<PAGE>
<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 For the quarterly period ended March 31, 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)
DELAWARE 14-1681606
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
195 LAKE LOUISE MARIE ROAD, ROCK HILL, NEW YORK 12775-8000
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (914) 796-2100
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[x] Yes [ ] No
The aggregate number of shares of the Registrant's Common Stock, $.01 par value,
outstanding on May 13,1996 was 13,111,516.
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Page 1 of 16 pages
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<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC.
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
PART I- FINANCIAL INFORMATION
<S> <C>
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
(Unaudited) March 31, 1996 and December 31, 1995....................... 3-4
Consolidated Statements of Income (Unaudited) for
the Three Months Ended March 31, 1996 and 1995......................... 5
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 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.......................... 10-14
PART II- OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 15
Item 2. Changes in Securities.................................................. 15
Item 3. Defaults upon Senior Securities........................................ 15
Item 4. Submission of Matters to a Vote of Security Holders.................... 15
Item 5. Other Information...................................................... 15
Item 6. Exhibits and Reports on Form 8-K....................................... 15
Signature ....................................................................... 16
</TABLE>
-2-
<PAGE>
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
(in thousands)
March 31, December 31,
1996 1995
--------- ------------
(Unaudited)
<S> <C> <C>
Investments:
Securities, Available for sale--at fair value
Fixed maturities (amortized cost: 1996--$525,105; 1995--$510,056) $527,661 $521,402
Equity securities-(cost 1996 $23,617
1995--$20,132); 24,381 21,024
Short-term investments--at principal
balances, which approximate fair value 9,546 7,353
Investment in limited liability corporation 3,115 2,935
-------- --------
TOTAL INVESTMENTS 564,703 552,714
Cash
Agents' balances due, less 2,532 5,115
allowances for doubtful accounts
(1996--$3,478; 1995--$3,346) 25,014 25,779
Premiums receivable from insureds,
less allowances for doubtful accounts
(1996--$30; 1995--$105) 25,024 24,177
Deferred federal income tax benefits 25,395 23,627
Accrued investment income 6,824 7,458
Deferred policy acquisition costs 21,155 18,797
Net reinsurance recoverables
less allowances for possible uncollectible
amounts (1996--$115; 1995--$115) 91,154 76,955
Data processing equipment and software--at cost,
less accumulated depreciation and amortization
(1996--$2,387; 1995--$2,259) 1,381 1,434
Insurance renewal and claims adjusting rights and
other intangible assets, less accumulated
amortization (1996--$2,587; 1995--$2,370) 2,865 3,082
Home office building and equipment--
at cost, less accumulated depreciation
(1996--$5,513; 1995--$5,031) 27,721 28,043
Federal income taxes recoverable 217
Other assets 4,881 5,950
-------- --------
TOTAL ASSETS $798,649 $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>
March 31, December 31,
1996 1995
-------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Policy liabilities:
Unpaid losses $322,561 $309,164
Unpaid loss adjustment expenses 60,670 58,272
Unearned premiums 110,241 107,282
------- ---------
TOTAL POLICY LIABILITIES 493,472 474,718
Note payable 25,000 25,000
Funds withheld under reinsurance contract 34,208 28,226
Federal income taxes payable 1,829
Cash dividend payable to shareholders 1,573 1,568
Other liabilities 10,431 14,103
-------- ---------
TOTAL LIABILITIES 566,513 543,615
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--13,068,205 shares; 1995--13,062,501 shares) 131 130
Additional paid-in capital 168,090 167,587
Net unrealized appreciation/(depreciation)
of investments in available-for-sale securities 2,158 7,955
Retained earnings 62,545 54,849
-------- ---------
SUBTOTAL 232,924 230,521
Less: Treasury stock--at cost (1996--41,400 shares;
1995--41,400 shares) (788) (788)
-------- ---------
TOTAL CAPITAL 232,136 229,733
-------- ---------
TOTAL LIABILITIES AND CAPITAL $798,649 $773,348
======== ========
Book Value per share $17.76 $17.59
====== ======
</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
Ended March 31,
-----------------------
1996 1995
---- ----
<S> <C> <C>
REVENUES
Premiums written $74,860 $57,258
Premiums ceded (13,131) (9,088)
------- ------
NET PREMIUMS WRITTEN 61,729 48,170
Increase in unearned premiums (3,435) (2,416)
------- -------
NET PREMIUMS EARNED 58,294 45,754
Net investment income 7,786 6,737
Net realized capital gains (losses) 691 (756)
------- --------
TOTAL NET INVESTMENT INCOME 8,477 5,981
Gross claims adjusting income 25 36
------- --------
TOTAL REVENUES 66,796 51,771
EXPENSES
Losses 26,512 21,493
Loss adjustment expenses 8,931 6,942
Amortization of policy acquisition costs 12,381 9,689
Underwriting and other expenses 5,791 4,593
Interest Expense 441
------- -------
TOTAL EXPENSE 54,056 42,717
INCOME BEFORE INCOME TAXES 12,740 9,054
INCOME TAXES
State 115 (49)
Federal 3,361 2,217
------- --------
TOTAL INCOME TAXES 3,476 2,168
------- --------
NET INCOME $9,264 $6,886
====== ======
PER SHARE DATA
Operating Income $.68 $.57
Net realized capital gains (losses) .03 (.04)
---- ----
NET INCOME $.71 $.53
==== ====
WEIGHTED AVERAGE SHARES OUTSTANDING 13,047 12,997
====== ======
</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>
Three Months
Ended March 31,
-------------------------
1996 1995
---- ----
<S> <C> <C>
OPERATING ACTIVITIES
Net income $9,264 $ 6,886
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in policy liabilities 18,754 15,039
Increase (decrease) in federal income taxes 278 4,814
Decrease (increase) in reinsurance balances (8,217) (1,132)
(Increase) decrease in agents' balances and
premiums receivable (82) 2,423
Change in deferred policy acquisition costs (2,358) (581)
Decrease (increase) in accrued investment income 634 (98)
Depreciation and amortization 938 671
Realized capital (gains) losses (691) 756
Other (2,675) (273)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,845 28,505
INVESTING ACTIVITIES
Sales of equity securities 5,534 1,256
Sales of available for sale securities 17,217 6,412
Calls, maturities and paydowns of fixed maturities 21,825 33,521
Purchases of securities (59,512) (61,449)
Net( purchases) sales of short-term investments (2,193) (10,050)
Purchase of home office building and equipment (160) 725
Purchase of data processing equipment and software (75) 90
-------- --------
NET CASH (USED IN) INVESTING ACTIVITIES (17,364) (29,495)
FINANCING ACTIVITIES
Cash dividends paid (1,568) (1,563)
Issuance of Common Stock 504 226
-------- --------
NET CASH (USED IN) FINANCING ACTIVITIES (1,064) (1,337)
-------- --------
INCREASE (DECREASE) IN CASH (2,583) (2,327)
CASH AT BEGINNING OF PERIOD 5,115 6,362
-------- --------
CASH AT END OF PERIOD $2,532 $4,035
====== ======
</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 three-month period ended March 31,
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>
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 $1,561 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
</TABLE>
4. At March 31, 1996, options to purchase 274,696 shares of Common Stock, at
per share exercise prices ranging from $12.79 to $31.88, were outstanding,
compared to options to purchase 338,549 shares of Common Stock, at per
share exercise prices ranging from $7.87 to $30.33, outstanding at March
31, 1995 under the Company's stock option plans (the "Plans"). Options to
purchase 96,576 and 96,541 shares of Common Stock were exercisable at March
31, 1996 and March 31, 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 375,000
and 67,500 shares, respectively, of the Company's Common Stock at $50.00 per
share at any time through December 31, 1999, which options
were outstanding at March 31, 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 March 31, 1996 and 1995,
such earned commissions accrued were $92,000 and ($186,000), 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 March 31,
1996 and 1995, claims adjusting expenses included with underwriting and
other expenses amounted to $44,000 and $94,000, respectively.
7. The components of the net reinsurance recoverables balances in the
accompanying balance sheets were as follows:
<TABLE>
<CAPTION>
March 31, 1996 December 31, 1995
-------------- -----------------
(in thousands)
<S> <C> <C>
Ceded paid losses recoverable $ 6,730 $ 2,639
Ceded unpaid losses and LAE 80,509 73,043
Ceded unearned premiums 5,065 5,541
Ceded reinsurance payable (1,150) (4,268)
------- --------
TOTAL $91,154 $76,955
======= =======
</TABLE>
The reinsurance ceded components of the amounts relating to the
accompanying income statements were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------
1996 1995
---- ----
(in thousands)
<S> <C> <C>
Ceded premiums earned $ 12,292 $9,112
Ceded incurred losses $ 9,647 $5,082
Ceded incurred LAE $ 3,218 $2,257
</TABLE>
-8-
<PAGE>
<PAGE>
Item 1. Notes to Consolidated Financial Statements (Unaudited)--Continued
The effect of reinsurance on premiums written and earned at March 31, 1996
and 1995 was as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
--------------------------------------------------------
1996 1995
Premiums Premiums
----------------------- -----------------------
Written Earned Written Earned
-------- -------- ------- --------
(in thousands)
<S> <C> <C> <C> <C>
Direct $73,395 $68,140 $56,055 $54,256
Assumed 1,465 2,446 1,203 610
Ceded (13,131) (12,292) (9,088) (9,112)
------- ------- ------ -----
Net $61,729 $58,294 $48,170 $45,754
======= ======= ======= =======
</TABLE>
8. During the first quarter of 1996, the Company adopted FASB statement No.
121, "Accounting for the Impairment of Long-Lived Assets an for Long-Lived
Assets to be Disposed of, "("FASB 121") 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-
<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 March 31, 1996 Compared to Three Months Ended March 31, 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 March 31, 1995 to 1996
----------------------- -----------------
1996 1995 Amount %
------ ------ -------- -----
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $24,098 $20,527 $3,571 17.4
General liability 16,910 10,040 6,870 68.4
Surety 11,648 9,653 1,995 20.7
Workers' compensation 3,049 3,895 (846) (21.7)
Other 2,589 1,639 950 58.0
--------- -------- ----------
Total $58,294 $45,754 $12,540 27.4
======= ======= =======
</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 March 31, Ended March 31,
------------------------ --------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Losses 45.5% 47.0% 45.5% 47.0%
Loss adjustment expenses (LAE) 14.0 14.3 15.3 15.2
---- ---- ---- ----
Losses and LAE 59.5 61.3 60.8 62.2
Acquisition, underwriting, interest, and
other expenses 31.9 30.3 31.2 31.2
---- ---- ---- ----
Total combined ratio 91.4% 91.6% 92.0% 93.4%
==== ==== ==== ====
</TABLE>
A variety of factors accounted for the 27.4% 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.
-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 social services, alarms and guards,
pest control, umbrella, 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, and of bonds for
small contractors, miscellaneous bonds, and bail bonds also showing substantial
percentage increases.
Net premiums earned for the workers' compensation line decreased primarily as a
result of decreases in the specialty niche program for cotton gins and other
smaller programs due to the Company's decision not to renew accounts deemed
unprofitable, and decreased required participation in the National Workers'
Compensation Reinsurance Pools. 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 the earthquake program. These increases were partially offset by
decreases in other miscellaneous small programs.
Net investment income before realized capital gains increased 15.6% due
principally to increases in investable assets resulting from the proceeds of the
$25 million borrowed in June, 1995, 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 41.7% due to the aforementioned increase in net investment
income and the realization of capital gains in the 1996 period compared to
realized 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 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 30.6% 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 29.0% 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 26.5% compared to the 27.4% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased at a 24.6% rate as
a result of a 23.4% increase in losses and a 28.7% increase in LAE. The increase
in losses and LAE was disproportionate to that of net earned premiums 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 28.7%
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 27.8% 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 commissions, increased
staffing and marketing expenses related to expansion, and salary increases. The
26.1% increase in underwriting, other expenses, and interest expense was
primarily the result of the interest asssociated with the $25 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 1.4
percentage points to 92.0% as a result of the above.
The foregoing changes resulted in income before taxes of $12,740,000 for the
1996 quarter. A 41.5% increase from the comparable 1995 quarter. Net income for
the period increased by $2,378,000 or 34.5%.
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 March 31, 1996, $798.6 million in total assets were comprised of the
following: 71.0% cash and investments, 11.4% net reinsurance recoverables, 6.3%
premiums receivable, 3.5% home office building and equipment, 5.8% deferred
expenses (federal income taxes and policy acquisition costs), and 2.0% other
assets.
The Company's subsidiaries maintain liquid operating positions and follow
investment guidelines that are intended to provide for an acceptable return on
investment while preserving capital, maintaining sufficient liquidity to meet
their obligations, and as to the Company's insurance subsidiaries, maintaining a
sufficient margin of capital and surplus to ensure their unimpaired ability to
write insurance and assume reinsurance.
-12-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
The following table provides a profile of the Company's fixed maturities
investment portfolio by rating at March 31, 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 $15,266) $324,207 $324,207 61.5%
AA/Aa 83,868 83,868 15.9
A/A 81,380 81,380 15.4
BBB/Baa 37,418 37,418 7.1
All other 788 788 0.1
-------- -------- -----
Total $527,661 $527,661 100.0%
======== ======== =====
</TABLE>
Cash flow generated from operations for the three-month periods ended March 31,
1996 and 1995 was $15.8 million, and $28.5 million, respectively, amounts
adequate to meet all obligations during the periods.
In April 1992, the Company commenced paying quarterly cash dividends to
shareholders. Cash dividends declared in the three-month periods ended March 31,
1996 and 1995 were $1,573,000 and $1,562,000, 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.
-13-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
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
December 31, 1995, Frontier recorded a subrogation recoverable of approximately
$19,000,000 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.
-14-
<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 February 29, 1996, the Company announced that it executed definitive
agreements to acquire, through its wholly owned subsidiary, Frontier Insurance
Company, 100% of the stock of United Capital Holding Company, and pursuant to a
second and independent transaction a 33% ownership interest in
Townsquare Title Insurance Services.
The acquisition of United Capital for $30.92 million includes its respective
subsidiaries, United Capital Insurance Company, United Capital Managers, Inc.,
and Fischer Underwriting Group, Incorporated. The transaction, subject to
regulatory approval, is expected to close in May 1996.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits.
None.
b. Reports on Form 8-K.
None.
-15-
<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: May 13, 1996 Frontier Insurance Group, Inc.
------------------------------
(Registrant)
By: /s/ Walter A. Rhulen
----------------------------
Walter A. Rhulen
Chairman of the Board and
President and Acting
Principal Financial Officer
-16-
<PAGE>
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
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