================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1995
OR
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
Commission File Number 0-15022
FRONTIER INSURANCE GROUP, INC.
(Exact name of Registrant as specified in its charter)
Delaware 14-1681606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
195 Lake Louise Marie Road, Rock Hill, New York 12775-8000
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 796-2100
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.
[x] Yes [ ] No
The aggregate number of shares of the Registrant's Common Stock, $.01 par value,
outstanding on November 9, 1995, was 13,060,259.
Page 1 of 18 pages
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<PAGE>
FRONTIER INSURANCE GROUP, INC.
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
PART I- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at September 30, 1995
(Unaudited) and December 31, 1994............................ 3-4
Consolidated Statements of Income (Unaudited) for the
Three Months and Nine Months Ended September 30, 1995
and 1994..................................................... 5
Consolidated Statements of Cash Flows (Unaudited) for the
Nine Months Ended September 30, 1995 and 1994................ 6
Notes to Consolidated Financial Statements (Unaudited)....... 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations................ 10-16
PART II- OTHER INFORMATION
Item 1. Legal Proceedings............................................ 17
Item 2. Changes in Securities........................................ 17
Item 3. Defaults upon Senior Securities.............................. 17
Item 4. Submission of Matters to a Vote of Security Holders.......... 17
Item 5. Other Information............................................ 17
Item 6. Exhibits and Reports on Form 8-K............................. 17
Signature............................................................ 18
</TABLE>
2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
CONSOLIDATED BALANCE SHEETS
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
ASSETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
----------- ------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed maturities, held to maturity--
principally at amortized cost
(market: 1995--$193,798; 1994--$190,874) $192,989 $202,129
Fixed maturities, available for sale--
at market value (amortized cost:
1995--$264,882; 1994--$149,846) 266,690 143,956
Equity securities--at market
(cost: 1995--$21,039; 1994--$52,458) 21,515 48,646
Short-term investments--at principal
balances, which approximate market 31,976 12,887
-------- -------
TOTAL INVESTMENTS 513,170 407,618
Cash 3,570 6,362
Agents' balances due, less
allowances for doubtful accounts
(1995--$2,414; 1994--$2,132) 22,713 20,909
Premiums receivable from insureds,
less allowances for doubtful accounts
(1995--$30; 1994--$105) 32,414 20,222
Deferred federal income tax benefits 27,789 30,767
Accrued investment income 6,194 5,078
Deferred policy acquisition costs 17,709 13,213
Net reinsurance recoverables
less allowances for possible uncollectible
amounts (1995--$115; 1994--$115) 73,370 54,779
Data processing equipment and software--at cost,
less accumulated depreciation and amortization
(1995--$2,242; 1994--$1,853) 1,402 1,618
Insurance renewal and claims adjusting rights and
other intangible assets, less accumulated
amortization (1995--$2,905; 1994--$2,016) 2,822 3,295
Home office building and equipment--
at cost, less accumulated depreciation
(1995--$4,373; 1994--$2,958) 27,812 27,403
Federal income taxes recoverable 246
Other assets 6,621 7,602
-------- --------
TOTAL ASSETS $735,586 $599,112
======== ========
</TABLE>
See notes to consolidated financial statements (unaudited).
3
<PAGE>
CONSOLIDATED BALANCE SHEETS--Continued
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
LIABILITIES AND CAPITAL
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1995 1994
----------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES
Policy liabilities:
Unpaid losses $ 298,901 $ 266,261
Unpaid loss adjustment expenses 50,358 46,376
Unearned premiums 111,184 81,224
--------- ---------
TOTAL POLICY LIABILITIES 460,443 393,861
Funds held by Company under reinsurance treaties 20,274 647
Note payable 25,000
Cash dividend payable 1,567 1,558
Federal income tax payable 449
Other liabilities 11,331 12,782
--------- ---------
TOTAL LIABILITIES 519,064 408,848
CAPITAL
Preferred Stock, par value $.01
per share; authorized and
unissued--1,000,000 shares
Common Stock, par value $.01 per share;
authorized--20,000,000 shares; issued
(1995--13,059,667 shares; 1994--13,021,058 shares) 131 130
Additional paid-in capital 167,548 167,209
Net unrealized appreciation/(depreciation)
of investments in available-for-sale securities 1,514 (6,307)
Retained earnings 48,117 29,886
--------- ---------
SUBTOTAL 217,310 190,918
Less: Treasury stock--at cost (1995--41,400 shares;
1994--35,400 shares) (788) (654)
--------- ---------
TOTAL CAPITAL 216,522 190,264
--------- ---------
TOTAL LIABILITIES AND CAPITAL $ 735,586 $ 599,112
========= =========
Book value per share $ 16.58 $ 14.61
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
4
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------ ------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Premiums written $ 79,468 $ 63,194 $ 200,838 $ 149,536
Premiums ceded 12,178 (4,108) (31,482) (9,230)
--------- --------- --------- ---------
NET PREMIUMS WRITTEN 67,290 59,086 169,356 140,306
Decrease (increase) in unearned premiums (17,417) (17,658) (27,289) (31,380)
--------- --------- --------- ---------
NET PREMIUMS EARNED 49,873 41,428 142,067 108,926
Net investment income 7,691 5,105 21,606 17,885
Net realized capital gains (losses) 477 (175) (23) (1,471)
--------- --------- --------- ---------
TOTAL NET INVESTMENT INCOME 8,168 4,930 21,583 16,414
Gross claims adjusting income 32 81 107 213
--------- --------- --------- ---------
TOTAL REVENUES 58,073 46,439 163,757 125,553
EXPENSES
Losses 23,551 36,325 67,451 65,830
Loss adjustment expenses 6,973 6,945 19,921 16,986
Amortization of policy acquisition costs 10,718 7,547 30,320 19,093
Underwriting and other expenses 4,804 5,251 14,519 13,427
Interest expense 451 451
--------- --------- --------- ---------
TOTAL EXPENSES 46,497 56,068 132,662 115,336
INCOME BEFORE INCOME TAXES 11,576 (9,629) 31,095 10,217
INCOME TAXES
State 430 (394) 690 302
Federal 2,901 (4,155) 7,489 928
--------- --------- --------- ---------
TOTAL INCOME TAXES 3,331 (4,549) 8,179 1,230
--------- --------- --------- ---------
NET INCOME $ 8,245 ($ 5,080) $ 22,916 $ 8,987
========= ========= ========= =========
PER SHARE DATA
Operating income (loss) $ .61 ($ .38) $ 1.76 $ .76
Net realized capital gains (losses) .02 (.01) .00 (.07)
--------- --------- --------- ---------
NET INCOME (LOSS) $ .63 ($ .39) $ 1.76 $ .69
========= ========= ========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING 13,017 13,016 13,009 12,985
</TABLE>
See notes to consolidated financial statements (unaudited).
5
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
------------------
1995 1994
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 22,917 $ 8,987
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in policy liabilities 66,582 60,516
Increase (decrease) in federal income taxes 2,283 (8,647)
Decrease (increase) in reinsurance balances 1,684 10,283
Increase in agents' balances and
premiums receivable (13,996) (18,599)
Change in deferred policy acquisition costs (4,496) (5,729)
Decrease (increase) in accrued investment income (1,115) 175
Depreciation and amortization 1,995 484
Realized capital gains (losses) (23) 1,471
Other (1,497) 948
-------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 74,334 49,889
INVESTING ACTIVITIES
Sales of equity securities 31,989 47,693
Sales of available for sale securities 83,309 33,437
Calls, maturities and paydowns of fixed maturities 76,010 23,866
Purchases of securities (267,999) (158,177)
Net (purchases) sales of short-term investments (19,089) 545
Purchase of home office building and equipment (1,825) (976)
Purchase of data processing equipment and software (175) (359)
-------- -------
NET CASH (USED IN) INVESTING ACTIVITIES (97,780) (53,971)
FINANCING ACTIVITIES
Issuance of note payable 25,000
Cash dividends paid (4,685) (4,426)
Issuance of common stock 339 587
-------- -------
NET CASH PROVIDED IN (USED IN)
FINANCING ACTIVITIES 20,654 (3,839)
-------- -------
INCREASE (DECREASE) IN CASH (2,792) (7,921)
CASH AT BEGINNING OF PERIOD 6,362 12,929
-------- -------
CASH AT END OF PERIOD $ 3,570 $ 5,008
-------- -------
-------- -------
</TABLE>
See notes to consolidated financial statements (unaudited).
6
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
(Unaudited)
1. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q and Article 10 of
Regulation S-X and, accordingly, do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 1994.
In the opinion of management, all adjustments (consisting of only normal,
recurring accruals) considered necessary for a fair presentation have been
included. Certain amounts in the 1994 financial statements have been
reclassified to conform to the 1995 presentation. All share and per share
information presented in the accompanying financial statements and these
notes thereto have been adjusted to give effect to stock dividends and
stock splits. Operating results for the three-month period and the
nine-month period ended September 30, 1995 are not necessarily indicative
of the results that may be expected for the year ending December 31, 1995.
2. Certain net investment income and realized capital loss amounts which were
reported to Frontier by a limited partnership in the first nine months of
1994 have been reclassified to reflect the accounting treatment applied to
them at year-end 1994.
3. Earnings per share information is presented on the basis of weighted
average shares outstanding for the period.
4. Dividends have been declared by the Board of Directors and paid by the
Company during the periods presented in the accompanying financial
statements as follows:
<TABLE>
<CAPTION>
Declaration Record Payment Type of Cash Number of
Date Date Date Dividend Paid Shares Issued
- ----------- ------ ------- -------- ---- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
08/11/94 09/30/94 10/20/94 $.12 per share cash $1,562 N/A
11/22/94 12/30/94 01/19/95 $.12 per share cash $1,558 N/A
03/16/95 03/31/95 04/20/95 $.12 per share cash $1,566 N/A
05/18/95 06/30/95 07/20/95 $.12 per share cash $1,567 N/A
08/17/95 09/29/95 10/19/95 $.12 per share cash $1,567 N/A
</TABLE>
5. At September 30, 1995 and 1994, respectively, options to purchase 325,569
and 228,501 shares of Common Stock, at per share exercise prices ranging
from $7.87 to $30.58, were outstanding under the Company's stock option
plans (the "Plans"). Options to purchase 112,959 and 98,739 shares of
Common Stock were exercisable at September 30, 1995 and September 30, 1994,
respectively, under the Plans.
During 1993, the Company granted the President and Chairman of the Board,
and a Vice President, separate stock options outside of the Plans to
purchase 375,000 and 67,500 shares, respectively, of the Company's Common
Stock at $50.00 per share at any time through December 31, 1999, which
options were outstanding at September 30, 1995.
The number of shares subject to options and the per share option prices
have been adjusted to reflect stock dividends and stock splits. Exercisable
options are nondilutive to earnings per share presented in the accompanying
financial statements.
7
<PAGE>
6. Contingent reinsurance commissions are accounted for on an earned basis and
are accrued, in accordance with the terms of the applicable reinsurance
agreement, based on the estimated level of profitability relating to such
reinsured business. During the three months ended September 30, 1995 and
1994, such earned commissions accrued were $(505,000) and $65,000,
respectively. During the nine months ended September 30, 1995 and 1994,
such earned commissions accrued were $(434,000) and $(240,000),
respectively. The estimated profitability of the reinsured business is
continually reviewed and as adjustments become necessary, such adjustments
are reflected in current operations.
7. Claims adjusting income is accounted for on an accrual basis, before
deducting the related expenses. During the three months ended September 30,
1995 and 1994, claims adjusting operating expenses included with
underwriting and other expenses amounted to $43,000 and $89,000,
respectively. During the nine months ended September 30, 1995 and 1994,
claims adjusting operating expenses included with underwriting and other
expenses amounted to $164,000 and $265,000, respectively.
8. The components of the net reinsurance recoverables balances in the
accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
September 30, 1995 December 31, 1994
------------------ -----------------
(in thousands)
<S> <C> <C>
Ceded paid losses recoverable $ 5,103 $ 3,946
Ceded unpaid losses and LAE 63,644 49,435
Ceded unearned premiums 5,179 3,885
Ceded reinsurance payable (556) (2,487)
------- --------
TOTAL $73,370 $54,779
------- --------
------- --------
</TABLE>
The reinsurance ceded components of the amounts relating to the
accompanying income statements are as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30
------------------------------
1995 1994
---- ----
(in thousands)
<S> <C> <C>
Ceded premiums earned $29,862 $14,754
Ceded incurred losses $17,631 $16,871
Ceded incurred LAE $ 9,102 $ 2,476
</TABLE>
The effect of reinsurance on premiums written and earned at September 30,
1995 and 1994 was as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30
---------------------------------------------------
1995 1994
Premiums Premiums
--------------------- ----------------------
Written Earned Written Earned
------- ------ ------- ------
(in thousands)
<S> <C> <C> <C> <C>
Direct $ 200,315 $ 171,184 $ 147,364 $ 120,327
Assumed 523 745 2,172 3,353
Ceded (31,482) (29,862) (9,230) (14,754)
--------- --------- -------- ---------
Net $ 169,356 $ 142,067 $ 140,306 $ 108,926
--------- --------- -------- ---------
--------- --------- -------- ---------
</TABLE>
8
<PAGE>
9. On June 29, 1995, the Company obtained a 4-1/2 year, $35 million line of
credit facility from The Bank of New York, under which it borrowed $25
million at an interest rate of 6.875% per annum, payable quarterly. The
bank's commitment reduces by $5 million at the end of each of 1996, 1997
and 1998, and expires at the end of 1999. The Company has no other
outstanding debt.
10. At June 30, 1995, the Company had completed its capital contribution of $45
million to the capital and surplus of Frontier Insurance Company, its
primary operating subsidiary, utilizing a combination of funds previously
held by the Company and loan proceeds from The Bank of New York loan. The
capital contribution was to fund projected future growth and to retain
Frontier Insurance Company's A-rating with A.M. Best.
11. On November 2, 1995, the Company announced that it had acquired the
realtors, errors and omissions book of business from Bankers Multiple Line
Insurance Company. The purchase price was $400,000 with $200,000 remitted
the date of closing, and an additional $200,00 due January 15, 1997, with
downward adjustments possible if certain commitments are not kept. The
personnel of this Company involved in placing and servicing the acquired
business have become employees of the Company and will continue to operate
from their location in Louisville, Kentucky.
9
<PAGE>
Item 2.Management's Discussion and Analysis of Financial Condition and Results
of Operations
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and notes thereto included elsewhere in this
Report and with the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1994.
Three Months Ended September 30, 1995 Compared to Three Months Ended September
30, 1994
The following table sets forth the net premiums earned by the principal lines of
insurance written by the Company for the periods indicated and the dollar amount
and percentage of change therein from period to period:
<TABLE>
<CAPTION>
Three Months Increase (Decrease)
Ended September 30, 1994 to 1995
------------------- -------------------
1995 1994 Amount %
---- ---- ------ --
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $22,772 $20,230 $2,542 12.6
General liability 13,152 7,703 5,449 70.7
Surety 9,818 8,255 1,563 18.9
Workers' compensation 2,207 3,370 (1,163) (34.5)
Other 1,924 1,870 54 2.9
------- ------- ------
Total $49,873 $41,428 $8,445 20.4
======= ======= ======
</TABLE>
The following table sets forth the Company's combined ratio calculated on a
statutory basis ("Statutory Combined Ratio") and on the basis of generally
accepted accounting principles ("GAAP Combined Ratio") for the periods
indicated:
<TABLE>
<CAPTION>
Statutory Combined Ratio GAAP Combined Ratio
------------------------ -------------------
Three Months Three Months
Ended September 30, Ended September 30,
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 47.2% 87.7% 47.2% 87.6%
Loss adjustment expenses (LAE) 13.5 16.2 14.0 16.8
---- ----- ---- -----
Losses and LAE 60.7 103.9 61.2 104.4
Acquisition, underwriting and other
expenses 29.8 25.7 31.0 30.9
---- ----- ---- -----
Total combined ratio 90.5% 129.6% 92.2% 135.3%
==== ===== ==== =====
</TABLE>
A variety of factors accounted for the 20.4% growth in net premiums earned, the
principal factor being increases in the majority of the Company's core and new
program business, partially offset by a decrease in workers' compensation
business, particularly the cotton gin program, and by the earned premiums ceded
under the Company's aggregate excess of loss reinsurance contract effective
January 1, 1995, pursuant to which 14% of earned premium for all lines of
business, except bail, customs, license and permit, and miscellaneous surety
bonds is ceded.
The increase in medical malpractice net premiums earned was primarily
attributable to an increase in the number of physicians insured, principally
those associated with mental health, home care, and other social service
organizations, growth in the program for psychiatrists, greater penetration of
the Ohio physician market, growth in the dental program endorsed by the Academy
of General Dentistry, and rate increases in Florida and other geographic areas.
10
<PAGE>
Net premiums earned for the general liability line increased primarily because
of increases in various programs, including social services, and alarms and
guards, pest control and excess employer's liability. These increases were
partially offset by a decrease in net written premiums earned in the umbrella
and in the crane operator liability programs.
Growth in surety net premiums earned continued in 1995, primarily attributable
to expanded writings of license and permit bonds, with bonds for small
contractors, miscellaneous bonds, and bail bonds also showing substantial
percentage increases.
Net premiums earned for the workers' compensation line decreased primarily as a
result of decreases in the specialty niche program for cotton gins, caused by a
weather-related reduction in the cotton crop, decreases in other smaller
programs due to the Company's decision not to renew accounts deemed
unprofitable, and decreased required participation in the National Workers'
Compensation Reinsurance Pools. These decreases were partially offset by
increases in workers' compensation premiums in the social services programs.
Net premiums earned for the other lines of business increased primarily due to
increased volume in commercial package policies in the social service program,
and the recent start-up of the earthquake program. These increases were
partially offset by decreases in other miscellaneous small programs.
Net investment income before realized capital gains and losses increased 50.7%
due principally to increases in investable assets resulting from the proceeds of
the $25 million borrowing under a line of credit facility, cash inflow from
regular operations, and as a result of the 1994 reclassification of previously
reported realized capital losses to net investment income, partially offset by
the interest charge on funds held by the Company for the benefit of the
reinsurer of the Company's aggregate excess of loss reinsurance contract. Total
net investment income increased 65.7% due to the aforementioned increase in net
investment income and the realization of capital gains compared to capital
losses realized in the 1994 period. The average annual pre-tax yield on
investments, excluding the charge for funds held under the aggregate excess of
loss reinsurance contract and realized capital gains and losses, decreased to
6.4% from 6.6%, primarily as the result of an increase in the proportion of
tax-advantaged securities to taxable securities held, compounded by generally
lower interest rates available for funds invested in 1994 and early 1995,
including funds from higher yielding investments which matured or were called
for redemption. The average annual after-tax yield on investments, excluding the
charge for funds held under the aggregate excess of loss reinsurance contract
and realized capital gains and losses, increased to 5.5% from 5.4%, primarily as
a result of generally higher interest rates available for funds invested in the
1995 quarter, partially offset by higher yielding investments coming to maturity
or being called for redemption as described above.
Gross claims adjusting income decreased 60.5% primarily as a result of a
decrease in claim services provided to outside companies, principally
Markel/Rhulen.
Total revenues increased 25.1% as a result of the above.
Total expenses decreased by 17.1% compared to the 20.4% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") decreased 29.5% as a result
of a 35.2% decrease in losses, partially offset by a 0.4% increase in LAE. The
decrease in losses was attributable to the one-time addition of $17.5 million to
the 1994 loss reserves in medical malpractice business in Florida. This decrease
was augmented by the aggregate excess of loss reinsurance contract which
provides coverage for certain losses and LAE in excess of 66% for the 1995
accident year. The 0.4% increase in LAE resulted from the increase in loss and
LAE ratios, partially offset by a change in the line of business mix to those
having a lower percentage relationship of LAE to losses and the allocation of
recoveries under the aggregate excess of loss contract. The decrease in losses
and LAE resulted in a loss and LAE component of the GAAP Combined Ratio 43.2
percentage points lower than in the comparable 1994 period. The 42.0% increase
in the amortization of policy acquisition costs was attributable primarily to an
increase in direct commission expense resulting from growth in programs with
11
<PAGE>
higher commission rates, a decrease in reinsurance contingent commissions,
increased staffing and marketing expenses related to expansion, and salary
increases, partially offset by a decrease in assumed commission expense
resulting from the continued decrease in assumed written premium. The 0.1%
increase in underwriting, other expenses and interest expense was primarily the
result of the interest expense associated with the borrowings under a line of
credit facility, increased staffing, increased facilities, equipment and
materials expense necessitated by the Company's growth, and salary increases,
offset by a decrease in policyholder dividends. Since the non-claim related
expenses increased at a percentage rate greater than that of earned premiums,
the non-claim related component of the GAAP Combined Ratio was 0.3 percentage
points higher than in the comparable 1994 period. The total GAAP Combined Ratio
decreased by 43.1 percentage points to 92.2% as a result of the above.
The foregoing changes resulted in income before income taxes of $11.6 million
for the 1995 quarter, a 220.2% increase from the comparable 1994 quarter. Net
income for the period increased by $13.3 million, or 262.3%. The comparative
results were significantly impacted by the $17.5 million addition to loss
reserves in the third quarter of 1994 reflected above, which resulted in a $5.1
million loss in that quarter.
Nine Months Ended September 30, 1995 Compared to Nine Months Ended September 30,
1994
The following table sets forth the net premiums earned by the principal lines of
insurance written by the Company for the periods indicated and the dollar amount
and percentage of change therein from period to period:
<TABLE>
<CAPTION>
Nine Months Increase (Decrease)
Ended September 30, 1994 to 1995
------------------- ------------------
1995 1994 Amount %
---- ---- ------ ---
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $ 64,344 $ 52,253 $12,091 23.1
General liability 35,079 18,263 16,816 92.1
Surety 29,160 20,870 8,290 39.7
Workers' compensation 7,996 13,066 (5,070) (38.8)
Other 5,488 4,475 1,013 22.6
-------- -------- -------
Total $142,067 $108,927 $33,140 30.4
======== ======== =======
</TABLE>
The following table sets forth the Company's combined ratio calculated on a
statutory basis ("Statutory Combined Ratio") and on the basis of generally
accepted accounting principles ("GAAP Combined Ratio") for the periods
indicated:
<TABLE>
<CAPTION>
Statutory Combined Ratio GAAP Combined Ratio
------------------------ -------------------
Nine Months Nine Months
Ended September 30, Ended September 30,
------------------------ -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 47.5% 60.4% 47.5% 60.4%
Loss adjustment expenses (LAE) 13.4 14.9 14.0 15.6
---- ---- ---- ----
Losses and LAE 60.9 75.3 61.5 76.0
Acquisition, underwriting and other
expenses 30.3 26.9 31.5 29.6
---- ----- ---- -----
Total combined ratio 91.2% 102.2% 93.0% 105.6%
==== ===== ==== =====
</TABLE>
12
<PAGE>
A variety of factors accounted for the 30.4% growth in net premiums earned, the
principal factor being increases in the majority of the Company's core and new
program business, partially offset by a decrease in workers' compensation
business, particularly the cotton gin program, and by the earned premiums ceded
under the Company's aggregate excess of loss reinsurance contract effective
January 1, 1995, pursuant to which 14% of earned premium for all lines of
business, except bail, customs, license and permit, and miscellaneous surety
bonds is ceded.
The increase in medical malpractice net premiums earned was primarily
attributable to an increase in the number of physicians insured, principally
those associated with mental health, home care, and other social service
organizations, growth in the program for psychiatrists, greater penetration of
the Ohio physician market, growth in the dental program endorsed by the Academy
of General Dentistry, and rate increases in Florida and other geographic areas.
Net premiums earned for the general liability line increased primarily because
of increases in various programs, including social services, and alarms and
guards, pest control and excess employer's liability. These increases were
partially offset by a decrease in net written premiums earned in the umbrella
and in the crane operator liability programs.
Growth in surety net premiums earned continued in 1995, primarily attributable
to expanded writings of license and permit bonds, with bonds for small
contractors, miscellaneous bonds, and bail bonds also showing substantial
percentage increases. The increase in license and permit bonds was primarily
attributable to the Company's acquisition in April 1994 of the license and
permit bond business of a California insurance agency.
Net premiums earned for the workers' compensation line decreased primarily as a
result of decreases in the specialty niche program for cotton gins caused by a
weather-related reduction in the cotton crop, and decreases in other smaller
programs due to the Company's decision not to renew accounts deemed
unprofitable, and because of decreased required participation in the National
Workers' Compensation Reinsurance Pools. These decreases were partially offset
by increases in workers' compensation premiums written in the social services
programs.
Net premiums earned for the other lines of business increased primarily due to
increased volume in commercial package policies in the social service program,
and the recent start-up of the earthquake program. These increases were
partially offset by decreases in other miscellaneous small programs.
Net investment income before realized capital gains and losses increased 20.8%
due principally to increases in investable assets resulting from the proceeds of
the $25 million borrowing under a line of credit facility, the January 1995
commutation of certain medical malpractice reinsurance treaties, and cash inflow
from regular operations, partially offset by the interest charge on funds held
by the Company for the benefit of the reinsurer of the Company's aggregate
excess of loss reinsurance contract. Total net investment income increased 31.5%
due to the aforementioned increase in net investment income and a decrease in
realized capital losses. The average annual pre-tax yield on investments,
excluding the charge for funds held under the aggregate excess of loss
reinsurance contract and realized capital gains and losses, decreased to 6.5%
from 6.6%, primarily as the result of an increase in the proportion of
tax-advantaged securities to taxable securities held, compounded by generally
lower interest rates available for funds invested in 1994 and early 1995,
including funds from higher yielding investments which matured or were called
for redemption. The average annual after-tax yield on investments, excluding the
charge for funds held under the aggregate excess of loss reinsurance contract
and realized capital gains and losses, decreased to 5.4% from 5.5%, primarily as
a result of generally lower interest rates available for funds invested in 1994
and early 1995, and higher yielding investments coming to maturity or being
called for redemption as described above.
13
<PAGE>
Gross claims adjusting income decreased 49.8% primarily as a result of a
decrease in claim services provided to outside companies, principally
Markel/Rhulen.
Total revenues increased 30.4% as a result of the above.
Total expenses increased by 15.0% compared to the 30.4% increase in net premiums
earned. Losses and loss adjustment expenses ('LAE') increased by 5.5% as a
result of a 2.5% increase in losses and a 17.3% increase in LAE. The increase in
losses was substantially lower than that for net premiums earned as a result of
the one-time addition of $17.5 million to the 1994 loss reserves in medical
malpractice business in Florida, partially offset by carrying higher loss and
LAE ratios to premiums earned for 1995 business, recoveries under the aggregate
excess of loss reinsurance contract which provides coverage for certain losses
and LAE in excess of 66% for the 1995 accident year, and to subrogation
recoveries in the surety line of business in excess of expectations. The 17.3%
increase in LAE resulted from the increase in loss and LAE ratios, partially
offset by a change in the line of business mix to those having a lower
percentage relationship of LAE to losses and the allocation of recoveries under
the aggregate excess of loss contract. Due to the disproportionate relationship
of losses and LAE to earned premium, the loss and LAE component of the GAAP
Combined Ratio was 14.5 percentage points lower than in the comparable 1994
period. The 58.8% increase in the amortization of policy acquisition costs was
attributable primarily to an increase in direct commission expense resulting
from growth in programs with higher commission rates, a decrease in reinsurance
contingent commissions, increased staffing and marketing expenses related to
expansion, and salary increases, partially offset by a decrease in assumed
commission expense resulting from the continued decrease in assumed written
premium. The 8.1% increase in underwriting, other expenses and interest expense
was primarily the result of the interest expense associated with the borrowing
under a line of credit facility, an increase in the additions to allowance for
bad debts, increased staffing, increased facilities, equipment and materials
expense necessitated by the Company's growth, a reduction in assessment
recoveries from the Texas Workers' Compensation Insurance Facility, and salary
increases, partially offset by a decrease in policyholder dividends. Since the
non-claim related expenses increased at a percentage rate more than that of
earned premiums, the non-claim related component of the GAAP Combined Ratio was
1.9 percentage points higher than in the comparable 1994 period. The total GAAP
Combined Ratio decreased by 12.6 percentage points to 93.0% as a result of the
above.
The foregoing changes resulted in income before income taxes of $31.1 million
for the nine months ended 1995, a 204.3% increase from the comparable 1994
period. Net income for the period increased by $13.9 million, or 155.0%. The
comparative results were significantly impacted by the $17.5 million addition to
loss reserves in the third quarter of 1994 reflected above, which resulted in a
lower net income for the 1994 period.
Liquidity and Capital Resources
The Company is a holding company, receiving cash principally through sales of
equities, borrowings, and dividends from its subsidiaries, certain of which are
subject to dividend restrictions. The ability of insurance and reinsurance
companies to underwrite insurance and reinsurance is based on maintaining
liquidity and capital resources sufficient to pay claims and expenses as they
become due. The primary sources of liquidity for the Company's subsidiaries are
funds generated from insurance and reinsurance premiums, investment income,
commission and fee income, capital contributions from the Company and proceeds
from sales and maturities of portfolio investments. The principal expenditures
of the Company's subsidiaries are for payment of losses and LAE, operating
expenses, commissions, and dividends to shareholders and policyholders.
The Company's subsidiaries maintain liquid operating positions and follow
investment guidelines that are intended to provide for an acceptable return on
investment while preserving capital, maintaining sufficient liquidity to meet
their obligations, and as to the Company's insurance subsidiaries, maintaining a
sufficient margin of capital and surplus to ensure their unimpaired ability to
write insurance and assume reinsurance.
14
<PAGE>
At September 30, 1995, the Company's $735.6 million in total assets were
comprised of the following: 70.2% cash and investments, 10% net reinsurance
recoverables, 7.5% premiums receivable, 3.8% home office building and equipment,
6.2% deferred expenses (federal income taxes and policy acquisition costs), and
2.3% other assets.
The following table provides a profile of the Company's fixed maturities
investment portfolio by rating at September 30, 1995:
<TABLE>
<CAPTION>
AMOUNT
MARKET REFLECTED ON PERCENT OF
S&P'S/MOODY'S RATING VALUE BALANCE SHEET PORTFOLIO
--------------------- -------- ------------- ----------
(DOLLAR AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
AAA/Aaa (including U.S. Treasuries of $33,745) $279,775 $280,069 60.9
AA/Aa 79,770 79,194 17.2
A/A 76,594 75,789 16.5
BBB/Baa 24,329 24,606 5.4
All other 20 20 0.0
-------- ------------- -----
Total $460,488 $459,678 100.0%
-------- ------------- -----
-------- ------------- -----
</TABLE>
Cash flow generated from operations for the nine-month periods ended September
30, 1995 and 1994 was $74.3 million, and $49.9 million, respectively, amounts
adequate to meet all obligations during the periods.
In April 1992, the Company commenced paying quarterly cash dividends to
shareholders. Cash dividends declared in the nine-month periods ended September
30, 1995 and 1994 were $4,700,000 and $4,419,000, respectively.
In January 1995, Frontier Insurance's medical malpractice reinsurers agreed to a
commutation of the 1991 treaty year, resulting in the receipt of $3.9 million in
cash and a concomitant increase in reserves for unpaid losses and LAE.
On June 29, 1995, the Company obtained a 4-1/2 year, $35 million line of credit
facility from The Bank of New York, under which it borrowed $25 million at an
interest rate of 6.875% per annum, payable quarterly. The bank's commitment
reduces by $5 million at the end of each of 1996, 1997 and 1998, and expires at
the end of 1999. The Company has no other outstanding debt.
As a result of a review by AM Best of Frontier Insurance Company's A- (Excel-
lent) rating, the Company agreed with AM Best to make a $45 million capital
infusion to Frontier Insurance Company by June 30,1995 in order to fund its
projected growth and retain its A- rating. At June 30, 1995 the Company had
completed the $45 million capital infusion, utilizing a combination of funds
previously held by the Company and loan proceeds from The Bank of New York loan.
On November 10, 1994, the Company announced a stock repurchase program to
purchase up to 1,000,000 shares of its Common Stock from time to time in
compliance with SEC Rule 10b-18 at the discretion of the Chairman of the Board.
The program authorizes the purchase of up to 1,000,000 shares at such times and
prices as the Company deems advantageous. There is no commitment or obligation
on the part of the Company to purchase any particular number of shares, and the
program may be suspended at any time at the Company's discretion. Through
December 31, 1994, the Company had purchased 35,400 shares at a cost of
$654,000, and during the first quarter of 1995 an additional 6,000 shares were
purchased at a cost of $133,485; such 41,400 purchased shares are held as
treasury shares.
15
<PAGE>
Reinsurance
Frontier has entered into a stop loss reinsurance contract with Centre
Reinsurance Company of New York ('Centre Re') for 1995 and future years. Under
the terms of the agreement, Centre Re provides reinsurance protection within
certain accident year and contract aggregate dollar limits for losses and LAE in
excess of a predetermined ratio of these expenses to net premiums earned for a
given accident year for all lines of business except bail, customs, license and
permit, and miscellaneous surety bonds. The loss and LAE ratio above which the
reinsurance provides coverage is 66%, 65%, and 64% for accident years 1995
through 1997, respectively. The maximum amount recoverable for an accident year
is 175% of the reinsurance premium paid for the accident year, or $162,500,000
in the aggregate for the three years. During 1995, the Company ceded 14% of the
earned premiums from the covered lines of business to Centre Re.
Litigation with the State of New York
In December 1990, the New York State Court of Claims rendered a decision in
favor of the Company holding that a State University of New York ('SUNY')
medical school faculty member engaged in the clinical practice of medicine at a
SUNY medical facility, corollary to such physician's faculty activities, was
within the scope of such physician's employment by SUNY and was protected
against malpractice claims arising out of such activity by the State of New York
and not under the Company's medical malpractice policy. The decision was
affirmed on appeal by the New York State Appellate Division in November 1991 and
not appealed by the State. In July 1992, the State of New York enacted
legislation eliminating medical school faculty members of SUNY engaged in the
clinical practice of medicine at a SUNY medical facility from indemnification by
the State with respect to malpractice claims arising out of such activity,
retroactive to July 1, 1991. In an opinion filed on September 3, 1993 the Court
of Claims of the State of New York held, inter alia, that the July 1992
legislation by the State of New York eliminating SUNY medical school faculty
members engaged in the clinical practice of medicine, as part of their
employment by SUNY, from indemnification by the State with respect to
malpractice claims arising out of such activity was not to be applied
retroactively. This decision was affirmed by the New York State Appellate
Division in April 1994. Subsequently, in February 1995, the Appellate Division
granted leave to Frontier and the State of New York to have the issues of
Frontier's entitlement to recover its costs of defense and its costs of
settlement ruled on by the State's highest court, the New York Court of Appeals.
Oral argument before the Court of Appeals was held on October 18, with a
decision expected by the end of 1995. The Company is continuing to defend all
SUNY faculty members against malpractice claims that have been asserted and is
maintaining reserves therefor. Due to the continuing litigation, the Company is
unable to project at this time the ultimate outcome or quantify possible
favorable effects on the Company's financial position. The Company believes the
above-referenced decisions are controlling precedents and that it may benefit
economically by not being responsible for certain claims against SUNY physicians
for whom it presently carries reserves and may also be entitled to reimbursement
for certain claims previously paid.
Shareholder Litigation
The Company has been served with several purported class actions alleging
violations of federal securities laws by the Company and, in some cases, by
certain of its officers and directors; certain actions also allege violations of
the common law. The complaints relate to the Company's November 8, 1994
announcement of its third quarter financial results and allege that the Company
previously had omitted and/or misrepresented material facts with respect to its
earnings and profits. The Company believes the suits are without merit and has
retained special legal counsel to contest them vigorously.
16
<PAGE>
PART II -- OTHER INFORMATION
Item 1. Legal Proceedings
Not applicable.
Item 2. Changes in Securities
Not applicable.
Item 3. Defaults upon Senior Securities
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable.
Item 5. Other Information
On November 2, 1995, the Company announced that it had acquired the
realtors, errors and omissions book of business from Bankers Multiple
Line Insurance Company. The purchase price was $400,000 with $200,000
remitted the date of closing, and an additional $200,000 due January 15,
1997, with downward adjustments possible if certain commitments are not
kept. The personnel of this Company involved in placing and servicing
the acquired business have become employees of the Company and will
continue to operate from their location in Louisville, Kentucky.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
None.
b. Reports on Form 8-K.
None.
17
SIGNATURE
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.
DATE: November 13, 1995 Frontier Insurance Group, Inc.
(Registrant)
By: /s/ Dennis F. Plante
---------------------------------------------
Dennis F. Plante
Senior Vice President - Finance and Treasurer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
18
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> SEP-30-1995
<DEBT-HELD-FOR-SALE> 266,690
<DEBT-CARRYING-VALUE> 192,989
<DEBT-MARKET-VALUE> 0
<EQUITIES> 21,515
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 513,170
<CASH> 3,570
<RECOVER-REINSURE> 2,517
<DEFERRED-ACQUISITION> 17,709
<TOTAL-ASSETS> 735,586
<POLICY-LOSSES> 349,259
<UNEARNED-PREMIUMS> 111,184
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 131
0
0
<OTHER-SE> 216,391
<TOTAL-LIABILITY-AND-EQUITY> 735,586
142,067
<INVESTMENT-INCOME> 21,606
<INVESTMENT-GAINS> (23)
<OTHER-INCOME> 107
<BENEFITS> 87,372
<UNDERWRITING-AMORTIZATION> 30,320
<UNDERWRITING-OTHER> 14,519
<INCOME-PRETAX> 31,095
<INCOME-TAX> 8,179
<INCOME-CONTINUING> 22,916
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 22,916
<EPS-PRIMARY> 1.76
<EPS-DILUTED> 1.76
<RESERVE-OPEN> 263,202
<PROVISION-CURRENT> 87,009
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 5,753
<PAYMENTS-PRIOR> 57,811
<RESERVE-CLOSE> 287,532
<CUMULATIVE-DEFICIENCY> (885)
</TABLE>
