UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
Commission File Number 1-7461
ACCEPTANCE INSURANCE COMPANIES INC.
(Exact Name of Registrant As Specified in Its Charter)
DELAWARE 31-0742926
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
222 S. 15th Street, Suite 600 North
Omaha, Nebraska 68102
(Address of Principal Executive Offices)
(Zip Code)
Registrant's Telephone Number, Including Area Code:
(402) 344-8800
________
Securities Registered Pursuant to Section 12(b) of the Act:
Title of Each Class Name of Each Exchange on Which Registered
Common Stock $.40 Par Value New York Stock Exchange, Inc.
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period
that the Registrant has been required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
[ ]
<PAGE>
The aggregate market value of the Registrant's voting stock
held by non-affiliates (7,489,174 shares) on March 22, 1999 was $115,146,050.
The number of shares of each class of the Registrant's common
stock outstanding on March 22, 1999 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 14,243,088
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1999
Annual Meeting of Shareholders are incorporated by reference into Part III.
<PAGE>
GLOSSARY OF INSURANCE TERMS
Admitted Insurer: An insurance company licensed by a state
regulatory authority to transact insurance business in that state. An admitted
insurer is subject to the rules and regulations of each state in which it is
licensed governing virtually all aspects of its insurance operations and
financial condition. A non-admitted insurer, also known as an excess and
surplus lines insurer, is not licensed to transact insurance business in a
given state but may be permitted to write certain business in that state in
accordance with the provisions of excess and surplus lines insurance laws which
generally involve less rate, form and operational regulation.
Buy-up Coverage: Multi-Peril Crop Insurance policy providing
coverage in excess of that provided by CAT Coverage. Buy-up Coverage is
offered only through private insurers.
Case Reserve: The estimated liability for loss established
by a claims examiner for a reported claim.
CAT Coverage ("CAT"): The minimum available level of
Multi-Peril Crop Insurance, providing coverage for 50% of a farmer's historical
yield for eligible crops at 60% of the price per unit for such crop set by
the FCIC. This coverage is offered through private insurers and, in some
states, USDA field offices.
Combined Ratio: The sum of the expense ratio and the loss
ratio determined in accordance with GAAP or SAP.
Crop Revenue Coverage ("CRC"): An extension of the MPCI
program that provides a producer of crops with varying levels of insurance
protection against loss of revenues caused by changes in crop prices, low
yields, or a combination of the two.
Crop Year: For MPCI, a crop year commences on July 1 and
ends on June 30. For crop hail insurance, the crop year is the calendar year.
Direct Written Premiums: Total premiums collected in respect
of policies issued by an insurer during a given period without any reduction
for premiums ceded to reinsurers.
Excess and Surplus Lines Insurance: The business of insuring
risks for which insurance is generally unavailable from admitted insurers in
whole or in part. Such business is placed by the broker or agent with
nonadmitted insurers in accordance with the excess and surplus lines provisions
of state insurance laws.
Excess of Loss Reinsurance: A form of reinsurance in which
the reinsurer, subject to a specified limit, agrees to indemnify the ceding
company for the amount of each loss, on a defined class of business, that
exceeds a specified retention.
Expense Ratio: Under statutory accounting, the ratio of
underwriting expenses to net premiums written. Under GAAP accounting, the
ratio of underwriting expenses to net premiums earned.
Federal Crop Insurance Corporation ("FCIC"): A wholly-owned
federal government corporation within the Farm Service Agency.
Generally Accepted Accounting Principles ("GAAP"):
Accounting practices as set forth in opinions and pronouncements of the
Financial Accounting Standards Board and Accounting Principles Board and
American Institute of Certified Public Accountants Accounting Reasearch
Bulletins and which are applicable in the circumstances as of the date in
question.
<PAGE>
Gross Written Premiums: Direct written premiums plus
premiums collected in respect of policies assumed, in whole or in part, from
other insurance carriers.
Incurred But Not Reported ("IBNR") Reserves: The liability
for future payments on losses which have already occurred but have not yet been
reported to the insurer. IBNR reserves include LAE related to such losses and
may also provide for future adverse loss development on reported claims.
Insurance Regulatory Information System ("IRIS"): A system
of ratio analysis developed by the NAIC primarily intended to assist state
insurance departments in executing their statutory mandates to oversee the
financial condition of insurance companies.
Loss Adjustment Expenses ("LAE"): Expenses incurred in the
settlement of claims, including outside adjustment expenses, legal fees and
internal administrative costs associated with the claims adjustment process,
but not including general overhead expenses.
Loss Ratio: The ratio of losses and LAE incurred to premiums
earned.
Loss Reserves: Liabilities established by insurers to
reflect the estimated ultimate cost of claim payments as of a given date.
MPCI Imputed Premium: For purposes of the profit/loss
sharing arrangement with the federal government, the amount of premiums
credited to the Company for all CAT Coverages it sells, as such amount is
determined by formula.
MPCI Premium: For purposes of the profit/loss sharing
arrangement with the federal government, the amount of premiums credited to the
Company for all Buy-up and Crop Revenue Coverages paid by farmers, plus
the amount of any related federal premium subsidies.
MPCI Retention: The aggregate amount of MPCI Premium and, in
respect of CAT coverages imputed MPCI premium on which the Company retains risk
after allocating farms to the three federal reinsurance pools.
Multi-Peril Crop Insurance ("MPCI"): A federally-regulated
subsidized crop insurance program that insures a producer of crops with varying
levels of protection against loss of yield from substantially all natural
perils to growing crops.
NAIC: The National Association of Insurance Commissioners.
Net Premiums Earned: The portion of net premiums written
applicable to the expired period of policies and, accordingly, recognized as
income during a given period.
Net Premiums Written: Total premiums for insurance written
(less any return premiums) during a given period, reduced by premiums ceded in
respect to liability reinsured by other carriers.
Policyholders' or Statutory Surplus: As determined under SAP
(hereinafter defined), the excess of total admitted assets over total
liabilities.
Price Election: The maximum per unit commodity price by crop
to be used in computing MPCI Premiums (other than for Crop Revenue Coverage),
which is set each year by the FCIC.
Quota Share Reinsurance: A form of reinsurance whereby the
reinsurer agrees to indemnify the cedent for a stated percentage of each loss,
subject to a specified limit the cedent pays, on a defined class of business.
Reinsurance: The practice whereby a company called the
"reinsurer" assumes, for a share of the
<PAGE>
premium, all or part of a risk originally undertaken by another insurer called
the "ceding" company or "cedent." Reinsurance may be effected by "treaty"
reinsurance, where a standing agreement between the ceding and reinsuring
companies automatically covers all risks of a defined category, amount and
type, or by "facultative" reinsurance where reinsurance is negotiated and
accepted on a risk-by-risk basis.
Retention: The amount of liability, premiums or losses
which an insurance company keeps for its own account after application of
reinsurance.
Risk-Based Capital ("RBC"): Capital requirements for
property and casualty insurance companies adopted by the NAIC to assess
minimum capital requirements and to raise the level of protection that
statutory surplus provides for policyholder obligations.
Risk Management Agency ("RMA"): A division of the United
States Department of Agriculture ("USDA") which, along with the Federal Crop
Insurance Corporation ("FCIC") administers and provides reinsurance for the
federally-regulated MPCI and CRC programs.
Stop Loss Reinsurance: A form of reinsurance, similar to
Excess of Loss Reinsurance, whereby the primary insurer caps its loss on a
particular risk by purchasing reinsurance in excess of such cap.
Statutory Accounting Principles ("SAP"): Accounting
practices which consist of recording transactions and preparing financial
statements in accordance with the rules and procedures prescribed or permitted
by state regulatory authorities. Statutory accounting emphasizes solvency
rather than matching revenues and expenses during an accounting period.
<PAGE>
PART I
Item 1. Business.
Company Strategy
Acceptance Insurance Companies Inc. (the "Company")
underwrites and sells specialty property and casualty insurance coverages that
serve niche markets or programs and crop insurance coverages. The Company
selects niche markets or programs for which the Company believes that its
expertise affords it a competitive advantage and which integrate into a
diversified-risk portfolio of coverages. Within the crop insurance industry,
the Company is the third largest writer of crop insurance products in the
United States. The Company, through diversifying the risks insured, seeks to
avoid concentration in particular risks so that, during years when particular
lines of business are experiencing adverse operating results, overall operating
results will remain within targeted returns to shareholders. The Company's
goal is to achieve underwriting results better than the industry average, while
managing its investment portfolio to maximize after-tax yield and at the same
time emphasize stability and capital preservation and maintaining adequate
liquidity to meet all cash needs.
The Company believes that its success in niche markets and
programs requires that it be opportunistic. The Company believes its position
as both an admitted (licensed) and non-admitted (excess and surplus lines)
carrier provides the versatility to respond when different market conditions
and opportunities are presented. At the same time, the Company manages loss
exposure by diversifying its portfolio of coverages and maintaining reinsurance
programs with the goal of reducing volatility as well as mitigating
catastrophic or large loss exposure.
During the last three years, the Company has experienced
declining net revenues in its property and casualty businesses due to an
extremely competitive pricing environment while its crop insurance business has
continued to expand. The Company, however, continues to regularly explore new
opportunities where it has or can acquire experienced underwriters and other
managers with a long and profitable operating history in a particular line of
business.
Organization
The Company underwrites its insurance products through six
wholly-owned insurance company subsidiaries; Acceptance Insurance Company
("Acceptance Insurance"), Acceptance Indemnity Insurance Company ("Acceptance
Indemnity"), Acceptance Casualty Insurance Company ("Acceptance Casualty"),
American Growers Insurance Company ("American Growers"), Redland Insurance
Company ("Redland"), and Phoenix Indemnity Insurance Company ("Phoenix
Indemnity") (collectively referred to herein as the "Insurance Companies").
Collectively, the Insurance Companies are admitted in 48
states and the District of Columbia, and operate on a non-admitted basis in 46
states, the District of Columbia, Puerto Rico and the Virgin Islands. Two of
the Insurance Companies have received their Certificate of Authority
("T" listing) from the U.S. Department of Treasury. Each of the Insurance
Companies is rated A- (Excellent) by A.M. Best. A.M. Best bases its ratings
upon factors that concern policyholders and agents, and not upon factors
concerning investor protection.
The Company's insurance agency and insurance service
subsidiaries principally write and service insurance coverages placed with one
of the Insurance Companies.
The Company was incorporated in Ohio as National Fast Food
Corp. in 1968, reincorporated in Delaware in 1969 and renamed Acceptance
Insurance Companies Inc. in 1992.
Business Segments
The Company has organized its insurance underwriting and
marketing business by product line into two segments, Property and Casualty
Insurance and Crop Insurance.
<PAGE>
Property and Casualty Insurance
Property and Casualty Insurance includes the following
principal lines:
Property and casualty coverages on both an admitted
and non-admitted basis including general liability, specialty auto,
garage excess liability, liquor liability, property and commercial
multi-peril coverages for small and medium businesses which have
unique exposures, do not satisfy the underwriting criteria of standard
carriers, or are not serviced well by standard carriers due to size or
location.
Worker's compensation, professional liability, and
speciality coverages, including coverages for transportation risks,
standard property and casualty coverages for the rural market,
temporary help agencies, greyhound race tracks, condominiums, auto
dealers, and fine arts which are marketed through agencies
concentrating in a particular program or type of coverage.
During 1998, the Company discontinued several
product lines including coverages for certain specialty automobile
lines, aviation, and complex general liability risks. Additionally,
Phoenix Indemnity, which writes non-standard private passenger
automobile business, is being held for sale.
Crop Insurance
The principal lines of the Company's Crop insurance segment
are MPCI and named peril insurance. MPCI is a federally-subsidized farm price
support program designed to encourage farmers to share, through premium
payments, in the federal government's price support programs. MPCI provides
farmers with yield coverage for crop damage from substantially all natural
perils. CRC is an extension of the MPCI program which provides farmers with
protection from revenue loss caused by changes in crop prices and low yields.
As used herein, the term MPCI includes CRC, unless the context indicates
otherwise. For the year ended December 31, 1998, the Company had a market
share of approximately 15% of MPCI business written in the United States.
The largest named peril crop insurance product offered by the
Company is crop hail insurance which insures growing crops against damage
resulting from hail storms. The Company also sells a small volume of insurance
against damage to specific crops from other named perils. In addition, the
Company sells supplemental revenue products which enhance the coverages
available to the farmer under the federal CRC program. None of these products
involve federal reinsurance or price subsidy participation.
The following table reflects the amount of net written
premium for these two insurance segments for the periods set forth below.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
Property and Casualty Insurance..........................$248,479 $275,075 $300,300
Crop Insurance(1)..........................................61,013 59,989 66,649
--------- --------- ---------
Total.................................................$309,492 $335,064 $366,949
========= ========= =========
<FN>
- ---------------
(1) For a discussion of the accounting treatment of MPCI premiums, see
"Management's Discussion and Analysis of Financial Condition and
Results of Operations - General."
</FN>
</TABLE>
<PAGE>
Marketing
The Company markets its property and casualty insurance
products through a network of independent general agents who process and accept
applications for insurance coverages from retail agents who sell insurance to
insurance buyers. The Company also markets a portion of its property and
casualty insurance products and its crop insurance products through a network
of retail agents which specialize in the lines of insurance marketed by them.
The Company compensates its agents through commissions based on a percentage of
premiums produced. The Company also offers most of its agents a contingent
commission based on volume and profitability and other programs designed to
encourage agents to enhance the placement of profitable business with the
Company.
Combined Ratios
The statutory combined ratio, which reflects underwriting
results before taking into account investment income, is a traditional measure
of the underwriting performance of a property and casualty insurer. A combined
ratio of less than 100% indicates underwriting profitability whereas a combined
ratio in excess of 100% indicates unprofitable underwriting. The following
table reflects the loss ratios, expense ratios and combined ratios of the
Company and the property and casualty insurance industry, computed in
accordance with SAP, for the periods shown.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
<S> <C> <C> <C>
The Company
Loss Ratio............................................ 72.3%(1) 63.7% 69.8%
Expense Ratio.............................................. 38.9 34.0 26.6
--------- ------- ------
Combined Ratio............................................ 111.2% 97.7% 96.4%
========= ======= ======
Industry Average(2)
Loss Ratio................................................. 76.2% 72.8% 78.4%
Expense Ratio.............................................. 28.8 28.8 27.4
--------- ------- ------
Combined Ratio.............................................105.0% 101.6% 105.8%
========= ======= ======
<FN>
- ---------------
(1) The $24.2 million reserve strengthening taken by the Company in 1998,
for 1997 and prior years, accounts for 7.4% of the loss ratio for
1998. See "Loss and Loss Adjustment Expense Reserves."
(2) Source: Best's Aggregates & Averages - Property Casualty
(1998 Edition). Ratios for 1998 are unpublished but have been
provided to the Company by A.M. Best.
</FN>
</TABLE>
Underwriting
The Company organizes its underwriting staff by product line,
enabling underwriters to focus on the unique risks associated with the
specialty coverages written by the Company. The Company seeks to ensure that
each specialty product or program fits into the Company's goals through a
strategic planning process whereby managers evaluate the historical and
expected levels of underwriting profitability of the coverages written. The
Company then allocates its capital among product lines where it believes the
best underwriting opportunities exist.
Each underwriter is required to comply with risk parameters,
retention limits and rates and forms prescribed by the Company. All
underwriting operations of the Company are subject to special periodic audit
by the Company's home office personnel and the reinsurers which accept a
portion of these risks.
<PAGE>
Generally, the Company grants general agents the authority to
sell and bind insurance coverages in accordance with detailed procedures and
limitations established by the Company. The Company promptly reviews coverages
bound by agents, decides whether the insurance is written in accordance with
such procedures and limitations, and, subject to state law limits and policy
terms, may cancel coverages that are not in compliance.
The Company grants limited binding authority to certain
independent agents in certain lines of business, and provides that all other
agents submit all applications to the Company's underwriting staff in order for
such coverages to be bound.
Claims
The Company's claims department administers all claims and
directs all legal and adjustment aspects of the claims handling process. To
assist in settling claims the Company regularly uses independent adjusters,
attorneys and investigators as well as third party administrators for some
specialty lines. The Company's claims department is organized into three
parts, each supervised by a senior claims vice president. The Crop Claims
Department manages all claims arising out of the Company's crop insurance
operations through its home office staff and a system of regional claims
offices which supervise specially trained independent adjusters. The Litigation
Department, which is broken down by geographic area, handles larger litigation
claims files and other complex and serious claims. The Claims Department,
which also is broken down by geographic area, handles the other claims files
and supervises the claims handlers. The Company emphasizes the use
of internal staff rather than independent adjusters, improving claims
processing systems and rapid response mechanisms. These systems have
significantly reduced the number of claims handled by each claims examiner.
The Company believes this structure will continue to reduce loss adjustment
expense, shorten the life of open claim files and permit the Company to
estimate more rapidly and consistently future claim liabilities.
Loss and Loss Adjustment Expense Reserves
In the property and casualty insurance industry, it is not
unusual for significant periods of time, ranging up to several years, to elapse
between the occurrence of an insured loss, the report of the loss to the
insurer and the insurer's payment of that loss. The liability for losses and
loss adjustment expenses is determined by management based on historical
patterns and expectations of claims reported and paid, losses which have
occurred but which are not yet reported, trends in claim experience,
information available on an industry-wide basis, changes in the Company's claim
handling procedures and premium rates. The Company's lines of specialty
insurance business are considered less predictable than standard insurance
coverages. The effects of inflation are implicitly reflected in these loss
reserves through the industry data utilized in establishing such reserves. The
Company does not discount its reserves to estimated present value for financial
reporting purposes.
In examining reserve adequacy, historical data is reviewed,
and, as additional experience and other data become available and are reviewed,
estimates of reserves are revised, resulting in increases or decreases to
reserves for insured events of prior years. In 1998, 1997 and 1996 the Company
made additional provisions through a charge to earnings of $24.2 million, $6.9
million, and $9.5 million, respectively, for its reestimated liability for
losses and loss adjustment expenses for prior accident years. During 1998, the
Company has discontinued several product lines due to the continuation of
unexpected development and pricing that is no longer acceptable to the Company.
These lines of business included coverages for certain specialty automobile
lines, aviation, and complex general liability risks. As a result of these
current developments, management modified the assumptions used in reserving
1997 and prior years for these lines which created most of the unfavorable
development during 1998.
The liability established represents management's best
estimate and is based on sources of currently available evidence including an
analysis prepared by an independent actuary engaged by the Company. Even with
such extensive analyses, the Company believes that its ultimate liability may
from time to time vary from such estimates.
The Company annually obtains an independent review of its
loss reserving process and reserve estimates by a independent professional
actuary as part of the annual audit of its financial statements.
<PAGE>
The following table presents an analysis of the Company's
reserves, reconciling beginning and ending reserve balances for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(in thousands)
<S> <C> <C> <C>
Net loss and loss adjustment
expense reserves at beginning
of year........................................................$263,106 $246,752 $201,356
--------- --------- ---------
Provisions for net losses and
loss adjustment expenses for
claims occurring in the current
year........................................................... 212,894 206,597 233,727
Increase in net reserves for
claims occurring in prior years............................... 24,167 6,858 9,530
--------- --------- ---------
237,061 213,455 243,257
--------- --------- ---------
Net losses and loss adjustment
expenses paid for claims
occurring during:
The current year........................................... (100,968) (110,372) (102,565)
Prior years............................................... (113,224) (86,729) (95,296)
--------- --------- ---------
(214,192) (197,101) (197,861)
--------- --------- ---------
Net loss and loss adjustment
expense reserves at end of year................................ 285,975 263,106 246,752
Reinsurance recoverable on unpaid
losses and loss adjustment
expenses....................................................... 238,769 165,547 185,421
--------- --------- ----------
Gross loss and loss adjustment
expense reserves...............................................$524,744 $428,653 $432,173
========= ========= ==========
</TABLE>
The following table presents the development of balance sheet
net loss reserves from calendar years 1988 through 1998. The top line of the
table shows the loss reserves at the balance sheet date for each of the
indicated years. These amounts are the estimates of losses and loss adjustment
expenses for claims arising in all prior years that are unpaid at the balance
sheet date, including losses that had been incurred but not yet reported to the
Company. The middle section of the table shows the cumulative amount paid,
expressed as a percentage of the initial reserve amount, with respect to
previously recorded reserves as of the end of each succeeding year. The lower
section of the table shows the reestimated amount, expressed as a percentage of
the initial reserve amount, of the previously recorded reserves based on
experience as of the end of each succeeding year. The estimate changes as more
information becomes known about the frequency and severity of claims for
individual years. The "Net cumulative redundancy (deficiency)" caption
represents the aggregate percentage increase (decrease) in the initial reserves
estimated. It should be noted that the table presents the "run off" of balance
sheet reserves, rather than accident or policy year loss development. The
Company computes the cumulative redundancy (deficiency) annually on a calendar
year basis.
The establishment of reserves is an inherently uncertain
process. The Company underwrites both property and casualty coverages in a
number of specialty areas of business which may involve greater risks than
standard property and casualty lines. These risk components may make more
difficult the task of estimating reserves for losses, and cause the Company's
underwriting results to fluctuate. Further, conditions and trends that have
effected the development of loss reserves in the past may not necessarily occur
in the future. Accordingly, it may not be appropriate to extrapolate future
redundancies or deficiencies based on this information.
The Company adopted Statement of Financial Accounting
Standards No. 113 ("SFAS #113"), "Accounting and Reporting for Reinsurance of
Short-Duration and Long-Duration Contracts," effective January 1, 1993. The
application of SFAS #113 resulted in the reclassification of amounts ceded to
reinsurers, which amounts were previously reported as a reduction in unearned
premium and unpaid losses and loss adjustment expenses, to assets on the
consolidated balance sheet. The table below includes a reconciliation of net
loss and loss adjustment expense reserves to amounts presented on the
consolidated balance sheet after reclassifications related to the adoption of
SFAS #113. The gross cumulative deficiency is presented for 1992 through 1997,
the only years on the table for which the Company has restated amounts in
accordance with SFAS #113.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net reserves for unpaid
losses and loss
adjustment expenses $34,092 $43,380 $58,439 $66,132 $77,627 $115,714 $141,514 $201,356 $246,752 $263,106 $285,975
Cumulative amount of net
liability paid through:
One year later 30.5% 30.0% 40.6% 45.7% 36.1% 49.1% 51.0% 47.3% 44.7% 43.0%
Two years later 52.1% 59.5% 70.8% 72.3% 73.6% 80.5% 86.1% 75.2% 71.8%
Three years later 68.7% 76.1% 88.5% 96.6% 94.5% 100.9% 104.5% 93.1%
Four years later 77.0% 84.5% 101.2% 108.1% 109.0% 108.8% 115.5%
Five years later 81.5% 89.2% 107.5% 115.1% 114.9% 113.6%
Six years later 85.3% 93.4% 109.7% 118.2% 118.2%
Seven years later 89.8% 94.5% 111.4% 119.5%
Eight years later 90.3% 95.5% 111.8%
Nine years later 90.4% 95.6%
Ten years later 90.4%
Net reserves reestimated as of:
One year later 97.9% 99.1% 100.3% 103.5% 103.3% 104.4% 115.8% 104.7% 102.8% 109.2%
Two years later 92.3% 95.2% 102.3% 109.9% 109.7% 114.5% 115.7% 106.6% 112.0%
Three years later 87.3% 91.4% 107.4% 116.9% 117.9% 113.1% 120.5% 114.2%
Four years later 84.9% 92.5% 110.7% 120.1% 117.7% 116.1% 125.9%
Five years later 85.3% 94.0% 112.7% 119.9% 119.8% 118.2%
Six years later 86.6% 95.9% 112.0% 120.5% 121.5%
Seven years later 91.0% 95.4% 112.5% 121.9%
Eight years later 90.7% 96.0% 113.4%
Nine years later 90.8% 96.7%
Ten years later 90.8%
Net cumulative redundancy
(deficiency) 9.2% 3.3% -13.4% -21.9% -21.5% -18.2% -25.9% -14.2% -12.0% -9.2%
Gross reserves for unpaid loss and
loss adjustment expenses $127,666 $211,600 $221,325 $369,244 $432,173 $428,653 $524,744
Reinsurance recoverable on unpaid
loss and loss adjustment expenses 50,039 95,886 79,811 167,888 185,421 165,547 238,769
-------- -------- -------- -------- -------- -------- --------
Net reserves for unpaid loss and
loss adjustment expenses $ 77,627 $115,714 $141,514 $201,356 $246,752 $263,106 $285,975
======== ======== ======== ======== ======== ======== ========
Reestimated gross reserves for unpaid
loss and loss adjustment expenses 112.0% 118.6% 131.6% 110.3% 109.2% 114.2%
Reestimated reinsurance recoverable
on unpaid loss and loss adjustment
expenses 97.1% 119.1% 141.8% 105.7% 105.6% 122.1%
Reestimated net reserves for unpaid
loss and loss adjustment expenses 121.5% 118.2% 125.9% 114.2% 112.0% 109.2%
======== ======= ======== ======= ======= ========
Gross cumulative redundancy (deficiency) -12.0% -18.6% -31.6% -10.3% -9.2% -14.2%
======== ======= ======== ======= ======= ========
</TABLE>
<PAGE>
Reinsurance
A significant component of the Company's business strategy
involves the structuring of reinsurance to reduce volatility in its business
segments as well as to avoid large or catastrophic loss exposure. Reinsurance
involves an insurance company transferring, or ceding, all or a portion of its
exposure on insurance to a reinsurer. The reinsurer assumes the ceded exposure
in return for a portion of the premium received by the insurance company.
Reinsurance does not discharge the insurer from its obligations to its insured.
If the reinsurer fails to meet its obligations, the ceding insurer remains
liable to pay the insured loss, but the reinsurer is liable to the ceding
insurer to the extent of the reinsured portion of any loss.
The Company limits its exposure under individual policies by
purchasing excess of loss and quota share reinsurance, as well as maintaining
catastrophe reinsurance to protect against catastrophic occurrences where
claims can arise under several policies from a single event, such as a
hurricane, earthquake, wind storm, riot, tornado or other extraordinary event.
The Company generally retains the first $500,000 of risk
under its property and casualty lines of business, ceding the next $1,500,000
(on a per risk basis) on property and $5,500,000 (on an occurrence basis) on
casualty, respectively to reinsurers. To the extent that individual policies
exceed reinsurance treaty limits, the Company purchases reinsurance on a
facultative (specific policy) basis.
The Company maintains catastrophe reinsurance for its
casualty lines which provides coverage for $14 million in excess of $6 million
of aggregate risk per occurrence, and for its property lines, which provides
coverage of 95% of $117.5 million in excess of a $2.5 million retention per
occurrence. The Company reviews the concentrations of property values in its
property lines of business continually and models possible losses for
catastrophic events through computer simulations of different levels of storm
activity, adjusting the required limit of liability or the concentrations of
property coverage as deemed appropriate.
In its workers' compensation line, the Company buys excess of
loss protection on a statutory basis in excess of a $600,000 per occurrence
retention.
The Company reinsures its MPCI business with various federal
reinsurance pools administered by the RMA. 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. The Company's net
exposure on MPCI business is further reduced by excess of loss reinsurance
purchased from private carriers. This excess of loss reinsurance generally
provides coverage for 95% of losses in excess of a $3,000,000 deductible after
the Company's loss ratio reaches specified limits for each line of business,
ranging from 72% to 77% on crop hail and named peril business and 100% on MPCI
business. Additionally 80% of the Company's crop hail business is reinsured
through quota share agreements.
At December 31, 1998, 90% of the Company's outstanding
reinsurance recoverables were from domestic reinsurance companies or the
federal government, 93% of which was from reinsurance companies rated A-
(excellent) or better by A.M. Best or from the federal government. The
balance was primarily placed with major international reinsurers.
Investments
The Company's investment policy is to maximize the after-tax
yield of the portfolio while emphasizing the stability and preservation of the
Company's capital base. Further, the portfolio is invested in types of
securities and in an aggregate duration which reflect the nature of the
Company's liabilities and expected liquidity needs. The Company manages its
portfolio internally. The Company's fixed maturity securities are classified
as available-for-sale and carried at estimated fair value. The investment
portfolio at December 31, 1998 and 1997, consisted of the following:
<PAGE>
<TABLE>
<CAPTION>
December 31, 1998 December 31, 1997
Amortized Estimated Amortized Estimated
Cost Fair Value Cost Fair Value
Type of Investment (in thousands)
<S> <C> <C> <C> <C>
Fixed maturity securities
U.S. Treasury and government securities............................$77,671 $78,785 $104,039 $104,534
States, municipalities and political
subdivisions.................................................... 161,017 167,202 129,378 133,860
Other debt securities.............................................. 56,786 53,193 40,131 39,598
Mortgage-backed securities......................................... 38,475 37,927 48,056 44,807
------- ------- -------- --------
Total fixed maturity securities.............................. 333,949 337,107 321,604 322,799
Common stocks...................................................... 39,438 44,371 23,574 30,847
Preferred stocks................................................... 27,246 27,316 51,185 53,309
Commercial mortgages................................................ 9,549 9,549 10,248 10,248
Real estate....................................................... 3,300 3,300 3,329 3,329
Short-term investments(1)......................................... 67,754 67,754 32,185 32,185
-------- -------- -------- --------
Total........................................................$481,236 $489,397 $442,125 $452,717
======== ======== ======== ========
<FN>
- ---------------
(1) Due to the short-term nature of crop insurance, the Company must maintain short-term investments to fund
amounts due to pay losses. Historically, these short-term funds are highest in the fall corresponding to the
cash flow in the agricultural industry.
</FN>
</TABLE>
The following table sets forth, as of December 31, 1998, the
composition of the Company's fixed maturity securities portfolio by time to
maturity:
<TABLE>
<CAPTION>
Estimated
Maturity Fair Value Percent
(in thousands, except percentages)
<S> <C> <C>
1 year or less.............................................................$ 10,180 3.0%
More than 1 year through 5 years............................................ 70,479 20.9%
More than 5 years through 10 years......................................... 59,625 17.7%
More than 10 years......................................................... 158,896 47.1%
Mortgage-backed securities.................................................. 37,927 11.3%
-------- ------
Total.................................................................$337,107 100.0%
======== ======
</TABLE>
<PAGE>
The Company's investment results for the periods indicated
are set forth below:
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
(in thousands, except percentages)
<S> <C> <C> <C>
Net investment income..........................................................$ 28,320 $ 28,016 $ 26,491
Average investment
portfolio(1)................................................................. 497,649 453,876 402,404
Pre-tax return on average
investment portfolio......................................................... 5.7% 6.2% 6.6%
Net realized gains.............................................................$ 6,825 $ 7,321 $ 5,216
Change in unrealized gain (loss) on available-for-sale securities .............$ (1,580) $ 8,361 $ (1,495)
<FN>
- ---------------
(1) Represents the average of the beginning and ending investment portfolio (excluding real estate) computed on
a quarterly basis.
</FN>
</TABLE>
Regulation
As a general rule, an insurance company must be licensed to
transact insurance business in each jurisdiction in which it operates, and
almost all significant operations of a licensed insurer are subject to
regulatory scrutiny. Licensed insurance companies are generally known as
"admitted" insurers. Most states provide a limited exemption from licensing
for insurers issuing insurance coverages that generally are not available from
admitted insurers. Their coverages are referred to as "surplus lines"
insurance and these insurers as "surplus lines" or "non-admitted" companies.
The Company's admitted insurance business is subject to
comprehensive, detailed regulation throughout the United States, under statutes
which delegate regulatory, supervisory and administrative powers to state
insurance commissioners. The primary purpose of such regulations and
supervision is the protection of policyholders and claimants rather than
stockholders or other investors. Depending on whether the insurance company is
domiciled in the state and whether it is an admitted or non-admitted insurer,
such authority may extend to such things as (i) periodic reporting of the
insurer's financial condition; (ii) periodic financial examination;
(iii) approval of rates and policy forms; (iv) loss reserve adequacy;
(v) insurer solvency; (vi) the licensing of insurers and their agents; (vii)
restrictions on the payment of dividends and other distributions;
(viii) approval of changes in control; and (ix) the type and amount of
permitted investments.
The Company also is subject to laws governing insurance
holding companies in Nebraska, Iowa, Arizona and Texas, where the Insurance
Companies are domiciled. These laws, among other things, require the
Company to file periodic information with state regulatory authorities
including information concerning its capital structure, ownership, financial
condition and general business operations; regulate certain transactions
between the Company, its affiliates and the Insurance Companies, including the
amount of dividends and other distributions and the terms of surplus notes; and
restrict the ability of any one person to acquire certain levels of the
Company's voting securities (generally 10%) without prior regulatory approval.
Except for interest on surplus notes issued by the Insurance
Companies and payments on the American Agrisurance ("Am Ag") profit sharing,
the Company is dependent for funds to pay its operating and other expenses
upon dividends and other distributions from the Insurance Companies, the
payment of which are subject to review and authorization by state insurance
regulatory authorities. Under Nebraska law, no domestic insurer may make a
dividend or distribution which, together with dividends or distributions paid
during the preceding twelve months, exceeds the greater of (i) 10% of such
insurer's policyholders' surplus as of the preceding December 31 or (ii) such
insurer's statutory net income (excluding realized capital gains) for the
preceding calendar year, until either it has been approved, or a thirty-day
waiting period shall have passed during which it has not been disapproved by
the Nebraska Insurance Director. Iowa and Texas have similar laws governing
the payment of dividends or distributions of insurance companies domiciled in
their state. In any case, the maximum amount of dividends the Insurance
Companies may pay to Acceptance is limited to its earned surplus, also known as
unassigned funds. Under Arizona law, payment of dividends or distributions by
a domestic insurer is limited to the lesser of (i) 10% of such insurer's
policyholders' surplus as of the preceding December 31 or (ii) such insurer's
net investment income for the preceding calendar year. The tiered structure of
the Company's insurance subsidiaries effectively imposes two levels of dividend
restriction on the payment to the ultimate parent of dividends from Acceptance
Indemnity, Phoenix Indemnity, American Growers and Acceptance Casualty. During
1999, the statutory limitation on dividends from the Insurance Companies to
Acceptance without further insurance department approval is approximately
$15.9 million.
<PAGE>
Other regulatory and business considerations may further
limit the ability of the Insurance Companies to pay dividends. For example,
the impact of dividends on surplus could effect an insurers' competitive
position, the amount of premiums that it can write and its ability to pay
future dividends. Further, the insurance laws and regulations of Nebraska,
Iowa, Arizona and Texas require that the statutory surplus of an insurance
company domiciled therein, following any dividend or distribution by such
company, be reasonable in relation to its outstanding liabilities and adequate
for its financial needs.
While the non-insurance company subsidiaries are not subject
directly to the dividend and other distribution limitations, insurance holding
company regulations govern the amount which a subsidiary within the holding
company system may charge any of the Insurance Companies for services
(e.g., agents' commissions).
The Company's MPCI program is federally-regulated and
supported by the federal government by means of premium subsidies to farmers
and expense reimbursement and federal reinsurance pools for private insurers.
Consequently, the MPCI program is subject to oversight by the legislative and
executive branches of the federal government, including the RMA. The MPCI
program regulations prescribe premiums which may be charged and generally
require compliance with federal guidelines with respect to underwriting, rating
and claims administration. The Company is required to perform continuous
internal audit procedures and is subject to audit by several federal
government agencies.
During the past several years, various regulatory and
legislative bodies have adopted or proposed new laws or regulations to deal
with the cyclical nature of the insurance industry, catastrophic events and
insurance capacity and pricing. These regulations include (i) the creation of
"market assistance plans" under which insurers are induced to provide certain
coverages, (ii) restrictions on the ability of insurers to cancel certain
policies in mid-term, (iii) advance notice requirements or limitations imposed
for certain policy non-renewals and (iv) limitations upon or decreases in rates
permitted to be charged.
The NAIC has approved and recommended that states adopt and
implement several regulatory initiatives designed to be used by regulators as
an early warning tool to identify deteriorating or weakly capitalized
insurance companies and to decrease the risk of insolvency of insurance
companies. These initiatives include the implementation of the Risk Based
Capital ("RBC") standards for determining adequate levels of capital and
surplus to support four areas of risk facing property and casualty insurers:
(a) asset risk (default on fixed income assets and market decline), (b) credit
risk (losses from unrecoverable reinsurance and inability to collect agents'
balances and other receivables),(c) underwriting risk (premium pricing and
reserve estimates), and (d) off-balance sheet/growth risk (excessive premium
growth and unreported liabilities). At December 31, 1998 the Insurance
Companies met the RBC requirements as promulgated by the domiciliary states
of the Insurance Companies and the NAIC.
The NAIC has developed its Insurance Regulatory Information
System ("IRIS") to assist state insurance departments in identifying
significant changes in the operations of an insurance company, such as changes
in its product mix, large reinsurance transactions, increases or decreases in
premiums received and certain other changes in operations. Such changes may
not result from any problems with an insurance company but may merely indicate
changes in certain ratios outside ranges defined as normal by the NAIC. When
an insurance company has four or more ratios falling outside "normal ranges,"
state regulators may investigate to determine the reasons for the variance
and whether corrective action is warranted. At December 31, 1998, none of the
six Insurance Companies had more than three ratios falling outside
"normal ranges."
The eligibility of the Insurance Companies to write insurance
on a surplus lines basis is dependent on their compliance with certain
financial standards, including the maintenance of a requisite level of capital
and surplus and the establishment of certain statutory deposits. State surplus
lines laws typically: (i) require the insurance producer placing the business
to show that he or she was unable to place the coverage with admitted insurers;
(ii) establish minimum financial requirements for surplus lines insurers
operating in the state; and (iii) require the insurance producer to obtain a
special surplus lines license. In recent years, many jurisdictions have
increased the minimum financial standards applicable to surplus lines
eligibility.
The Insurance Companies also may be required under the
solvency or guaranty laws of most states in which they are licensed to pay
assessments (up to certain prescribed limits) to fund policyholder losses or
liabilities of insolvent or rehabilitated insurance companies. These
assessments may be deferred or forgiven under most guaranty laws if they would
threaten an insurer's financial strength and, in certain instances, may be
offset against future premium taxes. Some state laws and regulations further
require participation by the Insurance Companies in pools or funds to provide
types of insurance coverages which they would not ordinarily accept.
<PAGE>
Uncertainties Affecting the Insurance Business
The property and casualty insurance business is highly
competitive, with over 3,000 insurance companies in the United States, many of
which have substantially greater financial and other resources, and may offer
a broader variety of coverages than those offered by the Company. Beginning in
the latter half of the 1980s, there has been severe price competition in the
insurance industry which has resulted in a reduction in the volume of premiums
written by the Company in some of its lines of businesses, because of its
unwillingness to reduce prices to meet competition. In the crop insurance
business, the Company competes with other crop insurance companies primarily on
the basis of service and commissions to agents.
The specialty property and casualty coverages underwritten by
the Company may involve greater risks than more standard property and casualty
lines. These risks may include a lack of predictability, and in some
instances, the absence of a long-term, reliable historical data base upon which
to estimate future losses.
Pricing in the property and casualty insurance industry is
cyclical in nature, fluctuating from periods of intense price competition,
which led to record underwriting losses during the early 1980's, to periods of
increased market opportunity as some carriers withdrew from certain market
segments. Despite increased price competition in recent years, the Company has
maintained consistent earned premium income during such periods, principally
through geographic expansion, acquisitions and implementation of new insurance
programs.
The Company's results also may be influenced by factors
influencing the insurance industry generally and which are largely beyond the
Company's control. Such factors include (a) weather-related catastrophes; (b)
taxation and regulatory reform at both the federal and state level; (c) changes
in industry standards regarding rating and policy forms; (d) significant
changes in judicial attitudes towards liability claims; (e) the cyclical nature
of pricing in the industry; and (f) changes in the rate of inflation, interest
rates and general economic conditions. The Company's crop insurance results
are particularly subject to wide fluctuations because of weather factors
influencing crop harvests. Crop insurance results are not generally known
until the last half of the year. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- General."
The insurance business is highly regulated and supervised in
the states in which the Insurance Companies conduct business. The crop
insurance lines are subject to significant additional federal regulation. The
regulations relating to the property and casualty and crop insurance business
at both the state and federal level are frequently modified and such
modifications may impact future insurance operations. See "Regulation."
Adverse loss experience for 1997 and prior years resulted in
a strengthening of loss reserves for the year ended December 31, 1998, in the
amount of $24.2 million. The establishment of appropriate loss reserves is
an inherently uncertain process, and, it has been necessary, and over time may
continue to be necessary, to revise estimated loss reserve liabilities. See
"Loss and Loss Adjustment Reserves," for a further discussion of factors which
may, in the future, influence loss reserve estimates.
Property and casualty insurance is a capital intensive
business and the Company is obliged to maintain minimum levels of surplus in
the Insurance Companies in order to continue writing insurance at current
levels or to increase its writings, and also to meet various operating ratio
standards established by state insurance regulatory authorities and by
insurance rating bureaus. Without additional capital, the Company could be
required to curtail growth or even to reduce its volume of premium writings in
order to satisfy state regulations or to maintain its current A- (excellent)
rating from A.M. Best. The Company's long-term history is one of continuing
premium growth, and it may be expected to require additional capital from time
to time, through additional offerings of its securities, increase in its debt
or otherwise. The Company continually reviews the surplus needs of the
Insurance Companies, and may, from time-to-time, need to seek additional
funding.
<PAGE>
Employees
At March 22, 1999 the Company and its subsidiaries employed
17 salaried executives and 1,025 other personnel. Acceptance believes that
relations with its employees are good.
Item 2. Properties.
The following table sets forth certain information regarding
the principal properties of the Company.
<TABLE>
<CAPTION>
General Leased/
Location Character Size Owned(1)
<S> <C> <C> <C>
Omaha, NE.......................................Office 58,000 sq. ft. Leased
Council Bluffs, IA..............................Office 142,000 sq. ft. Leased
Council Bluffs, IA..............................Office 33,000 sq. ft. Owned
Whitsett, NC....................................Office 7,000 sq. ft. Leased
Phoenix, AZ.....................................Office 33,000 sq. ft. Leased
Scottsdale, AZ..................................Office 27,000 sq. ft. Leased
Itasca, IL......................................Office 4,000 sq. ft. Leased
Overland Park, KS...............................Office 3,000 sq. ft. Leased
<FN>
- ---------------
(1) The range of expiration dates for these leases is November 30, 2001(Omaha), December 31, 2001 with five
year option (Council Bluffs), December 31, 2000 (Whitsett), February 21, 2000 (Phoenix), December 31,
2001 (Scottsdale), August 31, 2001 (Itasca), and December 31, 2001 (Overland Park).
</FN>
</TABLE>
Item 3. Legal Proceedings.
There are no material legal proceedings pending involving the
Company or any of its subsidiaries which require reporting pursuant to this
Item.
Item 4. Submission of Matters to a Vote of Security Holders.
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended December 31, 1998.
<PAGE>
PART II.
Item 5. Market for Registrant's Equity and Related Stockholder Matters.
The Common Stock is listed and traded on the New York Stock
Exchange ("NYSE"). The following table sets forth the high and low sales
prices per share of Common Stock as reported on the NYSE Composite Tape for the
fiscal quarters indicated.
<TABLE>
<CAPTION>
High Low
<S> <C> <C>
Year Ended December 31, 1997
First Quarter............................................................. 22 7/8 18 5/8
Second Quarter............................................................ 22 3/4 18
Third Quarter............................................................. 26 3/4 21 1/4
Fourth Quarter............................................................ 28 5/8 22 3/8
Year Ended December 31, 1998
First Quarter............................................................. 25 3/8 22 5/8
Second Quarter............................................................ 25 1/4 21 1/2
Third Quarter............................................................. 24 11/16 17 7/16
Fourth Quarter............................................................ 20 13/16 17 1/16
</TABLE>
As of March 22, 1999, there were approximately 1,600 holders of record of
the Common Stock.
The Company has not paid cash dividends to its shareholders
during the periods indicated above and does not anticipate that it will pay
cash dividends in the foreseeable future. The Company's credit agreement with
its lenders ("Credit Agreement") prohibits the payment of cash dividends to
shareholders. See "Regulation" for a description of restrictions on payment of
dividends to the Company from the Insurance Companies; and see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations - Liquidity and Capital Resources" for a description of the
Company's Credit Agreement.
Item 6. Selected Consolidated Financial Data.
The following table sets forth certain selected consolidated
financial data and should be read in conjunction with, and is qualified in its
entirety by, the Consolidated Financial Statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing elsewhere herein. This selected consolidated financial
data has been derived from the audited Consolidated Financial Statements
of the Company and its subsidiaries.
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
1998(1) 1997(1) 1996(1) 1995(1) 1994(1)
(in thousands, except per share data and ratios)
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Insurance Revenues:
Gross premiums written..............................$700,960 $665,810 $651,060 $537,349 $447,483
======== ======== ======== ======== ========
Net premiums written................................$309,492 $335,064 $366,949 $286,183 $229,176
======== ======== ======== ======== ========
Net premiums earned.................................$328,044 $335,215 $348,653 $271,584 $202,659
Net investment income............................... 27,641 27,426 25,677 19,851 12,864
Net realized capital gains.......................... 6,825 7,321 5,206 2,531 554
Agency income..................................... -- -- 1,035 2,863 3,629
-------- -------- -------- -------- --------
Insurance revenues................................ 362,510 369,962 380,571 296,829 219,706
Non-insurance revenues................................ 679 590 824 976 412
-------- -------- -------- -------- --------
Total revenues........................................ 363,189 370,552 381,395 297,805 220,118
Insurance expenses:
Losses and loss adjustment
expenses.......................................... 237,061 213,455 243,257 212,337 142,951
Underwriting and other expenses..................... 104,736 97,109 95,803 72,602 52,627
Agency expenses...................................... -- -- 1,024 2,596 3,180
-------- -------- -------- -------- --------
Insurance expenses................................ 341,797 310,564 340,084 287,535 198,758
Non-insurance expenses................................ 3,502 2,063 2,015 2,165 1,684
-------- -------- -------- -------- --------
Total expenses........................................ 345,299 312,627 342,099 289,700 200,442
-------- -------- -------- -------- --------
Operating profit .................................... 17,890 57,925 39,296 8,105 19,676
Other expense:
Interest expense................................... (8,994) (6,569) (4,896) (2,591) (1,693)
Other expense, net................................ (816) (51) (910) (171) (271)
--------- --------- -------- --------- --------
Income before income taxes
and minority interests............................. 8,080 51,305 33,490 5,343 17,712
Provision (benefit) for income
taxes(2)............................................. 2,544 15,992 3,210 1,188 (3,443)
Minority interests in net income
of consolidated subsidiaries......................... -- -- -- -- 80
--------- --------- -------- -------- ---------
Net income .......................................... $ 5,536 $ 35,313 $ 30,280 $ 4,155 $ 21,075
========= ========= ======== ======== =========
Net income
per share:
- Basic..............................................$ .37 $ 2.34 $ 2.03 $ .28 $ 2.04
- Diluted............................................ .37 2.30 1.99 .28 1.86
GAAP Ratios:
Loss ratio........................................... 72.3% 63.7% 69.7% 78.2% 70.5%
Expense ratio........................................ 31.9% 28.9% 27.5% 26.7% 26.0%
-------- --------- -------- ------ -------
Combined loss and expense ratio..................... 104.2% 92.6% 97.2% 104.9% 96.5%
======== ========= ======== ====== =======
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
December 31,
1998 1997 1996 1995 1994
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Investments...........................................$489,397 $452,717 $405,926 $368,001 $264,743
Total assets........................................ 1,092,943 979,453 884,380 781,034 543,087
Loss and loss adjustment
expense reserves.................................... 524,744 428,653 432,173 369,244 221,325
Unearned premiums..................................... 162,037 157,134 140,217 124,122 97,170
Borrowings and term debt........................... 15,000 -- 69,000 69,000 29,000
Company-obligated mandatorily
redeemable Preferred Securities
of AICI Capital Trust, holding
solely Junior Subordinated
Debentures of the Company........................... 94,875 94,875 -- -- --
Stockholders' equity.................................. 236,154 253,670 207,820 177,787 159,754
Other Data:
Statutory Surplus of Insurance
Companies(3)........................................ 236,041 238,520 191,455 169,628 126,272
<FN>
__________________
(1) For a discussion of the accounting treatment of the Company's MPCI business, see "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- General."
(2) Results for 1994 reflect the utilization of tax loss carryforwards and other temporary differences resulting from prior
non-insurance operations.
(3) Statutory data has been derived from the separate financial statements of the Insurance Companies prepared in accordance
with SAP.
</FN>
</TABLE>
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
The following discussion and analysis of financial condition
and results of operations of the Company and its consolidated subsidiaries
should be read in conjunction with the Company's Consolidated Financial
Statements and the notes thereto included elsewhere herein.
General
During 1998, the Company continued to focus on improving
operating margins in its property and casualty business by emphasizing
profitable lines, reunderwriting marginal lines and eliminating unprofitable
lines. This process led to a restructuring of the Company's property and
casualty business in the fourth quarter of 1998 including the elimination of
$151.0 million in gross written premiums from unprofitable lines of business,
reinsurance agreements transferring run-off of the eliminated lines of
business, and the strengthening of the Company's loss and loss adjustment
expense reserves, principally on the eliminated lines of business.
During the past five years, the Company's other major
segment, crop insurance, has met or exceeded the Company's operating margin
expectations, and this trend continued during 1998. The Company is currently
the third largest writer of MPCI business in the United States.
MPCI is a government-sponsored program with accounting
treatment which differs from more traditional property and casualty insurance
lines. For income statement purposes, gross premiums written consist of the
aggregate amount of MPCI premiums paid by farmers, and does not include any
related federal premium subsidies or expense reimbursement. The Company's
profit or loss from its MPCI business is determined after the crop season
ends on the basis of a profit sharing formula established by law and the RMA.
For income statement purposes, any such profit share earned by the Company, net
of the cost of third party reinsurance, is shown as net premiums written,
which equals net premiums earned for MPCI business; whereas, any share of
losses payable by the Company is charged to losses and loss adjustment
expenses. Due to various factors, including timing and severity of losses from
storms and other natural perils and crop production cycles, the profit or loss
on MPCI premiums is primarily recognized in the second half of the calendar
year. The Company relies on loss information from the field to determine
(utilizing a formula established by the RMA) the level of losses that should be
considered in estimating the profit or loss during this period. Based upon
available loss information, the Company records an estimate of the profit
or loss during the third quarter and then re-evaluates the estimate using
additional loss information available at year-end to determine any remaining
portion to be recorded in the fourth quarter. All expense reimbursements
received are credited to underwriting expenses.
Certain characteristics of the Company's crop business may
affect comparisons, including: (i) the seasonal nature of the business whereby
profits or losses are generally recognized predominately in the second half
of the year; (ii) the nature of crop business whereby losses are known within a
short time period; and (iii) the limited amount of investment income associated
with crop business. In addition, cash flows from such business differ from
cash flows from certain more traditional lines. See "Liquidity and Capital
Resources" below. The seasonal and short term nature of the Company's crop
business, as well as the impact on such business of weather and other natural
perils, may produce more volatility in the Company's operating results on a
quarter to quarter or year to year basis than has historically been the case.
Forward-Looking Information
Except for the historical information contained in this
Annual Report on Form 10-K, matters discussed herein may constitute
forward-looking information, within the meaning of the Private Securities
Litigation Reform Act of 1995. 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.
<PAGE>
The Company's results are significantly impacted by its crop
business, particularly its MPCI line. Results from the crop lines are not
generally known until the third and fourth quarters of the year, after crops
are harvested. Crop results are particularly dependent on events beyond the
Company's control, notably weather conditions during the crop growing seasons
in the states where the Company writes a substantial amount of its crop
insurance, and, with the introduction of the Company's new Crop Revenue
Coverage, the market price of grains on various commodity exchanges.
Additionally, federal regulations governing aspects of crop insurance are
frequently modified, and any such changes may impact crop insurance results.
Forward-looking information set forth herein does not take
into account any impact from any adverse weather conditions during the 1999
crop season, or the various other factors noted above which may affect crop and
non-crop operation results.
Results of Operations
Year Ended December 31, 1998
Compared to Year Ended December 31, 1997
The Companys net income decreased 84.3% from $35.3 million in
the year ended December 31, 1997 to $5.5 million in the year ended December 31,
1998. The Companys operating income decreased 69.1% from $57.9 million in the
year ended December 31, 1997 to $17.9 million in the year ended December 31,
1998. These deteriorating results occurred due to a decline in the Company's
net premiums earned, an increase in the Company's incurred losses and loss
adjustment expenses, an increase in the Company's underwriting and general and
administrative expenses, an increase in the Company's interest expenses, and a
decrease in the Company's net realized capital gains. These negative results
were primarily a result of the failure of the Company's property and casualty
operations to achieve underwriting profitability, whereas the Company's crop
insurance operations were able to meet or exceed profitability expectations for
the fifth consecutive year.
During 1998, as in 1997, the Company's goal in its property and
casualty segment was to improve underwriting results through an emphasis on
profitable lines, modification of marginal lines, and a discontinuation of
unprofitable lines. By the fourth quarter of 1998, it became clear that this
process was not meeting the Company's goals for underwriting profitability, and
therefore, the Company undertook substantial restructuring of its property and
casualty operations in order to focus on profitable lines of speciality
business generated by its general agents and program managers. This
restructuring eliminated approximately $151.0 million in annual gross written
premiums from lines of business the Company believed had developed into
commodity insurance products no longer meeting the criteria of its core
specialty business. As part of the property and casualty operations
restructuring, the Company entered into discussions for sale of some
discontinued business, most notably the non-standard automobile business, and
entered into reinsurance agreements transferring the runoff of the remaining
discontinued lines to reinsurers. The Company also strengthened its loss and
loss adjustment reserves primarily due to continued unexpected development,
principally on the discontinued lines of business. As part of the restructuring
plan, the Company recorded an after tax charge in the fourth quarter of 1998 of
approximately $23.3 million, and the Company expects an after tax charge of
approximately $.9 million to be recorded in the first quarter of 1999. Before
the charges associated with the restructuring, the Company's net income for
1998 was $28.8 million. In addition to the non-standard automobile business,
the Company discontinued several product lines including coverages for certain
specialty automobile lines, aviation, and complex general liability risks.
The remaining property and casualty lines of business have historically
achieved underwriting loss and expense ratios below 100%, and with the
reinsurance of discontinued lines and the strengthening of reserves for the
discontinued business, the Company believes that it has enhanced the ability of
its property and casualty operations to return to profitability in 1999.
The Company's crop segment was a significant contributor to the
underwriting earnings of the Company in both 1997 and 1998. During 1997, this
segment contributed $36.9 million to the Company's underwriting earnings as
compared to $30.0 million during 1998. During 1997, the Company earned a
profit share of 31.5% on its MPCI retained premium pool of approximately
$155.5 million or $49.0 million. In addition, the Company recorded in the
first quarter of 1998 additional profit share of 2.5% or $4.0 million for the
1997 year. This compares with an earned profit sharing of 25.0% on $196.5
million retained premium pool generating $49.1 million in 1998.
For the second year in a row, the Company experienced a decline
in net insurance premiums earned from $335.2 million in 1997 to $328.0 million
in 1998. While the Company's gross written premiums increased 5.3% from
$665.8 million in 1997 to $701.0 million in 1998, an increase in the premiums
which the Company ceded to reinsurers resulted in a decrease in net premiums
written and net premiums earned. Due to the competitive environment in the
property and casualty business, new programs which the Company initiated in
1998 were heavily reinsured in order to diminish the impact on the Company's
results until such time as these new programs confirmed their expected level of
profitability, and lines of business which were profitable but performing below
the Company's return on equity expectations, were more heavily reinsured in
order to take advantage of favorable reinsurance terms available in the market.
These factors offset growth in profitable lines of business during 1998, as
competitive pressures in the property and casualty industry minimized growth
in these lines of business.
<PAGE>
The Company's losses and loss adjustment expenses incurred
increased from $213.5 million during 1997 to $237.1 million in 1998. This
increase in losses and loss adjustment expenses was principally attributable to
the $24.2 million strengthening in loss reserves for prior periods. Excluding
the strengthening of loss reserves for prior periods, losses and loss
adjustment expenses incurred decreased .3%, and the ratio of the Company's
losses and loss adjustment expenses to net premiums earned increased from 63.7%
in 1997 to 64.9%, excluding reserve strengthening for prior periods, in 1998.
Including the reserve adjustment for prior periods, the Company's ratio of
losses and loss adjustment expenses to net premiums earned in 1998 was 72.3%.
In the Company's property and casualty operations, results from operations
which will continue after the restructuring were considerably better than
those of the operations discontinued in the restructuring. Those operations
being discontinued experienced a ratio of loss and loss adjustment expense to
net premiums earned of 112.0% during 1998 whereas those operations which
continue after the restructuring experienced a ratio of losses and loss
adjustment expenses to net premiums earned of 65.6% during 1998.
Underwriting expenses increased from $97.1 million during 1997
to $104.7 million during 1998, thus increasing the ratio of underwriting
expenses to net premiums earned from 29.0% in 1997 to 31.9% in 1998.
Underwriting expense in the Company's crop insurance operations increased from
1997 expenses of $9.0 million to underwriting expenses in 1998 of $14.8
million. This increase of $5.7 million resulted from a decrease in the expense
reimbursement from the federal government in the Company's MPCI crop insurance
program of $5.2 million, an increase in commissions paid to agents on MPCI
policies purchased at the catastrophic level of $3.3 million as the market
changed its commission practices on this type of policy from a flat fee to a
percentage of imputed premiums, and, offsetting these increase in expenses, a
decrease in the crop insurance segment's operating expenses of $2.8 million
resulting from improvements in operating efficiencies. The Company's
underwriting expenses in its property and casualty segment increased more
modestly from $88.1 million or 32.0% of net premiums earned in 1997 to $90.0
million or 33.7% of net premiums earned in 1998. This increase in underwriting
expenses in the property and casualty segment occurred principally from a
shifting emphasis on casualty lines of business under which the Company pays a
lower rate of commission to property lines of business in which the Company's
acquisition expenses are greater, but where its historical loss ratios are
lower. In the Company's property and casualty segment, the Company has sought
to reduce overall operating expenses as part of its restructuring process, and
therefore, believes that the ratio of underwriting expenses to net premiums
earned will return to the level experienced in 1997 during 1999. In the
Company's crop insurance operations, the federal government has again in 1999
reduced the expense reimbursement under the Company's MPCI crop insurance
programs. The Company does not believe that the competitive marketplace for
crop insurance will allow it to reduce commissions or other operating expenses
commensurate with the reduction in federal reimbursement, and therefore, the
Company expects underwriting expenses in its crop segment to again increase
during 1999.
The Company's charges for general and administrative expenses
increased from $2.1 million in 1997 to $3.5 million during 1998. The principal
component of this increase was a $1.1 million charge recorded in 1998 related
to the valuation of its non-standard automobile subsidiary that is being held
for sale.
The Company's net investment income remained approximately the
same during 1997 as its was in 1998, increasing from $28.0 million during 1997
to $28.3 million during 1998. This slight increase in net investment income
was positively impacted by an increase in the average outstanding size of the
Company's investment portfolio from $453.9 million during the twelve months
ended December 31, 1997 to $497.7 million during the twelve months ended
December 31, 1998. However, the before tax investment yield of the Company's
investments declined from 6.2% during 1997 to 5.7% during 1998. This decrease
in investment yield was a result of an overall lower interest rate environment
during 1998 as compared to 1997 as well as an increase in the amount of
municipal tax advantaged securities and common stock in the Company's
investment portfolio during 1998 as compared to 1997. In addition, the
Company's net realized capital gains decreased from $7.3 million during the
twelve months ended December 31, 1997 to $6.8 million during the twelve months
ended December 31, 1998.
<PAGE>
The Company's net income was also negatively impacted by an
increase in the Company's interest expense of 36.9% from $6.6 million during
the year ended December 31, 1997 to $9.0 million during the year ended December
31, 1998. The increase in interest expense was a result of both an increase
in the Company's average outstanding borrowings from $81.6 million during the
twelve months ended December 31, 1997 to $100.0 million for the twelve months
ended December 31, 1998, and an increase in the average interest rate from 8.1%
during 1997 to 9.0% during 1998. The increased borrowings were used to add
statutory surplus to the insurance Company's 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, 1998. During the remainder
of 1998, the Company repurchased one million shares of the Company's stock at a
cost of approximately $22.1 million. The Company funded these repurchases
using available cash and $15 million of borrowings under its Revolving Credit
Facility. The Company expects to pay off its outstanding bank borrowings
during the second quarter of 1999 from available cash, but may consider
repurchasing additional shares of the Company's stock again in 1999 if excess
cash flows are developed. The increase in the Company's average interest rate
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).
Results of Operations
Year ended December 31, 1997
Compared to Year Ended December 31, 1996
The Company's net income increased 16.6% from $30.3 million
in the year ended December 31, 1996 to $35.3 million in the year ended
December 31, 1997. The Company's operating income increased 47.4% from
$39.3 million in the year ended December 31, 1996 to $57.9 million in the year
ended December 31, 1997. These improved results occurred despite a decrease in
the Company's insurance premiums earned and the differential between the growth
in net income and operating income occurred as the Company's tax rate returned
to normal levels in 1997 after the Company's 1996 taxes were positively
affected by the decrease in the valuation allowance relating to the unrealized
loss from the Company's investment in Major Realty. The improved results were
attributed primarily to improved loss and expense ratios in the Company's
Property and Casualty segment, excellent crop results resulting from an above
average profit sharing earned in the Company's MPCI program, and increased
investment income and realized gains from the Company's investment portfolio.
These positive factors were partially offset by an increase in the expense
ratio of the Crop segment, increased interest expense, and an increase in the
Company's effective tax rate.
After several years of growth in net insurance premiums
earned, the Company experienced a decline in net insurance premiums earned
from $348.7 million in 1996 to $335.2 million in 1997, a decline of
approximately 3.9%. During 1997, the Company's goal in its Property and
Casualty segment was to improve underwriting results through an emphasis on
profitable lines, a restructuring of marginal lines, and a discontinuation of
unprofitable lines. During this process, growth in profitable lines of business
was offset by declining volumes in the discontinued lines resulting in only a
.8% increase in direct premiums written and a 2.3% increase in gross premiums
written. In lines of business in which the Company was seeking to improve
marginal results, the Company ceded additional amounts to reinsurers in order
to reduce the impact of these lines as well as to help improve the net results
of the Company. Due to the competitive environment in the Property and Casualty
business, new programs which the Company initiated in 1997 were also heavily
reinsured in order to diminish the impact on the Company's results until such
time as these new programs confirmed their expected level of profitability.
Accordingly, the Company increased its cessions to reinsurers by approximately
$46.6 million from $284.1 million in 1996 to $330.7 million during 1997,
resulting in a 8.7% decline in net premiums written during 1997 as compared to
1996.
In the Company's Crop segment, the Company's premium levels
were also relatively flat as direct written premiums decreased from
$198.6 million in 1996 to $196.5 million in 1997 and gross premiums increased
slightly from $242.9 million in 1996 to $248.0 million in 1997. These
relatively level written premiums resulted as increases in the Company's policy
count under the Company's largest program, the MPCI crop insurance program,
were offset by reductions in commodity prices upon which the Company's premiums
are based.
Underwriting results in the Company's Property and Casualty
segment improved during 1997 as compared to 1996. This segment experienced a
$12.3 million underwriting loss and a combined ratio of 104.5% in the twelve
months ended December 31, 1997 as compared to a $31.9 million underwriting loss
and a combined ratio of 111.3% for the twelve months ended December 31, 1996.
<PAGE>
The Property and Casualty segment's improved underwriting
results were due to a decrease in both the segment's accident year and calendar
year loss and loss adjustment expense ratios from 1996 to 1997. The segment's
loss and loss adjustment expense ratios fell from 74.6% and 78.0% on an
accident and calendar year basis respectively during 1996 to 69.9% and 72.5%
on an accident year calendar year basis respectively during 1997. The
improvement in the loss and loss adjustment expense ratio resulted from a
change in mix of business, emphasizing more profitable lines, restructuring
reinsurance to improve the Company's net results and the cancellation of
programs and agents with unprofitable loss and loss adjustment expense ratios.
Additionally, the Property and Casualty segment's expense
ratio decrease from 33.4% during 1996 to 32.0% during 1997. During 1996, many
of the new programs within the segment were in a start-up phase in which
fixed expenses were not offset by adequate earned premiums. During 1997, growth
in earned premiums in these programs allowed fixed costs to move into a more
normal relationship as a percentage of earned premiums.
During 1997, non-automobile lines of business continued to
outperform the automobile lines of business within the Company's Property and
Casualty segment. For the year 1997, automobile lines recorded a 112.9%
combined ratio while non-automobile lines recorded 99.9% combined ratio. The
Company continues to effect significant underwriting changes within its
automobile lines in order to bring them closer to the Company's desired
goal of a combined ratio of 100.0% or less.
The Company's Crop segment was a significant contributor to
the underwriting earnings of the Company in both 1996 and 1997. During 1996,
the segment contributed $41.5 million to the Company's underwriting
earnings as compared to $36.9 million during 1997. During 1997, the Company
earned a profit share of 31.5% on its MPCI retained premium pool of
approximately $155.5 million or $49.0 million. This compares with an earned
profit share of 23.5% on a $161.4 million retained premium pool generating
$37.9 million in 1996.
During the first quarter of 1996, the Company's operating
income benefited from a $2.8 million profit in the Company's Crop segment. The
principal component of this $2.8 million was the recording of an additional
$3.8 million in profit sharing under the Company's MPCI program. The Company's
estimate of its profit sharing under the MPCI program at December 31, 1995 was
affected by a volatile crop growing season during which many of the rules
pertaining to preventive planting payments were changed and a combination of
unusual weather conditions manifested themselves in an unusually late harvest.
As claims were closed during the first quarter of 1996 and the final preventive
planting rules applied to these losses, the Company was able to earn additional
profit sharing. The 1996 growing year did not experience this same degree of
volatility, and the harvest was not delayed by unusual weather conditions.
Consequently, the MPCI profit sharing income recorded at December 31, 1996 more
accurately estimated actual results than had the profit sharing recorded at
December 31, 1995. During the first quarter of 1997, the Company experienced
operating income of approximately $900,000 from the operations of its Crop
segment. The Company believes that the crop results for the first quarter of
1997 were more typical of a normal year than those experienced in the first
quarter of 1996.
The improved profit sharing income in 1997 was offset by an
increase in the Company's net operating expenses under the MPCI program. This
increase in net expenses was due to a decrease in expense reimbursement from
the federal government under the MPCI program from 31.0% for both MPCI and Crop
Revenue Coverage (CRC) policies in 1996 to 29.0% and 25.0% respectively for
MPCI and CRC policies in 1997. This resulted in an approximate $7.2 million
decrease in expense reimbursement from 1996 to 1997. The Company was unable to
pass along any of this expense reduction to its producing agents due to the
competitive environment for MPCI business during 1997.
The Company's net income for 1997 also benefited from an
increase in net investment income and net realized capital gains. The
Company's net investment income increased 5.8% during the twelve months ended
December 31, 1997 as compared to the twelve month period ended December 31,
1996 while the Company's net realized capital gains increased 40.4% in 1997 as
compared to 1996. The increase in the Company's net investment income resulted
from an increase in the average size of the Company's portfolio from $402.4
million during the year ended December 31, 1996 to $453.9 million during the
year ended December 31, 1997, an increase of 12.8%. This increase in the size
of the portfolio was offset by a decrease in the annualized investment yield of
the portfolio from 6.6% during 1996 to 6.2% during 1997. This decrease in
annual investment yield was due to an increase in the average amount of tax
advantaged securities within the Company's portfolio and a lower interest rate
environment during 1997.
<PAGE>
The Company's interest expense increased 34.2% from $4.9
million during 1996 to $6.6 million during 1997. This increase in interest
expense resulted from both an increase in the Company's average borrowings
and the average interest rate paid by the Company. During 1997, the Company's
average borrowings were $81.6 million and the average interest rate was 8.1% as
compared to average borrowings in 1996 of $69 million and an average interest
rate of 7.1%. The increased borrowings during 1997 were used to add statutory
surplus to the Company's insurance company subsidiaries. The increase in the
Company's average interest rate paid resulted from the issuance of $94.875
million in Trust Preferred Securities and the retirement of the Company's
outstanding bank debt during the third quarter of 1997 (see discussion under
Liquidity and Capital Resources).
The Company's 1996 taxes were positively effected by the
decrease in the valuation allowance related to the unrealized loss from the
Company's investment in Major Realty. In October 1995, Major Realty announced
that its Board of Directors had determined that it was in the best interest of
the stockholders to seek a merger partner, otherwise seek a transaction for
the sale of the company. At December 31, 1996, the Company believed that the
realization of the capital loss associated with such a transaction was more
likely than not due to sufficient carryforwards of capital gains as well as the
likelihood of future capital gains. No such benefit was realized in 1997, and
therefore, the Company's effective tax rate increased to a more normal level of
31.2% as compared to an effective tax rate of 9.6% in 1996.
Liquidity and Capital Resources
The Company has included a discussion of the liquidity and
capital resources requirement of the Company and the insurance subsidiaries.
The Company - Parent Only
As an insurance holding company, the Company's assets consist
primarily of the capital stock of its subsidiaries, surplus notes issued by two
of its insurance company subsidiaries and investments held at the holding
company level. The Company's primary sources of liquidity are receipts from
interest payments on the surplus notes, payments from the profit sharing
agreement with American Agrisurance, the Company's wholly owned subsidiary
which operates as the general agent for the Company's crop insurance programs,
tax sharing payments from its subsidiaries, investment income from, and
proceeds from the sale of, holding company investments, and dividends and other
distributions from subsidiaries of the Company. The Company's liquidity needs
are primarily to service debt, pay operating expenses and taxes, make
investments in subsidiaries, and repurchase shares of the Company's stock.
The Company currently holds three surplus notes, each in the
amount of $20 million, issued by two of its insurance company subsidiaries,
bearing interest at the rate of 9% per annum payable semi-annually and
quarterly. Although repayment of all or part of the principal of these surplus
notes requires prior insurance department approval, no prior approval of
interest payment is currently required.
Under the American Agrisurance profit sharing agreement,
American Agrisurance receives up to 50% of the crop insurance profit after
expenses and a margin retained by the Insurance Companies based upon a formula
established by the Company and approved by the Nebraska Department of
Insurance. If the calculated profit share is negative, such negative amounts
are carried forward and offset future profit sharing payments. For the year
ended December 31, 1998 and 1997, American Agrisurance recorded $13.2 million
and $12.4 million, net of tax, related to the profit sharing agreement. These
amounts were distributed in the form of a dividend to the Company.
Dividends from the insurance subsidiaries of the Company are
regulated by the regulatory authorities of the states in which each subsidiary
is domiciled. The laws of such states generally restrict dividends from
insurance companies to parent companies to certain statutorily approved limits.
In 1999, the statutory limitation on dividends from insurance company
subsidiaries to the parent without further insurance departmental approval is
approximately $15.9 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.
<PAGE>
In August 1997, AICI Capital Trust, a Delaware business trust
organized by the Company (the "Issuer Trust") issued 3.795 million shares or
$94.875 million aggregate liquidation amount of its 9% Preferred Securities
(liquidation amount $25 per Preferred Security). The Company owns all of the
common securities (the "Common Securities") of the issue trust. The Preferred
Securities represent preferred undivided beneficial interests in the Issuer
Trust's assets. The assets of the Issuer Trust consist solely of the Company's
9% Junior Subordinated Debentures due 2027 which were issued in August of 1997
in an amount equal to the Preferred Securities and the Common Securities. The
Company primarily used the net proceeds in the amount of $90.9 million from the
sale of the Junior Subordinated Debentures to pay down the $90.0 million of
borrowings under its Revolving Credit Facility. Distributions on the Preferred
Securities and Junior Subordinated Debentures are cumulative, accrue from the
date of issuance and are payable quarterly in arrears. The Junior Subordinated
Debentures are subordinate and junior in right of payment to all senior
indebtedness of the Company and are subject to certain events of default and
redemptive provisions, all described in the Junior Debenture Indenture. At
December 31, 1998, the Company had Preferred Securities of $94.875 million
outstanding at a weighted annual interest cost of 9.1%.
In June 1997, the Company amended its borrowing arrangements
with its bank lenders providing a five-year revolving credit facility (the
"Revolving Credit Facility"), with a final maturity of 2002, in amounts not
to exceed $100 million. In August 1997, the Company used the net proceeds from
the issuance of Junior Subordinated Debentures to repay the Company's
outstanding indebtedness of $90 million under the Revolving Credit Facility.
As a result of the Junior Subordinated Debentures, the Revolving Credit
Facility was reduced from $100 million to $65 million. The Company selects its
interest rate as either the prime rate or LIBOR plus a margin which varies
depending on the Company's funded debt to equity ratio. Interest is payable
quarterly. At December 31, 1998, the Company had $15 million outstanding
under this arrangement. Borrowings and interest cost averaged $5.2 million
and 6.5% during 1998. The Revolving Credit Facility contains covenants which
do not permit the payment of dividends by the Company, requires the Company to
maintain certain operating and debt service coverage ratios, required
maintenance of specified levels of surplus and requires the Company to meet
certain tests established by the regulatory authorities.
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 December 31, 1998, the Company has
repurchased one million shares at an average cost of $22.07 per share. The
Company funded these repurchases using available cash and $15.0 million of
borrowings under its Revolving Credit Facility.
As of December 31, 1998, the Company held cash, invested
assets excluding investments in subsidiaries, and dividends receivable of
$19.1 million.
Insurance Companies
The principal liquidity needs of the Insurance Companies are
to fund losses and loss adjustment expense payments and to pay underwriting
expenses, including commissions and other expenses. The available sources to
fund these requirements are net premiums received and, to a lesser extent, cash
flows from the Company's investment activities, which together have been
adequate to meet such requirements on a timely basis. The Company
monitors the cash flows of the Insurance Companies and attempts to maintain
sufficient cash to meet current operating expenses, and to structure its
investment portfolio at a duration which approximates the estimated cash
requirements for the payments of loss and loss adjustment expenses.
Cash flows from the Company's MPCI and crop hail businesses
differ in certain respects from cash flows associated with more traditional
property and casualty lines. MPCI premiums are not received from farmers
until the covered crops are harvested, and when received are promptly remitted
by the Company in full to the government. Covered losses are paid by the
Company during the growing season as incurred, with such expenditures
reimbursed by the government within three business days. Policy acquisition
and administration expenses are paid by the Company as incurred during the
year. The Company periodically throughout the year receives a payment in
reimbursement of its policy acquisition and administration expenses.
The Company's profit or loss from its MPCI business is
determined after the crop season ends on the basis of a profit sharing formula
established by law and the RMA. Commencing with the 1997 year, the Company
receives a profit share in cash, with 60% of the amount in excess of 17.5% of
its MPCI Retention (as defined in the profit sharing agreement) in any year
carried forward to future years, or it must pay its share of losses. Prior to
the 1997 year, the amount carried forward to future years was any amount in
excess of 15% of its MPCI retention. The Company recognized $49.1 million in
profit sharing earned on the MPCI business during 1998, and in addition,
recognized $4.5 million during 1998 in profit sharing earned on 1997 MPCI
business. The Company received $51.5 million in payments under the MPCI
program in March of 1999.
In the crop hail insurance business, premiums are generally
not received until after the harvest, while losses and other expenses are paid
throughout the year.
<PAGE>
Changes in Financial Condition
The NAIC has established a Risk Based Capital ("RBC") formula
for property and casualty insurance companies. The RBC initiative is designed
to enhance the current regulatory framework for the evaluation of the capital
adequacy of a property and casualty insurer. The formula requires an insurer
to compute the amount of capital necessary to support four areas of risk facing
property and casualty insurers: (a) asset risk (default on fixed income assets
and market decline), (b) credit risk (losses from unrecoverable reinsurance and
inability to collect agents' balances and other receivables), (c) underwriting
risk (premium pricing and reserve estimates), and (d) off balance sheet/growth
risk (excessive premium growth and unreported liabilities). The Insurance
Companies have reviewed and applied the RBC formula for the 1998 year and have
exceeded these requirements.
The Company's stockholders' equity decreased by approximately
$17.5 million from December 31, 1997 to December 31, 1998. The principal
components of this change were the repurchase of one million shares of the
Company's stock at an aggregate cost of $22.1 million, net income of $5.5
million for the year ended 1998, and a decrease in the value of the Company's
investment portfolio causing the unrealized gain (loss) on available-for-sale
securities net of tax to decrease from a gain of $6.9 million to a gain of
$5.3 million.
Consolidated Cash Flows
Cash flows from operations for the year ended December 31,
1998 were $34.0 million as compared to cash flows from operating activities of
$10.1 million during 1997. The increase in positive cash flows is primarily
the result of the profit sharing payments received from the federal government
under the Company's MPCI crop insurance program. During 1997, this component of
operating cash flows was $25.5 million while in 1998, it was $57.0 million.
Cash flows from the Company's MPCI and crop hail business are
different in certain respects from cash flows associated with more traditional
property and casualty lines (see Liquidity and Capital Resources, Insurance
Companies).
Inflation
The Company does not believe that inflation has had a
material impact on its financial condition or results of operations.
Quantitative and Qualitative Disclosure about Market Risk
The Company's balance sheet includes a significant amount of
assets and liabilities whose fair value are subject to market risk. Market risk
is the risk of loss arising from adverse changes in market interest rates or
prices. The Company currently has interest rate risk as it relates to its fixed
maturity securities and mortgage loans and equity price risk as it relates to
its marketable equity securities. In addition, the Company is also subject to
interest rate risk at the time of refinancing as it relates to its mandatorily
redeemable Preferred Securities. The Company's bank debt is short-term in
nature as the Company generally secures rates for periods ranging from one to
six months and therefore approximates fair value. The Company's market risk
sensitive instruments are entered into for purposes other than trading.
At December 31, 1998, the Company had $346.6 million of fixed
maturity securities and mortgage loans and $71.7 million of marketable equity
securities that were subject to market risk. The Company's investment strategy
is to manage the duration of the portfolio relative to the duration of the
liabilities while managing interest rate risk. In addition, the Company has the
ability to hold its maturity investments until maturity and therefore would not
expect to recognize a material adverse impact on income or cash flows.
The Company's Preferred Securities of $94.875 million at
December 31, 1998, mature in August 2027 and are redeemable at the Company's
option in August 2002. The Company will continue to monitor the interest
rate environment and evaluate refinancing opportunities as the redemption and
maturity date approaches.
The Company uses two models to analyze the sensitivity of its
market risk assets and liabilities. For its fixed maturity securities,
mortgage loans and mandatorily redeemable Preferred Securities, the Company
uses duration modeling to calculate changes in fair value. For its marketable
equity securities, the Company uses a hypothetical 20% decrease in the fair
value of these securities. Actual results may differ from the hypothetical
results assumed in this disclosure due to possible actions taken by management
to mitigate adverse changes in fair value and because fair values of
securities may be affected by credit concerns of the issuer, prepayment
speeds, liquidity of the security and other general market conditions. The
sensitivity analysis duration model used by the Company produces a loss in fair
value of $19.0 million on its fixed maturity securities and mortgage loans and
a gain in fair value of $8.7 million on its mandatorily redeemable Preferred
Securities, based on a 100 basis point increase in interest rates. The
hypothetical 20% decrease in fair value of the Company's marketable equity
securities produces a loss in fair value of $14.3 million.
<PAGE>
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 Company has addressed the
Year 2000 issue with respect to the majority of the Company's IT systems and
believes that they are Year 2000 compliant and management expects the remaining
Company IT systems to be Year 2000 compliant by September 1, 1999.
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 as of the filing date of this 10-K.
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 $2.9 million
relating to the year 2000 issue since inception of the project, including $1.5
million during the twelve months ended December 31, 1998. The Company
anticipates an additional $.3 to $.8 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 September 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>
Recent Statement of Financial Accounting Standards
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133 (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 does not expect the adoption of SFAS
No. 133 to have a material impact to the Company's consolidated financial
statements.
Item 7A. Quantitative and Qualitative Disclosure about Market Risk.
Information relating to this item is set forth under the
caption "Quantitative and Qualitative Disclosure About Market Risk" in Item 7,
Management's Discussion and Analysis of Financial Condition and Results of
Operation. Such information is incorporated herein.
Item 8. Financial Statements and Supplementary Data.
See Item 14 hereof and the Consolidated Financial Statements
attached hereto.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
There have been no disagreements with the Registrant's
independent accountants of the nature calling for disclosure under Item 9.
PART III.
Item 10. Directors and Executive Officers of the Registrant.
The information required by Item 10 with respect to the
Registrant's executive officers and directors will be set forth in the
Company's 1999 Proxy Statement included as Exhibit 99.6 hereto and is
incorporated herein by reference.
Item 11. Executive Compensation
The information required by Item 11 will be set forth in the
Company's 1999 Proxy Statement which will be filed within 120 days of the
Company's year end and is incorporated herein by reference.
<PAGE>
Item 12. Security Ownership of Certain Beneficial Owners and Management.
The information required by Item 12 will be set forth in the
Company's 1999 Proxy Statement which will be filed within 120 days of the
Company's year end and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
The information required by Item B will be set forth in the
Company's 1999 Proxy Statement which will be filed within 120 days of the
Company's year end and is incorporated herein by reference.
PART IV.
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as a part of this
Report:
1. Financial Statements. The Company's audited
Consolidated Financial Statements for the years ended December 31,
1998 and 1997 consisting of the following:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders'
Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II. Condensed Financial
Information of Registrant
Schedule V. Valuation Accounts
3. The Exhibits filed herewith are set forth in the
Exhibit Index attached hereto.
(b) No Current Reports on Form 8-K have been filed during the
last fiscal quarter of the period covered by this Report.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Audited Consolidated Financial Statements for the
Years Ended December 31, 1998 and December 31,
1997:
Independent Auditors' Report
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statement of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Acceptance Insurance Companies Inc. and Subsidiaries
We have audited the accompanying consolidated balance sheets of Acceptance
Insurance Companies Inc. and subsidiaries as of December 31, 1998 and 1997, and
the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Acceptance Insurance Companies
Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 5, 1999
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (dollars in thousands except share data)
DECEMBER 31, 1998 AND 1997
- -----------------------------------------------------------------------------
<TABLE>
<CAPTION>
ASSETS 1998 1997
<S> <C> <C>
Investments:
Fixed maturities available-for-sale (Note 2) $ 337,107 $ 322,799
Marketable equity securities available-for-sale (Note 2) 71,687 84,156
Mortgage loans and other investments 9,549 10,248
Real estate 3,300 3,329
Short-term investments, at cost, which approximates market 67,754 32,185
-------------- -------------
489,397 452,717
Cash 6,897 8,048
Investment in Major Realty Corporation (Note 4) - 9,183
Receivables, net (Note 5) 185,951 180,793
Reinsurance recoverable on unpaid losses and loss adjustment expenses 238,769 165,547
Prepaid reinsurance premiums 76,663 53,208
Property and equipment, net of accumulated depreciation of $12,328
and $10,105 16,425 15,588
Deferred policy acquisition costs 25,433 30,328
Excess of cost over acquired net assets 33,363 35,567
Deferred income tax (Note 6) 6,901 15,842
Other assets 13,144 12,632
-------------- --------------
$ 1,092,943 $ 979,453
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses (Note 7) $ 524,744 $ 428,653
Unearned premiums 162,037 157,134
Amounts payable to reinsurers 35,840 17,955
Accounts payable and accrued liabilities 24,293 27,166
Bank borrowings (Note 8) 15,000 -
Company-obligated mandatorily redeemable Preferred Securities of
AICI Capital Trust, holding solely Junior Subordinated Debentures of the
Company (Note 9) 94,875 94,875
-------------- --------------
Total liabilities 856,789 725,783
-------------- --------------
Commitments and contingencies (Notes 10 and 11)
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized, none
issued - -
Common stock, $.40 par value, 40,000,000 shares authorized;
15,466,860 and 15,421,247 shares issued 6,187 6,168
Capital in excess of par value 198,657 198,080
Accumulated other comprehensive income, net of tax 5,305 6,885
Retained earnings 52,281 46,745
-------------- --------------
262,430 257,878
Less:
Treasury stock, at cost, 1,209,520 and 209,519 shares (Note 12) (26,047) (3,979)
Contingent stock, 20,396 and 20,396 shares (229) (229)
-------------- --------------
Total stockholders' equity 236,154 253,670
-------------- --------------
$ 1,092,943 $ 979,453
============== ==============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands except per share data)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Revenues:
Insurance premiums earned (Note 7) $ 328,044 $ 335,215 $ 348,653
Insurance agency commissions - - 1,035
Net investment income (Note 2) 28,320 28,016 26,491
Net realized capital gains 6,825 7,321 5,216
----------- ----------- -------------
363,189 370,552 381,395
----------- ----------- -------------
Costs and expenses:
Cost of revenues:
Insurance losses and loss adjustment expenses (Note 7) 237,061 213,455 243,257
Insurance agency costs - - 1,024
Insurance underwriting expenses 104,736 97,109 95,803
General and administrative expenses 3,502 2,063 2,015
----------- ----------- -------------
345,299 312,627 342,099
----------- ----------- -------------
Operating profit 17,890 57,925 39,296
----------- ----------- -------------
Other income (expense):
Interest expense (8,994) (6,569) (4,896)
Loss on investee (Note 4) (704) (209) 1,052)
Other, net (112) 158 142
----------- ----------- -----------
(9,810) (6,620) (5,806)
----------- ----------- ------------
Income before income taxes 8,080 51,305 33,490
Income tax expense (benefit) (Note 6):
Current (7,248) 15,164 14,173
Deferred 9,792 828 10,963)
----------- ----------- ------------
2,544 15,992 3,210
----------- ----------- ------------
Net income $ 5,536 $ 35,313 $ 30,280
=========== =========== ============
Net income per share:
Basic $ 0.37 $ 2.34 $ 2.03
=========== =========== ============
Diluted $ 0.37 $ 2.30 $ 1.99
=========== =========== ============
<FN>
The accompanying notes are an integral part of the consolidated
financial statements.
</FN>
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- ------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Accumulated
Other Retained
Capital in Comprehensive Earnings Total
Common Excess of Income/(Loss), (Accumulated Treasury Contingent Stockholders'
Stock Par Value Net of Tax Deficit) Stock Stock Equity
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January $ 6,057 $ 194,823 $ 19 $ (18,848) $ (1,564) $ (2,700) $ 177,787
1, 1996
Net income - - - 30,280 - - 30,280
Change in unrealized
gain (loss)on
available-for-sale
securities, net of
income taxes of $806
(Note 18) - - (1,495) - - - (1,495)
Total comprehensive -----------
income 28,785
Issuance of common -----------
stock under employee
benefit plans 46 1,267 - - - - 1,313
Purchase of
treasury stock - - - - (65) - (65)
----------- ----------- ----------- ----------- ----------- ----------- ------------
Balance at December
31, 1996 6,103 196,090 (1,476) 11,432 (1,629) (2,700) 207,820
Net income - - - 35,313 - - 35,313
Change in unrealized
gain (loss)on
available-for-sale
securities, net of
income taxes of
$(4,502) (Note 18) - - 8,361 - - - 8,361
Total comprehensive ------------
income 43,674
Contingent share ------------
settlement related
to Redland
acquisition - - - - (1,611) 2,471 860
Issuance of common
stock under employee
benefit plans 65 1,990 - - - - 2,055
Purchase of
treasury stock - - - - (739) - (739)
----------- ----------- ----------- ----------- ----------- ----------- -------------
Balance at December
31, 1997 6,168 198,080 6,885 46,745 (3,979) (229) 253,670
Net income - - - 5,536 - - 5,536
Change in unrealized
gain (loss) on
available-for-sale
securities, net of
income taxes of $851
(Note 18) - - (1,580) - - - (1,580)
Total comprehensive -------------
income 3,956
Issuance of common -------------
stock under employee
benefit plans 19 577 - - - - 596
Purchase of
treasury stock - - - - (22,068) - (22,068)
----------- ----------- ------------ ----------- ----------- ----------- -------------
Balance at December
31, 1998 $ 6,187 $ 198,657 $ 5,305 $ 52,281 $ (26,047) $ (229) $ 236,154
============ =========== ============ =========== =========== =========== =============
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,536 $ 35,313 $ 30,280
Adjustments to reconcile net income to net cash provided by (used
for) operating activities:
Depreciation and amortization 5,554 4,523 4,282
Deferred tax expense (benefit) 9,792 828 (10,963)
Loss on investee 704 209 1,052
Policy acquisition costs incurred (85,106) (84,000) (94,140)
Amortization of policy acquisition costs 90,001 83,109 89,288
Gain on sale of investments (6,825) (7,321) (5,216)
Increase (decrease) in cash attributable to changes in assets
and liabilities:
Receivables (5,158) (47,430) (27,117)
Net losses and loss adjustment expenses 22,869 16,354 45,396
Net unearned premiums (18,552) (151) 18,296
Amounts payable to reinsurers 17,885 7,798 (8,004)
Accounts payable and accrued liabilities (2,873) 2,153 2,293
Other, net 131 (1,236) (2,516)
------------ ----------- -----------
Net cash from operating activities 33,958 10,149 42,931
------------ ----------- -----------
Cash flows from investing activities:
Proceeds from sales of investments available-for-sale 163,064 206,075 145,819
Proceeds from maturities of investments 5,924 28,191 29,207
Proceeds from maturities of investments available-for-sale 113,157 102,470 21,498
Proceeds from sale of Major Realty Corporation 8,479 - -
Purchases of investments (5,330) (20,693) (28,230)
Purchases of investments available-for-sale (273,338) (343,089) (249,540)
Other, net (4,936) (9,629) (6,046)
------------ ----------- ---------
Net cash from investing activities 7,020 (36,675) (87,292)
------------ ----------- -----------
Cash flows from financing activities:
Proceeds from bank borrowings 15,000 21,000 -
Repayments of bank borrowings - (90,000) -
Proceeds from issuance of Company-obligated mandatorily redeemable
Preferred Securities, net of $3,976 in related expenses - 90,899 -
Proceeds from issuance of common stock 596 2,055 1,313
Purchase of treasury stock (22,068) (739) (65)
------------ ----------- -----------
Net cash from financing activities (6,472) 23,215 1,248
------------ ----------- -----------
Net increase (decrease) in cash and short-term investments 34,506 (3,311) (43,113)
Cash and short-term investments at beginning of year 38,316 41,627 84,740
----------- ----------- ----------
Cash and short-term investments at end of year $ 72,822 $ 38,316 $ 41,627
=========== =========== ==========
<FN>
The accompanying notes are an integral part of the consolidated financial
statements.
</FN>
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(Columnar Amounts in Thousands Except Per Share Data)
- ------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations - Acceptance Insurance Companies Inc.
(the "Company") is primarily engaged in the specialty property and
casualty insurance business through its wholly-owned subsidiaries,
Acceptance Insurance Holdings Inc. ("Acceptance") and The Redland Group,
Inc. ("Redland").
The Company concentrates on writing specialty coverages not generally
emphasized by standard insurance carriers. These specialty coverages
primarily include specialty automobile lines, surplus lines liability and
substandard property coverages, complex general liability risks, workers'
compensation, and crop insurance. Insurance is marketed through both
general and independent agents. The Company writes business as both an
admitted (licensed) and non-admitted (excess and surplus lines) carrier
in most of the United States.
Principles of Consolidation - The Company's consolidated financial
statements include the accounts of its majority-owned subsidiaries. All
significant intercompany transactions have been eliminated.
Insurance Accounting - Generally, premiums are recognized as income
ratably over the terms of the related policies. The crop hail premiums
are recorded utilizing historical loss activity to match premiums earned
with estimated loss exposure. Insurance costs are associated with
premiums earned, resulting in the recognition of profits over the term of
the policies. This association is accomplished through amortization of
deferred policy acquisition costs and provisions for unearned premiums
and loss reserves.
The Company writes multi-peril crop insurance ("MPCI") and crop revenue
coverage ("CRC") pursuant to terms established by the Federal Risk
Management Agency ("RMA"). As used herein, the term MPCI includes CRC.
The Company issues and administers policies, for which it receives
administrative fees, and the Company participates in a profit sharing
arrangement in which it receives from the government a portion of the
aggregate profit, or pays a portion of the aggregate loss, with respect
to the business it writes. The Company's share of the profit or loss on
the MPCI business it writes is determined under a formula established by
the RMA. The Company records an estimate of its share of the profit or
loss based upon available loss information. Commencing with the 1997
year, the Company receives a profit share in cash, with 60% of the amount
in excess of 17.5% of its MPCI Retention (as defined in the profit
sharing agreement) in any year carried forward to future years, or it
must pay its share of losses. Prior to the 1997 year, the amount carried
forward to future years was any amount in excess of 15% of its MPCI
retention. The Company recognizes as income in the current year these
amounts which are carried forward as a receivable. The amounts carried
forward as a receivable are received in future years in cash or as a
reduction of losses due the RMA. MPCI premiums received during the year
which correspond to next year's crop season are deferred until the next
year. Insurance underwriting expenses are presented net of
administrative fees received from the RMA for reimbursement of costs
incurred by the Company.
<PAGE>
The liability for unearned premiums represents the portion of premiums
written which relates to future periods and is calculated generally using
the pro rata method. The Company also provides a liability for policy
claims based on its review of individual claim cases and the estimated
ultimate settlement amounts. This liability also includes estimates of
claims incurred but not reported based on Company and industry paid and
reported claim and settlement expense experience. Differences which arise
between the ultimate liability for claims incurred and the liability
established will be reflected in the statement of operations of future
periods as additional claim information becomes available.
Certain costs of acquiring new insurance business, principally
commissions, premium taxes, and other underwriting expenses, have been
deferred. Such costs are being amortized as related premiums are earned.
Anticipated investment income is considered in evaluating recoverability
of deferred acquisition costs.
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 December 31, 1998
and 1997, approximately $1,829,000 and $1,917,000 of short-term
investments had maturity dates at acquisition of greater than
three months.
Investments - Investments in fixed maturities include bonds, notes and
redemptive preferred stocks and investments in marketable equity
securities include common and nonredemptive preferred stocks. All
investments in fixed maturities and marketable equity securities have
been classified as available-for-sale. Available-for-sale securities are
stated at fair value with the unrealized gains and losses reported as a
separate component of stockholders' equity, net of tax. Realized
investment gains and losses on sales of securities are determined on the
specific identification method.
Mortgage loans are carried at the lower of their unpaid principal balance
or if impaired, fair value. Real estate is stated at the lower of cost
or estimated net realizable value and is non-income producing.
Property and Equipment - Property and equipment are stated at cost, net
of accumulated depreciation. Depreciation is recognized principally
using the straight-line method over a period of five to ten years. The
Company capitalizes and amortizes direct costs incurred with the
development of internal use software.
Excess of Cost Over Acquired Net Assets - The excess of cost over equity
in acquired net assets is being amortized principally using the
straight-line method over periods not exceeding 40 years. Accumulated
amortization approximated $8,036,000 and $6,933,000 at December 31, 1998
and 1997, respectively.
Impairment of Long-Lived Assets - Measurement of the impairment of
long-lived assets is evaluated periodically based primarily on
management's estimate of future earnings. During 1998, the Company
recorded a $1,100,000 impairment in general and administrative expenses
related to a consolidated subsidiary that is being held for sale. The
consolidated subsidiary held for sale has total assets of aproximately
$58 million at December 31, 1998 and insurance premiums earned of
approximately $43 million for the year ended December 31, 1998.
Use of Estimates - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results may differ from
those estimates.
<PAGE>
Estimates made by management include the liability for losses and loss
adjustment expenses and recoverability of deferred policy acquisition
costs. The Company underwrites property and casualty coverages in a
number of specialty areas of business which may involve greater risks
than standard property and casualty lines, including the risks associated
with the absence of long-term, reliable historical claims experience.
These risk components may make more difficult the task of estimating
reserves for losses, and cause the Company's underwriting results to
fluctuate. Due to the inherent uncertainty of estimating reserves, it
has been necessary, and may over time continue to be necessary, to revise
estimated liabilities, as reflected in the Company's loss and loss
adjustment expense reserves. Additionally, conditions and trends that
have affected the development of loss reserves in the past may not
necessarily occur in the future.
Recent Statements of Financial Accounting Standards - In June 1998, the
Financial Accounting Standards Board (FASB) issued Statement of Financial
Accounting Standards No. 133 (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 does not expect the
adoption of SFAS No. 133 to have a material impact to the Company's
consolidated financial statements.
Reclassifications - Certain prior period amounts have been reclassified
to conform with current year presentation.
2. INVESTMENTS
A summary of net investment income earned on the investment portfolio for
the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Interest on fixed maturities $ 19,991 $ 18,075 $ 15,189
Interest on short-term investments 7,256 8,329 9,652
Other 1,871 2,334 2,242
----------- ----------- -----------
29,118 28,738 27,083
Investment expenses (798) (722) (592)
----------- ----------- -----------
Net investment income $ 28,320 $ 28,016 $ 26,491
=========== =========== ===========
<FN>
The amortized cost and related estimated fair values of investments in
the accompanying balance sheets are as follows:
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
<S> <C> <C> <C> <C>
December 31, 1998:
Fixed maturities available-for-sale:
U.S. Treasury and government securities $ 77,671 $ 1,228 $ 114 $ 78,785
States, municipalities and political
subdivisions 161,017 6,278 93 167,202
Mortgage-backed securities 38,475 42 590 37,927
Other debt securities 56,786 1,795 5,388 53,193
----------- ----------- --------- ----------
$ 333,949 $ 9,343 $ 6,185 $ 337,107
=========== =========== ========= ==========
Marketable equity securities - preferred stock $ 27,246 $ 494 $ 424 $ 27,316
=========== =========== ========= ==========
Marketable equity securities - common stock $ 39,438 $ 9,718 $ 4,785 $ 44,371
=========== =========== ========= ==========
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
=========== =========== ========= ==========
<FN>
The amortized cost and related estimated fair values of the fixed
maturity securities as of December 31, 1998 are shown below by stated
maturity dates. Actual maturities may differ from stated maturities
because the borrowers may have the right to call or prepay obligations
with or without call or prepayment penalties.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Amortized Estimated
Cost Fair Value
<S> <C> <C>
Fixed maturities available-for-sale:
Due in one year or less $ 9,841 $ 10,180
Due after one year through five years 72,071 70,479
Due after five years through ten years 61,064 59,625
Due after ten years 152,498 158,896
----------- -----------
295,474 299,180
Mortgage-backed securities 38,475 37,927
----------- -----------
$ 333,949 $ 337,107
=========== ===========
</TABLE>
<PAGE>
The Company's collateral backed securities portfolio consists of
mortgage-backed securities, all of which are collateralized mortgage
obligations ("CMOs"). The following table sets forth as of December 31,
1998, the categories of the Company's CMOs, which at such date had an
average expected life of approximately four years:
<TABLE>
<CAPTION>
Par Amortized Estimated
Value Cost Fair
Type of CMO (1) (1) Value
<S> <C> <C> <C>
Fixed coupon $ 12,684 $ 12,644 $ 12,684
Floating rate (2) 19,103 18,990 18,616
Inverse floating rate (2) 6,874 6,841 6,627
----------- ----------- -----------
Total CMOs (3) $ 38,661 $ 38,475 $ 37,927
=========== =========== ===========
<FN>
(1) Par value is the face amount of the underlying mortgage collateral.
Any cost in excess of par value is a "premium" whereas cost lower than
par value is a "discount". The Company's aggregate CMO portfolio has
been purchased at a discount.
(2) Floating rate CMOs provide an increased interest rate when a specified
index interest rate increases and a lower interest rate when such
index rate decreases, while inverse floating rate CMOs provide a lower
interest rate when the index increases and a higher rate when the
index rate decreases. Generally, the Company's floating rate and
inverse floating rate securities are tied to the one month LIBOR.
The market values of the Company's floating rate and inverse floating
rate CMOs are significantly impacted by various factors, including the
outlook for future interest rate changes and such securities' relative
liquidity under current market conditions.
(3) All of the CMO portfolio collateral is guaranteed by government
agencies.
</FN>
</TABLE>
Proceeds from sales of fixed maturity securities during the years ended
December 31, 1998, 1997 and 1996 were approximately $111,131,000,
$147,854,000 and $100,203,000, respectively. Gross realized gains on
sales of fixed maturity securities were approximately $2,073,000,
$1,908,000 and $1,681,000, and gross realized losses on sales of fixed
maturity securities were approximately $197,000, $181,000 and $22,000
during the years ended December 31, 1998, 1997 and 1996, respectively.
As required by insurance regulatory laws, certain bonds with an amortized
cost of approximately $25,467,000 and short-term investments of
approximately $634,000 at December 31, 1998 were deposited in trust with
regulatory agencies.
3. FAIR VALUES OF FINANCIAL INSTRUMENTS
Statement of Financial Accounting Standards No. 107, Disclosures about
Fair Value of Financial Instruments ("SFAS 107"), requires fair value
disclosures for financial instruments. Certain financial instruments,
including insurance contracts, were excluded from SFAS 107 disclosure
requirements due to perceived difficulties in measuring fair value.
In determining fair value, the Company used quoted market prices when
available. For instruments where quoted market prices were not
available, the Company used independent pricing services or appraisals by
the Company's management. Those services and appraisals reflected the
estimated present values utilizing current risk-adjusted market rates of
similar instruments.
Considerable judgment is necessarily required in interpreting market data
to develop the estimates of fair value. Accordingly, the estimates
presented herein are not necessarily indicative of the amounts the
Company could realize in a current market exchange. The use of different
market assumptions and/or estimation methodologies may have a material
effect on the estimated fair value.
The carrying values of cash and short-term investments, receivables and
accounts payable, and accruals are deemed to be reasonable estimates of
their fair values due to their short-term nature. The estimated fair
values of the Company's other financial instruments as of December 31,
1998 and 1997, are as follows:
<PAGE>
<TABLE>
<CAPTION>
Carrying Value Estimated Fair Value
1998 1997 1998 1997
<S> <C> <C> <C> <C>
Investments in fixed maturity securities $ 337,107 $ 322,799 $ 337,107 $ 322,799
Investments in marketable equity
securities 71,687 84,156 71,687 84,156
Mortgage loans and other investments 9,549 10,248 9,549 10,248
Investment in Major Realty Corporation - 9,183 - 9,183
Bank borrowings, term debt and other
borrowings 15,000 - 15,000 -
Company-obligated mandatorily redeemable
Preferred Securities of AICI Capital Trust,
holding solely Junior Subordinated
Debentures of the Company 94,875 94,875 94,401 96,545
</TABLE>
4. INVESTMENT IN MAJOR REALTY CORPORATION
At December 31, 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. In addition, the Company also had a note with Major
Realty, that was convertible into Major Realty stock at the option of the
Company at the prevailing market price conversion, with an outstanding
balance at December 31, 1997 of $5.6 million.
During May 1998, the Company closed on a transaction whereby the
Company's investment in Major Realty was converted to cash and the
remaining balance of the note plus accrued interest was paid. This
transaction resulted in the Company recording a net loss from investee of
approximately $.7 million and a net tax benefit of approximately
$.7 million.
<PAGE>
5. RECEIVABLES
The major components of receivables at December 31 are summarized as
follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Insurance premiums and agents' balances due $ 68,494 $ 80,113
Amounts recoverable from reinsurers 24,922 19,519
Profit sharing gain due from the RMA 71,452 71,227
Accrued interest 5,146 5,108
Installment notes receivable 3,975 5,183
Federal income tax receivable 16,880 4,533
Other 287 95
Less allowance for doubtful accounts (5,205) (4,985)
----------- -----------
$ 185,951 $ 180,793
=========== ===========
</TABLE>
6. INCOME TAXES
The Company recognizes a net deferred tax asset or liability for all
temporary differences and a related valuation allowance when realization
of the asset is uncertain. The valuation allowance at December 31, 1998
and 1997 relates to capital loss items. The net deferred tax as of
December 31, is as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Unpaid losses and loss adjustment expenses $ 12,512 $ 12,311
Unearned premiums 5,976 7,275
Allowances for doubtful accounts 1,822 1,745
Other 2,344 2,618
Major Realty basis difference - 8,391
----------- -----------
Deferred tax asset 22,654 32,340
----------- -----------
Deferred policy acquisition costs (8,902) (10,615)
Unrealized gain on marketable equity securities
available-for-sale (1,751) (3,289)
Unrealized gain on fixed maturities available-for-sale (1,105) (418)
Unrealized gain on consolidated subsidiary held for sale (1,869) -
Other (2,051) (1,064)
----------- -----------
Deferred tax liability (15,678) (15,386)
----------- -----------
6,976 16,954
Valuation allowance (75) (1,112)
----------- -----------
Net deferred tax asset $ 6,901 $ 15,842
=========== ===========
</TABLE>
<PAGE>
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:
<TABLE>
<CAPTION>
December 31,
1998 1997 1996
<S> <C> <C> <C>
Computed U.S. federal income taxes $ 2,828 $ 17,986 $ 11,744
Nondeductible amortization of goodwill and other
intangibles 445 550 631
Tax-exempt interest income (2,301) (1,951) (1,408)
Dividends received deduction (885) (1,203) (1,073)
Recognition of a portion of the deferred tax asset (1,037) - (7,354)
Unrealized gain on consolidated subsidiary held for sale 1,869 - -
State income tax 698 289 -
Other 927 321 670
----------- ----------- -----------
Income tax expense $ 2,544 $ 15,992 $ 3,210
=========== =========== ===========
<FN>
Cash payments for income taxes were approximately $5,099,000,
$14,303,000, and $20,000,000 during the years ended December 31, 1998,
1997, and 1996, respectively.
</FN>
</TABLE>
7. INSURANCE PREMIUMS AND CLAIMS
Insurance premiums written and earned by the Company's insurance
subsidiaries for the years ended December 31, 1998, 1997 and 1996 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Direct premiums written $ 605,504 $ 591,931 $ 587,397
Assumed premiums written 95,456 73,879 63,663
Ceded premiums written (391,468) (330,746) (284,111)
----------- ----------- -----------
Net premiums written $ 309,492 $ 335,064 $ 366,949
=========== =========== ===========
Direct premiums earned $ 606,105 $ 575,938 $ 571,971
Assumed premiums earned 89,952 72,954 62,994
Ceded premiums earned (368,013) (313,677) (286,312)
----------- ----------- -----------
Net premiums earned $ 328,044 $ 335,215 $ 348,653
=========== =========== ===========
</TABLE>
Included in ceded premiums written and earned is $141.4 million,
$136.7 million, and $134.0 million of MPCI premiums ceded to the
RMA for the years ended December 31, 1998, 1997, and 1996, respectively.
Included in assumed premiums written and earned in 1998, 1997, and 1996
is $55.0 million, $51.7 million, and $42.2 million of MPCI profit share.
<PAGE>
The following table presents an analysis of the Company's reserves for
losses and loss adjustment expenses, reconciling beginning and ending
balances for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net loss and loss adjustment expense reserves at
beginning of year $ 263,106 $ 246,752 $ 201,356
Provisions for net losses and loss adjustment expenses ---------- ---------- ----------
for claims occurring in the current year 212,894 206,597 233,727
Increase in net reserves for claims occurring in prior years 24,167 6,858 9,530
---------- ---------- ----------
237,061 213,455 243,257
---------- ---------- ----------
Net losses and loss adjustment expenses paid for claims
occurring during:
Current year (100,968) (110,372) (102,565)
Prior years (113,224) (86,729) (95,296)
--------- ---------- ----------
(214,192) (197,101) (197,861)
--------- ---------- ----------
Net loss and loss adjustment expense reserves at end
of year 285,975 263,106 246,752
Reinsurance recoverable on unpaid losses and loss
adjustment expenses 238,769 165,547 185,421
---------- ----------- -----------
Gross loss and loss adjustment expense reserves $ 524,744 $ 428,653 $ 432,173
========== =========== ===========
</TABLE>
Insurance losses and loss adjustment expenses have been reduced by
recoveries recognized under reinsurance contracts of $424.1 million,
$223.3 million, and $300.8 million for the years ended December 31, 1998,
1997, and 1996, respectively, of which approximately $213.8 million,
$109.1 million, and $207.5 million, respectively, relate to recoveries on
the MPCI business from the RMA.
The liability for losses and loss adjustment expenses is determined by
management based on historical patterns and expectations of claims
reported and paid, trends in claim experience, information available on
an industry-wide basis, as well as changes in the Company's claim
handling procedures and premium rates. During 1998, the Company has
discontinued several product lines due to the continuation of unexpected
development and pricing that is no longer acceptable to the Company.
These lines of business included coverages for certain specialty
automobile lines, aviation, and complex general liability risks. As a
result of these current developments, management modified the assumptions
used in reserving 1997 and prior accident years for these lines which
created most of the unfavorable development during 1998.
The liability for losses and loss adjustment expenses represents
management's best estimate and is based on sources of available evidence
including an analysis prepared by an actuary engaged by the Company. The
Company's lines of business are considered less predictable than standard
insurance coverages.
8. BANK BORROWINGS
In June 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 (See Note 9). 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 December 31, 1998, the Company had $15 million outstanding under this
arrangement and at December 31, 1997, the Company had no outstanding
indebtedness (See Note 12).
At December 31, 1998, the Revolving Credit Facility was collateralized by
the Company's Acceptance and Redland common stock. Borrowings and
interest cost averaged $5.2 million and 6.5% during 1998 and $43.1
million and 7.0% during 1997. The Revolving Credit Facility contains
covenants which do not permit the payment of dividends by the Company,
requires the Company to maintain certain operating and debt service
coverage ratios, requires maintenance of specified levels of surplus
and requires the Company to meet certain tests established by regulatory
authorities.
Cash payments for interest related to the Revolving Credit Facility were
approximately $.2 million, $3.3 million, and $4.7 million during the
years ended December 31, 1998, 1997 and 1996, respectively.
9. COMPANY-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF AICI
CAPITAL TRUST, HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES OF THE
COMPANY
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 in
2027, which were issued in August 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
December 31, 1998 and 1997, the Company had Preferred Securities of
$94.875 million outstanding at a weighted average interest cost of 9.1%
and 9.2%, respectively.
Cash payments for interest related to the Junior Subordinated Debentures
were approximately $8.5 million and $3.5 million during the years ended
December 31, 1998 and 1997, respectively.
10. CONTINGENCIES
The Company is involved in various insurance related claims and other
legal actions arising from the normal conduct of business. Management
believes that the outcome of these proceedings will not have a material
adverse effect on the consolidated financial statements of the Company.
At December 31, 1998 Acceptance Premium Finance Company, Inc., an
affiliate, had a revolving line of credit agreement which provided for
borrowings up to $20,000,000 maturing in April 1999. Borrowings under
this agreement are guaranteed by the Company. Acceptance Premium Finance
Company, Inc. had $17,500,000 and $12,900,000 outstanding under this line
of credit at December 31, 1998 and 1997, respectively.
<PAGE>
11. OPERATING LEASES
The Company leases office space and certain furniture and equipment under
operating leases. Future minimum obligations under these operating leases
are as follows at December 31, 1998:
1999 $ 3,742
2000 3,330
2001 2,638
2002 151
--------
$ 9,861
========
Rental expense totaled approximately $4,418,000, $4,353,000, and
$3,715,000 for the years ended December 31, 1998, 1997 and 1996,
respectively.
12. 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 were made from time to time in the open market and in private
transactions. During 1998, the Company repurchased one million shares of
its common stock at an average cost of $22.07 per share. The Company
funded these repurchases using available cash and $15 million of
borrowings under its Revolving Credit Facility.
13. STOCK OPTIONS AND EMPLOYEE BENEFIT PLANS
The Company's 1996 incentive stock option plan provides for a maximum of
1,500,000 options to be granted to employees and directors. Stock
options issued to employees will vest in not less than five annual
installments. Stock options issued to non-employee directors will vest
at the expiration of the directors' current term. All options expire no
later than ten years from the date of grant and the exercise price will
not be less than 100% of the market value at the date of grant.
The 1992 incentive stock option plan was terminated as to future grants
upon approval of the 1996 incentive stock option plan. The 1992
incentive stock option plan provided for options granted to employees
which vest over 4 years from the date of the grant and options to
non-employee directors which vest one year from the date of grant. All
options expire no later than ten years from the date of grant and the
exercise price is equal to the market price at the date of grant.
Under the Company's employee stock purchase plan, the Company is
authorized to issue up to 500,000 shares of common stock to its
full-time employees. Under the terms of the plan, each year employees
can choose to purchase up to 10% of their annual compensation. The
purchases may be made during six month phases generally commencing at the
beginning of January and July. The purchase price of the stock is equal
to the lower of 85% of the market price on the termination date of the
phase or when the subscription is paid in full, whichever occurs first;
or 85% of the average of the market price on the commencement date of the
phase and the market price on the termination date of the phase or when
the subscription is paid in full, whichever occurs first. Under the plan,
the Company sold 19,113, 16,744, and 12,690 shares during 1998, 1997, and
1996, respectively.
<PAGE>
The Company applies APB Opinion 25 and related Interpretations in
accounting for its plans. Accordingly, no compensation cost has been
recognized for its stock option plans and its stock purchase plan. Had
compensation cost for the Company's stock-based compensation plans been
determined based on the fair value at the grant dates for awards under
those plans consistent with the method of SFAS No. 123, the Company's net
income and net income per share would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income:
As reported $ 5,536 $ 35,313 $ 30,280
Pro forma
4,508 33,672 28,929
Net income per share:
Basic:
As reported $ 0.37 $ 2.34 $ 2.03
Pro forma
0.30 2.24 1.94
Diluted:
As reported $ 0.37 $ 2.30 $ 1.99
Pro forma
0.30 2.19 1.91
</TABLE>
The fair value of the options at the date of grant under the incentive
stock option plans and the fair value of the employees' purchase rights
under the employee stock purchase plan were estimated using a
Black-Scholes option-pricing model with the following weighted-average
assumptions for 1998, 1997, and 1996, respectively: risk-free interest
rates of 5.7%, 6.7%, and 6.7%; expected volatility of 24%, 22%, and 22%;
weighted-average expected lives of options of 7 years and an expected
life of employees' purchase rights of one year; and no dividend yield.
A summary of the status of the Company's stock option plans as of
December 31, 1998, 1997 and 1996 and changes during the years ended on
those dates is presented below:
<TABLE>
<CAPTION>
1998 1997 1996
--------------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning
of year 1,292,500 $ 22.16 1,378,021 $ 21.46 622,731 $ 12.96
Granted 70,500 32.62 10,500 21.00 883,000 26.45
Exercised 26,500 8.99 77,896 10.15 87,210 11.23
Forfeited 1,250 22.00 18,125 21.13 40,500 21.54
---------- ----------- ----------
Outstanding at end of year 1,335,250 $ 22.97 1,292,500 $ 22.16 1,378,021 $ 21.46
========== =========== =========== ========== ========== =========
Options exercisable at
year end 697,000 466,719 270,896
Weighted-average fair value
per share of options
granted during the year $ 5.92 $ 8.84 $ 4.21
</TABLE>
<PAGE>
The following table summarizes information about stock options
outstanding at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------------
Weighted-
Average Weighted Weighted-
Remaining Average Average
Number Contractual Exercise Number Exercise
Range of Exercise Prices Outstanding Life Price Exercisable Price
<S> <C> <C> <C> <C> <C>
11.38 to 14.50 378,125 5.7 years $ 13.17 329,375 $ 12.97
17.13 10,500 7.4 years 17.13 10,500 17.13
19.69 to 21.00 183,500 7.6 years 19.77 183,500 19.77
22.00 to 22.94 183,500 7.6 years 22.67 173,000 22.65
26.05 to 29.95 370,625 7.6 years 27.96 625 28.50
33.65 to 44.50 209,000 7.8 years 35.22 - -
--------- -------
$11.38 to 44.50 1,335,250 7.1 years $ 22.97 697,000 $ 17.24
================ ========= ========= ========= ======= ==========
<FN>
The Company has a defined contribution plan for which related expense for
1998, 1997, and 1996 was approximately $1,486,000, $1,085,000 and
$1,002,000, respectively.
</FN>
</TABLE>
14. RELATED PARTY TRANSACTIONS
The Company contracts with a related party to administer health insurance
benefits for its employees and to place property and casualty coverage on
behalf of the Company whereby the related party receives commissions from
the insurance providers which totalled $327,000, $321,000 and $237,000
in 1998, 1997 and 1996, respectively. In addition, the Company pays
commissions and fees to a related party in connection with insurance
written and loss control activities, which totalled $357,000, $181,000
and $186,000 in 1998, 1997 and 1996, respectively. This related party
reimburses the Company for an allocable share of certain office occupancy
expenses, $9,000, $36,000 and $174,000 in 1998, 1997 and 1996,
respectively.
The Company made payments during 1998, 1997 and 1996 totalling
approximately $380,000, $351,000 and $298,000, respectively, to a related
party to provide investment related services.
15. REINSURANCE
The Company's insurance subsidiaries cede insurance to other companies
under quota share, excess of loss and facultative treaties. The
insurance subsidiaries also maintain catastrophe reinsurance to protect
against catastrophic occurrences where claims can arise under numerous
policies due to a single event. The reinsurance agreements are tailored
to the various programs offered by the insurance subsidiaries. The
largest amount retained in any one risk by the insurance subsidiaries
during 1998 was $600,000. The methods used for recognizing income and
expenses related to reinsurance contracts have been applied in a manner
consistent with the recognition of income and expense on the underlying
direct and assumed business (See Note 1).
Three reinsurers, who have an A.M. Best rating of A- (excellent) or
better, accounted for approximately 34% and 30% of the reinsurance
recoverables and prepaid reinsurance premiums at December 31, 1998 and
1997, respectively. No other reinsurer, except for the RMA, accounted
for more than 5% of these balances.
<PAGE>
16. DIVIDEND RESTRICTIONS AND REGULATORY MATTERS
Dividends from the insurance subsidiaries of the Company are regulated
by the state regulatory authorities of the states in which each
subsidiary is domiciled. The laws of such states generally restrict
dividends from insurance companies to certain statutorily approved
limits. During 1999, dividends from insurance subsidiaries to the Company
without further insurance department approval are limited to
approximately $15.9 million.
The Company's insurance subsidiaries reported to regulatory authorities
total statutory policyholders' surplus of approximately $236,041,000 and
$238,520,000 at December 31, 1998 and 1997, respectively, and total
statutory net income of $1,068,000, $27,428,000, and $21,344,000 for
the years ended December 31, 1998, 1997, and 1996, respectively.
17. NET INCOME PER SHARE
The net income per share for both basic and diluted for the years ended
December 31, 1998, 1997, and 1996 are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Net income $ 5,536 $ 35,313 $ 30,280
========== ========== =========
Weighted average common shares outstanding 14,843 15,065 14,933
Dilutive effect of contingent shares 20 67 75
Dilutive effect of stock options and warrants 176 234 177
---------- ---------- ---------
Diluted weighted average common and equivalent
shares outstanding 15,039 15,366 15,185
========== ========== =========
Basic net income per share $ 0.37 $ 2.34 $ 2.03
========== ========== =========
Diluted net income per share $ 0.37 $ 2.30 $ 1.99
========== ========== =========
</TABLE>
18. OTHER COMPREHENSIVE INCOME
Effective January 1, 1998, the Company adopted SFAS No. 130, Reporting
Comprehensive Income. Other comprehensive income (loss) determined in
accordance with SFAS No. 130 for the years ended December 31 are as
follows:
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Unrealized holding gains arising during the year $ 4,394 $ 20,184 $ 2,915
Income tax expense 1,538 7,064 1,020
---------- ---------- ---------
Unrealized holding gains arising during the year, net of tax 2,856 13,120 1,895
---------- ---------- ---------
Reclassification adjustment for gains realized in net income 6,825 7,321 5,216
Income tax expense 2,389 2,562 1,826
---------- ---------- ---------
Reclassification adjustment for gains realized in net
income, net of tax 4,436 4,759 3,390
---------- ---------- ---------
Other comprehensive income (loss) $ (1,580) $ 8,361 $ (1,495)
========== ========== =========
</TABLE>
<PAGE>
19. BUSINESS SEGMENTS
The Company is engaged in the specialty property and casualty and the
crop insurance business. The Property and Casualty Insurance segment
consists of excess and surplus lines liability and property, substandard
property, specialty automobile, workers' compensation, professional
liability, and specialty coverages for transportation risks, temporary
help agencies, condominiums, rural markets, and fine arts. The principal
lines of the Crop Insurance segment are MPCI and crop hail insurance.
The accounting policies of the segments are the same as those described
in the summary of significant accounting policies (see Note 1).
Management evaluates the performance of and allocates its resources to
its operating segments based on income before income taxes. Interest
income and interest expense are primarily allocated to segments based
upon estimated investments and capital, respectively. Under a stop loss
reinsurance treaty, the Property and Casualty Insurance segment assumed
premiums of $3.5 million, $4.5 million and $4.5 million for the years
ended December 31,1998, 1997 and 1996, respectively, from the Crop
Insurance segment, utilizing the excess capacity of the Property and
Casualty Insurance segment. Depreciation and amortization totaled
$3.1 million, $2.2 million and $2.8 million for the Property and Casualty
Insurance segment and $2.5 million, $2.3 million and $1.5 million for the
Crop segment for the years ended December 31, 1998, 1997 and 1996,
respectively. Management does not utilize assets as a significant
measurement tool for evaluating segments.
Segment revenues and segment operating profit for the years ended
December 31, are as follows:
<TABLE>
<CAPTION>
Property and
Casualty Crop
1998 Insurance Insurance Total
<S> <C> <C> <C>
Revenues $ 297,439 $ 65,750 $ 363,189
=========== ========== ==========
Operating profit (loss) (16,045) 33,935 17,890
Interest expense and other 6,679 3,131 9,810
----------- ---------- ----------
Income before income taxes $ (22,724) $ 30,804 $ 8,080
=========== ========== ==========
1997
Revenues $ 306,258 $ 64,294 $ 370,552
=========== ========== ==========
Operating profit 17,507 40,418 57,925
Interest expense and other 4,537 2,083 6,620
----------- ---------- ----------
Income before income taxes $ 12,970 $ 38,335 $ 51,305
=========== ========== ==========
1996
Revenues $ 311,745 $ 69,650 $ 381,395
=========== ========== ==========
Operating profit (loss) (4,437) 43,733 39,296
Interest expense and other 4,202 1,604 5,806
----------- ---------- ----------
Income before income taxes $ (8,639) $ 42,129 $ 33,490
=========== ========== ==========
</TABLE>
<PAGE>
The Company does not have a single customer which represents 10% or more
of its consolidated revenues. In addition, substantially all revenue of
the Company's reportable segments are attributed to or located in the
United States.
20. INTERIM FINANCIAL INFORMATION (UNAUDITED)
<TABLE>
<CAPTION>
Basic Diluted
Under- Net Net
writing Net Income Income
Income Income (Loss) (Loss)
Quarters Ended (1) Revenues (Loss) (Loss) Per Share Per Share
(3) (3)
(In thousands, except per share data)
<S> <C> <C> <C> <C> <C>
1998:
December 31 (2) $ 78,159 $ (32,012) $ (19,802) $ (1.39) $ (1.39)
September 30 124,328 17,820 14,778 1.01 1.00
June 30 81,938 (1,063) 4,402 0.29 0.29
March 31 78,764 1,502 6,158 0.40 0.40
------------ ------------ ----------- ---------- -----------
$ 363,189 $ (13,753) $ 5,536 $ 0.37 $ 0.37
============ ============ =========== ========== ===========
1997:
December 31 $ 87,812 $ 5,234 $ 8,349 $ 0.55 $ 0.54
September 30 122,092 21,309 18,808 1.25 1.22
June 30 81,755 (1,103) 4,242 0.28 0.28
March 31 78,893 (789) 3,914 0.26 0.26
------------ ------------ ----------- ---------- -----------
$ 370,552 $ 24,651 $ 35,313 $ 2.34 $ 2.30
============ ============ =========== ========== ===========
<FN>
(1) The Company is significantly involved in crop insurance programs,
including the federal Multi-Peril Crop Insurance program and the crop
hail business. The Company's operating results from its crop program
can vary substantially from quarter to quarter as a result of various
factors, including timing and severity of losses from storms and other
natural perils and crop production cycles. Therefore, the results for
any quarter are not necessarily indicative of results for any future
period. The results of the crop program business primarily are
recognized in the second half of the calendar year.
(2) Underwriting income (loss) was reduced in the quarter ended
December 31, 1998 by the approximately $24.2 million strengthening of
loss and loss adjustment expense reserves.
(3) Quarterly net income per share numbers may not add to the annual net
income per share.
</FN>
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1998 AND 1997
BALANCE SHEETS (Parent Company Only)
(In Thousands)
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS 1998 1997
<S> <C> <C>
Cash and short-term investments $ 17,906 $ 960
Receivables, net 5,607 6,343
Intercompany receivables 248 13,159
Surplus note receivable from subsidiary 60,000 60,000
Investments in subsidiaries 255,444 260,707
Other assets 7,297 7,987
---------- ----------
$ 346,502 $ 349,156
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities $ 473 $ 611
Bank borrowings 15,000 -
Company-obligated mandatorily redeemable Preferred Securities of
AICI Capital Trust, holding solely Junior Subordinated Debentures of
the Company 94,875 94,875
---------- ----------
Total liabilities 110,348 95,486
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized, none issued
Common stock, $.40 par value, 40,000,000 shares authorized; 15,466,860
and 15,421,247 shares issued 6,187 6,168
Capital in excess of par value 198,657 198,080
Accumulated other comprehensive income, net of tax 5,305 6,885
Retained earnings 52,281 46,475
--------- ---------
262,430 257,878
Less:
Treasury stock, at cost, 1,209,520 and 209,519 shares (26,047) (3,979)
Contingent stock, 20,396 and 20,396 shares (229) (229)
---------- ----------
Total stockholders' equity 236,154 253,670
---------- ----------
$ 346,502 $ 349,156
========== ==========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
STATEMENTS OF OPERATIONS (Parent Company Only)
(In Thousands)
- -----------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Revenues $ - $ - $ -
Costs and expenses:
General and administrative expenses 2,502 2,112 2,167
-------- --------- ---------
Operating loss (2,502) (2,112) (2,167)
Other income (expense):
Interest expense (8,994) (6,569) (4,925)
Undistributed share of net income (loss) of subsidiaries (3,933) 25,040 31,586
Other 19,313 17,889 5,235
-------- -------- ---------
6,386 36,360 31,896
-------- -------- ---------
Income before income taxes 3,884 34,248 29,729
Income tax benefit (expense):
Current 1,834 995 505
Deferred (182) 70 46
-------- --------- ---------
Net income $ 5,536 $ 35,313 $ 30,280
======== ========= =========
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
STATEMENTS OF CASH FLOWS (Parent Company Only)
(In Thousands)
- ------------------------------------------------------------------------------------------------------------------------
1998 1997 1996
<S> <C> <C> <C>
Cash flows from operating activities:
Net income $ 5,536 $ 35,313 $ 30,280
Adjustments to reconcile net income from continuing
operations to net cash used for operating activities:
Deferred tax expense (benefit) 182 (70) (46)
Undistributed share of net loss (income) of subsidiaries 3,933 (25,040) (31,586)
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Receivables 13,647 (14,233) (3,049)
Payables (138) (334) (1,446)
Other, net 508 234 75
-------- --------- ---------
Net cash used for operating activities 23,668 (4,130) (5,772)
Cash flows from investing activities:
Contributions to investments in subsidiaries (250) (20,000) (50)
Proceeds from sale of investments available-for-sale - - 3,005
-------- -------- -------
Net cash used for investing activities (250) (20,000) 2,955
Cash flows from financing activities:
Proceeds from bank borrowings 15,000 21,000 -
Repayments of bank borrowings - (90,000) -
Proceeds from issuance of Company-obligated mandatorily redeemable
Preferred Securities, net of $3,976 in related expenses - 90,899 -
Proceeds from issuance of common stock 596 2,055 1,313
Purchase of treasury stock (22,068) (739) (65)
-------- -------- ---------
Net cash provided by financing activities (6,472) 23,215 1,248
-------- -------- ---------
Net increase (decrease) in cash and short-term investments 16,946 (915) (1,569)
Cash and short-term investments at beginning of year 960 1,875 3,444
--------- --------- ---------
Cash and short-term investments at end of year $ 17,906 $ 960 $ 1,875
========= ========= =========
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
- -------------------------------------------------------------------------------
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.
Included in the Statements of Operations in Other is $5,400,000, $4,500,000,
and $3,585,000 of interest income on surplus notes from subsidiaries for the
years ended December 31, 1998, 1997 and 1996, respectively, and $13,199,000 and
$12,381,000 of dividend income from a subsidiary for the years ended
December 31, 1998 and 1997, respectively.
Cash payments for interest were $8,739,000, $6,795,000, and $4,708,000 during
the years ended December 31, 1998, 1997 and 1996, respectively.
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE V
VALUATION ACCOUNTS
YEARS ENDED DECEMBER 31, 1998, 1997 AND 1996
(In Thousands)
- -----------------------------------------------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
Balance
at Balance
Beginning at
of End of
Period Additions Deductions Period
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended December 31, 1998 $ 4,985 $ 2,147 $ 1,927 $ 5,205
Year ended December 31, 1997 $ 3,454 $ 2,558 $ 1,027 $ 4,985
Year ended December 31, 1996 $ 2,432 $ 1,956 $ 934 $ 3,454
</TABLE>
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ACCEPTANCE INSURANCE COMPANIES INC.
/s/ Kenneth C. Coon
By _____________________________________ Dated: March 24, 1999
Kenneth C. Coon
Chairman and Chief Executive Officer
/s/ Georgia M. Mace
By _____________________________________ Dated: March 24, 1999
Georgia M. Mace
Chief Financial Officer and Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ Jay A. Bielfield
Dated: March 24, 1999 ______________________________
Jay A. Bielfield, Director
/s/ Kenneth C. Coon
Dated: March 24, 1999 ______________________________
Kenneth C. Coon, Director
/s/ Edward W. Elliott, Jr.
Dated: March 24, 1999 ______________________________
Edward W. Elliott, Jr., Director
/s/ Robert LeBuhn
Dated: March 24, 1999 ________________________________
Robert LeBuhn, Director
/s/ Michael R. McCarthy
Dated: March 24, 1999 ________________________________
Michael R. McCarthy, Director
/s/ John P. Nelson
Dated: March 24, 1999 ________________________________
John P. Nelson, Director
/s/ R. L. Richards
Dated: March 24, 1999 ________________________________
R. L. Richards, Director
/s/ David L. Treadwell
Dated: March 24, 1999 ________________________________
David L. Treadwell, Director
/s/ Doug T. Valassis
Dated: March 24, 1999 ________________________________
Doug T. Valassis, Director
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 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, filed July 29, 1997.
4.9 Form of Stock Certificate representing shares of Acceptance
Insurance Companies Inc., Common Stock, $.40 par value.
Incorporated by reference to Exhibit 4.1 to Registrant's Annual
Report on Form 10-K for the fiscal year ended December 31, 1992.
10.1 Intercompany Federal Income Tax Allocation Agreement between
Acceptance Insurance Holdings Inc. and its subsidiaries and the
Registrant dated April 12, 1990, and related agreements.
Incorporated by reference to Exhibit 10i to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
August 31, 1990.
10.2 Employment Agreement dated February 19, 1990 between Acceptance
Insurance Holdings Inc., the Registrant and Kenneth C. Coon.
Incorporated by reference to Exhibit 10.65 to the Registrant's
Annual Report on Form 10-K for the fiscal year ended
December 31, 1991.
10.3 Employment Agreement dated July 2, 1993 between the Registrant
and John P. Nelson. Incorporated by reference to Exhibit 10.6
to the Registrant's Quarterly Report on Form 10-Q for the period
ended September 30, 1994.
<PAGE>
10.4 Employment Agreement dated July 2, 1993 between the Registrant
and Richard C. Gibson. Incorporated by reference to Exhibit
10.6 to the Registrant's Quarterly Report on Form 10-Q for the
period ended September 30, 1994.
10.5 $100,000,000 Amended and Restated Credit Agreement by and Among
the Registrant, The First National Bank of Chicago, Comerica
Bank, First National Bank of Omaha, First Bank, N.A., Wells
Fargo Bank, National Association and Mercantile Bank, N.A. and
The First National Bank of Chicago, As Agent, and Comerica Bank,
First National Bank of Omaha, and First Bank, N.A.,
As Co-Agents, dated as of June 6, 1997. Incorporated by
reference to Exhibit 10.5 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1997.
10.6 The Registrant's 1997 Employee Stock Purchase Plan.
Incorporated by reference to the Registrant's Proxy Statement
filed on or about April 29, 1997.
10.7 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.
10.8 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.
10.9 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.
10.10 The Registrant's 1996 Incentive Stock Option Plan.
Incorporated by reference to the Registrant's Proxy Statement
filed on or about May 3, 1996.
21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche LLP.
23.2 Report on schedules of Deloitte & Touche LLP.
27 Financial Data Schedule.
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
The following is a list of subsidiaries of Registrant as of March 31, 1999,
other than subsidiaries which, considered in the aggregate as a single
subsidiary, would not consitute a significant subsidiary as defined by
Securities and Exchange Commission Regulation S-X
<TABLE>
<CAPTION>
NAME OF SUBSIDIARY STATE OF
INCORPORATION
<S> <C>
Acceptance Insurance Holdings Inc. (1) Nebraska
Radice Lands, Inc. (1) Florida
The Redland Group, Inc. (1) Iowa
Acceptance Insurance Services, Inc. (2) Nebraska
Acceptance Insurance Company (2) Nebraska
Redland Transportation, Inc. (2) North Carolina
Acceptance Indemnity Insurance Company (3) Nebraska
Phoenix Indemnity Insurance Company (3) Arizona
American Agrisurance, Inc. (4) Iowa
Redland Insurance Company (5) Iowa
Agro International, Inc. (6) Iowa
Crop Insurance Marketing, Inc. (7) Iowa
American Agrijusters, Co. (8) Iowa
American Growers Ins. Company (8) Nebraska
U. S. Ag Insurance Services Inc. (9) Texas
Acceptance Casualty Insurance Company (8) Texas
Acceptance Premium Finance Company (10) Arizona
Redland Specialty Underwriters, Inc. (11) Iowa
<FN>
__________
(1) A wholly owned subsidiary of Acceptance Insurance Companies Inc.
(2) A wholly owned subsidiary of Acceptance Insurance Holdings Inc.
(3) A wholly owned subsidiary of Acceptance Insurance Company.
(4) A wholly owned subsidiary of The Redland Group, Inc.
(5) An approximately 99.99% owned subsidiary of The Redland Group, Inc.
(6) An approximately 80% owned subsidiary of The Redland Group, Inc.
(7) A wholly owned subsidiary of American Agrisurance, Inc.
(8) A wholly owned subsidiary of Redland Insurance Company.
(9) An approximately 60% owned subsidiary of Redland Insurance Company.
(10) A 50% owned subsidiary of Acceptance Insurance Companies Inc.
(11) A 50% owned subsidiary of The Redland Group, Inc.
</FN>
</TABLE>
INDEPENDENT AUDITORS' CONSENT
To the Board of Directors and Stockholders
Acceptance Insurance Companies Inc. and Subsidiaries
We consent to the incorporation by reference in Registration Statement No.
33-53730 and No. 33-68856 on Form S-3 and in Registration Statement No.
33-07397, No. 33-67180 and No. 33-51441 on Form S-8 of Acceptance Insurance
Companies Inc. and subsidiaries of our reports dated March 5, 1999 appearing in
this Annual Report on Form 10-K of Acceptance Insurance Companies Inc. and
subsidiaries for the year ended December 31, 1998.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 29,1999
INDEPENDENT AUDITORS' REPORT ON SCHEDULES
To the Board of Directors and Stockholders
Acceptance Insurance Companies Inc. and Subsidiaries
We have audited the consolidated financial statements of Acceptance Insurance
Companies Inc. and subsidiaries as of December 31, 1998 and 1997, and for each
of the three years in the period ended December 31, 1998, and have issued our
report thereon dated March 5, 1999; such financial statements and report are
included elsewhere in this Form 10-K. Our audits also included the financial
statement schedules of Acceptance Insurance Companies Inc. and subsidiaries,
listed in Item 14. These financial statement schedules are the responsibility
of the Company's management. Our responsibility is to express an opinion based
on our audits. In our opinion, such consolidated financial statement schedules,
when considered in relation to the basic consolidated financial statement taken
as a whole, present fairly in all material respects the information set forth
therein.
/s/ DELOITTE & TOUCHE LLP
DELOITTE & TOUCHE LLP
Omaha, Nebraska
March 5, 1999
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
audited consolidated financial statements included in the Annual Report on
Form 10-K and is qualified in its entirety by reference to such financial
statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 337,107
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 71,687
<MORTGAGE> 9,549
<REAL-ESTATE> 3,300
<TOTAL-INVEST> 489,397
<CASH> 6,897
<RECOVER-REINSURE> 24,922
<DEFERRED-ACQUISITION> 25,433
<TOTAL-ASSETS> 1,092,943
<POLICY-LOSSES> 524,744
<UNEARNED-PREMIUMS> 162,037
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 109,875
0
0
<COMMON> 6,187
<OTHER-SE> 229,967
<TOTAL-LIABILITY-AND-EQUITY> 1,092,943
328,044
<INVESTMENT-INCOME> 28,320
<INVESTMENT-GAINS> 6,825
<OTHER-INCOME> 0
<BENEFITS> 237,061
<UNDERWRITING-AMORTIZATION> 90,001
<UNDERWRITING-OTHER> 14,735
<INCOME-PRETAX> 8,080
<INCOME-TAX> 2,544
<INCOME-CONTINUING> 5,536
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,536
<EPS-PRIMARY> .37
<EPS-DILUTED> .37
<RESERVE-OPEN> 263,106
<PROVISION-CURRENT> 212,894
<PROVISION-PRIOR> 24,167
<PAYMENTS-CURRENT> 100,968
<PAYMENTS-PRIOR> 113,224
<RESERVE-CLOSE> 285,975
<CUMULATIVE-DEFICIENCY> 24,167
</TABLE>
