<PAGE>
<PAGE>
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): JUNE 3, 1997
FRONTIER INSURANCE GROUP, INC.
(Exact name of registrant as specified in charter)
<TABLE>
<S> <C> <C>
DELAWARE 0-15022 14-1681606
(State or other juris- (Commission (IRS Employer
diction of incorp- File Number) Identification No.)
oration)
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
NOT APPLICABLE
(Former name or former address, if changed since last report)
<PAGE>
<PAGE>
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA FINANCIAL INFORMATION AND EXHIBITS.
(a) Financial Statements of Business Acquired.
The audited consolidated financial statements of Lyndon
Property Insurance Company and subsidiaries as of December
31, 1996 and 1995 and for each of the three years then
ended (with Report of Independent Auditors thereon) and
unaudited interim consolidated financial statements as of
March 31, 1997 and for the three months ended March 31,
1997 and March 31, 1996.
(b) Pro Forma Financial Information.
The unaudited pro forma consolidated balance sheet as of
March 31, 1997 and consolidated statements of income for
the three months ended March 31, 1997 and the year ended
December 31, 1996, with the notes thereto.
(c) Exhibits.
23(b) Consent of Independent Public Accountants
<PAGE>
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Lyndon Property Insurance Company:
We have audited the accompanying consolidated balance sheets of Lyndon Property
Insurance Company (a Missouri corporation) and subsidiaries as of December 31,
1996 and 1995, and the related consolidated statements of income, stockholder's
equity and cash flows for the year ended December 31, 1996 and the three months
ended December 31, 1995 and the combined statements of income, stockholder's
equity and cash flows of Lyndon Property Insurance Company and Lyndon Life
Insurance Company for the nine months ended September 30, 1995 and the year
ended December 31, 1994. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Lyndon Property Insurance
Company and subsidiaries as of December 31, 1996 and 1995, and the results of
their operations and their cash flows for the year ended December 31, 1996, the
three months ended December 31, 1995, the nine months ended September 30, 1995
and the year ended December 31, 1994, in conformity with generally accepted
accounting principles.
As discussed in Note 2 of the accompanying notes to the financial statements,
the Company adopted new accounting standards promulgated by the Financial
Accounting Standards Board, changing its method of accounting, effective January
1, 1994, for certain investments in debt and equity securities.
ARTHUR ANDERSEN LLP
St. Louis, Missouri
June 13, 1997
<PAGE>
<PAGE>
Lyndon Property Insurance Company and Subsidiaries
Consolidated Balance Sheets
As of December 31, 1996 and 1995
(Under Ownership of Mercury Finance Company)
(Dollars in thousands, except share data)
<TABLE>
<CAPTION>
Unaudited
3/31/97 12/31/96 12/31/95
---------- -------- --------
<S> <C> <C> <C>
Assets
Investments:
Investments Available-for-Sale at
fair value (amortized cost of
$193,888, $160,332 and $170,413) $192,936 $161,781 $173,773
Investments Held-to-Maturity at
amortized cost (fair value of
$8,215, $8,025 and $6,444) 8,047 7,765 6,120
Short-term Investments (at amortized
cost which approximates fair value) 13,832 43,411 52,638
--------- --------- ---------
Total Investments 214,815 212,957 232,531
Cash 3,868 3,409 10,701
Accrued Investment Income 3,322 3,214 3,935
Receivable from Mercury Finance - 9,048 89
Accounts Receivable 29,979 31,401 118,379
Deferred Policy Acquisition Costs 43,503 41,648 4,039
Reinsurance Recoverable 98,353 91,665 28,634
Deferred Income Taxes - - 2,833
Other Assets 2,004 9,309 14,243
--------- --------- ---------
Total Assets $395,844 $402,651 $415,384
========= ========= =========
Liabilities
Policy Liabilities:
Unpaid Losses $ 48,846 $ 32,420 $ 51,026
Unpaid Loss Adjustment Expenses 498 357 13
Unearned Premiums 178,106 206,796 139,053
--------- --------- ---------
Total Policy Liabilities 227,450 239,573 190,092
Deferred Income Taxes 4,390 4,957 -
Accrued Income Taxes 2,184 106 10,659
Due to Mercury Finance 500 - -
Accounts Payable 30,026 38,124 109,328
Other Liabilities 12,563 4,127 5,292
--------- --------- ---------
Total Liabilities 277,113 286,887 315,371
--------- --------- ---------
Stockholder's Equity
Common Stock ($1,000 par value;
authorized 4,000 shares, issued
and outstanding 4,000 shares) 4,000 4,000 4,000
Additional Paid-in Capital 78,178 78,178 78,178
Net Unrealized (Losses) Gains on Investments (617) 942 2,184
Retained Earnings 37,170 32,644 15,651
--------- --------- ---------
Total Stockholder's Equity 118,731 115,764 100,013
--------- --------- ---------
Total Liabilities and Stockholder's Equity $395,844 $402,651 $415,384
========= ========= =========
</TABLE>
See Notes to Financial Statements
<PAGE>
<PAGE>
Lyndon Property Insurance Company and Subsidiaries
Consolidated Statements of Income
For the Three Months Ended March 31, 1997 and 1996
(Under Ownership of Mercury Finance Company)
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Three
Months Months
Ended Ended
3/31/97 3/31/96
--------- ---------
<S> <C> <C>
Revenues
Premiums Written $43,660 $45,672
Premiums Ceded 30,026 24,330
------- -------
Net Premiums Written 13,634 21,342
(Decrease) Increase in Unearned Premiums (9,586) 5,271
------- -------
Net Premiums Earned 23,220 16,071
Net Investment Income 3,023 2,927
Net Realized Investment Gains (Losses) 29 (48)
Other Revenues 100 276
------- -------
Total Revenues 26,372 19,226
Expenses
Losses 10,938 4,124
Loss Adjustment Expenses 496 370
Amortization of Policy Acquisition Costs,
net of reinsurance allowances of $7,744
and $1,254 3,053 (3,489)
Amortization of Present Value of Future
Business 2,229 3,851
Operating Expenses 2,911 3,554
------- -------
Total Expenses 19,627 8,410
Income Before Income Tax Expense 6,745 10,816
Income Tax Expense 2,219 3,544
------- -------
Net Income $ 4,526 $ 7,272
======= =======
</TABLE>
See Notes to Financial Statements
<PAGE>
<PAGE>
Lyndon Property Insurance Company and Subsidiaries
Consolidated Statements of Income
For the Year Ended December 31, 1996
and the Three Months Ended December 31, 1995
(Under Ownership of Mercury Finance Company)
(Dollars in thousands)
<TABLE>
<CAPTION>
Three
Year Months
Ended Ended
12/31/96 12/31/95
-------- --------
<S> <C> <C>
Revenues
Premiums Written $226,081 $ 51,311
Premiums Ceded 129,467 30,197
-------- --------
Net Premiums Written 96,614 21,114
Increase (Decrease) in Unearned Premiums 13,337 (9,500)
-------- --------
Net Premiums Earned 83,277 30,614
Net Investment Income 12,082 4,250
Net Realized Investment Gains (Losses) 606 (24)
Other Revenues 833 --
-------- -------
Total Revenues 96,798 34,840
Expenses
Losses 25,041 11,430
Loss Adjustment Expenses 2,512 109
Reserve Adjustment on Reinsurance Assumed -- (13,542)
Amortization of Policy Acquisition Costs,
net of reinsurance allowances of $9,122
and $1,197 10,999 (973)
Amortization of Present Value of Future
Business 11,080 3,851
Operating Expenses 7,172 23,808
-------- --------
Total Expenses 56,804 24,683
Income Before Income Tax Expense 39,994 10,157
Income Tax Expense 13,012 3,489
-------- --------
Net Income $ 26,982 $ 6,668
======== ========
</TABLE>
See Notes to Financial Statements
<PAGE>
<PAGE>
Lyndon Property Insurance Company
and Lyndon Life Insurance Company
Combined Statements of Income
For the Nine Months Ended September 30, 1995
and the Year Ended December 31, 1994
(Under Ownership of ITT Corporation)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine
Months Year
Ended Ended
9/30/95 12/31/94
-------- --------
<S> <C> <C>
Revenues
Premiums Written $159,215 $123,211
Premiums Ceded 43,002 106,662
-------- --------
Net Premiums Written 116,213 16,549
Increase (Decrease) in Unearned Premiums 23,595 (24,484)
-------- --------
Net Premiums Earned 92,618 41,033
Net Investment Income 30,195 42,140
Net Realized Investment (Losses) Gains (8,174) 2,865
Other Revenues 24,653 13,980
-------- --------
Total Revenues 139,292 100,018
Expenses
Losses 47,723 1,585
Loss Adjustment Expenses 330 92
Reserve Adjustment on Reinsurance Assumed 18,509 12,890
Amortization of Policy Acquisition Costs,
net of reinsurance allowances of $1,922
and $1,068 7,345 689
Operating Expenses 46,277 16,866
Other Expenses 899 1,978
-------- --------
Total Expenses 121,083 34,100
Income Before Income Tax Expense and
Cumulative Effect of Change in
Accounting Principle 18,209 65,918
Income Tax Expense 6,466 22,180
-------- --------
Income Before Cumulative Effect of
Change in Accounting Principle 11,743 43,738
Cumulative Effect of Change in Accounting
Principle, Net of Tax -- (2,978)
-------- --------
Net Income $ 11,743 $ 40,760
======== ========
</TABLE>
See Notes to Financial Statements
<PAGE>
<PAGE>
Lyndon Property Insurance Company and Subsidiaries
Consolidated Statements of Stockholder's Equity
For the Three Months Ended December 31, 1995
and the Year Ended December 31, 1996
(Under Ownership of Mercury Finance Company)
(Dollars in thousands)
<TABLE>
<CAPTION>
Net
Unrealized
Additional Gains
Common Paid-in Retained (Losses) on
Stock Capital Earnings Investments Total
------- ---------- -------- ------------- ------
<S> <C> <C> <C> <C> <C>
Balances at 10/01/95 $4,000 $78,178 $ 8,994 $ -0- $ 91,172
Net Income 6,668 6,668
Loss on Related-Party
Investment Sales (11) (11)
Change in Unrealized Gains
(Losses) on Available-
for-Sale Securities,
Net of Tax 2,184 2,184
------ ------- -------- ------- --------
Balances at 12/31/95 4,000 78,178 15,651 2,184 100,013
------ ------- -------- ------- --------
Net Income 26,982 26,982
Dividends to Stockholder (10,000) (10,000)
Gain on Related-Party
Investment Sales 11 11
Change in Unrealized Gains
(Losses) on Available-
for-Sale Securities,
Net of Tax (1,242) (1,242)
------ ------- -------- ------- --------
Balances at 12/31/96 4,000 78,178 32,644 942 115,764
------ ------- -------- ------- --------
Unaudited
Net Income 4,526 4,526
Change in Unrealized Gains
(Losses) on Available-
for-Sale Securities,
Net of Tax (1,559) (1,559)
------ ------- -------- ------- --------
Balances at 3/31/97 $4,000 $78,178 $ 37,170 $ (617) $118,731
====== ======= ======== ======= ========
</TABLE>
See Notes to Financial Statements
<PAGE>
<PAGE>
Lyndon Property Insurance Company
and Lyndon Life Insurance Company
Combined Statements of Stockholder's Equity
For the Year Ended December 31, 1994
and the Nine Months Ended September 30, 1995
(Under Ownership of ITT Corporation)
(Dollars in thousands)
<TABLE>
<CAPTION>
Net
Common Unrealized
Stock and Gains
Paid-in Retained (Losses) on
Capital Earnings Investments Total
--------- -------- ------------ -----
<S> <C> <C> <C> <C>
Balances at 12/31/93 $106,900 $ 354,137 $ 116 $ 461,153
Net Income 40,760 40,760
Dividends to Stockholder (35,400) (35,400)
Loss on Related-Party
Investment Sales (8,121) (8,121)
Change in Unrealized Gains
(Losses) on Available-
for-Sale Securities,
Net of Tax (17,946) (17,946)
-------- --------- -------- ---------
Balances at 12/31/94 106,900 351,376 (17,830) 440,446
-------- --------- -------- ---------
Net Income 11,743 11,743
Dividends to Stockholder (15,518) (382,874) (398,392)
Gain on Related-Party
Investment Sales 6,336 6,336
Intercompany Reinsurance
Recapture 13,419 13,419
Change in Unrealized Gains
(Losses) on Available-
for-Sale Securities,
Net of Tax 17,825 17,825
-------- --------- -------- ---------
Balances at 9/30/95 $ 91,382 $ -0- $ (5) $ 91,377
======== ========= ======== =========
</TABLE>
See Notes to Financial Statements
<PAGE>
<PAGE>
Lyndon Property Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Three Months Ended March 31, 1997 and 1996
(Under Ownership of Mercury Finance Company)
(Dollars in thousands)
<TABLE>
<CAPTION>
Unaudited Unaudited
Three Three
Months Months
Ended Ended
3/31/97 3/31/96
--------- ----------
<S> <C> <C>
Operating Activities:
Net Income $ 4,526 $ 7,272
Adjustments to Net Income:
Net Realized Investment Gains (29) (221)
Net Amortization of Bond
Premium/Discount 647 235
Increase in Deferred Policy
Acquisition Costs (1,855) (12,510)
Changes in:
Liabilities for Unpaid Losses
and Loss Adjustment Expenses 16,567 (17,587)
Reinsurance Recoverable (6,688) (20,240)
Unearned Premiums (28,690) 15,916
Receivable from Mercury Finance 9,048 4
Accounts Receivable 1,421 74,433
Accounts Payable (8,098) (59,761)
Due to Mercury Finance 501 -
Accrued Investment Income (109) 1,068
Other 17,853 (7,748)
-------- --------
Net Cash Provided from (Used for)
Operating Activities 5,094 (19,139)
-------- --------
Investing Activities:
Investments Available-for-Sale:
Purchases (43,448) (15,108)
Proceeds from Sales and Maturities 9,502 34,419
Investments Held-to-Maturity:
Purchases (306) (1,168)
Proceeds from Calls and Redemptions 38 833
-------- --------
Net Cash (Used for) Provided from
Investing Activities (34,214) 18,976
-------- --------
Net Change in Cash and Short-Term
Investments (29,120) (163)
Cash and Short-Term Investments - at
Beginning of Period 46,820 63,339
-------- --------
Cash and Short-Term Investments - at
End of Period $ 17,700 $ 63,176
======== ========
</TABLE>
See Notes to Financial Statements
<PAGE>
<PAGE>
Lyndon Property Insurance Company and Subsidiaries
Consolidated Statements of Cash Flows
For the Year Ended December 31, 1996
and the Three Months Ended December 31, 1995
(Under Ownership of Mercury Finance Company)
(Dollars in thousands)
<TABLE>
<CAPTION>
Year Three Months
Ended Ended
12/31/96 12/31/95
-------- ------------
<S> <C> <C>
Operating Activities:
Net Income
$ 26,982 $ 6,668
Adjustments to Net Income:
Net Realized Investment (Gains) Losses (769) 24
Net Amortization of Bond
Premium/Discount 2,386 (887)
Increase in Deferred Policy
Acquisition Costs (37,609) (7,539)
Deferred Income Taxes 8,459 845
Changes in:
Liabilities for Unpaid Losses
and Loss Adjustment Expenses (18,262) 4,499
Reinsurance Recoverable (63,031) (1,156)
Unearned Premiums 67,743 3,081
Receivable from Mercury Finance (8,959) (89)
Accounts Receivable 86,978 (49,966)
Accounts Payable (71,204) (301)
Accrued Investment Income - 44
Other (6,063) 7,891
--------- ---------
Net Cash Used for Operating
Activities (13,349) (36,886)
--------- ---------
Investing Activities:
Investments Available-for-Sale:
Purchases (83,836) (4,720)
Proceeds from Sales and Maturities 92,258 53,881
Investments Held-to-Maturity:
Purchases (2,360) (401)
Proceeds from Calls and Redemptions 768 211
--------- ---------
Net Cash Provided from
Investing Activities 6,830 48,971
--------- ---------
Financing Activities:
Dividends Paid on Common Stock (10,000) -
Payment to ITT - (98,392)
--------- ---------
Net Change in Cash and Short-
Term Investments (16,519) (86,307)
Cash and Short-Term Investments - at
Beginning of Period 63,339 149,646
--------- ---------
Cash and Short-Term Investments - at
End of Period $ 46,820 $ 63,339
========= =========
</TABLE>
See Notes to Financial Statements
<PAGE>
<PAGE>
Lyndon Property Insurance Company
and Lyndon Life Insurance Company
Combined Statements of Cash Flows
For the Nine Months Ended September 30, 1995
and the Year Ended December 31, 1994
(Under Ownership of ITT Corporation)
(Dollars in thousands)
<TABLE>
<CAPTION>
Nine
Months Year
Ended Ended
9/30/95 12/31/94
------- --------
<S> <C> <C>
Operating Activities:
Net Income $ 11,743 $ 40,760
Cumulative Effect of Change in Accounting
Principle - 2,978
Adjustments to Net Income:
Net Realized Investment Losses (Gains) 8,174 (2,865)
Net Amortization of Bond
Premium/Discount 947 2,221
Decrease (Increase) in Deferred Policy
Acquisition Costs 37,871 (22,639)
Deferred Income Taxes (91,761) 13,958
Changes in:
Liabilities for Unpaid Losses
and Loss Adjustment Expenses 4,861 (8,372)
Reinsurance Recoverable 36,827 48,099
Unearned Premiums (19,545) (49,328)
Intercompany Receivable 4,774 (4,777)
Accounts Receivable 40,610 (61,173)
Intercompany Payable (24,110) (7,527)
Accounts Payable (6,634) 40,403
Accrued Investment Income 4,264 (3,120)
Other 16,285 (18,426)
--------- ---------
Net Cash Provided from (Used for)
Operating Activities 24,306 (29,808)
--------- ---------
Investing Activities:
Investments Available-for-Sale:
Purchases (152,439) (489,900)
Proceeds from Sales and Maturities 374,824 349,488
Investments Held-to-Maturity:
Proceeds from Maturities - 2,646
--------- ---------
Net Cash Provided from (Used for)
Investing Activities 222,385 (137,766)
--------- ---------
Financing Activities:
Dividends Paid on Common Stock (300,000) (35,400)
--------- ---------
Net Change in Cash and Short-
Term Investments (53,309) (202,974)
Cash and Short-Term Investments - at
Beginning of Period 196,891 399,865
--------- ---------
Cash and Short-Term Investments - at
End of Period $ 143,582 $ 196,891
========= =========
</TABLE>
See Notes to Financial Statements
<PAGE>
<PAGE>
Lyndon Property Insurance Company and Subsidiaries
Notes to Financial Statements
(Dollars in Thousands)
NOTE 1: COMPANY OWNERSHIP AND NATURE OF BUSINESS
Lyndon Property Insurance Company, a Missouri domiciled insurance company, and
its subsidiaries ("the Company") provide credit-related and specialty insurance
through a variety of distribution channels in both the financial and specialty
insurance markets primarily throughout the United States. Credit-related
products include collateral protection, credit property, involuntary
unemployment insurance, auto physical damage, credit life and credit accident
and health coverages which are marketed by general agents and market
representatives primarily through finance companies and banks. The Company is
also engaged in the business of direct writing of credit life, accident and
health and various other credit-related insurance policies for customers of
Mercury Finance Company ("Mercury"). Specialty insurance products include auto
residual value, non-standard auto and warranty.
Prior to May 1, 1995, Lyndon Property Insurance Company ("LPIC") and Lyndon Life
Insurance Company ("LLIC") were separate subsidiaries wholly-owned by ITT
Financial Corporation ("Financial"), which was wholly-owned by ITT Corporation,
and then subsequently reorganized as ITT Industries, Inc. ("ITT"). Effective May
1, 1995, Financial was merged with ITT, leaving the direct ownership of LPIC and
LLIC to ITT. The financial statements for 1994 and the nine months ended
September 30, 1995 reflect the combined results of LPIC and LLIC.
On October 20, 1995, Mercury acquired from ITT all of the shares of the Company
for $72,500 in cash and a note payable of $8,600 due in connection with the run-
off of certain reinsurance business. Also on that date, just prior to the sale,
ITT contributed all of the common stock of LLIC to LPIC. For accounting
purposes, the date of the transaction was October 1, 1995. The acquisition was
accounted for under the purchase method of accounting with the adjustments
incorporated in the Company's financial statements. Purchase accounting
adjustments primarily consisted of recording certain investment securities at
fair value, eliminating deferred acquisition costs and establishing an amount
for the present value of future business. The excess of fair value over the cost
of net assets acquired (negative goodwill) relating to the acquisition was
offset against the present value of future business component of the purchase
accounting adjustments.
On December 31, 1995, Mercury contributed all of the common stock of Twin
Mercury Life Insurance Company, an Arizona domiciled life insurer, to LLIC. On
June 1, 1996, Mercury also contributed all of the common stock of Gulfco Life
Insurance Company, a Louisiana domiciled life insurer, to LPIC. Both
contributions were accounted for similar to the pooling of interests method of
accounting. The net assets of the companies contributed by Mercury were recorded
at existing carrying amounts and the financial statements have been restated to
include the results of operations for the three months ended December 31, 1995
and the year ended December 31, 1996. Other wholly-owned subsidiaries which were
formed in 1996 include Lyndon Southern Insurance Company, a property and
casualty insurer domiciled in Louisiana which is currently awaiting its
Certificate of Authority and Lyndon General Agency of Texas, Inc.
<PAGE>
<PAGE>
The Company is a majority stockholder in Lyndon-DFS Warranty Services, Inc.
("LWS") which is a stock warranty service company that was incorporated in the
state of Missouri on August 17, 1995 and commenced operations on January 1,
1996. LWS operates as a warranty administration service company for a
non-affiliated company and offers extended warranty products through Mercury
branch offices. The Company owns 95.1% of LWS's Class A stock and 100% of the
Class B stock.
Four market representatives accounted for approximately 72% of the Company's
direct business in 1996. Loss of all or a substantial portion of the business
provided by these sources could have a material adverse effect on the financial
condition and results of operations of the Company.
NOTE 2: SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements for the year ended December
31, 1996 and three months ended December 31, 1995 include the accounts of LPIC
and all majority owned subsidiaries, all of which are under the ownership of
Mercury. The accompanying combined financial statements for the nine months
ended September 30, 1995 and the year ended December 31, 1994 reflect the
combined results of operations and cash flows of LPIC and LLIC under the
ownership of ITT. The stockholder's equity statement for these periods has been
presented by combining the individual equity components of each entity. All
significant intercompany balances and transactions have been eliminated.
The significant accounting policies followed by the Company are summarized
below.
Cash and Short-Term Investments
The Company considers all highly liquid investments, with an original maturity
of three months or less, to be cash equivalents. Short-term investments are
stated at cost which approximates market.
Investments
The Company classifies investments as held-to-maturity securities and available-
for-sale securities. Held-to-maturity securities are reported at cost, adjusted
for amortization of premium or discount, and available-for-sale securities are
reported at fair value with unrealized gains and losses excluded from earnings
and reported in a separate component of stockholder's equity, net of applicable
income taxes.
Fair values for securities are based on quoted market prices, where available.
For securities not actively traded, fair values are estimated using values
obtained from independent pricing services. For mortgage backed securities,
the Company considers estimates of future principal prepayments in the
calculation of the constant effective yield necessary to apply the interest
method. If a difference arises between the prepayments anticipated and actual
prepayments received, the Company recalculates the effective yield to reflect
the actual payments received and the anticipated future payments. Realized gains
and losses from the sales or liquidation of investments are determined using the
specific identification basis.
Deferred Policy Acquisition Costs
Policy acquisition costs, representing commissions, premium taxes and certain
other underwriting expenses, net of reinsurance allowances, are deferred and
amortized over policy terms. Estimates of future revenues, including investment
income and tax benefits, are compared to estimates of future costs, including
amortization of policy acquisition costs, to determine if business currently in
force is expected to result in a net loss. No revenue deficiencies have been
determined in the periods presented.
<PAGE>
<PAGE>
Recognition of Premium Revenues
Property and casualty insurance premiums are earned over the life of the
contracts principally using pro-rata and sum-of-the months digits methods or in
relation to anticipated benefits to the policyholders. Life insurance premiums
are earned over the life of the contracts principally using the sum-of-the
months digits method, while accident and health premiums are principally
recognized using the mean of the sum-of-the months digits method and the
pro-rata method over the time period to which the premiums relate.
Unpaid Losses and Loss Adjustment Expenses (LAE)
The liabilities for unpaid losses and LAE represent the estimated liabilities
for reported claims, claims incurred but not yet reported ("IBNR") and the
related LAE. The liabilities for unpaid losses and LAE are determined using
case-basis evaluations and actuarial analyses and represent estimates of the
ultimate expected cost of all losses and LAE unpaid at the balance sheet date.
The liabilities for unpaid losses and LAE have not been reduced by estimated
salvage and subrogation recoverable or by the effects of discounting estimated
ultimate payments to their present value.
Reinsurance
Assumed reinsurance premiums written, commissions and unpaid losses are
accounted for based principally on the reports received from the ceding
insurance companies and in a manner consistent with the terms of the related
reinsurance agreements. Liabilities for unpaid losses, LAE and unearned premiums
are stated gross of ceded reinsurance recoverables. Premiums earned and losses
and LAE incurred are stated net of reinsurance ceded.
Income Taxes
Income tax provisions are based on income reported for financial statement
purposes, adjusted for permanent differences between financial and taxable
income. Deferred federal income taxes are recognized using the liability method,
whereby tax rates are applied to the temporary differences between the financial
reporting and tax bases of assets and liabilities. Deferred tax assets and
liabilities are adjusted for changes in tax rates or laws, and the adjustment is
reflected in income during the period in which such change is enacted.
Intangibles
In connection with the October 20, 1995 acquisition of the Company by Mercury,
the present value of future business account was initially recorded at $18,648.
This account is being amortized in an accelerated manner over an approximate
three year period reflecting the estimated earnings patterns of the existing
insurance business at the date of acquisition. The present value of future
business account was $3,717 and $14,797 at December 31, 1996 and 1995,
respectively, included in other assets.
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements.
Estimates also affect the reported amounts of revenues and expenses during the
period. Actual results may differ from those estimates.
Changes in Accounting Principle
Effective January 1, 1994, LPIC and LLIC adopted Statement of Financial
Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The new standard requires, among other things, that
<PAGE>
<PAGE>
securities be classified as "held-to-maturity," "available-for-sale" or
"trading" based on the Company's intentions with respect to the ultimate
disposition of the security and its ability to effect those intentions. The
classification determines the appropriate accounting carrying value (cost basis
or fair value) and, in the case of fair value, whether the adjustment impacts
Stockholder's Equity directly or is reflected in the Statements of Income.
Investments in equity securities are reflected at fair value with the
corresponding impact included in Stockholder's Equity. The majority of the
Company's fixed maturities are classified as "available-for-sale" and
accordingly, these investments are reflected at fair value with the
corresponding adjustments due to market changes included as a component of
Stockholder's Equity designated "Unrealized Gain (Loss) on Securities, Net of
Tax." The remaining securities are classified as "held-to-maturity" and carried
at amortized cost based at the Company's intent and ability to hold these
securities until maturity.
Emerging Issues Task Force ("EITF") issue No. 93-18 prescribes specific
accounting treatment with respect to mortgage-backed interest-only investments.
EITF 93-18 reached the conclusion that the measure of impairment of these
instruments should be changed from undiscounted cash flows to fair value.
Accordingly, the amortized cost basis of such instruments that were determined
to have other-than-temporary impairment losses at the time of the initial
adoption of SFAS No. 115 have been written down to fair value and reflected as a
cumulative effect of accounting change of approximately $2,978 after-tax as of
January 1, 1994.
NOTE 3: UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liability for unpaid losses and LAE is determined on the basis of estimates
of unpaid incurred amounts with respect to both reported and unreported losses.
Provisions are intended to cover ultimate payment amounts, net of amounts
recoverable from reinsurers. These estimates are continually reviewed and, as
necessary, any adjustments are reflected in current operations. Since these
reserves are based on estimates, the ultimate settlement of claims may vary from
the amounts included in the accompanying financial statements. Although it is
not possible to measure the degree of variability inherent in such estimates,
management believes claim reserves are reasonable.
<PAGE>
<PAGE>
The following table sets forth a reconciliation of the beginning and ending loss
and LAE reserve balances for the following periods:
<TABLE>
<CAPTION>
Year Ended Three Months
12/31/96 Ended 12/31/95
---------- --------------
<S> <C> <C>
Gross reserves at beginning of period $ 51,039 $ 46,539
Reinsurance recoverable on unpaid losses
and LAE at beginning of year 2,274 1,029
-------- --------
Net reserves at beginning of period 48,765 45,510
Incurred losses and LAE for claims
relating to:
Current year 36,347 8,290
Prior years (8,794) 3,249
-------- --------
Total incurred losses and LAE 27,553 11,539
Loss and LAE payments for claims
relating to:
Current year 19,113 2,167
Prior years 33,393 6,117
-------- --------
Total loss and LAE payments 52,506 8,284
Net reserves at end of year 23,812 48,765
Reinsurance recoverable on unpaid
losses and LAE at end of year 8,965 2,274
-------- --------
Gross reserves at end of year $ 32,777 $ 51,039
======== ========
</TABLE>
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended 9/30/95 12/31/94
------------- ----------
<S> <C> <C>
Gross reserves at beginning of year $ 40,919 $ 49,272
Reinsurance recoverable on unpaid losses
and LAE at beginning of year 23,837 34,920
-------- --------
Net reserves at beginning of year 17,082 14,352
Incurred losses and LAE for claims
relating to:
Current year 30,418 6,407
Prior years 17,635 (4,730)
-------- --------
Total incurred losses and LAE 48,053 1,677
Loss and LAE payments for claims
relating to:
Current year 8,922 (10,254)
Prior years 11,423 9,201
-------- --------
Total loss and LAE payments 20,345 (1,053)
Net reserves at end of period 44,790 17,082
Reinsurance recoverable on unpaid
losses and LAE at end of period 970 23,837
-------- --------
Gross reserves at end of period $ 45,760 $ 40,919
======== ========
</TABLE>
The net $8,794 decrease in prior years' reserves in 1996 was mainly attributable
to favorable development on the credit accident and health claim reserves. The
net $3,249 and $17,635 increase in prior years' reserves for the three months
<PAGE>
<PAGE>
ended December 31, 1995 and the nine months ended September 30, 1995 was
primarily the result of the recapture of business previously ceded to former
affiliates. The net $4,730 decrease in prior years' reserves in 1994 was
primarily the result of the recapture of business previously reinsured from a
former affiliate.
NOTE 4: PREMIUMS AND REINSURANCE
Prior to the sale to Mercury, the Company was engaged in providing low risk
financial reinsurance primarily to large and highly rated life and health
insurers. As part of the sale of Lyndon Insurance Group, the Company's financial
reinsurance operations were sold in a separate transaction to a joint venture of
RGA Reinsurance Company ("RGA") and Swiss Re in 1995. In restructuring the
Company's reinsurance operations for this sale, all but one of the treaties
previously ceded to an ITT affiliate were recaptured by the Company effective
April 1, 1995. Simultaneously, nearly all of the financial reinsurance treaties
were retroceded to Fencourt Reinsurance Company, LTD ("Fencourt"), a subsidiary
of ITT. Effective July 1, 1995, these treaties were recaptured from Fencourt and
virtually all of the Company's financial reinsurance treaties were retroceded to
RGA as part of the sale agreement. The RGA and Swiss Re reinsurance transaction
was approved by the Missouri Department of Insurance.
The transfer of the blocks of business did not have a material impact on the
financial condition of the Company. In addition, ITT has also agreed to
indemnify the Company in the event any losses are incurred on this business.
Only one treaty had not been novated or recaptured as of December 31, 1996. This
treaty is expected to be either terminated or novated by the end of 1998.
In the ordinary course of business, the Company reinsures certain risks for the
purpose of limiting the maximum loss exposure and to limit its risks in regard
to certain products. Reinsurance contracts do not relieve the Company from its
obligations to policyholders. Failure of reinsurers to honor their obligations
could result in losses to the Company.
The effect of reinsurance on premiums written and earned was as follows:
<TABLE>
<CAPTION>
Year Ended Three Months Ended
12/31/96 12/31/95
---------------------- -----------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Direct $191,038 $117,797 $ 40,584 $ 24,205
Assumed 35,043 62,526 10,727 24,735
Ceded 129,467 97,046 30,197 18,326
-------- -------- -------- --------
Net $ 96,614 $ 83,277 $ 21,114 $ 30,614
======== ======== ======== ========
<CAPTION>
Nine Months Ended Year Ended
9/30/95 12/31/94
----------------------- -----------------------
Premiums Premiums Premiums Premiums
Written Earned Written Earned
--------- --------- --------- --------
<S> <C> <C> <C> <C>
Direct $ 76,394 $ 45,390 $ 18,797 $ 50,110
Assumed 82,821 104,882 104,414 133,413
Ceded 43,002 57,654 106,662 142,490
-------- -------- -------- --------
Net $116,213 $ 92,618 $ 16,549 $ 41,033
======== ======== ======== ========
</TABLE>
<PAGE>
<PAGE>
Incurred losses and LAE are net of reinsurance recoveries of:
$35,047 for the year ended December 31, 1996
$ 6,673 for the three months ended December 31, 1995
$ 1,100 for the nine months ended September 30, 1995
$40,867 for the year ended December 31, 1994
The components of the net reinsurance recoverable balances included in the
accompanying balance sheets are as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
-------- --------
<S> <C> <C>
Ceded paid losses & LAE recoverable $ 3,850 $ 2,409
Ceded unpaid losses and LAE 8,965 2,274
Ceded unearned premiums 84,493 39,303
Ceded reinsurance payable (5,643) (15,352)
------- --------
TOTAL $91,665 $ 28,634
======= ========
</TABLE>
The aggregate recoverables from the companies below represent approximately 77%
and 84% of total recoverables at December 31, 1996 and 1995, respectively:
<TABLE>
<CAPTION>
12/31/96 12/31/95
-------- --------
<S> <C> <C>
Zurich Reinsurance Centre, Inc. $24,426 $11,617
San Francisco Reinsurance 22,106 4,390
Admiral Life Insurance Company of America 10,872 3,283
Fireman's Fund Insurance Company 6,721 2,040
Employer's Reinsurance Corporation 6,106 2,777
</TABLE>
NOTE 5: INCOME TAXES
The Company's federal income tax return was consolidated with ITT and affiliated
companies for the periods ending before October 20, 1995. The method of
allocation between the companies was generally based upon separate return
calculations with current credits for net losses.
For the period beginning on and after October 20, 1995, the Company's federal
income tax return was consolidated with Mercury and affiliated companies.
Amounts payable or recoverable related to periods before October 20, 1995 are
subject to an indemnification agreement with ITT which has the effect that the
Company is not at risk for any income taxes nor entitled to any recoveries
related to those periods.
The Company made income tax payments less refunds to the parent companies of:
$15,305 in the year ended December 31, 1996
$ 1,061 in the three months ended December 31, 1995
$90,899 in the nine months ended September 30, 1995
$ 6,145 in the year ended December 31, 1994
The components of income tax expense for the periods noted are as follows:
<TABLE>
<CAPTION>
Year Ended Three Months
12/31/96 Ended 12/31/95
----------- --------------
<S> <C> <C>
Income tax expense:
Current federal income tax expense $ 4,553 $2,644
Deferred 8,459 845
------- ------
Total income tax expense $13,012 $3,489
======= ======
</TABLE>
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended 9/30/95 12/31/94
------------- ----------
<S> <C> <C>
Income tax expense:
Current federal income tax expense $ 97,527 $ 8,122
Current state income tax 700 100
Deferred income tax (benefit) (91,761) 13,958
-------- -------
Total income tax expense $ 6,466 $22,180
======== =======
</TABLE>
A reconciliation of income tax expense based on the prevailing corporate income
tax rate of 35% to the income tax expense reflected in the accompanying
financial statements is as follows:
<TABLE>
<CAPTION>
Year Ended Three Months
12/31/96 Ended 12/31/95
---------- --------------
<S> <C> <C>
Income tax at prevailing corporate
income tax rate applied to
pre-tax income $13,998 $3,555
Add (deduct) tax effect of:
Tax-exempt interest income (859) (154)
Other (127) 88
------- ------
Total income tax expense $13,012 $3,489
======= ======
</TABLE>
<TABLE>
<CAPTION>
Nine Months Year Ended
Ended 9/30/95 12/31/94
------------- -----------
<S> <C> <C>
Income tax at prevailing corporate
income tax rate applied to
pre-tax income $6,373 $23,071
Add (deduct) tax effect of:
Tax-exempt interest income (401) (918)
Other 494 27
------ -------
Total income tax expense $6,466 $22,180
====== =======
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets and liabilities at December 31, 1996 and 1995
are as follows:
<TABLE>
<CAPTION>
12/31/96 12/31/95
-------- --------
<S> <C> <C>
Deferred tax assets:
Unearned premiums $ 6,897 $ 5,345
Claims reserves 1,007 1,458
Policy acquisition costs - 2,982
Other 981 742
------- -------
Total 8,885 10,527
------- -------
Deferred tax liabilities:
Policy acquisition costs 11,276 -
Present value of future business 1,301 5,179
Unrealized gains on securities 507 1,176
Other 758 1,339
------- -------
Total 13,842 7,694
------- -------
Net deferred tax (liability) asset $(4,957) $ 2,833
======= =======
</TABLE>
<PAGE>
<PAGE>
NOTE 6: INVESTMENTS
The major categories of total net investment income are summarized as follows:
<TABLE>
<CAPTION>
Year Ended Three Months
12/31/96 Ended 12/31/95
---------- --------------
<S> <C> <C>
Interest and dividends:
Fixed maturities $ 9,658 $3,200
Short-term and other investments 2,689 1,156
------- ------
Total interest and dividends 12,347 4,356
Less investment expenses 265 106
------- ------
Net investment income 12,082 4,250
------- ------
Realized capital gains (losses):
Securities available-for-sale:
Fixed maturity securities 703 (26)
Short-term investments (163) -
Fixed maturities held-to-maturity 66 2
------- ------
Total realized capital gains (losses) 606 (24)
------- ------
Total net investment income $12,688 $4,226
======= ======
<CAPTION>
Nine Months Year Ended
Ended 9/30/95 12/31/94
------------- ----------
<S> <C> <C>
Interest and dividends:
Fixed maturities $18,323 $36,078
Short-term and other investments 12,173 6,542
------- -------
Total interest and dividends 30,496 42,620
Less investment expenses 301 480
------- -------
Net investment income 30,195 42,140
------- -------
Realized capital (losses) gains:
Securities available-for-sale:
Fixed maturity securities (8,174) 2,865
------- -------
Total realized capital (losses) gains (8,174) 2,865
------- -------
Total net investment income $22,021 $45,005
======= =======
</TABLE>
Gross realized capital gains on available-for-sale securities were:
$ 873 for the year ended December 31, 1996
$ 39 for the three months ended December 31, 1995
$ 3,960 for the nine months ended September 30, 1995
$ 4,397 for the year ended December 31, 1994
Gross realized capital losses on available-for-sale securities were:
$ 333 for the year ended December 31, 1996
$ 65 for the three months ended December 31, 1995
$12,134 for the nine months ended September 30, 1995
$ 1,532 for the year ended December 31, 1994
<PAGE>
<PAGE>
Gross realized capital gains on held-to-maturity securities resulting from calls
of these securities were:
$66 for the year ended December 31, 1996
$ 2 for the three months ended December 31, 1995
Bonds and notes were on deposit with various regulatory authorities to meet
statutory requirements with amortized costs of:
$10,207 as of December 31, 1996
$ 9,966 as of December 31, 1995
Investments in available-for-sale securities at December 31, 1996 are summarized
as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 9,490 $ 13 $ (78) $ 9,425
Obligations of states and
political subdivisions 68,397 1,378 (391) 69,384
Corporate securities 63,629 882 (443) 64,068
Mortgage-backed securities 18,816 166 (78) 18,904
-------- -------- -------- --------
Total available-for-sale $160,332 $ 2,439 $ (990) $161,781
======== ======== ======== ========
</TABLE>
Investments in available-for-sale securities at December 31, 1995 are summarized
as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- --------- ---------- ----------
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $ 9,573 $ 102 $ (134) $ 9,541
Obligations of states and
political subdivisions 51,563 1,512 (847) 52,228
Corporate securities 95,010 4,000 (1,255) 97,755
Mortgage-backed securities 14,267 196 (214) 14,249
-------- -------- -------- --------
Total available-for-sale $170,413 $ 5,810 $ (2,450) $173,773
======== ======== ======== ========
</TABLE>
<PAGE>
<PAGE>
At December 31, 1996, the maturities of available-for-sale securities are shown
below. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
--------- ----------
<S> <C> <C>
Due in one year or less $ 13,747 $ 13,291
Due after one year to five years 54,042 54,377
Due after five years to ten years 29,012 29,568
Due after ten years 44,715 45,641
Mortgage-backed securities 18,816 18,904
-------- --------
Total $160,332 $161,781
======== ========
</TABLE>
Investments in held-to-maturity securities at December 31, 1996 are summarized
as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ----------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $2,833 $ 17 $(31) $2,819
Obligations of states and
political subdivisions 3,787 75 (1) 3,861
Corporate securities 850 33 - 883
------ ---- ---- ------
Total fixed maturities 7,470 125 (32) 7,563
Other 295 174 (7) 462
------ ---- ---- ------
Total held-to-maturity $7,765 $299 $(39) $8,025
====== ==== ==== ======
</TABLE>
Investments in held-to-maturity securities at December 31, 1995 are summarized
as follows:
<TABLE>
<CAPTION>
Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
Fixed maturity securities:
U.S. Treasury securities
and obligations of U.S.
government corporations
and agencies $1,897 $ 26 $(6) $1,917
Obligations of states and
political subdivisions 3,109 65 - 3,174
Corporate securities 701 57 - 758
------ ---- --- ------
Total fixed maturities 5,707 148 (6) 5,849
Other 413 184 (2) 595
------ ---- --- ------
Total held-to-maturity $6,120 $332 $(8) $6,444
====== ==== === ======
</TABLE>
<PAGE>
<PAGE>
At December 31, 1996, the maturities of held-to-maturity securities are shown
below. Actual maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or without call
or prepayment penalties.
<TABLE>
<CAPTION>
Estimated
Amortized Market
Cost Value
--------- ----------
<S> <C> <C>
Due in one year or less $ 681 $ 685
Due after one year to five years 3,022 3,036
Due after five years to ten years 2,460 2,504
Due after ten years 1,602 1,800
------ ------
Total $7,765 $8,025
====== ======
</TABLE>
NOTE 7: DIVIDEND AND CAPITAL RESTRICTIONS
With the approval of the Missouri Department of Insurance, the Company paid a
cash dividend in the amount of $98,392 to ITT on October 20, 1995, just prior to
the sale to Mercury as part of the sales transaction. For accounting purposes,
the dividend was accounted for in the period ending September 30, 1995 on the
Statement of Stockholder's Equity.
The maximum amount of dividends which can be paid by insurance companies
domiciled in the State of Missouri is subject to statutory restrictions. The
maximum dividend payout which may be made in 1997 without prior approval of the
Insurance Commissioner is $7,110. Dividends are paid at the discretion of the
Board of Directors subject to these regulatory restrictions.
Additionally, the insurance subsidiaries are subject to certain Risk-Based
Capital ("RBC") requirements as specified by the National Association of
Insurance Commissioners. Under those requirements, the amount of capital and
surplus maintained by the insurance companies is to be determined based on the
various risk factors related to it. At December 31, 1996, the Company met the
RBC requirements.
NOTE 8: STATUTORY BASIS CAPITAL AND NET INCOME
Generally accepted accounting principles differ in certain material respects
from the accounting practices prescribed or permitted by insurance regulatory
authorities (statutory basis). The consolidated statutory net income and capital
are as follows:
<TABLE>
<CAPTION>
Statutory
Capital
Statutory and
Net Income Surplus
---------- ---------
<S> <C> <C>
Year ended and as of December 31, 1996 $ 22,359 $ 71,105
Three months ended and as of December 31, 1995 118,771 57,516
</TABLE>
The combined statutory net (loss) income is as follows:
<TABLE>
<CAPTION>
Statutory Net
Income (Loss)
-------------
<S> <C>
Nine months ended September 30, 1995 $(84,867)
Year ended December 31, 1994 18,691
</TABLE>
<PAGE>
<PAGE>
The statutory net loss in the nine months ended September 30, 1995 was due to
the retrocession and sale of the financial reinsurance treaties which resulted
in a large statutory net loss offset by gains recorded directly to surplus for
reinsurance of existing business. The significant increase in statutory net
income in the fourth quarter of 1995 occurred when many of these financial
reinsurance treaties were novated or terminated which effectively reversed many
of the earlier entries.
NOTE 9: EMPLOYEE BENEFITS
Substantially all employees of the Company are covered by non-contributory
defined benefit pension plans sponsored by Mercury. The Company pays its
actuarial allocation each year, which was $104 in 1996 and $19 for the three
months ended December 31, 1995. No present value of accumulated vested benefits
or assets available for benefits is readily available.
The Company participates in Mercury's stock purchase plan and a tax deferred
retirement savings trust (401-K plan); employees are eligible to participate in
the plans after having attained specified terms of service. Both plans cover
substantially all full time employees of the Company and provide for employee
contributions and partial matching contributions by Mercury. The expenses
related to the plans were $115 for 1996 and $24 for the three months ended
December 31, 1995. The benefit plan information under ITT ownership is
insignificant.
NOTE 10: RELATED-PARTY TRANSACTIONS
Intercompany transactions under Mercury ownership are primarily the result of
the issuance of insurance by the Company to Mercury customers and the allocation
of taxes. Premiums written or assumed by the Company through Mercury branch
offices and commissions paid to Mercury in 1996 totalled $50,453 and $17,013,
respectively.
As of December 31, 1996, amounts due from parent include $8,878 that represents
an amount due from Mercury for estimated assumed premiums on the collateral
protection insurance marketed through the Mercury branch network. An identical
amount is included in policy cancellation reserves representing the estimated
amount of policies that will be cancelled upon proof of insurance. Effective
March 1, 1997, the reinsurance agreement with a non-affiliated insurance group
relating to the collateral protection program was terminated. The ceding
companies recaptured $7,716 of unearned premiums, $1,212 of claim reserves,
$8,878 of policy cancellation reserves and an $8,878 policy cancellation reserve
receivable. Total written and earned premiums for this program were $35,800 and
$28,258, respectively, for the year ended December 31, 1996. There was no gain
or loss recorded related to this transaction during the three months ended March
31, 1997. Also included in amounts due from parent was $170 of premiums less
commissions not yet remitted to the Company.
Intercompany transactions under ITT ownership were created primarily from the
issuance of credit life, credit disability, fire, inland marine and surety
coverages through affiliated finance companies and reinsurance assumed from and
ceded to affiliated insurance companies. Premiums generated through ITT
affiliates are $36,714 and $7,547 for the nine months ended September 30, 1995
and the year ended December 31, 1994, respectively.
<PAGE>
<PAGE>
The intercompany reinsurance recapture of $13,419 in the Statement of
Stockholder's Equity represents the recapture of credit life and credit accident
and health business previously ceded to an affiliate. Under the terms of the
original reinsurance agreement the business was ceded along with a cash payment
equalling the net statutory reserves. When the business was recaptured, the
consideration received equaled the net statutory reserves which exceeded the
GAAP reserves. Accordingly, the difference was recorded directly to
stockholder's equity.
Prior to the sale to Mercury, the Company periodically sold investments to other
insurance companies within the ITT consolidated group and any gains or losses on
those sales were recorded directly to stockholder's equity.
NOTE 11: COMMITMENTS AND CONTINGENCIES
The Company has been named as a defendant in various lawsuits. The Company
provides for costs related to contingencies when a loss is probable and the
amount is reasonably determinable. Under an indemnification agreement with ITT,
the Company is not liable for contingencies arising from events occurring prior
to the sale of the Company on October 20, 1995, which represents the majority of
all litigation outstanding at December 31, 1996. Although the ultimate losses
are not presently determinable, it is management's opinion that the outcome of
such litigation, and other contingencies, after the consideration of the
indemnification agreement, will have no material adverse impact on the results
of operations or financial position of the Company.
NOTE 12: SUBSEQUENT EVENTS
On June 3, 1997, Mercury executed and closed on a stock purchase agreement
between Mercury and Frontier Insurance Group, Inc. for the sale of the Company
and its majority owned subsidiaries. The purchase price was $92,000 in cash plus
the assumption of a $1,021 Mercury liability owed to ITT in connection with the
October 1995 acquisition.
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. FORM 8-K/A-1 DATED JUNE 3, 1997
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma consolidated financial statements of Frontier
Insurance Group, Inc. and subsidiaries (the "Company") give effect to the
acquisitions of Lyndon Property Insurance Company ("Lyndon"), United Capital
Holding Company ("UCHC"), Regency Insurance Company ("Regency") and Emrol
Installment Premium Discount, Inc. ("Emrol") (the "acquisitions") as more fully
described in the accompanying notes to unaudited pro forma consolidated
financial statements. The unaudited pro forma consolidated financial statements
reflect the Company's preliminary purchase price allocation and is subject to
revision as information becomes available. Management believes that the
preliminary allocation of the purchase price is not expected to differ
materially from the final allocation. The pro forma consolidated balance
sheet has been prepared as if the acquisition of Lyndon had been consummated
on March 31, 1997. The pro forma consolidated statements of income
have been prepared as if the acquisitions had been consummated on January
1, 1996. Such pro forma consolidated financial statements are not necessarily
indicative of the results of future operations, nor of the results of historical
operations had the acquisitions been consummated on such dates.
The unaudited pro forma consolidated financial statements should be read in
conjunction with: the accompanying notes to the unaudited pro forma consolidated
financial statements; the Company's Current Report on Form 8-K for an event
dated June 3, 1997; the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996; the Company's Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 1997; Lyndon's audited consolidated financial
statements as of December 31, 1996 and for the year then ended and Lyndon's
unaudited interim consolidated financial statements as of March 31, 1997 and for
the three months ended March 31, 1997 and March 31, 1996.
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES FORM 8-K/A-1 DATED JUNE 3, 1997
</TABLE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1997
(Unaudited)
ASSETS
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Company
---------------------- ----------- Pro Forma
Company Lyndon Debit Credit Consolidated
----------- ------ ----- ------ ------------
<S> <C> <C> <C> <C> <C>
Investments:
Fixed maturities available for sale $ 707,199 $ 192,936 $ 8,215(1) $ 908,350
Fixed maturities held to maturity 8,047 $ 8,047(1)
Equity securities 20,351 20,351
Short-term investments 102,547 13,832 30,000(2) 86,379
Investment in limited liability corporation 3,018 3,018
---------- ---------- ---------- ---------- ----------
TOTAL INVESTMENTS 833,115 214,815 8,215 38,047 1,018,098
Cash 15,688 3,868 30,000(2) 92,000(4) 19,556
62,000(3)
Agents' balances due, less
allowances for doubtful accounts 50,794 29,979 80,773
Premiums receivable from insureds, less
allowances for doubtful accounts 27,489 27,489
Net reinsurance recoverables,
less allowances for possible
uncollectible amounts 209,569 98,353 307,922
Accrued investment income 9,778 3,322 13,100
Federal income taxes recoverable 1,165 1,165
Deferred policy acquisition costs 36,834 43,503 43,503(5) 36,834
Present value of future profits 47,700(6) 41,932(7) 5,768
Deferred federal income tax asset 29,540 15,700(5) 16,650(6) 38,876
14,676(7) 4,390(8)
Home office building, property and
equipment--less accumulated
depreciation and amortization 40,130 40,130
Intangible assets, less accumulated
amortization 11,311 11,311
Other assets 10,507 2,004 2,890(5) 9,621
---------- ---------- ---------- ---------- ----------
TOTAL ASSETS $1,275,920 $ 395,844 $ 178,291 $ 239,412 $1,610,643
========== ========== ========== ========== ==========
</TABLE>
See notes to the unaudited pro forma consolidated balance sheet.
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES FORM 8-K/A-1 DATED JUNE 3, 1997
</TABLE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED BALANCE SHEET
March 31, 1997
(Unaudited)
LIABILITIES AND SHAREHOLDERS' EQUITY
(dollar amounts in thousands)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Company
--------------------------- ------------------- Pro Forma
Company Lyndon Debit Credit Consolidated
----------- ------ ----- ------ ------------
<S> <C> <C> <C> <C> <C>
LIABILITIES:
Policy liabilities:
Unpaid losses $ 452,669 $ 48,846 $ 501,515
Unpaid loss adjustment expenses 116,478 498 116,976
Unearned premiums 180,891 178,106 358,997
----------- ----------- ----------- -------- -----------
TOTAL POLICY LIABILITIES 750,038 227,450 977,488
Funds withheld under reinsurance
contracts 72,112 72,112
Revolving loan credit facility $ 62,000(3) 62,000
Federal income taxes payable 2,184 2,184
Deferred federal income tax liability 4,390 $ 4,390(8)
Cash dividend payable to shareholders 1,905 1,905
Other liabilities 13,688 43,089 56,777
----------- ----------- ----------- -------- -----------
TOTAL LIABILITIES 837,743 277,113 4,390 62,000 1,172,466
GUARANTEED PREFERRED BENEFICIAL
INTEREST IN COMPANY'S CONVERTIBLE
SUBORDINATED DEBENTURES 166,979 166,979
SHAREHOLDERS' EQUITY--
Common stock 147 4,000 4,000(4) 147
Additional paid-in capital 222,289 78,178 78,178(4) 222,289
Net unrealized losses (2,873) (617) 168(1) (2,873)
449(4)
Retained earnings 52,423 37,170 10,271(4) 31,050(6) 52,423
30,693(5)
27,256(7)
----------- ----------- ----------- -------- -----------
SUBTOTAL 271,986 118,731 150,398 31,667 271,986
Less treasury stock 788 788
----------- ----------- ----------- -------- -----------
TOTAL SHAREHOLDERS' EQUITY 271,198 118,731 150,398 31,667 271,198
----------- ----------- ----------- -------- -----------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $ 1,275,920 $ 395,844 $ 154,788 $ 93,667 $1,610,643
=========== =========== =========== ======== ===========
</TABLE>
See notes to the unaudited pro forma consolidated balance sheet.
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
The following pro forma adjustments have been applied to the historical
consolidated balance sheets of the Company to give effect to the acquisition of
Lyndon as if it had occurred on March 31, 1997.
(1) All fixed maturities have been classified as available for sale and
marked to market.
(2) Short-term investments were decreased and cash increased through sales
in order to fund the purchase of Lyndon.
(3) Cash increased as a result of the Company obtaining a $100 million, 5
year revolving loan credit facility, under which it drew down $62
million to fund the purchase of Lyndon.
(4) Cash decreased as a result of the purchase of Lyndon.
(5) The deferred policy acquisition costs and related deferred federal
income taxes have been adjusted as a result of the purchase.
(6) To reflect the purchase accounting adjustments for the present value of
future profits ("PVFP") related to the purchase of Lyndon and the
related deferred federal income tax assets.
(7) The excess of the net assets acquired over the purchase price has been
adjusted together with the related deferred income tax assets.
(8) Reclassification of deferred tax liabilities.
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES FORM 8-K/A-1 DATED JUNE 3, 1997
</TABLE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
Three Months Ended March 31, 1997
(Unaudited)
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Pro Forma
Historical Adjustments Company
------------------------ ---------------------- Pro Forma
Company Lyndon Debit Credit Consolidated
----------- ------ ----- ------ ------------
<S> <C> <C> <C> <C> <C>
REVENUES:
Premiums written $ 105,812 $ 43,660 $ 149,472
Premiums ceded (26,499) (30,026) (56,525)
--------- --------- --------- ------ ---------
Net premiums written 79,313 13,634 92,947
Decrease (increase) in
net unearned premiums (1,506) 9,586 8,080
--------- --------- --------- ------ ---------
Net premiums earned 77,807 23,220 101,027
Net investment income 11,893 3,023 $ 491(g) 14,425
Realized capital gains 721 29 750
--------- --------- --------- ------ ---------
Total net investment income 12,614 3,052 491 15,175
Gross claims adjusting income 15 15
Other income 100 100
--------- --------- --------- ------ ---------
TOTAL REVENUES 90,436 26,372 491 116,317
EXPENSES:
Losses 31,116 10,938 42,054
Loss adjustment expenses 14,558 496 15,054
Amortization of policy
acquisition costs 15,951 3,053 19,004
Amortization of present
value of future profits 2,229 597(f) $ 2,229(f) 597
Underwriting and other expenses 9,231 2,911 12,142
Minority interest in income of
consolidated subsidiary
trust 2,732 2,732
Interest expense 964(c) 964
--------- --------- --------- ------ ---------
TOTAL EXPENSES 73,588 19,627 1,561 2,229 92,547
--------- --------- --------- ------ ---------
INCOME BEFORE
INCOME TAXES 16,848 6,745 2,052 2,229 23,770
INCOME TAXES:
State 103 103
Federal 4,841 2,219 62(e) 7,122
--------- --------- --------- ------ ---------
TOTAL INCOME TAXES 4,944 2,219 62 7,225
--------- --------- --------- ------ ---------
NET INCOME $ 11,904 $ 4,526 $ 2,114 $2,229 $ 16,545
========= ========= ========= ====== =========
PER SHARE DATA:
Primary earnings per
common share $.41 $.56
==== ====
Fully diluted earnings per
common share $.38 $.50
==== ====
</TABLE>
See notes to the unaudited pro forma consolidated statements of income.
<PAGE>
<PAGE>
<TABLE>
<S> <C> <C>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES FORM 8-K/A-1 DATED JUNE 3, 1997
</TABLE>
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
PRO FORMA CONSOLIDATED STATEMENT OF INCOME
Year Ended December 31, 1996
(Unaudited)
(dollar amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Historical
------------------------------------------------------- Pro Forma
Adjustments Company
Regency ------------------- Pro Forma
Company UCHC* and Emrol* Lyndon Debit Credit Consolidated
----------- ---- --------- ------ ----- ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C>
REVENUES:
Premiums written $ 402,799 $ 11,380 $ 4,559 $ 226,081 $ 644,819
Premiums ceded (90,936) (7,553) (2,343) (129,467) (230,299)
---------- ---------- ---------- ---------- ---------- ------- ---------
Net premiums written 311,863 3,827 2,216 96,614 414,520
Decrease (increase) in
net unearned premiums (45,874) (597) 17 (13,337) (59,791)
---------- ---------- ---------- ---------- ---------- ------- ---------
Net premiums earned 265,989 3,230 2,233 83,277 354,729
Net investment income 37,226 3,371 540 12,082 $ 4,262(b) 48,957
Realized capital gains 1,707 647 606 2,960
---------- ---------- ---------- ---------- ---------- ------- ---------
Total net investment income 38,933 4,018 540 12,688 4,262 51,917
Gross claims adjusting income 55 55
Other income 833 833
---------- ---------- ---------- ---------- ---------- ------- ---------
TOTAL REVENUES 304,977 7,248 2,773 96,798 4,262 407,534
EXPENSES:
Losses 97,058 366 1,275 25,041 123,740
Loss adjustment expenses 58,933 1,244 87 2,512 62,776
Amortization of policy
acquisition costs 57,540 (408) 116 10,999 $ 4,039(a) 64,208
Amortization of present
value of future profits 11,080 3,580(a) 11,080(a) 3,580
Underwriting and other
expenses 30,540 542 1,111 7,172 422(d) 39,787
Minority interest in
income of consolidated
subsidiary trust 2,277 2,277
Interest expense 1,970 3,856(c) 5,826
---------- ---------- ---------- ---------- ---------- ------- ---------
TOTAL EXPENSES 248,318 1,744 2,589 56,804 7,858 15,119 302,194
---------- ---------- ---------- ---------- ---------- ------- ---------
INCOME BEFORE INCOME TAXES 56,659 5,504 184 39,994 12,120 15,119 105,340
INCOME TAXES:
State 723 723
Federal 15,869 1,949 69 13,012 1,155(e) 32,054
---------- ---------- ---------- ---------- ---------- ------- ---------
TOTAL INCOME TAXES 16,592 1,949 69 13,012 1,155 32,777
---------- ---------- ---------- ---------- ---------- ------- ---------
NET INCOME $ 40,067 $ 3,555 $ 115 $ 26,982 $ 13,275 $15,119 $ 72,563
========== ========== ========== ========== ========== ======= =========
PER SHARE DATA:
Primary earnings per
common share $1.39 $2.51
===== =====
Fully diluted earnings per
common share $1.37 $2.43
===== =====
</TABLE>
- ----------
(*) Historical numbers represent results of operations for the periods prior
to the respective acquisition dates.
See notes to the unaudited pro forma consolidated statements of income.
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP INC. AND SUBSIDIARIES
NOTES TO THE UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF INCOME
The following pro forma adjustments have been applied to the historical
consolidated statements of income for the year ended December 31, 1996 of the
Company, Lyndon, UCHC, Regency and Emrol to give effect to the acquisitions as
if they had occurred on January 1, 1996.
(a) Amortization of deferred policy acquisition costs and the PVFP have
been adjusted to reflect estimated amortization expense calculated
based on a valuation of business in force as of the purchase date. The
resulting PVFP was offset by the excess of net assets acquired over the
purchase price and is being amortized over the related earned premiums.
(b) Net investment income has been decreased to reflect the reduction of
investment income as a result of the sale of fixed maturities used to
fund the acquisitions of Lyndon and UCHC (approximately $61 million),
and from the sale of short-term investments and fixed maturities for
the payment of $59.8 million in dividends to their previous parent
companies, assuming pretax yields ranging from 6.4% to 6.9%.
(c) Interest expense has been increased to reflect the draw down of $62
million of the $100 million revolving loan credit facility with
Deutsche Bank, assuming an interest rate of 6.035%.
(d) Underwriting and other expenses have been increased to reflect the
amortization of the excess cost over net assets acquired arising from
the acquisitions of UCHC, Regency and Emrol.
(e) Federal income taxes have been increased to reflect the net tax effect
of the pro forma adjustments.
(f) Amortization of policy acquisition costs and the PVFP have been
adjusted to reflect estimated amortization expense calculated based on
a valuation of business in force as of the purchase date. The resulting
PVFP was offset by the excess of net assets acquired over the purchase
price and is being amortized over the related earned premiums.
(g) Net investment income has been decreased to reflect the reduction in
investment income from the sale of short-term investments used to fund
the acquisition of Lyndon (approximately $30 million), assuming a
pretax yield of 6.5%.
<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 hereunto duly authorized.
FRONTIER INSURANCE GROUP, INC.
(Registrant)
By:/s/ Mark H. Mishler
______________________________________
Mark H. Mishler
Vice President, Treasurer and
Chief Financial Officer
(Principal Financial and Accounting Officer
and Duly Authorized Officer)
Dated: July 16, 1997
<PAGE>
<PAGE>
FRONTIER INSURANCE GROUP, INC. FORM 8-K/A-1 EXHIBIT 23(b)
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we consent to the incorporation by reference
in the Registration Statement (Form S-3) and related Prospectus of Frontier
Insurance Group, Inc. for the registration of 4,600,000 shares of its common
stock of our report dated June 13, 1997, with respect to the consolidated
financial statements of Lyndon Property Insurance Company and subsidiaries
included in Frontier Insurance Group, Inc.'s Form 8-K/A-1 filed with the
Securities and Exchange Committee on July 16, 1997.
/S/ Arthur Andersen LLP
___________________________
St. Louis, Missouri
July 16, 1997
