SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 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 November 6, 1998 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 14,330,850
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets (unaudited)
September 30, 1998 and December 31, 1997
Consolidated Statements of Operations (unaudited)
Three Months and Nine Months Ended September 30, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited)
Nine Months Ended September 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 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 30, December 31,
1998 1997
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale..................................... $ 360,783 $ 322,799
Marketable equity securities - preferred stock.......................... 29,006 53,309
Marketable equity securities - common stock............................. 39,034 30,847
Mortgage loans and other investments.................................... 9,823 10,248
Real estate............................................................. 3,304 3,329
Short-term investments, at cost, which approximates
market................................................................ 94,922 32,185
----------- ----------
536,872 452,717
Cash....................................................................... 219 8,048
Investment in Major Realty Corporation..................................... -- 9,183
Receivables, net........................................................... 287,016 180,793
Reinsurance recoverable on unpaid loss and loss
adjustment expenses...................................................... 240,525 165,547
Prepaid reinsurance premiums............................................... 60,576 53,208
Property and equipment, net................................................ 15,741 15,588
Deferred policy acquisition costs.......................................... 32,321 30,328
Excess of cost over acquired net assets.................................... 34,742 35,567
Deferred income tax........................................................ 6,161 15,842
Other assets............................................................... 10,466 12,632
----------- ----------
Total assets........................................................ $1,224,639 $ 979,453
=========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses........................................ $ 505,507 $ 428,653
Unearned premiums.......................................................... 165,075 157,134
Amounts payable to reinsurers.............................................. 157,337 17,955
Accounts payable and accrued liabilities................................... 30,181 27,166
Bank borrowings............................................................ 13,000 --
Company-obligated manditorily redeemable Preferred Securities of
AICI Capital Trust, holding solely Junior Subordinated Debentures
of the Company.......................................................... 94,875 94,875
---------- ---------
Total liabilities.................................................. 965,975 725,783
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, 15,462,066 and 15,421,247
shares issued......................................................... 6,185 6,168
Capital in excess of par value.......................................... 198,579 198,080
Accumulated other comprehensive income, net of tax ..................... 6,085 6,885
Retained earnings....................................................... 72,083 46,745
----------- ----------
282,932 257,878
Less:
Treasury stock, at cost, 1,102,220 and 209,519 shares..................... (24,039) (3,979)
Contingent stock, 20,396 shares............................................ (229) (229)
----------- ----------
Total stockholders' equity.............................................. 258,664 253,670
----------- ----------
Total liabilities and stockholders' equity.............................. $1,224,639 $ 979,453
=========== ==========
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months and nine months ended September 30, 1998 and 1997
(in thousands, except per share data)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
--------------- --------------
1998 1997 1998 1997
----- ------
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums earned............................... $ 117,240 $112,742 $ 258,327 $ 256,748
Net investment income................................... 7,217 7,308 21,349 20,619
Net realized capital gains (losses)..................... (129) 2,042 5,354 5,373
------------ --------- ---------- ---------
124,328 122,092 285,030 282,740
------------ --------- ---------- ---------
Costs and expenses:
Costs of revenues:
Insurance losses and loss adjustment expenses......... 60,450 58,974 158,233 161,369
Insurance underwriting expenses....................... 38,970 32,459 81,835 75,962
General and administrative expenses 624 525 1,842 1,622
------------ -------- -------- --------
100,044 91,958 241,910 238,953
------------ -------- -------- --------
Operating profit........................................... 24,284 30,134 43,120 43,787
------------ -------- -------- --------
Other income (expense):
Interest expense........................................ (2,278) (1,960) (6,608) (4,364)
Loss on investee........................................ -- (54) (704) (171)
Other, net.............................................. 1 61 (56) 73
----------- -------- --------- ---------
(2,277) (1,953) (7,368) (4,462)
----------- -------- --------- ---------
Income before income taxes ................................ 22,007 28,181 35,752 39,325
Income tax expense (benefit):
Current............................................... 7,317 13,618 303 14,587
Deferred.............................................. (88) (4,245) 10,111 (2,226)
------------ --------- ----------- -----------
Net income................................................. $ 14,778 $ 18,808 $ 25,338 $ 26,964
============ ========= =========== ===========
Net income per share:
Basic ................................................. $ 1.01 $ 1.25 $ 1.69 $ 1.79
============ ========= =========== ===========
Diluted................................................. $ 1.00 $ 1.23 $ 1.66 $ 1.76
============ ========= =========== ===========
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1998 and 1997
(in thousands)
(unaudited)
<TABLE>
<CAPTION>
1998 1997
------------- ----------
<S> <C> <C>
Cash flows from operating activities:
Net income........................................................................ $ 25,338 $ 26,964
Net adjustment to reconcile net income to net cash provided by
operating activities............................................................ 56,494 33,631
------------- ---------
Net cash provided by operating activities..................................... 81,832 60,595
------------- ---------
Cash flows from investing activities:
Proceeds from sales of investments available-for-sale............................. 122,798 148,526
Proceeds from maturities of investments .......................................... 5,125 8,080
Proceeds from maturities of investments available-for-sale........................ 78,501 66,756
Purchases of investments.......................................................... (4,676) (20,004)
Purchases of investments available-for-sale....................................... (218,719) (263,918)
Purchases of property and equipment............................................... (3,320) (8,226)
-------------- ----------
Net cash used for investing activities....................................... (20,291) (68,786)
-------------- ----------
Cash flows from financing activities:
Proceeds from bank borrowings..................................................... 13,000 21,000
Repayment of bank borrowings...................................................... -- (90,000)
Net proceeds from issuance of Company-obligated
manditorily redeemable preferred securities..................................... -- 90,994
Proceeds from issuance of common stock............................................ 516 903
Repurchase of common stock..................................................... . (20,060) --
-------------- -----------
Net cash provided by (used in) financing activities.......................... (6,544) 22,897
-------------- -----------
Net increase in cash and cash equivalents............................................ 54,997 14,706
Cash and cash equivalents at beginning of period..................................... 38,316 41,627
-------------- -----------
Cash and short-term investments at end of period..................................... $ 93,313 $ 56,333
============== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......................................... $ 6,404 $ 4,630
============== ===========
Cash paid (received)during the period for income taxes............................ $ 481 $ (1,835)
============== ===========
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies:
Principles of Consolidation
The Company's consolidated financial statements include the accounts of
Acceptance Insurance Companies Inc. and its subsidiaries (the "Company").
All significant intercompany transactions have been eliminated.
Management's Opinion
The accompanying consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments except as otherwise
disclosed, which in the opinion of management are considered necessary to
fairly present the Company's financial position as of September 30, 1998 and
December 31, 1997, and the results of operations for the three months and
nine months ended September 30, 1998 and 1997 and cash flows for the nine
months ended September 30, 1998 and 1997.
Statements of Cash Flows
The Company aggregates cash and cash equivalents with maturity dates
of three months or less from the date of purchase for purposes of reporting
cash flows. As of September 30, 1998 approximately $1,828,000 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 results 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.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
2. Investments:
The amortized cost and related estimated fair values of debt and equity
securities in the accompanying balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
-------------- -------------- --------------- ---------------
<S> <C> <C> <C> <C>
September 30, 1998:
Fixed maturities available-for-sale:
U.S. Treasury and government
securities............................. $ 94,929 $ 1,887 $ 5 $ 96,811
States, municipalities and political
subdivisions........................... 152,097 6,795 19 158,873
Mortgage-backed securities............... 49,419 533 145 49,807
Other debt securities.................... 57,311 1,674 3,693 55,292
------------- ------------- -------------- ------------
$ 353,756 $ 10,889 $ 3,862 $ 360,783
============= ============= ============== ============
Marketable equity securities -
preferred stock........................ $ 27,855 $ 1,249 $ 98 $ 29,006
============= ============= ============== ============
Marketable equity securities -
common stock........................... $ 37,850 $ 6,607 $ 5,423 $ 39,034
============= ============= ============== ============
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>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
3. Insurance Premiums and Claims:
Insurance premiums written and earned by the Company's insurance
subsidiaries for the three months and nine months ended
September 30, 1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
---------------- ---------------
1998 1997 1998 1997
------------ ----------- ------------- -----------
<S> <C> <C> <C> <C>
Direct premiums written.......................... $ 219,541 $229,906 $ 504,926 $488,794
Assumed premiums written......................... 58,811 45,291 78,868 57,575
Ceded premiums written........................... (163,346) (165,048) (324,895) (293,030)
----------- ---------- ------------- ------------
Net premiums written........................ $ 115,006 $110,149 $ 258,899 $253,339
=========== ========== ============= ============
Direct premiums earned........................... $ 224,251 $228,544 $ 500,720 $478,380
Assumed premiums earned.......................... 57,180 45,399 75,135 55,408
Ceded premiums earned............................ (164,191) (161,201) (317,528) (277,040)
----------- ---------- ------------- ------------
Net premiums earned......................... $ 117,240 $112,742 $ 258,327 $256,748
=========== ========== ============= ============
</TABLE>
Insurance loss and loss adjustment expenses have been reduced by
recoveries recognized under reinsurance contracts of approximately
$163.7 million and $68.8 million for the three months ended
September 30, 1998 and 1997, respectively. Insurance loss and loss
adjustment expenses have been reduced by recoveries recognized under
reinsurance contracts of approximately $314.4 million and
$158.6 million for the nine months ended September 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 September 30, 1998, the Company had $13 million
outstanding indebtedness under this arrangement at a weighted average
interest cost of 6.5%. (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
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
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 September 30, 1998, the Company had $94.875 million
outstanding at a weighted average interest cost of 9.1%.
6. Income Taxes:
As of September 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 September 30, 1998 primarily relates to
capital loss items whose realization is uncertain. The net deferred
tax asset is as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1998 1997
-------------- --------------
<S> <C> <C>
Unpaid losses and loss adjustment expenses........................... $ 11,249 $ 12,311
Unearned premiums.................................................... 7,315 7,275
Allowances for doubtful accounts .................................... 2,241 1,745
Other................................................................ 1,787 2,618
Major Realty basis difference........................................ -- 8,391
------------- --------------
Deferred tax asset................................................... 22,592 32,340
------------- --------------
Deferred policy acquisition costs.................................... (11,312) (10,615)
Other................................................................ (1,768) (1,064)
Unrealized gain on fixed maturities available-for-sale............... (2,459) (418)
Unrealized gain on marketable equity securities...................... (817) (3,289)
------------- --------------
Deferred tax liability............................................... (16,356) (15,386)
------------- --------------
6,236 16,954
Valuation allowance.................................................. (75) (1,112)
------------- --------------
Net deferred tax asset............................................... $ 6,161 $ 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>
September 30,
---------------
1998 1997
------- ------
<S> <C> <C>
Computed U.S. federal income taxes..................................... $ 12,513 $ 13,782
Nondeductible amortization of goodwill and other intangibles........... 333 404
Tax-exempt interest income............................................. (1,553) (1,403)
Dividends received deduction........................................... (780) (952)
Reduction of the valuation allowance................................... (1,037) --
Other.................................................................. 938 530
----------- ------------
Income taxes provided.................................................. $ 10,414 $ 12,361
=========== ============
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
7. Net Income Per Share:
Basic and diluted net income per share for the three months and nine
months ended September 30, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
--------------- --------------
1998 1997 1998 1997
---------- -------------- ------------ ----------
<S> <C> <C> <C> <C>
Net income $ 14,778 $ 18,808 $ 25,338 $ 26,964
========== ============= ========== ===========
Weighted average common shares outstanding 14,642 15,066 15,025 15,036
Dilutive effect of contingent shares 20 20 20 62
Dilutive effect of stock options 172 250 197 261
---------- ------------- ---------- -----------
Diluted weighted average common and equivalent
shares outstanding 14,834 15,336 15,242 15,359
========== ============= ========== ===========
Basic net income per share $ 1.01 $ 1.25 $ 1.69 $ 1.79
========== ============= ========== ===========
Diluted net income per share $ 1.00 $ 1.23 $ 1.66 $ 1.76
========== ============= ========== ===========
</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 nine months ended September 30, 1998, and 1997 are
as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
--------------- --------------
1998 1997 1998 1997
------ -----
<S> <C> <C> <C> <C>
Net income $ 14,778 $ 18,808 $25,338 $ 26,964
Other comprehensive income (loss):
Net unrealized gains (losses) on securities,
net of tax (2,250) 3,832 (800) 7,806
----------- ----------- ---------- ----------
Comprehensive income $ 12,528 $ 22,640 $24,538 $ 34,770
=========== =========== ========== ==========
</TABLE>
9. Stock Repurchase
On June 1, 1998, the Company's Board of Directors authorized the
repurchase of up to one million shares of the Company's common stock.
Purchases may be made from time to time in the open market and in
private transactions. The actual number of shares purchased will depend
upon the price and prevailing market conditions. As of September 30,
1998, the Company has repurchased 892,700 shares of its common stock at
an average cost of $22.47 per share. The Company funded these
repurchases using available cash and $13 million of borrowings under
its Revolving Credit Facility.
<PAGE>
PART 1.
ITEM 2.
ACCEPTANCE INSURANCE COMPANIES INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations of the Company and its consolidated subsidiaries is based
upon the Company's interim consolidated financial statements and the notes
thereto included in this report.
RESULTS OF OPERATIONS
Forward-Looking Information
Except for the historical information contained in this Quarterly Report on
Form 10-Q, matters discussed herein may constitute forward-looking information.
Such forward-looking information reflects the Company's current best estimates
regarding future operations, but, since these are only estimates, actual
results may differ materially from such estimates.
A variety of events, most of which are outside the Company's control, cannot be
accurately predicted and may materially impact estimates of future operations.
Important among such factors are weather conditions, natural disasters, changes
in state and federal regulations, price competition impacting premium levels,
changes in tax laws, financial market performance, changes in court decisions
effecting coverages, and general economic conditions.
The Company's results are significantly impacted by its crop business,
particularly its Multi-Peril Crop Insurance (MPCI) lines. 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 (CRC), 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 remainder of the 1998
crop season, or the various other factors noted above which may affect crop and
non-crop operating results.
Three months and nine months ended September 30, 1998
Compared to the three months and nine months ended September 30, 1997
The Company's net income for the three months and nine months ended
September 30, 1998 decreased 21.4% and 6.0% respectively from the same periods
in 1997. The three months ended September 30, 1998 were adversely impacted by
severe weather activity including hurricanes and Midwest hailstorms and a
decrease in realized gains as compared to the three months ended
September 30, 1997. The nine months ended September 30, 1998 were impacted
by the same factors, but increased investment income and additional profit
sharing from the previous year under the Company's MPCI program recorded in the
first six months partially offset these negative factors in the nine month
period.
During the first nine months of 1998, the Company's crop insurance operations
were affected by an over-all increase in the premium volume of MPCI business,
an increase in the Company's retention rate under the federal reinsurance
program for the MPCI business, a reduction in the expense reimbursement
allowance from the federal government under the MPCI program and increased
losses in the Company's crop hail and named peril crop insurance programs.
During the third quarter of 1998, the Company recognized MPCI profit sharing
income of approximately $45.1 million based upon a retained MPCI pool of
<PAGE>
$196.2 million and a profit sharing percentage of 23.0%. During the third
quarter of 1997, the Company recognized MPCI profit sharing income of
approximately $38.0 million based upon a retained MPCI pool of $155.3 million
and a profit sharing percentage of 24.5%. The size of the Company's retained
pool increased from 1997 to 1998 due to an increase in the overall MPCI premium
from $251.7 million in 1997 to $274.0 million in 1998 as well as an increase in
the amount of business retained by the Company for its own account. The
increase in the gross premiums under the MPCI premium was due to both an
increase in policy count as well as an increase in the commodity prices upon
which the MPCI premium is based. The increase in the Company's retention
occurred as the Company applied new refined selection techniques provided for
under the new reinsurance contract with the federal government.
The increase in MPCI profit sharing income was largely offset by a decrease in
expense reimbursement from the federal government under the MPCI program from
29.0% for MPCI and 25.0% for CRC policies in 1997 to 27.0% and 23.25%
respectively for MPCI and CRC policies in 1998. The Company was able to
partially offset this decrease in expense reimbursement through efficiencies in
its MPCI operations, but was unable to pass any of the reduction along to its
agents through commission reductions due to a competitive marketplace in the
MPCI business. The net result of the increase in MPCI profit sharing income and
decrease in expense reimbursement was a $.3 million increase in MPCI income for
the first nine months of 1998 versus the same period in 1997. This increase
was offset by an increase in losses from the Company's crop hail and named
peril crop insurance programs. Losses during the first nine months of 1998
under these programs were approximately $2.7 million compared with a
$.9 million loss during the same period in 1997. In addition, during the first
nine months of 1998, the Company recognized approximately $3.3 million of
profit from adjustments to the prior years MPCI profit sharing as compared to
only $1.1 million during the first nine months of 1997. Thus, for the nine
months ended September 30, 1998 the Company recognized a net improvement of
$.7 million in its crop insurance operations as compared to the same period in
1997, whereas the Company's results for the three months ended September 30,
1998 were $1.5 million less profitable than the same quarter in 1997.
The Company's property and casualty operations were impacted by severe weather
activity from hurricanes and Midwestern storms during the three and nine months
ended September 30, 1998 when compared to the same periods a year earlier.
Premium income levels, expense ratios and loss ratios for the periods being
compared otherwise remained relatively stable from 1997 to 1998. The severe
weather activity resulted in additional losses of approximately $3.2 million
during the third quarter effecting both the three and nine months results for
the Company's property and casualty operations. For the three months ended
September 30, 1998, the Company's loss and expense ratio from non-crop
operations was 104.0% as compared to 102.9% during the first nine months of
1997, and for the three months ended September 30, 1998 the Company's loss
expense ratio was 107.6% as compared to 104.5% during the same three months
in 1997.
Realized gains in the Company's investment portfolio also decreased
$2.2 million in the three months ended September 30, 1998 as compared to the
same period in 1997. For the nine months ended September 30, 1998, realized
gains were approximately the same as compared to the nine months ended
September 30, 1997. The realized losses recorded during the third quarter of
1998 were principally in the Company's equity portfolio.
While investment income was down slightly, approximately $.1 million, during
the third quarter of 1998 as compared to the same period in 1997, investment
income was approximately $.7 million more during the nine months ended
September 30, 1998 as compared to the same period a year earlier. The small
decrease in investment income during the three months ended September 30, 1998
as well as the increase in investment income during the nine months ended
September 30, 1998, both as compared to the same periods a year earlier,
resulted from an increase in the size of the investment portfolio from
$475.4 million and $448.0 million during the three and nine months ended
September 30, 1997 to $515.2 million and $496.5 million during the three and
nine months ended September 30, 1998, offset by a decrease in the average yield
on the portfolio from 6.15% and 6.16% during the three and nine months ended
September 30, 1997 to 5.60% and 5.73% during the three and nine months ended
September 30, 1998. The decrease in yield on the investment portfolio from
1997 to 1998 was a result of a lower interest rate environment and an increase
in the percentage of the Company's securities invested in tax advantaged
municipal securities during 1998 as compared to the same periods in 1997.
<PAGE>
The Company's net income during the three and nine months ended
September 30, 1998 was adversely effected by an increase in interest expense
of 16.2% and 51.4% when compared to the similar periods in 1997. The increase
in interest expense was a result of both an increase in the Company's average
outstanding borrowings from $92.8 million and $77.1 million during the three
and nine months ended September 30, 1997 to $101.8 and $97.2 million during the
three and nine months ended September 30, 1998, and an increase in the average
interest rate from 8.5% and 7.5% for the three and nine months ended
September 30, 1997 to 8.9% and 9.1% for the three and nine months ended
September 30, 1998. The increased borrowings were used to add statutory
surplus to the Company's insurance company subsidiaries as well as to
repurchase shares of the Company's stock under the Company's Stock Repurchase
program approved by the Board of Directors in May of 1998. 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 Liquidity and Capital Resources).
The Company's effective tax rate declined from 33.3% and 31.4% during the three
and nine months ended September 30, 1997 to 32.8% and 29.1% during the three
and nine months ended September 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 September 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 nine months ended
September 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
results 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.
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company has included a discussion of the liquidity and capital resources
requirement of the Company and the Company's insurance subsidiaries.
The Company-Parent Only
As an insurance holding company, the Company's assets consist primarily of the
capital stock of its subsidiaries, 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, make investments in
subsidiaries, and repurchase shares of stock under the Company's stock
repurchase program.
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 department 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
September 30, 1998, the Company had $94.875 million outstanding at a weighted
annual interest cost of 9.1%.
As of September 30, 1998, the Company maintains a five-year revolving credit
facility (the "Revolving Credit Facility") with its bank lenders in the amount
of $65 million. The Company selects its interest rate at 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 September 30, 1998, the
Company had $13 million outstanding indebtedness under this arrangement at a
weighted interest cost of 6.5%.
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 September 30, 1998, the Company has repurchased 892,700
shares at an average cost of $22.47 per share. The Company funded these
repurchases using available cash and $13.0 million of borrowings under its
Revolving Credit Facility. Under the Revolving Credit Facility, the Company is
authorized to borrow up to $15.0 million to fund the repurchase of its stock.
<PAGE>
As of September 30, 1998, the Company held cash and invested assets, excluding
investment in subsidiaries, of $.6 million.
Insurance Companies
The principal liquidity needs of the Insurance Companies are to fund losses and
loss adjustment expense payments and to pay underwriting expense, 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 $5.0 million from
December 31, 1997 to September 30, 1998. The principal components of this
increase were net income of $25.3 million during the first nine months of 1998,
a decrease in the value of the Company's investment portfolio of $.8 million,
net of tax and the repurchase of 892,700 shares of the Company's stock at an
aggregate cost of approximately $20.1 million. The change in the unrealized
gain/loss on available-for-sale securities was attributable to an increase in
the unrealized gain in the Company's fixed income portfolio of $3.8 million,
net of tax, offset by a decrease in the unrealized gain/loss in the Company's
equity portfolio of $4.6 million, net of tax.
Consolidated Cash Flows
Cash provided by operating activities was positive during the nine months ended
September 30, 1998 and 1997, with $81.8 million and $60.6 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 nine months of 1997, this component of operating cash flows was
$25.5 million while in the first nine months of 1998, it was $57.0 million.
<PAGE>
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 and microcontrollers
which recognize only two digits rather than four to identify the year. Any
computer program or microcontroller that has a date sensitive function may
recognize a date of "00" as the year 1900 rather than the year 2000. If not
corrected, this could cause computers and other devices dependent upon
microcontrollers to fail or perform miscalculations.
The Company previously identified its information technology ("IT") systems
requiring modification to be Year 2000 compliant. The Company developed and
continues to implement a corrective plan utilizing both internal and external
resources to make necessary modifications to, and to test, the Company's IT
systems for Year 2000 compliance. The majority of the Company's IT systems
currently are Year 2000 compliant and management expects the remaining Company
IT systems to be Year 2000 compliant by December 31, 1998.
Additionally, the Company is reviewing its Non-IT systems which rely on
microprocessors, such as copiers, fax machines, telephone equipment and mail
room equipment, to determine whether they require modification to be Year 2000
compliant. The Company currently also is communicating with the lessors and
other providers of its Non-IT systems in regards to their Year 2000 compliance
status.
The Company relies on various third parties in the normal course of its
operations and has identified certain third parties with which it has material
relationships. These include insurance producers, reinsurers, government
agencies, banks and providers of telecommunication and utility. The Company
currently is communicating with these material third parties to determine if
they are Year 2000 compliant.
One of the more significant third parties is the Risk Management Agency ("RMA")
which, along with the Federal Crop Insurance Corporation ("FCIC"), administers
the federal crop insurance program. The RMA calculates and settles the
Company's MPCI profit share and expense reimbursement. The RMA has publicly
stated that all RMA and FCIC systems will be Year 2000 compliant by March 1999.
The Company has conducted a comprehensive review of potential claims related
to Year 2000 issues which might be submitted in conjunction with policies of
insurance it currently underwrites. Although the Company has concluded
Year 2000 exposures are not covered under its existing insurance policies, the
Company is acting to eliminate, reduce or mitigate potential claims for
coverage of Year 2000 exposures through the use of exclusionary language, new
underwriting procedures and pricing practices, withdrawal from certain classes
of business, and establishment of a specialized unit within its claims
department to respond to such claims.
The Company has expensed costs of approximately $2.7 million relating to the
year 2000 issue since inception of the project, including $1.3 million during
the nine months ended September 30, 1998. The Company anticipates an
additional $.5 to $1.1 million of expenses to complete the project.
Although the Company plans to have addressed the Year 2000 issues prior to
being affected by such issues, it currently is assessing the need to develop
contingency plans, particularly with respect to certain third parties with
whom it has material relationships. The Company anticipates this assessment
will be complete, and contingency plans with respect to certain third parties
will be in the development stage, by March 1999.
Particularly because of the potentially wide-scale disruption of general
infrastructure and business systems, and despite the Company's activities in
regards to the Year 2000 issue, there can be no assurance that computer and
microcontroller failures related to the Year 2000 will not interfere with
the Company's normal business operations, result in unintended and unexpected
claims under policies of insurance written by the Company, or otherwise have
a material adverse affect upon the Company's business, financial condition and
results of operations.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) No reports on Form 8-K were filed by the registrant during
the quarter for which this report is filed.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCEPTANCE INSURANCE COMPANIES INC.
November 11, 1998 /S/ KENNETH C COON
-----------------------
Kenneth C. Coon
Chief Executive Officer
November 11, 1998 /S/ GEORGIA M MACE
------------------------
Georgia M. Mace
Treasurer and Chief Financial Officer
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 360,783
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 68,040
<MORTGAGE> 9,823
<REAL-ESTATE> 3,304
<TOTAL-INVEST> 536,872
<CASH> 219
<RECOVER-REINSURE> 58,817
<DEFERRED-ACQUISITION> 32,321
<TOTAL-ASSETS> 1,224,639
<POLICY-LOSSES> 505,507
<UNEARNED-PREMIUMS> 165,075
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 107,875
0
0
<COMMON> 6,185
<OTHER-SE> 252,479
<TOTAL-LIABILITY-AND-EQUITY> 1,224,639
258,327
<INVESTMENT-INCOME> 21,349
<INVESTMENT-GAINS> 5,354
<OTHER-INCOME> 0
<BENEFITS> 158,233
<UNDERWRITING-AMORTIZATION> (1,993)
<UNDERWRITING-OTHER> 83,828
<INCOME-PRETAX> 35,752
<INCOME-TAX> 10,414
<INCOME-CONTINUING> 25,338
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 25,338
<EPS-PRIMARY> 1.69
<EPS-DILUTED> 1.66
<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>
