claims and paid claims. As the new case reserving
standards were implemented during 1994 and 1995, the trends in
reported loss information became less reliable as historical data
upon which to estimate ultimate losses, since, the more recent
reported claim information lacked comparability to the experience
in earlier years. The loss reserve strengthening recorded in 1995
described below, was thus based primarily upon information relating
to the trends in paid claims, rather than reported claims, along
with the Company statistical and operating information, industry
trends and other data regularly considered by management in its
periodic estimation of the liability for losses and loss adjustment
expenses.
RESULTS OF OPERATIONS
Three months and nine months ended September 30, 1995
Compared to three months and nine months ended September 30, 1994
The Company's net income for the three months ended September 30,
1995 decreased $12.3 million from the same period in 1994, while
the net income for nine months decreased by $14.7 million as
compared to the first nine months of 1994. The principal factor
effecting this decline was the Company's decision to strengthen
its estimate of loss reserves for prior years, resulting in a
charge to earnings of $17.5 million ($11.3 million after-tax) in
the third quarter and $22.3 million ($14.5 million after tax) for
the nine months ended September 30, 1995. In addition, with the
Company's increase in its estimates for ultimate loss ratios for
prior years, the Company also increased its expected ultimate
loss ratios for the 1995 accident year. These negative effects
were partially offset by an increase in the Company's investment
income as well as positive results in the Company's crop
insurance division.
The following factors led management to conclude that the
Company's estimates of loss reserves for 1994 and prior year
losses should be revised resulting in the reserve strengthening
in the three and nine month periods ending September 30, 1995.
1. During the second quarter of 1995 the Company began to
notice deviations from the loss development patterns
expected at December 31, 1994, noting, principally,
deterioration in the loss ratio of its commercial automobile
business. At that time, management attributed the deviation
to the more rapid development of reported (as distinguished
from paid) claim information resulting from the new
procedures established for the Company's claims department
described above. This trend continued, however, in the
third quarter of 1995.
2. The analysis of paid claim trends in the commercial
automobile line indicated that reserves for 1994 and prior
year losses were being depleted at a rate faster than had
been estimated when loss reserves were initially
established. The Company's historical experience had been
that, by year-end 1995, approximately 31.0% of earned
premium, would have been paid out on claims incurred in
1994, while actual results reflected that approximately
31.3% of earned premium had been paid out through the first
nine months of 1995. As to claims incurred in 1993,
historically, approximately 45.5% of earned premium would
have been paid out through year-end 1995, whereas the
analysis of claim paid information indicated that through
the first nine months of 1995, approximately 47% of earned
premium had been paid out on 1993 claims.
There was no singular event or one block of the commercial
automobile line which appeared to be responsible for the
adverse development of paid claims. Rather, the Company
experienced unfavorable loss development in several blocks
of commercial automobile liability, such as tow trucks in
Missouri and Illinois, mobile home toters in Missouri,
Illinois, Arkansas and Alabama, coal trucks in Kentucky and
valet parking in Florida. The Company also experienced
unfavorable development with certain agents in various
geographic regions. During the period February through
October 1995 the Company's underwriting specialists
canceled certain agents and programs and nonrenewed specific
policies and the underwriting staff continues to monitor
closely the commercial automobile business.
3. The actuarial analysis of other principal liability lines
did not show the same trend in paid loss development,
however, management felt it prudent to adjust earlier
estimates of ultimate loss liability for certain other
lines. The Company canceled its Texas nursing home business
in late 1994 but the number of reported claims continues to
exceed expectations. A July 1995 decision of the Supreme
Court of California expanded the potential exposure of
property and casualty insurance companies to defend claims
and indemnify insureds under previously issued commercial
general liability policies, and the Company anticipated an
adverse impact on pending claims and new claims in
California. These and other factors influenced management's
decision to affect the increase in estimated loss reserves
for 1994 and prior year claims.
Also influencing the decision was management's recognition
that a variety of changes have taken place in the property
and casualty insurance industry through consolidations,
transfers of certain types of risks between companies and
the like, all of which may tend to impact the mix of
liability risks written over time by the Company so that
certain estimated loss assumptions made earlier in the
history of these lines of business may have changed by the
time later policies were issued and when losses occurred.
These industry changes were felt to be a factor which
suggested the need for caution in making ultimate loss
estimates.
The analysis in the third quarter of 1995 was done by
Company personnel in consultation with the independent
actuaries who have advised the Company that they agree with
the Company's new loss reserve estimates.
The $17.5 million increase in reserves for 1994 and prior year
losses were as follows by year and line of business.
<TABLE>
<CAPTION>
Lines of Business
(in millions)
Other
Accident Auto Liability Workers
Year Liability & CMP Products Comp. Other Total
- -------- --------- --------- -------- ------- ----- -----
<S> <C> <C> <C> <C> <C> <C>
1994 4.8 2.3 .1 1.2 -- 8.4
1993 1.4 .7 1.2 .9 .2 4.4
1992 .2 2.7 .3 .8 .1 4.1
1991 &
Prior -- .3 .1 .2 -- .6
--- --- --- --- --- ----
Total 6.4 6.0 1.7 3.1 .3 17.5
</TABLE>
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 led to an increase in the Company's loss ratio
excluding crop business for the 1995 accident year from 64% for
the first six months of 1995 to 70% for the first nine months of
1995. For the three months ended September 30, 1995, the Company
recorded a 75.6% loss and loss adjustment expense ratio,
excluding the $17.5 million charge for prior year loss
strengthening, as compared to 71.3% for the same period during
1994. The higher loss ratio in 1995 is attributed primarily to
the reassessment of the 1995 accident year loss ratio during the
third quarter of the current year. For the nine months ended
September 30, 1995, the Company's loss and loss adjustment
expense ratio was 69.9%, exclusive of $22.3 million in charges
for prior year loss strengthening, as compared to 71.4% for the
nine months ended September 30, 1994. This decrease in loss
ratio for the nine months can be attributed primarily to a
decrease in the Company's loss ratio in its crop hail business.
The Company believes that its loss reserves at September 30, 1995
are adequate. Selective steps are being taken, in addition to
those mentioned above, to take rate increases, reduce agents'
commissions, terminate certain coverages and discontinue some
lines in certain regions in order to eliminate or reduce
exposures found to be causes of the unsatisfactory loss
development experience. Management intends to continue to
closely monitor statistical and other information with respect to
loss reserves, in particular those lines of insurance that are
more difficult to predict. However, the estimates of loss
reserves are inherently uncertain and such estimates may continue
to change as more information becomes available.
The Company's operating profit or loss from its crop insurance
operations are generally recognized in the quarters ending
September 30 and December 31 as the majority of the insured crops
are harvested. Each crop season is somewhat unique, and
therefore, the amount of profit or loss recorded in each quarter
will vary from year to year as the time of the harvest varies.
The Company's net income was favorably impacted during the nine
months ended September 30, 1995 from its crop insurance
operations.
The Company has two major divisions in its crop insurance
products, crop hail insurance, and Federal MPCI crop insurance.
The Company's crop hail insurance results for the nine months
ended September 30, 1995 improved dramatically over the Company's
experience for the same nine months of 1994. During 1995, the
crop hail business produced underwriting earnings of $1.4 million
on $35.8 million of net earned premium. During the same period
in 1994, the Company experienced a loss of $6.5 million on $21.3
million of net earned premium.
The Company's MPCI business contributed $10.3 million in pre-tax
income for the nine months ended September 30, 1995 as compared
to $11.1 million pre-tax income for the nine months ended
September 30, 1994. This decrease in profitability was due
primarily to a much more difficult growing season during 1995
than in 1994. In the upper Midwest where the Company retains the
majority of its MPCI exposure, the 1995 growing season was
effected by a wet spring causing delayed planting, followed by a
period of hot weather which stressed the newly emerging crops and
an early frost in September. In contrast, the 1994 growing
season in the upper Midwest was nearly perfect resulting in
record crop yields. While the growing conditions in 1995 were
not as favorable as they were in 1994, the Company benefitted
from an increased retained pool upon which it is paid its profit
sharing, increasing from approximately $77 million in 1994 to
$105 million in 1995. While the final results of the MPCI
program will not be known until the end of the fourth quarter, it
is anticipated that the Company may experience further gains in
the fourth quarter if the harvest proceeds in the current
fashion.
The Company's investment income increased 52.2% and 58.7%,
respectively, in the three and nine months ended September 30,
1995 from the same three and nine months periods during 1994.
The increase in investment income was attributable to both an
increase in the average size of the investment portfolio as well
as an increase in yields during the three and nine months ended
September 30, 1995 as compared to similar periods in the prior
year. For the three months ended September 30, 1995, the average
size of the investment portfolio was $329.7 million compared to
$229.2 million for the three months ended September 30, 1994.
For the nine month period, the average size of the investment
portfolio was $311.8 million for the period ended September 30,
1995 as compared to $207.0 million for the period ended September
30, 1994. In addition, the average pre-tax yield on this
portfolio increased from 6.2% and 5.9% for the three and nine
months ended September 30, 1994 to 6.6% and 6.3% for the three
and nine months ended September 30, 1995. The size of the
investment portfolio increased from both positive cash flows and
approximately $53.4 million in proceeds from the exercise of
warrants in December of 1994. Investment yields increased as the
overall interest rate environment during the first nine months of
1995 was higher than the interest rate environment in the similar
period during 1994.
The Company's income from realized capital gains also increased
in the three and nine months ended September 30, 1995 when
compared to similar periods a year earlier. These increases
resulted primarily from favorable changes in the interest rate
environment as well as positive trends in the stock market, both
of which allowed the Company to realize gains in its investment
portfolio.
The Company's expense ratio showed little change during the three
and nine months ended September 30, 1995 as compared to the
similar periods in 1994. For the quarter ended September 30,
1995, the Company's expense ratio decreased to 21.2% as compared
to 22.9% in the same period during 1994. This decrease was
mainly attributable to the Company's deferral of operating
expense margins in its crop insurance lines from the second
quarter of 1995 to the third quarter of 1995. In 1995, problems
arising out of delayed planting issues resulted in changing rules
under the new Federal MPCI program, and therefore, the Company
could not estimate any operating expense margins under the
program in the second quarter of 1995. During 1994, no such
delays occurred, and therefore, expense margins were primarily
realized in the second quarter. For the nine months ended
September 30, 1995, the Company's expense ratio was 27.0% as
compared to 26.0% in the same period during 1994. This increase
in the expense ratio was principally attributable to an increase
in the Company's expense ratio for its property and casualty
products associated with development costs for new programs
during the 1995 year. While property and casualty division
expenses were higher for the first nine months of 1995 as
compared to the same period in 1994, the third quarter of 1995
did see a decrease (in the underwriting expenses of the property
and casualty division) from the second quarter of 1995 of 2.1%.
The Company's net income was impacted by income tax benefits of
$1.4 million and $3.5 million during the nine months and three
months ended September 30, 1995 and $2.1 million for the nine
months ended September 30, 1994. The benefit in the nine months
ended September 30, 1994 resulted primarily from the Company
meeting the realizability test under SFAS NO. 109, "Accounting
for Income Taxes." The Company had recorded pre-tax losses from
1989 through 1992 and although the circumstances that generated
these losses were not indicative of operating income, management
was uncertain of future earnings and recorded the related
valuation allowance account. At June 30, 1994 the Company had
reported several consecutive quarters of pre-tax earnings and
management believed it was more likely than not that the Company
would realize a portion of the deferred tax asset. The deferred
tax benefit of $2.1 million recognized during the nine months
ended September 30, 1994 related to the portion of the deferred
tax asset that was estimated to be realized in future years.
The income tax benefits in the current year are primarily the
result of the Company's pre-tax losses of $2.8 million and $9.5
million for the nine months and three months ended September 30,
1995, respectively. These losses resulted primarily from
reserve strengthening for prior accident years as described
previously and thus management continues to believe it is more
likely than not that the Company will realize a portion of the
deferred tax asset.
Recent Statement of Financial Accounting Standards
On January 1, 1995 the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 114 and 118, "Accounting by
Creditors for Impairment of a Loan." As of January 1, 1995 and
September 30, 1995 the Company has no material loans that are
considered impaired. Accordingly, the adoption of SFAS No. 114
and 118 had no effect on the Company's financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has included a discussion of the liquidity and
capital resources requirements of the Company and the Company's
insurance subsidiaries.
The Company - Parent Only
As an insurance holding company, the Company's assets consist
primarily of the capital stock of its subsidiaries, surplus notes
issued by one of its insurance company subsidiaries and
investments held at the holding company level. The Company's
primary sources of liquidity are dividends and other
distributions from subsidiaries, interest payments on the surplus
notes, tax sharing payments from its subsidiaries and net
investment income from, and proceeds from the sale of, holding
company investments. The Company's liquidity needs are primarily
to service debt, pay operating expenses and taxes and make
investment in subsidiaries.
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 parent
companies to certain statutorily approved limits. As of
September 30, 1995, the statutory limitations on dividends from
the insurance company subsidiaries to the parent without further
insurance department approval were approximately $6.0 million.
In addition to dividends, the parent company receives additional
liquidity from cash flows from agency and claims service
operations of its noninsurance company subsidiaries.
The Company currently holds two surplus notes issued by one of
its insurance company subsidiaries in the amount of $20.0 million
each, for a total of $40.0 million. Each note bears interest at
the rate of 9% per annum, payable quarterly. Although repayment
of all or part of the principal of these surplus notes requires
prior insurance department approval, no prior approval of
interest payments is currently required.
At September 30, 1995, the Company held approximately $4.7
million of cash and investments available to meet liquidity
needs.
The Company is also party to a Revolving Credit Facility with a
group of bank lenders which is secured by substantially all of
the Company's assets. At June 30, 1995 the maximum amount which
might have been borrowed under the facility was $35.0 million.
On July 26, 1995 the Company closed a new facility under which
the Company's maximum borrowing limit was increased to $90
million. Generally, the new agreement provides for 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 borrowing. Further, the
Company will select its interest rate at 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.
As of September 30, 1995 the Company had $49 million outstanding
under its bank facility. All of the borrowings are currently at
0.75% over LIBOR.
The $90 million facility is being utilized primarily to
capitalize the Company's insurance company subsidiaries. Due to
the loss in the most recent quarter resulting from a charge to
earnings to strengthen prior year loss reserves, the Company
believes that further borrowings under the facility may be
required in the fourth quarter of 1995.
<PAGE>
Insurance Companies
The principal liquidity needs of the insurance companies are to
fund losses and loss adjustment expense payments, to pay
underwriting expenses including commissions to agents, to pay
interest under the surplus notes described above and to make tax
payments. Available sources for these requirements are premiums
received and cash flows from investment activities. Together,
these sources historically have been adequate to meet the
described requirements on a timely basis. The Company monitors
the cash flows of its insurance company subsidiaries 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 expense.
Changes in Financial Condition
The Company's stockholders' equity increased by approximately
$10.4 million at September 30, 1995 as compared to December 31,
1994. Principal components of this increase in equity were a net
loss of $1.5 million generated during the first nine months of
1995 and a decrease in the unrealized loss, net of tax, in the
Company's available for sale securities from $13.7 million at
December 31, 1994 to $2.0 million at September 30, 1995.
The NAIC has released its Risk Based Capital (RBC) formula for
property and casualty insurance companies. The Company's
insurance company subsidiaries have reviewed and applied this RBC
formula for the 1994 year and have exceeded the requirements of
such formula.
Consolidated Cash Flow
Cash flows from operating activities were $37.4 million for the
nine months ended September 30, 1995, providing adequate capital
to meet all of the Company's cash needs.
Cash flows for 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 administration
expenses.
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.
Inflation
The Company does not believe that inflation has had a material
impact on its financial condition or the results of operation.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) No reports on Form 8-K were filed by the registrant during
the quarter for which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements 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.
November 14, 1995 /s/ KENNETH C. COON
-----------------------------------
Kenneth C. Coon
Chief Executive Officer
November 14, 1995 /s/ GEORGIA M. MACE
-----------------------------------
Georgia M. Mace
Treasurer and Chief Accounting
Officer
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
3.(i) 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.
10.1 $90,000,000 Credit Agreement By and Among the
Registrant, NBD Bank, N.A., First National Bank of
Omaha, FirsTier Bank, N.A., Comerica Bank, First
Interstate Bank of Arizona and NBD Bank, N.A., As
Agent, dated as of July 26, 1995. Incorporated by
reference to Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30, 1995.
10.2 Intercompany Federal Income Tax Allocation Agreement
between Acceptance Insurance Holdings Inc. and its
subsidiaries and the Registrant dated April 12, 1990,
and related agreements. Incorporated by reference to
Exhibit 10i to the Registrant's Annual Report on Form
10-K for the fiscal year ended August 31, 1990.
10.3 Amended and Restated Registration Rights Agreement,
dated April 9, 1990, between the Registrant and
Patricia Investments, Inc. Incorporated by reference
to Exhibit 10d to the Registrant's Quarterly Report on
Form 10-Q for the period ended May 31, 1990.
10.4 Warrants to purchase a total of 389,507 shares of
common stock ($.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.
10.5 Employment Agreement dated February 19, 1990 between
Acceptance Insurance Holdings Inc., the Registrant and
Kenneth C. Coon. Incorporated by reference to Exhibit
10.65 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
<PAGE>
10.6 Employment Agreement dated July 2, 1993 between the
Registrant and John P. Nelson. Incorporated by
reference to Exhibit 10.6 to the Registrant's Quarterly
Report on Form 10-Q for the period ended September 30,
1994.
10.7 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.
11* Computation of Income per share.
27* Financial Data Schedule.
99.1 The Registrant's Amended 1992 Incentive Stock Option
Plan. Incorporated by reference to the Registrant's
Proxy Statement filed on or about May 2, 1995.
99.2 The Registrant's Amended Employee Stock Purchase Plan.
Incorporated by reference to the Registrant's Proxy
Statement filed on or about April 29, 1994.
99.3 The Registrant's Employee Stock Ownership and Tax
Deferred Savings Plan as merged, amended and restated
effective October 1, 1990. Incorporated by reference
to Exhibit 10.4 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended November 30, 1990.
99.4 First Amendment to the Registrant's Employee Stock
Ownership and Tax Deferred Savings Plan. Incorporated
by reference to Exhibit 99.4 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1993.
99.5 Second Amendment to the Registrant's Employee Stock
Ownership and Tax Deferred Savings Plan. Incorporated
by reference to Exhibit 99.5 to the Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1993.
* Previously filed.
