<PAGE>
--------------------------------------------------------------------------------
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 June 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 August 9, 1995, was 13,057,639.
--------------------------------------------------------------------------------
Page 1 of 19 pages
<PAGE>
FRONTIER INSURANCE GROUP, INC.
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
PART I- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at June 30, 1995
(Unaudited) and December 31, 1994 ............................. 3-4
Consolidated Statements of Income (Unaudited) for the
Three Months and Six Months Ended June 30, 1995 and 1994 ...... 5
Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 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 .............................. 18
Signature ............................................................. 19
</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>
June 30, December 31,
1995 1994
----------- ------------
(Unaudited)
<S> <C> <C>
Investments:
Fixed maturities, held to maturity--
principally at amortized cost
(market: 1995--$207,234; 1994--$190,874) $204,727 $202,129
Fixed maturities, available for sale--
at market value (amortized cost:
1995--$191,944; 1994--$149,846) 194,328 143,956
Equity securities--at market
(cost: 1995--$48,517; 1994--$52,458) 47,110 48,646
Short-term investments--at principal
balances, which approximate market 31,240 12,887
-------- --------
TOTAL INVESTMENTS 477,405 407,618
Cash 11,635 6,362
Agents' balances due, less
allowances for doubtful accounts
(1995--$2,456; 1994--$2,132) 17,751 20,909
Premiums receivable from insureds,
less allowances for doubtful accounts
(1995--$101; 1994--$105) 29,567 20,222
Deferred federal income tax benefits 27,350 30,767
Accrued investment income 5,609 5,078
Deferred policy acquisition costs 15,394 13,213
Net reinsurance recoverables
less allowances for possible uncollectible
amounts (1995--$115; 1994--$115) 62,312 54,779
Data processing equipment and software--at cost,
less accumulated depreciation and amortization
(1995--$2,196; 1994--$1,853) 1,474 1,618
Insurance renewal and claims adjusting rights and
other intangible assets, less accumulated
amortization (1995--$2,688; 1994--$2,016) 3,195 3,295
Home office building and equipment--
at cost, less accumulated depreciation
(1995--$3,767; 1994--$2,958) 27,747 27,403
Federal income taxes recoverable 1,815 246
Other assets 6,034 7,602
-------- --------
TOTAL ASSETS $687,288 $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>
June 30, December 31,
1995 1994
----------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Policy liabilities:
Unpaid losses $285,536 $266,261
Unpaid loss adjustment expenses 48,643 46,376
Unearned premiums 91,857 81,224
-------- --------
TOTAL POLICY LIABILITIES 426,036 393,861
Funds held by Company under reinsurance treaties 12,656 647
Note payable 25,000
Cash dividend payable 1,566 1,558
Other liabilities 13,099 12,782
-------- --------
TOTAL LIABILITIES 478,357 408,848
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--13,056,896 shares; 1994--13,021,058 shares) 131 130
Additional paid-in capital 167,518 167,209
Net unrealized appreciation/(depreciation)
of investments in available-for-sale securities 635 (6,307)
Retained earnings 41,434 29,886
-------- --------
SUBTOTAL 209,718 190,918
Less: Treasury stock--at cost (1995--41,400 shares;
1994--35,400 shares) (787) (654)
-------- --------
TOTAL CAPITAL 208,931 190,264
-------- --------
TOTAL LIABILITIES AND CAPITAL $687,288 $599,112
======== ========
Book value per share $ 16.00 $ 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 share data)
<TABLE>
<CAPTION>
Three Months Six Months
Ended June 30, Ended June 30,
------------------ ---------------
1995 1994 1995 1994
------ ------- ------ ------
<S> <C> <C> <C> <C>
REVENUES
Premiums written $64,112 $42,961 121,370 $86,342
Premiums ceded (10,216) (1,519) (19,304) (5,122)
-------- -------- -------- -------
NET PREMIUMS WRITTEN 53,896 41,442 102,066 81,220
Decrease (increase) in unearned premiums (7,456) (9,531) (9,872) (13,721)
------- ------- ------- -------
NET PREMIUMS EARNED 46,440 31,911 92,194 67,499
Net investment income 7,178 6,362 13,915 12,779
Net realized capital gains (losses) 256 (384) (500) (1,296)
------- ------- ------- -------
TOTAL NET INVESTMENT INCOME 7,434 5,978 13,415 11,483
Gross claims adjusting income 39 65 75 132
------- ------- ------- -------
TOTAL REVENUES 53,913 37,954 105,684 79,114
EXPENSES
Losses 22,407 13,228 43,900 29,505
Loss adjustment expenses 6,006 5,002 12,948 10,042
Amortization of policy acquisition
costs 9,913 5,448 19,602 11,546
Underwriting and other expenses 5,122 3,850 9,715 8,175
------- -------- ------- -------
TOTAL EXPENSES 43,448 27,528 86,165 59,268
INCOME BEFORE INCOME TAXES 10,465 10,426 19,519 19,846
INCOME TAXES
State 309 468 260 695
Federal 2,371 2,630 4,588 5,084
------- -------- ------- -------
TOTAL INCOME TAXES 2,680 3,098 4,848 5,779
------- -------- ------- -------
NET INCOME $7,785 $7,328 $14,671 $14,067
======= ======== ======= =======
PER SHARE DATA
Operating income $.59 $.58 $1.15 $1.14
Net realized capital losses .01 (.02) (.02) (.06)
--- ----- ----- ----
NET INCOME $.60 $.56 $1.13 $1.08
==== ===== ===== ====
WEIGHTED AVERAGE SHARES OUTSTANDING 13,012 12,997 13,005 12,969
======= ======== ======= =======
</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>
Six Months
Ended June 30,
-----------------
1995 1994
------ ------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 14,671 $14,067
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in policy liabilities 32,175 14,318
Increase (decrease) in federal income taxes 1,848 (1,489)
Decrease (increase) in reinsurance balances (4,476) 6,915
Increase in agents' balances and
premiums receivable (6,181) (10,154)
Change in deferred policy acquisition costs (2,181) (3,362)
Increase in accrued investment income (531) (215)
Depreciation and amortization 1,824 460
Realized capital gains (losses) (500) 2,131
Other (1,950) 3,591
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 34,699 26,262
INVESTING ACTIVITIES
Sales of equity securities 4,952 45,622
Sales of available for sale securities 21,991 21,113
Calls, maturities and paydowns of fixed maturities 52,732 11,361
Purchases of securities (146,484) (118,575)
Net (purchases) sales of short-term investments 16,553 11,729
Purchase of home office building and equipment (1,118) (669)
Purchase of data processing equipment and software (237) (301)
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (51,611) (29,720)
FINANCING ACTIVITIES
Issuance of note payable 25,000
Cash dividends paid (3,124) (2,864)
Issuance of Common Stock 309 504
-------- --------
NET CASH PROVIDED BY (USED IN)
FINANCING ACTIVITIES 22,185 (2,360)
-------- --------
INCREASE (DECREASE) IN CASH 5,273 (5,818)
CASH AT BEGINNING OF PERIOD 6,362 12,929
-------- --------
CASH AT END OF PERIOD $11,635 $7,111
======== =======
</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
six-month period ended June 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 six 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>
05/19/94 06/06/94 06/17/94 3:2 stock $ 7(1) 4,328
05/19/94 06/30/94 07/21/94 $.12 per share cash $1,561 N/A
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
</TABLE>
(1) Cash paid in lieu of issuance of fractional shares.
5. At June 30, 1995 and 1994, respectively, options to purchase 333,000 and
290,000 shares of Common Stock, at per share exercise prices ranging from
$7.87 to $30.33, were outstanding under the Company's stock option plans
(the "Plans"). Options to purchase 119,000 and 128,000 shares of Common
Stock were exercisable at June 30, 1995 and June 30, 1994, respectively,
under the Plans.
-7-
<PAGE>
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 June 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.
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 June 30, 1995 and 1994,
such earned commissions accrued were $(47,000) and $(76,000), respectively.
During the six months ended June 30, 1995 and 1994, such earned commissions
accrued were $(233,000) and $(305,000), 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 June 30, 1995
and 1994, claims adjusting operating expenses included with underwriting
and other expenses amounted to $67,000 and $82,000, respectively. During
the six months ended June 30, 1995 and 1994, claims adjusting operating
expenses included with underwriting and other expenses amounted to $121,000
and $176,000, respectively.
8. The components of the net reinsurance recoverables balances in the
accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
June 30, 1995 December 31, 1994
------------- -----------------
(in thousands)
<S> <C> <C>
Ceded paid losses recoverable $ 6,625 $ 3,946
Ceded unpaid losses and LAE 54,515 49,435
Ceded unearned premiums 3,996 3,885
Ceded reinsurance payable (2,824) (2,487)
--------- ---------
TOTAL $ 62,312 $ 54,779
========= =========
</TABLE>
The reinsurance ceded components of the amounts relating to the
accompanying income statements are as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30
-------------------------
1995 1994
------- -------
(in thousands)
<S> <C> <C>
Ceded premiums earned $19,138 $11,022
Ceded incurred losses $9,233 $13,051
Ceded incurred LAE $5,952 $1,854
</TABLE>
-8-
<PAGE>
The effect of reinsurance on premiums written and earned at June 30, 1995
and 1994 was as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30
--------------------------------------------------------
1995 1994
Premiums Premiums
---------------------------- --------------------------
Written Earned Written Earned
------- ------ ------- ------
(in thousands)
<S> <C> <C> <C> <C>
Direct $ 121,062 $ 110,892 $ 85,604 $ 79,977
Assumed 308 440 738 1,544
Ceded (19,304) (19,138) (5,122) (11,022)
---------- ---------- ---------- ----------
Net $ 102,066 $ 92,194 $ 81,220 $ 67,499
========== ========== ========== ==========
</TABLE>
9. On June 29, 1995, the Company obtained a 4 1/2 year, $35 million reducing
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, with the balance being reduced at the end of 1999. The Company
has no other outstanding debt.
10. At June 30, 1995 the Company had completed adding $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 addition to capital
and surplus was to fund projected future growth and to retain Frontier
Insurance Company's A- rating with A.M. Best.
-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 June 30, 1995 Compared to Three Months Ended June 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 June 30, 1994 to 1995
-------------------- -------------------
1995 1994 Amount %
---- ---- ------ ----
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $ 21,044 $ 16,837 $ 4,207 25.0
General liability 11,887 5,155 6,732 130.6
Surety 9,690 6,166 3,524 57.2
Workers' compensation 1,893 2,668 (775) (29.0)
Other 1,926 1,085 841 77.5
-------- -------- -------- -----
Total $ 46,440 $ 31,911 $ 14,529 45.5
======== ======== ======== =====
</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 June 30, Ended June 30,
--------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 48.2% 41.5% 48.2% 41.5%
Loss adjustment expenses (LAE) 12.5 14.7 13.0 15.7
---- ---- ---- ----
Losses and LAE 60.7 56.2 61.2 57.2
Acquisition, underwriting and other
expenses 31.0 27.0 32.2 28.8
---- ---- ---- ----
Total combined ratio 91.7% 83.2% 93.4% 86.0%
==== ==== ==== ====
</TABLE>
A variety of factors accounted for the 45.5% growth in net premiums earned, the
principal factor being increases in the majority of the Company's core and new
program business, which was 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
which 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 in Florida and other
geographic areas. These increases were partially offset by a decrease in dental
net premiums earned, primarily as the result of rate decreases offsetting growth
in the Company's program endorsed by the Academy of General Dentistry.
-10-
<PAGE>
Net premiums earned for the general liability line increased primarily because
of increases in various programs, including social services, 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 and the
alarm and guards 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, caused by a
weather-related reduction in cotton crop, 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 12.8% 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 of the Company's aggregate
excess of loss reinsurance contract. Total net investment income increased 24.4%
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 7.1%, 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,
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 gains and losses, decreased to 5.2% 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.
Gross claims adjusting income decreased 40.0% primarily as a result of a
decrease in claim services provided to outside companies, principally
Markel/Rhulen.
Total revenues increased 42.0% as a result of the above.
Total expenses increased by 57.8% compared to the 45.5% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased at a 55.6% rate as
a result of a 69.4% increase in losses and a 20.1% increase in LAE. The increase
in losses was higher than that for net premiums earned and results from carrying
higher loss and LAE ratios to premiums earned for 1995 business. This increase
was partially offset 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 20.1% 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 increase in losses
and LAE resulted in a
-11-
<PAGE>
loss and LAE component of the GAAP Combined Ratio 4.0 percentage points higher
than in the comparable 1994 period. The 82.0% increase in the amortization of
policy acquisition costs was attributable primarily to an increase in direct
commission expense resulting from growth in programs with 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 33.0% increase in underwriting and
other expenses was primarily the result of increased staffing, increased
facilities, equipment and materials expense necessitated by the Company's
growth, salary increases, a reduction in assessment recoveries from the Texas
Workers' Compensation Insurance Facility and increased 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 3.4 percentage points higher than in the comparable 1994 period. The
total GAAP Combined Ratio increased by 7.4 percentage points to 93.4% as a
result of the above.
The foregoing changes resulted in income before income taxes of $10.5 million
for the 1995 quarter, a 0.4% increase from the comparable 1994 quarter. Net
income for the period increased by $457,000, or 6.2%.
Six Months Ended June 30, 1995 Compared to Six Months Ended June 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>
Six Months Increase (Decrease)
Ended June 30, 1994 to 1995
--------- -------- ----------------
1995 1994 Amount %
------ ------ ------ ---
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $ 41,571 $ 32,023 $ 9,548 29.8
General liability 21,927 10,560 11,367 107.6
Surety 19,342 12,615 6,727 53.3
Workers' compensation 5,789 9,696 (3,907) (40.3)
Other 3,565 2,605 960 36.8
-------- -------- -------- ----
Total $ 92,194 $ 67,499 $ 24,695 36.6
======== ======== ======== ====
</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
Six Months Six Months
Ended June 30, Ended June 30,
--------------------- -------------------
1995 1994 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 47.6% 43.7% 47.6 43.7%
Loss adjustment expenses (LAE) 13.4 14.0 14.1 14.9
---- ---- ---- ----
Losses and LAE 61.0 57.7 61.7 58.6
Acquisition, underwriting and other
expenses 30.7 27.8 31.6 28.9
---- ---- ---- ----
Total combined ratio 91.7% 85.5% 93.3% 87.5%
==== ==== ==== ====
</TABLE>
-12-
<PAGE>
A variety of factors accounted for the 36.6% growth in net premiums earned, the
principal factor being increases in the majority of the Company's core and new
program business, which was 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
which 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 in Florida and other
geographic areas. These increases were partially offset by a decrease in dental
net premiums earned, primarily as the result of rate decreases offsetting growth
in the Company's program endorsed by the Academy of General Dentistry.
Net premiums earned for the general liability line increased primarily because
of increases in various programs, including social services, and alarms and
guards, 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 caused by a
weather-related reduction in cotton crop, 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 8.9% 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 of the Company's aggregate
excess of loss reinsurance contract. Total net investment income increased 16.8%
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,
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 gains and losses, decreased to 5.6% from 5.9%, 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 43.2% primarily as a result of a
decrease in claim services provided to outside companies, principally
Markel/Rhulen.
Total revenues increased 33.6% as a result of the above.
Total expenses increased by 45.4% compared to the 36.6% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased at a 43.7% rate as
a result of a 48.8% increase in losses and a 28.9% increase in LAE. The increase
in losses was slightly higher than that for net premiums earned and results from
carrying higher loss and LAE ratios to premiums earned for 1995 business. This
increase was partially offset by 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 28.9% 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 increase in losses and LAE resulted in a loss and LAE
component of the GAAP Combined Ratio 3.1 percentage points higher than in the
comparable 1994 period. The 69.8% 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 18.8% 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, 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 2.7
percentage points higher than in the comparable 1994 period. The total GAAP
Combined Ratio increased by 5.8 percentage points to 93.3% as a result of the
above.
The foregoing changes resulted in income before income taxes of $19.5 million
for the six months ended 1995, a 1.6% decrease from the comparable 1994 period.
Net income for the period increased by $604,000, or 4.3%.
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 June 30, 1995, the Company's $687.3 million in total assets were comprised of
the following: 71.2% cash and investments, 9.1% net reinsurance recoverables,
6.9% premiums receivable, 4.0% home office building and equipment, 6.2% 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.
-14-
<PAGE>
The following table provides a profile of the Company's fixed maturities
investment portfolio by rating at June 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 $19,064) $231,620 $229,960 57.6
AA/Aa 71,058 70,929 17.8
A/A 68,211 67,336 16.9
BBB/Baa 30,653 30,810 7.7
All other 20 20 0.0
-------- -------- ------
Total $401,562 $399,055 100.0%
======== ======== =====
</TABLE>
Cash flow generated from operations for the six-month periods ended June 30,
1995 and 1994 was $35 million, and $26 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 six-month periods ended June 30,
1995 and 1994 were $3,129,000 and $2,857,000, 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 reducing 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, with
the balance being reduced 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-
(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. At June 30, 1995 the Company had
completed adding $45 million to the capital and surplus of Frontier Insurance
Company, 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; which 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 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.
Oral argument before the Court of Appeals is scheduled in mid-October, 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
On May 18, 1995 the shareholders of the Company held their annual
meeting in Rock Hill, New York. The holders of 11,079,462 shares
of Common Stock were present or represented by proxy and,
accordingly, a quorum was present and matters were voted upon as
follows:
a. By plurality vote, the following persons were elected Directors
of the Company:
Votes Votes
For Withheld
---------- --------
Walter A. Rhulen 11,066,000 13,456
Peter L. Rhulen 11,065,985 13,477
Jesse M. Farrow 11,061,815 17,647
Lawrence E. O'Brien 11,066,006 13,456
Douglas C. Moat 11,066,006 13,456
b. The vote to ratify the reappointment of Ernst & Young as independent
auditors of the Company also passed. Votes totaling 11,056,543 were
in favor of the ratification, 11,217 were against, and 11,702 shares
abstained.
Item 5. Other Information
In July 1995, an operating subsidiary of the Company, Frontier Pacific
Insurance Company ("Frontier Pacific") finalized arrangements with
Associated International Insurance Company ("AIIC") to jointly
underwrite a commercial earthquake insurance program in California (on
an Inland Marine policy form). This program is very heavily reinsured to
minimize the exposure. The Company expects the program to generate $18
million of direct premium on an annual basis to Frontier Pacific.
-17-
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
None.
b. On July 14, 1995, the Company filed a report on Form 8-K, reporting
that on June 29, 1995 it had obtained a 4 1/2 year, $35 million
reducing 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, with the balance being
reduced at the end of 1999. The Company has no other outstanding
debt.
In the July 14, 1995 8-K filing, the Company also reported that on
June 30, 1995 it had completed adding $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
addition to capital and surplus was to fund projected future growth
and to retain Frontier Insurance Company's A- rating with A.M. Best.
-18-
<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: August 14, 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)
-19-
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> JUN-30-1995
<DEBT-HELD-FOR-SALE> 194,328
<DEBT-CARRYING-VALUE> 204,727
<DEBT-MARKET-VALUE> 0
<EQUITIES> 47,110
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 477,405
<CASH> 11,635
<RECOVER-REINSURE> 6,625
<DEFERRED-ACQUISITION> 15,394
<TOTAL-ASSETS> 687,288
<POLICY-LOSSES> 334,179
<UNEARNED-PREMIUMS> 91,587
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
<COMMON> 131
0
0
<OTHER-SE> 208,800
<TOTAL-LIABILITY-AND-EQUITY> 687,288
92,194
<INVESTMENT-INCOME> 13,915
<INVESTMENT-GAINS> (500)
<OTHER-INCOME> 75
<BENEFITS> 58,848
<UNDERWRITING-AMORTIZATION> 19,602
<UNDERWRITING-OTHER> 9,715
<INCOME-PRETAX> 19,519
<INCOME-TAX> 4,848
<INCOME-CONTINUING> 14,671
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 14,671
<EPS-PRIMARY> 1.13
<EPS-DILUTED> 1.13
<RESERVE-OPEN> 312,637
<PROVISION-CURRENT> 57,904
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 1,438
<PAYMENTS-PRIOR> 38,236
<RESERVE-CLOSE> 334,179
<CUMULATIVE-DEFICIENCY> (3,312)
</TABLE>
