SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7461
ACCEPTANCE INSURANCE COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 31-0742926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
222 South 15th St., Suite 600 N.
Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
Registrants's telephone number, including area code: (402) 344-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
YES XX NO
The number of shares of each class of the Registrant's common stock outstanding
on August 6, 1998 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 14,529,504
ACCEPTANCE INSURANCE COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets June 30, 1998 (unaudited)
and December 31, 1997 (audited)
Consolidated Statements of Operations (unaudited)
Three Months and Six Months Ended June 30, 1998
and 1997
Consolidated Statements of Cash Flows (unaudited)
Six Months Ended June 30, 1998 and 1997
Notes to Interim Consolidated Financial Statements
(unaudited)
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
Item 6. Exhibits and Reports on Form 8-K
Signatures
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
(unaudited) (audited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale..................................... $ 386,755 $ 322,799
Marketable equity securities - preferred stock.......................... 35,048 53,309
Marketable equity securities - common stock............................. 35,708 30,847
Mortgage loans and other investments.................................... 9,968 10,248
Real estate............................................................. 3,322 3,329
Short-term investments, at cost, which approximates
market................................................................ 51,463 32,185
522,264 452,717
Cash....................................................................... 6,214 8,048
Investment in Major Realty Corporation..................................... -- 9,183
Receivables, net........................................................... 138,579 180,793
Reinsurance recoverable on unpaid loss and loss
adjustment expenses...................................................... 233,251 165,547
Prepaid reinsurance premiums............................................... 61,405 53,208
Property and equipment, net................................................ 15,673 15,588
Deferred policy acquisition costs.......................................... 32,019 30,328
Excess of cost over acquired net assets.................................... 35,020 35,567
Deferred income tax........................................................ 4,862 15,842
Other assets............................................................... 18,424 12,632
Total assets........................................................ $1,067,711 $ 979,453
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses........................................ $ 499,856 $ 428,653
Unearned premiums.......................................................... 168,150 157,134
Amounts payable to reinsurers.............................................. 25,964 17,955
Accounts payable and accrued liabilities................................... 12,782 27,166
Company - obligated manditorily redeemable Preferred Securities of
AICI Capital Trust, holding solely Junior Subordinated Debentures
of the Company.......................................................... 94,875 94,875
Total liabilities.................................................. 801,627 725,783
Contingencies.............................................................. -- --
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized, none issued............................................... -- --
Common stock, $.40 par value, 40,000,000
shares authorized, 15,456,012 and 15,421,247
shares issued......................................................... 6,182 6,168
Capital in excess of par value.......................................... 198,470 198,080
Accumulated other comprehensive income, net of tax...................... 8,335 6,885
Retained earnings....................................................... 57,305 46,745
270,292 257,878
Less:
Treasury stock, at cost, 209,520 and 209,519 shares........................ (3,979) (3,979)
Contingent stock, 20,396 shares........................................... (229) (229)
Total stockholders' equity.............................................. 266,084 253,670
Total liabilities and stockholders' equity.............................. $1,067,711 $ 979,453
</TABLE>
The accompanying notes are an integral part of
the interim consolidated financial statements.
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months and six months ended June 30, 1998 and 1997
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums earned............................... $ 72,084 $72,944 $141,087 $144,006
Net investment income................................... 7,212 6,791 14,132 13,311
Net realized capital gains.............................. 2,642 2,020 5,483 3,331
81,938 81,755 160,702 160,648
Costs and expenses:
Costs of revenues:
Insurance losses and loss adjustment expenses......... 51,482 52,588 97,783 102,395
Insurance underwriting expenses....................... 21,665 21,459 42,865 43,503
General and administrative expenses 562 573 1,218 1,097
73,709 74,620 141,866 146,995
Operating profit........................................... 8,229 7,135 18,836 13,653
Other income (expense):
Interest expense........................................ (2,165) (1,247) (4,330) (2,404)
Loss on investee........................................ -- (63) (704) (117)
Other, net.............................................. (91) (4) (57) 12
(2,256) (1,314) (5,091) (2,509)
Income before income taxes ................................ 5,973 5,821 13,745 11,144
Income tax expense (benefit):
Current............................................... (8,423) 2,390 (7,014) 969
Deferred.............................................. 9,994 (811) 10,199 2,019
Net income................................................. $ 4,402 $ 4,242 $ 10,560 $ 8,156
Net income per share:
Basic ................................................. $ .29 $ .28 $ .69 $ .54
Diluted................................................. $ .29 $ .28 $ .68 $ .53
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the six months ended June 30, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 10,560 $ 8,156
Net adjustment to reconcile net income to net cash provided by
operating activities............................................................ 50,891 19,995
Net cash provided by operating activities..................................... 61,451 28,151
Cash flows from investing activities:
Proceeds from sales of investments available-for-sale............................. 75,287 45,717
Proceeds from maturities of investments .......................................... 1,970 3,932
Proceeds from maturities of investments available-for-sale........................ 43,388 26,662
Purchases of investments.......................................................... (1,666) (5,837)
Purchases of investments available-for-sale....................................... (161,123) (86,907)
Purchases of property and equipment............................................... (2,177) (6,383)
Net cash used for investing activities....................................... (44,321) (22,816)
Cash flows from financing activities:
Proceeds from bank borrowings..................................................... -- 21,000
Proceeds from issuance of common stock............................................ 404 820
Net cash provided by financing activities.................................... 404 21,820
Net increase in cash and short-term investments...................................... 17,534 27,155
Cash and short-term investments at beginning of period............................... 38,316 41,627
Cash and short-term investments at end of period..................................... $ 55,850 $ 68,782
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......................................... $ 4,269 $ 2,721
Cash paid during the period for income taxes...................................... $ 97 $ (1,878)
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies:
Principles of Consolidation
The Company's consolidated financial statements include the accounts of
Acceptance Insurance Companies Inc. and its subsidiaries (the "Company").
All significant intercompany transactions have been eliminated.
Management's Opinion
The accompanying consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments except as otherwise
disclosed, which in the opinion of management are considered necessary to
fairly present the Company's financial position as of June 30, 1998 and
December 31, 1997, and the results of operations for the three months and
six months ended June 30, 1998 and 1997 and cash flows for the six months
ended June 30, 1998 and 1997.
Statements of Cash Flows
The Company aggregates cash and short-term investments with maturity dates
of three months or less from the date of purchase for purposes of reporting
cash flows. As of June 30, 1998 approximately $1,827,000 of short-term
investments had a maturity date at acquisition of greater than three months.
Recent Statements of Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB)issued
Statement of Financial Accounting Standards No. 130 (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. See Note 8.
In June 1997, the FASB issued SFAS No. 131," Disclosures About Segments of
an Enterprise and Related Information". SFAS No. 131 specifies revised
guidelines for determining an entity's operating segments and the type and
level of financial information to be disclosed. SFAS No. 131 is effective
for fiscal years beginning after December 15, 1997. Adoption of
SFAS No. 131 may 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 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15,1999. Management is currently evaluating the impact of
SFAS No.133 on the Company's consolidated financial statements.
Reclassifications
Certain prior year accounts have been reclassified to conform with current
period presentation.
2. Investments:
The amortized cost and related estimated fair values of debt and equity
securities in the accompanying balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
June 30, 1998:
Fixed maturities available-for- sale:
U.S. Treasury and government
securities............................. $ 129,275 $ 604 $ 32 $ 129,847
States, municipalities and political
subdivisions........................... 142,786 3,941 164 146,563
Mortgage-backed securities............... 56,970 128 1,474 55,624
Other debt securities.................... 55,739 1,138 2,156 54,721
$ 384,770 $ 5,811 $ 3,826 $ 386,755
Marketable equity securities -
preferred stock........................ $ 33,311 $ 1,737 $ -- $ 35,048
Marketable equity securities -
common stock........................... $ 26,608 $ 10,804 $ 1,704 $ 35,708
December 31, 1997:
Fixed maturities available-for-sale:
U.S. Treasury and government
securities............................. $ 104,039 $ 536 $ 41 $ 104,534
States, municipalities and political
subdivisions........................... 129,378 4,520 38 133,860
Mortgage-backed securities............... 48,056 132 3,381 44,807
Other debt securities.................... 40,131 792 1,325 39,598
$ 321,604 $ 5,980 $ 4,785 $ 322,799
Marketable equity securities -
preferred stock........................ $ 51,185 $ 2,291 $ 167 $ 53,309
Marketable equity securities -
common stock........................... $ 23,574 $ 8,439 $ 1,166 $ 30,847
</TABLE>
3. Insurance Premiums and Claims:
Insurance premiums written and earned by the Company's insurance
subsidiaries for the three months and six months ended June 30, 1998
and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Six Months
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Direct premiums written.......................... $ 157,057 $138,512 $ 285,385 $258,888
Assumed premiums written......................... 11,025 7,315 20,057 12,284
Ceded premiums written........................... (99,781) (73,952) (161,549) (127,982)
Net premiums written........................ $ 68,301 $ 71,875 $ 143,893 $143,190
Direct premiums earned........................... $ 154,798 $133,931 $ 276,469 $249,836
Assumed premiums earned.......................... 8,311 6,053 17,955 10,009
Ceded premiums earned............................ (91,025) (67,040) (153,337) (115,839)
Net premiums earned......................... $ 72,084 $ 72,944 $ 141,087 $144,006
</TABLE>
Insurance loss and loss adjustment expenses have been reduced by
recoveries recognized under reinsurance contracts of approximately
$127,291,000 and $74,710,000 for the three months ended June 30, 1998
and 1997, respectively. Insurance loss and loss adjustment expenses
have been reduced by recoveries recognized under reinsurance
contracts of approximately $150,708,000 and $89,731,000 for the six
months ended June 30, 1998 and 1997, respectively.
4. Bank Borrowings:
On June 6, 1997, the Company amended its borrowing arrangements with
its bank lenders providing a $100 million five-year Revolving Credit
Facility. 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 issuance 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 of .50% to 1.25%
depending on the Company's debt to equity ratio. Interest is payable
quarterly. At June 30, 1998, the Company had no outstanding
indebtedness under this arrangement. On August 5, 1998, the Company
borrowed $8 million under this arrangement (See Note 9).
5. Company-obligated mandatorily redeemable Preferred Securities of AICI
Capital Trust, holding solely Junior Subordinated Debentures of the
Company:
In August of 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 Issuer Trust. The Preferred Securities represent preferred
undivided beneficial interests in the Issuer Trust's assets. The
assets of the Issuer Trust consist solely of the Company's 9% Junior
Subordinated Debentures due 2027 which were issued in August of 1997
in an amount equal to the total of the Preferred Securities and the
Common Securities. The Company primarily used the net proceeds in the
amount of approximately $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
redemption provisions, all as described in the Junior Debenture
Indenture. At June 30, 1998, the Company had $94.875 million
outstanding at a weighted average interest cost of 9.1%.
6. Income Taxes:
As of June 30, 1998, management believes it is more likely than not
that the Company will realize a portion of the deferred tax asset.
The valuation allowance at June 30, 1998 primarily relates to capital
loss items whose realization is uncertain. The net deferred tax
asset is as follows (in thousands):
<TABLE>
June 30, December 31,
1998 1997
<CAPTION>
<S> <C> <C>
Unpaid losses and loss adjustment expenses........................... $11,547 $12,311
Unearned premiums.................................................... 7,472 7,275
Allowances for doubtful accounts .................................... 2,004 1,745
Other................................................................ 1,407 2,618
Major Realty basis difference....................................... -- 8,391
Deferred tax asset................................................... 22,430 32,340
Deferred policy acquisition costs.................................... (11,207) (10,615)
Other................................................................ (1,798) (1,064)
Unrealized gain on fixed maturites available-for-sale................ (695) (418)
Unrealized gain on marketable equity securities...................... (3,793) (3,289)
Deferred tax liability............................................... (17,493) (15,386)
4,937 16,954
Valuation allowance.................................................. (75) (1,112)
Net deferred tax asset............................................... $ 4,862 $15,842
</TABLE>
Income taxes computed by applying statutory rates to income before income
taxes are reconciled to the provision for income taxes set forth in the
consolidated financial statements as follows (in thousands):
<TABLE>
June 30,
1998 1997
<CAPTION>
<S> <C> <C>
Computed U.S. federal income taxes................................... $ 4,835 $ 3,906
Nondeductible amortization of goodwill and other intangibles......... 221 284
Tax-exempt interest income........................................... (1,042) (893)
Dividends received deduction......................................... (516) (612)
Reduction of the valuation allowance ................................ (1,037) --
Other................................................................ 724 303
Income taxes provided................................................ $ 3,185 $ 2,988
</TABLE>
7. Net Income Per Share:
Basic and diluted net income per share for the three months and six
months ended June 30, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Six Months
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 4,402 $ 4,242 $10,560 $ 8,156
Weighted average common shares outstanding 15,221 15,052 15,216 15,021
Dilutive effect of contingent shares 21 90 21 83
Dilutive effect of stock options 195 186 209 207
Diluted weighted average common and equivalent
shares outstanding 15,437 15,328 15,446 15,311
Basic net income per share $ 0.29 $ 0.28 $ 0.69 $ 0.54
Diluted net income per share $ 0.29 $ 0.28 $ 0.68 $ 0.53
</TABLE>
8. Comprehensive Income:
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." The comprehensive income for the
three months and six months ended June 30, 1998, and 1997 are as
follows:
<TABLE>
<CAPTION>
Three Months Six Months
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Net income $ 4,402 $ 4,242 $ 10,560 $ 8,156
Other comprehensive income (loss):
Net unrealized gains (losses) on
securities (967) 4,821 1,450 3,974
Comprehensive income 3,435 9,063 $ 12,010 $ 12,130
</TABLE>
9. Stock Repurchase
On June 1, 1998 the Company's Board of Directors authorized the
repurchase of up to one million shares of its common stock. Purchases
may be made from time to time in the open market and in private
transations. The actual number of shares purchased will depend upon the
price and prevailing market conditions. As if August 6,1998, the
Company has repurchased 700,700 shares of its common stock at an
average cost of $22.60 per share. The Company funded these repurchases
using available cash and $8 million of borrowings under its Revolving
Credit Facility.
PART 1.
ITEM 2.
ACCEPTANCE INSURANCE COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations of the Company and its consolidated subsidiaries is
based upon the Company's interim consolidated financial statements and the
notes thereto included in this report.
RESULTS OF OPERATIONS
Forward-Looking Information
Except for the historical information contained in this Quarterly Report on
Form 10-Q, matters discussed herein may constitute forward-looking information.
Such forward-looking information reflects the Company's current best estimates
regarding future operations, but, since these are only estimates, actual
results may differ materially from such estimates.
A variety of events, most of which are outside the Company's control, cannot be
accurately predicted and may materially impact estimates of future operations.
Important among such factors are weather conditions, natural disasters, changes
in state and federal regulations, price competition impacting premium levels,
changes in tax laws, financial market performance, changes in court decisions
effecting coverages, and general economic conditions.
The Company's results are significantly impacted by its crop business,
particularly its MPCI line. Results from the crop lines are not generally known
until the third and fourth quarters of the year, after crops are harvested.
Crop results are particularly dependent on events beyond the Company's control,
notably weather conditions during the crop growing season in the states where
the Company writes a substantial amount of its crop insurance, and, with the
introduction of the Company's 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 operating
results.
Three months and six months ended June 30, 1998
Compared to three months and six months ended June 30, 1997
The Company's net income for the three months and six months ended
June 30, 1998 increased 3.8% and 29.5% respectively from the same periods in
1997. The first six months of 1998 were positively impacted by an improvement
in the Company's loss and loss adjustment expense ratio, an increase in
investment income and realized gains, and a lower income tax rate. These
positive factors were partially offset by lower net premiums earned, an
increase in interest expense, and an increase in the expense ratio of the
Company.
The Company's loss and loss adjustment expense ratio declined from 72.1% and
71.1% respectively during the three months and six months ended June 30, 1997
to 71.4% and 69.3% respectively during the three months and six months ended
June 30, 1998. This reduction in the Company's loss ratio resulted from
improved results in the Company's Crop Division and improved underwriting
results in the Company's Property and Casualty Divisions during the first
six months of 1998 as compared to the same period in 1997. During the first
six months of 1998, the Company recognized underwriting income of $3.3 million
in its Crop Division as compared with $1.1 million during the first six months
of 1997. In both periods, the principal source of profits was derived from the
recording of additional profit sharing from the previous year under the
Company's Multi-Peril Crop Insurance (MPCI) program. The Company's estimate of
its profit sharing under the MPCI program at December 31, 1997 was affected by
a severe early winter snow storm which affected geographic areas where the
Company had a high concentration of crop insurance. As the crops were
harvested, the effect of this snow storm was minimal, and therefore, the
Company made a larger adjustment during the first six months of 1998 for its
previous year's results than had occurred in 1997. In addition, the Company's
loss and loss adjustment expense ratio in its Property and Casualty Divisions
improved from 69.9% and 70.2% respectively during the three and six months
ended June 30, 1997 to 69.0% and 69.3% respectively during the three and six
months ended June 30, 1998. While the improvement in underwriting loss and
loss adjustment expense ratio for the Property and Casualty Divisions for
the six months ended June 30, 1998 was minor, the loss ratio for the twelve
months ended June 30, 1998 was 72.1% as compared to a loss ratio for the
twelve months ended June 30, 1997 of 77.6%, a considerable improvement. The
Company believes that this is indicative of the continued improvement in its
Property and Casualty Divisions over the last twelve months.
The improvement in the Company's loss and loss adjustment expense ratio during
the first six months of 1998 as compared with the same period a year earlier
was offset somewhat by a decline in net premiums earned as well as a slight
increase in the Company's expense ratio. The Company's net premiums earned
decreased by 1.2% and 2.0% during the three and six months ended June 30, 1998
as compared with the same periods in 1997. This decrease in net premiums
earned resulted from an increase in the Company's premiums ceded to reinsurers,
as the gross premiums written by the Company actually increased 15.3% and 12.6%
during the three and six months ended June 30, 1998 as compared to the three
and six months ended June 30, 1997. The increase in premiums ceded to
reinsurers resulted from growth in lines of business where the Company cedes a
higher percentage of its premiums to reinsurers. These lines included new
programs where the Company historically takes less risk until it is confident
regarding a program's performance as well as property lines where the costs of
individual risk capacity and catastrophe protection result in more premiums
ceded to reinsurers than in the Company's casualty programs.
The Company's expense ratio increased from 29.4% and 30.2% during the three
and six months ended June 30, 1997 to 30.1% and 30.4% during the three and six
months ended June 30, 1998. The principal reason for the increase in the
expense ratio, was additional expenses the Company incurred in its project to
update its information systems into a Year 2000 compliant mode. During the
first six months of 1997, the Company's expenditures on this project were only
$87,000 whereas during the first six months of 1998 these expenditures were
approximately $900,000 (see Year 2000). Without the increased Year 2000
expenditures, the Company's expense ratio would have actually been less during
the six months ended June 30, 1998 as compared to the same period a year
earlier.
The Company's operating profit was also positively impacted during the three
and six months ended June 30, 1998 as compared with the same periods in 1997
by an increase in the Company's investment income of 6.2% in both the three and
six months ended June 30, 1998 and an increase in the net realized capital
gains of 30.8% and 64.6% respectively during the three and six months ended
June 30, 1998 as compared with the same periods a year earlier. The increase
in the Company's net investment income resulted from an increase in the average
size of the Company's portfolio from $444.9 million and $434.3 million during
the three and six months ended June 30, 1997 to $502.6 million and
$487.2 million during the three and six months ended June 30, 1998. This
increase in the size of the portfolio was offset somewhat by a decrease in the
annualized investment yield of the portfolio from 6.1% during the three and six
months ended June 30, 1997 to 5.7% and 5.8% during the three and six months
ended June 30, 1998. This decrease in annualized investment yield was
principally a result of an increase in the amount of municipal bond securities
within the Company's portfolio during the first six months of 1998 as
compared to the first six months of 1997, an overall lower interest rate
environment, and to a lesser extent, an increase in the size of the Company's
investments in common stock. A lower interest rate environment and positive
results in the Company's equity investments provided the Company with
additional opportunities to realize gains in the Company's investment portfolio
during the first six months of 1998.
The Company's net income during the three and six months ended June 30, 1998
as compared to the same period a year earlier was adversely effected by an
increase in the interest expense of 73.6% and 80.1% for the three and six
months ended June 30, 1998. This increase in interest expense was a result of
both an increase in the Company's average outstanding borrowings from
$69.1 million during the six months ended June 30, 1997 to $94.9 million during
the six months ended June 30, 1998, and an increase in the average interest
rates from 7.0% during the six months ended June 30, 1997 to 9.1% during the
six months ended June 30, 1998. The increased borrowings 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 quarters of 1997 (See
Liquidity and Capital Resources).
The Company's effective income tax rate declined from 27.1% and 26.8% during
the three and six months ended June 30, 1997 to 26.3% and 23.2% during the
three and six months ended June 30, 1998. This lower effective tax rate
resulted from an increase in the size of the Company's investment in tax
advantaged municipal securities as well as the tax benefit of the sale of its
approximate 33% equity investment in Major Realty Corporation during the second
quarter of 1998. As of June 30, 1997, the Company held an approximate 33%
equity investment in Major Realty Corporation, a publicly traded real estate
company engaged in the ownership and development of its undeveloped land in
Orlando, Florida. On March 6, 1998, the Company, with certain stockholders of
Major Realty who together held a majority interest in Major Realty, entered
into a Stockholder Agreement with an outside party whereby Major Realty was to
be merged with this outside party and all shares of Major Realty converted into
the right to receive cash. This transaction was completed in May of 1998. The
Company recorded this transaction as a net loss from investee of approximately
$.7 million and a tax benefit to income tax expense of approximately
$.7 million. Thus, this transaction lowered the Company's effective tax rate,
but due to the net loss from investee, had no material effect on the results of
the Company for the six months ended June 30, 1998.
Recent Statement of Financial Accounting Standards
In June 1997, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards No. 130 (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. See Note 8.
In June 1997, the FASB issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information". SFAS No. 131 specifies revised guidelines
for determining an entity's operating segments and the type and level of
financial information to be disclosed. SFAS No.131 is effective for fiscal
years beginning after December 15, 1997. Adoption of SFAS No. 131 may 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 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities," which establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities.
SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Management is currently evaluating the impact of
SFAS No. 133 on the Company's consolidated financial statements.
LIQUIDITY AND CAPITAL RESOURCES
The Company has included a discussion of the liquidity and capital resources
requirement of the Company and the Company's insurance subsidiaries.
The Company-Parent Only
As an insurance 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.
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 Issuer Trust. The Preferred Securities
represent preferred undivided beneficial interests in the Issuer Trust's
assets. The assets of the Issuer Trust consist solely of the Company's 9%
Junior Subordinated Debentures due 2027 which were issued 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 Debenture 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
June 30, 1998, the Company had $94.875 million outstanding at a weighted annual
interest cost of 9.1%.
As of June 30, 1998, the Company maintains a five-year revolving credit
facility (the "Revolving Credit Facility") with its bank lender in the amount
of $65 million. The Company selects its interest rate at either the prime rate
of LIBOR plus a margin which varies depending on the Company's funded debt to
equity ratio. Interest is payable quarterly. During the first six months
of 1998, the Company had no outstanding indebtedness under this arrangement.
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, requires maintenance of specific
levels of surplus and requires the Company to meet certain tests established by
the regulatory authorities.
At its May 29, 1998 meeting, the Company's Board of Directors approved a stock
repurchase plan providing for the repurchase of up to one million shares of the
Company's stock. As of August 6, 1998, the Company has repurchased 700,700
shares at an average cost of $22.60 per share. Funds for the repurchase of
stock are provided by cash and invested assets held at the parent company
level, cash flows to the parent from its subsidiaries and borrowings under the
Company's bank line of credit, under which the Company is authorized to spend
up to $15 million for the repurchase of its stock.
As of June 30, 1998, the Company held cash and invested assets, excluding
investment in subsidiaries, of $10.2 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.
In the crop hail business, premiums are generally not received until after the
harvest, while losses and other expenses are paid throughout the year.
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 years, 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 $52.6 million during 1997 and the first
quarter of 1998 in profit sharing earned on 1997 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.
Changes in Financial Condition
The Company's stockholders' equity increased by approximately $12.4 million at
June 30, 1998 as compared to December 31, 1997. The principal components of
this increase were net income of $10.6 million during the six months of 1998
and an increase in the value of the Company's investment portfolio causing the
unrealized gain on available-for-sale securities, net of tax, to improve from
$6.9 million at December 31, 1997 to $8.3 million at June 30, 1998. This
change in the unrealized gain on available-for-sale securities was almost
entirely attributable to an improvement in the unrealized gain in the Company's
equity portfolio.
Consolidated Cash Flows
Cash provided by operating activities was positive during the six months ended
June 30, 1998 and 1997, with $61.5 million and $28.2 million in positive cash
flow during the two periods respectively. The major component of this cash
flow during both periods was profit sharing payments received from the federal
government under the Company's MPCI crop insurance program. During the first
three months of 1997, this component of operating cash flows was $25.5 million
while in the first three months of 1998, it was $57.0 million.
Inflation
The Company does not believe that inflation has had a material impact on its
financial condition or the 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 expensed costs relating to the Year 2000 issue
of approximately $0.9 million during the six months ended June 30, 1998, and
anticipates an additional $0.9 to $1.6 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.
The Company is conducting a comprehensive review of potential Year 2000 related
claims which might arise from policies of insurance currently being
underwritten. From such review, the Company will develop a coordinated plan to
eliminate, reduce or mitigate any Year 2000 exposures indicated including the
use of exclusionary language, new underwriting and pricing practices,
withdrawal from certain classes of business, and effective claim management
techniques. The Company expects to have such a plan in place by the end
of 1998.
ACCEPTANCE INSURANCE COMPANIES INC
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
The Registrant's Annual Meeting of shareholders was held on
May 28, 1998, and the following matters were submitted to a
vote of shareholders at such Annual Meeting.
At the Annual Meeting, nine Directors nominees were elected
by shareholders to serve as Directors until the next Annual
Meeting of shareholders, and until their successors are named.
The number of votes for each such Director and the number of
votes withheld for each Director are set forth below:
<TABLE>
<CAPTION>
Name Number of Votes
For Withheld
<S> <C> <C>
Jay A. Bielfield 11,336,719 53,843
Kenneth C. Coon 11,283,873 106,689
Edward W. Elliott, Jr. 11,337,336 53,226
Robert LeBuhn 11,339,730 50,772
Michael R. McCarthy 11,337,340 53,222
John P. Nelson 11,337,340 53,222
R.L. Richards 11,340,990 49,572
David L. Treadwell 11,280,860 109,702
Doug T. Valassis 11,337,315 53,247
</TABLE>
Each nominee received at least 99.0% of the votes cast.
Also submitted to shareholders at such Annual Meeting was a
proposal to ratify the appointment of Deloitte and Touche as
the Company's principal independent public accountants for
1998. The voting results of such proposal are as follows:
<TABLE>
<CAPTION>
<S> <C>
FOR 11,377,492
AGAINST 5,002
ABSTAIN 8,068
</TABLE>
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) No reports on Form 8-K were filed by the registrant during
the quarter for which this report is filed.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCEPTANCE INSURANCE COMPANIES INC.
August 13, 1998 /s/ KENNETH C. COON
Kenneth C. Coon
Chief Executive Officer
August 13, 1998 /s/ GEORGIA M. MACE
Georgia M. Mace
Treasurer and Chief Accounting Officer
ACCEPTANCE INSURANCE COMPANIES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE SIX MONTHS ENDED JUNE 30, 1998
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
27 Financial Data Schedule.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements included in the Form 10-Q and is
qualified in its entiretly by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> JUN-30-1998
<DEBT-HELD-FOR-SALE> 386,755
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 70,756
<MORTGAGE> 9,968
<REAL-ESTATE> 3,322
<TOTAL-INVEST> 522,264
<CASH> 6,214
<RECOVER-REINSURE> 23,340
<DEFERRED-ACQUISITION> 32,019
<TOTAL-ASSETS> 1,067,711
<POLICY-LOSSES> 499,856
<UNEARNED-PREMIUMS> 168,150
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 94,875
0
0
<COMMON> 6,182
<OTHER-SE> 259,902
<TOTAL-LIABILITY-AND-EQUITY> 1,067,711
141,087
<INVESTMENT-INCOME> 14,132
<INVESTMENT-GAINS> 5,483
<OTHER-INCOME> 0
<BENEFITS> 97,783
<UNDERWRITING-AMORTIZATION> (1,691)
<UNDERWRITING-OTHER> 44,556
<INCOME-PRETAX> 13,745
<INCOME-TAX> 3,185
<INCOME-CONTINUING> 10,560
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 10,560
<EPS-PRIMARY> .69
<EPS-DILUTED> .68
<RESERVE-OPEN> 0<F1>
<PROVISION-CURRENT> 0<F1>
<PROVISION-PRIOR> 0<F1>
<PAYMENTS-CURRENT> 0<F1>
<PAYMENTS-PRIOR> 0<F1>
<RESERVE-CLOSE> 0<F1>
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>This amount is presented on an annual basis. See 12/31/97 Form 10-K for the
most recent reported amounts.
</FN>
</TABLE>
