- - --------------------------------------------------------------------------------
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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 March 31, 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 May 10, 1995, was 13,050,940.
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Page 1 of 16 pages
<PAGE>
FRONTIER INSURANCE GROUP, INC.
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C> <C>
PART I- FINANCIAL INFORMATION
- - -----------------------------
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at March 31, 1995
(Unaudited) and December 31, 1994 ............................ 3-4
Consolidated Statements of Income (Unaudited) for
the Three Months Ended March 31, 1995 and 1994 ............... 5
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 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 ................ 10-14
PART II- OTHER INFORMATION
- - --------------------------
Item 1. Legal Proceedings ............................................ 15
Item 2. Changes in Securities ........................................ 15
Item 3. Defaults upon Senior Securities .............................. 15
Item 4. Submission of Matters to a Vote of Security Holders .......... 15
Item 5. Other Information ............................................ 15
Item 6. Exhibits and Reports on Form 8-K ............................. 15
Signature .............................................................. 16
</TABLE>
-2-
<PAGE>
PART I - FINANCIAL INFORMATION
- - ------------------------------
Item 1. Consolidated Financial Statements
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---------- -----------
(Unaudited)
<S> <C> <C>
Investments:
Fixed maturities, held to maturity--principally at
amortized cost (market: 1995--$207,443; 1994--$190,874) $ 209,862 $ 202,129
Fixed maturities, available for sale--at market
value (amortized cost: 1995--$166,094; 1994--$149,846) 164,226 143,956
Equity securities--at market (cost: 1995--$48,018;
1994--$52,458 ...................................... 45,536 48,646
Short-term investments--at principal balances,
which approximate market ............................. 22,937 12,887
--------- ---------
TOTAL INVESTMENTS ................................ 442,561 407,618
Cash ................................................. 4,035 6,362
Agents' balances due, less allowances for doubtful
accounts (1995--$2,388; 1994--$2,132) ............... 13,453 20,909
Premiums receivable from insureds, less allowances
for doubtful accounts (1995--$101; 1994--$105) ...... 24,696 20,222
Deferred federal income tax benefits ................. 29,488 30,767
Accrued investment income ............................ 5,177 5,078
Deferred policy acquisition costs .................... 13,793 13,213
Net reinsurance recoverables less allowances for
possible uncollectible amounts (1995--$115; 1994--$115) 56,873 54,779
Data processing equipment and software--at cost,
less accumulated depreciation and
amortization (1995--$2,027; 1994--$1,853) ........... 1,533 1,618
Insurance renewal and claims adjusting rights and
other intangible assets, less accumulated
amortization (1995--$2,430; 1994--$2,016) ........... 3,104 3,295
Home office building and equipment--at cost, less
accumulated depreciation (1995--$3,352; 1994--$2,958) 27,734 27,403
Federal income taxes recoverable ..................... 246
Other assets ......................................... 6,195 7,602
--------- ---------
TOTAL ASSETS ..................................... $ 628,642 $ 599,112
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
-3-
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--Continued
LIABILITIES AND CAPITAL
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1995 1994
---------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES
Policy liabilities:
Unpaid losses ...................................... $ 280,332 $ 266,261
Unpaid loss adjustment expenses .................... 45,167 46,376
Unearned premiums .................................. 83,804 81,224
--------- ---------
TOTAL POLICY LIABILITIES ......................... 409,303 393,861
Funds held by Company under reinsurance treaties ... 5,367 647
Federal income taxes payable ....................... 2,634
Cash dividend payable .............................. 1,562 1,558
Other liabilities .................................. 10,507 12,782
--------- ---------
TOTAL LIABILITIES .................................. 429,373 408,848
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--13,049,139 shares; 1994--13,021,058 shares).... 130 130
Additional paid-in capital ............................. 167,435 167,209
Net unrealized appreciation/(depreciation)
of investments in available-for-sale securities ...... (2,718) (6,307)
Retained earnings ...................................... 35,210 29,886
-------- --------
SUBTOTAL ........................................... 200,057 190,918
Less: Treasury stock--at cost (1995--41,400 shares;
1994--35,400 shares) ................................. (788) (654)
-------- --------
TOTAL CAPITAL ...................................... 199,269 190,264
-------- --------
TOTAL LIABILITIES AND CAPITAL ...................... $ 628,642 $ 599,112
========= =========
Book value per share ..................................... $15.27 $14.61
====== ======
</TABLE>
See notes to consolidated financial statements (unaudited).
-4-
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
----------------------
1995 1994
---- ----
<S> <C> <C>
REVENUES
Premiums written ............................... $ 57,258 $ 43,381
Premiums ceded ................................. (9,088) (3,603)
-------- --------
NET PREMIUMS WRITTEN ......................... 48,170 39,778
Decrease (increase) in unearned premiums ....... (2,416) (4,190)
-------- --------
NET PREMIUMS EARNED .......................... 45,754 35,588
Net investment income .......................... 6,737 6,417
Net realized capital gains (losses) ............ (756) (912)
-------- --------
TOTAL NET INVESTMENT INCOME .................. 5,981 5,505
Gross claims adjusting income .................. 36 66
-------- --------
TOTAL REVENUES ............................... 51,771 41,159
EXPENSES
Losses ......................................... 21,493 16,277
Loss adjustment expenses ....................... 6,942 5,040
Amortization of policy acquisition costs ....... 9,689 6,098
Underwriting and other expenses ................ 4,593 4,324
-------- --------
TOTAL EXPENSES ............................... 42,717 31,739
INCOME BEFORE INCOME TAXES ....................... 9,054 9,420
INCOME TAXES
State .......................................... (49) 227
Federal ........................................ 2,217 2,453
-------- --------
TOTAL INCOME TAXES ........................... 2,168 2,680
-------- --------
NET INCOME ................................... $ 6,886 $ 6,740
======== ========
PER SHARE DATA
Operating income $.57 $.56
Net realized capital losses (.04) (.04)
---- ----
NET INCOME $.53 $.52
==== ====
WEIGHTED AVERAGE SHARES OUTSTANDING 12,997 12,950
-------- --------
</TABLE>
See notes to consolidated financial statements (unaudited).
-5-
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
--------------------
1995 1994
-------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 6,886 $ 6,740
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in policy liabilities 15,039 9,636
Increase (decrease) in federal income taxes 4,814 3,144
Decrease (increase) in reinsurance balances (1,132) 8,988
(Increase) decrease in agents' balances and
premiums receivable 2,423 (7,295)
Change in deferred policy acquisition costs (581) (1,755)
Decrease (increase) in accrued investment income (98) 483
Depreciation and amortization 671 (75)
Realized capital gains (losses) (756) 1,517
Other (273) 4,470
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 26,993 25,853
INVESTING ACTIVITIES
Sales of equity securities 1,256 29,630
Sales of available for sale securities 6,412 13,359
Calls, maturities and paydowns of fixed maturities 35,033 5,559
Purchases of securities (61,449) (95,735)
Net (purchases) sales of short-term investments (10,050) 12,897
Purchase of home office building and equipment 725 (369)
Purchase of data processing equipment and software 90 (64)
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (27,983) (34,723)
-------- --------
FINANCING ACTIVITIES
Cash dividends paid (1,563) (1,295)
Issuance of Common Stock 226 15
-------- --------
NET CASH (USED IN) FINANCING ACTIVITIES (1,337) (1,280)
-------- --------
INCREASE (DECREASE) IN CASH (2,327) (10,150)
CASH AT BEGINNING OF PERIOD 6,362 12,929
-------- --------
CASH AT END OF PERIOD $ 4,035 $ 2,779
======== ========
</TABLE>
See notes to consolidated financial statements (unaudited).
-6-
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(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 ended March 31,
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 quarter 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
- - ----------- -------- -------- ------------------- ---------- -------------
<S> <C> <C> <C> <C> <C>
03/15/94 03/30/94 04/20/94 $.15 per share cash $1,295,500 N/A
05/19/94 06/06/94 06/17/94 3:2 stock split $ 6,848(1) 4,327,704
05/19/94 06/30/94 07/21/94 $.12 per share cash $1,561,389 N/A
08/11/94 09/30/94 10/20/94 $.12 per share cash $1,562,498 N/A
11/22/94 12/30/94 01/19/95 $.12 per share cash $1,558,279 N/A
03/16/95 03/31/95 04/20/95 $.12 per share cash $1,561,928 N/A
</TABLE>
- - ---------
(1) Cash paid in lieu of issuance of fractional shares.
5. At March 31, 1995, options to purchase 338,549 shares of Common Stock, at
per share exercise prices ranging from $7.87 to $30.33, were outstanding,
compared to options to purchase 290,274 shares of Common Stock, at per
share exercise prices ranging from $7.81 to $29.83, outstanding at March
31, 1994 under the Company's stock option plans (the "Plans"). Options to
purchase 96,541 and 133,455 shares of Common Stock were exercisable at
March 31, 1995 and March 31, 1994, respectively, under the Plans.
-7-
<PAGE>
Item 1.Notes to Consolidated Financial Statements (Unaudited)--Continued
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
March 31, 1995.
The number of shares subject to options and the per share option prices have
been adjusted to reflect stock dividends. Exercisable options are nondilutive to
earnings per share presented in the accompanying financial statements.
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 March 31, 1995 and 1994,
such earned commissions accrued were $(186,000) and $(229,000),
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 March 31,
1995 and 1994, claims adjusting operating expenses included with
underwriting and other expenses amounted to $54,000 and $94,000,
respectively.
8. The components of the net reinsurance recoverables balances in the
accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
March 31, 1995 December 31, 1994
-------------- -----------------
(in thousands)
<S> <C> <C>
Ceded paid losses recoverable $ 6,135 $ 3,946
Ceded unpaid losses and LAE 49,227 49,435
Ceded unearned premiums 3,840 3,885
Ceded reinsurance payable (2,329) (2,487)
-------- --------
TOTAL $ 56,873 $ 54,779
======== ========
</TABLE>
The reinsurance ceded components of the amounts relating to the
accompanying income statements are as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
----------------------------
1995 1994
------ -------
(in thousands)
<S> <C> <C>
Ceded premiums earned $9,112 $6,403
Ceded incurred losses $5,082 $7,440
Ceded incurred LAE $2,257 $1,350
</TABLE>
-8-
<PAGE>
Item 1. Notes to Consolidated Financial Statements (Unaudited)--Continued
The effect of reinsurance on premiums written and earned at March 31, 1995
and 1994 was as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31
-----------------------------------------------------
1995 1994
Premiums Premiums
------------------- ----------------------
Written Earned Written Earned
------- ------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Direct $56,055 $54,256 $41,772 $39,642
Assumed 1,203 610 1,609 2,349
Ceded 9,088 9,112 3,603 6,403
------- ------- ------- -------
Net $48,170 $45,754 $39,778 $35,588
======= ======= ======= =======
</TABLE>
-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 March 31, 1995 Compared to Three Months Ended March 31, 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 March 31, 1994 to 1995
------------------- ------------------
1995 1994 Amount %
------- ------- ------- -----
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $ 20,527 $ 15,187 $ 5,340 35.2
General liability 10,040 5,405 4,635 85.8
Surety 9,653 6,448 3,205 49.7
Workers' compensation 3,895 7,028 (3,133) (44.6)
Other 1,639 1,520 119 7.8
-------- -------- --------
Total $ 45,754 $ 35,588 $ 10,166 28.6
======== ======== ========
</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 March 31, Ended March 31,
------------------ -----------------
1995 1994 1995 1994
---- ---- ---- -----
<S> <C> <C> <C> <C>
Losses 47.0% 45.7% 47.0% 45.7%
Loss adjustment expenses (LAE) 14.3 13.1 15.2 14.2
---- ---- ---- ----
Losses and LAE 61.3 58.8 62.2 59.9
Acquisition, underwriting and other 30.3 28.8 31.2 29.0
---- ---- ---- ----
Total combined ratio 91.6% 87.6% 93.4% 88.9%
==== ==== ==== ====
</TABLE>
A variety of factors accounted for the 28.6% growth in net premiums earned, the
principal factor being increases in the Company's core and new program business,
which was partially offset by the earned premiums ceded under an aggregate
excess of loss reinsurance contract entered into by the Company that cedes 14%
of earned premium for all lines of business except bail, customs, license and
permit, and miscellaneous surety bonds.
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 Company's program for psychiatrists, greater
penetration of the Ohio physician market and rate increases. These increases
were partially offset by a decrease in dental net premiums earned, primarily as
the result of rate decreases.
-10-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
Net premiums earned for the general liability line increased primarily because
of increases in various programs, including social services, and alarms and
guards, and because of the impact of new programs commenced subsequent to the
first quarter of 1994, including crane operator liability and excess employer's
liability. These increases were partially offset by a decrease in net written
premiums earned in the umbrella program.
Growth in surety net premiums earned continued in 1995, and was 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 and 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. The decrease was 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 in accident and health policies in the excess medical stop loss program.
These increases were partially offset by decreases in other miscellaneous small
programs.
Net investment income before realized capital losses increased 5.0% due
principally to increases in investable assets resulting from 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 associated with the Company's
aggregate excess of loss reinsurance contract which it entered into in 1995.
Total net investment income increased 8.6% 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 6.9% from 7.2%, primarily as the result of an increase in
the proportion of tax-advantaged securities held to taxable securities,
compounded by generally lower interest rates available for funds invested in
1994 and early 1995, and the impact of higher yielding investments which mature
or which are called for redemption being reinvested at the lower rates. The
average annual after-tax yield on investments, excluding the charge for funds
held under the aggregate excess of loss reinsurance contract and realized gains
and losses, decreased to 5.5% from 5.8%, 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.
Gross claims adjusting income decreased 45.6% primarily as a result of a
decrease in claim services provided to outside companies, principally
Markel/Rhulen, partially offset by an increase in the rates charged for certain
services.
Total revenues increased 25.8% as a result of the above.
-11-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
Total expenses increased by 34.6% compared to the 28.6% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased at a 33.4% rate as
a result of a 32.0% increase in losses and a 37.7% increase in LAE. The increase
in losses was substantially equivalent to that for net premiums earned. This
increase was partially offset by the aggregate excess of loss reinsurance
contract which provides coverage for 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 37.7% increase in LAE resulted from a change in
the line of business mix to those having a higher percentage relationship of LAE
to losses. The increase in losses and LAE resulted in a loss and LAE component
of the GAAP Combined Ratio 3.8 percentage points higher than in the comparable
1994 period. The 58.9% 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 6.2% increase in underwriting and other expenses was primarily the
result of an increase in the additions to allowance for bad debts, increased
staffing, increased facilities, equipment and materials expense necessitated by
the Company's growth, salary increases, and increased 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 2.2 percentage points higher than in the comparable 1994 period. The
total GAAP Combined Ratio increased by 5.1 percentage points to 93.4% as a
result of the above.
The foregoing changes resulted in income before income taxes of $9,054,000 for
the 1995 quarter, a 3.9% decrease from the comparable 1994 quarter. Net income
for the period increased by $140,000, or 2.2%.
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
are for payment of losses and LAE, operating expenses, commissions, and
dividends to shareholders and policyholders.
At March 31, 1995, the Company's $628.6 million in total assets were comprised
of the following: 71.0% cash and investments, 9.0% net reinsurance recoverables,
6.1% premiums receivable, 4.4% home office building and equipment, 6.9% deferred
expenses (federal income taxes and policy acquisition costs), and 2.6% other
assets.
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.
-12-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
The following table provides a profile of the Company's fixed maturities
investment portfolio by rating at March 31, 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 $15,266) $229,307 $229,888 61.5%
AA/Aa 64,194 64,593 17.3
A/A 50,534 51,382 13.7
BBB/Baa 27,614 28,205 7.5
All other 20 20 0.0
-------- -------- -----
Total $371,669 $374,088 100.0%
======== ======== =====
</TABLE>
Cash flow generated from operations for the three-month period ended March 31,
1995 and 1994 was $27.0 million, and $25.9 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 three-month periods ended March 31,
1995 and 1994 were $1,562,000 and $1,296,000, 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 concommitant increase in reserves for unpaid losses and LAE.
As a result of a review by AM Best of Frontier Insurance Company's A-
(Excellent) rating, the Company agreed with AM Best to make a $45 million
capital infusion by June 30,1995 in order to fund Frontier Insurance Company's
projected growth and retain its A- rating. The funds for the infusion will come
in part from funds currently held by the Company and from borrowings. The
Company is considering several borrowing alternatives and during the second
quarter 1995 will consummate the alternative it believes is most advantageous to
the Company.
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, which 41,400 shares are held as treasury
shares.
-13-
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
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 the first quarter 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.
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, which together aggregate approximately $25 million. 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.
-14-
<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
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
None.
b. Reports on Form 8-K.
None.
-15-
<PAGE>
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: May 12, 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)
-16-
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