<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 March 31, 1997
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, 1997 was 14,721,175.
Page 1 of 16 pages
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FRONTIER INSURANCE GROUP, INC.
<TABLE>
<CAPTION>
INDEX PAGE
----- ----
<S> <C>
PART I- FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets at
March 31, 1997 (Unaudited) and December 31, 1996....................................... 3-4
Consolidated Statements of Income (Unaudited) for
the Three Months Ended March 31, 1997 and 1996......................................... 5
Consolidated Statements of Cash Flows (Unaudited)
for the Three Months Ended March 31, 1997 and 1996..................................... 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
ASSETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- -------------
(Unaudited)
<S> <C> <C>
Investments:
Securities, available for sale--at fair value:
Fixed maturities (amortized cost: 1997--$712,465; 1996--$680,281) $ 707,199 $ 685,277
Equity securities (cost: 1997--$19,505; 1996--$13,871) 20,351 16,271
Short-term investments 102,547 133,835
Investment in limited liability corporation 3,018 2,937
---------- ----------
TOTAL INVESTMENTS 833,115 838,320
Cash 15,688 8,332
Agents' balances due, less allowances for doubtful accounts
(1997--$2,226; 1996--$2,225) 50,794 50,558
Premiums receivable from insureds, less allowances for doubtful accounts
(1997--$55; 1996--$60) 27,489 26,225
Net reinsurance recoverables less allowances for possible uncollectible amounts
(1997--$561; 1996--$517) 209,569 192,569
Accrued investment income 9,778 9,364
Federal income taxes recoverable 1,165 3,987
Deferred policy acquisition costs 36,834 32,871
Deferred federal income tax asset 29,540 27,620
Home office building, property and equipment--at cost, less accumulated
depreciation and amortization (1997--$12,158; 1996--$11,184) 40,130 37,167
Intangible assets, less accumulated amortization (1997--$4,235; 1996--$3,808) 11,311 11,738
Other assets 10,507 7,656
---------- ----------
TOTAL ASSETS $1,275,920 $1,246,407
========== ==========
</TABLE>
See notes to consolidated financial statements (unaudited).
-3-
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--Continued
LIABILITIES AND SHAREHOLDERS' EQUITY
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
----------- ------------
(Unaudited)
<S> <C> <C>
LIABILITIES
Policy liabilities:
Unpaid losses $ 452,669 $ 429,506
Unpaid loss adjustment expenses 116,478 109,567
Unearned premiums 180,891 185,728
---------- ----------
TOTAL POLICY LIABILITIES 750,038 724,801
Funds withheld under reinsurance contracts 72,112 64,065
Cash dividend payable to shareholders 1,905 1,904
Other liabilities 13,688 20,110
---------- ----------
TOTAL LIABILITIES 837,743 810,880
COMMITMENTS AND CONTINGENCIES
GUARANTEED PREFERRED BENEFICIAL INTEREST
IN COMPANY'S CONVERTIBLE SUBORDINATED
DEBENTURES 166,979 166,953
SHAREHOLDERS' EQUITY--
Preferred Stock, par value $.01 per share; authorized and unissued--
1,000,000 shares
Common Stock, par value $.01 per share (shares authorized:
50,000,000, shares issued: 1997--14,703,968;
1996--14,689,552) 147 147
Additional paid-in capital 222,289 221,984
Net unrealized (losses) gains (2,873) 4,807
Retained earnings 52,423 42,424
---------- ----------
SUBTOTAL 271,986 269,362
Less treasury stock--at cost (45,540 shares) 788 788
---------- ----------
TOTAL SHAREHOLDERS' EQUITY 271,198 268,574
---------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $1,275,920 $1,246,407
========== ==========
Book value per share $18.44 $18.28
====== ======
</TABLE>
See notes to consolidated financial statements (unaudited).
-4-
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Three Months
Ended March 31,
---------------------------
1997 1996
------- --------
<S> <C> <C>
REVENUES
Premiums written $105,812 $74,860
Premiums ceded (26,499) (13,131)
-------- -------
NET PREMIUMS WRITTEN 79,313 61,729
Increase in net unearned premiums (1,506) (3,435)
-------- -------
NET PREMIUMS EARNED 77,807 58,294
Net investment income 11,893 7,786
Realized capital gains 721 691
-------- -------
TOTAL NET INVESTMENT INCOME 12,614 8,477
Gross claims adjusting income 15 25
-------- -------
TOTAL REVENUES 90,436 66,796
EXPENSES
Losses 31,116 26,512
Loss adjustment expenses 14,558 8,931
Amortization of policy acquisition costs 15,951 12,381
Underwriting and other expenses 9,231 5,791
Minority interest in income of consolidated subsidiary trust 2,732
Interest expense 441
-------- -------
TOTAL EXPENSES 73,588 54,056
-------- -------
INCOME BEFORE INCOME TAXES 16,848 12,740
INCOME TAXES
State 103 115
Federal 4,841 3,361
-------- -------
TOTAL INCOME TAXES 4,944 3,476
-------- -------
NET INCOME $ 11,904 $ 9,264
======== =======
PER SHARE DATA:
Primary earnings per common share $.81 $.65
==== ====
Fully diluted earnings per common share $.76 $.65
==== ====
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING (in thousands):
Primary 14,695 14,352
Fully diluted 18,379 14,352
</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,
-------------------------
1997 1996
------- --------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $11,904 $ 9,264
Adjustments to reconcile net income to net cash provided
by operating activities:
Increase in policy liabilities 25,237 18,754
Increase in reinsurance balances (8,953) (8,217)
Increase in agents' balances and premiums receivable (1,500) (82)
Increase in deferred policy acquisition costs (3,963) (2,358)
(Increase) decrease in accrued investment income (414) 634
Deferred income tax expense 2,220 278
Depreciation and amortization 1,551 938
Realized capital gains (721) (691)
Other (6,455) (2,675)
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 18,906 15,845
INVESTING ACTIVITIES
Proceeds from sales of fixed maturities available-for-sale 14,116 17,217
Proceeds from calls, paydowns and maturities of fixed maturities
available-for-sale 22,918 21,825
Proceeds from sales of equity securities 1,636 5,534
Purchases of securities (75,891) (59,512)
Net sales (purchases) of short-term investments 31,288 (2,193)
Additions and improvement to home office building (1,682) (160)
Purchase of property and equipment (2,257) (75)
Proceeds from sales of property and equipment 2
Investment in limited liability corporation (81)
------- -------
NET CASH USED IN INVESTING ACTIVITIES (9,951) (17,364)
FINANCING ACTIVITIES
Cash dividends paid (1,904) (1,568)
Issuance of common stock 305 504
------- -------
NET CASH USED IN FINANCING ACTIVITIES (1,599) (1,064)
------- -------
INCREASE (DECREASE) IN CASH 7,356 (2,583)
CASH AT BEGINNING OF YEAR 8,332 5,115
------- -------
CASH AT END OF YEAR $15,688 $ 2,532
======= =======
</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, 1996.
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 1996 financial statements have been
reclassified to conform to the 1997 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,
1997 are not necessarily indicative of the results that may be expected for
the year ending December 31, 1997.
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
---------- ------ ------- -------- ---- -------------
(in thousands)
<S> <C> <C> <C> <C> <C>
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
11/21/96 12/27/96 01/14/97 $.13 per share cash $1,904 N/A
02/27/97 03/24/97 04/18/97 $.13 per share cash $1,905 N/A
</TABLE>
(1) Cash in lieu of fractional shares.
4. At March 31, 1997, options to purchase 321,441 shares of common stock, at
per share exercise prices ranging from $18.86 to $39.75 were outstanding,
compared to options to purchase 274,696 shares of common stock, at per
share exercise prices ranging from $7.15 to $27.57, outstanding at March
31, 1996 under the Company's stock option plans (the "Plans"). Options to
purchase 130,690 and 96,576 shares of common stock were exercisable at
March 31, 1997 and March 31, 1996, 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 March 31, 1997.
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, 1997 and 1996,
such earned commissions accrued were $574,000 and $92,000, 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,
1997 and 1996, claims adjusting expenses included with underwriting and
other expenses amounted to $15,000 and $25,000, respectively.
7. The components of the net reinsurance recoverables balances in the
accompanying balance sheets were as follows:
<TABLE>
<CAPTION>
March 31, 1997 December 31, 1996
-------------- -----------------
(in thousands)
<S> <C> <C>
Ceded paid losses recoverable $ 8,527 $ 7,519
Ceded unpaid losses and LAE 189,042 165,467
Ceded unearned premiums 26,059 32,403
Ceded reinsurance payable (14,059) (12,820)
-------- --------
TOTAL $209,569 $192,569
======== ========
</TABLE>
The reinsurance ceded components of the amounts relating to the
accompanying income statements were as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
-------------------------------------
1997 1996
------- --------
(in thousands)
<S> <C> <C>
Ceded premiums earned $32,842 $12,292
Ceded incurred losses 27,685 9,647
Ceded incurred LAE 4,705 3,218
</TABLE>
The effect of reinsurance on premiums written and earned at March 31, 1997
and 1996 was as follows:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------------------------------
1997 1996
Premiums Premiums
---------------------- ---------------------
Written Earned Written Earned
--------- -------- ------- -------
(in thousands)
<S> <C> <C> <C> <C>
Direct $104,244 $108,553 $73,395 $68,140
Assumed 1,568 2,096 1,465 2,446
Ceded (26,499) (32,842) (13,131) (12,292)
-------- -------- ------- ------
Net $ 79,313 $ 77,807 $61,729 $58,294
======== ======== ======= =======
</TABLE>
-8-
<PAGE>
<PAGE>
Item 1. Notes to Consolidated Financial Statements (Unaudited)--Continued
8. In the first quarter of 1997, the Company adopted Financial Accounting
Standards Board Statement 125, "Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities" ("FASB 125"), which
provides accounting and reporting standards for sales, securitizations, and
servicing of receivables and other financial assets, secured borrowing and
collateral transactions, and the extinguishments of liabilities. The
adoption excluded the provisions that deal with securities lending,
repurchase and dollar repurchase agreements, and the recognition of
collateral, which will be adopted in 1998 pursuant to the proposed
amendment. The adoption of FASB 125 did not have a material impact to the
Company's financial position or results of operations.
In February 1997, the Financial Accounting Standards Board issued Statement
128, "Earnings per Share," which is required to be adopted on December 31,
1997. At that time, the Company will be required to change the method
currently used to compute earnings per share and to restate all prior
periods. Under the new requirements for calculating primary earnings per
share, the dilutive effect of stock options will be excluded. The impact is
expected to result in no change in primary earnings per share in either of
the quarters ended March 31, 1997 and 1996. The impact on the calculations
of fully diluted earnings per share for these quarters is not expected to
be material.
-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, 1996.
Three Months Ended March 31, 1997 Compared to Three Months Ended March 31, 1996
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, 1996 to 1997
------------------------- ------------------
1997 1996 Amount %
-------- -------- ------ ---
(dollar amounts in thousands)
<S> <C> <C> <C> <C>
Medical malpractice (including
dental malpractice) $27,907 $24,098 $3,809 15.8
General liability 28,076 16,910 11,166 66.0
Surety 12,720 11,648 1,072 9.2
Workers' compensation 808 3,049 (2,241) (73.5)
Commercial earthquake 1,744 512 1,232 240.6
Other 6,552 2,077 4,475 215.5
------- ------- -------
Total $77,807 $58,294 $19,513 33.5
======= ======= =======
</TABLE>
The following table sets forth the Company's combined ratio calculated on a
statutory basis ("Statutory Combined Ratio") and on the basis of generally
accepted accounting principles ("GAAP Combined Ratio") for the periods
indicated:
<TABLE>
<CAPTION>
Statutory Combined Ratio GAAP Combined Ratio
-------------------------- -------------------------
Three Months Three Months
Ended March 31, Ended March 31,
-------------------------- ------------------------
1997 1996 1997 1996
-------- -------- -------- ------
<S> <C> <C> <C> <C>
Losses 40.0% 45.5% 40.0% 45.5%
Loss adjustment expenses (LAE) 18.7 14.0 18.7 15.3
---- ---- ---- ----
Losses and LAE 58.7 59.5 58.7 60.8
Acquisition, underwriting, interest, and
other expenses 33.4 31.9 32.3 31.2
---- ---- ---- ----
Total combined ratio 92.1% 91.4% 91.0% 92.0%
==== ==== ==== ====
</TABLE>
A variety of factors accounted for the 33.5% growth in net premiums earned, the
principal factor being increases in the Company's core and new program business
and as a result of the acquisitions of United Capitol and Regency Insurance
Company in the second and third quarter of 1996, respectively. This increase was
partially offset by a decrease in workers' compensation, particularly the cotton
gin program that the Company discontinued during 1996, a decrease in social
services programs due to price competition and to an increase in reinsurance
costs associated with the aggregate excess of loss reinsurance contract.
The increase in medical malpractice net premiums earned was primarily
attributable to an increase in the number of physicians insured in the programs
for psychiatrists and alternative risks, geographical expansion in Ohio, Texas,
Michigan and Illinois, growth in the dental program endorsed by the Academy of
General Dentistry, partially offset by the reclassification of net premiums
written in the social services programs to the general liability line of
business.
Net premiums earned for the general liability line increased primarily because
of increases in various
-10-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
programs, including continued growth in the social services programs, alarms
and guards, demolition contractors, excess employer's liability, and asbestos
abatement as a result of the acquisition of United Capitol in May 1996. These
increases were partially offset by a decrease in net premiums earned in the
umbrella and crane operator liability programs.
Growth in surety net premiums earned continued in 1997, and was primarily
attributable to expanded writings of license and permit bonds, small contractors
bonds and miscellaneous bonds.
Net premiums earned for the workers' compensation line decreased primarily as a
result of decreases in the specialty niche programs for cotton gins and feed
lots, decreases in social services programs due to price competition and lesser
required participation in the National Workers' Compensation Reinsurance Pools.
The decrease was partially offset by increases in workers' compensation premiums
written in the alternative risk program which the Company initiated in 1996.
Net premiums earned for the commercial earthquake program increased primarily
due to the growth in the number of policies written in 1996 which are earned pro
rata in 1997, partially offset by the planned decrease in this line of business.
Net premiums earned for the other lines of business increased primarily due to
increased volume in commercial package policies in the social services program,
and in the mobile homeowners program and auto physical damage business as a
result of the acquisition of Regency effective in June 1996. These increases
were partially offset by decreases in other miscellaneous small programs.
Net investment income before realized capital gains and losses increased 52.7%
due principally to increases in invested assets resulting from the proceeds of
the issuance of Convertible Trust Originated Preferred Securities ("Convertible
TOPrS") in October 1996, cash inflow from regular operations, and the
contribution to net investment income by United Capitol and Regency, partially
offset by the interest charge on funds held by the Company for the benefit of
the reinsurer of the Company's aggregate excess of loss reinsurance contract.
Total net investment income increased 48.8% due to the aforementioned increase
in net investment income and a significantly lower increase in realized capital
gains of 4.3%. The average annual pre-tax yield on investments, excluding the
charge for funds held under the aggregate excess loss of reinsurance contract
and realized capital gains and losses, was 6.5%, unchanged from the previous
year. The average annual after-tax yield on investments, excluding the charge
for funds held under the aggregate excess of loss reinsurance contract and
realized capital gains and losses, was 5.1%.
Gross claims adjusting income decreased 40.0% 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 35.4% as a result of the above.
Total expenses increased by 36.1% compared to the 33.5% increase in net premiums
earned. Losses and loss adjustment expenses ("LAE") increased at a 28.9% rate as
a result of a 17.4% increase in losses and a 63.0% 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 64% and 65% for the 1997 and 1996 accident years,
respectively, which resulted in a loss and LAE component of the GAAP Combined
Ratio 2.1 percentage points lower than in the comparable 1996 period. The 63.0%
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 38.6% increase in
the amortization of policy acquisition costs, underwriting and other expenses
was attributable primarily to an increase in direct commission expense resulting
from growth in programs with higher commission rates, increased staffing and
marketing expenses related to expansion,
-11-
<PAGE>
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations--Continued
salary increases and the contribution of total expenses associated with the
acquisition of United Capitol and Regency in 1996. The $441,000 decrease in
interest expense was primarily the result of the repayment and termination of
the line of credit in the fourth quarter of 1996. The Company also incurred
approximately $2,732,000 of expenses in 1996 associated with the Convertible
TOPrS. As the non-claim related component of the GAAP Combined Ratio increased
at a greater rate than premiums earned, the non-claim component was 1.1
percentage points higher than in the comparable 1996 period. The total GAAP
Combined Ratio decreased by 1.0 percentage point to 91.0 as a result of the
above.
The foregoing changes resulted in income before taxes of $16,848,000 for the
1997 quarter, a 32.2% increase from the comparable 1996 quarter. Net income for
the period increased by $2,640,000 or 28.5%.
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, 1997, $1.3 billion in total assets were comprised of the following:
66.5% cash and investments, 16.4% net reinsurance recoverables, 6.1% premiums
receivable, 3.1% home office building and equipment, 5.2% deferred expenses
(federal income taxes and policy acquisition costs), and 2.7% 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, 1997:
<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 $409,984 $409,984 58.0
of $22,339) 111,734 111,734 15.8
AA/Aa 138,207 138,207 19.5
A/A 47,250 47,250 6.7
BBB/Baa 24 24 0.0
-------- -------- -----
All other $707,199 $707,199 100.0
-------- -------- -----
-------- -------- -----
Total
</TABLE>
Cash flow generated from operations for the three-month periods ended March 31,
1997 and 1996 was $18.9 million, and $15.8 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 during the three-month periods ended
March 31, 1997 and 1996 were $1,905,000 and $1,568,000, 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 prior to 1997. During the first quarter
of 1997, the Company elected to include license and permit bonds, fidelity bonds
and certain other miscellaneous surety bonds in the net premiums earned ceded
under the contract. The loss and LAE ratio above which the reinsurance provides
coverage is 65% and 64% for accident years 1996 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 1997 and 1996 the Company ceded 13.0%
and 13.5% 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 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. In January
1997, the New York Court of Claims rendered a decision granting summary
judgement to the Company on three SUNY cases that were previously paid by the
Company. This decision has been appealed 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 and believes that the
Company's exposure to liability under such lawsuits, if any, would not have a
material adverse effect on the Company's financial condition.
-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 March 31, 1997, the Company announced that it executed a definitive agreement
to acquire 100% of the stock of Lyndon Property Insurance Company and its six
subsidiaries, Lyndon Life Insurance Company, Twin Mercury Life Insurance
Company, Gulfco Life Insurance Company, Lyndon Southern Insurance Company,
Lyndon - DFS Warranty Services, Inc. and Lyndon General Agency of Texas, Inc.,
subject to certain closing conditions and regulatory approval, at a purchase
price of approximately $92,000,000. The transaction is expected to close in May
1997.
On April 30, 1997, the Company executed a commitment letter with Deutsche Bank
AG, New York Branch ("Deutsche"), whereby Deutsche will provide a $100,000,000
Revolving Credit Facility for five years, subject to the execution of a
definitive credit agreement. The Company proposes to borrow $62 million to fund
the purchase of Lyndon Property Insurance Company and its six subsidiaries. The
transaction is expected to close in May 1997.
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 15, 1997 Frontier Insurance Group, Inc.
--------------------------------------
(Registrant)
By: /s/ Mark H. Mishler
--------------------------------------
Mark H. Mishler
Vice President - Finance and Treasurer
(Principal Financial and
Accounting Officer and Duly
Authorized Officer)
-16-
<PAGE>
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<FISCAL-YEAR-END> DEC-31-1997
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