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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended March 31, 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)
Registrant's telephone number, including area code:
(402) 344-8800
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES XX NO
----- ----
The number of shares of each class of the Registrant's common
stock outstanding on May 11, 1998 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 15,451,149
=================================================================
ACCEPTANCE INSURANCE COMPANIES INC.
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets March 31, 1998 (unaudited)
and December 31, 1997 (audited)
Consolidated Statements of Operations (unaudited) Three
Months Ended March 31, 1998 and 1997
Consolidated Statements of Cash Flows (unaudited) Three
Months Ended March 31, 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)
March 31, December 31,
1998 1997
--------- ------------
(unaudited) (audited)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale $ 387,881 $ 322,799
Marketable equity securities -
preferred stock 48,427 53,309
Marketable equity securities -
common stock 34,769 30,847
Mortgage loans and other investments 10,068 10,248
Real estate 3,325 3,329
Short-term investments, at cost,
which approximates market 29,686 32,185
--------- ---------
514,156 452,717
Cash 7,143 8,048
Investment in Major Realty
Corporation 5,422 9,183
Receivables, net 142,300 180,793
Reinsurance recoverable on unpaid
loss and loss adjustment expenses 143,920 165,547
Prepaid reinsurance premiums 52,664 53,208
Property and equipment, net 15,550 15,588
Deferred policy acquisition costs 32,235 30,328
Excess of cost over acquired net
assets 35,300 35,567
Deferred income tax 14,335 15,842
Other assets 17,532 12,632
--------- ---------
Total assets $ 980,557 $ 979,453
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses $ 409,765 $ 428,653
Unearned premiums 163,179 157,134
Amounts payable to reinsurers 29,241 17,955
Accounts payable and accrued
liabilities 20,985 27,166
Company - obligated mandatorily
redeemable Preferred Securities of
AICI Capital Trust, holding
solely Junior Subordinated Debentures
of the Company 94,875 94,875
--------- ---------
Total liabilities 718,045 725,783
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,
15,448,654 and 15,421,247
shares issued 6,180 6,168
Capital in excess of par value 198,336 198,080
Unrealized gain on available-
for-sale securities, net of tax 9,302 6,885
Retained earnings 52,902 46,745
--------- ---------
266,720 257,878
Less:
Treasury stock, at cost, 209,519
shares (3,979) (3,979)
Contingent stock, 20,396 shares ( 229) ( 229)
--------- ---------
Total stockholders' equity 262,512 253,670
--------- ---------
Total liabilities and
stockholders' equity $ 980,557 $ 979,453
========= =========
<FN>
The accompanying notes are an integral part of the interim
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months ended March 31, 1998 and 1997
(in thousands, except per share data)
(unaudited)
1998 1997
-------- --------
<S> <C> <C>
Revenues:
Insurance premiums earned $ 69,003 $ 71,062
Net investment income 6,920 6,520
Net realized capital gains 2,841 1,311
-------- --------
78,764 78,893
Costs and expenses:
Costs of revenues:
Insurance losses and loss
adjustment expenses 46,301 49,807
Insurance underwriting expenses 21,200 22,044
General and administrative expenses 656 524
-------- --------
68,157 72,375
-------- --------
Operating profit 10,607 6,518
-------- --------
Other income (expense):
Interest expense (2,165) (1,157)
Share of net loss of investee (704) (54)
Other, net 34 16
-------- --------
(2,835) (1,195)
-------- --------
Income before income taxes 7,772 5,323
Income tax expense (benefit):
Current 1,409 (1,421)
Deferred 205 2,830
-------- --------
Net income $ 6,158 $ 3,914
======== ========
Net income per share:
Basic $ .40 $ .26
======== ========
Diluted $ .40 $ .26
======== ========
<FN>
The accompanying notes are an integral part of the interim
consolidated financial statements.
</FN>
/TABLE
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the three months ended March 31, 1998 and 1997
(in thousands)
(unaudited)
1998 1997
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 6,158 $ 3,914
Net adjustment to reconcile net
income to net cash provided by
operating activities 48,457 21,250
-------- --------
Net cash provided by operating
activities 54,615 25,164
-------- --------
Cash flows from investing activities:
Proceeds from sales of investments
available-for-sale 31,308 11,877
Proceeds from maturities of
investments 1,223 2,712
Proceeds from maturities of
investments available-for-sale 19,138 17,096
Purchases of investments (985) (1,819)
Purchases of investments available-
for-sale (107,804) (64,519)
Purchases of property and equipment (1,075) (1,773)
-------- --------
Net cash used for investing
activities (58,195) (36,426)
-------- --------
Cash flows from financing activities:
Proceeds from issuance of common
stock 268 175
-------- --------
Net cash provided by financing
activities 268 175
-------- --------
Net increase (decrease) in cash and
short-term investments (3,312) (11,087)
Cash and short-term investments at
beginning of period 38,316 41,627
-------- --------
Cash and short-term investments at
end of period $ 35,004 $ 30,540
======== ========
Supplemental disclosure of cash
flow information:
Cash paid during the period for
interest $ 2,135 $ 1,134
======== ========
Cash paid during the period for
income taxes $ 4 $ 0
======== ========
<FN>
The accompanying notes are an integral part of the interim
consolidated financial statements.
</FN>
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies:
Principles of Consolidation
The Company's consolidated financial statements include the
accounts of Acceptance Insurance Companies Inc. and its
majority owned subsidiaries (the "Company"). All
significant intercompany transactions have been eliminated.
Management's Opinion
The accompanying consolidated financial statements reflect
all adjustments, consisting only of normal recurring
adjustments except as otherwise disclosed, which in the
opinion of management are considered necessary to fairly
present the Company's financial position as of March 31,
1998 and December 31, 1997, and the results of operations
for the three months ended March 31, 1998 and 1997 and cash
flows for the three months ended March 31, 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 March
31, 1998 approximately $1,825,000 of short-term investments
had a maturity date at acquisition of greater than three
months.
Recent Statements of Financial Accounting Standards
In February 1997, the Financial Accounting Standards Board
(FASB) issued Statement of Financial Accounting Standards
No. 128 (SFAS No. 128)," Earnings Per Share". This
statement establishes accounting standards for the
presentation of basic and diluted earnings per share. In
addition, SFAS No. 128 requires a reconciliation of the
numerator and denominator of the basic and diluted EPS
computations. The Company adopted SFAS No. 128 in 1997 and
accordingly, earnings per share has been restated for all
periods presented.
In February 1997, the FASB issued SFAS No. 129," Disclosure
of Information about Capital Structure". This statement
establishes standards for disclosing information about an
entity's capital structure. The Company adopted SFAS No.
129 in 1997. SFAS No. 129 contains no change in disclosure
requirements for entities that were previously subject to
the requirements of Accounting Principles Board Opinions
Nos. 10 and 15 and SFAS No. 47 and as such the adoption of
SFAS No. 129 did not have any effect on the Company's
reporting.
In June 1997, the FASB issued SFAS No. 130," Reporting
Comprehensive Income". SFAS No. 130 establishes standards
for the reporting and display of comprehensive income. The
purpose of reporting comprehensive income is to present a
measure of all changes in shareholders' equity that result
from recognized transactions and other economic events of
the period, other than transactions with owners in their
capacity as owners. SFAS No. 130 is effective for financial
statements issued for periods beginning after December 15,
1997. 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.
Reclassifications
Certain prior year accounts have been reclassified to
conform with current period presentation.
2. Investments:
The amortized cost and related market values of debt and
equity securities in the accompanying balance sheets are as
follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- -------
<S> <C> <C> <C> <C>
March 31, 1998:
Fixed maturities
available-for-sale:
U.S. Treasury and
government
securities $138,642 $ 532 $ 48 $139,126
States, municipalities
and political
subdivisions 142,380 3,783 182 145,981
Mortgage-backed
securities 56,276 35 2,420 53,891
Other debt securities 49,336 1,082 1,535 48,883
-------- -------- -------- --------
$386,634 $ 5,432 $ 4,185 $387,881
======== ======== ======== ========
Marketable equity
securities -
preferred stock $ 46,405 $ 2,131 $ 109 $ 48,427
======== ======== ======== ========
Marketable equity
securities -
common stock $ 23,727 $ 11,799 $ 757 $ 34,769
======== ======== ======== ========
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 ended March 31,
1998 and 1997 are as follows (in thousands):
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Direct premiums written $128,328 $120,376
Assumed premiums written 9,032 4,969
Ceded premiums written (61,768) (54,030)
-------- --------
Net premiums written $ 75,592 $ 71,315
======== ========
Direct premiums earned $121,671 $115,905
Assumed premiums earned 9,644 3,956
Ceded premiums earned (62,312) (48,799)
-------- --------
Net premiums earned $ 69,003 $ 71,062
======== ========
</TABLE>
Insurance loss and loss adjustment expenses have been
reduced by recoveries recognized under reinsurance contracts
of approximately $23,417,000 and $15,021,000 for the three
months ended March 31, 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
March 31, 1998, the Company had no outstanding indebtedness
under this arrangement.
5. Company-obligated mandatorily redeemable Preferred
Securities of AICI Capital Trust, holding solely Junior
Subordinated Debentures of the Company:
On August 4, 1997, AICI Capital Trust, a Delaware business
trust organized by the Company (the "Issuer Trust") issued
3.3 million shares or $82.5 million aggregate liquidation
amount of its 9% Preferred Securities (liquidation amount
$25 per Preferred Security). In addition, the Company
granted the underwriters an option, exercisable within 30
days of July 29, 1997, (the "Option") to purchase up to an
additional 495,000 shares or $12.375 million aggregate
liquidation amount of Preferred Securities on the same terms
as the Preferred Securities previously issued, solely to
cover over-allotments, if any. On August 18, 1997, the
Company issued the additional 495,000 shares or $12.375
million aggregate liquidation amount of the Issuer Trust's
9% Preferred Securities.
The Company owns all of the common securities (the "Common
Securities") of the Issuer Trust. The Preferred Securities
represent preferred undivided beneficial interests in the
Issuer Trust's assets. The assets of the Issuer Trust
consist solely of the Company's 9% Junior Subordinated
Debentures due 2027 which were issued August 4, 1997 and
August 18, 1997 in an amount equal to the total of the
Preferred Securities and the Common Securities. The Company
primarily used the net proceeds in the amount of
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 March 31, 1998, the Company had $94.875
million outstanding at a weighted average interest cost of
9.1%.
6. Income Taxes:
As of March 31, 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 March 31,
1998 primarily relates to capital loss items whose
realization is uncertain. The net deferred tax asset is as
follows (in thousands):
<TABLE>
<CAPTION>
March 31, December 31,
1998 1997
--------- ------------
<S> <C> <C>
Unpaid losses and loss adjustment
expenses 11,636 12,311
Unearned premiums 7,736 7,275
Allowances for doubtful accounts 1,789 1,745
Other 2,859 2,618
Major Realty basis difference 8,637 8,391
------- -------
Deferred tax asset 32,657 32,340
------- -------
Deferred policy acquisition costs (11,282) (10,615)
Other (1,955) (1,064)
Unrealized gain on fixed maturities
available-for-sale (437) (418)
Unrealized gain on marketable
equity securities (4,573) (3,289)
------- -------
Deferred tax liability (18,247) (15,386)
------- -------
14,410 16,954
Valuation allowance (75) (1,112)
------- -------
Net deferred tax asset $14,335 $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>
<CAPTION>
March 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Computed U.S. federal income taxes $ 2,721 $ 1,873
Nondeductible amortization of
goodwill and other intangibles 109 142
Tax-exempt interest income (570) (410)
Dividends received deduction (239) (296)
Recognition of a portion of the
deferred tax asset (1,036) --
Other 629 100
-------- --------
Income taxes provided $ 1,614 $ 1,409
======== ========
</TABLE>
7. Net Income Per Share:
Basic and diluted net income per share for the three months
ended March 31, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
March 31,
------------------------
1998 1997
-------- --------
<S> <C> <C>
Net income $ 6,158 $ 3,914
======== ========
Weighted average common shares
outstanding 15,210 14,990
Dilutive effect of contingent
shares 21 75
Dilutive effect of stock options 224 229
-------- --------
Diluted weighted average common
and equivalent shares outstanding 15,455 15,294
======== ========
Basic net income per share $0.40 $0.26
======== ========
Diluted net income per share $0.40 $0.26
======== ========
</TABLE>
8. Comprehensive Income:
Effective January 1, 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income." The comprehensive income,
with the associated per share data, for the three months
ended March 31, 1998, and 1997 are as follows:
<TABLE>
<CAPTION>
March 31,
-------------------------
1998 1997
--------- ---------
<S> <C> <C>
Net income $ 6,158 $ 3,914
Other Comprehensive income (loss):
Net unrealized gains (losses) on
securities 2,417 (847)
------- -------
Comprehensive income $ 8,575 $ 3,067
======= =======
Shares - Basic 15,210 14,990
Shares - Diluted 15,455 15,294
Net income per share - Basic 0.40 0.26
Comprehensive income per share
- Basic 0.56 0.20
Net income per share - Diluted 0.40 0.26
Comprehensive income per share
- Diluted 0.55 0.20
</TABLE>
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 ended March 31, 1998
Compared to three months ended March 31, 1997
The Company's operating profit and net income increased 62.7% and
57.3% respectively during the three months ended March 31, 1998
as compared to the same period in 1997. These improved results
were principally a result of an improved loss and loss adjustment
expense ratio and an increase in investment income and realized
gains. These positive factors were partially offset by lower net
premiums earned and an increase in interest expense.
The Company's loss and loss adjustment expense ratio declined
from 70.1% during the three months ended March 31, 1997 to 67.1%
during the three months ended March 31, 1998. This reduction in
loss ratio resulted from improved results in the Company's Crop
Division during the first quarter of 1998 versus the first
quarter of 1997. During the first quarter of 1998, the Company
recognized underwriting income of $3.2 million in its Crop
Division as compared with $0.9 million during the first quarter
of 1997. In both periods, the profit 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 effected by a severe early
winter snow storm which effected 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
quarter of 1998 for its previous year's results than had occurred
in 1997. The Company believes that the crop results for the
first quarter of 1997 were more typical of a normal year than
those experienced in the first quarter of 1998.
The underwriting results for the Company's Property and Casualty
Divisions remained relatively constant at combined loss and
expense ratios of 102.4% and 102.6% respectively in the first
quarter of 1997 and the first quarter of 1998, as a slight
reduction in the Company's loss and loss adjustment expense ratio
from 70.4% during the first quarter of 1997 to 69.7% during the
first quarter of 1998 was offset by an increase in the
underwriting expense ratio from 32.0% during the first quarter of
1997 to 32.9% during the first quarter of 1998. In addition, the
Company also experienced a decline in the net premiums earned of
its Property and Casualty operations from $70.6 million during
the three months ended March 31, 1997 to $66.0 million during the
first three months of 1998. This decrease in net premiums earned
was a result of lower premium writings in the nine months
preceding the quarter ended March 31, 1998 as opposed to the
quarter ended March 31, 1997. During the three months ended
March 31, 1998, however, net written premiums did increase to
$72.6 million from $70.8 million during the same period in 1997.
Therefore, the Company expects earned premiums to begin to
increase during subsequent quarters in 1998 in line with the
increases in net written premium during the first quarter of
1998.
While the Company's underwriting loss and expense ratios in its
Property and Casualty Divisions for the quarters ending March 31,
1998 and March 31, 1997 were quite similar, the loss ratios for
the twelve months ended March 31, 1998 did improve considerably
from those recorded in the twelve months ended March 31, 1997.
The Company believes that this is indicative of the continued
improvement in its Property and Casualty Divisions over the last
year, but that the relatively level results of the most recent
three months indicates that the degree of improvement in the
Company's Property and Casualty Divisions is slowing.
The Company's operating profit was also positively impacted
during the first quarter of 1998 as compared with the first
quarter of 1997 by an increase in the Company's investment income
of 6.1% and an increase in net realized capital gains of 116.7%.
The increase in the Company's net investment income resulted from
an increase in the average size of the Company's portfolio from
$423.7 million during the three months ended March 31, 1997 to
$471.8 million during the three months ended March 31, 1998.
This increase in the size of the portfolio was offset somewhat by
a decrease in the annualized investment yield of the portfolio
from 6.2% during the three months ended March 31, 1997 to 5.9%
during the three months ended March 31, 1998. This decrease in
annualized investment yield was principally a result of an
increase in the amount of tax advantaged securities within the
Company's portfolio during the first quarter of 1998 as compared
to the first quarter of 1997, an overall lower interest rate
environment, and to a lessor extent, an increase in the size of
the Company's investments in common stock. A lower interest rate
environment and positive results in the stock market provided the
Company with additional opportunities to realize gains in the
Company's investment portfolio during the first quarter of 1998.
The Company's net income during the first three months of 1998 as
compared to the same period a year earlier was adversely effected
by an increase in the interest expense of approximately $1.0
million or 87.1%. This increase in interest expense was a result
of both an increase in the Company's outstanding debt from $69.0
million during the three months ended March 31, 1997 to $94.9
million during the three months ended March 31, 1998, and an
increase in the average interest rate from 6.7% for the three
months ended March 31, 1997 to 9.1% during the three months ended
March 31, 1998. The increased borrowings during the second
quarter of 1997 were used to add statutory surplus to the
Company's insurance company subsidiaries. The increase in the
Company's average interest rate paid resulted from the issuance
of $94.875 million in Trust Preferred Securities and the
retirement of the Company's outstanding bank debt during the
third quarter of 1997 (See Liquidity and Capital Resources).
As of March 31, 1998 and 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 hold a majority interest in Major Realty,
entered into a Stockholder Agreement with an outside party
whereby Major Realty will be merged with this outside party and
all shares of Major Realty will be converted into the right to
receive cash. During the first quarter of 1998, this transaction
was recorded 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, net of tax, did not have a
material effect on the results of the three months ended March
31, 1998. The Company anticipates the closing of the merger to
occur in the second quarter of 1998 without further impact on its
earnings.
Recent Statement of Financial Accounting Standards
In February 1997, the Financial Accounting Standards board (FASB)
issued Statement of Financial Accounting Standards No. 128 (SFAS
No. 128), "Earnings Per Share." This statement establishes
accounting standards for the presentation of basic and diluted
earnings per share. In addition, SFAS No. 128 requires a
reconciliation of the numerator and denominator of the basic and
diluted EPS computations. The Company adopted SFAS No. 128 in
1997 and accordingly, earnings per share has been restated for
all periods presented.
In February 1997, the FASB issued SFAS No. 129, "Disclosure of
Information about Capital Structure." This statement establishes
standards for disclosing information about an entity's capital
structure. The Company adopted SFAS No. 129 in 1997. SFAS No.
129 contains no change in disclosure requirements for entities
that were previously subject to the requirements of Accounting
Principles Board Opinions Nos. 10 and 15 and SFAS No. 47 and as
such the adoption of SFAS No. 129 did not have any effect on the
Company's reporting.
In June 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income." SFAS No. 130 establishes standards for
the reporting and display of comprehensive income. The purpose
of reporting comprehensive income is to present a measure of all
changes in shareholders' equity that result from recognized
transactions and other economic events of the period, other than
transactions with owners in their capacity as owners. SFAS No.
130 is effective for financial statements issued for periods
beginning after December 15, 1997.
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.
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, 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 Debentures to
pay down the $90.0 million of borrowings under its Revolving
Credit Facility. Distributions on the Preferred Securities and
Junior Subordinated Debentures are cumulative, accrue from the
date of issuance and are payable quarterly in arrears. The
Junior Subordinated Debentures are subordinate and junior in
right of payment to all senior indebtedness of the Company and
are subject to certain events of default and redemptive
provisions, all described in the Junior Debenture Indenture. At
March 31, 1998, the Company had $94.875 million outstanding at a
weighted annual interest cost of 9.1%.
As of March 31, 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. During the first quarter
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.
As of March 31, 1998, the Company held cash and invested assets,
excluding investment in subsidiaries, of $11.9 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
$8.8 million at March 31, 1998 as compared to December 31, 1997.
The principal components of this increase were net income of $6.2
million during the first three 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 $9.3 million at
March 31, 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
three months ended March 31, 1998 and 1997, with $54.6 million
and $25.2 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 $0.5 million
during the three months ended March 31, 1998, and anticipates an
additional $1.3 to $2.0 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.
PART II. OTHER INFORMATION
- ---------------------------
ACCEPTANCE INSURANCE COMPANIES INC.
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.
May 11, 1998 /s/ KENNETH C. COON
---------------------------------
Kenneth C. Coon
Chief Executive Officer
May 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 THREE MONTHS ENDED MARCH 31, 1998
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
3.1 Registrant's Restated Certificate of
Incorporation, incorporated by reference to
Registrant's Annual Report of Form 10-K for the
period ending December 31, 1993, and Amendment
thereto, incorporated by reference to Registrant's
Quarterly Report on Form 10-Q for the period ended
June 30, 1995.
3.2 Restated By-laws of Acceptance Insurance Companies
Inc., incorporated by reference to Registrant's Annual
Report on Form 10-K for the fiscal year ended December
31, 1993.
4.3 Form of Preferred Security (included in Exhibit 4.8).
Incorporated by reference to Form S-3 Registration No.
33-28749, filed July 29,1997.
4.4 Form of Guarantee Agreement between Acceptance
Insurance Companies Inc. and Bankers Trust Company.
Incorporated by reference to Form S-3 Registration No.
33-28749, filed July 29,1997.
4.5 Form of Junior Subordinated Indentures between
Acceptance Insurance Companies Inc., and Bankers Trust
Company. Incorporated by reference to Form S-3
Registration No. 33-28749, filed July 29,1997.
4.6 Certification of Trust of AICI Capital Trust.
Incorporated by reference to Form S-3 Registration No.
33-28749, filed July 29, 1997.
4.7 Trust Agreement between Acceptance Insurance Companies
Inc. and Bankers Trust (Delaware). Incorporated by
reference to Form S-3 Registration No. 33-28749, filed
July 29,1997.
4.8 Form of Amended and Restated Trust Agreement among
Acceptance Insurance Companies Inc., Bankers Trust
Company and Bankers Trust (Delaware). Incorporated by
reference to Form S-3 Registration No. 33-28749, July
29, 1997.
4.9 Form of Stock Certificate representing shares of
Acceptance Insurance Companies Inc., Common Stock, $.40
par value. Incorporated by reference to Exhibit 4.1 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31,1992.
10.1 Intercompany Federal Income Tax Allocation
Agreement between Acceptance Insurance Holdings
Inc. and its subsidiaries and the Registrant dated
April 12, 1990, and related agreements.
Incorporated by reference to Exhibit 10i to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended August 31, 1990.
10.2 Employment Agreement dated February 19, 1990 between
Acceptance Insurance Holdings Inc., the Registrant and
Kenneth C. Coon. Incorporated by reference to Exhibit
10.65 to the Registrant's Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10.3 Employment Agreement dated July 2, 1993 between
the Registrant and John P. Nelson. Incorporated
by reference to Exhibit 10.6 to the Registrant's
Quarterly Report on Form 10-Q for the period ended
September 30, 1994.
10.4 Employment Agreement dated July 2, 1993 between
the Registrant and Richard C. Gibson.
Incorporated by reference to Exhibit 10.6 to the
Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1994.
10.5 $100,000,000 Amended and Restated Credit Agreement by
and among the Registrant, The First National Bank of
Chicago, Comerica Bank, First National Bank of Omaha,
First Bank, N.A., Wells Fargo Bank, National
Association and Mercantile Bank, N.A. and The First
National Bank of Chicago, As Agent, and Comerica Bank,
First National Bank of Omaha, and First Bank N.A., As
Co-Agents, dated as of June 6,1997. Incorporated by
reference to Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the period ended June 30,1997.
27 Financial Data Schedule.
99.1 The Registrant's 1997 Employee Stock Purchase
Plan. Incorporated by reference to the
Registrant's Proxy Statement filed on or about
April 29,1997.
99.2 The Registrant's Employee Stock Ownership and Tax
Deferred Savings Plan as merged, amended and
restated effective October 1, 1990. Incorporated
by reference to Exhibit 10.4 to the Registrant's
Quarterly Report on Form 10-Q for the quarter
ended November 30, 1990.
99.3 First Amendment to the Registrant's Employee Stock
Ownership and Tax Deferred Savings Plan.
Incorporated by reference to Exhibit 99.4 to the
Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1993.
99.4 Second Amendment to the Registrant's Employee
Stock Ownership and Tax Deferred Savings
Plan. Incorporated by reference to Exhibit
99.5 to the Registrant's Annual Report on
Form 10-K for the fiscal year ended December
31, 1993.
99.5 The Registrant's 1996 Incentive Stock Option Plan.
Incorporated by reference to the Registrant's Proxy
Statement filed on or about May 3, 1996.
<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> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 387,881
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 83,196
<MORTGAGE> 10,068
<REAL-ESTATE> 3,325
<TOTAL-INVEST> 514,156
<CASH> 7,143
<RECOVER-REINSURE> 18,871
<DEFERRED-ACQUISITION> 32,235
<TOTAL-ASSETS> 980,557
<POLICY-LOSSES> 409,765
<UNEARNED-PREMIUMS> 163,179
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 94,875
0
0
<COMMON> 6,180
<OTHER-SE> 256,332
<TOTAL-LIABILITY-AND-EQUITY> 980,557
69,003
<INVESTMENT-INCOME> 6,920
<INVESTMENT-GAINS> 2,841
<OTHER-INCOME> 0
<BENEFITS> 46,301
<UNDERWRITING-AMORTIZATION> (1,907)
<UNDERWRITING-OTHER> 23,107
<INCOME-PRETAX> 7,772
<INCOME-TAX> 1,614
<INCOME-CONTINUING> 6,158
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 6,158
<EPS-PRIMARY> .40
<EPS-DILUTED> .40
<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>
