=================================================================
UNITED STATES
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
For the Fiscal Year Ended December 31, 1996
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 (10,334,406 shares) on March 24,
1997 was $193,770,112.
The number of shares of each class of the Registrant's
common stock outstanding on March 24, 1997 was:
Class of Common Stock No. of Shares Outstanding
--------------------- -------------------------
Common Stock, $.40 Par Value 15,258,640
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's
1997 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 RMA. 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.
Crop Revenue Coverage ("CRC"): An extension of the
MPCI program that insures a producer of crops with varying levels
of protection against loss of revenues caused by changes in crop
prices, low yields, or a combination of the two.
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 generally 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 in
which 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.
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 estimated ultimate 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 loss
of yield from 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.
Risk Management Agency ("RMA"): A division of the
United State Department of Agriculture ("USDA") which, along with
the Federal Crop Insurance Corporation ("FCIC") administers and
provides reinsurance for the federally-regulated MPCI and CRC
programs.
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 reinsurance 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, through diversifying the
risks insured, seeks to avoid concentration in particular risks
so that, during years when particular lines of business are
experiencing adverse operating results, overall operating results
will remain within targeted returns to shareholders. 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 and 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.
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
46 states and the District of Columbia, and operate on a non-
admitted basis in 45 states, the District of Columbia, Puerto
Rico and the Virgin Islands. Two of the Insurance Companies have
received their Certificate of Authority ("T" listing) from the
U.S. Department of Treasury. 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.
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.
Business Divisions
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 principal lines of the Company's Crop insurance
division are MPCI and crop hail insurance. MPCI is a federally
subsidized farm price support program designed to encourage
farmers to share, through premium payments, in the federal
government's price support programs. MPCI provides farmers with
yield coverage for crop damage from substantially all natural
perils. CRC is an extension of the MPCI program which provides
farmers with protection from revenue loss caused by changes in
crop prices, low yields, or a combination of the two. As used
herein, the term MPCI includes CRC, unless the context indicates
otherwise. For the year ended December 31, 1996, the Company was
the fourth largest writer of MPCI business in the United States
with a market share of approximately 15%.
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 divisions for the periods set
forth below.
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
General Agency $162,157 $135,125 $114,635
Crop Insurance(1) 66,649 46,950 34,592
Program Insurance 95,805 75,279 50,070
Non-Standard Auto 42,338 28,829 29,879
-------- -------- --------
Total $366,949 $286,183 $229,176
======== ======== ========
<FN>
- ---------------
(1) 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 and the property and casualty
insurance industry, computed in accordance with SAP, for the
periods shown.
<TABLE>
Years Ended December 31,
----------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
The Company
Loss Ratio 69.8% 78.2%(1) 70.8%
Expense Ratio 26.6 26.1 25.6
----- ----- -----
Combined Ratio 96.4% 104.3% 96.4%
===== ===== =====
Industry Average(2)
Loss Ratio 78.6% 78.9% 81.0%
Expense Ratio 27.3 27.5 27.3
----- ----- -----
Combined Ratio 105.9% 106.4% 108.3%
===== ===== =====
<FN>
<PAGE>
- ---------------
(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) Source: Best's Aggregates & Averages - Property Casualty
(1996 Edition). Ratios for 1996 are from A.M. Best.
</FN>
</TABLE>
Underwriting
The Company's goal is to achieve overall 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, which
underwrite 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 that its ultimate liability may from time to time vary
from such estimates.
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>
Years Ended December 31,
----------------------------
1996 1995 1994
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net loss and loss adjustment
expense reserves at beginning
of year $201,356 $141,514 $115,714
-------- -------- --------
Provisions for net losses and
loss adjustment expenses for
claims occurring in the current
year 233,727 190,019 137,881
Increase in net reserves for
claims occurring in prior years 9,530 22,318 5,070
-------- -------- --------
243,257 212,337 142,951
-------- -------- --------
Net losses and loss adjustment
expenses paid for claims
occurring during:
The current year (102,565) (80,281) (60,375)
Prior years (95,296) (72,214) (56,776)
-------- -------- --------
(197,861) (152,495) (117,151)
-------- -------- --------
Net loss and loss adjustment
expense reserves at end of year 246,752 201,356 141,514
Reinsurance recoverable on unpaid
losses and loss adjustment
expenses 185,421 167,888 79,811
-------- -------- --------
Gross loss and loss adjustment
expense reserves $432,173 $369,244 $221,325
======== ======== ========
</TABLE>
The following table presents the development of balance
sheet net loss reserves from calendar years 1986 through 1996.
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 the "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 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 1995,
the only years on the table for which the Company has restated
amounts in accordance with SFAS #113.
<PAGE>
<TABLE>
Years Ended December 31,
----------------------------------------------------
1986 1987 1988 1989 1990 1991
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net reserves for unpaid
losses and loss
adjustment expenses $17,373 $27,730 $34,092 $43,380 $58,439 $66,132
Cumulative amount of net
liability paid through:
One year later 32.5% 30.6% 30.5% 30.0% 40.6% 45.7%
Two years later 63.1% 56.7% 52.1% 59.5% 70.8% 72.3%
Three years later 84.7% 72.9% 68.7% 76.1% 88.5% 96.6%
Four years later 93.4% 81.8% 77.0% 84.5% 101.2% 108.1%
Five years later 100.1% 84.7% 81.5% 89.2% 107.5% 115.1%
Six years later 100.5% 87.1% 85.3% 93.4% 109.7%
Seven years later 100.9% 88.2% 89.8% 94.5%
Eight years later 102.2% 95.0% 90.3%
Nine years later 112.4% 95.2%
Ten years later 112.4%
Net reserves reestimated as of:
One year later 99.3% 96.6% 97.9% 99.1% 100.3% 103.5%
Two years later 104.7% 97.6% 92.3% 95.2% 102.3% 109.9%
Three years later 107.3% 91.3% 87.3% 91.4% 107.4% 116.9%
Four years later 103.0% 89.7% 84.9% 92.5% 110.7% 120.1%
Five years later 103.6% 88.1% 85.3% 94.0% 112.7% 119.9%
Six years later 102.5% 88.8% 86.6% 95.9% 112.0%
Seven years later 102.7% 88.9% 91.0% 95.4%
Eight years later 103.0% 95.4% 90.7%
Nine years later 112.7% 95.2%
Ten years later 112.4%
Net cumulative redundancy
(deficiency) -12.4% 4.8% 9.3% 4.6% -12.0% -19.9%
<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,
--------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net reserves for unpaid
losses and loss
adjustment expenses $ 77,627 $115,714 $141,514 $201,356 $246,752
Cumulative amount of net
liability paid through:
One year later 36.1% 49.1% 51.0% 47.3%
Two years later 73.6% 80.5% 86.1%
Three years later 94.5% 100.9%
Four years later 109.0%
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 103.3% 104.4% 115.8% 104.7%
Two years later 109.7% 114.5% 115.7%
Three years later 117.9% 113.1%
Four years later 117.7%
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Net cumulative redundancy
(deficiency) -17.7% -13.1% -15.7%(1) -4.7%
<PAGE>
Gross reserves for unpaid loss and
loss adjustment expenses $127,666 $211,600 $221,325 $369,244 $432,173
Reinsurance recoverable on unpaid
loss and loss adjustment expenses 50,039 95,886 79,811 167,888 $185,421
------- ------- ------- ------- -------
Net reserves for unpaid loss and
loss adjustment expenses 77,627 115,714 $141,514 $201,356 $246,752
======= ======== ======= ======== ========
Reestimated gross reserves for unpaid
loss and loss adjustment expenses 108.9% 112.4% 116.6% 98.8%
Reestimated reinsurance recoverable on
unpaid loss and loss adjustment
expenses 95.2% 111.6% 118.2% 91.7%
-------- ------- ------- -------
Reestimated net reserves for unpaid loss
and loss adjustment expenses 117.7% 113.1% 115.7% 104.7%
------- ------- ------- -------
Gross cumulative redundancy (deficiency) - 8.9% -12.4% -16.6% 1.2%
======== ======= ======= =======<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 loss, 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 property and casualty lines, ceding the next
$1,500,000 and $2,500,000, respectively, to reinsurers. On its
complex liability and property exposures, the Company cedes
losses in excess of $1,000,000 to its excess reinsurers and
maintains a separate 80% quota share treaty on the first
$1,000,000 of risk. To the extent that individual policies
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 $17 million in excess
of $3 million of aggregate risk per occurrence, and for its
property lines, which provides catastrophe coverage of 95% of
$77.5 million in excess of $2.5 million per occurrence. The
Company reviews the concentrations of property values in its
property lines of business continually, and models possible
losses from catastrophic events through computer simulations of
different levels of storm activity, adjusting the required limit
of the liability or the concentrations of property coverages as
appropriate.
In its workers' compensation line, the Company buys
excess of loss protection on a statutory basis in excess of a
$500,000 per occurrence retention.
The Company reinsures its MPCI business with various
federal reinsurance pools administered by the RMA. In 1996, the
Company ceded to the RMA an aggregate of 35% 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. This excess of loss reinsurance generally provides
coverage for 95% of losses in excess of a $3,000,000 deductible
after the Company's loss ratio reaches specified limits for each
line of business, specifically 77% on crop hail and named peril
business and 100% on MPCI business. Additionally 50% of the
Company's crop hail business is reinsured through quota share
agreements.
At December 31, 1996, 93% of the Company's outstanding
reinsurance recoverables were from domestic reinsurance companies
or the federal government, 98% 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. The Company's fixed maturity securities are
classified as available-for-sale and carried at estimated fair
value. The investment portfolio at December 31, 1996 and
December 31, 1995, consisted of the following:
<PAGE>
<TABLE>
December 31, 1996 December 31, 1995
------------------- -------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- -------- --------- --------
<S> <C> <C> <C> <C>
Type of Investment
- ------------------
Fixed maturity securities
U.S. Treasury and government securities $86,359 $ 86,253 $ 51,022 $ 51,689
States, municipalities and political
subdivisions 93,293 94,607 69,433 71,194
Other debt securities 34,581 34,309 27,484 28,197
Mortgage-backed securities 60,138 52,835 72,359 67,220
------- -------- -------- --------
Total fixed maturity securities 274,371 268,004 220,298 218,300
Common stocks 17,112 20,873 15,211 17,929
Preferred stocks 62,628 62,964 31,299 30,608
Commercial mortgages 11,149 11,149 11,290 11,290
Real estate 3,342 3,342 3,354 3,354
Short-term investments(1) 39,594 39,594 86,520 86,520
-------- -------- -------- --------
Total $408,196 $405,926 $367,972 $368,001
======== ======== ======== ========
<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,
1996, the composition of the Company's fixed maturity securities
portfolio by time to maturity:
<TABLE>
Estimated
Maturity Fair Value Percent
-------- -------- -------
<S> <C> <C>
1 year or less $ 14,300 5.3%
More than 1 year through 5 years 50,689 18.9%
More than 5 years through 10 years 56,133 21.0%
More than 10 years 94,047 35.1%
Mortgage-backed securities 52,835 19.7%
------- -----
Total $268,004 100.0%
======= =====
</TABLE>
The Company's investment results for the periods
indicated are set forth below:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1996 1995 1994
-------- -------- --------
(in thousands, except percentages)
<S> <C> <C> <C>
Net investment income $ 26,491 $ 20,651 $ 13,276
Average investment
portfolio(1) 402,404 321,251 220,125
Pre-tax return on average
investment portfolio 6.6% 6.4% 6.0%
Net realized gains $ 5,216 $ 2,707 $ 554
<FN>
- ---------------
(1) 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
(generally 10%) 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 1997, the statutory
limitation on dividends from the Insurance Companies to
Acceptance without further Insurance Department approval is
approximately $10.4 million.
Other regulatory and business considerations may
further limit the ability 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 RMA. The MPCI program
regulations prescribe premiums which may be charged and 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 has 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, 1996
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 for the year ended
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 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 24, 1997 the Company and its subsidiaries
employed 18 salaried executives and 1,102 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>
General Leased/
Location Character Size Owned(1)
- -------- --------- ---- --------
<S> <C> <C> <C>
Omaha, NE Office 80,000 sq. ft. Leased
Council Bluffs, IA-A Office 142,000 sq. ft. Leased
Council Bluffs, IA-B Office 33,000 sq. ft. Leased
Council Bluffs, IA-C Office 11,000 sq. ft. Leased
Burlington, NC Office 18,000 sq. ft. Leased
Phoenix, AZ Office 33,000 sq. ft. Leased
Scottsdale, AZ Office 27,000 sq. ft. Leased
<FN>
- ---------------
(1) The range of expiration dates for these leases is
November 30, 2001 (Omaha), December 31, 2001 with five year
option (Council Bluffs-A), June 30, 1997 (Council Bluffs-B),
November 30, 1997 (Council Bluffs-C), December 31, 2000
(Burlington), February 21, 2000 (Phoenix), and December,
1998 (Scottsdale).
</FN>
</TABLE>
Item 3. Legal Proceedings.
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,
1996.
<PAGE>
PART II.
Item 5. Market for Registrant's Equity and Related Stockholder
Matters.
The Common Stock is listed and traded on the New York
Stock Exchange ("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>
High Low
---- ---
<S> <C> <C>
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 Ended December 31, 1996
First Quarter 15 1/2 13 7/8
Second Quarter 18 1/4 14 3/4
Third Quarter 19 17
Fourth Quarter 22 1/2 19 1/8
Year Ending December 31, 1997
First Quarter
(through March 24, 1997) 23 1/8 18 1/4
</TABLE>
The closing sales price of the Common Stock on March
24, 1997, as reported on the NYSE Composite Tape, was $18 3/4 per
share. As of March 24, 1997, there were approximately 1,800
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 Company's credit agreement with its lenders ("Credit
Agreement") 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; and see "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Liquidity and
Capital Resources" for a description of the Company's Credit
Agreement.
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>
Years Ended
December 31,
-----------------------------------------------------------
1996(1) 1995(1) 1994(1) 1993(1) 1992
--------- --------- --------- ----------- ----------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Insurance Revenues:
Gross premiums written $651,060 $537,349 $447,483 $256,042 $152,091
======= ======= ======= ======= =======
Net premiums written $366,949 $286,183 $229,176 $137,505 $ 84,085
======= ======= ======= ======= =======
Net premiums earned $348,653 $271,584 $202,659 $128,082 $ 79,164
Net investment income 25,677 19,851 12,864 10,467 8,220
Net realized capital gains 5,206 2,531 554 2,250 1,046
Agency income 1,035 2,863 3,629 4,119 3,992
------- ------- ------- ------- -------
Insurance revenues 380,571 296,829 219,706 144,918 92,422
Non-insurance revenues 824 976 412 377 2,610
------- ------- ------- ------- -------
Total revenues 381,395 297,805 220,118 145,295 95,032
Insurance expenses:
Losses and loss adjustment
expenses 243,257 212,337 142,951 92,805 60,025
Underwriting and other expenses 95,803 72,602 52,627 36,905 23,523
Agency expenses 1,024 2,596 3,180 3,794 3,736
------- ------- ------- ------- -------
Insurance expenses 340,084 287,535 198,758 133,504 87,284
Non-insurance expenses 2,015 2,165 1,684 1,225 3,107
------- ------- ------- ------- -------
Total expenses 342,099 289,700 200,442 134,729 90,391
------- ------- ------- ------- -------
Operating profit 39,296 8,105(2) 19,676 10,566 4,641(3)
<PAGE>
Other income (expense):
Interest expense (4,896) (2,591) (1,693) (2,235) (4,428)
Other income (expense), net (910) (171) (271) (340) (823)
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes
and minority interests 33,490 5,343 17,712 7,991 (610)
Provision (benefit) for income
taxes(4) 3,210 1,188 (3,443) 167 --
Minority interests in net income
(loss) of consolidated
subsidiaries -- -- 80 238 216
------- ------- ------- ------- -------
Net income (loss) from
continuing operations $ 30,280 $ 4,155(2) $ 21,075 $ 7,586 $ (826)(3)
======= ======= ======= ======= =======
Net income (loss) from
continuing operations
per share:
- Primary $ 2.00 $ .28 $ 1.71 $ 0.86 $ (0.24)
- Fully diluted 1.96 .27 1.68 0.85 (0.24)
GAAP Ratios:
Loss ratio 69.8% 78.2% 70.5% 72.5% 75.8%
Expense ratio 27.5% 26.7% 26.0% 28.8% 29.7%
------- ------- ------- ------- -------
Combined loss and expense ratio 97.3% 104.9% 96.5% 101.3% 105.5%
======= ======= ======= ======= =======
</TABLE>
<PAGE>
<TABLE>
December 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investments $405,926 $368,001 $264,743 $187,986 $124,311
Total assets 884,380 781,034 543,087 409,385 257,734
Loss and loss adjustment
expense reserves 432,173 369,244 221,325 211,600 127,666
Unearned premiums 140,217 124,122 97,170 60,114 41,709
Borrowings and term debt 69,000 69,000 29,000 18,951 33,567
Stockholders' equity 207,820 177,787 159,754 95,717 34,523
Other Data:
Statutory Surplus of Insurance
Companies(5) 191,455 169,628 126,272 73,910 34,527
<FN>
<PAGE>
__________________
(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) 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 net income 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 1996.
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 RMA. 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 RMA) 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 characteristics of the Company's crop business
may affect comparisons, including: (i) the seasonal nature of the
business whereby profits or losses are generally recognized
predominately in the second half of the year; (ii) the 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 the case.
Forward-Looking Information
Except for the historical information contained in this
Annual Report on Form 10-K, 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 seasons in the
states where the Company writes a substantial amount of its crop
insurance, and, with the introduction of the Company's new Crop
Revenue Coverage, the market price of grains on various commodity
exchanges. 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 1997 crop season, or the various other factors noted
above which may affect crop and non-crop operation results.
RESULTS OF OPERATIONS
Year Ended December 31, 1996
Compared to Year Ended December 31, 1995
The Company's net income increased approximately 629%
from $4.2 million in the year ended December 31, 1995 to $30.3
million in the year ended December 31, 1996. This increase in
net income resulted from improved underwriting results in the
Company's Crop and General Agency divisions, growth in premium
revenues, increased investment income and realized gains, and a
decrease in the effective tax rate of the Company. These
positive factors were offset by deteriorating results in the
Company's Program division, increased interest expense, and a
somewhat higher expense ratio for the Company.
The combined underwriting loss and expense ratio
improved from 104.9% for the year ended December 31, 1995 to
97.3% for the 1996 year. This improvement in the Company's
combined ratio was enhanced by growth in net premiums earned of
28.4%. The greatest contribution to these improved underwriting
results was made by the Company's Crop division. The Company's
Crop division increased its MPCI writings from $183.3 million for
the year ended December 31, 1995 to $248.3 million for the 1996
year. In addition to this growth in MPCI premium, the Company
increased its retained pool from $104.3 million in 1995 to $161.4
million in 1996. This growth in premium was aided by an increase
in commodity prices for the major crops insured by the Company
and the introduction of an enhancement to the MPCI policy, CRC,
which generated significantly higher premiums per policy than the
traditional MPCI policy. Improved weather conditions also
contributed significantly to the improved results in the Crop
division as the Company's MPCI profit sharing percentage realized
during 1996 increased to 23.5% from 13.4% realized during 1995.
In addition, the 1996 year benefited from $4.3 million of
additional profit sharing realized in the first quarter of 1996
as final results of the late 1995 harvest were available.
Underwriting results in the Company's General Agency
division also improved in 1996 as compared to 1995, as the
Company's combined ratio in this division improved from 116.4% in
1995 to 106.9% in 1996. The Company's 1995 results were affected
by a $22.3 million strengthening of reserves for prior year
losses (see results of operations for year ended December 31,
1995 compared to year ended December 31, 1994), and $16.5 million
of the $22.3 million affected the General Agency division,
contributing to the 116.4% combined ratio recorded during 1995.
When comparing accident year loss ratios for 1995 and 1996 in the
General Agency division, the results are similar. In the year
ended December 31, 1995, the General Agency division 1995
accident year loss ratio was 69.8% as compared to a 1996 accident
year loss ratio of 69.9%. The General Agency division was also
able to improve its combined ratio through a reduction in
expenses during 1996 as its expense ratio fell to 31.9% in 1996
as compared to 34.1% in 1995.
The Company also benefited from a 28.3% increase in
investment income during 1996 as compared to that of 1995, and an
increase in the realized investment gains of the Company of 92.7%
when comparing the same periods. The increase in investment
income was principally due to an increase in the average size of
the investment portfolio. The average size of the Company's
investment portfolio increased by 25.3% from $321.3 million for
the twelve months ended December 31, 1995 to $402.4 million for
the twelve months ended December 31, 1996, while the pre-tax
yield on the portfolio increased from 6.4% in 1995 to 6.6% in
1996. The size of the Company's investment portfolio increased
from retained earnings and positive cash flows from operations.
While the Company's income tax expense increased from
$1.2 million for the twelve months ended December 31, 1995 to
$3.2 million for the 1996 year, the Company's effective tax rate
declined from 22.2% in 1995 to 9.6% in 1996. The Company's 1996
taxes were positively effected by the decrease in the valuation
allowance relating to the unrealized loss from the Company's
investment in Major Realty. In October 1995, Major Realty
announced that its Board of Directors had determined that it was
in the best interest of the stockholders to seek a merger partner
or otherwise seek a transaction for the sale of the company. At
December 31, 1996, the Company believed that the realization of
the capital loss associated with such a transaction was more
likely than not due to sufficient carryforwards of capital gains
as well as the likelihood of future capital gains.
Positive factors effecting net income were partially
offset by deteriorating underwriting results in the Company's
Program division. The Program division's combined loss and
expense ratio increased from 113.6% during 1995 to 117.5% during
1996. A variety of factors combined to cause this deterioration
in underwriting results. In two of the division's departments,
Rural America and Special Products, weather related incidents
increased the frequency of losses. In the Rural America
department, storms in areas where the Company had concentrations
of farm business adversely effected the Company's loss ratio,
while in the Company's Special Products department, prolonged
sub-zero temperatures in the greater Chicago area increased the
number and severity of freeze losses experienced in the Company's
condominium program. The Company has taken steps to reduce its
geographic concentrations in the Rural America department, and is
making changes in the reinsurance structure of both of these
departments in order to reduce volatility and improve net
underwriting results.
Additionally in the Program division, the Company
changed its strategies within its Workers' Compensation
underwriting activities during 1996. In 1995 and previous years,
the Company had followed a strategy of depopulating assigned risk
pools through the application of intensive case management
techniques with risks which had become unacceptable to the
standard market due to frequency rather than severity. With the
improvement of workers' compensation results for the industry as
a whole, more companies were willing to write workers'
compensation, and therefore, the number of risks fitting the
Company's profile for removal from assigned risk pools was
substantially depleted. During 1996, the Company moved to a
strategy of partnership arrangements with select agencies in
which the agent accepts part of the underwriting risk in return
for an enhanced profit sharing from the Company. Due to the
competitive market, this strategy is developing slowly, and,
thus, the Company experienced a 65% decrease in its direct
written premiums in this line of business. This transition phase
caused the expense ratio in this line of business to increase
more than 100%, and resulted in an underwriting loss for this
line of business. The Company believes that this line of
business can return to profitability as the new partnership
arrangements grow.
Offsetting these deteriorating results in the Program
division were improved results in the Company's Transportation
department. Within the Transportation department, the Company's
loss and expense ratio improved from 120.6% during the year ended
December 31, 1995 to 103.6% during 1996. While the department
did not produce an underwriting profit, the Company believes that
the improvement in the Company's underwriting ratios indicates
that the actions taken during 1995 and 1996 to reorganize this
department are having a positive effect.
The Company's Non-Standard underwriting activities
experienced unprofitable results for the first time in six years
as a result of an increase in both the severity and frequency of
losses, particularly in the area of physical damage losses. The
Company has increased rates beginning in 1996 and continuing into
1997, reduced commissions in certain areas with poor experience,
and canceled agents with loss ratio problems. This division is
also beginning to see a slow improvement in its expense ratio,
and the Company expects this improvement in the expense ratio to
accelerate during 1997.
The Company's interest expense also increased during
1996 as compared to 1995. This increase in interest expense was
due to an increase in the Company's borrowings under its bank
facility which increased from an average of $34.3 million during
the 1995 to $69.0 million during 1996. Offsetting this increase
in the size of borrowings was a decline in the average interest
rate under the bank facility from 7.6% during 1995 to 7.1% during
1996. The additional borrowings under the bank facility were
contributed to the Company's subsidiaries in order to support
underwriting activities and maintain capital adequacy ratios at a
level commensurate with the Company's current A- rating by A.M.
Best & Company.
The Company experienced a somewhat higher expense ratio
during 1996 than during 1995. This ratio increased from 26.7% in
1995 to 27.5% in 1996 primarily due to higher net commission
expense in the Program division of the Company. This higher net
commission expense was a result of a changing mix of business
with a lesser percentage of premiums produced in lower commission
programs such as Workers' Compensation and Transportation and a
higher percentage of premiums produced in higher commission lines
of business. In addition, the Company decreased the use of quota
share reinsurance within the Program division during 1996.
During 1997, the Company expects to again increase the use of
quota share reinsurance within the Program division, and with the
continued growth in new programs offsetting high initial
expenses, expects the expense ratio of this division to fall in
1997.
Year Ended December 31, 1995
Compared to Year Ended December 31, 1994
The Company's net income fell 80.3% from 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'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'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 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. 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 in 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.
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. 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.
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
was 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 division 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
non-insurance operations, the Company generated significant tax
loss carryforwards and other temporary differences, all of which
were used by the end of 1994.
LIQUIDITY AND CAPITAL RESOURCES
The Company has included a discussion of the liquidity
and capital resources requirement of the Company and the
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 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. In 1997, the
statutory limitation on dividends from insurance company
subsidiaries to the parent without further insurance departmental
approval is approximately $10.4 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 a party to a Credit Agreement which
provides a three-year revolving credit facility in amounts not to
exceed $75 million. Until July 26, 1996, the Credit Facility
also included a one-year Term Loan Facility not to exceed $15
million. This Term Loan Facility expired on July 26, 1996, as
the Company had not drawn upon this facility as of that date.
Under the Revolving Credit Facility, 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. At December 31, 1996, the
outstanding balance under the facility was $69 million, with an
interest cost of 6.7%. 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 Company is currently negotiating
with its banks to restructure the Credit Facility to incorporate
the previous Term Loan Facility and current Revolving Credit
Facility into one Credit Facility.
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 RMA. 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 $37.9 million, before private reinsurance, in profit
sharing earned on the MPCI business during 1996, and in addition,
recognized $4.3 million during 1996 in profit sharing earned on
1995 MPCI business.
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 established a 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 1996 year and have exceeded
these requirements.
The Company's stockholder's equity increased by
approximately 17% or $30 million from December 31, 1995 to
December 31, 1996. The principal components of this change in
stockholder's equity were an increase in the Company's retained
earnings from an accumulated deficit at December 31, 1995 of
$18.8 million to retained earnings of $11.4 million at December
31, 1996, an increase in capital in excess of par value of $1.3
million as a result of the exercise of certain outstanding
warrants and stock options, and an increase in the Company's
unrealized loss on available-for-sale securities, net of tax, of
$1.5 million.
Consolidated Cash Flows
Cash flows from operations for the year ended December
31, 1996 were $42.9 million as compared to cash flows from
operating activities of $46.5 million during 1995. The positive
cash flows for both 1996 and 1995 have provided adequate capital
to meet all of the Company's cash needs.
Cash flows from the Company's MPCI and crop hail
business are different in certain respects from cash flows
associated with more traditional property and casualty lines (see
Liquidity and Capital Resources, Insurance Companies).
Inflation
The Company does not believe that inflation has had a
material impact on its financial condition or results of
operations.
Recent Statement of Financial Accounting Standards
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
was 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 in its accounting for stock based compensation
awards to employees and directors, while expanding its
disclosures as required by SFAS No. 123.
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 1997 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 1997 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 1997 Proxy Statement included as Exhibit 99.6
hereto and incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item B will be set forth in
the Company's 1997 Proxy Statement included as Exhibit 99.6
hereto and incorporated herein by reference.
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, 1996 and 1995 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
Audited Consolidated Financial Statements for the
Years Ended December 31, 1996 and December 31,
1995:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<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 20, 1997
Kenneth C. Coon
Chairman and Chief Executive Officer
/s/ Georgia M. Mace
By _____________________________________ Dated: March 20, 1997
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 20, 1997 ______________________________
Jay A. Bielfield, Director
/s/ Kenneth C. Coon
Dated: March 20, 1997 ______________________________
Kenneth C. Coon, Director
/s/ Edward W. Elliott, Jr.
Dated: March 20, 1997 ______________________________
Edward W. Elliott, Jr., Director
/s/ Robert LeBuhn
Dated: March 20, 1997 ________________________________
Robert LeBuhn, Director
/s/ Michael R. McCarthy
Dated: March 20, 1997 ________________________________
Michael R. McCarthy, Director
/s/ John P. Nelson
Dated: March 20, 1997 ________________________________
John P. Nelson, Director
/s/ R. L. Richards
Dated: March 20, 1997 ________________________________
R. L. Richards, Director
<PAGE>
/s/ David L. Treadwell
Dated: March 20, 1997 ________________________________
David L. Treadwell, Director
/s/ Doug T. Valassis
Dated: March 20, 1997 ________________________________
Doug T. Valassis, Director
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1996
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.
110.5 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 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.
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 1997 Annual Meeting of Shareholders
filed on or prior to April 30, 1997.
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 Plan. 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, 1996 and 1995
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, 1996 and 1995, and the related consolidated
statements of operations, stockholders' equity and cash flows for
each of the three years in the period ended December 31, 1996.
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, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1996 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.
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 12, 1997
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED BALANCE SHEETS (dollars in thousands except
share data)
DECEMBER 31, 1996 AND 1995
ASSETS 1996 1995
<S> <C> <C>
Investments:
Fixed maturities available-for-sale (Note 2) $268,004 $218,300
Marketable equity securities available-for-sale (Note 2) 83,837 48,537
Mortgage loans and other investments 11,149 11,290
Real estate 3,342 3,354
Short-term investments, at cost, which approximates market 39,594 86,520
-------- --------
405,926 368,001
Cash 10,697 7,648
Investment in Major Realty Corporation (Note 4) 8,827 9,878
Receivables, net (Note 5) 133,363 106,246
Reinsurance recoverable on unpaid loss and loss adjustment expenses 185,421 167,888
Prepaid reinsurance premiums 36,140 38,341
Property and equipment, net of accumulated depreciation of $7,077 and $4,886 8,988 5,284
Deferred policy acquisition costs 29,437 24,585
Excess of cost over acquired net assets 35,783 37,003
Deferred income tax (Note 6) 21,172 9,403
Other assets 8,626 6,757
________ ________
$884,380 $781,034
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses (Note 7) $432,173 $369,244
Unearned premiums 140,217 124,122
Amounts payable to reinsurers 10,157 18,161
Accounts payable and accrued liabilities 25,013 22,720
Bank borrowings, term debt and other borrowings (Note 8) 69,000 69,000
-------- --------
Total liabilities 676,560 603,247
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;
15,256,507 and 15,141,220 shares issued 6,103 6,057
Capital in excess of par value 196,090 194,823
Unrealized gain (loss) on available-for-sale securities, net of tax (1,476) 19
Retained earnings (accumulated deficit) 11,432 (18,848)
________ _________
212,149 182,051
Less:
Treasury stock, at cost, 38,680 and 35,559 shares (1,629) (1,564)
Contingent stock, 240,000 shares (Note 11) (2,700) (2,700)
-------- --------
Total stockholders' equity 207,820 177,787
-------- --------
$884,380 $781,034
<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, 1996, 1995 AND 1994
1996 1995 1994
<S> <C> <C> <C>
Revenues:
Insurance premiums earned (Note 7) $348,653 $271,584 $202,659
Insurance agency commissions 1,035 2,863 3,629
Net investment income (Note 2) 26,491 20,651 13,276
Net realized capital gains 5,216 2,707 554
-------- -------- --------
381,395 297,805 220,118
Costs and expenses: -------- -------- --------
Cost of revenues:
Insurance losses and loss adjustment expenses (Note 7) 243,257 212,337 142,951
Insurance agency costs 1,024 2,596 3,180
Insurance underwriting expenses 95,803 72,602 52,627
General and administrative expenses 2,015 2,165 1,684
-------- -------- --------
342,099 289,700 200,442
-------- -------- --------
Operating profit 39,296 8,105 19,676
-------- -------- --------
Other income (expense):
Interest expense (4,896) (2,591) (1,693)
Loss on investee (Note 4) (1,052) (265) (297)
Other, net 142 94 26
-------- -------- --------
(5,806) (2,762) (1,964)
-------- -------- --------
Income before income taxes and minority interests 33,490 5,343 17,712
Income tax expense (benefit) (Note 6):
Current 14,173 4,002 2,487
Deferred (10,963) (2,814) (5,930)
-------- -------- --------
3,210 1,188 (3,443)
Minority interests in net income of consolidated subsidiaries - - (80)
-------- -------- --------
Net income $ 30,280 $ 4,155 $ 21,075
======== ======== ========
Net income per share:
Primary $ 2.00 $ 0.28 $ 1.71
======== ======== ========
Fully diluted $ 1.96 $ 0.27 $ 1.68
======== ======= ========
<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, 1996, 1995 AND 1994
Retained
Capital in Unrealized Earnings Total
Common Excess of Gain (Accumulated Treasury Contingent Stockholders'
Stock Par Value (Loss) Deficit) Stock Stock Equity
<C> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1994 $3,991 $140,002 $ 66 $(44,078) $(1,564) $(2,700) $ 95,717
Issuance of common stock on 1,946 51,467 - - - - 53,413
exercise of warrants
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
Issuance of common stock under
employee benefit plans 46 1,267 - - - - 1,313
Purchase of treasury stock - - - - (65) - (65)
Change in unrealized gain (loss) on
available-for-sale securities, net
of income taxes of $806 - - (1,495) - - - (1,495)
Net income - - - 30,280 - - 30,280
------ -------- -------- ------- -------- ------- ---------
Balance at December 31, 1996 $6,103 $196,090 $ (1,476) $ 11,432 $(1,629) $(2,700) $207,820
====== ======== ======== ======== ======= ======= ========
<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 CASH FLOWS (in thousands)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
1996 1995 1994
<C> <C> <C> <C>
Cash flows from operating activities:
Net income $ 30,280 $ 4,155 $ 21,075
Adjustments to reconcile net income to net cash provided
by (used for) operating activities:
Depreciation and amortization 4,282 3,821 3,522
Deferred tax benefit (10,963) (2,814) (5,930)
Loss on investee 1,052 265 297
Minority interests - - 80
Policy acquisition costs incurred (94,140) (62,171) (55,234)
Amortization of policy acquisition costs 89,288 57,420 47,215
Gain on sale of investments (5,216) (2,707) (554)
Increase (decrease) in cash attributable to changes
in assets and liabilities:
Receivables (27,117) (29,253) (28,855)
Net losses and loss adjustment expenses 45,396 59,842 25,800
Net unearned premiums 18,296 14,599 26,515
Amounts payable to reinsurers (8,004) (1,148) 12,123
Accounts payable and accrued liabilities 2,293 6,191 (2,402)
Other, net (2,516) (1,674) (978)
--------- --------- ---------
Net cash from operating activities 42,931 46,526 42,674
--------- --------- ---------
Cash flows from investing activities:
Proceeds from sales of investments - - 640
Proceeds from sales of investments available-for-sale 145,819 135,820 24,179
Proceeds from maturities of investments 29,207 42,938 37,483
Proceeds from maturities of investments
available-for-sale 21,498 10,306 15,437
Purchases of investments (28,230) (51,233) (48,162)
Purchases of investments available-for-sale (249,540) (187,575) (101,243)
Other, net (6,046) (2,432) (2,022)
--------- --------- ---------
Net cash from investing activities (87,292) (52,176) (73,688)
--------- --------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings - 40,000 29,000
Repayments of bank borrowings - - (18,597)
Repayments of term debt, other borrowings
and notes payable to affiliates - - (354)
Proceeds from issuance of common stock 1,313 154 53,633
Purchase of treasury stock (65) - -
Minority interests - - 7
--------- --------- ---------
Net cash from financing activities 1,248 40,154 63,689
--------- --------- ---------
Net increase (decrease) in cash and short-term investments (43,113) 34,504 32,675
Cash and short-term investments at beginning of period 84,740 50,236 17,561
--------- --------- ---------
Cash and short-term investments at end of period $ 41,627 $ 84,740 $ 50,236
========= ========= =========
Non-cash financing activities:
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, 1996, 1995 AND 1994
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 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 Risk Management
Agency ("RMA"). 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 RMA. 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 RMA. 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 RMA 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 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.
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, 1996 and 1995, approximately
$8,664,000 and $9,428,000 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, fair 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. The Company capitalizes direct
costs incurred with the development of internal use software.
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
$5,658,000 and $4,439,000 at December 31, 1996 and 1995,
respectively.
Impairment of Long-Lived Assets - Measurement of the
impairment of long-lived assets is evaluated periodically
based primarily on management's estimate of future earnings.
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.
Per Share Data - Primary and fully diluted earnings per share
are based on weighted average shares outstanding of
approximately 15.1 million and 15.4 million, respectively,
for the year ended December 31, 1996; 15.0 million and 15.2
million, respectively, for the year ended December 31, 1995;
and approximately 13.4 million and 13.6 million,
respectively, for the year ended December 31, 1994. Included
in weighted average shares outstanding in 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 1996 and 1995, the treasury
stock method was used without modification.
Reclassifications - Certain prior period amounts 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>
1996 1995 1994
<S> <C> <C> <C>
Interest on fixed maturities $15,189 $14,913 $10,357
Interest on short-term investments 9,652 5,461 2,101
Other 2,242 829 1,420
------- ------- -------
27,083 21,203 13,878
Investment expenses (592) (552) (602)
------- ------- -------
Net investment income $26,491 $20,651 $13,276
======= ======= =======
</TABLE>
<PAGE>
The amortized cost and related estimated fair values of
investments in the accompanying balance sheets are as follows
(in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<C> <C> <C> <C> <C>
December 31, 1996:
Fixed maturities available-for-sale:
U.S. Treasury and government securities $ 86,359 $ 154 $ 260 $ 86,253
States, municipalities and political subdivisions 93,293 1,620 306 94,607
Mortgage-backed securities 60,138 205 7,508 52,835
Other debt securities 34,581 685 957 34,309
-------- ------ ------ --------
$274,371 $2,664 $9,031 $268,004
======== ====== ====== ========
Marketable equity securities - preferred stock $ 62,628 $ 932 $ 596 $ 62,964
======== ====== ====== ========
Marketable equity securities - common stock $ 17,112 $4,641 $ 880 $ 20,873
======== ====== ====== ========
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>
The amortized cost and related estimated fair values of the
fixed maturity securities as of December 31, 1996 are shown
below by stated maturity dates. Actual maturities may differ
from stated maturities because the borrowers may have the
right to call or prepay obligations with or without call or
prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
(in thousands)
<S> <C> <C>
Fixed maturities available-for-sale:
Due in one year or less $ 14,351 $ 14,300
Due after one year through five years 50,799 50,689
Due after five years through ten years 55,470 56,133
Due after ten years 93,613 94,047
------- --------
214,233 215,169
Mortgage-backed securities 60,138 52,835
-------- --------
$274,371 $268,004
======== ========
</TABLE>
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, 1996 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 Estimated
Value Cost Fair
Type of CMO (1) (1) Value
<S> <C> <C> <C>
Fixed coupon $13,597 $13,372 $13,483
Floating rate (2) 16,812 16,486 15,743
Inverse floating rate (2) 31,410 30,280 23,609
------- ------- -------
Total CMOs (3) $61,819 $60,138 $52,835
======= ======= =======
<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 floating
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, 1996, 1995 and 1994 were
approximately $100,203,000, $113,523,000 and $21,729,000,
respectively. Gross realized gains on sales of fixed
maturity securities were approximately $1,681,000, $1,421,000
and $55,000, and gross realized losses on sales of fixed
maturity securities were approximately $22,000, $499,000 and
$13,000 during the years ended December 31, 1996, 1995 and
1994, respectively.
As required by insurance regulatory laws, certain bonds with
an amortized cost of approximately $18,784,000 and short-term
investments of approximately $3,133,000 at December 31, 1996
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, 1996
and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
Carrying Value Estimated Fair Value
1996 1995 1996 1995
<S> <C> <C> <C> <C>
Investments in fixed maturity securities $268,004 $218,300 $268,004 $218,300
Investments in marketable equity securities 83,837 48,537 83,837 48,537
Mortgage loans and other investments 11,149 11,290 11,149 11,290
Investment in Major Realty Corporation 8,827 9,878 8,827 9,878
Bank borrowings, term debt and other borrowings 69,000 69,000 69,000 69,000
</TABLE>
4. INVESTMENT IN MAJOR REALTY CORPORATION
As of December 31, 1996 and 1995, 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, 1996, the carrying value of the Company's
equity investment in Major Realty approximated $3.8 million
or $1.65 per share. At that date, Major Realty had a
stockholders' equity of approximately $3.2 million and the
quoted market price of Major Realty was $1.50 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. 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 1996 and 1995 of $503,000
and $106,000, respectively, is included in net investment
income.
<PAGE>
The following summary financial data for Major Realty as of
and for the years ended December 31, 1996 and 1995 was
obtained from Major Realty's consolidated financial
statements (in thousands):
<TABLE>
<CAPTION>
December 31,
1996 1995
<S> <C> <C>
Land held for sale or development $5,141 $5,292
Mortgage note receivable 2,750 2,750
Other assets 1,235 1,680
------ ------
Total assets $9,126 $9,722
====== ======
Mortgage and other notes payable $5,064 $5,064
Other liabilities 874 891
Stockholders' equity 3,188 3,767
------ ------
Total liabilities and stockholders' equity $9,126 $9,722
====== ======
Total revenues $ 839 $7,255
Gross profit 213 4,132
Net income (loss) (579) 2,664
</TABLE>
5. RECEIVABLES
The major components of receivables at December 31 are
summarized as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Insurance premiums and agents' balances due $ 63,079 $ 60,602
Amounts recoverable from reinsurers 11,786 20,379
Profit sharing gain due from the RMA 45,364 19,616
Accrued interest 4,826 4,023
Installment notes receivable 5,954 3,207
Federal income tax receivable 5,085 -
Other 723 851
Less allowance for doubtful accounts (3,454) (2,432)
-------- -------
$133,363 $106,246
======== ========
</TABLE>
6. INCOME TAXES
The Company recognizes a net deferred tax asset or liability
for all temporary differences and a related valuation
allowance when realization of the asset is uncertain. The
valuation allowance at December 31, 1996 and 1995 related to
capital loss items. At December 31, 1996, the realization of
the majority of these capital loss items are more likely than
not due to sufficient carryforwards of capital gains as well
as the likelihood of future capital gains. The net deferred
tax as of December 31, is as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Unpaid losses and loss adjustment expenses $ 13,322 $ 10,701
Unearned premiums 7,283 6,004
Allowances for doubtful accounts 1,213 869
Other 2,689 1,443
Unrealized loss on fixed maturities available-for-sale 2,229 699
Major Realty basis difference 8,317 7,950
-------- --------
Deferred tax asset 35,053 27,666
-------- --------
Deferred policy acquisition costs (10,303) (8,605)
Unrealized gain on marketable equity securities (1,434) (710)
Other (1,071) (888)
-------- --------
Deferred tax liability (12,808) (10,203)
-------- --------
22,245 17,463
Valuation allowance (1,073) (8,060)
-------- --------
Net deferred tax asset $ 21,172 $ 9,403
======== ========
</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,
1996 1995 1994
<S> <C> <C> <C>
Computed U.S. federal income taxes $11,744 $ 1,870 $ 6,022
Nondeductible amortization of goodwill and other intangibles 631 541 514
Tax-exempt interest income (1,408) (1,049) (400)
Dividends received deduction (1,073) (390) (217)
Recognition of a portion of the deferred tax asset (7,354) - (9,469)
Other 670 216 107
------- ------- -------
Income tax (benefit) expense $ 3,210 $ 1,188 $(3,443)
======= ======= =======
</TABLE>
Cash payments for income taxes were approximately
$20,000,000, $4,253,000, and $1,478,000 during the years
ended December 31, 1996, 1995, and 1994.
7. INSURANCE PREMIUMS AND CLAIMS
Insurance premiums written and earned by the Company's
insurance subsidiaries for the years ended December 31, 1996,
1995 and 1994 are as follows (in thousands):
<TABLE>
<CAPTION>
1996 1995 1994
<S> <C> <C> <C>
Direct premiums written $ 587,397 $ 514,241 $ 410,228
Assumed premiums written 63,663 23,108 37,255
Ceded premiums written (284,111) (251,166) (218,307)
--------- --------- --------
Net premiums written $ 366,949 $ 286,183 $ 229,176
========= ========= =========
Direct premiums earned $ 571,971 $ 489,834 $ 376,624
Assumed premiums earned 62,994 20,563 33,802
Ceded premiums earned (286,312) (238,813) (207,767)
--------- --------- ---------
Net premiums earned $ 348,653 $ 271,584 $ 202,659
========= ========= =========
</TABLE>
Included in ceded premiums written and earned is $134.0
million, $95.4 million, and $92.7 million of MPCI premiums
ceded to the RMA for the years ended December 31, 1996, 1995,
and 1994, respectively. Included in assumed premiums written
and earned in 1996, 1995, and 1994 is $42.2 million, $14.2
million, and $17.0 million of MPCI profit share.
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>
1996 1995 1994
<S> <C> <C> <C>
Net loss and loss adjustment expense reserves at beginning of year $ 201,356 $ 141,514 $ 115,714
--------- --------- ---------
Provisions for net losses and loss adjustment expenses for claims
occurring in the current year 233,727 190,019 137,881
Increase in net reserves for claims occurring in prior years 9,530 22,318 5,070
--------- --------- ---------
243,257 212,337 142,951
--------- --------- ---------
Net losses and loss adjustment expenses paid for claims occurring during:
Current year (102,565) (80,281) (60,375)
Prior years (95,296) (72,214) (56,776)
--------- --------- ---------
(197,861) (152,495) (117,151)
--------- --------- ---------
Net loss and loss adjustment expense reserves at end of year 246,752 201,356 141,514
Reinsurance recoverable on unpaid loss and loss adjustment expenses 185,421 167,888 79,811
--------- --------- ---------
Gross loss and loss adjustment expense reserves $ 432,173 $ 369,244 $ 221,325
========= ========= =========
</TABLE>
Insurance loss and loss adjustment expenses have been reduced
by recoveries recognized under reinsurance contracts of
$300.8 million, $300.9 million, and $145.5 million for the
years ended December 31, 1996, 1995, and 1994, respectively,
of which approximately $207.5 million, $204.6 million, and
$65.8 million, respectively, relate to recoveries on the MPCI
business from the RMA.
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 for losses and loss adjustment expenses
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.
<PAGE>
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 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. 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 December 31, 1996 and
1995, the Company had $69 million outstanding under this
arrangement at a weighted average interest cost of 6.7% and
6.8%, respectively.
At December 31, 1996, the line of credit was collateralized
by the Company's Acceptance and Redland common stock.
Borrowings and interest expense averaged $69.0 million and
7.1% during 1996 and $34.3 million and 7.6% during 1995. 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 70,725 warrants remained outstanding at
December 31, 1996. In January 1993, these notes were
redeemed.
Cash payments for interest were approximately $4.7 million,
$2.3 million and $1.5 million during the years ended December
31, 1996, 1995 and 1994, respectively.
9. CONTINGENCIES
The Company is also 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, 1996, Acceptance Premium Finance Company,
Inc., an affiliate, had a revolving line of credit agreement
which provided for borrowings up to $16,000,000 maturing in
September, 1998. Borrowings under this agreement are
guaranteed by the Company. Acceptance Premium Finance
Company, Inc. had $10,100,000 and $7,200,000 outstanding under
this line of credit at December 31, 1996 and 1995,
respectively.
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 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.
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,
1996 (in thousands):
<TABLE>
<S> <C>
1997 $ 3,922
1998 3,044
1999 2,783
2000 2,672
2001 1,963
-------
$14,384
=======
</TABLE>
Rental expense totaled approximately $3,715,000, $3,286,000
and $2,529,000 for the years ended December 31, 1996, 1995
and 1994, respectively.
13. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
The Company's 1996 incentive stock option plan provides for a
maximum of 1,500,000 options to be granted to employees and
directors. Stock options issued to employees will vest in
not less than five annual installments. Stock options issued
to non-employee directors will vest at the expiration of the
directors' current term. All options expire no later than
ten years from the date of grant and the exercise price will
not be less than 100% of the market value at the date of
grant.
The 1992 incentive stock option plan was terminated as to
future grants upon approval of the 1996 incentive stock
option plan. The 1992 incentive stock option plan provided
for options granted to employees which vest over 4 years from
the date of the grant and options to non-employee directors
which vest one year from the date of grant. All options
expire no later than ten years from the date of grant and the
exercise price is equal to the market price at the date of
grant.
Under the Company's employee stock purchase plan, the Company
is authorized to issue up to 500,000 shares of common stock
to its full-time employees. Under the terms of the plan,
each year employees can choose to purchase up to 10% of their
annual compensation. The purchases may be made during six
month phases generally commencing at the beginning of January
and July. The purchase price of the stock is equal to the
lower of 85% of the market price on the termination date of
the phase or when the subscription is paid in full, whichever
first occurs; or 85% of the average of the market price on
the commencement date of the phase and the market price on
the termination date of the phase or when the subscription is
paid in full, whichever first occurs. Under the plan, the
Company sold 12,690, 12,374, and 19,722 shares during 1996,
1995, and 1994, respectively.
<PAGE>
The Company applies APB Opinion 25 and related
Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its stock option
plans and its stock purchase plan. Had compensation cost for
the Company's stock-based compensation plans been determined
based on the fair value at the grant dates for awards under
those plans consistent with the method of FASB Statement No.
123, the Company's net income and earnings per share would
have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
<S> <C> <C>
Net income:
As reported $30,280 $ 4,155
Pro forma 28,929 3,754
Earnings per share:
Primary:
As reported $ 2.00 $ 0.28
Pro forma 1.92 0.25
Fully diluted:
As reported $ 1.96 $ 0.27
Pro forma 1.88 0.25
</TABLE>
The fair value of the options at the date of grant under the
incentive stock option plans and the fair value of the
employees' purchase rights under the employee stock purchase
plan were estimated using a Black-Scholes option-pricing
model with the following weighted-average assumptions for
1996 and 1995, respectively: risk-free interest rates of
6.0% and 6.7%; expected volatility of 22%; weighted-average
expected lives of options of 7 years and an expected life of
employees' purchase rights of one year; and no dividend
yield.
A summary of the status of the Company's stock option plans
as of December 31, 1996, 1995 and 1994 and changes during
those years ending on those dates is presented below:
<TABLE>
<CAPTION>
1996 1995 1994
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 622,731 $12.96 399,731 $12.12 274,231 $12.42
Granted 883,000 26.45 223,000 14.47 125,500 11.47
Exercised 87,210 11.23 - - - -
Forfeited 40,500 21.54 - - - -
--------- ------ ------- ------ ------- ------
Outstanding at end of year 1,378,021 $21.46 622,731 $12.96 399,731 $12.12
========= ====== ======= ====== ======= ======
Options exercisable at year end 270,896 271,481 211,231
Weighted-average fair value of options granted
during the year $ 4.21 $ 5.79
</TABLE>
The following table summarizes information about stock
options outstanding at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
Weighted-
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
$8.75 67,500 1.1 years $ 8.75 67,500 $ 8.75
11.38 to 14.50 423,146 7.5 years 13.03 199,021 12.50
17.13 10,500 9.4 years 17.13 - -
19.69 174,500 9.5 years 19.69 - -
22.00 to 22.65 176,500 9.4 years 22.64 2,000 22.00
26.05 to 29.95 350,625 9.5 years 28.00 1,625 28.50
34.45 to 38.50 175,250 9.5 years 34.46 750 38.50
--------- --------- ------ ------- ------
$8.75 to $38.50 1,378,021 8.5 years $21.46 270,896 $11.80
</TABLE>
The Company has a defined contribution plan for which related
expense for 1996, 1995, and 1994 was approximately
$1,002,000, $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 $237,000 and $241,000 in
1996 and 1995, respectively. In addition, the Company pays
commissions and fees in connection with insurance written and
loss control activities, which totalled $186,000 and $149,000
in 1996 and 1995, respectively. This related party
reimburses the Company for an allocable share of certain
office occupancy expenses, $174,000 and $192,000 in 1996 and
1995, respectively.
The Company made payments during 1996 and 1995 totalling
approximately $298,000 and $243,000, 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 1996 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, 1996 and 1995. No other reinsurer, except for
the RMA 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 1997,
dividends from insurance company subsidiaries to the Company
without further insurance department approval are limited to
approximately $10.4 million.
The Company's insurance subsidiaries reported to regulatory
authorities total policyholders' surplus of approximately
$191,455,000 and $169,628,000 at December 31, 1996 and 1995,
respectively, and total statutory net income/(loss) of
$21,344,000, $(247,000), and $6,659,000 for the years ended
December 31, 1996, 1995, and 1994, 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) (1) Per Share (1) Per Share (1)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1996:
December 31 $ 91,461 $ (8,951) $ 5,459 $ 0.36 $ 0.35
September 30 128,853 20,408 17,318 1.14 1.12
June 30 85,303 (2,211) 3,025 0.20 0.20
March 31 75,778 347 4,478 0.30 0.29
-------- -------- ------- ------ -----
$381,395 $ 9,593 $30,280 $ 2.00 $ 1.96
======== ======== ======= ====== ======
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
======== ======== ======= ====== ======
<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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1996 AND 1995
BALANCE SHEETS (Parent Company Only)
(In Thousands)
ASSETS 1996 1995
<S> <C> <C>
Fixed maturities available-for-sale $ - $ 3,047
Cash and short-term investments 1,875 3,444
Receivables, net 6,485 4,497
Intercompany receivables 1,061 -
Surplus note receivable from subsidiary 40,000 40,000
Investments in subsidiaries 226,444 196,268
Other assets 1,900 1,922
-------- --------
$277,765 $249,178
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 945 $ 664
Intercompany payables - 1,727
Bank borrowings 69,000 69,000
-------- --------
Total liabilities 69,945 71,391
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized, none issued
Common stock, $.40 par value, 20,000,000 shares authorized; 15,256,507
and 15,141,220 shares issued 6,103 6,057
Capital in excess of par value 196,090 194,823
Unrealized gain (loss) on available-for-sale securities, net of tax (1,476) 19
Retained earnings (accumulated deficit) 11,432 (18,848)
-------- --------
212,149 182,051
Less:
Treasury stock, at cost, 38,680 and 35,559 shares (1,629) (1,564)
Contingent stock, 240,000 shares (2,700) (2,700)
-------- --------
Total stockholders' equity 207,820 177,787
-------- --------
$277,765 $249,178
======== ========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II - (Continued)
CONDENSED FINANCIAL INFORMATION OF
REGISTRANT
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
STATEMENTS OF OPERATIONS (Parent Company
Only)
(In Thousands)
1996 1995 1994
<S> <C> <C> <C>
Revenues $ - $ - $ -
Costs and expenses:
General and administrative expenses 2,167 2,225 1,878
------- ------- -------
Operating loss (2,167) (2,225) (1,878)
Other income (expense):
Interest expense (4,925) (2,651) (1,434)
Share of net income of subsidiaries 31,586 5,254 19,203
Other 5,235 3,323 724
------- ------- -------
31,896 5,926 18,493
------- ------- -------
Income before income taxes 29,729 3,701 16,615
Income tax benefit:
Current 505 382 734
Deferred 46 72 3,726
------- ------- -------
Net income $30,280 $ 4,155 $21,075
======= ======= =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
STATEMENTS OF CASH FLOWS (Parent Company Only)
(In Thousands)
1996 1995 1994
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 30,280 $ 4,155 $ 21,075
Adjustments to reconcile net income from continuing operations to
net cash used for operating activities:
Deferred tax benefit (46) (72) (3,726)
Share of net income of subsidiaries (31,586) (5,254) (19,203)
Increase (decrease) in cash attributable to changes in assets
and liabilities:
Receivables (3,049) (879) (572)
Payables (1,446) (1,631) (4,564)
Other, net 75 (927) 291
-------- -------- --------
Net cash used for operating activities (5,772) (4,608) (6,699)
Cash flows from investing activities:
Contributions to investments in subsidiaries (50) (38,803) (66,679)
Purchases of investment - - (972)
Purchases of investment available-for- sale - (6,030) (2,977)
Proceeds from maturities of investments - 1,000 -
Proceeds from sale of investments available-for-sale 3,005 6,187 -
-------- -------- --------
Net cash used for investing activities 2,955 (37,646) (70,628)
Cash flows from financing activities:
Proceeds from bank borrowings - 40,000 29,000
Proceeds from issuance of common stock 1,313 154 53,633
Purchase of treasury stock (65) - -
-------- --------- --------
Net cash provided by financing activities 1,248 40,154 82,633
-------- -------- --------
Net increase (decrease) in cash and short-term investments (1,569) (2,100) 5,306
Cash and short-term investments at beginning of year 3,444 5,544 238
-------- -------- --------
Cash and short-term investments at end of year $ 1,875 $ 3,444 $ 5,544
======== ======== ========
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
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.
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 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.
The deferred tax benefit for the year ended December 31, 1994 is
mainly comprised of $3.6 million of realized net operating loss
carryforwards.
Cash payments for interest were $4,708,000, $2,337,000 and
$1,272,000 during the years ended December 31, 1996, 1995 and
1994, respectively.
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE V
VALUATION ACCOUNTS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
(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, 1996 $2,432 $1,956 $ 934 $3,454
Year ended December 31, 1995 $1,321 $1,304 $ 193 $2,432
Year ended December 31, 1994 $2,093 $ 656 $1,428 $1,321
</TABLE>
EXHIBIT 11
ACCEPTANCE INSURANCE COMPANIES INC.
COMPUTATION OF INCOME PER SHARE
Years Ended December 31, 1996, 1995, and 1994
(in thousands, except per share data)
(unaudited)
<TABLE>
Years Ended December 31,
----------------------------------
1996 1995 1994(1)
-------- --------- ---------
<S> <C> <C> <C>
PRIMARY EARNINGS PER SHARE:
Net income $30,280 $ 4,155 $21,075
Adjustment for interest expense reduction
and interest income from assumed
proceeds -- -- 1,826
------- ------ ------
Adjusted net income 30,280 4,155 22,901
======= ====== ======
Weighted average number of shares
outstanding 14,933 14,858 10,351
Adjustment for effect of outstanding
options and warrants 177 144 --
Adjustment for shares issuable -- -- 3,069
------ ------ ------
Adjusted weighted average number of
shares outstanding 15,110 15,002 13,420
====== ====== ======
<PAGE>
Net income per share $ 2.00 $ 0.28 $ 1.71
======= ======= =======
FULLY DILUTED EARNINGS PER SHARE:
Net income $30,280 $ 4,155 $21,075
Adjustment for interest expense reduction
and interest income from assumed
proceeds -- -- 1,757
------ ------ ------
Adjusted net income $30,280 $ 4,155 $22,832
====== ====== ======
Weighted average number of shares
outstanding 15,173 15,098 10,591
Adjustment for effect of outstanding
options and warrants 241 145 --
Adjustment for shares issuable -- -- 3,025
------ ------ ------
Adjusted weighted average number of shares
outstanding 15,414 15,243 13,616
====== ====== ======
Net income per share $ 1.96 $ 0.27 $ 1.68
<FN> ======= ======= =======
<PAGE>
- ---------------
(1) For the year ended December 31, 1994 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.
</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>
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
Redland Transportation, 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. 33-07397, No. 33-67180 and No.
33-51441 on Form S-8 of Acceptance Insurance Companies Inc.
of our reports dated March 12, 1997 which expresses an
unqualified opinion and includes an explanatory paragraph
relating to the change in accounting method as described in
Note 1 to the consolidated financial statements appearing
in this Annual Report on Form 10-K of Acceptance Insurance
Companies Inc. for the year ended December 31, 1996.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 27, 1997
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, 1996 and
1995, and for each of the three years in the period ended
December 31, 1996, and have issued our report thereon dated March
12, 1997 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 the 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, 1997
<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-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 268,004
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 83,837
<MORTGAGE> 11,149
<REAL-ESTATE> 3,342
<TOTAL-INVEST> 405,926
<CASH> 10,697
<RECOVER-REINSURE> 11,786
<DEFERRED-ACQUISITION> 29,437
<TOTAL-ASSETS> 884,380
<POLICY-LOSSES> 432,173
<UNEARNED-PREMIUMS> 140,217
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 69,000
0
0
<COMMON> 6,103
<OTHER-SE> 201,717
<TOTAL-LIABILITY-AND-EQUITY> 884,380
348,653
<INVESTMENT-INCOME> 26,491
<INVESTMENT-GAINS> 5,216
<OTHER-INCOME> 1,035
<BENEFITS> 243,257
<UNDERWRITING-AMORTIZATION> 89,288
<UNDERWRITING-OTHER> 6,515
<INCOME-PRETAX> 33,490
<INCOME-TAX> 3,210
<INCOME-CONTINUING> 30,280
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 30,280
<EPS-PRIMARY> 2.00
<EPS-DILUTED> 1.96
<RESERVE-OPEN> 201,356
<PROVISION-CURRENT> 233,727
<PROVISION-PRIOR> 9,530
<PAYMENTS-CURRENT> 102,565
<PAYMENTS-PRIOR> 95,296
<RESERVE-CLOSE> 246,752
<CUMULATIVE-DEFICIENCY> 9,530
</TABLE>
