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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[XX] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7461
ACCEPTANCE INSURANCE COMPANIES INC.
(Exact name for registrant as specified in its charter)
Delaware 31-0742926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
222 South 15th St., Suite 600 N.
Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(402) 344-8800
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15 (d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES XX NO
----- ------
The number of shares of each class of the Registrant's common
stock outstanding on November 5, 1997 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 15,342,440
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<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1997 (unaudited) and December 31, 1996
(audited)
Consolidated Statements of Operations (unaudited)
Three Months and Nine Months Ended September 30, 1997
and 1996
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 30, 1997 and 1996
Notes to Interim Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures<PAGE>
PART 1. FINANCIAL INFORMATION
- -------------------------------
Item 1. Financial Statements
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
September 30, December 31,
1997 1996
------------ -----------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for
sale $ 329,459 $ 268,004
Marketable equity securities -
preferred stock 57,668 62,964
Marketable equity securities -
common stock 30,843 20,873
Mortgage loans and other
investments 10,513 11,149
Real estate 3,332 3,342
Short-term investments, at cost,
which approximates market 74,303 39,594
---------- ----------
506,118 405,926
Cash 3,171 10,697
Investment in Major
Realty Corporation 9,067 8,827
Receivables, net 259,652 133,363
Reinsurance recoverable on
unpaid loss and loss
adjustment expenses 191,813 185,421
Prepaid reinsurance premiums 52,129 36,140
Property and equipment, net 14,970 8,988
Deferred policy acquisition costs 29,302 29,437
Excess of cost over acquired net
assets 35,938 35,783
Deferred income tax 19,194 21,172
Other assets 10,005 8,626
---------- ----------
Total assets $1,131,359 $ 884,380
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses $ 452,694 $432,173
Unearned premiums 152,799 140,217
Amounts payable to reinsurers 139,137 10,157
Accounts payable and accrued
liabilities 47,501 25,013
Bank borrowings -- 69,000
Company-obligated mandatorily redeemable
Preferred Securities of AICI Capital
Trust, holding solely Junior
Subordinated Debentures of
the Company 94,875 --
---------- ---------
Total liabilities 887,006 676,560
Contingencies -- --
Stockholders' equity:
Preferred stock, no par value,
5,000,000 shares authorized,
none issued -- --
Common stock, $.40 par value,
40,000,000 shares authorized;
15,341,028 and 15,256,507
shares issued 6,137 6,103
Capital in excess of par value 196,959 196,090
Unrealized gain (loss) on
available for sale securities,
net of tax 6,330 (1,476)
Retained earnings 38,396 11,432
---------- ---------
247,822 212,149
Less:
Treasury stock, at cost, 181,888
and 38,680 shares (3,240) (1,629)
Contingent stock, 20,396
and 240,000 shares (229) (2,700)
---------- ---------
Total stockholders' equity 244,353 207,820
---------- ---------
Total liabilities and
stockholders' equity $1,131,359 $884,380
========== =========
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements.
</FN>
/TABLE
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months and nine months ended
September 30, 1997 and 1996
(in thousands, except per share data)
(unaudited)
Three Months Nine Months
-------------------- ------------------
1997 1996 1997 1996
--------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums
earned $112,742 $121,374 $256,748 265,774
Net investment
income 7,308 6,588 20,619 19,580
Net realized capital
gains 2,042 808 5,373 3,575
-------- -------- -------- --------
122,092 128,770 282,740 288,929
-------- -------- -------- --------
Costs and expenses:
Cost of revenues:
Insurance losses
and loss adjust-
ment expenses 58,974 73,863 161,369 174,985
Insurance under-
writing expenses 32,459 27,149 75,962 72,243
General and
administrative
expenses 525 489 1,622 1,552
-------- -------- -------- --------
91,958 101,501 238,953 248,780
-------- -------- -------- --------
Operating profit 30,134 27,269 43,787 40,149
-------- -------- -------- --------
Other income
(expense):
Interest expense (1,960) (1,211) (4,364) (3,706)
Loss on investee (54) (44) (171) (161)
Other, net 61 27 73 100
-------- -------- -------- --------
(1,953) (1,228) (4,462) (3,767)
-------- -------- -------- --------
Income before
income taxes 28,181 26,041 39,325 36,382
Income tax
expense (benefit):
Current 13,618 13,038 14,587 14,891
Deferred (4,245) (4,315) (2,226) (3,330)
--------- -------- -------- ---------
Net income $ 18,808 $ 17,318 $ 26,964 $ 24,821
======== ======== ======== ========
Net income
per share:
Primary $ 1.23 $ 1.14 $ 1.77 $ 1.64
======== ======== ======== ========
Fully diluted $ 1.22 $ 1.12 $ 1.74 $ 1.61
======== ======== ======== ========
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1997 and 1996
(in thousands)
(unaudited)
1997 1996
--------- --------
<S> <C> <C>
Cash flows from operating
activities:
Net income $ 26,964 $ 24,821
Net adjustment to reconcile net
income to net cash provided by
operating activities 33,631 41,337
--------- ---------
Net cash provided by operating
activities 60,595 66,158
--------- ---------
Cash flows from investing
activities:
Proceeds from sales of investments
available for sale 148,526 114,493
Proceeds from maturities of
investments 8,080 15,793
Proceeds from maturities of
investments available for sale 66,756 6,302
Purchases of investments (20,004) (20,377)
Purchases of investments available
for sale (263,918) (183,245)
Purchases of property and equipment (8,226) (3,931)
--------- ---------
Net cash used for investing
activities (68,786) (70,965)
--------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings 21,000 --
Proceeds from issuance of
common stock 903 1,178
Net proceeds from issuance of Company
- obligated mandatorily redeemable
Preferred Securities 90,994 --
Repayments of bank borrowings (90,000) --
--------- ---------
Net cash provided by financing
activities 22,897 1,178
--------- ---------
Net increase (decrease) in cash and
short-term investments 14,706 (3,629)
Cash and short-term investments
at beginning of period 41,627 84,740
--------- ---------
Cash and short-term investments
at end of period $ 56,333 $ 81,111
========= =========
Supplemental disclosure of cash
flow information:
Cash paid during the period for
interest $ 4,630 $ 3,848
========= =========
Cash paid during the period for
income taxes $ (1,835) $ 3,250
========= =========
<FN>
The accompanying notes are an integral part of the
interim consolidated financial statements
</FN>
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies:
Principles of Consolidation
The Company's consolidated financial statements include the
accounts of Acceptance Insurance Companies Inc. and its
majority owned subsidiaries (the "Company"). All
significant intercompany transactions have been eliminated.
Management's Opinion
The accompanying consolidated financial statements reflect
all adjustments, consisting only of normal recurring
adjustments except as otherwise disclosed, which in the
opinion of management are considered necessary to fairly
present the Company's financial position as of September 30,
1997 and December 31, 1996, and the results of operations
for the three months and nine months ended September 30,
1997 and 1996 and cash flows for the nine months ended
September 30, 1997 and 1996.
Statements of Cash Flows
The Company aggregates cash and short-term investments with
maturity dates of three months or less from the date of
purchase for purposes of reporting cash flows. As of
September 30, 1997 approximately $21,141,000 of short-term
investments had a maturity date at acquisition of greater
than three months.
Recent Statements of Financial Accounting Standards
In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards
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 continued to apply APB No. 25 in its
accounting for stock-based compensation awards to employees
and directors, while expanding its disclosures as required
by SFAS No. 123.
In June 1997, FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards
for the reporting and display of comprehensive income. The
purpose of reporting comprehensive income is to present a
measure of all changes in shareholders' equity that result
from recognized transactions and other economic events of
the period, other than transactions with owners in their
capacity as owners. SFAS No. 130 is effective for financial
statements issued for periods beginning after December 15,
1997. Adoption of SFAS No. 130 will result in additional
disclosures in the Company's financial statements but will
not impact the Company's reported net income or net income
per share.
In June 1997, the FASB issued SFAS No. 131, "Disclosures
About Segments of an Enterprise and Related Information."
SFAS No. 131 specifies revised guidelines for determining an
entity's operating segments and the type and level of
financial information to be disclosed. SFAS No. 131 is
effective for fiscal years beginning after December 15,
1997. The Company is in the process of evaluating the
impact of this statement to its financial statements
disclosures.
Reclassifications
Certain prior year accounts have been reclassified to
conform with current period presentation.
2. Investments:
The amortized cost and related estimated fair values of debt
and equity securities in the accompanying balance sheets are
as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
September 30, 1997:
Fixed maturities
available for sale:
U.S. Treasury and
government
securities $111,066 $ 276 $ 95 $111,247
States, municipalities
and political sub-
divisions 128,111 3,573 152 131,532
Mortgage-backed
securities 53,072 146 3,854 49,364
Other debt securities 36,954 754 392 37,316
-------- ------- ------- --------
$329,203 $ 4,749 $ 4,493 $329,459
======== ======= ======= ========
Marketable equity
securities -
preferred stock $ 55,735 $ 2,150 $ 217 $ 57,668
======== ======= ======= ========
Marketable equity
securities -
common stock $ 23,292 $ 8,292 $ 741 $ 30,843
======== ======= ======= ========
December 31, 1996:
Fixed maturities
available for sale:
U.S. Treasury and
government
securities $ 86,359 $ 154 $ 260 $ 86,253
States, municipalities
and political sub-
divisions 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
======== ======= ======= ========
</TABLE>
3. Insurance Premiums and Claims
Insurance premiums written and earned by the Company's
insurance subsidiaries for the three months and nine months
ended September 30, 1997 and 1996 are as follows (in
thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
------------------- -----------------
1997 1996 1997 1996
-------- --------- -------- -------
<S> <C> <C> <C> <C>
Direct premiums written $229,906 $247,371 $488,794 $496,567
Assumed premiums written 45,291 33,448 57,575 53,032
Ceded premiums written (165,048) (158,652) (293,030) (261,274)
-------- -------- -------- --------
Net premiums written $110,149 $122,167 $253,339 $288,325
======== ======== ======== ========
Direct premiums earned $228,544 $245,957 $478,380 $478,143
Assumed premiums earned 45,399 33,381 55,408 51,704
Ceded premiums earned (161,201) (157,964) (277,040) (264,073)
======== ======== ======== ========
Net premiums earned $112,742 $121,374 $256,748 $265,774
======== ======== ======== ========
</TABLE>
Insurance loss and loss adjustment expenses have been
reduced by recoveries recognized under reinsurance contracts
of approximately $187,309,000 and $195,625,000 for the three
months ended September 30, 1997 and 1996, respectively.
Insurance loss and loss adjustment expenses have been
reduced by recoveries recognized under reinsurance contracts
of approximately $277,040,000 and $320,962,000 for the nine
months ended September 30, 1997 and 1996, respectively.
4. Bank Borrowings, Term Debt and Other Borrowings:
On June 6, 1997, the Company amended its borrowing
arrangements with its bank lenders providing a $100 million
five year Revolving Credit Facility. Further the Company
selects its interest rate as either the prime rate or LIBOR
plus a margin of .50% to 1.25% depending on the Company's
debt to equity ratio. Interest is payable quarterly.
On August 4, 1997, the Company used the net proceeds of
$79.6 million from the issuance of Junior Subordinated
Debentures to repay a portion of the Company's outstanding
indebtedness under the Revolving Credit Facility. As of
that date, the outstanding indebtedness under the Revolving
Credit Facility was reduced from $90.0 million to $10.4
million. The net proceeds received on August 18, 1997 from
the additional issuance of Junior Subordinated Debentures in
connection with the underwriters exercise of the Option was
primarily used to pay down the remaining $10.4 million in
outstanding indebtedness under the Revolving Credit
Facility. As a result of the issuance of the Junior
Subordinated Debentures, the Revolving Credit Facility was
reduced from $100 million to approximately $63.6 million.
(See Note 7). At September 30, 1997, the Company had no
outstanding borrowings under the Revolving Credit Facility.
5. Income Taxes:
As of September 30, 1997, management believes it is more
likely than not that the Company will realize a portion of
the deferred tax asset. The valuation allowance at
September 30, 1997 primarily relates to capital loss items
whose realization is uncertain. The net deferred tax asset
is as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
-------------- -------------
<S> <C> <C>
Unpaid losses and loss adjustment
expenses 13,334 13,322
Unearned premiums 7,045 7,283
Allowances for doubtful accounts 1,632 1,213
Other 4,923 2,689
Unrealized loss on fixed maturities
available for sale -- 2,229
Major Realty basis difference 8,377 8,317
------- -------
Deferred tax asset 35,311 35,053
------- -------
Deferred policy acquisition costs (10,256) (10,303)
Other (1,274) (1,071)
Unrealized gain on fixed maturities
available for sale (89) --
Unrealized gain on marketable
equity securities (3,319) (1,434)
------- -------
Deferred tax liability (14,938) (12,808)
------- -------
20,373 22,245
Valuation allowance (1,179) (1,073)
------- -------
Net deferred tax asset $19,194 $21,172
======= =======
</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>
Nine Months Ended
September 30,
1997 1996
---------- ---------
<S> <C> <C>
Computed U.S. federal income taxes $ 13,782 $ 12,750
Nondeductible amortization of
goodwill and other intangibles 404 426
Tax-exempt interest income (1,403) (1,008)
Dividends received deduction (952) (781)
Other 530 174
-------- --------
Income taxes provided $ 12,361 $ 11,561
======== ========
</TABLE>
6. Per Share Data:
Primary and fully diluted earnings per share are based on
the weighted average shares outstanding of approximately
15.3 million and 15.4 million, respectively, for the three
months ended September 30, 1997 and approximately 15.2
million and 15.5 million, respectively, for the three months
ended September 30, 1996. Primary and fully diluted
earnings per share are based on the weighted average shares
outstanding of approximately 15.3 million and 15.5 million,
respectively, for the nine months ended September 30, 1997
and approximately 15.1 million and 15.4 million,
respectively, for the nine months ended September 30, 1996.
In March 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 128
(SFAS No. 128), "Earnings Per Share". This statement
establishes accounting standards for the presentation of
basic and diluted earnings per share. This statement is
effective for periods ending after December 15, 1997. While
early adoption of this statement is prohibited, disclosure
of pro forma data prior to adoption is permitted. For the
three months and nine months ended September 30, 1997 and
1996 pro forma earnings per share, based upon applying SFAS
No. 128 are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Pro forma earnings
per share:
Basic $ 1.25 $ 1.16 $ 1.79 $ 1.66
Diluted $ 1.23 $ 1.13 $ 1.76 $ 1.64
</TABLE>
7. Company - obligated mandatorily redeemable Preferred
Securities of AICI Capital Trust, holding solely Junior
Subordinated Debentures of the Company:
On August 4, 1997, AICI Capital Trust, a Delaware business
trust organized by the Company (the "Issuer Trust") issued
3.3 million shares or $82.5 million aggregate liquidation
amount of its 9% Preferred Securities (liquidation amount
$25 per Preferred Security). In addition, the Company
granted the underwriters an option, exercisable within 30
days of July 29, 1997, (the "Option") to purchase up to an
additional 495,000 shares or $12.375 million aggregate
liquidation amount of Preferred Securities on the same terms
as the Preferred Securities previously issued, solely to
cover over-allotments, if any. On August 18, 1997, the
Company issued the additional 495,000 shares or $12.375
million aggregate liquidation amount of the Issuer Trust's
9% Preferred Securities.
The Company owns all of the common securities (the "Common
Securities") of the Issuer Trust. The Preferred Securities
represent preferred undivided beneficial interests in the
Issuer Trust's assets. The assets of the Issuer Trust
consist solely of the Company's 9% Junior Subordinated
Debentures due 2027 which were issued August 4, 1997 and
August 18, 1997 in an amount equal to the total of the
Preferred Securities and the Common Securities. The Company
primarily used the net proceeds in the amount of $91.0
million from the sale of the Junior Subordinated Debentures
to pay down the $90.0 million of borrowings under its
Revolving Credit Facility.
Distributions on the Preferred Securities and Junior
Subordinate Debentures are cumulative, accrue from the date
of issuance and are payable quarterly in arrears. The
Junior Subordinated Debentures are subordinate and junior in
right of payment to all senior indebtedness of the Company
and are subject to certain events of default and redemption
provisions, all as described in the Junior Debenture
Indenture.<PAGE>
PART 1.
- -------
ITEM 2.
ACCEPTANCE INSURANCE COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition
and results of operations of the Company and its consolidated
subsidiaries is based upon the Company's interim consolidated
financial statements and the notes thereto included in this
report.
RESULTS OF OPERATIONS
Forward-Looking Information
Except for the historical information contained in this Quarterly
Report on Form 10-Q, matters discussed herein may constitute
forward-looking information. Such forward-looking information
reflects the Company's current best estimates regarding future
operations, but, since these are only estimates, actual results
may differ materially from such estimates.
A variety of events, most of which are outside the Company's
control, cannot be accurately predicted and may materially impact
estimates of future operations. Important among such factors are
weather conditions, natural disasters, changes in state and
federal regulations, price competition impacting premium levels,
changes in tax laws, financial market performance, changes in
court decisions affecting coverages, and general economic
conditions.
The Company's results are significantly impacted by its crop
business, particularly its MPCI line. Results from the crop
lines are not generally known until the third and fourth quarters
of the year, after crops are harvested. Crop results are
particularly dependent on events beyond the Company's control,
notably weather conditions during the crop growing season in the
states where the Company writes a substantial amount of its crop
insurance. Additionally, federal regulations governing aspects
of crop insurance are frequently modified, and any such changes
may impact crop insurance results.
Three months and nine months ended September 30, 1997
Compared to three months and nine months ended September 30, 1996
The Company's net income for the three months and nine months
ended September 30, 1997 increased by 8.6% as compared to the
same periods in 1996. The first nine months of 1997 were
positively impacted by an improvement in the profitability of the
Property and Casualty operations of the Company, an increase in
the Company's net investment income and net realized capital
gains, and an increase in the Company's profit sharing income
under its Multi-Peril Crop Insurance (MPCI) program. These
positive factors were partially offset by lower net premiums
earned, an increase in the net expenses in the Company's MPCI
crop program, and an increase in interest expense. Reduced
income realized in the Company's Crop Division during the first
three months of 1997 as compared to the first three months of
1996 also negatively impacted the Company's net income.
The underwriting loss and expense ratios of the Company's
Property and Casualty operations improved during the three and
nine month periods ended September 30, 1997 from 106.4% and
104.7% in the three and nine months ended September 30, 1996 to
104.5% and 102.9% during the same periods in 1997. This
improvement in operating margin was offset by somewhat lower net
premiums earned. Net premiums earned declined 7.1% and 3.4%
during the three and nine months ended September 30, 1997 from
the same periods in 1996. This decrease was attributable to both
a decrease in direct premiums written and an increase in premiums
ceded to reinsurers. The decrease in direct premiums written
was a result of the Company's curtailment of premium writings in
areas not meeting the Company's profitability goals, and the
increase in cessions to reinsurers resulted from a change in the
mix of the Company's business as well as an increase in cessions
to reinsurers in lines where the Company was seeking to improve
its underwriting margins. Additionally, the Company increased
its cessions to reinsurers in its crop hail business in order to
lessen the volatility of results in this line of business.
The Company's net income was also positively impacted during the
three and nine months ended September 30, 1997 by an increase in
the Company's net investment income and net realized capital
gains. The Company's net investment income increased 10.9% and
5.3% respectively in the three and nine months ended September
30, 1997 as compared to the same periods in 1996, while the
Company's net realized capital gains increased 152.7% and 50.3%
in the three and nine months ended September 30, 1997 as compared
to the same periods a year earlier. The increase in the
Company's net investment income resulted from an increase in the
average size of the Company's portfolio from $395.7 million
during the nine months ended September 30, 1996 to $448.0 million
during the nine months ended September 30, 1997. This increase
in the size of the portfolio was offset by a decrease in the
annualized investment yield of the portfolio from 6.4% and 6.6%
during the three and nine months ended September 30, 1996 to 6.1%
during the same periods in 1997. This decrease in annual
investment yield was principally a result of an increase in the
average amount of tax advantaged securities within the Company's
portfolio during the first nine months of 1997 as demonstrated by
a relatively stable tax-effected return of 4.9% during the nine
months ended September 30, 1996 and 4.7% during the nine months
ended September 30, 1997.
During the first quarter of 1996, the Company's operating income
benefited from a $2.8 million profit in the Company's Crop
Division. The principal component of this $2.8 million was the
recording of an additional $3.8 million in profit sharing under
the Company's MPCI program. The Company's estimate of its profit
sharing under the MPCI program at December 31, 1995 was affected
by a volatile crop growing season during which many of the rules
pertaining to preventive planting payments were changed and a
combination of unusual weather conditions manifested themselves
in an unusually late harvest. As claims were closed during the
first quarter of 1996 and the final preventive planting rules
applied to these losses, the Company was able to earn additional
profit sharing. The 1996 growing year did not experience this
same degree of volatility, and the harvest was not delayed by
unusual weather conditions. Consequently, the MPCI profit
sharing income recorded at December 31, 1996 more accurately
estimated actual results than had the profit sharing recorded at
December 31, 1995. During the first quarter of 1997, the Company
experienced operating income of approximately $900,000 from the
operations of its Crop Division. The Company believes that the
crop results for the first quarter of 1997 were more typical of a
normal year than those experienced in the first quarter of 1996.
During the third quarter of 1997, the Company recognized MPCI
profit sharing income of approximately $38.0 million based upon a
retained MPCI pool of $155.3 million and a profit sharing
percentage of 24.5%. During the third quarter of 1996, the
Company recognized MPCI profit sharing income of $28.8 million
based upon a retained MPCI pool of $160 million and a profit
sharing percentage of 18%. The size of the Company's retained
pool decreased slightly from the 1996 year to the 1997 year
despite a slight increase in the overall MPCI premium from $248
million in 1996 to $252 million in 1997. This was a result of
the Company's strategy to reduce its retentions in the upper
Midwest in order to protect the Company from the adverse effects
of spring flooding. The increase in the Company's MPCI profit
sharing income was offset by an increase in the Company's net
operating expenses under the MPCI program. This increase in net
expenses was due to a decrease in expense reimbursement from the
federal government under the MPCI program from 31% for both MPCI
and Crop Revenue Coverage (CRC) policies in 1996 to 29% and 25%
respectively for MPCI and CRC policies in 1997. This resulted in
an approximately $7.2 million decrease in expense reimbursements
from 1996 to 1997. The Company was unable to pass along any of
this expense reduction to its producing agents due to the
competitive environment for commissions paid to agents for MPCI
business during 1997.
The Company's interest expense during the three and nine months
ended September 30, 1997 increased by 61.8% and 17.8%
respectively from the same periods a year earlier. This increase
in interest expense resulted from both an increase in the
Company's average borrowings and the average interest rate paid
by the Company. During the three and nine months ended September
30, 1997, the Company's average borrowings were $92.8 million and
$77.1 million respectively while the Company's average borrowings
were $69 million for both the three and nine month periods ended
September 30, 1996. The increased borrowings during 1997 were
used to add statutory surplus to the Company's insurance company
subsidiaries. The increase in the Company's average interest
rate paid resulted from the issuance of $94.875 million in Trust
Preferred Securities and the retirement of the Company's
outstanding bank debt during the third quarter of 1997 (see
discussion under Liquidity and Capital Resources).
Recent Statement of Financial Accounting Standards
In October 1995, the Financial Accounting Standards Board
("FASB") issued Statement of Financial Accounting Standards 123,
(SFAS No. 123), "Accounting for Stock-Based Compensation," which
is effective for the Company on January 1, 1996. SFAS No. 123
requires expanded disclosures of stock-based compensation
arrangements with employees and encourages (but does not require)
compensation cost to be measured based on the fair value of the
equity instrument awarded. Companies are permitted, however, to
continue to apply APB Opinion No. 25, which recognizes
compensation cost based on the intrinsic value of the equity
instruments awarded. The Company continued to apply APB No. 25
in its accounting for stock-based compensation awards to
employees and directors, while expanding its disclosures as
required by SFAS No. 123.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
the reporting and display of comprehensive income. The purpose
of reporting comprehensive income is to present a measure of all
changes in shareholders' equity that result from recognized
transactions and other economic events of the period, other than
transactions with owners in their capacity as owners. SFAS No.
130 is effective for financial statements issued for periods
beginning after December 15, 1997. Adoption of SFAS No. 130 will
result in additional disclosures in the Company's financial
statements but will not impact the Company's reported net income
or net income per share.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About
Segments of an Enterprise and Related Information." SFAS No. 131
specifies revised guidelines for determining an entity's
operating segments and the type and level of financial
information to be disclosed. SFAS No. 131 is effective for
fiscal years beginning after December 15, 1997. The Company is
in the process of evaluating the impact of this statement to its
financial statements disclosures.
LIQUIDITY AND CAPITAL RESOURCES
The Company has included a discussion of the liquidity and
capital resources requirements of the Company and the Company's
insurance subsidiaries.
The Company-Parent Only
As an insurance holding company, the Company's assets consist
primarily of the capital stock of its subsidiaries, three surplus
notes issued by its insurance company subsidiaries and
investments held at the holding company level. The Company's
primary sources of liquidity are dividends and other
distributions from subsidiaries, interest payments on the surplus
notes, tax sharing payments from its subsidiaries and net
investment income from, and proceeds from the sale of, holding
company investments.
The Company's liquidity needs are primarily to service debt, pay
operating expenses and taxes and make investments in
subsidiaries.
Dividends from the insurance subsidiaries of the Company are
regulated by the state regulatory authorities of the states in
which each subsidiary is domiciled. The laws of such states
generally restrict dividends from insurance companies to parent
companies to certain statutorily approved limits. As of
September 30, 1997, the statutory limitation on dividends from
insurance company subsidiaries to the parent without further
insurance departmental approval was 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 three surplus notes, each in the
amount of $20.0 million, issued by two of its insurance company
subsidiaries, bearing interest at the rate of 9% per annum,
payable semi-annually and quarterly. Although repayment of all
or part of the principal of this surplus note requires 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.
On August 4, 1997, AICI Capital Trust, a Delaware business trust
organized by the Company (the "Issuer Trust") issued 3.3 million
shares or $82.5 million aggregate liquidation amount of its 9%
Preferred Securities (liquidation amount $25 per Preferred
Security). In addition, the Company granted the underwriters an
option, exercisable within 30 days of July 29, 1997, (the
"Option") to purchase up to an additional 495,000 shares or
$12.375 million aggregate liquidation amount of Preferred
Securities on the same terms as the Preferred Securities
previously issued, solely to cover over-allotments, if any. On
August 18, 1997, the Company issued the additional 495,000 shares
or $12.375 million aggregate liquidation amount of the Issuer
Trust's 9% Preferred Securities.
The Company owns all of the common securities (the "Common
Securities") of the Issuer Trust. The Preferred Securities
represent preferred undivided beneficial interests in the Issuer
Trust's assets. The assets of the Issuer Trust consist solely of
the Company's 9% Junior Subordinated Debentures due 2027 which
were issued August 4, 1997 and August 18, 1997 in an amount equal
to the total of the Preferred Securities and the Common
Securities. The Company primarily used the net proceeds in the
amount of $91.0 million from the sale of the Junior Subordinated
Debentures to pay down $90.0 million of borrowings under its
Revolving Credit Facility. As a result of the issuance of the
Junior Subordinated Debentures, the Revolving Credit Facility was
reduced from $100 million to approximately $63.6 million. At
September 30, 1997, the Company had no outstanding borrowings
under the Revolving Credit Facility.
Distributions on the Preferred Securities and Junior Subordinated
Debentures are cumulative, accrue from the date of issuance and
are payable quarterly in arrears. The Junior Subordinated
Debentures are subordinate and junior in right of payment to all
senior indebtedness of the Company and are subject to certain
events of default and redemption provisions, all as described in
the Junior Debenture Indenture.
Insurance Companies
The principal liquidity needs of the Insurance Companies are to
fund losses and loss adjustment expense payments, to pay
underwriting expenses, including commissions to agents, to pay
interest under the surplus notes described above and to make tax
payments. Available sources for these requirements are premiums
received and cash flows from investment activities. Together,
these sources historically have been adequate to meet the
described requirements on a timely basis. The Company monitors
the cash flows of its insurance company subsidiaries and attempts
to maintain sufficient cash to meet current operating expenses,
and to structure its investment portfolio at a duration which
approximates the estimated cash requirements for the payment of
loss and loss adjustment expenses.
Changes in Financial Condition
The Company's stockholders' equity increased by approximately
$36.5 million at September 30, 1997 as compared to December 31,
1996. The principal components of this increase were net income
of $27.0 million during the first nine months of 1997 and an
increase in the value of the Company's investment portfolio
causing the unrealized gain (loss) on available for sale
securities net of tax to improve from a loss of $1.5 million to a
gain of $6.3 million. This change in the unrealized gain (loss)
on available for sale securities was comprised of a improvement
in the unrealized gain (loss) in the Company's fixed maturity
portfolio of $4.3 million net of tax and an increase of $3.5
million net of tax in the unrealized gain in the Company's equity
portfolio.
Consolidated Cash Flow
Cash provided by operating activities was positive during both
the nine months ended September 30, 1996 and 1997, with $66.2
million and $60.6 million of positive cash flow during the two
periods respectively. The major component of this positive cash
flow during both periods was the Company's MPCI crop program
including profit sharing payments received from the federal
government, expense reimbursements from the federal government
and receipt of premium from farmers. The decrease in cash flow
from the nine months ended September 30, 1996 to the same period
in 1997 was a result of a decrease in the Company's gross written
premium as well as an increase in the premium ceded to reinsurers
by the Company.
Cash flows for the Company's MPCI and crop hail businesses differ
in certain respects from cash flows associated with more
traditional property and casualty lines. MPCI premiums are not
received from farmers until the covered crops are harvested, and
when received are promptly remitted by the Company in full to the
government. Covered losses are paid by the Company during the
growing season as incurred, with such expenditures reimbursed by
the government within three business days. Policy acquisition
and administration expenses are paid by the Company as incurred
during the year. The Company periodically throughout the year
receives a payment in reimbursement of its policy administration
expenses.
In the crop hail business, premiums are generally not received
until after the harvest, while losses and other expenses are paid
throughout the year.
Inflation
The Company does not believe that inflation has had a material
impact on its financial condition or the results of operation.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
PART II. OTHER INFORMATION
- ---------------------------
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) No reports on Form 8-K were filed by the registrant during
the quarter for which this report is filed.<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ACCEPTANCE INSURANCE COMPANIES INC.
November 14, 1997 /s/ KENNETH C. COON
---------------------------------
Kenneth C. Coon
Chief Executive Officer
November 14, 1997 /s/ GEORGIA M. MACE
---------------------------------
Georgia M. Mace
Treasurer and Chief Accounting
Officer
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
3.1 Registrant's Restated Certificate of
Incorporation, incorporated by reference to
Registrant's Annual Report of Form 10-K for the
period ending December 31, 1993, and Amendment
thereto, incorporated by reference to 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.
4.3 Form of Preferred Security (included in Exhibit 4.8).
Incorporated by reference to Form S-3 Registration
No.33-28749, filed July 29, 1997.
4.4 Form of Guarantee Agreement Between Acceptance
Insurance Companies Inc. and Bankers Trust Company.
Incorporated by reference to Form S-3 Registration
No.33-28749, filed July 29, 1997.
4.5 Form of Junior Subordinated Indentures Between
Acceptance Insurance Companies Inc. and Bankers Trust
Company. Incorporated by reference to Form S-3
Registration No. 33-28749, filed July 29, 1997.
4.6 Certification of Trust of AICI Capital Trust.
Incorporated by reference to Form S-3 Registration No.
33-28749, filed July 29, 1997.
4.7 Trust Agreement between Acceptance Insurance Companies
Inc. and Bankers Trust (Delaware). Incorporated by
reference to Form S-3 Registration No. 33-28749, filed
July 29, 1997.
4.8 Form of Amended and Restated Trust Agreement among
Acceptance Insurance Companies Inc., Bankers Trust
Company and Bankers Trust (Delaware). Incorporated by
reference to Form S-3 Registration No.33.28749, filed
July 29, 1997.
4.9 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 Intercompany Federal Income Tax Allocation Agreement
between Acceptance Insurance Holdings Inc. and its
subsidiaries and the Registrant dated April 12, 1990,
and related agreements. Incorporated by reference to
Exhibit 10i to the Registrant's Annual Report on Form
10-K for the fiscal year ended August 31, 1990.
10.2 Employment Agreement dated February 19, 1990
between Acceptance Insurance Holdings Inc., the
Registrant and Kenneth C. Coon. Incorporated by
reference to Exhibit 10.65 to the Registrant's
Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
10.3 Employment Agreement dated July 2, 1993 between
the Registrant and John P. Nelson. Incorporated
by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the period ended
September 30, 1994.
10.4 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.
10.5 $100,000,000 Amended and Restated Credit Agreement by
and Among the Registrant, The First National Bank of
Chicago, Comerica Bank, First National Bank of Omaha,
First Bank, N.A., Wells Fargo Bank, National
Association and Mercantile Bank, N.A. and The First
National Bank of Chicago, As Agent, and Comerica Bank,
First National Bank of Omaha, and First Bank, N.A., As
Co-Agents, dated as of June 6, 1997.
11 Computation of Income per share.
27 Financial Data Schedule.
99.1 The Registrant's Amended Employee Stock Purchase
Plan. Incorporated by reference to the
Registrant's Proxy Statement filed on or about
April 29, 1994.
99.2 The Registrant's Employee Stock Ownership and Tax
Deferred Savings Plan as merged, amended and
restated effective October 1, 1990. Incorporated
by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended November 30, 1990.
99.3 First Amendment to the Registrant's Employee Stock
Ownership and Tax Deferred Savings Plan.
Incorporated by reference to Exhibit 99.4 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
99.4 Second Amendment to the Registrant's Employee
Stock Ownership and Tax Deferred Savings Plan.
Incorporated by reference to Exhibit 99.5 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
99.5 The Registrant's 1996 Incentive Stock Option Plan.
Incorporated by reference to the Registrant's
Proxy Statement filed on or about May 3, 1996.
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
COMPUTATION OF INCOME PER SHARE
for the three months and nine months ended
September 30, 1997 and 1996
(in thousands, except per share data)
(unaudited)
Exhibit 11
Three Months Nine Months
-------------------- -------------------
1997 1996 1997 1996
-------- ------- ------- -------
<S> <C> <C> <C> <C>
PRIMARY INCOME
PER SHARE:
Net income $18,808 $17,318 $26,964 $24,821
======= ======= ======= =======
Weighted average number
of shares outstanding 15,067 14,963 15,036 14,919
Adjustment for stock
options 249 225 221 172
------- ------- ------- -------
Adjusted weighted
average number of
shares outstanding 15,316 15,188 15,257 15,091
======= ======= ======= =======
Primary income
per share $ 1.23 $ 1.14 $ 1.77 $ 1.64
======= ======= ======= =======
FULLY DILUTED INCOME
PER SHARE:
Net income $18,808 $17,318 $26,964 $24,821
======= ======= ======= =======
Weighted average number
of shares outstanding 15,087 15,203 15,203 15,159
Adjustment for stock
options 324 291 335 249
------- ------- ------- -------
Adjusted weighted
average number of
shares outstanding 15,411 15,494 15,538 15,408
======= ======= ======= =======
Fully diluted income
per share $ 1.22 $ 1.12 $ 1.74 $ 1.61
======= ======= ======= =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements included in the Form 10-Q and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 329,459
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 88,511
<MORTGAGE> 10,513
<REAL-ESTATE> 3,332
<TOTAL-INVEST> 506,118
<CASH> 3,171
<RECOVER-REINSURE> 43,698
<DEFERRED-ACQUISITION> 29,302
<TOTAL-ASSETS> 1,131,359
<POLICY-LOSSES> 452,694
<UNEARNED-PREMIUMS> 152,799
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 94,875
0
0
<COMMON> 6,137
<OTHER-SE> 238,216
<TOTAL-LIABILITY-AND-EQUITY> 1,131,359
256,748
<INVESTMENT-INCOME> 20,619
<INVESTMENT-GAINS> 5,373
<OTHER-INCOME> 0
<BENEFITS> 161,369
<UNDERWRITING-AMORTIZATION> 135
<UNDERWRITING-OTHER> 75,827
<INCOME-PRETAX> 39,325
<INCOME-TAX> 12,361
<INCOME-CONTINUING> 26,964
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 26,964
<EPS-PRIMARY> 1.77
<EPS-DILUTED> 1.74
<RESERVE-OPEN> 0<F1>
<PROVISION-CURRENT> 0<F1>
<PROVISION-PRIOR> 0<F1>
<PAYMENTS-CURRENT> 0<F1>
<PAYMENTS-PRIOR> 0<F1>
<RESERVE-CLOSE> 0<F1>
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>This amount is presented on an annual basis. See 12/31/96 Form 10-K for the
most recent reported amounts.
</FN>
</TABLE>
