=================================================================
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, 1997
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 (10,512,043 shares) on March 23,
1998 was $251,632,029.
The number of shares of each class of the Registrant's
common stock outstanding on March 23, 1998 was:
Class of Common Stock No. of Shares Outstanding
--------------------- -------------------------
Common Stock, $.40 Par Value 15,467,634
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's
1998 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.
Buy-up Coverage: Multi-Peril Crop Insurance policy
providing coverage in excess of that provided by CAT 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.
CAT Coverage ("CAT"): 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 unit for such crop set by the FCIC. This coverage is offered
through private insurers and, in some states, USDA field offices.
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 provides a producer of crops with varying
levels of insurance protection against loss of revenues caused by
changes in crop prices, low yields, or a combination of the two.
Crop Year: For MPCI, a crop year commences on July 1
and ends on June 30. For crop hail insurance, the crop year is
the calendar year.
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.
Federal Crop Insurance Corporation ("FCIC"): A wholly-
owned federal government corporation within the Farm Service
Agency.
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 related to such losses and may also provide
for future adverse loss development on reported claims.
Insurance Regulatory Information System ("IRIS"): A
system of ratio analysis developed by the NAIC primarily intended
to assist state insurance departments in executing their
statutory mandates to oversee the financial condition of
insurance companies.
Loss Adjustment Expenses ("LAE"): Expenses incurred in
the settlement of claims, including outside adjustment expenses,
legal fees and internal administrative costs associated with the
claims adjustment process, but not including general overhead
expenses.
Loss Ratio: The ratio of losses and LAE incurred to
premiums earned.
Loss Reserves: Liabilities established by insurers to
reflect the 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 CAT 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 and Crop Revenue Coverages
paid by farmers, plus the amount of any related federal premium
subsidies.
MPCI Retention: The aggregate amount of MPCI Premium
and, in respect of CAT coverages imputed MPCI 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 Premiums Earned: The portion of net premiums
written applicable to the expired period of policies and,
accordingly, recognized as income during a given period.
Net Premiums Written: 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.
Price Election: The maximum per unit commodity price
by crop to be used in computing MPCI Premiums (other than for
Crop Revenue Coverage), which is set each year by the FCIC.
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 effected 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-Based Capital ("RBC"): Capital requirements for
property and casualty insurance companies adopted by the NAIC to
assess minimum capital requirements and to raise the level of
protection that statutory surplus provides for policyholder
obligations.
Risk Management Agency ("RMA"): A division of the
United States 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 46 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, 1997, the Company was
the third 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, daily auto rental, auto dealers, family restaurants
and fine arts.
Transportation coverages insure long haul truckers and
upper Midwest regional and national trucking companies hauling
rural products. The rural market consists of standard property
and casualty coverages offered through Redland's agents, which
includes farm owners, automobile, livestock mortality and limited
commercial coverages.
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,
--------------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
General Agency $147,642 $162,157 $135,125
Crop Insurance(1) 59,989 66,649 46,950
Program Insurance 47,064 95,805 75,279
Non-Standard Auto 80,369 42,338 28,829
-------- -------- --------
Total $335,064 $366,949 $286,183
======== ======== ========
<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
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. The Company compensates its agents
through commissions based on a percentage of premiums produced.
The Company also offers most of its agents a contingent
commission based on volume and profitability and other programs
designed to encourage agents to enhance the placement of
profitable business with the Company.
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>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1996 1995
------ ------ ------
<S> <C> <C> <C>
The Company
Loss Ratio 63.7% 69.8% 78.2%(1)
Expense Ratio 34.0 26.6 26.1
----- ----- -----
Combined Ratio 97.7% 96.4% 104.3%
===== ===== =====
Industry Average(2)
Loss Ratio 73.7% 78.4% 78.9%
Expense Ratio 28.1 27.4 27.5
----- ----- -----
Combined Ratio 101.8% 105.8% 106.4%
===== ===== =====
<FN>
- ---------------
(1) The $22.3 million loss reserve strengthening taken by the
Company in 1995 accounts for 8.2% of the loss ratio for
1995. See "Loss and Loss Adjustment Expense Reserves."
(2) Source: Best's Aggregates & Averages - Property Casualty
(1997 Edition). Ratios for 1997 are unpublished but have
been provided to the Company by A.M. Best.
</FN>
</TABLE>
Underwriting
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 goals 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 operations, Acceptance Risk
Managers and Professional Liability Insurance Managers, insurance
agency operations that are not owned by the Company but currently
write exclusively for Acceptance, underwrite more difficult
casualty and professional lines business and grant no
underwriting authority to general agents. Instead, 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.
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. The Company's claims department is organized into
two parts, each supervised by a senior claims vice president.
The Litigation Department, which is broken down by geographic
area, handles larger litigation claims files and other complex
and serious claims. The Claims Department, which also is broken
down by geographic area, handles the other claims files and
supervises the claims handlers. The Company emphasizes the use
of internal staff rather than independent adjusters, improving
claims processing systems and rapid response mechanisms. These
systems have significantly reduced the number of claims handled
by each claims examiner. The Company believes this structure
will continue 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 are reviewed, estimates of reserves are revised,
resulting in increases or decreases to reserves for insured
events of prior years. In 1997, 1996 and 1995 the Company made
additional provisions through a charge to earnings of $6.9
million, $9.5 million and $22.3 million, respectively, for its
reestimated liability for losses and loss adjustment expenses for
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>
<CAPTION>
Years Ended December 31,
----------------------------
1997 1996 1995
-------- -------- --------
(in thousands)
<S> <C> <C> <C>
Net loss and loss adjustment
expense reserves at beginning
of year $246,752 $201,356 $141,514
-------- -------- --------
Provisions for net losses and
loss adjustment expenses for
claims occurring in the current
year 206,597 233,727 190,019
Increase in net reserves for
claims occurring in prior years 6,858 9,530 22,318
-------- -------- --------
213,455 243,257 212,337
-------- -------- --------
Net losses and loss adjustment
expenses paid for claims
occurring during:
The current year (110,372) (102,565) (80,281)
Prior years (86,729) (95,296) (72,214)
-------- -------- --------
(197,101) (197,861) (152,495)
-------- -------- --------
Net loss and loss adjustment
expense reserves at end of year 263,106 246,752 201,356
Reinsurance recoverable on unpaid
losses and loss adjustment
expenses 165,547 185,421 167,888
-------- -------- --------
Gross loss and loss adjustment
expense reserves $428,653 $432,173 $369,244
======== ======== ========
</TABLE>
The following table presents the development of balance
sheet net loss reserves from calendar years 1987 through 1997.
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 effected 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 1996,
the only years on the table for which the Company has restated
amounts in accordance with SFAS #113.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
----------------------------------------------------
1987 1988 1989 1990 1991 1992
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
Net reserves for unpaid
losses and loss
adjustment expenses $27,730 $34,092 $43,380 $58,439 $66,132 $77,627
Cumulative amount of net
liability paid through:
One year later 30.6% 30.5% 30.0% 40.6% 45.7% 36.1%
Two years later 56.7% 52.1% 59.5% 70.8% 72.3% 73.6%
Three years later 72.9% 68.7% 76.1% 88.5% 96.6% 94.5%
Four years later 81.8% 77.0% 84.5% 101.2% 108.1% 109.0%
Five years later 84.7% 81.5% 89.2% 107.5% 115.1% 114.9%
Six years later 87.1% 85.3% 93.4% 109.7% 118.2%
Seven years later 88.2% 89.8% 94.5% 111.4%
Eight years later 95.0% 90.3% 95.5%
Nine years later 95.2% 90.4%
Ten years later 95.2%
Net reserves reestimated as of:
One year later 96.6% 97.9% 99.1% 100.3% 103.5% 103.3%
Two years later 97.6% 92.3% 95.2% 102.3% 109.9% 109.7%
Three years later 91.3% 87.3% 91.4% 107.4% 116.9% 117.9%
Four years later 89.7% 84.9% 92.5% 110.7% 120.1% 117.7%
Five years later 88.1% 85.3% 94.0% 112.7% 119.9% 119.8%
Six years later 88.8% 86.6% 95.9% 112.0% 120.5%
Seven years later 88.9% 91.0% 95.4% 112.5%
Eight years later 95.4% 90.7% 96.0%
Nine years later 95.2% 90.8%
Ten years later 95.3%
Net cumulative redundancy
(deficiency) 4.7% 9.2% 4.0% -12.5% -20.5% -19.8%
<PAGE>
Gross reserves for unpaid loss and
loss adjustment expenses $127,666
Reinsurance recoverable on unpaid
loss and loss adjustment expenses 50,039
------
Net reserves for unpaid loss and
loss adjustment expenses 77,627
======
Reestimated gross reserves for unpaid
loss and loss adjustment expenses 111.7%
Reestimated reinsurance recoverable
on unpaid loss and loss adjustment
expenses 99.1%
-----
Reestimated net reserves for unpaid
loss and loss adjustment expenses 119.8%
======
Gross cumulative redundancy (deficiency) -11.7%
<CAPTION> =====
<PAGE>
Years Ended December 31,
--------------------------------------------------------
1993 1994 1995 1996 1997
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net reserves for unpaid
losses and loss
adjustment expenses $115,714 $141,514 $201,356 $246,752 $263,106
Cumulative amount of net
liability paid through:
One year later 49.1% 51.0% 47.3% 44.7%
Two years later 80.5% 86.1% 75.2%
Three years later 100.9% 104.5%
Four years later 108.8%
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 104.4% 115.8% 104.7% 102.8%
Two years later 114.5% 115.7% 106.6%
Three years later 113.1% 120.5%
Four years later 116.1%
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Net cumulative redundancy
(deficiency) -16.1% -20.5% -6.6% -2.8%
<PAGE>
Gross reserves for unpaid loss and
loss adjustment expenses $211,600 $221,325 $369,244 $432,173 $428,653
Reinsurance recoverable on unpaid
loss and loss adjustment expenses 95,886 79,811 167,888 185,421 165,547
------- ------- ------- ------- -------
Net reserves for unpaid loss and
loss adjustment expenses 115,714 $141,514 $201,356 $246,752 $263,106
======= ======== ======= ======== ========
Reestimated gross reserves for unpaid
loss and loss adjustment expenses 116.4% 122.4% 99.9% 96.0%
Reestimated reinsurance recoverable on
unpaid loss and loss adjustment
expenses 116.8% 125.8% 91.8% 87.1%
-------- ------- ------- -------
Reestimated net reserves for unpaid loss
and loss adjustment expenses 116.1% 120.5% 106.6% 102.8%
------- ------- ------- -------
Gross cumulative redundancy (deficiency) -16.4% -22.4% .1% 4.0%
======== ======= ======= =======<PAGE>
Reinsurance
</TABLE>
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 (on a per risk basis) and $2,500,000 (on an occurrence
basis), respectively, to reinsurers. On its complex liability
and property exposure, 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 (with close
to complete reinsurer participation) of 95% of $77.5 million in
excess of a retention 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 for 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 1997, the
Company ceded to the RMA an aggregate of 38% 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 70% of the
Company's crop hail business is reinsured through quota share
agreements.
At December 31, 1997, 90% of the Company's outstanding
reinsurance recoverables were from domestic reinsurance companies
or the federal government, 96% of which was from reinsurance
companies rated A- (excellent) or better by A.M. Best or from the
federal government. The balance was primarily placed with major
international reinsurers.
Investments
The Company's investment policy is to maximize the
after-tax yield of the portfolio while emphasizing the stability
and preservation of the Company's capital base. Further, the
portfolio is invested in types of securities and in an aggregate
duration which reflect the nature of the Company's liabilities
and expected liquidity needs. The Company manages its portfolio
internally. The Company's fixed maturity securities are
classified as available-for-sale and carried at estimated fair
value. The investment portfolio at December 31, 1997 and
December 31, 1996, consisted of the following:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
------------------- -------------------
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
--------- -------- --------- --------
Type of Investment
- ------------------
<S> <C> <C> <C> <C>
Fixed maturity securities
U.S. Treasury and government securities $104,039 $104,534 $ 86,359 $ 86,253
States, municipalities and political
subdivisions 129,378 133,860 93,293 94,607
Other debt securities 40,131 39,598 34,581 34,309
Mortgage-backed securities 48,056 44,807 60,138 52,835
-------- -------- -------- --------
Total fixed maturity securities 321,604 322,799 274,371 268,004
Common stocks 23,574 30,847 17,112 20,873
Preferred stocks 51,185 53,309 62,628 62,964
Commercial mortgages 10,248 10,248 11,149 11,149
Real estate 3,329 3,329 3,342 3,342
Short-term investments(1) 32,185 32,185 39,594 39,594
-------- -------- -------- --------
Total $442,125 $452,717 $408,196 $405,926
======== ======== ======== ========
<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,
1997, the composition of the Company's fixed maturity securities
portfolio by time to maturity:
<TABLE>
<CAPTION>
Estimated
Maturity Fair Value Percent
-------- -------- -------
<S> <C> <C>
1 year or less $ 13,946 4.3%
More than 1 year through 5 years 82,535 25.6%
More than 5 years through 10 years 50,349 15.6%
More than 10 years 131,162 40.6%
Mortgage-backed securities 44,807 13.9%
------- ------
Total $322,799 100.0%
======= ======
</TABLE>
The Company's investment results for the periods
indicated are set forth below:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------------
1997 1996 1995
-------- -------- --------
(in thousands, except percentages)
<S> <C> <C> <C>
Net investment income $ 28,016 $ 26,491 $ 20,651
Average investment
portfolio(1) 453,876 402,404 321,251
Pre-tax return on average
investment portfolio 6.2% 6.6% 6.4%
Net realized gains $ 7,321 $ 5,216 $ 2,707
<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 and payments on the American Agrisurance ("Am
Ag") profit sharing, the Company is dependent for funds to pay
its operating and other expenses upon dividends and other
distributions from the Insurance Companies, the payment of which
are subject to review and authorization by state insurance
regulatory authorities. Under Nebraska law, no domestic insurer
may make a dividend or distribution which, together with
dividends or distributions paid during the preceding twelve
months, exceeds the greater of (i) 10% of such insurer's
policyholders' surplus as of the preceding December 31 or (ii)
such insurer's statutory net income (excluding realized capital
gains) for the preceding calendar year, until either it has been
approved, or a thirty-day waiting period shall have passed during
which it has not been disapproved by the Nebraska Insurance
Director. Iowa and Texas have similar laws governing the payment
of dividends or distributions of insurance companies domiciled in
their state. In any case, the maximum amount of dividends the
Insurance Companies may pay to Acceptance is limited to its
earned surplus, also known as unassigned funds. Under Arizona
law, payment of dividends or distributions by a domestic insurer
is limited to the lesser of (i) 10% of such insurer's
policyholders' surplus as of the preceding December 31 or (ii)
such insurer's net investment income for the preceding calendar
year. The tiered structure of the Company's insurance
subsidiaries effectively imposes two levels of dividend
restriction on the payment to the ultimate parent of dividends
from Acceptance Indemnity, Phoenix Indemnity, American Growers
and Acceptance Casualty. During 1998, the statutory limitation
on dividends from the Insurance Companies to Acceptance without
further insurance department approval is approximately $21.7
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
effect 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, 1997
the Insurance Companies meet the RBC requirements as promulgated
by the domiciliary states of the Insurance Companies and the
NAIC.
The NAIC has developed its Insurance Regulatory
Information System ("IRIS") to assist state insurance departments
in identifying significant changes in the operations of an
insurance company, such as changes in its product mix, large
reinsurance transactions, increases or decreases in premiums
received and certain other changes in operations. Such changes
may not result from any problems with an insurance company but
may merely indicate changes in certain ratios outside ranges
defined as normal by the NAIC. When an insurance company has
four or more ratios falling outside "normal ranges," state
regulators may investigate to determine the reasons for the
variance and whether corrective action is warranted. At December
31, 1997, of the six Insurance Companies only Acceptance Casualty
had more than three ratios falling outside "normal ranges,"
specifically four out of the twelve IRIS ratios. This was
primarily the result of two factors, an increase in Acceptance
Casualty's intercompany pooling participation percentage and a
$20 million capital contribution received from the Company in the
form of a surplus note. The Company does not believe that these
ratios will result in regulatory action having a material effect
on the Company.
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. In the crop insurance business, the Company
competes with other crop insurance companies primarily on the
basis of service and commissions to agents.
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 23, 1998 the Company and its subsidiaries
employed 18 salaried executives and 1,043 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> <S> <S> <S>
Omaha, NE Office 58,000 sq. ft. Leased
Council Bluffs, IA Office 142,000 sq. ft. Leased
Council Bluffs, IA Office 33,000 sq. ft. Owned
Burlington, NC Office 4,000 sq. ft. Leased
Phoenix, AZ Office 33,000 sq. ft. Leased
Scottsdale, AZ Office 27,000 sq. ft. Leased
Itasca, IL Office 4,000 sq. ft. Leased
Overland Park, KS Office 3,000 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), December 31, 2000 (Burlington),
February 21, 2000 (Phoenix), December 31, 2001 (Scottsdale),
August 31, 2001 (Itasca), and December 31, 2001 (Overland
Park)
</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,
1997.
<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>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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 Ended December 31, 1997
First Quarter 22 7/8 18 5/8
Second Quarter 22 3/4 18
Third Quarter 26 3/4 21 1/4
Fourth Quarter 28 5/8 22 3/8
Year Ending December 31, 1998
First Quarter
(through March 23, 1998) 25 3/8 22 3/4
</TABLE>
The closing sales price of the Common Stock on March
23, 1998, as reported on the NYSE Composite Tape, was $23 15/16
per share. As of March 23, 1998, 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>
<CAPTION>
Years Ended
December 31,
-----------------------------------------------------------
1997(1) 1996(1) 1995(1) 1994(1) 1993(1)
--------- --------- --------- ----------- ----------
(In thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Insurance Revenues:
Gross premiums written $665,810 $651,060 $537,349 $447,483 $256,042
======= ======= ======= ======= =======
Net premiums written $335,064 $366,949 $286,183 $229,176 $137,505
======= ======= ======= ======= =======
Net premiums earned $335,215 $348,653 $271,584 $202,659 $128,082
Net investment income 27,426 25,677 19,851 12,864 10,467
Net realized capital gains 7,321 5,206 2,531 554 2,250
Agency income -- 1,035 2,863 3,629 4,119
------- ------- ------- ------- -------
Insurance revenues 369,962 380,571 296,829 219,706 144,918
Non-insurance revenues 590 824 976 412 377
------- ------- ------- ------- -------
Total revenues 370,552 381,395 297,805 220,118 145,295
Insurance expenses:
Losses and loss adjustment
expenses 213,455 243,257 212,337 142,951 92,805
Underwriting and other expenses 97,109 95,803 72,602 52,627 36,905
Agency expenses -- 1,024 2,596 3,180 3,794
------- ------- ------- ------- -------
Insurance expenses 310,564 340,084 287,535 198,758 133,504
Non-insurance expenses 2,063 2,015 2,165 1,684 1,225
------- ------- ------- ------- -------
Total expenses 312,627 342,099 289,700 200,442 134,729
------- ------- ------- ------- -------
Operating profit 57,925 39,296 8,105(2) 19,676 10,566
<PAGE>
Other income (expense):
Interest expense (6,569) (4,896) (2,591) (1,693) (2,235)
Other income (expense), net (51) (910) (171) (271) (340)
------- ------- ------- ------- -------
Income (loss) from continuing
operations before income taxes
and minority interests 51,305 33,490 5,343 17,712 7,991
Provision (benefit) for income
taxes(3) 15,992 3,210 1,188 (3,443) 167
Minority interests in net income
(loss) of consolidated
subsidiaries -- -- -- 80 238
------- ------- ------- ------- -------
Net income (loss) from
continuing operations $ 35,313 $ 30,280 $ 4,155(2) $ 21,075 $ 7,586
======= ======= ======= ======= =======
Net income (loss) from
continuing operations
per share:
- Basic $ 2.34 $ 2.03 $ .28 $ 2.04 $ .91
- Diluted 2.30 1.99 .28 1.86 .84
GAAP Ratios:
Loss ratio 63.7% 69.7% 78.2% 70.5% 72.5%
Expense ratio 28.9% 27.5% 26.7% 26.0% 28.8%
------- ------- ------- ------- -------
Combined loss and expense ratio 92.6% 97.2% 104.9% 96.5% 101.3%
======= ======= ======= ======= =======
<PAGE>
<CAPTION>
December 31,
---------------------------------------------------------
1997 1996 1995 1994 1993
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investments $452,717 $405,926 $368,001 $264,743 $187,986
Total assets 979,453 884,380 781,034 543,087 409,385
Loss and loss adjustment
expense reserves 428,653 432,173 369,244 221,325 211,600
Unearned premiums 157,134 140,217 124,122 97,170 60,114
Borrowings and term debt -- 69,000 69,000 29,000 18,951
Company-obligated mandatorily
redeemable Preferred Securities
of AICI Capital Trust, holding
solely Junior Subordinated
Debentures of the Company 94,875 -- -- -- --
Stockholders' equity 253,670 207,820 177,787 159,754 95,717
Other Data:
Statutory Surplus of Insurance
Companies(4) 238,520 191,455 169,628 126,272 73,910
<PAGE>
<FN>
__________________
(1) For a discussion of the accounting treatment of the Company's MPCI business, the results of
which are included beginning July 1, 1993, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
(2) Net income was reduced in 1995 by the strengthening of loss reserves in the amount of
approximately $22.3 million relating principally to 1994 and prior year losses in the
commercial auto liability and general liability and commercial multi-peril lines of insurance.
(3) Results for 1994 and 1993 reflect the utilization of tax loss carryforwards and other temporary
differences resulting from prior non-insurance operations.
(4) 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
After five years of consistent growth in premiums
written, both from internal growth and acquisitions, the Company
experienced little growth in direct premiums written and a
decrease in net premiums written during 1997. During 1997, the
Company focused on improving operating margins by emphasizing
profitable lines, restructuring and reunderwriting marginal lines
and discontinuing clearly unprofitable lines. The Company's
efforts were rewarded with record operating earnings of $57.9
million in 1997 as well as the continuation of a pattern of
profitable quarters begun in the third quarter of 1992 when the
phasing out of its prior non-insurance operations was
substantially completed. The only exception to this pattern was
a net loss of $6.0 million in the third quarter of 1995 when the
Company strengthened loss reserves.
The Company has pursued a strategy of focusing on
selected niche businesses through acquisitions, new agency
relationships and additions of key professional staff. The
Company's most significant acquisition was its purchase in July
of 1993 of The Redland Group, Inc., a major writer of MPCI and
other crop insurance coverages. In 1997, the Company was the
third largest writer of MPCI business in the United States.
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 1998 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, 1997
Compared to Year Ended December 31, 1996
The Company's net income increased 16.6% from $30.3
million in the year ended December 31, 1996 to $35.3 million in
the year ended December 31, 1997. The Company's operating income
increased 47.4% from $39.3 million in the year ended December 31,
1996 to $57.9 million in the year ended December 31, 1997. These
improved results occurred despite a decrease in the Company's
insurance premiums earned and the differential between the growth
in net income and operating income occurred as the Company's tax
rate returned to normal levels in 1997 after the Company's 1996
taxes were positively affected by the decrease in the valuation
allowance relating to the unrealized loss from the Company's
investment in Major Realty. The improved results were attributed
primarily to improved loss and expense ratios in all of the
Company's Property and Casualty divisions, excellent crop results
resulting from an above average profit sharing earned in the
Company's MPCI program, and increased investment income and
realized gains from the Company's investment portfolio. These
positive factors were partially offset by an increase in the
expense ratio of the Crop division, increased interest expense,
and an increase in the Company's effective tax rate.
After several years of growth in net insurance premiums
earned, the Company experienced a decline in net insurance
premiums earned from $348.7 million in 1996 to $335.2 million in
1997, a decline of approximately 3.9%. During 1997, the
Company's goal in its Property and Casualty divisions was to
improve underwriting results through an emphasis on profitable
lines, a restructuring of marginal lines, and a discontinuation
of unprofitable lines. During this process, growth in profitable
lines of business was offset by declining volumes in the
discontinued lines resulting in only a .8% increase in direct
premiums written and a 2.3% increase in gross premiums written.
In lines of business in which the Company was seeking to improve
marginal results, the Company ceded additional amounts to
reinsurers in order to reduce the impact of these lines as well
as to help improve the net results of the Company. Due to the
competitive environment in the Property and Casualty business,
new programs which the Company initiated in 1997 were also
heavily reinsured in order to diminish the impact on the
Company's results until such time as these new programs confirmed
their expected level of profitability. Accordingly, the Company
increased its cessions to reinsurers by approximately $46.6
million from $284.1 million in 1996 to $330.7 million during
1997, resulting in a 8.7% decline in net premiums written during
1997 as compared to 1996.
In the Company's Crop division, the Company's premium
levels were also relatively flat as direct written premiums
decreased from $198.6 million in 1996 to $196.5 million in 1997
and gross premiums increased slightly from $242.9 million in 1996
to $248.0 million in 1997. These relatively level written
premiums resulted as increases in the Company's policy count
under the Company's largest program, the MPCI crop insurance
program, were offset by reductions in commodity prices upon which
the Company's premiums are based.
Underwriting results in all three of the Company's
Property and Casualty divisions improved during 1997 as compared
to 1996. The Company's General Agency division experienced a
$4.0 million underwriting loss and a combined ratio of 102.7% in
the twelve months ended December 31, 1997 as compared to a $10.8
million underwriting loss and a combined ratio of 106.9% for the
twelve months ended December 31, 1996. The General Agency
division's improved underwriting results were a result of a
decrease in both the division's accident year and calendar year
loss and loss adjustment expense ratios from 1996 to 1997. The
division's loss and loss adjustment expense ratios fell from
69.9% and 75.0% on an accident and calendar year basis
respectively during 1996 to 66.5% and 69.6% on an accident and
calendar year basis respectively during 1997. These improved
loss ratios were offset partially by an increase in the expense
ratio of the division from 31.9% during 1996 to 33.0% during
1997. This increase in the expense ratio resulted from a
decrease in net earned premiums from $155.3 million during 1996
to $148.5 million during 1997 with expenses remaining level at
approximately $49 million in both years.
The Company's Non-Standard Auto division experienced
its first unprofitable year in six years in 1996 as the division
recorded a $5.5 million underwriting loss and a 114.9% combined
ratio. The division's performance improved to an underwriting
loss of $2.4 million and a 105.6% combined ratio in 1997. During
1997, the Company continued a pattern of regular rate increases
combined with the cancellation of unprofitable programs and
agents and was able to improve its loss and loss adjustment
expense ratio from 82.5% in 1996 to 75.2% in 1997. In addition,
the division was able to increase its insurance premiums earned
by 14.1% while increasing expenses by only 7.1%, helping to lower
its expense ratio from 32.3% in 1996 to 30.4% in 1997. The
Company expects that profit improvement directives initiated in
1997 will continue to improve results within this division during
1998. The Company also expects continued growth within this
division during the 1998 year resulting in continued improvement
in the division's expense ratio.
The Program division improved from an underwriting loss
of $15.6 million and a combined ratio of 117.5% during 1996 to an
underwriting loss of $5.9 million and a combined ratio of 107.0%
during 1997. These improved underwriting results were achieved
by improvements of just over 5% in both the expense and loss
ratios of the division. During 1996, many of the new programs
within the division were in a start-up phase in which fixed
expenses were not offset by adequate earned premiums. During
1997, growth in earned premium allowed fixed costs to move into a
more normal relationship as a percentage of earned premiums, thus
allowing the division to record a noticeable drop in its expense
ratios from 36.3% during 1996 to 31.0% during 1997. The
improvement in the loss ratio resulted from a change in the mix
of business, emphasizing more profitable lines, restructuring of
reinsurance to improve the Company's net results and the
discontinuation of programs and agents with unprofitable loss
ratios. The Company expects continued improvement in the results
of the Program division as the benefit of the initiatives started
in 1997 are realized in 1998.
During 1997, non-automobile lines of business continued
to outperform the automobile lines of business within the
Company's Property and Casualty divisions. For the year 1997,
automobile lines recorded a 112.9% combined ratio while
non-automobile lines recorded 99.9% combined ratio. The Company
continues to effect significant underwriting changes within its
automobile lines in order to bring them closer to the Company's
desired goal of a combined ratio of 100.0% or less.
The Company's Crop division was a significant
contributor to the underwriting earnings of the Company in both
1996 and 1997. During 1996, the division contributed $41.5
million to the Company's underwriting earnings as compared to
$36.9 million during 1997. During 1997, the Company earned a
profit share of 31.5% on its MPCI retained premium pool of
approximately $155.5 million or $49.0 million. This compares
with an earned profit share of 23.5% on a $161.4 million retained
premium pool generating $37.9 million in 1996.
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.
The improved profit sharing income in 1997 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 31.0% for both MPCI and Crop Revenue
Coverage (CRC) policies in 1996 to 29.0% and 25.0% respectively
for MPCI and CRC policies in 1997. This resulted in an
approximate $7.2 million decrease in expense reimbursement 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 MPCI business during 1997. The Company has
initiated several automation and cost cutting programs in order
to reduce its overall operating expense under the MPCI program.
During 1998, the expense reimbursement from the federal
government under the MPCI program declined again to 27.0% for
MPCI policies and 23.25% for CRC policies. Further, the Company
expects an additional reduction for the 1999 crop year. While
the Company continues to emphasize cost reduction and automation
initiatives, the Company will be unable to fully compensate for
these reductions in expense reimbursements unless it is able to
reduce agents commissions. Given the competitive environment for
the MPCI policies, it is unknown at this time whether the Company
will be able to effect such commission reductions without a loss
of business in its MPCI line.
The Company's net income for 1997 also benefited from
an increase in net investment income and net realized capital
gains. The Company's net investment income increased 5.8% during
the twelve months ended December 31, 1997 as compared to the
twelve month period ended December 31, 1996 while the Company's
net realized capital gains increased 40.4% in 1997 as compared to
1996. The increase in the Company's net investment income
resulted from an increase in the average size of the Company's
portfolio from $402.4 million during the year ended December 31,
1996 to $453.9 million during the year ended December 31, 1997,
an increase of 12.8%. This increase in the size of the portfolio
was offset by a decrease in the annualized investment yield of
the portfolio from 6.6% during 1996 to 6.2% during 1997. This
decrease in annual investment yield was due to an increase in the
average amount of tax advantaged securities within the Company's
portfolio and a lower interest rate environment during 1997.
The Company's interest expense increased 34.2% from
$4.9 million during 1996 to $6.6 million during 1997. 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 1997, the Company's average
borrowings were $81.6 million and the average interest rate was
8.1% as compared to average borrowings in 1996 of $69 million and
an average interest rate of 7.1%. 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).
The Company's 1996 taxes were positively effected by
the decrease in the evaluation allowance related 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, 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. No such benefit was realized
in 1997, and therefore, the Company's effective tax rate
increased to a more normal level of 31.2% as compared to an
effective tax rate of 9.6% in 1996.
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.
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, 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 further 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.
Offsetting these deteriorating results in the Program
division were improved results in the Company's Transportation
department. With 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.
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.
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
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.
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,
surplus notes issued by two of its insurance company subsidiaries
and investments held at the holding company level. The Company's
primary sources of liquidity are receipts from interest payments
on the surplus notes, payments from the profit sharing agreement
with American Agrisurance, the Company's wholly owned subsidiary
which operates as the general agent for the Company's crop
insurance programs, tax sharing payments from its subsidiaries,
investment income from, and proceeds from the sale of, holding
company investments, and dividends and other distributions from
subsidiaries of the Company. The Company's liquidity needs are
primarily to service debt, pay operating expenses and taxes, and
make investments in subsidiaries.
The Company currently holds three surplus notes, each
in the amount of $20 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 these surplus notes requires prior
insurance department approval, no prior approval of interest
payment is currently required.
Under the American Agrisurance profit sharing
agreement, American Agrisurance receives up to 50% of the crop
insurance profit after expenses and a margin retained by the
Insurance Companies based upon a formula established by the
Company and approved by the Nebraska Department of Insurance. If
the calculated profit share is negative, such negative amounts
are carried forward and offset future profit sharing payments.
For the year ended December 31, 1997, American Agrisurance
recorded $12.4 million, net of tax, related to the profit sharing
agreement. This entire amount was distributed in the form of a
dividend to the Company.
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 1998, the
statutory limitation on dividends from insurance company
subsidiaries to the parent without further insurance departmental
approval is approximately $21.7 million.
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.
In August 1997, AICI Capital Trust, a Delaware business
trust organized by the Company (the "Issuer Trust") issued 3.795
million shares or $94.875 million aggregate liquidation amount of
its 9% Preferred Securities (liquidation amount $25 per Preferred
Security). The Company owns all of the common securities (the
"Common Securities") of the issue 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 in August of 1997 in an amount equal
to the Preferred Securities and the Common Securities. The
Company primarily used the net proceeds in the amount of $90.9
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 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 redemptive
provisions, all described in the Junior Debenture Indenture. At
December 31, 1997, the Company had $94.875 million outstanding at
a weighted annual interest cost of 9.2%.
On June 6, 1997, the Company amended its borrowing
arrangements with its bank lenders providing a five-year
revolving credit facility (the "Revolving Credit Facility"), with
a final maturity of 2002, in amounts not to exceed $100 million.
In August 1997, the Company used the net proceeds from the
issuance of Junior Subordinated Debentures to repay the Company's
outstanding indebtedness of $90 million under the Revolving
Credit Facility. As a result of the Junior Subordinated
Debentures, the Revolving Credit Facility was reduced from $100
million to $65 million. The Company selects its interest rate as
either the prime rate or LIBOR plus a margin which varies
depending on the Company's funded debt to equity ratio. Interest
is payable quarterly. At December 31, 1997, the Company had no
outstanding indebtedness under this arrangement. Borrowings and
interest cost averaged $43.1 million and 7.0% during 1997. The
Revolving Credit Facility 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,
required maintenance of specified levels of surplus and requires
the Company to meet certain tests established by the regulatory
authorities.
As of December 31, 1997, the Company held cash,
invested assets excluding investments in subsidiaries, and
dividends receivable of $13.3 million.
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
payments 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. Commencing with
the 1997 year, the Company receives a profit share in cash, with
60% of the amount in excess of 17.5% 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.
Prior to the 1997 year, the amount carried forward to future
years was any amount in excess of 15% of its MPCI retention. The
Company recognized $49.0 million in profit sharing earned on the
MPCI business during 1997, and in addition, recognized $1.0
million during 1997 in profit sharing earned on 1996 MPCI
business. With the change in profit sharing payment rules
including amounts payable for the 1997 crop year, the Company
received $57.0 million in payments under the MPCI program in
February of 1998.
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 1997 year and have exceeded these
requirements.
The Company's stockholders' equity increased by
approximately $45.9 million from December 31, 1996 to December
31, 1997. The principal components of this increase were net
income of $35.3 million for the year ended 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 $6.9
million.
Consolidated Cash Flows
Cash flows from operations for the year ended December
31, 1997 were $10.1 million as compared to cash flows from
operating activities of $42.9 million during 1996. The decrease
in positive cash flows is a result of a decline in the growth of
gross written premiums coupled with a higher percentage of gross
written premiums ceded to reinsurers.
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.
Year 2000
The year 2000 issue is the result of computer programs
which recognize only two digits rather than four to identify the
year. Any of the Company's computer programs that have time
sensitive software may recognize a date of "00" as the year 1900
rather than the year 2000. If not corrected, this could cause
computer systems to fail or perform miscalculations.
The Company has identified the computer system
applications that require modification to be Year 2000 compliant.
The Company has developed a corrective plan whereby internal and
external resources are being utilized to make the necessary
modifications to and testing of the Company's computer systems.
While some of the Company's computer systems are currently Year
2000 compliant, management expects the remaining systems to be
Year 2000 compliant by December 31, 1998. The Company has
expensed costs relating to the Year 2000 issue of approximately
$1.4 million in 1997 and anticipates an additional $1.8 to $2.5
million of expenses to complete the project. The estimated costs
and estimated date of completion of the Year 2000 project is
based on management's best estimates. However, there can be no
guarantee that these estimates will be achieved and actual
results could differ from the Company's plan.
In addition, the Company is communicating with others
with which it does business to determine if they are Year 2000
compliant. However, there can be no guarantee that the systems
of these companies will achieve Year 2000 compliance in a timely
manner.
Recent Statement of Financial Accounting Standards
In February 1997, the Financial Accounting Standards
Board (FASB) 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. In addition, SFAS No. 128
requires a reconciliation of the numerator and denominator of the
basic and diluted EPS computations. The Company adopted SFAS No.
128 in 1997 and accordingly, earnings per share has been restated
for all periods presented.
In February 1997, the FASB issued SFAS No. 129,
Disclosure of Information about Capital Structure. This
statement establishes standards for disclosing information about
an entity's capital structure. The Company adopted SFAS No. 129
in 1997. SFAS No. 129 contains no change in disclosure
requirements for entities that were previously subject to the
requirements of Accounting Principles Board Opinions Nos. 10 and
15 and SFAS No. 47 and as such the adoption of SFAS No. 129 did
not have any effect on the Company's reporting.
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, 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. Adoption of SFAS
No. 131 may result in additional disclosures in the Company's
financial statements.
Item 7A. Not applicable.
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 1998 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 1998 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 1998 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 1998 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, 1997 and 1996 consisting of the following:
Independent Auditors' Report
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, 1997 and December 31,
1996:
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 24, 1998
Kenneth C. Coon
Chairman and Chief Executive Officer
/s/ Georgia M. Mace
By _____________________________________ Dated: March 24, 1998
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 24, 1998 ______________________________
Jay A. Bielfield, Director
/s/ Kenneth C. Coon
Dated: March 24, 1998 ______________________________
Kenneth C. Coon, Director
/s/ Edward W. Elliott, Jr.
Dated: March 24, 1998 ______________________________
Edward W. Elliott, Jr., Director
/s/ Robert LeBuhn
Dated: March 24, 1998 ________________________________
Robert LeBuhn, Director
/s/ Michael R. McCarthy
Dated: March 24, 1998 ________________________________
Michael R. McCarthy, Director
/s/ John P. Nelson
Dated: March 24, 1998 ________________________________
John P. Nelson, Director
/s/ R. L. Richards
Dated: March 24, 1998 ________________________________
R. L. Richards, Director
<PAGE>
/s/ David L. Treadwell
Dated: March 24, 1998 ________________________________
David L. Treadwell, Director
/s/ Doug T. Valassis
Dated: March 24, 1998 ________________________________
Doug T. Valassis, Director
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 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. Incorporated by reference to
Exhibit 10.5 to the Registrant's Quarterly Report on
Form 10-Q for the quarter ended June 30, 1997.
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 The Registrant's 1997 Employee Stock Purchase Plan.
Incorporated by reference to the Registrant's Proxy
Statement filed on or about April 29, 1997.
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.
99.6 Proxy Statement for 1998 Annual Meeting of Shareholders
filed on or prior to April 30, 1998.
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
The following is a list of subsidiaries of Registrant as of
March 31, 1998, other than subsidiaries which, considered in the
aggregate as a single subsidiary, would not constitute a
significant subsidiary as defined by Securities and Exchange
Commission Regulation S-X
<TABLE>
<CAPTION>
STATE OF
NAME OF SUBSIDIARY INCORPORATION
<S> <C>
Acceptance Insurance Holdings Inc. (1) Nebraska
Radice Lands, Inc. (1) Florida
The Redland Group, Inc. (1) Iowa
Acceptance Insurance Services, Inc. (2) Nebraska
Acceptance Insurance Company (2) Nebraska
Redland Transportation, Inc. (2) North Carolina
Acceptance Indemnity Insurance Company (3) Nebraska
Phoenix Indemnity Insurance Company (3) Arizona
Major Realty Corporation (4) Delaware
American Agrisurance, Inc. (5) Iowa
Redland Insurance Company (6) Iowa
Agro International, Inc. (7) Iowa
Crop Insurance Marketing, Inc. (8) Iowa
American Agrijusters, Co. (9) Iowa
American Growers Ins. Company (9) Nebraska
U.S. Ag Insurance Services Inc. (10) Texas
Acceptance Casualty Insurance Company (9) Texas
Acceptance Premium Finance Company (11) Arizona
Redland Specialty Underwriters, Inc. (12) Iowa
<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 approximately 33.1% owned subsidiary of Acceptance
Insurance Company.
(5) A wholly owned subsidiary of The Redland Group, Inc.
(6) An approximately 99.99% owned subsidiary of The Redland
Group, Inc.
(7) An approximately 80% owned subsidiary of The Redland Group,
Inc.
(8) A wholly owned subsidiary of American Agrisurance Inc.
(9) A wholly owned subsidiary of Redland Insurance Company.
(10) An approximately 60% owned subsidiary of Redland Insurance
Company.
(11) A 50% owned subsidiary of Acceptance Insurance Companies
Inc.
(12) A 50% owned subsidiary of The Redland Group, Inc.
</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 13, 1998 appearing in this Annual Report on Form 10-K
of Acceptance Insurance Companies Inc. for the year ended
December 31, 1997.
/s/ Deloitte & Touche LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 27, 1998
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, 1997 and
1996, and for each of the three years in the period ended
December 31, 1997, and have issued our report thereon dated March
13, 1998; such financial statements and report are included
elsewhere in this Form 10-K. Our audits also included the
financial statement schedules of Acceptance Insurance Companies
Inc., listed in Item 14. These financial statement schedules are
the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits. In
our opinion, such consolidated financial statements 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 13, 1998
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE AUDITE
CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE ANNUAL REPORT ON FORM 10-K AN
IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENT
</LEGEND>
<S> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<PERIOD-END> DEC-31-1995 DEC-31-1996 DEC-31-1997
<DEBT-HELD-FOR-SALE> 218,300 268,004 322,799
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 48,537 83,837 84,156
<MORTGAGE> 11,290 11,149 10,248
<REAL-ESTATE> 3,354 3,342 3,329
<TOTAL-INVEST> 368,001 405,926 452,717
<CASH> 7,648 10,697 8,048
<RECOVER-REINSURE> 20,379 11,786 19,519
<DEFERRED-ACQUISITION> 24,585 29,437 30,328
<TOTAL-ASSETS> 781,034 884,380 979,453
<POLICY-LOSSES> 369,244 432,173 428,653
<UNEARNED-PREMIUMS> 124,122 140,217 157,134
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 69,000 69,000 94,875
0 0 0
0 0 0
<COMMON> 6,057 6,103 6,168
<OTHER-SE> 171,730 201,717 247,502
<TOTAL-LIABILITY-AND-EQUITY> 781,034 884,380 979,453
271,584 348,653 335,215
<INVESTMENT-INCOME> 20,651 26,491 28,016
<INVESTMENT-GAINS> 2,707 5,216 7,321
<OTHER-INCOME> 2,863 1,035 0
<BENEFITS> 212,337 243,257 213,455
<UNDERWRITING-AMORTIZATION> 57,420 89,288 83,109
<UNDERWRITING-OTHER> 15,182 6,515 7,821
<INCOME-PRETAX> 5,343 33,490 51,305
<INCOME-TAX> 1,188 3,210 15,992
<INCOME-CONTINUING> 4,155 30,280 35,313
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,155 30,280 35,313
<EPS-PRIMARY> .28 2.03 2.34
<EPS-DILUTED> .28 1.99 2.30
<RESERVE-OPEN> 141,514 201,356 246,752
<PROVISION-CURRENT> 190,019 233,727 206,597
<PROVISION-PRIOR> 22,318 9,530 6,858
<PAYMENTS-CURRENT> 80,281 102,565 110,372
<PAYMENTS-PRIOR> 72,214 95,296 86,729
<RESERVE-CLOSE> 201,356 246,752 263,106
<CUMULATIVE-DEFICIENCY> 22,318 9,530 6,858
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(CONTINUED) 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> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1996 DEC-31-1996 DEC-31-1996
<PERIOD-END> MAR-31-1996 JUN-30-1996 SEP-30-1996
<DEBT-HELD-FOR-SALE> 205,587 234,157 242,668
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 69,902 89,706 83,989
<MORTGAGE> 10,950 9,711 11,330
<REAL-ESTATE> 3,354 3,349 3,345
<TOTAL-INVEST> 385,002 385,391 427,203
<CASH> 4,504 9,041 9,244
<RECOVER-REINSURE> 14,295 15,689 29,707
<DEFERRED-ACQUISITION> 25,607 30,920 31,530
<TOTAL-ASSETS> 734,500 827,170 1,077,371
<POLICY-LOSSES> 324,998 400,654 500,902
<UNEARNED-PREMIUMS> 130,653 142,392 143,874
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 69,000 69,000 69,000
0 0 0
0 0 0
<COMMON> 6,057 6,092 6,098
<OTHER-SE> 172,886 176,321 193,771
<TOTAL-LIABILITY-AND-EQUITY> 734,500 827,170 1,077,371
67,504 144,400 265,774
<INVESTMENT-INCOME> 6,464 12,992 19,580
<INVESTMENT-GAINS> 1,181 2,767 3,575
<OTHER-INCOME> 629 922 1,055
<BENEFITS> 45,883 101,122 174,985
<UNDERWRITING-AMORTIZATION> (1,022) (6,355) (6,945)
<UNDERWRITING-OTHER> 22,296 51,497 79,190
<INCOME-PRETAX> 6,296 10,341 36,382
<INCOME-TAX> 1,818 2,838 11,561
<INCOME-CONTINUING> 4,478 7,503 24,821
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 4,478 7,503 24,821
<EPS-PRIMARY> .30 .50 1.66
<EPS-DILUTED> .30 .50 1.64
<RESERVE-OPEN> 0<F1> 0<F1> 0<F1>
<PROVISION-CURRENT> 0<F1> 0<F1> 0<F1>
<PROVISION-PRIOR> 0<F1> 0<F1> 0<F1>
<PAYMENTS-CURRENT> 0<F1> 0<F1> 0<F1>
<PAYMENTS-PRIOR> 0<F1> 0<F1> 0<F1>
<RESERVE-CLOSE> 0<F1> 0<F1> 0<F1>
<CUMULATIVE-DEFICIENCY> 0<F1> 0<F1> 0<F1>
<FN>
<F1>This amount is presented on an annual basis. See 12/31/97 Form 10-K for the
most recent reported amounts.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
(CONTINUED) 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> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1997 DEC-31-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<DEBT-HELD-FOR-SALE> 294,513 291,387 329,459
<DEBT-CARRYING-VALUE> 0 0 0
<DEBT-MARKET-VALUE> 0 0 0
<EQUITIES> 92,865 84,550 88,511
<MORTGAGE> 10,977 11,142 10,513
<REAL-ESTATE> 3,339 3,335 3,332
<TOTAL-INVEST> 432,253 459,443 506,118
<CASH> 7,908 10,504 3,171
<RECOVER-REINSURE> 14,552 13,870 43,698
<DEFERRED-ACQUISITION> 30,050 29,781 29,302
<TOTAL-ASSETS> 848,617 932,623 1,131,359
<POLICY-LOSSES> 380,529 440,237 462,694
<UNEARNED-PREMIUMS> 145,700 151,542 152,799
<POLICY-OTHER> 0 0 0
<POLICY-HOLDER-FUNDS> 0 0 0
<NOTES-PAYABLE> 69,000 90,000 94,875
0 0 0
0 0 0
<COMMON> 6,109 6,135 6,137
<OTHER-SE> 204,953 214,635 238,216
<TOTAL-LIABILITY-AND-EQUITY> 848,617 932,623 1,131,359
71,062 144,006 256,748
<INVESTMENT-INCOME> 6,520 13,311 20,619
<INVESTMENT-GAINS> 1,311 3,331 5,373
<OTHER-INCOME> 0 0 0
<BENEFITS> 49,807 102,395 161,369
<UNDERWRITING-AMORTIZATION> (613) (344) 135
<UNDERWRITING-OTHER> 22,657 43,847 75,827
<INCOME-PRETAX> 5,323 11,114 39,325
<INCOME-TAX> 1,409 2,988 12,361
<INCOME-CONTINUING> 3,914 8,156 26,964
<DISCONTINUED> 0 0 0
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 3,914 8,156 26,964
<EPS-PRIMARY> .26 .54 1.79
<EPS-DILUTED> .26 .53 1.76
<RESERVE-OPEN> 0<F1> 0<F1> 0<F1>
<PROVISION-CURRENT> 0<F1> 0<F1> 0<F1>
<PROVISION-PRIOR> 0<F1> 0<F1> 0<F1>
<PAYMENTS-CURRENT> 0<F1> 0<F1> 0<F1>
<PAYMENTS-PRIOR> 0<F1> 0<F1> 0<F1>
<RESERVE-CLOSE> 0<F1> 0<F1> 0<F1>
<CUMULATIVE-DEFICIENCY> 0<F1> 0<F1> 0<F1>
<FN>
<F1>This amount is presented on an annual basis. See 12/31/97 Form 10-K for the
most recent reported amounts.
</FN>
</TABLE>
