<PAGE>
<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 September 30, 1996
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)
<TABLE>
<S> <C>
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)
</TABLE>
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 8, 1996 was 14,688,064.
- --------------------------------------------------------------------------------
Page 1 of 19 pages
<PAGE>
<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, 1996 (Unaudited) and December 31, 1995................... 3-4
Consolidated Statements of Income (Unaudited) for
the Three Months and Nine Months Ended September 30, 1996 and 1995 5
Consolidated Statements of Cash Flows (Unaudited)
for the Nine Months Ended September 30, 1996 and 1995.................. 6
Notes to Consolidated Financial Statements (Unaudited)................. 7-9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations.......................... 10-17
`PART II- OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 18
Item 2. Changes in Securities.................................................. 18
Item 3. Defaults upon Senior Securities........................................ 18
Item 4. Submission of Matters to a Vote of Security Holders.................... 18
Item 5. Other Information...................................................... 18
Item 6. Exhibits and Reports on Form 8-K....................................... 18
Signature ....................................................................... 19
</TABLE>
-2-
<PAGE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
------------- ------------
(Unaudited)
<S> <C> <C>
Investments:
Securities, Available for sale--at fair value
Fixed maturities (amortized cost:
1996--$627,785; 1995--$510,056) $ 627,507 $ 521,402
Equity securities-(cost 1996--$20,582
1995--$20,132); 22,030 21,024
Short-term investments--at principal
balances, which approximate fair value 19,274 7,353
Investment in limited liability corporation 3,403 2,935
---------- ----------
TOTAL INVESTMENTS 672,214 552,714
Cash
Agents' balances due, less 12,365 5,115
allowances for doubtful accounts
(1996--$2,562; 1995--$3,346) 44,850 25,779
Premiums receivable from insureds,
less allowances for doubtful accounts
(1996--$61; 1995--$105) 32,011 24,177
Deferred federal income tax benefits 33,937 23,627
Accrued investment income 7,782 7,458
Deferred policy acquisition costs 28,688 18,797
Net reinsurance recoverables
less allowances for possible uncollectible
amounts (1996--$528; 1995--$115) 160,389 76,955
Data processing equipment and software--at cost,
less accumulated depreciation and amortization
(1996--$3,597; 1995--$2,259) 2,300 1,434
Transportation equipment --at cost, less accumulated
depreciation (1996--$199;1995--0) 5,642
Insurance renewal and claims adjusting rights and
other intangible assets, less accumulated
amortization (1996--$3,359; 1995--$2,370) 11,715 3,082
Home office building and equipment--
at cost, less accumulated depreciation
(1996--$5,874; 1995--$5,031) 27,765 28,043
Federal income taxes recoverable 217
Other assets 10,135 5,950
---------- ----------
TOTAL ASSETS $1,049,793 $ 773,348
========== ==========
</TABLE>
See notes to consolidated financial statements (unaudited).
-3-
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--Continued
LIABILITIES AND CAPITAL
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
September 30, December 31,
1996 1995
----------- -----------
(Unaudited)
<S> <C> <C>
LIABILITIES
Policy liabilities:
Unpaid losses $ 427,398 $ 309,164
Unpaid loss adjustment expenses 92,004 58,272
Unearned premiums 165,027 107,282
----------- -----------
TOTAL POLICY LIABILITIES 684,429 474,718
Note payable 32,100 25,000
Funds withheld under reinsurance contract 53,115 28,226
Cash dividend payable to shareholders 1,903 1,568
Federal income taxes payable 657
Other liabilities 22,837 14,103
----------- -----------
TOTAL LIABILITIES 795,041 543,615
COMMITMENTS AND CONTINGENT LIABILITIES
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
(1996--14,687,070 shares; 1995--14,368,751 shares) 147 130
Additional paid-in capital 221,926 167,587
Net unrealized appreciation
of investments in available-for-sale securities 660 7,955
Retained earnings 32,807 54,849
----------- -----------
SUBTOTAL 255,540 230,521
Less: Treasury stock--at cost (1996-45,540 shares;
1995--45,540 shares) (788) (788)
----------- -----------
TOTAL CAPITAL 254,752 229,733
----------- -----------
TOTAL LIABILITIES AND CAPITAL $ 1,049,793 $ 773,348
=========== ===========
Book value per share $17.35 $15.99
====== ======
</TABLE>
See notes to consolidated financial statements (unaudited).
-4-
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
--------------------- -------------------
1996 1995 1996 1995
------ -------- ------ ------
<S> <C> <C> <C> <C>
REVENUES
Premiums written $ 123,202 $ 79,468 $ 283,028 $ 200,838
Premiums ceded (22,525) (12,178) (48,999) (31,482)
--------- --------- --------- ---------
NET PREMIUMS WRITTEN 100,677 67,290 234,029 169,356
Increase in unearned premiums (30,050) (17,417) (39,260) (27,289)
--------- --------- --------- ---------
NET PREMIUMS EARNED 70,327 49,873 194,769 142,067
Net Investment income 9,650 7,691 26,024 21,606
Net realized capital gains (losses) (221) 477 1,084 (23)
--------- --------- --------- ---------
TOTAL NET INVESTMENT INCOME 9,429 8,168 27,108 21,583
Gross claims adjusting income 9 32 46 107
--------- --------- --------- ---------
TOTAL REVENUES 79,765 58,073 221,923 163,757
EXPENSES
Losses 30,420 23,551 87,336 67,451
Loss adjustment expenses 11,623 6,973 30,351 19,921
Amortization of policy acquisition costs 14,461 10,718 42,172 30,320
Underwriting and other expenses 9,018 4,804 20,656 14,519
Interest Expense 529 451 1,409 451
--------- --------- --------- ---------
TOTAL EXPENSES 66,051 46,497 181,924 132,662
INCOME BEFORE INCOME TAXES 13,714 11,576 39,999 31,095
INCOME TAXES
State (45) 430 502 690
Federal 4,246 2,901 10,951 7,489
--------- --------- --------- ---------
TOTAL INCOME TAXES 4,201 3,331 11,453 8,179
--------- --------- --------- ---------
NET INCOME $ 9,513 $ 8,245 $ 28,546 $ 22,916
========= ========= ========= =========
PER SHARE DATA
Operating Income $.67 $.55 $1.94 $1.60
Net realized capital gains/(losses) (.01) .02 .05
---- ---- ----- -----
NET INCOME $.66 $.57 $1.99 $1.60
==== ==== ===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING 14,436 14,319 14,374 14,284
====== ====== ====== ======
</TABLE>
See notes to consolidated financial statements (unaudited).
-5-
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
1996 1995
--------- ---------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 28,546 $ 22,917
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in policy liabilities 209,711 66,582
Increase (decrease) in federal income taxes (5,663) 2,283
Decrease (increase) in reinsurance balances (58,545) 1,684
Increase in agents' balances and
premiums receivable (26,905) (13,996)
Change in deferred policy acquisition costs (9,891) (4,496)
Increase in accrued investment income (324) (1,115)
Depreciation and amortization 2,497 1,995
Realized capital gains (1,018) (23)
Gain on sale of real estate (65)
Other 4,549 (1,497)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 142,892 74,334
INVESTING ACTIVITIES
Sales of available for sale securities 84,955 115,298
Calls, maturities and paydowns of fixed maturities 160,917 76,010
Purchases of securities (361,933) (267,999)
Net purchases of short-term investments (11,921) (19,089)
Net purchases of fixed assets (8,772) (2,000)
Purchases of intangible assets (9,623)
Investment in limited liability corporation (468)
--------- ---------
NET CASH USED IN INVESTING ACTIVITIES (146,845) (97,780)
FINANCING ACTIVITIES
Issuance of note payable 7,100 25,000
Cash dividends paid (5,010) (4,685)
Issuance of Common Stock 9,113 339
--------- ---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 11,203 20,654
INCREASE (DECREASE) IN CASH 7,250 (2,792)
CASH AT BEGINNING OF PERIOD 5,115 6,362
--------- ---------
CASH AT END OF PERIOD $ 12,365 $ 3,570
========= =========
</TABLE>
See notes to consolidated financial statements (unaudited).
-6-
<PAGE>
<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, 1995. 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 1995 financial statements have been reclassified to conform
to the 1996 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 nine-month period ended September 30, 1996 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1996.
2. Earnings per share information is presented on the basis of weighted average
shares outstanding for the period.
3. 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 (Cash Paid, in thousands):
<TABLE>
<CAPTION>
Declaration Record Payment Type of Cash Number of
Date Date Date Dividend Paid Shares Issued
----------- ------ --------- ------------------- ------ -------------
<S> <C> <C> <C> <C> <C>
03/16/95 03/31/95 04/20/95 $.12 per share cash $1,561 N/A
05/18/95 06/30/95 07/20/95 $.12 per share cash $1,562 N/A
08/17/95 09/29/95 10/19/95 $.12 per share cash $1,562 N/A
11/16/95 12/29/95 01/18/96 $.12 per share cash $1,562 N/A
03/28/96 04/08/96 04/30/96 $.12 per share cash $1,568 N/A
05/23/96 06/28/96 07/19/96 10% stock 11(1) 1,311,178
05/23/96 06/28/96 07/19/96 $.13 per share cash $1,870 N/A
08/15/96 09/30/96 10/18/96 $.13 per share cash $1,903 N/A
</TABLE>
- ----------
(1) Cash in lieu of fractional shares.
4. At September 30, 1996, options to purchase 280,300 shares of Common Stock,
at per share exercise prices ranging from $18.86 to $30.80, were
outstanding, compared to options to purchase 325,569 shares of Common Stock,
at per share exercise prices ranging from $7.15 to $27.80, outstanding at
September 30, 1995 under the Company's stock option plans (the "Plans").
Options to purchase 108,713 and 112,959 shares of Common Stock were
exercisable at September 30, 1996 and 1995, 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 412,500 and 74,250 shares, respectively, of Common Stock at $45.45
per share at any time through December 31, 1999, which options were
outstanding at September 30, 1996.
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.
-7-
<PAGE>
<PAGE>
Item 1. Notes to Consolidated Financial Statements (Unaudited)--Continued
5. 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, 1996 and
1995, contingent reinsurance earned commissions accrued were $171,000 and
$65,000, respectively. During the nine months ended September 30, 1996 and
1995,contingent reinsurance earned commissions accrued were $69,000 and
$413,000, respectively. The estimated profitability of the reinsured
business is continually reviewed and as adjustments become necessary, such
adjustments are reflected in current operations.
6. Claims adjusting income is accounted for on an accrual basis, before
deducting the related expenses. During the three months ended September 30,
1996 and 1995, claims adjusting expenses included with underwriting and
other expenses amounted to $15,000 and $43,000, respectively. During the
nine months ended September 30, 1996 and 1995, claims adjusting expenses
included with underwriting and other expenses amounted to $77,000 and
$164,000, respectively.
7. The components of the net reinsurance recoverables balances in the
accompanying balance sheets were as follows:
<TABLE>
<CAPTION>
September 30, 1996 December 31, 1995
------------------ -----------------
(in thousands)
<S> <C> <C>
Ceded paid losses recoverable $6,114 $ 2,639
Ceded unpaid losses and LAE 143,501 73,043
Ceded unearned premiums 18,315 5,541
Ceded reinsurance payable (7,541) (4,268)
---------- --------
TOTAL $160,389 $76,955
======== =======
</TABLE>
The reinsurance ceded components of the amounts relating to the accompanying
income statements were as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1996 1995
------- ---------
(in thousands)
<S> <C> <C>
Ceded premiums earned $45,792 $29,862
Ceded incurred losses $12,018 $17,631
Ceded incurred LAE $ 3,246 $ 9,102
</TABLE>
-8-
<PAGE>
<PAGE>
Item 1. Notes to Consolidated Financial Statements (Unaudited)--Continued
The effect of reinsurance on premiums written and earned at September 30,
1996 and 1995 was as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30,
----------------------------------------------------------
1996 1995
Premiums Premiums
------------------------- -------------------------
Written Earned Written Earned
--------- --------- --------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Direct $ 278,093 $ 235,314 $ 200,315 $ 171,184
Assumed 4,934 5,246 523 745
Ceded (48,998) (45,791) (31,482) (29,862)
--------- --------- --------- ---------
Net $ 234,029 $ 194,769 $ 169,356 $ 142,067
========= ========= ========= =========
</TABLE>
8. During the first quarter of 1996, the Company adopted FASB Statement No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of ("FASB 121"), which requires impairment losses to
be recorded on long-lived assets, certain identifiable intangibles, and
goodwill related to those assets, when indicators of impairment are present
and the undiscounted cash flows estimated to be generated by those assets
are less than the assets carrying amount. The adoption of FASB 121 did not
have a material impact on the accounting for Long-Lived Assets.
9. During the second quarter of 1996, the Company increased prior years'
reserves by approximately $13.0 million, which was entirely offset by an
increase in the same amount of the subrogation recoverable recognized in
conjunction with the favorable December 1995 ruling in the New York Court of
Appeals. Such increase in the subrogation recoverable resulted from further
documentation and verification in the second quarter of 1996 of claims
already paid and reserves currently held by the Company that the Company
believes are reimbursable by the State of New York.
-9-
<PAGE>
<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, 1995.
" SAFE HARBOR" STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: This discussion and analysis may contain forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934 which are not historical facts, and involve
risks and uncertainties that could cause actual results to differ materially
from those expected and projected.
Three Months Ended September 30, 1996 Compared to Three Months Ended
September 30, 1995
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, 1995 to 1996
--------------------- ------------------------
1996 1995 Amount %
-------- -------- -------- -----
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $ 28,396 $ 22,772 $ 5,624 24.7
General liability 20,776 13,152 7,624 58.0
Surety 12,692 9,818 2,875 29.3
Commercial earthquake 2,327 84 2,243 2675.2
Workers' compensation 768 2,207 (1,439) (65.2)
Other 5,368 1,840 3,528 191.7
-------- -------- --------
Total $ 70,327 $ 49,873 $ 20,454 41.0
======== ======== ========
</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,
------------------------- ----------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 43.3% 47.2% 43.3% 47.2%
Loss adjustment expenses (LAE) 15.2 13.5 16.5 14.0
---- ---- ---- ----
Losses and LAE 58.5 60.7 59.8 61.2
Acquisition, underwriting, interest,
and other expenses 30.3 29.8 33.3 31.0
---- ---- ---- ----
Total combined ratio 88.8% 90.5% 93.1% 92.2%
==== ==== ==== ====
</TABLE>
A variety of factors accounted for the 41.0% growth in net premiums earned, the
principal factor being increases in the Company's core and new program business,
partially offset by the ceding of earned premiums under the Company's aggregate
excess of loss reinsurance contract pursuant to which 13.5% of earned premiums
for all lines of business, except bail, customs, license and permit, and
miscellaneous surety bonds, are ceded.
-10-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
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, geographical
expansion in Ohio, Texas, Michigan and Illinois, growth in the dental program
endorsed by the Academy of General Dentistry, and rate increases in Florida.
Net premiums earned for the general liability line increased primarily as a
result of increases in various programs, including alarms and guards, pest
control, umbrella, asbestos abatement and excess employer's liability.
Growth in surety net premiums earned continued in 1996, and was primarily
attributable to expanded writings of license and permit bonds, bonds for small
contractors, miscellaneous bonds, and custom bonds.
Net premiums earned for the commercial earthquake program increased primarily
due to growth in the program which was initiated in the third quarter of 1995.
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
programs due to competitive market conditions.
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 the mobile homeowners program. These increases were partially offset by
decreases in other miscellaneous small programs.
Net investment income before realized capital gains and losses increased 25.5%
due principally to increases in investable assets resulting from the proceeds of
the borrowing under a line of credit facility, net investment income
attributable to the contribution to investment income from the recent
acquisitions of United Capitol Holding Company and Regency Insurance Company,
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. Total net
investment income (after capital gains or losses) increased 15.4% due to the
realization of capital losses in the 1996 period and the realization of capital
gains in the 1995 period. The average annual pre-tax yield on investments,
excluding the charge for funds held under the aggregate excess of loss
reinsurance contract, decreased to 6.5% from 6.9%, primarily as the result of
generally lower interest rates available for funds invested in 1995 and early
1996, and the reinvestment at the lower rates of 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 4.9%
from 5.2%, primarily for the reasons described above.
Gross claims adjusting income decreased 72.6% primarily as a result of a
decrease in claim services provided to outside companies, partially offset by an
increase in the rates charged for certain services.
Total revenues increased 37.4% as a result of the above.
-11-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
Total expenses increased by 42.1% compared to the 41.0% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased at a 37.7% rate as
a result of a 29.2% increase in losses and a 66.7% increase in LAE. The increase
in losses and LAE was disproportionately lower than that of net premiums earned
due to the aggregate excess of loss reinsurance contract which provides coverage
for losses and LAE in excess of 65% and 66% for the 1996 and 1995 accident
years, respectively,which resulted in a loss and LAE component of the GAAP
Combined Ratio 1.4 percentage points lower than in the comparable 1995 period.
The 66.7% 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 34.9%
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 commissions,
increased staffing and marketing expenses related to expansion, and salary
increases. The 81.6% increase in underwriting, other expenses, and interest
expense was primarily the result of the interest associated with the $32 million
borrowed under the 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, and salary increases.
Since the non-claim related expenses increased at a percentage
disproportionately higher than that of net premiums earned, the non-claim
related component of the GAAP Combined Ratio was 2.3 percentage points higher
than in the comparable 1995 period. The total GAAP Combined Ratio increased by
.9 percentage points to 93.1% as a result of the above.
The foregoing changes resulted in income before taxes of $13,714,000 for the
1996 quarter, a 18.5% increase from the comparable 1995 quarter. Net income for
the quarter increased by $1,268,000, or 15.4%, over the comparable 1995 quarter.
Nine Months Ended September 30, 1996 Compared to Nine Months Ended
September 30, 1995
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, 1995 to 1996
------------------------------------------------
1996 1995 Amount %
--------- -------- --------- -----
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $80,385 $64,344 $16,041 24.9
General liability 55,014 35,079 19,935 56.8
Surety 37,021 29,160 7,861 27.0
Commercial Earthquake 6,163 84 6,079 7236.9
Workers' Compensation 5,981 7,996 (2,015) (25.2)
Other 10,205 5,404 4,801 88.8
--------- -------- ---------
Total $194,769 $142,067 $52,702 37.1
======== ======== =========
</TABLE>
-12-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
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 June 30,
----------------------- ---------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 44.8% 47.5% 44.8% 47.5%
Loss adjustment expenses (LAE) 14.5 13.4 15.6 14.0
---- ---- ---- ----
Losses and LAE 59.3 60.9 60.4 61.5
Acquisition, underwriting, interest, and
other expenses 31.3 30.3 32.3 31.5
---- ---- ---- ----
Total combined ratio 90.6% 91.2% 92.7% 93.0%
==== ==== ==== ====
</TABLE>
A variety of factors accounted for the 37.1% growth in net premiums earned, the
principal factor being increases in the Company's core and new program business,
partially offset by a decrease in worker's compensation and by the ceding of
earned premiums under the Company's aggregate excess of loss reinsurance
contract pursuant to which 13.5% of earned premiums for all lines of business,
except bail, customs, license and permit, and miscellaneous surety bonds, are
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 Company's program for psychiatrists, geographical
expansion in Ohio, Texas, Michigan and Illinois, growth in the dental program
endorsed by the Academy of General Dentistry, and rate increases in Florida.
Net premiums earned for the general liability line increased primarily because
of increases in various programs, including social services, alarms and guards,
pest control, umbrella, asbestos abatement and excess employer's liability.
Growth in surety net premiums earned continued in 1996, and was primarily
attributable to expanded writings of license and permit bonds, bonds for small
contractors, miscellaneous bonds, and custom bonds.
Net premiums earned for the commercial earthquake program increased primarily
due to the growth in the number of policies written for the nine-month period in
1996 over the comparable nine-month period in 1995, when the program was
initiated.
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
programs due to competitive market conditions.
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 the mobile homeowner's program. These increases were partially offset by
decreases in other miscellaneous small programs.
-13-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
Net investment income before realized capital gains increased 20.4% due
principally to increases in investable assets resulting from the proceeds of the
borrowing under a line of credit facility, net investment income attributable to
the contribution to investment income from the recent acquisitions of United
Capitol Holding Company and Regency Insurance Company, 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. Total net investment income (after capital
gains or losses) increased 25.6% due to the realization of capital gains in the
1996 period and the realization of capital losses in the 1995 period. The
average annual pre-tax yield on investments, excluding the charge for funds held
under the aggregate excess of loss reinsurance contract, decreased to 6.5% from
6.9%, primarily as the result of generally lower interest rates available for
funds invested in 1995 and early 1996, and the reinvestment at the lower rates
of 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 4.9% from 5.5%, primarily for the reasons described
above.
Gross claims adjusting income decreased 57.0% primarily as a result of a
decrease in claim services provided to outside companies, partially offset by an
increase in the rates charged for certain services.
Total revenues increased 35.5% as a result of the above.
Total expenses increased by 37.1%, similar to the 37.1% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased at a 34.7% rate as
a result of a 29.5% increase in losses and a 52.4% increase in LAE. The increase
in losses and LAE was disproportionately lower than that of net premiums earned
due to the aggregate excess of loss reinsurance contract which provides coverage
for losses and LAE in excess of 65% and 66% for the 1996 and 1995 accident
years, respectively, which resulted in a loss and LAE component of the GAAP
Combined Ratio 1.1 percentage points lower than in the comparable 1995 period.
The 52.4% 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 Company also
increased prior years' reserves by $13.0 million, which was entirely offset by
an increase in the same amount of the subrogation recoverable recognized in
conjunction with the favorable December 1995 ruling in the New York Court of
Appeals. Such increase in the subrogation recoverable resulted from further
documentation and verification in the second quarter of 1996 of claims already
paid and reserves currently held by the Company that the Company believes are
reimbursable by the State of New York. The 39.1% 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 commissions, increased staffing and marketing
expenses related to expansion, and salary increases. The 47.4% increase in
underwriting, other expenses, and interest expense was primarily the result of
the interest associated with the $32 million borrowed under the 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, and salary increases. Since the non-claim related expenses
increased at a percentage disproportionately higher than that of net premiums
earned, the non-claim related component of the GAAP Combined Ratio was 1.2
percentage points higher than in the comparable 1995 period. The total GAAP
Combined Ratio increased by .9 percentage points to 93.1% as a result of the
above.
-14-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
The foregoing changes resulted in income before taxes of $39,999,000 for the
nine months ended 1996, a 28.6% increase from the comparable 1995 period. Net
income for the period increased by $5,630,000, or 24.6%, over the comparable
1995 nine-month 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
are for payment of losses and LAE, operating expenses, commissions, and
dividends to shareholders.
The Company's total assets at September 30, 1996 of $ 1.05 billion were
comprised of the following: 65.2% cash and investments, 15.3% net reinsurance
recoverables, 7.3% premiums receivable, 3.2% home office building and equipment,
5.9% deferred expenses (federal income taxes and policy acquisition costs), and
3.1% 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.
The following table provides a profile of the Company's fixed maturities
investment portfolio by rating at September 30, 1996:
<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 $35,394) $398,378 $398,378 63.4%
AA/Aa 95,179 95,179 15.2
A/A 90,838 90,838 14.5
BBB/Baa 43,088 43,088 6.9
All other 24 24
-------- -------- -----
Total $627,507 $627,507 100.0%
======== ======== =====
</TABLE>
-15-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
Cash flow generated from operations for the nine-month periods ended September
30, 1996 and 1995 was $142.9 million, and $74.3 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 period ended September
30, 1996 and 1995 were $5,341,000 and $4,700,000 respectively.
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 1996 and 1995 the
Company ceded 13.5% and 14% of the earned premiums from the covered lines of
business to Centre Re, respectively.
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.
In December 1995, the New York Court of Appeals ruled on this issue and
concluded that Frontier was entitled to recoveries from the State for such
medical malpractice claims. As a result of this decision, the Company believes
the above-referenced decisions are controlling precedents and that it will
benefit economically by not being ultimately responsible for certain claims
against SUNY physicians for whom it presently carries reserves and be entitled
to reimbursements of certain claims previously paid; accordingly, effective June
30, 1996 and December 31, 1995, Frontier recorded subrogation
-16-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
recoverables of approximately $13,000,000 and $19,000,000, respectively,
representing the amount of claims already paid and the reserves currently held
by Frontier on open cases that management believes are reimbursable by the State
of New York. To the extent that the amount of the actual recovery varies, such
difference will be reported in the period recognized. The Company is continuing
to defend all SUNY faculty members against malpractice claims that have been
asserted and is maintaining reserves therefor adjusted for the anticipated
recoveries.
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.
-17-
<PAGE>
<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 September 16, 1996, the Company acquired 100% of the stock of
Regency Insurance Company and Emrol Premium Finance Company in
exchange for shares of the Company's Common Stock, effective July 1,
1996.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
None.
b. Reports on Form 8-K.
On June 7,1996, the Company filed a report on Form 8-K,as
amended on October 7, 1996 reporting that on May 22,1996 it had
acquired, through its wholly owned subsidiary , Frontier
Insurance Company, 100% of the capital stock of United Capitol
Holding Company. The amended Form 8-K updated United Capital
Holding Company's financial information through June 30, 1996.
On October 24, 1996, the Company filed a report on Form 8-K
reporting the sale of 3,450,000 6 1/4% Convertible Trust
Originated Preferred Securities issued by its financing vehicle,
Frontier Financing Trust, a Delaware statutory business trust
sponsored by the Company, the proceeds of which were invested in
the Company's 6 1/4% Convertible Subordinated Debentures. Net
proceeds to the Company from the offering were $167,756,000.
-18-
<PAGE>
<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: November 13, 1996 Frontier Insurance Group, Inc.
------------------------------
(Registrant)
By: /s/ Mark H. Mishler
________________________________________
Mark H. Mishler
Vice President of Finance and Treasurer
(Principle Financial and Accounting
Officer and Duly Authorized Officer)
-19-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<DEBT-HELD-FOR-SALE> 627,607
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 22,030
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 672,214
<CASH> 12,365
<RECOVER-REINSURE> 4,578
<DEFERRED-ACQUISITION> 28,688
<TOTAL-ASSETS> 1,049,793
<POLICY-LOSSES> 519,402
<UNEARNED-PREMIUMS> 166,027
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 32,100
<COMMON> 147
0
0
<OTHER-SE> 254,625
<TOTAL-LIABILITY-AND-EQUITY> 1,049,793
194,769
<INVESTMENT-INCOME> 26,024
<INVESTMENT-GAINS> 1,084
<OTHER-INCOME> 46
<BENEFITS> 117,687
<UNDERWRITING-AMORTIZATION> 42,172
<UNDERWRITING-OTHER> 20,656
<INCOME-PRETAX> 39,999
<INCOME-TAX> 11,453
<INCOME-CONTINUING> 28,546
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 28,546
<EPS-PRIMARY> 1.99
<EPS-DILUTED> 1.99
<RESERVE-OPEN> 367,436
<PROVISION-CURRENT> 193,709
<PROVISION-PRIOR> 53,679
<PAYMENTS-CURRENT> 10,481
<PAYMENTS-PRIOR> 76,547
<RESERVE-CLOSE> 519,402
<CUMULATIVE-DEFICIENCY> 8,394
</TABLE>
