SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[xx] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Commission File Number 1-7461
ACCEPTANCE INSURANCE COMPANIES INC.
(Exact name of registrant as specified in its charter)
Delaware 31-0742926
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
222 South 15th St., Suite 600 N.
Omaha, Nebraska 68102
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (402) 344-8800
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
YES XX NO
The number of shares of each class of the Registrant's common stock
outstanding on November 10, 1999 was:
Class of Common Stock No. of Shares Outstanding
Common Stock, $.40 Par Value 14,254,474
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
FORM 10-Q
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements:
Consolidated Balance Sheets
September 30, 1999 and December 31, 1998
Consolidated Statements of Operations
Three Months and Nine Months Ended September 30,1999 and 1998
Consolidated Statements of Cash Flows
Nine Months Ended September 30, 1999 and 1998
Notes to Interim Consolidated Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
Signatures
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands)
(unaudited)
September 30, December 31,
1999 1998
______________ ___________
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available-for-sale..................................... $ 311,848 $ 337,107
Marketable equity securities - preferred stock.......................... 16,943 27,316
Marketable equity securities - common stock........................... 36,102 44,371
Mortgage loans and other investments.................................... 9,074 9,549
Real estate............................................................. 3,185 3,300
Short-term investments, at cost, which approximates
market................................................................ 82,607 67,754
___________ ____________
459,759 489,397
Cash....................................................................... 1,369 6,897
Receivables, net........................................................... 331,231 185,951
Reinsurance recoverable on unpaid losses and loss
adjustment expenses...................................................... 390,262 238,769
Prepaid reinsurance premiums............................................... 62,986 76,663
Property and equipment, net................................................ 19,270 16,425
Deferred policy acquisition costs.......................................... 19,458 25,433
Excess of cost over acquired net assets.................................... 28,754 33,363
Deferred income tax........................................................ 15,323 6,901
Other assets............................................................... 9,932 13,144
___________ ____________
Total assets........................................................ $1,338,344 $1,092,943
=========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses........................................ $ 674,912 $ 524,744
Unearned premiums.......................................................... 128,516 162,037
Amounts payable to reinsurers.............................................. 193,355 35,840
Accounts payable and accrued liabilities................................... 40,843 24,293
Bank borrowings............................................................ -- 15,000
Company - obligated manditorily redeemable Preferred Securities of
AICI Capital Trust, holding solely Junior Subordinated Debentures
of the Company.......................................................... 94,875 94,875
___________ ___________
Total liabilities.................................................. 1,132,501 856,789
Contingencies.............................................................. -- --
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares
authorized, none issued............................................... -- --
Common stock, $.40 par value, 40,000,000
shares authorized, 15,482,886 and 15,466,860
shares issued......................................................... 6,193 6,187
Capital in excess of par value.......................................... 198,868 198,657
Accumulated other comprehensive
income (loss), net of tax .......................................... (6,945) 5,305
Retained earnings....................................................... 34,003 52,281
___________ ___________
232,119 262,430
Less:
Treasury stock, at cost, 1,209,520 shares.................................. (26,047) (26,047)
Contingent stock, 20,396 shares............................................ (229) (229)
___________ ___________
Total stockholders' equity.............................................. 205,843 236,154
___________ ___________
Total liabilities and stockholders' equity.............................. $1,338,344 $1,092,943
=========== ===========
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
for the three months and nine months ended September 30, 1999 and 1998
(in thousands, except per share data)
(unaudited)
Three Months Nine Months
___________________________ __________________________
1999 1998 1999 1998
_________ __________ ___________ __________
<S> <C> <C> <C> <C>
Revenues:
Insurance premiums earned............................... $ 98,857 $ 117,240 $ 210,429 $ 258,327
Net investment income................................... 6,111 7,217 18,749 21,349
Net realized capital gains (losses)..................... 1,072 (129) 6,414 5,354
_________ __________ _________ __________
106,040 124,328 235,592 285,030
_________ __________ _________ __________
Costs and expenses:
Costs of revenues:
Insurance losses and loss adjustment expenses......... 97,502 60,450 176,333 158,233
Insurance underwriting expenses....................... 45,125 38,970 80,382 81,835
General and administrative expenses. . . . . . . . . . 525 624 1,715 1,842
_________ __________ _________ __________
143,152 100,044 258,430 241,910
_________ __________ _________ __________
Operating profit (loss).................................... (37,112) 24,284 (22,838) 43,120
_________ __________ _________ __________
Other income (expense):
Interest expense........................................ (2,186) (2,278) (6,846) (6,608)
Share of net loss of investee........................... -- -- -- (704)
Other, net.............................................. (74) 1 (53) (56)
_________ __________ _________ __________
(2,260) (2,277) (6,899) (7,368)
_________ __________ _________ __________
Income (loss) before income taxes and cumulative effect
of change in accounting principles .................... (39,372) 22,007 (29,737) 35,752
Income tax expense (benefit):
Current............................................... (7,849) 7,317 (10,154) 303
Deferred.............................................. (6,320) (88) (1,643) 10,111
_________ __________ ___________ ___________
Income (loss) before cumulative effect of change in
accounting principles.................................... (25,203) 14,778 (17,940) 25,338
Cumulative effect of change in accounting principles....... -- -- (338) --
_________ __________ __________ __________
Net income (loss).......................................... $(25,203) $ 14,778 $ (18,278) $ 25,338
========= ========== ========== ==========
Earnings (loss) per share:
Basic:
Income (loss) before cumulative effect of change in
accounting principles............................... $ (1.77) $ 1.01 $ (1.26) $ 1.69
Cumulative effect of change in accounting principles. -- -- (.02) --
Net income (loss).................................... (1.77) 1.01 (1.28) 1.69
Diluted:
Income (loss) before cumulative effect of change in
accounting principles............................... $ (1.77) $ 1.00 $ (1.26) $ 1.66
Cumulative effect of change in accounting principles -- -- (.02) --
Net income (loss)..................................... (1.77) 1.00 (1.28) 1.66
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
<PAGE>
<TABLE>
<CAPTION>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
for the nine months ended September 30, 1999 and 1998
(in thousands)
(unaudited)
1999 1998
__________ ___________
<S> <C> <C>
Cash flows from operating activities:
Net income (loss)................................................................. $ (18,278) $ 25,338
Net adjustment to reconcile net income (loss) to net cash from
operating activities............................................................ 24,736 56,494
__________ ___________
Net cash from operating activities............................................ 6,458 81,832
__________ ___________
Cash flows from investing activities:
Proceeds from sales of investments................................................ 10,010 --
Proceeds from sales of investments available-for-sale............................. 117,754 122,798
Proceeds from maturities of investments .......................................... 7,993 5,125
Proceeds from maturities of investments available-for-sale........................ 39,847 78,501
Purchases of investments.......................................................... (26,617) (4,676)
Purchases of investments available-for-sale....................................... (157,829) (218,719)
Purchases of property and equipment............................................... (6,738) (3,320)
__________ ___________
Net cash from investing activities........................................... (15,580) (20,291)
__________ ___________
Cash flows from financing activities:
Proceeds from bank borrowings................................................... -- 13,000
Repayment of bank borrowings...................................................... (15,000) --
Repurchase of common stock........................................................ -- (20,060)
Proceeds from issuance of common stock............................................ 217 516
Proceeds from sale of Phoenix Indemnity, net of cash sold......................... 23,591 --
__________ ___________
Net cash from financing activities........................................... 8,808 (6,544)
__________ ___________
Net increase (decrease) in cash and short-term investments........................... (314) 54,997
Cash and short-term investments at beginning of period............................... 72,822 38,316
__________ ___________
Cash and short-term investments at end of period..................................... $ 72,508 $ 93,313
========== ===========
Supplemental disclosure of cash flow information:
Cash paid during the period for interest.......................................... $ 6,868 $ 6,404
========== ===========
Cash paid during the period for income taxes...................................... $ -- $ 481
========== ===========
</TABLE>
The accompanying notes are an integral part of the
interim consolidated financial statements.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. Summary of Significant Accounting Policies:
Principles of Consolidation
The Company's consolidated financial statements include the accounts of
Acceptance Insurance Companies Inc. and its majority owned subsidiaries
(the "Company"). All significant intercompany transactions have been
eliminated.
Management's Opinion
The accompanying consolidated financial statements reflect all adjustments,
consisting only of normal recurring adjustments except as otherwise
disclosed, which in the opinion of management are considered necessary to
fairly present the Company's financial position as of September 30, 1999 and
December 31, 1998, and the results of operations for the three months and
nine months ended September 30, 1999 and 1998 and cash flows for the nine
months ended September 30, 1999 and 1998.
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 September 30, 1999 approximately $11,468,000 of
short-term investments had a maturity date at acquisition of greater than
three months.
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, 2000. Management does not expect the
adoption of SFAS No. 133 to have a material impact to the Company's
consolidated financial statements.
Change in Accounting Principles
In December 1997, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants (AcSEC) issued Statement
of Position 97-3, "Accounting by Insurance and Other Enterprises for
Insurance-Related Assessments" (SOP 97-3). SOP 97-3 provides guidance for
determining when an entity should recognize a liability for guaranty-fund
and other insurance-related assessments, how to measure that liability, and
when an asset may be recognized for the recovery of such assessments through
premium tax offsets. The Company adopted SOP 97-3 on January 1, 1999
resulting in a cumulative effect of change in accounting principles of
$338,000.
Reclassifications
Certain prior period amounts have been reclassified to conform with current
year presentation.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
2. Investments:
The amortized cost and related estimated fair values of debt and equity
securities in the accompanying balance sheets are as follows (in thousands):
<TABLE>
<CAPTION>
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
__________ ___________ ___________ ___________
<S> <C> <C> <C> <C>
September 30, 1999:
Fixed maturities available-for- sale:
U.S. Treasury and government
securities............................. $ 124,586 $ 280 $ 2,089 $ 122,777
States, municipalities and political
subdivisions........................... 137,386 866 4,336 133,916
Mortgage-backed securities............... 23,493 -- 1,016 22,477
Other debt securities.................... 35,736 63 3,121 32,678
__________ ___________ _________ ___________
$ 321,201 $ 1,209 $ 10,562 $ 311,848
========== =========== ========= ===========
Marketable equity securities -
preferred stock........................ $ 17,610 $ 130 $ 797 $ 16,943
========== =========== ========= ===========
Marketable equity securities -
common stock........................... $ 36,767 $ 5,934 $ 6,599 $ 36,102
========== =========== ========= ===========
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
========== =========== ========== ============
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
3. Insurance Premiums and Claims:
Insurance premiums written and earned by the Company's insurance
subsidiaries for the three months and nine months ended September 30,
1999 and 1998 are as follows (in thousands):
<TABLE>
<CAPTION>
Three Months Nine Months
___________________________ ___________________________
1999 1998 1999 1998
____________ _________ _________ __________
<S> <C> <C> <C> <C>
Direct premiums written.......................... $ 246,227 $ 219,541 $ 526,751 $ 504,926
Assumed premiums written......................... 58,326 58,811 70,783 78,868
Ceded premiums written........................... (206,723) (163,346) (391,671) (324,895)
____________ __________ __________ ___________
Net premiums written........................ $ 97,830 $ 115,006 $ 205,863 $ 258,899
============ ========== ========= ===========
Direct premiums earned........................... $ 254,747 $ 224,251 $ 540,639 $ 500,720
Assumed premiums earned.......................... 58,326 57,180 75,038 75,135
Ceded premiums earned............................ (214,216) (164,191) (405,248) (317,528)
____________ __________ __________ __________
Net premiums earned......................... $ 98,857 $ 117,240 $ 210,429 $ 258,327
============ ========== ========== ==========
</TABLE>
Insurance loss and loss adjustment expenses have been reduced by
recoveries recognized under reinsurance contracts of approximately
$228.9 million and $163.7 million for the three months ended September
30, 1999 and 1998, respectively. Insurance loss and loss adjustment
expenses have been reduced by recoveries recognized under reinsurance
contracts of approximately $419.0 million and $314.4 million for the
nine months ended September 30, 1999 and 1998, respectively.
4. Bank Borrowings:
The Company's $65 million Revolving Credit Facility with its bank
lenders is subject to automatic reductions on a quarterly basis
beginning March 31, 1999. At September 30, 1999 the Revolving Credit
Facility was reduced to $60.5 million. The Company selects its
interest rate as either the prime rate or LIBOR plus a margin of .50%
to 1.25% depending on the Company's debt to equity ratio. Interest is
payable quarterly. At September 30, 1999, the Company had no
outstanding indebtedness under this arrangement.
5. Company-obligated mandatorily redeemable Preferred Securities of AICI
Capital Trust, holding solely Junior Subordinated Debentures of the
Company:
In 1997, AICI Capital Trust, a Delaware business trust organized by
the Company (the "Issuer Trust") issued 3.795 million shares or
$94.875 million aggregate liquidation amount of its 9% Preferred
Securities (liquidation amount $25 per Preferred Security). The
Company owns all of the common securities (the "Common Securities")
of the Issuer Trust. The Preferred Securities represent preferred
undivided beneficial interests in the Issuer Trust's assets. The
assets of the Issuer Trust consist solely of the Company's 9% Junior
Subordinated Debentures due 2027 which were issued in 1997 in an
amount equal to the total of the Preferred Securities and the Common
Securities.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
Distributions on the Preferred Securities and Junior Subordinated
Debentures are cumulative, accrue from the date of issuance and are
payable quarterly in arrears. The Junior Subordinated Debentures are
subordinate and junior in right of payment to all senior indebtedness
of the Company and are subject to certain events of default and
redemption provisions, all as described in the Junior Debenture
Indenture. At September 30, 1999, the Company had $94.875 million
outstanding at a weighted average interest cost of 9.2%.
6. Income Taxes:
As of September 30, 1999, management believes it is more likely than
not that the Company will realize a portion of the deferred tax asset.
The valuation allowance at September 30, 1999 primarily relates to
capital loss items whose realization is uncertain. The net deferred
tax asset is as follows (in thousands):
<TABLE>
<CAPTION>
September 30, December 31,
1999 1998
____________ _____________
<S> <C> <C>
Unpaid losses and loss adjustment expenses....................... $ 11,415 $ 12,512
Unearned premiums................................................ 4,587 5,976
Allowances for doubtful accounts................................. 2,176 1,822
Other............................................................ 2,848 2,344
Unrealized loss on fixed maturities available-for-sale........... 3,274 --
Unrealized loss on marketable equity securities ............... . . 467 --
_________ _________
Deferred tax asset............................................... 24,767 22,654
_________ _________
Deferred policy acquisition costs................................ (6,810) (8,902)
Other............................................................. (2,559) (2,051)
Unrealized gain on fixed maturities available-for-sale............ -- (1,105)
Unrealized gain on marketable equity securities................... -- (1,751)
Unrealized gain on consolidated subsidiaries held for sale....... -- (1,869)
_________ _________
Deferred tax liability .......................................... (9,369) (15,678)
_________ _________
15,398 6,976
Valuation allowance.............................................. (75) (75)
_________ _________
Net deferred tax asset ........................................ $ 15,323 $ 6,901
========= =========
</TABLE>
Income taxes computed by applying statutory rates to income before
income taxes are reconciled to the provision for income taxes set
forth in the consolidated financial statements as follows
(in thousands):
<TABLE>
<CAPTION>
September 30,
____________________________
1999 1998
_________ _________
<S> <C> <C>
Computed U.S. federal income taxes..................................... $(10,408) $ 12,513
Nondeductible amortization of goodwill and other intangibles........... 299 333
Tax-exempt interest income............................................. (1,845) (1,553)
Dividends received deduction........................................... (459) (780)
Recognition of a portion of the deferred tax asset..................... -- (1,037)
Other.................................................................. 616 938
_________ _________
Income taxes provided........................................... $(11,797) $ 10,414
========= =========
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
7. Net Income (Loss) Per Share:
Basic and diluted net income (loss) per share for the three months
and nine months ended September 30, 1999, and 1998 are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
_______________________ _______________________
1999 1998 1999 1998
_________ __________ __________ ___________
<S> <C> <C> <C> <C>
Income (loss) before cumulative effect of change in
accounting principles $ (25,203) $ 14,778 $ (17,940) $ 25,338
Cumulative effect of change in accounting principles -- -- (338) --
__________ __________ ___________ ___________
Net income (loss) $ (25,203) $ 14,778 $ (18,278) $ 25,338
========== ========== =========== ===========
Weighted average common shares outstanding 14,252 14,642 14,246 15,025
Dilutive effect of contingent shares -- 20 -- 20
Dilutive effect of stock options -- 172 -- 197
_________ __________ ___________ __________
Diluted weighted average common and equivalent
shares outstanding 14,252 14,834 14,246 15,242
========== ========== =========== =========
Earnings (loss) per share:
Basic:
Income (loss) before cumulative effect of change
in accounting principles $ (1.77) $ 1.01 $ (1.26) $ 1.69
Cumulative effect of change in accounting
principles -- -- (.02) --
Net income (loss) (1.77) 1.01 (1.28) 1.69
Diluted:
Income (loss) before cumulative effect of change
in accounting principles $ (1.77) $ 1.00 $ (1.26) $ 1.66
Cumulative effect of change in accounting
principles -- -- (.02) --
Net income (loss) (1.77) 1.00 (1.28) 1.66
</TABLE>
8. Comprehensive Income (Loss):
Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income." The comprehensive income (loss) for the three
months and nine months ended September 30, 1999, and 1998 are as
follows:
<TABLE>
<CAPTION>
Three Months Nine Months
______________________ ________________________
1999 1998 1999 1998
_________ __________ ___________ ___________
<S> <C> <C> <C> <C>
Net income (loss) $(25,203) $ 14,778 $ (18,278) $ 25,338
Other comprehensive income (loss):
Unrealized gains (losses) of investments,
net of reclassification adjustments (9,414) (3,462) (18,846) (1,231)
Deferred income tax expense (benefits) on changes (3,295) (1,212) (6,596) (431)
__________ __________ ___________ __________
Other comprehensive income (loss) (6,119) (2,250) (12,250) (800)
__________ __________ ___________ ___________
Comprehensive income (loss) $(31,322) $ 12,528 $ (30,528) $ 24,538
========== ========== =========== ===========
</TABLE>
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS, Continued
(unaudited)
9. 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. 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 for the three and nine months ended September
30, 1998 from the Crop Insurance segment, utilizing the excess capacity
of the Property and Casualty Insurance segment. Management does
not utilize assets as a significant measurement tool for evaluating
segments.
Segment revenues and segment operating profit (loss) for the three
months and nine months ended September 30 are as follows:
<TABLE>
<CAPTION>
Three Months Nine Months
__________________________________________ ______________________________________
Property and Property and
Casualty Crop Casualty Crop
Insurance Insurance Total Insurance Insurance Total
______________ ____________ _________ ___________ _________ __________
<S> <C> <C> <C> <C> <C> <C>
1999
Revenues $ 53,912 $ 52,128 $106,040 $ 177,918 $ 57,674 $235,592
============== ============ ========= =========== ========= =========
Operating profit (loss) $ (47,561) $ 10,449 $(37,112) $ (35,932) $ 13,094 $(22,838)
Interest expense and other 1,367 893 2,260 4,169 2,730 6,899
______________ ____________ __________ ___________ _________ __________
Income (loss) before
income taxes $ (48,928) $ 9,556 $(39,372) $ (40,101) $ 10,364 $(29,737)
============== ============ ========== ============ ========= ==========
1998
Revenues $ 73,638 $ 50,690 $124,328 $ 224,451 $ 60,579 $285,030
============== ============ ========= ============ ========= ==========
Operating profit $ 515 $ 23,769 $ 24,284 $ 13,833 $ 29,287 $ 43,120
Interest expense and other 1,439 838 2,277 4,939 2,429 7,368
______________ ____________ _________ ___________ _________ __________
Income (loss) before
income taxes $ (924) $ 22,931 $ 22,007 $ 8,894 $ 26,858 $ 35,752
============== ============ ========= =========== ========= ==========
</TABLE>
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.
10. Sale of Phoenix Indemnity Insurance Company:
On May 11, 1999, the Company entered into a definitive agreement with
Millers American Group, Inc. ("Millers") for the sale of the Company's
non-standard automobile business, including Phoenix Indemnity Insurance
Company ("Phoenix Indemnity ") to Millers. Under this agreement, the
Company transfered all of its non-standard automobile business and all
outstanding stock of Phoenix Indemnity to Millers in exchange for
approximately $25 million in cash in September 1999. The proceeds of
$25 million is subject to certain post closing adjustments.
<PAGE>
PART 1.
ITEM 2.
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of financial condition and
results of operations of the Company and its consolidated subsidiaries is based
upon the Company's interim consolidated financial statements and the notes
thereto included in this report.
RESULTS OF OPERATIONS
Forward-Looking Information
Except for the historical information contained in this Quarterly Report on
Form 10-Q, matters discussed herein may constitute forward-looking information,
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.
The Company's results are significantly impacted by its crop business,
particularly its MPCI line. Results from the crop lines are not generally
known until the third and fourth quarters of the year, after crops are
harvested. Crop results are particularly dependent on events beyond the
Company's control, notably weather conditions during the crop growing season
in the states where the Company writes a substantial amount of its crop
insurance, and, with the introduction of the Company's Crop Revenue Coverage,
the market price of grains on various commodity exchanges. Additionally,
federal regulations governing aspects of crop insurance are frequently
modified, and any such changes may impact crop insurance results.
Forward-looking information set forth herein does not take into account any
impact from any adverse weather conditions during the remainder of the 1999
crop season, or the various other factors noted above which may affect crop
and non-crop operating results.
Three months and nine months ended September 30, 1999
Compared to three months and nine months ended September 30, 1998
The Company's net income decreased from $14.8 million and $25.3 million for
the three and nine months ended September 30, 1998 to a net loss of $25.2
million and $18.3 million for the three and nine months ended September 30,
1999. The three and nine month results for 1999 were impacted by a
strengthening of the Company's reserves for loss and loss adjustment expense, a
reduction in net premiums written in the Company's property and casualty
segment, an increase in net operating expenses as well as an increase in
reinsurance costs in the Company's crop segment and a decline in investment
income. Certain nonrecurring events also affect the comparison of results for
the three and nine months ended September 30, 1999 with results for the same
periods in 1998. During the first nine months of 1998, the Company benefited
from additional profit sharing earned in the previous year under the Company's
Multi-Peril Crop Insurance program. Results in the first nine months of 1999
also were negatively impacted by charges associated with the previously
announced restructuring of the Company's property and casualty segment as well
as the cumulative effect of a change in accounting principles adopted on
January 1, 1999.
The Company historically has performed an actuarial study in conjunction with
its independent actuary as of September 30 of each year. This study indicated
a significant increase in the number of claims incurred by the Company but not
previously reported (IBNR) at September 30, 1999. The increase in previously
unreported claims was principally under policies covering the 1990 through 1995
accident years, and primarily were new construction defect claims reported
under general liability policies insuring contractors in the state of
California. To a lessor extent, the Company also experienced an increase in
IBNR claims for the 1998 year in its commercial automobile lines.
<PAGE>
California construction defect claims increased as a result of the 1995
California Supreme Court decision in Montrose Chemical Corporation vs. Admiral
Insurance Company. In that decision, the Court adopted the "continuous
trigger" theory of insurance coverage for third party cases involving claims of
continuous, progressive or deteriorating bodily injury or property damage.
Under this theory, the timing of the insured's act which allegedly caused the
accident, event or condition resulting in a claim is largely immaterial. As
long as the potential damages remain outstanding, all of the contractor's or
subcontractor's successive policies potentially may provide coverage. Thus,
the Court's Montrose decision created a whole new basis for coverage under
years of previously issued policies. Beginning in 1995, the Company altered
its underwriting criteria for construction risks and began endorsing policies
exposed to these types of continuous exposures in order to avoid coverage for
conditions which existed prior to the inception of Company policies.
As a result of the unexpected increase in claims from the 1990 through 1995
accident years, the Company set its best point estimate for loss and loss
adjustment expense reserves at the top of the independent actuary's range,
and consequently increased its loss reserves for 1998 and prior years
by approximately $44.0 million. The Company also applied the more conservative
assumptions to the 1999 accident year results, contributing, in part, to an
increase in its loss ratio from June 30, 1999 of 3.7%. Also contributing to
this increase were $1.7 million in losses from hurricane Floyd.
The Company previously announced a restructuring of its property and casualty
segment in which approximately one-third of its property and casualty gross
written premiums for 1998 were discontinued. As a part of this restructuring,
the Company ceded the unearned premium from its discontinued lines, as well
as new premiums written during the run-off of the discontinued lines, to an
independent reinsurer. Accordingly, during the three months and nine months
ended September 30, 1999, the Company's net premiums earned in its property and
casualty segment declined by 29.0% and 22.1% respectively as compared to the
same periods during 1998. While the Company reduced operating expenditures in
consideration of the reduced premium writings, the Company's property and
casualty underwriting expense ratio increased in both the three months and nine
months ended September 30, 1999 as compared to a year earlier, from 32.3% and
32.6% in 1998 to 36.7% and 33.7% in 1999. As part of the restructuring, the
Company also sold its non-standard automobile operations. The sale of the
Company's non-standard automobile business, including Phoenix Indemnity
Insurance Company, was closed in September of 1999 and, therefore, the Company
expects further reductions in its net written premiums and operating
expenditures in the fourth quarter of 1999.
The Company experienced increased demand for its crop segment products during
the first nine months of 1999 as compared to the first nine months of 1998,
particularly products sold under the federally subsidized Multi-Peril Crop
Insurance (MPCI) program and the Company's proprietary CropRevenue
CoveragePlus(TM)(CRCPlus) product. During 1999, the Company's MPCI premiums
increased to approximately $366 million from $274 million in 1998. At the same
time, however, the Company's net expenses as a percentage of written premiums
increased from 1998 to 1999 due to a decrease in the rate at which the Company
is reimbursed by the federal government for the expenses of operating its MPCI
program. In 1998 the Company's reimbursement rate was approximately 24.7%,
while in 1999 this reimbursement rate fell to 21.7%. Due to competitive
pressures, the Company was unable to pass any of this expense reduction along
to its agents as agents' commissions remained relatively constant at 15.5% in
both years. The Company does not expect a similar reduction in its expense
reimbursements from the federal government during the 2000 crop year, but a
change in the Company's mix of business could result in a small reduction in
its total reimbursement rate for the 2000 crop season.
The increased demand for the Company's proprietary CRCPlus product exceeded the
Company's traditional reinsurance program. Five factors generally contributed
to this demand: steadily declining commodity prices during the primary sales
season, increased federal subsidies for purchasers of crop insurance, rapid
market acceptance of this product for newly offered specialty crops, a
technical error in the quoting software for one specialty crop which
understated the applicable premium for that crop, and disproportionately high
coverage levels for certain crops. As a result, the Company elected to close
its sales season early and limit available coverage for some crops. In order
to maintain its aggregate retained risk near historic levels, the Company's
excess reinsurance costs increased by $8.2 million during 1999 as compared to
1998. The Company expects $7.5 million of these additional excess reinsurance
costs to continue in the future. The Company also experienced additional costs
in 1999 of $1.5 million in the placement of its quota share reinsurance program
for CRCPlus. In addition, the Company ceded a portion of the profit share
related to approximately $35.0 million of its retained premiums under the MPCI
program to reinsurers participating in its overall crop reinsurance program.
The Company expects similar cessions to continue in the future in order to
secure the required reinsurance capacity for its crop segment.
As a result of these developments, the Company's retained MPCI pool increased
7.7% from 1998 to 1999 as compared to a 33.6% increase in the Company's total
MPCI premium. The Company also experienced higher operating expenses
associated with the early sales closing for its CRCPlus product. These
expenses totaled $4.1 million for the first nine months of 1999. The overall
effect was to reduce crop insurance operating income by $18.4 million for the
first nine months of 1999 as compared to the first nine months of 1998. While
the Company may not continue to offer certain proprietary crop products for
some specialty crops, the Company expects the profits resulting from increased
revenues in the Company's total crop segment associated with CRCPlus, to exceed
the additional costs of the Company's crop segment reinsurance program.
<PAGE>
The Company's net investment income declined from approximately $7.2 million
and $21.3 million for the three and nine months ended September 30, 1998 to
$6.1 million and $18.7 million for the three and nine months ended September
30, 1999. This decline in the investment income of the Company was affected
by a decline in the size of the average outstanding portfolio of the Company
from $515.2 million and $496.5 million during the three and nine months ended
September 30, 1998 to $467.4 million and $479.0 million for the three and nine
months ended September 30, 1999. In addition, the yield on the portfolio
declined from 5.6% and 5.7% during the three and nine months ended September
30, 1998 to 5.2% for the three and nine months ended September 30, 1999. This
decrease in yield resulted from several of the Company's higher yielding
preferred stock investments being called and the Company increasing its
holdings in tax advantaged municipal securities, as well as a decrease in
overall interest rates in the Company's fixed income portfolio and short term
cash equivalent portfolio from the first nine months of 1998 to the first nine
months of 1999. In addition, the Company's mortgage backed security portfolio
was, on average, $23 million less for the first nine months of 1999 versus 1998
as the Company reduced both the interest rate risk and the investment yield on
its mortgage backed portfolio through the elimination of substantially all of
its inverse floating rate collateralized mortgage obligations. As the Company
discontinued nearly one-third of its property and casualty business, the
duration of the portfolio was shortened and the overall credit quality of the
portfolio improved in order to maintain needed liquidity. Net realized gains
approximated $1.1 million and $6.4 million for the three and nine months ended
September 30, 1999 as compared to a realized loss of $.1 million and realized
gains of $5.4 million for the three and nine months ended September 30, 1998.
A comparison of the Company's results for the first nine months of 1999 to the
first nine months of 1998 also was affected by certain nonrecurring events. As
part of the previously announced restructuring of the Company's property and
casualty segment, the Company recorded a restructuring charge of approximately
$1.4 million in the first nine months of 1999, principally associated with
severance benefits paid to employees in the discontinued areas. During the
first nine months of 1998 the Company recognized underwriting profits of $3.3
million in its crop segment, as compared to a profit of $.1 million during the
first nine months of 1999, both resulting from the recording of additional
profit sharing from the previous year under the Company's MPCI program. In
addition, the Company adopted SOP 97-3 on January 1, 1999 resulting in a
cumulative effect of a change in accounting principles of $338,000. (See
"Recent Accounting Standards").
Recent 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, 2000. Management does not expect the adoption of SFAS No. 133 to
have a material impact to the Company's consolidated financial statements.
In December 1997, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AcSEC) issued Statement of Position
97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" (SOP 97-3). SOP 97-3 provides guidance for determining when an
entity should recognize a liability for guaranty-fund and other
insurance-related assessments, how to measure that liability, and when an
asset may be recognized for the recovery of such assessments through premium
tax offsets. The Company adopted SOP 97-3 on January 1, 1999 resulting in a
cumulative effect of change in accounting principles of $338,000.
LIQUIDITY AND CAPITAL RESOURCES
The Company has included a discussion of the liquidity and capital resources
requirement of the Company and the Company's insurance subsidiaries.
The Company - Parent Only
As an insurance holding company, the Company's assets consist primarily of the
capital stock of its subsidiaries, surplus notes issued by two of its insurance
company subsidiaries and investments held at the holding company level. The
Company's primary sources of liquidity are receipts from interest payments on
the surplus notes, payments from the profit sharing agreement with American
Agrisurance, the Company's wholly owned subsidiary which operates as the
general agent for the Company's crop insurance programs, tax sharing payments
from its subsidiaries, investment income from, and proceeds from the sale of,
holding company investments, and dividends and other distributions from
subsidiaries of the Company. The Company's liquidity needs are primarily to
service debt, pay operating expenses and taxes, make investments in
subsidiaries, and repurchase shares of the Company's stock.
<PAGE>
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. These amounts are 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.
In 1997, AICI Capital Trust, a Delaware business trust organized by the Company
(the "Issuer Trust") issued 3.795 million shares or $94.875 million aggregate
liquidation amount of its 9% Preferred Securities (liquidation amount $25 per
Preferred Security). The Company owns all of the common securities (the
"Common Securities") of the Issuer Trust. The Preferred Securities represent
preferred undivided beneficial interests in the Issuer Trust's assets. The
assets of the Issuer Trust consist solely of the Company's 9% Junior
Subordinated Debentures due 2027 which were issued in 1997 in an amount equal
to the Preferred Securities and the Common Securities. Distributions on the
Preferred Securities and Junior Subordinated Debentures are cumulative, accrue
from the date of issuance and are payable quarterly in arrears. The Junior
Subordinated Debentures are subordinate and junior in right of payment to all
senior indebtedness of the Company and are subject to certain events of default
and redemptive provisions, all described in the Junior Debenture Indenture. At
September 30, 1999, the Company had $94.875 million outstanding at a weighted
annual interest cost of 9.2%.
As of September 30, 1999, the Company maintains a five-year revolving credit
facility (the "Revolving Credit Facility") with its bank lenders in the amount
of $60.5 million. The Company selects its interest rate at either the prime
rate or LIBOR plus a margin which varies depending on the Company's funded debt
to equity ratio. Interest is payable quarterly. As of September 30, 1999,
the Company had no outstanding indebtedness under this arrangement. The
Revolving Credit Facility contains covenants which do not permit the payment
of dividends by the Company, requires the Company to maintain certain operating
and debt service coverage ratios, requires maintenance of specific levels of
surplus and requires the Company to meet certain tests established by the
regulatory authorities.
As of September 30, 1999, the Company held cash and invested assets, excluding
investment in subsidiaries, of $10.6 million.
Insurance Companies
The principal liquidity needs of the Insurance Companies are to fund losses and
loss adjustment expense payments and to pay underwriting 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.
<PAGE>
Cash flows from the Company's MPCI and crop hail businesses differ in certain
respects from cash flows associated with more traditional property and casualty
lines. MPCI premiums are not received from farmers until the covered crops are
harvested, and when received are promptly remitted by the Company in full to
the government. Covered losses are paid by the Company during the growing
season as incurred, with such expenditures reimbursed by the government within
three business days. Policy acquisition and administration expenses are paid
by the Company as incurred during the year. The Company periodically
throughout the year receives a payment in reimbursement of its policy
acquisition and administration expenses.
In the crop hail business, premiums are generally not received until after the
harvest, while losses and other expenses are paid throughout the year.
The Company's profit or loss from its MPCI business is determined after the
crop season ends on the basis of a profit sharing formula established by law
and the RMA. Commencing with the 1997 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 received $51.5 million in payments under the MPCI
program in March of 1999.
Changes in Financial Condition
The Company's stockholders' equity decreased by approximately $30.3 million at
September 30, 1999 as compared to December 31, 1998. The principal components
of this decrease were a net loss of $18.3 million during the first nine months
of 1999 and a decrease in the value of the Company's investment portfolio
causing the unrealized gain on available-for-sale securities, net of tax, to
decrease from $5.3 million at December 31, 1998 to a $6.9 million unrealized
loss at September 30, 1999. This change in the unrealized gain on
available-for-sale securities was attributable to a decline in the unrealized
gain in the Company's fixed maturity and equity securities.
Consolidated Cash Flows
Cash provided by operating activities was $6.5 million for the nine months
ended September 30, 1999 compared to cash provided from operations for the same
period in 1998 of $81.8 million. The major components of this decrease in
cash flow from period to period were profit sharing payments received from the
federal government under the Company's MPCI crop insurance program of $57.0
million in the first nine months of 1998 compared to $51.5 million in the first
nine months of 1999, $21.3 million in payments made in the first nine months of
1999 related to reinsurance on the Company's discontinued lines of business,
and declining premium volume in the Company's property and casualty segment.
Inflation
The Company does not believe that inflation has had a material impact on its
financial condition or the 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 market risk sensitive
instruments are entered into for purposes other than trading.
At September 30, 1999, the Company had $320.9 million of fixed maturity
securities and mortgage loans and $53.0 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.
<PAGE>
The Company's Preferred Securities of $94.875 million at September 30, 1999,
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 $17.4 million on its fixed
maturity securities and mortgage loans and a gain in fair value of $8.9 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
$10.6 million.
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 identified its information technology ("IT") systems requiring
modification to be Year 2000 compliant. The Company developed and implemented
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
Company's IT systems and believes that they are Year 2000 compliant.
Additionally, the Company has reviewed and believes its Non-IT systems which
rely on microprocessors, such as copiers, fax machines, telephone equipment and
mail room equipment, are Year 2000 compliant. The Company has also communicated
with the lessors and other providers and believes their Non-IT systems are Year
2000 compliant.
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 has
communicated with and received responses that these material third parties
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-Q.
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.
<PAGE>
The Company has expensed costs of approximately $2.9 million relating to the
year 2000 issue since inception of the project, and did not incur any expenses
during the nine months ended September 30, 1999. The Company does not
anticipate any additional expenses related to the Year 2000 project.
Although the Company has addressed the Year 2000 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 by December 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.
Sale of Phoenix Indemnity Insurance Company
On May 11, 1999, the Company entered into a definitive agreement with Millers
American Group, Inc. ("Millers") for the sale of the Company's non-standard
automobile business, including Phoenix Indemnity Insurance Company
("Phoenix Indemnity ") to Millers. Under this agreement, the Company
transfered all of its non-standard automobile business and all outstanding
stock of Phoenix Indemnity to Millers in exchange for approximately $25 million
in cash in September 1999. The proceeds of $25 million is subject to certain
post closing adjustments.
Class Action Suit
On August 17, 1999 James M. Wallace, III filed suit in Lonoke County, Arkansas
Circuit Court against the Company and its American Agrisurance, Inc. and
American Growers Insurance Company subsidiaries. The suit seeks recognition
as a class action on behalf of all persons who submitted applications for
CRCPlus coverage for rice during 1999. The plaintiff alleges defendants
breached a contract of insurance and acted in bad faith by offering to accept
his application at a maximum coverage level of $0.015 per pound rather than
$0.03 per pound, and that he withdrew his application. The suit seeks damages,
interest and attorneys fees.
Defendants removed the action to the United States District Court for the
Eastern District of Arkansas, Little Rock Division on September 16, 1999 and
filed an answer denying the plaintiff's claims and raising various defenses.
The plaintiff has initiated discovery and defendants have moved to dismiss
portions of the Complaint. While the case remains in an early procedural stage
the Company continues to believe it is without merit.
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
See Exhibit Index.
(b) Reports on Form 8-K:
Report on Form 8-K for an event (the issuance of a press release
announcing that a class action suit regarding CRCPlus(TM) and
seeking damages and attorney fees has been filed against the
Company and its subsidiaries in Lonoke County, Arkansas Circuit
Court) which occurred on August 26, 1999.
Report on Form 8-K for an event (the issuance of a press release
announcing the Company had completed the sale of the Company's
non-standard automobile business, including Phoenix Indemnity
Insurance Company, to Millers American Group, Inc.) which
occurred on September 20, 1999.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
ACCEPTANCE INSURANCE COMPANIES INC.
November 12, 1999 /S/KENNETH C COON
Kenneth C. Coon
Chairman and Chief Executive Officer
November 12, 1999 /S/ GEORGIA M MACE
Georgia M. Mace
Chief Financial Officer and Treasurer
<PAGE>
ACCEPTANCE INSURANCE COMPANIES INC. AND SUBSIDIARIES
QUARTERLY REPORT ON FORM 10-Q
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
21 Subsidiaries of the Registrant
27 Financial Data Schedule.
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
The following is a list of subsidiaries of Registrant as of November 12, 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
American Agrisurance, Inc. (4) Iowa
Redland Insurance Company (5) Iowa
Crop Insurance Marketing, Inc. (6) Iowa
American Agrijusters, Co. (7) Iowa
American Growers Ins. Company (7) Nebraska
U. S. Ag Insurance Services Inc. (8) Texas
Acceptance Casualty Insurance Company (7) Texas
Acceptance Premium Finance Company (9) Arizona
Redland Specialty Underwriters, Inc. (10) 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) A wholly owned subsidiary of American Agrisurance, Inc.
(7) A wholly owned subsidiary of Redland Insurance Company.
(8) An approximately 60% owned subsidiary of Redland Insurance Company.
(9) A 50% owned subsidiary of Acceptance Insurance Companies Inc.
(10) A 50% owned subsidiary of The Redland Group, Inc.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
unaudited consolidated financial statements included in the Form 10-Q and is
qualified in its entiretly by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 311,848
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 53,045
<MORTGAGE> 9,074
<REAL-ESTATE> 3,185
<TOTAL-INVEST> 459,759
<CASH> 1,369
<RECOVER-REINSURE> 58,933
<DEFERRED-ACQUISITION> 19,458
<TOTAL-ASSETS> 1,338,344
<POLICY-LOSSES> 674,912
<UNEARNED-PREMIUMS> 128,516
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 94,875
0
0
<COMMON> 6,193
<OTHER-SE> 199,650
<TOTAL-LIABILITY-AND-EQUITY> 1,338,344
210,429
<INVESTMENT-INCOME> 18,749
<INVESTMENT-GAINS> 6,414
<OTHER-INCOME> 0
<BENEFITS> 176,333
<UNDERWRITING-AMORTIZATION> 5,975
<UNDERWRITING-OTHER> 74,407
<INCOME-PRETAX> (29,737)
<INCOME-TAX> (11,797)
<INCOME-CONTINUING> (17,940)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> (338)
<NET-INCOME> (18,278)
<EPS-BASIC> (1.28)
<EPS-DILUTED> (1.28)
<RESERVE-OPEN> 0<F1>
<PROVISION-CURRENT> 0<F1>
<PROVISION-PRIOR> 0<F1>
<PAYMENTS-CURRENT> 0<F1>
<PAYMENTS-PRIOR> 0<F1>
<RESERVE-CLOSE> 0<F1>
<CUMULATIVE-DEFICIENCY> 0<F1>
<FN>
<F1>This amount is presented on an annual basis. See 12/31/98 Form 10-K for the
most recent reported amounts.
</FN>
</TABLE>
