<PAGE>
<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A-1
[x] Quarterly Report Pursuant to Section 13 or 15(d) of
the Securities Exchange Act of 1934
For the quarterly period ended June 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 August 9,1996 was 14,429,729.
- --------------------------------------------------------------------------------
Page 1 of 20 pages
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FRONTIER INSURANCE GROUP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C>
PART I- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
June 30, 1996 (Unaudited) and December 31, 1995........................ 3-4
Consolidated Statements of Income (Unaudited) for
the Three Months and Six Months Ended June 30, 1996 and 1995.......... 5
Consolidated Statements of Cash Flows (Unaudited)
for the Six Months Ended June 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....................................... 19
Signature ....................................................................... 20
</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>
June 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Investments:
Securities, Available for sale--at fair
value Fixed maturities (amortized cost:
1996--571,783; 1995--$510,056) $569,122 $521,402
Equity securities-(cost 1996--$29,133
1995--$20,132); 30,266 21,024
Short-term investments--at principal
balances, which approximate fair value 32,908 7,353
Investment in limited liability corporation 3,290 2,935
-------- --------
TOTAL INVESTMENTS 635,586 552,714
Cash
Agents' balances due, less 2,046 5,115
allowances for doubtful accounts
(1996--$3,537; 1995--$3,346) 32,563 25,779
Premiums receivable from insureds,
less allowances for doubtful accounts
(1996--$18; 1995--$105) 25,702 24,177
Deferred federal income tax benefits 33,024 23,627
Accrued investment income 7,689 7,458
Deferred policy acquisition costs 21,650 18,797
Net reinsurance recoverables
less allowances for possible uncollectible
amounts (1996--$182; 1995--$115) 143,826 76,955
Data processing equipment and software--at cost,
less accumulated depreciation and amortization
(1996--$2,515; 1995--$2,259) 1,479 1,434
Insurance renewal and claims adjusting rights and
other intangible assets, less accumulated
amortization (1996--$2,804; 1995--$2,370) 2,641 3,082
Home office building and equipment--
at cost, less accumulated depreciation
(1996--$5,995; 1995--$5,031) 28,446 28,043
Federal income taxes recoverable 398 217
Other assets 15,109 5,950
-------- --------
TOTAL ASSETS $950,159 $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>
June 30, December 31,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
LIABILITIES
Policy liabilities:
Unpaid losses $407,890 $309,164
Unpaid loss adjustment expenses 85,931 58,272
Unearned premiums 128,418 107,282
--------- ---------
TOTAL POLICY LIABILITIES 622,239 474,718
Note payable 29,200 25,000
Funds withheld under reinsurance contract 43,648 28,226
Cash dividend payable to shareholders 1,886 1,568
Other liabilities 16,184 14,103
--------- ---------
TOTAL LIABILITIES 713,157 543,615
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--14,384,761 shares; 1995--14,368,751 shares) 144 130
Additional paid-in capital 213,442 167,587
Net unrealized appreciation/(depreciation)
of investments in available-for-sale securities (993) 7,955
Retained earnings 25,197 54,849
--------- ---------
SUBTOTAL 237,790 230,521
Less: Treasury stock--at cost (1996-45,540 shares;
1995--45,540 shares) (788) (788)
---------- ----------
TOTAL CAPITAL 237,002 229,733
------- -------
TOTAL LIABILITIES AND CAPITAL $950,159 $773,348
======== ========
Book Value per share $16.48 $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 Six Months
Ended June 30, Ended June 30,
---------------- -----------------
1996 1995 1996 1995
------ -------- ------ -----
<S> <C> <C> <C> <C>
REVENUES
Premiums written $84,966 $64,112 $159,826 $121,370
Premiums ceded (13,343) (10,216) (26,474) (19,304)
--------- --------- ----------- -----------
NET PREMIUMS WRITTEN 71,623 53,896 133,352 102,066
Increase in unearned premiums (5,475) (7,456) (8,910) (9,872)
--------- --------- ----------- -----------
NET PREMIUMS EARNED 66,148 46,440 124,442 92,194
Net Investment income 8,588 7,178 16,374 13,415
Net realized capital gains (losses) 614 256 1,305 (500)
--------- --------- ----------- -----------
TOTAL NET INVESTMENT INCOME 9,202 7,434 17,679 13,415
Gross claims adjusting income 12 39 37 75
--------- --------- ----------- -----------
TOTAL REVENUES 75,362 53,913 142,158 105,684
EXPENSES
Losses 30,404 22,407 56,916 43,900
Loss adjustment expenses 9,797 6,006 18,728 12,948
Amortization of policy acquisition costs 15,330 9,913 27,711 19,602
Underwriting and other expenses 5,847 5,122 11,638 9,715
Interest Expense 439 880
--------- --------- ----------- -----------
TOTAL EXPENSE 61,817 43,448 115,873 86,165
INCOME BEFORE INCOME TAXES 13,545 10,465 26,285 19,519
INCOME TAXES
State 432 309 547 260
Federal 3,344 2,371 6,705 4,588
--------- --------- ----------- -----------
TOTAL INCOME TAXES 3,776 2,680 7,252 4,848
--------- --------- ----------- -----------
NET INCOME $9,769 $7,785 $19,033 $14,671
======== ====== ======= =======
PER SHARE DATA
Operating Income $.65 $.53 $1.27 $1.05
Net realized capital gains/(losses) .03 .01 .06 (.02)
----- ----- ------- --------
NET INCOME $.68 $.54 $1.33 $1.03
==== ==== ===== =====
WEIGHTED AVERAGE SHARES OUTSTANDING 14,380 14,313 14,351 14,306
====== ====== ====== ======
</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>
Six Months
Ended June 30,
----------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $19,033 $ 14,671
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in policy liabilities 147,521 32,175
Increase (decrease) in federal income taxes (9,578) 1,848
Decrease (increase) in reinsurance balances (51,449) (4,476)
(Increase) decrease in agents' balances and
premiums receivable (8,309) (6,181)
Change in deferred policy acquisition costs (2,853) (2,181)
Decrease (increase) in accrued investment income (231) (531)
Depreciation and amortization 926 1,824
Realized capital (gains) losses 1,305 (500)
Other (3,360) (1,950)
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 93,005 34,699
INVESTING ACTIVITIES
Sales of equity securities 16,449 4,952
Sales of available for sale securities 76,147 21,991
Calls, maturities and paydowns of fixed maturities 81,598 52,732
Purchases of securities (246,462) (146.484)
Net( purchases) sales of short-term investments (25,555) 16,553
Purchase of home office building and equipment (1,267) (1,118)
Purchase of data processing equipment and software (301) (237)
--------- ---------
NET CASH (USED IN) INVESTING ACTIVITIES (99,391) (51,611)
FINANCING ACTIVITIES
Issuance of note payable 4,200 25,000
Cash dividends paid (1,579) (3,124)
Issuance of Common Stock 696 309
---------- -----------
NET CASH (USED IN) FINANCING ACTIVITIES 3,317 22,185
INCREASE (DECREASE) IN CASH (3,069) 5,273
CASH AT BEGINNING OF PERIOD 5,115 6,362
--------- ---------
CASH AT END OF PERIOD $2,046 $11,635
====== =======
</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 six-month period ended June 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:
<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 $1,567 N/A
08/17/95 09/29/95 10/19/95 $.12 per share cash $1,567 N/A
11/16/95 12/29/95 01/18/96 $.12 per share cash $1,568 N/A
03/28/96 04/08/96 04/30/96 $.12 per share cash $1,573 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 $1,875 N/A
</TABLE>
(1) Cash in lieu of fractional shares.
4. At June 30, 1996, options to purchase 366,912 shares of Common Stock, at
per share exercise prices ranging from $11.63 to $28.98, were outstanding,
compared to options to purchase 366,300 shares of Common Stock, at per
share exercise prices ranging from $7.15 to $27.57, outstanding at June 30,
1995 under the Company's stock option plans (the "Plans"). Options to
purchase 205,225 and 130,900 shares of Common Stock were exercisable at
June 30, 1996 and June 30, 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 the Company's Common
Stock at $45.45 per share at any time through December 31, 1999, which
options were outstanding at June 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 June 30, 1996 and 1995,
such earned commissions accrued were $(10,000) and $(47,000), respectively.
During the six months ended June 30, 1996 and 1995, such earned commissions
accrued were $(102,000) and $(233,000), 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 June 30, 1996
and 1995, claims adjusting expenses included with underwriting and other
expenses amounted to $18,000 and $67,000, respectively. During the six
months ended June 30, 1996 and 1995, claims adjusting expenses included
with underwriting and other expenses amounted to $62,000 and $121,000,
respectively.
7. The components of the net reinsurance recoverables balances in the
accompanying balance sheets were as follows:
<TABLE>
<CAPTION>
June 30, 1996 December 31, 1995
------------- -----------------
(in thousands)
<S> <C> <C>
Ceded paid losses recoverable $6,862 $ 2,639
Ceded unpaid losses and LAE 126,691 73,043
Ceded unearned premiums 13,461 5,541
Ceded reinsurance payable (3,188) (4,268)
-------- --------
TOTAL $143,826 $76,955
======== =======
</TABLE>
The reinsurance ceded components of the amounts relating to the accompanying
income statements were as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Ceded premiums earned $26,023 $19,138
Ceded incurred losses $19,691 $ 9,233
Ceded incurred LAE $ 7,875 $ 5,952
</TABLE>
-8-
<PAGE>
<PAGE>
Item 1. Notes to Consolidated Financial Statements (Unaudited)--Continued
The effect of reinsurance on premiums written and earned at June 30, 1996
and 1995 was as follows:
<TABLE>
<CAPTION>
Six Months Ended June 30,
----------------------------------------------------------
1996 1995
Premiums Premiums
----------------------- ------------------------
Written Earned Written Earned
-------- -------- -------- ---------
(in thousands)
<S> <C> <C> <C> <C>
Direct $155,628 $146,401 $121,062 $110,892
Assumed 4,198 4,071 308 440
Ceded (26,474) (26,023) (19,304) (19,138)
---------- ------- ------- ------
Net $133,352 $124,449 $102,066 $ 92,194
======== ======== ======== =========
</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 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 the 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.
Three Months Ended June 30, 1996 Compared to Three Months Ended June 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 June 30, 1995 to 1996
------------------------------------------------
1996 1995 Amount %
---- ---- ------ ----
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $27,891 $21,044 $6,847 32.5
General liability 17,328 11,887 5,441 45.8
Surety 12,688 9,690 2,998 30.9
Workers' compensation 2,164 1,893 271 14.3
Other 6,077 1,926 4,158 315.5
--------- --------- ---------
Total $66,148 $46,440 $19,715 42.4
======= ======= =======
</TABLE>
The following table sets forth the Company's combined ratio calculated on a
statutory basis ("Statutory Combined Ratio") and on the basis of generally
accepted accounting principles ("GAAP Combined Ratio") for the periods
indicated:
<TABLE>
<CAPTION>
Statutory Combined Ratio GAAP Combined Ratio
------------------------ -------------------
Three Months Three Months
Ended June 30, Ended June 30,
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 46.0% 48.2% 46.0% 48.2%
Loss adjustment expenses (LAE) 14.1 12.5 14.8 13.0
---- ---- ---- ----
Losses and LAE 60.1 60.7 60.8 61.2
Acquisition, underwriting, interest, and
other expenses 32.4 31.0 31.9 32.2
---- ---- ---- ----
Total combined ratio 92.5% 91.7% 92.7% 93.4%
==== ==== ==== ====
</TABLE>
A variety of factors accounted for the 42.4% 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.
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, growth in the dental program endorsed
by the Academy of General Dentistry, rate increases in Florida and expansion in
other geographic areas.
-10-
<PAGE>
<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 alarms and guards, pest control,
umbrella, asbestos abatement and excess employer's liability. These increases
were partially offset by a decrease in net premiums earned in the crane operator
liability program.
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 bail bonds.
Net premiums earned for the workers' compensation line increased primarily as a
result of required participation in the National Workers' Compensation
Reinsurance Pools. The increase was partially offset by 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.
Net premiums earned for the other lines of business increased primarily due to
increased volume in the earthquake program and the mobile homeowners program.
These increases were partially offset by decreases in other miscellaneous small
programs.
Net investment income before realized capital gains increased 19.6% due
principally to increases in investable assets resulting from the proceeds of the
$29 million borrowing under a line of credit facility, 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 increased 23.8%
due to the aforementioned increase in net investment income and the realization
of capital gains in the 1996 period in excess of the realized 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
and realized capital gains and losses, 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 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 4.9% from 5.2%, primarily for the reasons described
above.
Gross claims adjusting income decreased 69.2% 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 39.8% 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 42.3% compared to the 39.8% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased at a 41.5% rate as
a result of a 35.7% increase in losses and a 63.1% increase in LAE. The increase
in losses and LAE was equivalent to that of net earned premiums which resulted
in a loss and LAE component of the GAAP Combined Ratio .4 percentage points
lower than in the comparable 1995 period, 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. The 63.1% 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 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 the reserves currently
held by the Company that the Company believes are reimbursable by the State of
New York. The 54.6% increase in t 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 22.7% increase in underwriting, other expenses, and
interest expense was primarily the result of the interest asssociated with the
$29 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
equivalent to that of earned premiums, the non-claim related component of the
GAAP Combined Ratio was comparable to the 1995 period. The total GAAP Combined
Ratio decreased by .7 percentage points to 92.7% as a result of the above.
The foregoing changes resulted in income before taxes of $13,545,000 for the
1996 quarter, a 29.4% increase from the comparable 1995 quarter. Net income for
the period increased by $1,984,000 or 25.5%.
Six Months Ended June 30, 1996 Compared to Six Months Ended June 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>
Six Months Increase (Decrease)
Ended June 30, 1995 to 1996
-------------- ------------
1996 1995 Amount %
---- ---- ------ ---
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $51,989 $41,571 $10,418 25.1
General liability 34,238 21,927 12,311 56.1
Surety 24,336 19,342 4,994 25.8
Workers' compensation 5,213 5,789 (576) (9.9)
Other 8,666 3,565 5,101 143.1
----------- --------- ---------
Total $124,442 $92,194 $32,248 35.0
======== ======= =======
</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
------------------------- -------------------
Six Months Six Months
Ended June 30, Ended June 30,
-------------- --------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 45.7% 47.6% 45.7% 47.6%
Loss adjustment expenses (LAE) 14.1 13.4 15.0 14.1
---- ---- ---- ----
Losses and LAE 59.8 61.0 60.7 61.7
Acquisition, underwriting, interest, and
other expenses 32.1 30.7 31.7 31.6
---- ---- ---- ----
Total combined ratio 91.9% 91.7% 92.4% 93.3%
==== ==== ==== ====
</TABLE>
A variety of factors accounted for the 35.0% 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, greater
penetration of the Ohio physician market, growth in the dental program endorsed
by the Academy of General Dentistry, rate increases in Florida and expansion in
other geographic areas.
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.
These increases were partially offset by a decrease in net premiums earned in
the crane operator liability program.
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 bail bonds.
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. 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,
the earthquake program and in the mobile homeowners 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 17.7% due
principally to increases in investable assets resulting from the proceeds of the
$29 million borrowing under a line of credit facility, 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 increased 31.8%
due to the aforementioned increase in net investment income and the realization
of capital gains in the 1996 period in excess of realized 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
and realized capital gains and losses, 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 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 4.9% from 5.5%, primarily for the reasons described
above.
Gross claims adjusting income decreased 50.7% 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 34.5% as a result of the above.
Total expenses increased by 34.5% compared to the 35.0% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased at a 33.1% rate as
a result of a 29.6% increase in losses and a 44.6% increase in LAE. The increase
in losses and LAE was disproportionate to that of net earned premiums which
resulted in a loss and LAE component of the GAAP Combined Ratio 1.0 percentage
points lower than in the comparable 1995 period, 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. The 41.4%
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 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 the
reserves currently held by the Company that the Company believes are
reimbursable by the State of New York. The 41.4% increase 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 28.9% increase in
underwriting, other expenses, and interest expense was primarily the result of
the interest asssociated with the $29 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 equivalent to that of earned premiums, the non-claim
related component of the GAAP Combined Ratio was comparable to the 1995 period.
The total GAAP Combined Ratio decreased by .9 percentage points to 92.4% 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 $26,285,00 for the six
months ended 1996, a 34.7% increase from the comparable 1995 period. Net income
for the period increased by $4,362,000 or 29.7%.
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.
At June 30, 1996, $950.2 million in total assets were comprised of the
following: 67.1% cash and investments, 15.1% net reinsurance recoverables, 5.9%
premiums receivable, 3.0% home office building and equipment, 5.8% 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 June 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 $24,098) $354,992 $354,992 62.4%
AA/Aa 90,554 90,554 15.9
A/A 82,479 82,479 14.5
BBB/Baa 41,073 41,073 7.1
All other 24 24 0.1
------------ ------------ -------
Total $569,122 $569,122 100.0%
======== ======== ======
</TABLE>
Cash flow generated from operations for the six-month periods ended June 30,
1996 and 1995 was $93 million, and $35 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,
1996 and 1995 were $3,448,000 and $3,129,000 respectively.
-15-
<PAGE>
<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 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 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.
-16-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
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
On May 23, 1996, the shareholders of the company held their annual
meeting in Rock Hill, New York. The shareholders of 11,900,479 shares
of Common Stock were present or represented by proxy and, accordingly,
a quorom was present and matters were voted upon as follows:
a. By plurality vote, the following persons were elected Directors
of the Company:
<TABLE>
<CAPTION>
Votes Votes
For Withheld
----- --------
<S> <C> <C>
Walter A. Rhulen 11,890,322 8,692
Peter L. Rhulen 11,890,172 8,842
Lawrence E. O'brien 11,890,322 8,692
Douglas C. Moat 11,884,507 10,507
Alan Gerry 11,884,672 14,342
</TABLE>
b. The vote to ratify the reappointment of Ernst & Young LLP as
independent auditors of the Company also passed. Votes totaling
11,890,120 were in favor of the ratification, 4,769 were against,
and 5,769 shares abstained.
Item 5. Other Information
On June 25, 1996, the Company announced that it executed definitive
agreements to acquire 100% stock of Regency Insurance Company and
Emrol Premium Finance Company in exchange for shares of Frontier
stock.
-18-
<PAGE>
<PAGE>
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 stock of United Capitol Holding
Company.
-19-
<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: October 9, 1996 Frontier Insurance Group, Inc.
------------------------------
(Registrant)
By: /s/ Mark H. Mishler
----------------------------
Mark H. Mishler
Vice President - Finance &
Treasurer
(Principal Financial and
Accounting Officer and Duly
Authorized Officer)
-20-
