UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 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 001-10997
INTEGON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3559471
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
500 West Fifth Street, Winston-Salem, North Carolina 27152
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(910) 770-2000
----------------------------------------------------
(Registrant's telephone number, including area code)
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.
Yes X No
---
As of November 12, 1997, there were 16,133,063 shares outstanding of
Integon Corporation's Common Stock.
Page 1
<PAGE>
INTEGON CORPORATION AND SUBSIDIARIES
INDEX TO FORM 10-Q
PART I - FINANCIAL INFORMATION
Page
Item 1. Financial Statements. ------
Balance Sheets - September 30, 1997 and December 31, 1996.............3
Statements of Operations - Three Months Ended September 30,
1997 and 1996 and nine months ended September 30, 1997 and
1996 .............................................................4
Statements of Cash Flows - Nine Months Ended September 30,
1997 and 1996.....................................................5
Notes to Financial Statements.........................................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.......................11
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K............................20
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
<TABLE>
<CAPTION>
INTEGON CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data)
September 30, December 31,
1997 1996
------------- ------------
<S>
ASSETS <C> <C>
Investments:
Fixed maturities available for sale--at market
(amortized cost $643,586 and $522,452).................................... $ 650,768 $ 521,311
Other long-term investments.................................................... 1,132 2,743
Short-term investments......................................................... 471 --
-------------- ----------
652,371 524,054
Cash and cash equivalents...................................................... 33,517 43,838
Reinsurance receivable......................................................... 163,505 185,077
Premiums due and uncollected (less allowance for
doubtful accounts of $5,282 and $5,282)................................... 224,077 248,537
Prepaid reinsurance premiums................................................... 49,107 48,909
Accounts receivable, primarily financing receivables
(less allowance for doubtful accounts of $1,433
and $1,112)................................................................ 42,445 32,957
Accrued investment income...................................................... 9,535 8,933
Deferred policy acquisition costs.............................................. 45,615 55,106
Property and equipment (less accumulated depreciation
of $16,791 and $10,808)................................................... 76,996 68,271
Goodwill (less accumulated amortization of $16,176
and $13,885).............................................................. 104,665 106,957
Deferred income taxes.......................................................... 24,257 22,044
Other assets................................................................... 23,641 12,116
-------------- ----------
$ 1,449,731 $1,356,799
============== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums.............................................................. $ 336,106 $ 364,081
Loss and loss adjustment expenses payable...................................... 532,170 478,031
Accrued expenses and other liabilities......................................... 126,241 104,536
Short-term debt................................................................ 22,000 44,000
Notes payable.................................................................. 150,723 150,760
-------------- ----------
1,167,240 1,141,408
-------------- ----------
Company-obligated mandatorily redeemable capital securities of subsidiary trust
holding solely Integon Corporation Junior Subordinated Deferrable Interest
Debentures.................................................................. 100,000 --
-------------- ----------
STOCKHOLDERS' EQUITY
$3.875 Convertible Preferred Stock--$.01 par value
per share, 1,437,500 shares authorized, 1,435,700 and
1,437,500 issued and outstanding............................................ 14 14
Common Stock--$.01 par value per share, authorized--
35,000,000 shares; issued--17,700,263 and
17,303,321 shares........................................................... 177 173
Class A Non-Voting Common Stock--$.01 par value per
share, authorized 20,000,000 shares; issued and
outstanding--none........................................................... -- --
Additional paid-in capital..................................................... 155,211 147,891
Net unrealized depreciation of securities...................................... 4,852 (700)
Retained earnings.............................................................. 60,058 105,834
Treasury stock--at cost, 1,567,200 shares...................................... (37,821) (37,821)
-------------- ----------
182,491 215,391
-------------- ----------
$ 1,449,731 $1,356,799
============== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 3
<PAGE>
Item 1. Financial Statements. (continued)
<TABLE>
<CAPTION>
INTEGON CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------
1997 1996 1997 1996
---- ---- ---- ----
<S> <C> <C> <C> <C>
REVENUES
Net premiums written................................................ $168,085 $214,369 $556,548 $606,442
======== ======== ======== ========
Premiums earned..................................................... $190,136 $191,790 $584,721 $536,845
Net investment income............................................... 10,542 8,026 29,855 23,637
Net realized investment gains (losses).............................. 471 1,140 (1,602) 2,360
Other income........................................................ 4,972 4,165 14,172 12,375
-------- -------- -------- --------
206,121 205,121 627,146 575,217
-------- -------- -------- --------
BENEFITS AND EXPENSES
Loss and loss adjustment expenses................................... 148,826 147,249 504,237 411,839
Policy acquisition and other underwriting
expenses.......................................................... 45,364 41,977 145,165 114,042
Other expenses...................................................... 5,604 4,311 15,520 11,682
Amortization of goodwill............................................ 764 769 2,292 2,308
Interest expense.................................................... 3,721 3,732 11,175 11,087
-------- -------- -------- --------
204,279 198,038 678,389 550,958
-------- -------- -------- --------
INCOME (LOSS) FROM OPERATIONS BEFORE FEDERAL
INCOME TAX (BENEFIT) AND DISTRIBUTIONS ON
CAPITAL SECURITIES OF SUBSIDIARY TRUST.............................. 1,842 7,083 (51,243) 24,259
Federal income tax (benefit)........................................ 641 2,212 (18,394) 7,706
-------- ------- -------- --------
Income (loss) before distributions on capital
securities of subsidiary trust...................................... 1,201 4,871 (32,849) 16,553
Distributions on capital securities of
subsidiary trust, net of federal income tax
benefit of $930, $--, $2,404 and $--................................ (1,727) -- (4,464) --
-------- -------- -------- --------
NET INCOME (LOSS).............................................. (526) 4,871 (37,313) 16,553
Preferred stock dividends........................................... 1,393 1,393 4,178 4,178
-------- -------- -------- --------
Net income (loss) available to common shareholders.................. $ (1,919) $ 3,478 $(41,491) $ 12,375
======== ======== ======== ========
EARNINGS PER COMMON SHARE
Primary............................................................. $ (.12) $ .22 $ (2.61) $ .78
======== ======== ========= ========
Fully diluted....................................................... $ (.12) $ .22 $ (2.61) $ .78
======== ======== ========= ========
Weighted average common shares outstanding:
Primary........................................................... 16,417 15,880 15,911 15,869
======== ======== ======== ========
Fully diluted..................................................... 16,417 15,880 15,911 15,869
======== ======== ======== ========
Dividends declared per share........................................ $ .09 $ .09 $ .27 $ .27
======== ========= ======== ========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 4
<PAGE>
Item 1. Financial Statements. (continued)
<TABLE>
<CAPTION>
INTEGON CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
Nine Months Ended
------------------------------
September 30,
1997 1996
Cash Flows from Operating Activities ----------- ---------
<S> <C> <C>
Net income (loss)...................................................................... $ (37,313) $ 16,553
Adjustments to reconcile net income to net cash provided by
operating activities:
Net realized investment (gains) losses............................................ 1,602 (2,360)
Depreciation and amortization..................................................... 8,906 7,157
Net amortization of discounts and premiums........................................ 86 927
Provision for deferred federal income taxes (benefit)............................. (5,203) (1,020)
Net decrease in reinsurance assets................................................ 21,374 16,767
Net (increase) decrease in premiums due and uncollected........................... 24,460 (60,187)
Net (increase) decrease in deferred policy acquisition
costs 9,491 (12,879)
Net increase in accounts and notes receivable,
accrued investment income and other assets..................................... (14,995) (2,754)
Increase (decrease) in unearned premiums.......................................... (27,975) 65,956
Increase in loss and loss adjustment expenses payable............................. 54,139 27,451
Net increase in accrued expenses and
other liabilities.............................................................. 34,150 9,768
--------- ---------
Net cash flows provided by operating activities
from continuing operations..................................................... 68,722 65,379
--------- ---------
Cash Flows from Investing Activities
Investment securities sold............................................................. 539,840 441,801
Investment securities matured, called or redeemed...................................... 17,515 18,984
Investment securities purchased........................................................ (679,152) (492,463)
Other, net............................................................................. (14,436) (7,021)
--------- ---------
Net cash flows used in investing activities....................................... (136,233) (38,699)
--------- ---------
Cash Flows from Financing Activities
Net increase (decrease) in short-term debt............................................. (22,000) 18,000
Proceeds from Company-obligated mandatorily redeemable
capital securities of subsidiary trust............................................ 100,000 --
Proceeds from exercise of share options................................................ 6,012 --
Common stock dividends................................................................. (4,285) (4,247)
Preferred stock dividends.............................................................. (4,178) (4,178)
Decrease in notes payable.............................................................. (37) (55)
Increase in book cash overdrafts....................................................... (18,322) (6,568)
--------- ---------
Net cash flows provided by financing activities.................................... 57,190 2,952
--------- ---------
Net increase (decrease) in cash and cash equivalents................................... (10,321) 29,632
Cash and cash equivalents at beginning of period................................... 43,838 21,046
--------- ---------
Cash and cash equivalents at end of period............................................. $ 33,517 $ 50,678
========= =========
Supplemental Disclosures of Cash Flows Information
Interest paid during the period........................................................ 10,578 $ 10,498
Federal income taxes paid during the period............................................ 36 10,300
</TABLE>
The accompanying notes are an integral part of these statements.
Page 5
<PAGE>
Item 1. Financial Statements. (continued)
INTEGON CORPORATION AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
(Unaudited)
Note 1 - Accounting Policies
The accompanying unaudited consolidated financial statements of Integon
Corporation and subsidiaries (the "Company") have been prepared in accordance
with generally accepted accounting principles for interim periods.
In the opinion of management, these financial statements include all
adjustments, including all normal recurring accruals, necessary for a fair
presentation of the consolidated financial position at September 30, 1997 and
December 31, 1996 and the consolidated results of operations and cash flows for
the periods ended September 30, 1997 and 1996.
The operating results for the nine months ended September 30, 1997 are not
necessarily indicative of the results to be expected for the full year ending
December 31, 1997.
Note 2 - Financing Activity
On February 10, 1997, Integon Capital I, a wholly-owned subsidiary trust of the
Company, issued $100.0 million of 10 3/4% capital securities due February 15,
2027 (the "Capital Securities"), the proceeds of which were invested in 10 3/4%
junior subordinated debentures of the Company due February 15, 2027.
The sole asset of Integon Capital I consists of $103.1 million of 10 3/4% junior
subordinated debentures of Integon Corporation due February 15, 2027. The
obligations of Integon Capital I under the Capital Securities are fully and
unconditionally guaranteed by the Company.
Holders of the Capital Securities are entitled to receive preferential
cumulative cash distributions accruing from the date of original issuance and
payable semi-annually in arrears on February 15 and August 15 of each year,
commencing August 15, 1997, at the annual rate of 10 3/4% of the liquidation
amount of
Page 6
<PAGE>
Item 1. Financial Statements. (continued)
$1,000 per Capital Security. The distribution rate and the distribution payment
dates and other payment dates for the Capital Securities will correspond to the
payments and payment dates on the junior subordinated debentures of Integon
Corporation. Distributions on the Capital Securities are deferrable at the
Company's option for up to five years. The Company, subject to certain
exceptions, may not pay dividends on its capital stock during such deferral
periods.
For financial reporting purposes, Integon Capital I is treated as a subsidiary
of the Company and, accordingly, its accounts are included in the consolidated
financial statements of the Company. The Capital Securities are presented in the
consolidated balance sheet of the Company as a separate line item directly above
stockholders' equity under the caption "Company-obligated mandatorily redeemable
capital securities of subsidiary trust holding solely Integon Corporation junior
subordinated deferrable interest debentures." The Company records distributions
payable on the Capital Securities as "Distributions on capital securities of
subsidiary trust" in its consolidated statement of income.
The Company paid $10.75 million of the proceeds from the transaction into a
reserve account which will be used to pay the first two interest payments on the
Capital Securities. The remaining net proceeds to the Company were used to
contribute $50.0 million to the insurance subsidiaries in the form of
certificates of contribution bearing interest at 10 3/4% per annum, not
compounded; to reduce the Company's short-term debt by $32.0 million and for
general corporate purposes.
Underwriting fees and other costs of $4.0 million relating to the issuance of
the Capital Securities have been capitalized. Such costs are being amortized
using the interest-rate method. See Note 6 of Notes to Financial Statements.
Note 3 - Stock Option and Incentive Plans
The Company applies APB 25 and related Interpretations in accounting for stock
option and incentive plans. Accordingly, no compensation cost has been
recognized for stock options issued under either the 1992 Stock Option Plan or
the Amended and Restated Omnibus Long-Term Performance Incentive Compensation
Plan.
Page 7
<PAGE>
Item 1. Financial Statements. (continued)
Had compensation cost for stock-based compensation under these two plans been
determined consistent with Statement of Financial Accounting Standards ("SFAS")
No. 123, the Company's net income and earnings per share on a pro forma basis
for the period ended September 30, would have been as follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Pro forma net income (loss).......................... $(675) $4,789 $(37,760) $16,305
Pro forma primary earnings
per share......................................... $(.13) $ .21 $ (2.64) $ .76
Pro forma fully diluted
earnings per share................................ $(.13) $ .21 $ (2.64) $ .76
</TABLE>
See Note 6 of Notes to Financial Statements.
Note 4 - Accounting Standards Issued But Not Yet Adopted
In February 1997, the Financial Accounting Standards Board issued SFAS No. 128
"Earnings per Share" which changes the method of calculating earnings per share.
SFAS No. 128 requires the presentation of "basic" earnings per share and
"diluted" earnings per share on the face of the income statement. Basic earnings
per share is computed by dividing the net income available to common
shareholders by the weighted average shares of outstanding common stock. The
calculation of diluted earnings per share is similar to basic earnings per share
except that the denominator includes dilutive common stock equivalents such as
stock options and warrants. The statement is effective for financial statements
for periods ending after December 31, 1997, and early adoption is not permitted.
The pro forma basic earnings per share and diluted earnings per share calculated
in accordance with SFAS No. 128 for the period ended September 30, are as
follows:
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- --------------------
1997 1996 1997 1996
------ ------ ------ ------
<S> <C> <C> <C> <C>
Pro forma basic earnings per
share......................................... $(.12) $.22 $(2.62) $.79
Pro forma diluted earnings
per share .................................... $(.12) $.22 $(2.62) $.78
</TABLE>
Page 8
<PAGE>
Item 1. Financial Statements. (continued)
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income",
which establishes standards for reporting and displaying comprehensive income
and its components (revenues, expenses, gains and losses) in financial
statements. In addition, SFAS No. 130 requires the Company to classify items of
other comprehensive income by their nature in a financial statement and display
the accumulated balance of other comprehensive income separately in the
shareholders' equity section of the statement of financial condition. The
Company will adopt SFAS No. 130 on January 1, 1998 as required.
Also in June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of
an Enterprise and Related Information". SFAS No. 131 establishes reporting
standards for public companies concerning annual and interim financial
statements of their operating segments. Operating segments are components of a
company about which separate financial information is available that is
regularly evaluated by the chief operating decision maker in deciding how to
allocate resources and assess performance. The standard sets criteria for
reporting disclosures about a company's products and services, geographic areas
and major customers. The Company will adopt SFAS No. 131 on January 1, 1998 as
required and believes that the impact on its financial position and results of
operations is not material.
Note 5 - Loss and Loss Adjustment Expenses Payable
Loss and loss adjustment expenses payable represent the estimated liability on
claims reported to the Company plus reserves for claims incurred but not yet
reported and the estimated settlement expenses related to these claims. The
liabilities for claims and related settlement expenses are determined using
"case basis" evaluations and statistical analysis and represent estimates of the
ultimate net cost of all losses incurred through the balance sheet date.
Although considerable variability is inherent in such estimates, management
believes that the liabilities for unpaid claims and related settlement expenses
are adequate; however, there can be no assurance that future adjustments to loss
and loss adjustment expenses payable will not be required. The estimates are
reviewed by management and, as adjustments to these liabilities become
necessary, such adjustments are reflected in current operations. There are no
methodologies that can be used to guarantee the ultimate accuracy of the
estimates developed. The Company had utilized the same reserve methodology for
five years and had consistently experienced favorable loss reserve development.
During the first quarter 1997 review of reserves, the loss experience data
revealed that the business was experiencing yet more adverse development than
indicated in the
Page 9
<PAGE>
Item 1. Financial Statements. (continued)
fourth quarter, and certain other unfavorable factors emerged, including higher
losses experienced during the fourth quarter than initially estimated, increased
physical damage frequency and severity trends, and a slower than anticipated
reduction in claims costs from loss control initiatives implemented at the
Company. Based on this information, the Company further segmented the data it
was using to estimate needed reserves and determined that the additional reserve
increase of $42.0 million was necessary.
Note 6 - Sale of the Company
On June 23, 1997, the Company signed a definitive agreement with General Motors
Acceptance Corporation ("GMAC") providing for the Company's merger with a
subsidiary of GMAC. The merger of Integon with a subsidiary of GMAC was
consummated on October 17, 1997 following shareholder approval on October 16,
1997. Holders of the Company's Common Stock received $26 per share in cash. Each
share of the Company's $3.875 Convertible Preferred Stock was convertible on or
before November 6, 1997 into a right to receive $68.24 per share in cash. Any
shares of Convertible Preferred Stock not converted were redeemed on November
12, 1997 at $52.33.
On November 12, 1997, the Company announced its offering to purchase for cash
any and all of $150.0 million aggregate principal amount of 8% Senior Notes due
1999 and 9 1/2% Senior Notes due 2001 issued by Integon, and any and all of the
$100.0 million aggregate principal amount of 10 3/4% Capital Securities issued
by Integon Capital I. Concurrently, the Company is soliciting consents from
holders to proposed amendments to the indentures pursuant to which the
securities were issued. The tender offers are made upon the terms and subject to
the conditions set forth in the Offer to Purchase and Consent Solicitation
Statements for each security which was mailed to holders on or about November
12, 1997.
Each of the consent solicitations will expire at 5:00 P.M. New York City time,
on Tuesday, November 25, 1997 unless extended ("Consent Date"). Each of the
tender offers will expire at 12:00 Midnight, New York City time, on Wednesday,
December 10, 1997, unless extended or earlier terminated by Integon. Payments
will be made on the third NYSE trading day following the expiration of the
tender offers.
In connection with the merger of Integon with a subsidiary of GMAC, the 1992
Stock Option Plan and the Amended and Restated Omnibus Long-Term Performance
Incentive Compensation Plan were terminated.
Page 10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
General
The following discussion and analysis should be read in conjunction with the
consolidated financial statements and related notes on pages 3 through 10 of
this Quarterly Report on Form 10-Q. The reader is presumed to have read or have
access to Integon Corporation's 1996 Annual Report on Form 10-K.
Results of Continuing Operations
Nine Months Ended September 30, 1997 ("1997") Compared with Nine Months Ended
September 30, 1996 ("1996")
Net premiums written decreased 8.2% from $606.4 million in 1996 to
$556.5 million in 1997. Nonstandard automobile insurance net premiums written
decreased from $550.1 million in 1996 to $487.9 million in 1997 or 11.3%. Price
increases taken during the fourth quarter of 1996 and the first three quarters
of 1997, ranging from 3% to 20% in response to losses experienced, have had the
effect of slowing premium growth. Due to changes which occur in the mix of
business, it is not possible to precisely measure the amount of increased
premiums realized from rate increases. The determination of the premium amount
is calculated based on a number of variables, including rate changes, limits of
liability, deductible levels, geographic location, and model of vehicle.
Specialty auto products net premiums written increased 33.8% from $37.0 million
in 1996 to $49.5 million in 1997. Premiums earned on all lines of business
increased 8.9% from $536.8 million in 1996 to $584.7 million in 1997 and
reflects primarily the increase in net premiums written during 1996 compared to
1995.
Loss and loss adjustment expenses increased 22.4% from $411.8 million
in 1996 to $504.2 million in 1997. The loss ratio, defined as loss and loss
adjustment expenses as a percentage of premiums earned, increased from 76.7% in
1996 to 86.2% in 1997 due primarily to an increase to loss reserves of $42.0
million during the first quarter of 1997 following a comprehensive review and
analysis by the Company's actuarial staff and independent consulting actuaries.
During the first quarter 1997 review of reserves, the loss experience
data revealed that the business was experiencing yet more adverse development
than indicated in the fourth quarter, and certain other unfavorable factors
emerged, including higher losses experienced during the fourth quarter than
initially estimated, increased physical damage frequency and severity
Page 11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (Continued)
trends, and a slower than anticipated reduction in claims costs from loss
control initiatives implemented at the Company. Based on this information, the
Company further segmented the data it was using to estimate needed reserves and
determined that the additional reserve increase of $42.0 million was necessary.
Since the end of the first quarter, the actual loss emergence from accident
years 1996 and prior has been consistent with the $42 million reserve increase
confirming the appropriateness of the adjustment. Losses for accident year 1997
are also emerging as expected in accordance with the current reserve level.
The Company's estimate of loss reserves, including reserves for claims
incurred but not reported, are subject to variability and, accordingly may
develop differently than projected. The process of estimating loss and loss
adjustment expense reserves requires the reliance on past history to predict the
development of known claims and claims incurred but not reported. There are no
methodologies that can be used to guarantee the ultimate accuracy of the
estimate developed. These estimates are reviewed by management and, as
adjustments to these liabilities become necessary such adjustments are reflected
in current operations.
Policy acquisition and other underwriting expenses increased $31.2
million from $114.0 million in 1996 to $145.2 million in 1997. The expense
ratio, defined as policy acquisition and other underwriting expenses as a
percentage of premiums earned, increased from 21.2% in 1996 to 24.8% in 1997.
The increase in the expense ratio was due primarily to a write-off of deferred
policy acquisition costs of $3.7 million due to the increase in the loss ratio
for accident year 1996 and due to an increase in personnel-related and
information systems costs. Such costs were incurred primarily to enhance the
Company's operations, and included expenses for modifications necessary to
accommodate the Year 2000.
As a result of the increased loss ratio in the fourth quarter of 1996,
and the first quarter of 1997 primarily relating to the earlier periods in the
1996 accident year, the Company reviewed the recoverability of its deferred
policy acquisition cost and determined that the sum of the expected loss and
loss adjustment expenses based on the loss and loss adjustment expense reserve
analysis at year end, the deferred policy acquisition cost, and expected policy
maintenance expenses for the net written premium for which the deferred policy
acquisition cost was recorded did not support the level of the acquisition cost
deferred. As a result, the Company wrote off $3.7 million of estimated
unrecoverable deferred policy acquisition cost.
Page 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (Continued)
Net investment income increased 26.3% from $23.6 million in 1996 to
$29.9 million in 1997 as a result of the $120.7 million increase in average
invested assets and a lower percentage invested in tax-exempt securities. The
pre-tax yield of the portfolio was 6.1% in 1997 compared to 6.0% in 1996. The
percentage of cash and invested assets invested in tax-exempt securities was
3.6% and 20.3% in 1997 and 1996, respectively. In addition to the variances
discussed above, there were pre-tax net realized investment losses of $1.6
million in 1997 compared to pre-tax net realized investment gains of $2.4
million in 1996.
Other income less other expenses decreased from income of $0.7 million
in 1996 to an expense of $1.3 million in 1997 due primarily to one time expenses
incurred during the period leading to the merger. See Note 6 of Notes to
Financial Statements.
Interest expense increased 0.8% from $11.1 million in 1996 to $11.2
million in 1997 due to increased short-term borrowings.
Federal income taxes decreased $26.1 million from $7.7 million tax
expense in 1996 to a $18.4 million tax benefit in 1997 due to a loss from
operations before federal income tax. The effective tax rate increased from
31.8% in 1996 to 35.9% in 1997 due primarily to the underwriting loss in 1997.
Based on available information, the Company has concluded it is more
likely than not that the deferred tax asset will be realized.
Distributions on capital securities of subsidiary trust resulted in an
after-tax charge of $4.5 million in 1997, representing the Company's minority
interest in the earnings of Integon Capital I, a single-purpose wholly-owned
subsidiary trust. The charge is due to the obligations incurred by Integon
Capital I on the Capital Securities issued February 10, 1997. See Note 2 of
Notes to Financial Statements.
Net income decreased $53.9 million from income of $16.6 million in 1996
to a loss of $37.3 million in 1997.
Page 13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (Continued)
Three Months Ended September 30, 1997 ("1997") Compared with Three Months Ended
September 30, 1996 ("1996")
Net premiums written decreased 21.6% from $214.4 million in 1996 to
$168.1 million in 1997. Nonstandard automobile insurance net premiums written
decreased from $194.5 million in 1996 to $148.2 million in 1997 or 23.8%. Price
increases taken during the fourth quarter of 1996 and the first three quarters
of 1997 have had the effect of slowing premium growth. Specialty auto products
net premiums written decreased 1.2% from $13.5 million in 1996 to $13.4 million
in 1997. Premiums earned on all lines of business decreased 0.9% from $191.8
million in 1996 to $190.1 million in 1997 and reflects primarily the decrease in
net premiums written during 1997 compared to 1996.
Loss and loss adjustment expenses increased 1.1% from $147.2 million in
1996 to $148.8 million in 1997. The loss ratio, defined as loss and loss
adjustment expenses as a percentage of premiums earned, increased from 76.8% in
1996 to 78.3% in 1997. A comprehensive actuarial review conducted in the first
quarter of 1997 showed that loss and loss adjustment expenses relating to
accident year 1996 increased significantly compared to the amounts previously
reported in 1996.
Policy acquisition and other underwriting expenses increased $3.4
million from $42.0 million in 1996 to $45.4 million in 1997. The expense ratio,
defined as policy acquisition and other underwriting expenses as a percentage of
premiums earned, increased from 21.9% in 1996 to 23.9% in 1997. The increase in
the expense ratio was due primarily to an increase in personnel-related and
other information systems costs incurred primarily to enhance the Company's
operations, and also included expenditures for modifications necessary to
accommodate the Year 2000. Additionally the reversal of a $1.0 million bonus
accrual in 1996 contributed to the variance from 1996 to 1997.
Net investment income increased 31.3% from $8.0 million in 1996 to $10.5
million in 1997 as a result of the $130.5 million increase in average invested
assets due primarily to the issuance of $100.0 million in capital securities by
Integon Capital I (See Note 2 of Notes to Financial Statements) and a lower
percentage invested in tax-exempt securities. The pre-tax yield of the portfolio
was 6.2% in 1997 compared to 5.8% in 1996. The
Page 14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (Continued)
percentage of cash and invested assets invested in tax-exempt securities was
3.6% and 20.3% in 1997 and 1996, respectively. In addition to the variances
discussed above, there were pre-tax net realized investment gains of $.5 million
in 1997 and $1.1 million in 1996.
Other income less other expenses resulted in an expense of $.1 million
in 1996 and $.6 million in 1997 due primarily to a decrease in premium finance
income.
Interest expense remained at $3.7 million in 1996 and in 1997.
Federal income taxes decreased $1.6 million from $2.2 million in 1996
to $.6 million in 1997 due to a decrease in pre-tax income.
Based on available information, the Company has concluded it is more
likely than not that the deferred tax asset will be realized.
Distributions on capital securities of subsidiary trust resulted in an
after-tax charge of $1.7 million in 1997, representing the Company's minority
interest in the earnings of Integon Capital I, a single-purpose wholly-owned
subsidiary trust. The charge is due to the obligations incurred by Integon
Capital I on the Capital Securities issued February 10, 1997. See Note 2 of
Notes to Financial Statements.
Net income decreased $5.4 million from income of $4.9 million in 1996
to a loss of $.5 million in 1997.
Page 15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (Continued)
<TABLE>
<CAPTION>
Analysis of Financial Condition
Information regarding the Company's investment portfolio at September 30, 1997 is as follows:
September 30, 1997
Type/Ratings of Investments (1) Carrying Amount (2) Percentage
- ------------------------------- ------------------- ----------
<S> <C> <C>
(in thousands)
Fixed maturities:
Government and agencies...................................... $181,554 26.4%
Aaa 111,020 16.1%
Aa ......................................................... 82,211 12.0%
A (3)........................................................ 267,891 39.1%
Baa 6,257 .9%
-------- -----
Total investment grade................................... 648,933 94.5%
Below investment grade....................................... 1,835 .3%
-------- -----
Subtotal................................................. 650,768 94.8%
Other long-term investments...................................... 1,132 .2%
Short-term investments........................................... 471 .1%
Cash and cash equivalents........................................ 33,517 4.9%
-------- -----
Total invested assets.................................... $685,888 100.0%
======== =====
</TABLE>
(1) The ratings set forth above are based on the ratings, if any, assigned
by Moody's Investors Service, Inc. ("Moody's"). If Moody's ratings were
unavailable, the equivalent ratings supplied by Standard & Poor's
Corporation ("S&P") or the National Association of Insurance
Commissioners ("NAIC") were used where available. The percentage of
rated securities that were not assigned a rating by Moody's at
September 30, 1997 was 5.5%.
(2) Carrying amount is estimated market value for fixed maturities avail-
able for sale.
(3) The "A" category includes $18.9 million of securities which were not
rated by Moody's or S&P, but were rated "1" by the NAIC.
Liquidity and Capital Resources
Sources of Funds. The Company's major sources of operating funds have
been (i) dividends from its subsidiaries, (ii) reimbursements of costs and
expenses in connection with the management agreement among the Company and its
subsidiaries pursuant to which the Company provides certain services to such
subsidiaries, (iii) tax sharing payments from the operating subsidiaries of the
Company and (iv) borrowings under credit facilities. The Company files a
consolidated federal income tax return including its subsidiaries and receives
payments pursuant to a tax sharing agreement among the Company and its
subsidiaries. Taxes are computed for each subsidiary and paid to the Company as
if such subsidiary were filing a tax return on a stand-alone basis, thereby
providing additional funds to the Company, because the aggregate of such
payments generally exceeds taxes to be paid by the Company on a consolidated
basis. These
Page 16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
sources are expected to be available for future needs except for dividends from
the Company's subsidiaries. Dividends will be retained by the subsidiaries as
needed. In light of the merger that occurred in October, (see Note 6 of Notes to
Financial Statements) the Company and its parent company will be reviewing
sources of funds for the future. The Company's insurance subsidiaries are
limited as to the amount of ordinary dividends they may pay (see "Regulation"
below). In addition, in determining the ability of its subsidiaries to pay
dividends, the Company monitors its subsidiaries' operating leverage based on
the level of net premiums written to statutory surplus. Currently, the Company
seeks to maintain its subsidiaries' ratio of net premiums written to statutory
surplus at a level of approximately 3.0x in accordance with industry standards.
The ratio was 2.7x for the twelve months ended September 30, 1997. On February
13, 1997, Integon Corporation contributed $50.0 million to the domestic
insurance subsidiaries in the form of certificates of contribution. Interest on
the certificates accrues at the rate of 10 3/4% per annum, not compounded, and
is due and payable semiannually to the extent funds exist pursuant to regulatory
requirements. As a result of the merger of the Company with a subsidiary of
General Motors Acceptance Corporation (see Note 6 of Notes to Financial
Statements) a capital contribution of $30.9 million was made to the domestic
insurance subsidiaries in October 1997.
As of September 30, 1997, Integon Corporation, the parent company, believes that
the sources of funds available to it are and will be sufficient to satisfy the
needs for general corporate purposes, including debt service, dividend payments
and working capital. These sources, including the $75.0 million committed credit
facility described in "Financing Activities" below, are and will be sufficient
to satisfy its short-term needs.
The principal sources of funds for the Company's subsidiaries are net premiums
collected, proceeds from investment income and from investments that have been
sold, matured or repaid and premium financing revenues.
On a consolidated basis, net cash flows provided by operating activities for the
nine months ended September 30, 1997 and 1996 were $68.7 million and $65.4
million, respectively. Based on the Company's current financial plans,
management believes that its subsidiaries will continue to realize positive cash
flows from their operating activities and that the operating liquidity needs of
such subsidiaries can be funded from such cash flow. Statements concerning cash
flows look forward in time. The
Page 17
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
following important factors, among others, could cause actual cash flows to
differ materially from those set forth in the above forward looking statement:
claims frequency, claims severity, severe adverse weather conditions, the cost
of automobile repair, economic activity, competitive pricing, and the regulatory
environment in which the Company operates.
Uses of Funds. The Company's principal uses of funds are the payment of
corporate operating expenses, taxes, debt service and dividends on Common and
Preferred Stock. During the first quarter of 1997, the Company contributed $50.0
million of capital in the form of certificates of contribution to the insurance
subsidiaries to maintain the ratio of net premiums written to statutory surplus
at a level of 3.0x.
The principal uses of funds of the Company's subsidiaries are the payment of
claims on insurance policies, the payment of operating expenses, the payment of
interest on the certificates of contribution, distributions on the Capital
Securities, purchase of investments, tax sharing payments and dividends to the
Company.
The Company and its subsidiaries have no material commitments for capital
expenditures.
Financing Activities: The Company has a committed credit facility of
$75.0 million. The interest rate charged on this credit facility is based on the
bids of the participating lenders and in the case of Eurodollar loans a margin
percentage ranging from .55% to .675% is added. The facility fee ranges from
.20% to .35% of the total amount of the facility.
On February 10, 1997, Integon Capital I issued $100.0 million of 10 3/4% capital
securities due February 15, 2027, the proceeds of which were invested in 10 3/4%
junior subordinated debentures of the Company, due February 15, 2027. See Note 2
and Note 6 of Notes to Financial Statements.
Investments. In accordance with the Company's investment policy, the
Company's investments at September 30, 1997 consisted primarily of
investment-grade securities (rated Baa or better by Moody's Investor Services,
Inc. or the equivalent). Consolidated cash and cash equivalents at September 30,
1997 amounted to $33.5 million, or 4.9% of total cash and invested assets.
Page 18
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Management has determined that the entire fixed maturity portfolio should be
classified as "available for sale". Fixed maturity securities classified as
"available for sale" are carried at estimated market value. The market value and
amortized cost of all fixed maturity securities at September 30, 1997 were
$650.8 million and $643.6 million, respectively. Management believes that the
securities in the Company's investment portfolio at September 30, 1997 are
readily marketable.
Regulation. Insurance laws and regulations impose certain restrictions
on the amount of dividends that may be paid by insurance companies. The maximum
amount of ordinary dividends that a North Carolina domiciled property and
casualty insurance company may pay at any point in time without regulatory
approval is the lesser of (a) 10% of the policyholders' statutory surplus of
such property and casualty insurance company as of the preceding December 31 or
(b) the statutory net income of such property and casualty insurance company for
the preceding calendar year, less the amount of dividends paid during the
preceding twelve months. The Company's insurance subsidiaries have made no
payments of ordinary dividends during the twelve months ended September 30,
1997. Dividends will be retained by the subsidiaries as needed.
If the insurance subsidiaries are not able to pay ordinary dividends and their
requests for the payment of extraordinary dividends are not granted, and if
amounts needed are in excess of the available funds under the credit facility,
additional borrowings, the issuance of additional securities or obtaining other
funds could be necessary to pay debt service, Common Stock and Preferred Stock
dividends and other expenses of the Company.
Page 19
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
Filed Herewith (*),
Nonapplicable (NA), or
Incorporated by Reference from
------------------------------
Integon
Exhibit Registration
Number Exhibit No. or Report
------- -------------
11.1 Computation of Earnings per Share * NA
b. Reports on Form 8-K.
The following reports on Form 8-K were filed during the quarter ended
September 30, 1997.
Filing Date Item No. Description
------------ ------- -------------
July 1, 1997 5 Other Events. Copy of press release
announcing extension ofexchange for
capital securities.
July 7, 1997 5 Other Events. Copy of press release
announcing the exchange of capital
securities.
July 18, 1997 5 Other Events. Announcement relating
to amendment to Merger Agreement.
August 4, 1997 5 Other Events. Copy of press release
concerning second quarter 1997
results.
August 14, 1997 5 Other Events. Copy of press release
declaring a cash dividend on the
Company's Common Stockand Preferred
Stock.
Page 20
<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.
INTEGON CORPORATION
November 14, 1997 /s/ Brian T. Sheekey
--------------------
Brian T. Sheekey
(Duly Authorized Officer
and Principal Accounting Officer)
Page 21
<PAGE>
Exhibit 11.1
INTEGON CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(Dollars in thousands, except per share data)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
---------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Income available to common shareholders:
Net income (loss).............................................. $ (526) $4,871 $(37,313) $16,553
Preferred stock dividends...................................... 1,393 1,393 4,178 4,178
------- ------ -------- -------
Net income (loss) available to common
shareholders............................................. $(1,919) $3,478 $(41,491) $12,375
======= ====== ======== =======
Weighted average common shares outstanding:
Primary:
Common shares outstanding................................. 16,002,942 15,732,440 15,843,641 15,724,386
Assumed exercise of stock options......................... 414,415 147,979 67,267 144,273
---------- ---------- ---------- ----------
Total...................................................... 16,417,357 15,880,419 15,910,908 15,868,659
========== ========== ========== ==========
Fully diluted:
Common shares outstanding................................. 16,002,942 15,732,440 15,843,641 15,724,386
Assumed exercise of stock options......................... 414,415 147,979 67,267 144,273
---------- ---------- ---------- ----------
Total...................................................... 16,417,357 15,880,419 15,910,908 15,868,659
========== ========== ========== ==========
Earnings per common share:
Primary........................................................ $ (.12) $ .22 $(2.61) $ .78
====== ====== ====== ======
Fully diluted.................................................. $ (.12) $ .22 $(2.61) $ .78
====== ====== ====== ======
</TABLE>
Page 22
<PAGE>
INDEX TO EXHIBITS
Filed Herewith (*),
Nonapplicable (NA), or
Incorporated by Reference from
--------------------------------------------
Integon
Exhibit Registration Sequential
Number Exhibit No. or Report Page Number
- ------- ------- ------------- -----------
11.1 Computation of Earnings
per Share 11.1 *
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND> This statement contains summary financial information
extracted from Integon Corporation's September 30, 1997
financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<CIK> 0000878660
<NAME> Integon Corporation
<MULTIPLIER> 1,000
<CURRENCY> U.S. Dollars
<S> <C>
<PERIOD-TYPE> 9-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-1-1997
<PERIOD-END> Sep-30-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 650,768
<DEBT-CARRYING-VALUE> 650,768
<DEBT-MARKET-VALUE> 650,768
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 652,371
<CASH> 33,517
<RECOVER-REINSURE> 163,505
<DEFERRED-ACQUISITION> 45,615
<TOTAL-ASSETS> 1,449,731
<POLICY-LOSSES> 532,170
<UNEARNED-PREMIUMS> 336,106
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 150,723
0
14
<COMMON> 177
<OTHER-SE> 182,300
<TOTAL-LIABILITY-AND-EQUITY> 1,449,731
584,721
<INVESTMENT-INCOME> 29,855
<INVESTMENT-GAINS> (1,602)
<OTHER-INCOME> 14,172
<BENEFITS> 504,237
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 145,165
<INCOME-PRETAX> (58,111)
<INCOME-TAX> (20,798)
<INCOME-CONTINUING> (37,313)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (37,313)
<EPS-PRIMARY> (2.61)
<EPS-DILUTED> (2.61)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
