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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1996
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)
Registrants'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 August 1, 1996 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 15,166,946
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<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
June 30, 1996 (unaudited) and December 31, 1995
(audited)
Consolidated Statements of Operations (unaudited)
Three Months and Six Months Ended June 30, 1996
and 1995
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 1996 and 1995
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)
June 30, December 31,
1996 1995
----------- ------------
(Unaudited) (audited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale $234,157 $218,300
Marketable equity securities -
preferred stock 67,653 30,608
Marketable equity securities -
common stock 22,053 17,929
Mortgage loans and other investments 9,711 11,290
Real estate 3,349 3,354
Short-term investments, at cost, which
approximates market 48,468 86,520
-------- --------
385,391 368,001
Cash 9,041 7,648
Investment in Major Realty Corporation 9,761 9,878
Receivables, net 108,978 106,246
Reinsurance recoverable on unpaid loss
and loss adjustment expenses 181,014 167,888
Prepaid reinsurance premiums 34,854 38,341
Property and equipment, net 7,192 5,284
Deferred policy acquisition costs 30,920 24,585
Excess of cost over acquired net assets 36,433 37,003
Deferred income tax 10,513 9,403
Other assets 13,073 6,757
-------- --------
Total assets $827,170 $781,034
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses $400,654 $369,244
Unearned premiums 142,392 124,122
Amounts payable to reinsurers 20,670 18,161
Accounts payable and accrued
liabilities 12,041 22,720
Bank borrowings 69,000 69,000
-------- --------
Total liabilities 644,757 603,247
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,
15,166,881 and 15,141,220 shares
issued 6,092 6,057
Capital in excess of par value 195,802 194,823
Unrealized gain (loss) on available
for sale securities, net of tax (3,872) 19
Accumulated deficit (11,345) (18,848)
-------- --------
186,677 182,051
Less:
Treasury stock, at cost, 35,559 shares (1,564) (1,564)
Contingent stock, 240,000 shares (2,700) (2,700)
-------- --------
Total stockholders' equity 182,413 177,787
-------- --------
Total liabilities and stockholders'
equity $827,170 $781,034
======== ========
<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 six months ended June 30, 1996 and 1995
(in thousands, except per share data)
(unaudited)
Three Months Six Months
---------------- ------------------
1996 1995 1996 1995
------- ------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums earned $76,896 $62,413 $144,400 $113,689
Insurance agency
commissions 293 769 922 1,642
Net investment income 6,528 4,817 12,992 9,238
Net realized capital gains 1,586 599 2,767 1,033
------- ------- -------- --------
85,303 68,598 161,081 125,602
------- ------- -------- --------
Costs and expenses:
Costs of revenues:
Insurance losses and loss
adjustment expenses 55,239 44,513 101,122 79,119
Insurance agency costs 343 742 874 1,452
Insurance underwriting
expenses 23,868 19,892 45,142 36,008
General and administrative
expenses 528 649 1,063 1,248
------- ------- -------- --------
79,978 65,796 148,201 117,827
------- ------- -------- --------
Operating profit 5,325 2,802 12,880 7,775
------- ------- -------- --------
Other income (expense):
Interest expense (1,242) (531) (2,495) (1,044)
Share of net loss of
investee (53) (83) (117) (157)
Other, net 15 41 73 81
------- ------- -------- -------
(1,280) (573) (2,539) (1,120)
------- ------- -------- -------
Income before income taxes 4,045 2,229 10,341 6,655
Income tax expense
(benefit):
Current 1,098 1,465 1,853 1,690
Deferred (78) (735) 985 483
------- ------- -------- -------
<PAGE>
Net income $ 3,025 $ 1,499 $ 7,503 $ 4,482
======= ======= ======== =======
Net income per share:
Primary $ .20 $ .10 $ .50 $ .30
======= ======= ======== =======
Fully diluted $ .20 $ .10 $ .49 $ .29
======= ======= ======== =======
<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 six months ended June 30, 1996 and 1995
(in thousands)
(unaudited)
1996 1995
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 7,503 $ 4,482
Net adjustment to reconcile net income to
net cash provided by operating activities 16,645 21,640
-------- -------
Net cash provided by operating activities 24,148 26,122
-------- -------
Cash flows from investing activities:
Proceeds from sales of investments
available for sale 73,930 61,744
Proceeds from maturities of investments 15,637 10,481
Proceeds from maturities of investments
available for sale 5,315 4,706
Purchases of investments (11,106) (18,740)
Purchases of investments available for sale (139,650) (91,624)
Purchases of property and equipment (2,958) (1,242)
-------- -------
Net cash used for investing activities (58,832) (34,675)
-------- -------
Cash flows from financing activities:
Proceeds from issuance of common stock 1,015 85
-------- -------
Net cash provided by financing activities 1,015 85
-------- -------
Net increase (decrease) in cash and
short-term investments (33,669) (8,468)
Cash and short-term investments at
beginning of period 84,740 50,236
-------- -------
Cash and short-term investments at end
of period $ 51,071 $41,768
======== =======
Supplemental disclosure of cash flow
information:
Cash paid during the period for interest $ 2,420 $ 1,079
======== =======
Cash paid during the period for income
taxes $ 2,050 $ 2,853
======== =======
<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 June 30,
1996 and December 31, 1995, and the results of operations
for the three months and six months ended June 30, 1996 and
1995 and cash flows for the six months ended June 30, 1996
and 1995.
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 June
30, 1996 approximately $6,438,000 of short-term investments
had a maturity date at acquisition of greater than three
months.
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. The adoption of this statement had 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 efffective 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 will continue to apply APB No. 25 to its stock based
compensation awards to employees and directors.
Reclassifications
Certain prior year accounts have been reclassified to
conform with current period presentation.
2. Per Share Data:
Primary and fully diluted earnings per share are based on
the weighted average shares outstanding of approximately
15.1 million and 15.3 million, respectively, for the three
months ended June 30, 1996 and approximately 15.0 million
and 15.2 million, respectively, for the three months ended
June 30, 1995. Primary earnings per share and fully
diluted earnings per share are based on the weighted average
shares outstanding of approximately 15.0 million and 15.3
million, respectively, for the six months ended June 30,
1996 and approximately 15.0 million 15.2 million,
respectively, for the six months ended June 30, 1995.
3. Investments:
The amortized cost and related market values of debt and
equity securities in the accompanying balance sheets are as
follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ------
<S> <C> <C> <C> <C>
June 30, 1996:
Fixed maturities
available for sale:
U.S. Treasury and
government securities $ 72,748 $ 198 $ 642 $ 72,304
States, municipalities
and political
subdivisions 85,268 1,570 522 86,316
Mortgage-backed
securities 59,957 34 8,601 51,390
Other debt securities 24,284 426 563 24,147
-------- ------ ------- --------
$242,257 $2,228 $10,328 $234,157
======== ====== ======= ========
Marketable equity
securities - preferred
stock $ 68,535 $ 339 $ 1,221 $ 67,653
======== ====== ======= ========
Marketable equity
securities - common
stock $ 19,027 $3,950 $ 924 $ 22,053
======== ====== ======= ========
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
======== ====== ======= ========
</TABLE>
4. Insurance Premiums and Claims:
Insurance premiums written and earned by the Company's
insurance subsidiaries for the three months and six months
ended June 30, 1996 and 1995 are as follows (in thousands):
<PAGE>
<TABLE>
<CAPTION>
Three Months Six Months
------------------ ------------------
1996 1995 1996 1995
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Direct premiums written $135,487 $110,799 $249,196 $213,099
Assumed premiums written 9,564 80 19,584 545
Ceded premiums written (49,727) (43,917) (102,622) (88,523)
-------- -------- -------- --------
Net premiums written $ 95,324 $ 66,962 $166,158 $125,121
======== ======== ======== ========
Direct premiums earned $123,970 $102,509 $232,186 $192,115
Assumed premiums earned 9,341 609 18,323 1,798
Ceded premiums earned (56,415) (40,705) (106,109) (80,224)
-------- -------- -------- --------
Net premiums earned $ 76,896 $ 62,413 $144,400 $113,689
======== ======== ======== ========
</TABLE>
Insurance loss and loss adjustment expenses have been
reduced by recoveries recognized under reinsurance contracts
of approximately $99,897,000 and $51,379,000 for the three
months ended June 30, 1996 and 1995, respectively.
Insurance loss and loss adjustment expenses have been
reduced by recoveries recognized under reinsurance contracts
of approximately $125,337,000 and $78,830,000 for the six
months ended June 30, 1996 and 1995, respectively.
5. Bank Borrowings, Term Debt and Other Borrowings:
On July 26, 1995, the Company amended its borrowing
arrangements with its bank lenders providing a $75 million
three year Revolving Credit Facility which, with the
consent of the banks, can be renewed annually for three
years, and a $15 million Term Loan Facility with a maturity
of the earlier of July 1996 or one year from the date of the
borrowing. The Term Loan Facility expired on July 26, 1996
as the Company had not drawn upon this facility as of that
date. The Company is currently negotiating with its banks
to restructure the credit facility to incorporate the
previous Term Loan Facility and Revolving Credit Facility
into one credit facility, or in the alternative, to extend
the expiration date of the Revolving Credit Facility and
reinstate a Term Loan Facility similar to the previous one.
Further, the Company selects its interest rate as either the
prime rate or LIBOR plus a margin of .75% to 1.5% depending
on the Company's debt to equity ratio. Interest is payable
quarterly. At June 30, 1996, the Company had $69.0 million
outstanding under this arrangement at a weighted average
interest cost of 7.2%.
6. Income Taxes:
As of June 30, 1996, management believes it is more likely
than not that the Company will realize a portion of the
deferred tax asset. The valuation allowance at June 30,
1996 primarily relates to capital loss items whose
realization is uncertain. The net deferred tax asset is as
follows (in thousands):
<TABLE>
<CAPTION>
June 30, December 31,
1996 1995
-------- ------------
<S> <C> <C>
Unpaid losses and loss adjustment
expenses 11,266 10,701
Unearned premiums 7,528 6,004
Allowances for doubtful accounts 1,217 869
Other 1,859 1,443
Unrealized loss on fixed maturities
available for sale 2,834 699
Major Realty basis difference 7,991 7,950
------- -------
Deferred tax asset 32,695 27,666
------- -------
Deferred policy acquisition costs (10,822) (8,605)
Other (2,508) (888)
Unrealized gain on marketable
equity securities (750) (710)
------- -------
Deferred tax liability (14,080) (10,203)
------- -------
18,615 17,463
Valuation allowance (8,102) (8,060)
------- -------
Net deferred tax asset $10,513 $ 9,403
======= =======
</TABLE>
<PAGE>
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>
June 30,
---------------------
1996 1995
------- -------
<S> <C> <C>
Computed U.S. federal income taxes $3,619 $2,328
Nondeductible amortization of goodwill
and other intangibles 284 269
Tax-exempt interest income (669) (437)
Dividends received deduction (497) (145)
Other 101 158
------ ------
Income taxes provided $2,838 $2,173
====== ======
</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.
RESULTS OF OPERATIONS
Forward-Looking Information
Except for the historical information contained in this Quarterly
Report of Form 10-Q, matters discussed herein may constitute
forward-looking information. 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
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 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 season 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 any adverse weather conditions during the
1996 crop season, or the various other factors noted above which
may affect crop and non-crop operating results.
<PAGE>
Three months and six months ended June 30, 1996
Compared to three months and six months ended June 30, 1995
The Company's net income for the three months and six months
ended June 30, 1996 increased 101.8% and 67.4% respectively from
the same periods in 1995. The second quarter of 1996 was
positively impacted by an increase in net premiums earned with
little or no change in the Company's combined loss and expense
operating ratio, an increase in net investment income and
realized capital gains, and a decrease in the Company's effective
income tax rate all as compared with the same period a year
earlier. These positive effects were slightly offset by an
increase in the interest expense of the Company and a decrease in
the net insurance agency income in both the three and six months
ended June 30, 1996 as compared to the same periods in 1995.
The Company's net premiums earned increased by 23.2% and 27.0% in
the three and six months ended June 30, 1996 respectively as
compared to the similar periods a year earlier. These increases
were principally attributable to growth in the direct and assumed
premiums written as well as a small decrease in the percentage of
premiums ceded to reinsurers. The increase in gross premiums
written (direct premiums plus assumed premiums) was slightly
larger for the second quarter of 1996 than for the first quarter
of 1996 increasing 30.8% during the second quarter as opposed to
20.4% in the first quarter of 1996, both as compared to similar
quarters in 1995.
Net premiums earned increased in each of the Company's three
property and casualty (non-crop) divisions in both the three and
six months ended 1996 as compared to the same periods in 1995.
The General Agency Division increased by $5.0 million and $9.8
million, the Program Division increased by $8.9 million and $16.3
million, and the Non-Standard Automobile Division increased by
$2.9 million and $4.4 million. The Company's Crop Insurance
Division net earned premium was approximately $10 million for
both the six months ended June 30, 1996 and June 30, 1995. The
Company's crop insurance business is seasonable, with the
majority of the premiums being recorded in the third and fourth
quarter of the year, and therefore, this lack of change in crop
insurance net earned premium is not necessarily indicative of the
final crop insurance premiums for the year.
The increases in premium revenue benefited the Company since the
Company's combined loss and expense ratios for the three and six
months ended June 30, 1996 remained approximately the same as
those recorded in the same three and six month periods in 1995.
While the ratios were similar, the Company's results were
effected by different factors in 1996 as compared to 1995.
During the second quarter of 1995, the Company's results were
impacted by wind and hail storms occurring across Texas and
Louisiana during the months of April and May, during which the
Company incurred approximately $1.1 million of pre-tax losses.
In addition, during the second quarter of 1995, the Company
experienced deterioration in the loss ratio of its commercial
automobile liability business principally attributable to a more
rapid emergence of losses from the 1994 year than had been
expected by the Company. During the first six months of 1996,
the Company was not materially effected by prior year loss
development as it had been in 1995. The Company, was, however,
again effected by winter storms which impacted the Company's
automobile physical damage loss ratios as well as spring storms
across the Midwest which significantly impacted the Company's
farm property business. During 1996, the combined ratio of the
Company was also favorably impacted by final adjustments to the
Company's Multi-Peril Crop Insurance (MPCI) profit sharing for
1995 which added approximately $4.3 million of income to the
Company's results during the first six months of 1996. The
Company's estimate of its profit sharing income under the MPCI
program at December 31, 1995 was effected by a volatile crop
growing season during which many of the rules pertaining to
prevented planting payments were changed and in which a
combination of unusual weather conditions manifested themselves
in an unusually late harvest. As claims were closed during the
first six months of 1996 and the final prevented planting rules
applied to these losses, the Company was able to earn additional
profit sharing. Offsetting this income were losses in the
Company's named peril crop insurance programs.
The Company's investment income increased 35.5% and 40.6%
respectively in the three months and six months ended June 30,
1996 from the same three and six month periods during 1995. This
increase in investment income resulted from both an increase in
the average size of the investment portfolio of the Company as
well as the pre-tax yield of the portfolio. During the three
months ended June 30, 1996 the average size of the Company's
investment portfolio was $392 million and the pre-tax yield of
the portfolio was 6.65%. This compared with an average portfolio
size of $309 million and a pre-tax yield of 6.24% for the
portfolio during the three months ended June 30, 1995. For the
six months ended June 30, 1996 the average portfolio size was
$387 million and the pre-tax portfolio yield was 6.72%. This
compared with an average portfolio size of $300 million and a
pre-tax yield of 6.15% for the six months ended June 30, 1995.
The size of the investment portfolio increased principally from
retained earnings and positive cash flows while investment yields
increased as the overall interest rate environment during the
first and second quarters of 1996 was higher than the first and
second quarters of 1995.
The Company's realized capital gains increased 164.8% and 167.9%
respectively in the three and six months ended June 30, 1996 as
compared to the similar periods a year earlier. This increase in
realized gains was attributable principally to gains realized in
the Company's equity portfolio with approximately 66% and 71% of
the gains attributable to the equity portfolio in the first three
months and six months of 1996 respectively.
Net income was also effected by a lower effective income tax rate
during the first and second quarters of 1996 as compared to the
first and second quarters of 1995, as tax expense decreased from
32.8% and 32.7% of pre-tax income during the three and six months
ended June 30, 1995 to 25.2% and 27.4% during the same periods in
1996. This reduction in the Company's income tax expense was a
result of additional income from tax advantaged securities in the
Company's investment portfolio such as preferred stocks and
municipal bonds. The Company was able to increase its investment
in such tax advantaged securities while increasing the overall
pre-tax yield of the portfolio as noted above.
Offsetting these positive factors was an increase in the interest
expense of the Company and a decrease in insurance agency income.
The increase in interest expense was the result of additional
borrowings under the Company's bank credit facility with average
borrowings increasing from $29 million during the first six
months of 1995 to $69 million during the first six months of
1996. During the periods being compared, the average interest
rate under the bank credit facility was relatively stable at 7.3%
and 7.2% during the three and six months ended June 30, 1995 and
7.2% and 7.2% during the three and six months ended June 30,
1996.
While the impact of the Company's insurance agency operations was
limited, the net insurance agency income decreased from $27,000
and $190,000 during the three and six months ended June 30, 1995
to a loss of $50,000 and a profit of $48,000 during the three and
six months ended June 30, 1996.
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. The adoption
of this statement had 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 will continue to apply APB
Opinion No. 25 to its stock based compensation awards to
employees and directors.
LIQUIDITY AND CAPITAL RESOURCES
The Company has included a discussion of the liquidity and
capital resources requirement 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, two 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
investments 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 June 30,
1996, the statutory limitation on dividends from insurance
company subsidiaries to the parent without further insurance
departmental approval was approximately $10.5 million. 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
claim service operations.
The Company currently holds two surplus notes, each in the amount
of $20 million, issued by one of its insurance company
subsidiaries, bearing interest at the rate of 9% per annum,
payable quarterly. Although repayment of all or part of the
principal of this surplus note requires prior insurance
department approval, no prior approval of interest payment is
currently required.
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 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 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. At
June 30, 1996, the outstanding balance under the facility was $69
million, bearing interest at 7.2%. 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 by additional one-year
periods with the consent of the lenders. The Term Loan Facility
expired on July 26, 1996 as the Company had not drawn upon this
facility as of that date. The Company is currently negotiating
with its banks to restructure the credit facility to incorporate
the previous Term Loan Facility and Revolving Credit Facility
into one credit facility, or in the alternative, to extend the
expiration date of the Revolving Credit Facility and reinstate a
Term Loan Facility similar to the previous one.
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 expenses.
Changes in Financial Condition
The Company's stockholders' equity increased by approximately
$4.6 million at June 30, 1996 as compared to December 31, 1995.
The three components of this increase were net income of $7.5
million during the first six months of 1996, an increase in the
unrealized loss of available for sale securities, net of tax, in
the Company's investment portfolio of $3.9 million, and $1
million in proceeds from the exercise of stock options and
employee stock purchases under the Employee Stock Purchase Plan.
Consolidated Cash Flow
Cash provided from operating activities was positive and
relatively stable during both the six months ended June 30, 1995
and 1996. Cash flows from operating activities were $24.1
million during the first six months of 1996 as compared to $26.1
million during the first six months of 1995. A large component
of this positive cash flow during both periods were profit
sharing payments received from the federal government Multi-Peril
Crop insurance program. During the first six months of 1995 this
component of operating cash flows was $11.6 million while in the
first six months of 1996 it was $16.4 million.
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.
August 13, 1996 /s/ KENNETH C. COON
-----------------------------------
Kenneth C. Coon
Chief Executive Officer
August 13, 1996 /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 SIX MONTHS ENDED JUNE 30, 1996
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
3.1 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.
10.1 $90,000,000 Credit Agreement By and Among the
Registrant, NBD Bank, N.A., First National
Bank of Omaha, FirsTier Bank, N.A., Comerica
Bank, First Interstate Bank of Arizona and
NBD Bank, N.A., As Agent, dated as of July
26, 1995. Incorporated by reference to
Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June
30, 1995.
10.2 Intercompany Federal Income Tax Allocation
Agreement between Acceptance Insurance
Holdings Inc. and its subsidiaries and the
Registrant dated April 12, 1990, and related
agreements. Incorporated by reference to
Exhibit 10i to the Registrant's Annual Report
on Form 10-K for the fiscal year ended August
31, 1990.
10.3 Warrants to purchase a total of 389,507
shares of common stock ($.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.
10.4 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.
10.5 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.
10.6 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.
99.6 The Registrant's 1996 Incentive Stock Option Plan.
Incorporated by reference to the Registrant's Proxy
Statement filed on or about May 3, 1996.
ACCEPTANCE INSURANCE COMPANIES INC.
COMPUTATION OF INCOME PER SHARE
for the three and six months ended June 30, 1996 and 1995
(in thousands, except per share data)
(unaudited)
Exhibit 11
<TABLE>
<CAPTION>
Three Months Six Months
---------------- ----------------
1996 1995 1996 1995
------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY INCOME PER SHARE:
Net income $ 3,025 $ 1,499 $ 7,503 $ 4,482
======= ======= ======= =======
Weighted average number of
shares outstanding 14,917 14,856 14,892 14,855
Adjustment for stock options 154 128 145 137
------- ------- ------- -------
Adjusted weighted average
number of shares
outstanding 15,071 14,984 15,037 14,992
======= ======= ======= =======
Primary income per share $ .20 $ .10 $ .50 $ .30
======= ======= ======= =======
FULLY DILUTED INCOME
PER SHARE:
Net income $ 3,025 $ 1,499 $ 7,503 $ 4,482
======= ======= ======= =======
Weighted average number of
shares outstanding 15,157 15,096 15,132 15,095
Adjustment for stock options 180 128 190 137
------- ------- ------- -------
Adjusted weighted average
number of shares
outstanding 15,337 15,224 15,322 15,232
======= ======= ======= =======
Fully diluted income per
share $ .20 $ .10 $ .49 $ .29
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements included in the Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> JUN-30-1996
<DEBT-HELD-FOR-SALE> 234,157
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 89,706
<MORTGAGE> 9,711
<REAL-ESTATE> 3,349
<TOTAL-INVEST> 385,391
<CASH> 9,041
<RECOVER-REINSURE> 15,689
<DEFERRED-ACQUISITION> 30,920
<TOTAL-ASSETS> 827,170
<POLICY-LOSSES> 400,654
<UNEARNED-PREMIUMS> 142,392
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 69,000
0
0
<COMMON> 6,092
<OTHER-SE> 176,321
<TOTAL-LIABILITY-AND-EQUITY> 827,170
144,400
<INVESTMENT-INCOME> 12,992
<INVESTMENT-GAINS> 2,767
<OTHER-INCOME> 922
<BENEFITS> 101,122
<UNDERWRITING-AMORTIZATION> (6,355)
<UNDERWRITING-OTHER> 51,497
<INCOME-PRETAX> 10,341
<INCOME-TAX> 2,838
<INCOME-CONTINUING> 7,503
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,503
<EPS-PRIMARY> .50
<EPS-DILUTED> .49
<RESERVE-OPEN> 0<F1>
<PROVISION-CURRENT> 0<F1>
<PROVISION-PRIOR> 0<F1>
<PAYMENTS-CURRENT> 0<F1>
<PAYMENTS-PRIOR> 0<F1>
<RESERVE-CLOSE> 0<F1>
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>This amount is presented on an annual basis. See 12/31/95 Form 10-K for the
most recent reported amounts.
</FN>
</TABLE>
