<PAGE>
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q/A
(AMENDMENT NO. 1)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1997
--------------
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________ to _______________
Commission file number 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 April 30, 1997, there were 15,736,121 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 - March 31, 1997 and December 31, 1996......... 3
Statements of Operations - Three Months Ended March 31,
1997 and 1996............................................. 4
Statements of Cash Flows - Three Months Ended March 31,
1997 and 1996............................................. 5
Notes to Financial Statements................................. 6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations................ 10
PART II - OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K......................... 18
Page 2
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
INTEGON CORPORATION AND SUBSIDIARIES
BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share data)
<TABLE>
<CAPTION>
March 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale--at market
(amortized cost $636,131 and $522,452) ........................... $ 625,104 $ 521,311
Other long-term investments .......................................... 2,815 2,743
Short-term investments ............................................... 5,720 --
----------- -----------
633,639 524,054
Cash and cash equivalents ............................................ 27,816 43,838
Reinsurance receivable ............................................... 176,839 185,077
Premiums due and uncollected (less allowance for
doubtful accounts of $5,282 and $5,282) .......................... 250,661 248,537
Prepaid reinsurance premiums ......................................... 52,584 48,909
Accounts receivable, primarily financing receivables
(less allowance for doubtful accounts of $1,398 and $1,112) ....... 39,602 32,957
Accrued investment income ............................................ 9,290 8,933
Deferred policy acquisition costs .................................... 52,215 55,106
Property and equipment (less accumulated depreciation
of $12,705 and $10,808) .......................................... 70,303 68,271
Goodwill (less accumulated amortization of $14,648 and $13,885) ...... 106,193 106,957
Deferred income taxes ................................................ 29,328 22,044
Other assets ......................................................... 31,807 12,116
----------- -----------
$ 1,480,277 $ 1,356,799
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Unearned premiums .................................................... $ 374,194 $ 364,081
Loss and loss adjustment expenses payable ............................ 523,554 478,031
Accrued expenses and other liabilities ............................... 149,007 104,536
Short-term debt ...................................................... 10,000 44,000
Notes payable ........................................................ 150,705 150,760
----------- -----------
1,207,460 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, issued and
outstanding ........................................................ 14 14
Common Stock--$.01 par value per share, authorized--
35,000,000 shares; issued--17,303,321 and
17,303,321 shares .................................................. 173 173
Class A Non-Voting Common Stock--$.01 par value per
share, authorized 20,000,000 shares; issued and
outstanding--none .................................................. -- --
Additional paid-in capital ........................................... 147,891 147,891
Net unrealized depreciation of securities ............................ (7,080) (700)
Retained earnings .................................................... 69,640 105,834
Treasury stock--at cost, 1,567,200 shares ............................ (37,821) (37,821)
---------- ----------
172,817 215,391
---------- ----------
$1,480,277 $1,356,799
========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 3
<PAGE>
Item 1. Financial Statements. (continued)
INTEGON CORPORATION AND SUBSIDIARIES
STATEMENTS OF OPERATIONS
(Unaudited)
(In thousands, except per share data)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
----------------------
1997 1996
--------- ---------
<S> <C> <C>
REVENUES
Net premiums written .................................................. $ 202,554 $ 194,262
========= =========
Premiums earned ....................................................... $ 196,117 $ 164,815
Net investment income ................................................. 9,043 7,753
Net realized investment gains (loss) .................................. (481) 2,077
Other income .......................................................... 4,540 4,175
--------- ---------
209,219 178,820
BENEFITS AND EXPENSES
Loss and loss adjustment expenses ..................................... 199,238 130,558
Policy acquisition and other underwriting expenses .................... 51,143 34,971
Other expenses ........................................................ 4,747 4,049
Amortization of goodwill .............................................. 764 769
Interest expense ...................................................... 3,767 3,631
--------- ---------
259,659 173,978
--------- ---------
INCOME (LOSS) FROM OPERATIONS BEFORE FEDERAL
INCOME TAX (BENEFIT) AND DISTRIBUTIONS ON
CAPITAL SECURITIES OF SUBSIDIARY TRUST (50,440) 4,842
Federal income tax (benefit) .......................................... (18,042) 1,457
--------- ---------
Income (loss) before distributions on capital
securities of subsidiary .............................................. (32,398) 3,385
Distributions on capital securities of
subsidiary trust, net of federal income
tax benefit of $533 ................................................... (990) --
--------- ---------
NET INCOME (LOSS) ................................................ (33,388) 3,385
Preferred stock dividends ............................................. 1,393 1,393
--------- ---------
Net income (loss) available to common shareholders .................... $ (34,781) $ 1,992
========= =========
EARNINGS PER COMMON SHARE
Primary ............................................................... $ (2.21) $ .13
========= =========
Fully diluted ......................................................... $ (2.21) $ .13
========= =========
Weighted average common shares outstanding:
Primary ............................................................. 15,736 15,903
========= =========
Fully diluted ....................................................... 15,736 15,903
========= =========
Dividends declared per share .......................................... $ .09 $ .09
========= =========
</TABLE>
The accompanying notes are an integral part of these statements.
Page 4
<PAGE>
Item 1. Financial Statements. (continued)
INTEGON CORPORATION AND SUBSIDIARIES
STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
-------------------------
1997 1996
---------- ----------
<S> <C> <C>
Cash Flows from Operating Activities
Net income (loss) ............................................ $ (33,388) $ 3,385
Adjustments to reconcile net income to net cash provided
by operating activities:
Net realized investment (gains) losses .................. 481 (2,077)
Depreciation and amortization ........................... 2,769 2,242
Net amortization of discounts and premiums .............. 255 170
Provision for deferred federal income taxes (benefit) ... (3,849) 281
Net decrease in reinsurance assets ...................... 4,563 11,409
Increase in premiums due and uncollected ................ (2,124) (20,953)
Net (increase) decrease in deferred policy acquisition
costs ................................................ 2,891 (5,454)
Net increase in accounts and notes receivable,
accrued investment income and other assets ........ (11,198) (4,199)
Increase in unearned premiums ........................... 10,113 27,442
Increase in loss and loss adjustment expenses payable ... 45,523 6,008
Net increase in accrued expenses and other liabilities 15,705 10,192
--------- ---------
Net cash flows provided by operating activities
from continuing operations ........................... 31,741 28,446
--------- ---------
Cash Flows from Investing Activities
Investment securities sold ................................... 267,386 112,247
Investment securities matured, called or redeemed ............ 4,276 2,917
Investment securities purchased .............................. (395,725) (126,684)
Other, net ................................................... 10 (727)
--------- ---------
Net cash flows used in investing activities ............. (124,053) (12,247)
--------- ---------
Cash Flows from Financing Activities
Net increase (decrease) in short-term debt ................... (34,000) 2,000
Proceeds from Company-obligated mandatorily redeemable
capital securities of subsidiary trust .................. 100,000 --
Common stock dividends ....................................... (1,415) (1,415)
Preferred stock dividends .................................... (1,393) (1,393)
Decrease in notes payable .................................... (55) (72)
Increase in book cash overdrafts ............................. 13,153 3,405
--------- ---------
Net cash flows provided by financing activities .......... 76,290 2,525
--------- ---------
Net increase (decrease) in cash and cash equivalents ......... (16,022) 18,724
Cash and cash equivalents at beginning of period ......... 43,838 21,046
--------- ---------
Cash and cash equivalents at end of period ................... $ 27,816 $ 39,770
========= =========
Supplemental Disclosures of Cash Flows Information
Interest paid during the period .............................. $ 3,421 $ 3,274
Federal income taxes paid during the period .................. -- 950
</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
MARCH 31, 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 March 31, 1997 and
December 31, 1996 and the consolidated results of operations and cash flows for
the periods ended March 31, 1997 and 1996.
The operating results for the three months ended March 31, 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 newly created 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 domestic insurance subsidiaries in the form of
certificates of contribution bearing interest at 10 3/4% per annum, not
compounded, 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 deferred. Such costs are being amortized using
the interest-rate method.
Note 3 - Stock Option and Incentive Plans
At March 31, 1997, the Company had two stock-based compensation plans, which are
described below. The Company applies APB 25 and related Interpretations in
accounting for these 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. Had compensation cost for stock-based compensation under these two plans
been determined consistent with Statement of Financial Accounting Standards
("SFAS") Number 123, the Company's net income and earnings per share on
Page 7
<PAGE>
Item 1. Financial Statements. (continued)
a pro forma basis for the three months ended March 31, would have been as
follows:
1997 1996
---- ----
Pro forma net income............................... $ (33,530) $ 3,302
Pro forma primary earnings per share............... $ (2.22) $ .12
Pro forma fully diluted earnings per share......... $ (2.22) $ .12
Note 4 - Earnings per Share
In February 1997, the Financial Accounting Standards Board issued SFAS 128
"Earnings per Share" ("SFAS 128") which changes the method of calculating
earnings per share. SFAS 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 128 for the three months ended March 31, are
as follows:
1997 1996
---- ----
Pro forma basic earnings per share.............. $(2.21) $.13
Pro forma diluted earnings per share............ $(2.21) $.13
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,
Page 8
<PAGE>
Item 1. Financial Statements. (continued)
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 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 - Subsequent Events
On April 28, 1997, Integon Corporation announced that an investment banker will
be retained to review all strategic alternatives available, including the sale
of the Company, after recording a loss of $2.21 per share for the quarter ended
March 31, 1997.
Page 9
<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 9 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
Three Months Ended March 31, 1997 ("1997") Compared with Three Months Ended
March 31, 1996 ("1996")
Net premiums written increased 4.3% from $194.3 million in 1996 to $202.6
million in 1997. Price increases taken during the fourth quarter of 1996 and the
first quarter 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 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.
Nonstandard automobile insurance net premiums written increased from $176.8
million in 1996 to $180.2 million in 1997 or 1.9% due primarily to growth in the
Company's more mature operating states. Specialty auto products net premiums
written increased 47.3% from $11.0 million in 1996 to $16.2 million in 1997.
Premiums earned on all lines of business increased 19.0% from $164.8 million in
1996 to $196.1 million in 1997 and reflects primarily the increase in net
premiums written during 1996 compared to 1995.
Loss and loss adjustment expenses increased 52.6% from $130.6 million in
1996 to $199.2 million in 1997. The loss ratio, defined as loss and loss
adjustment expenses as a percentage of premiums earned, increased from 79.2% in
1996 to 101.6% in 1997 due primarily to an increase to loss reserves of $42.0
million following a comprehensive review and analysis by the Company's actuarial
staff and independent consulting actuaries. During the first quarter of 1997,
the Company experienced greater than anticipated physical damage loss activity
related to the 1996 accident year. Post quarter analysis has determined that
winter storms in December resulted in a tendency for policyholders and affected
third parties to wait until after the holidays to report claims against the
Company. While this is not unusual behavior, it appeared to have happened to a
greater extent than previous experience would allow the Company to anticipate.
Furthermore, after an in-depth review, the Company determined that reserves
primarily related to automobile liability coverages needed to be strengthened.
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 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 million was necessary.
The Company believes that the recent events causing the net losses for the
year ended December 31, 1996 and quarter ended March 31, 1997 are not indicative
of the future earnings potential of the Company. The primary reason for the
losses in these periods was the charging of inadequate prices to customers prior
to 1997. The Company has revised its pricing and implemented underwriting
restrictions designed to enhance profitability.
Both the underwriting restrictions and the rate increases have had the
effect of reducing the loss ratio for the 1997 accident year as compared to the
1996 accident year. These changes have also reduced the net premiums written
growth rate during 1997, which, the Company believes, will assist in returning
it to profitability.
Page 10
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
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
estimates 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 $16.1 million
from $35.0 million in 1996 to $51.1 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 26.1% 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 other
information systems costs including for modifications necessary to accommodate
the Year 2000. As a result of the increased loss ratio in the first quarter of
1997 and the fourth quarter of 1996 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.
Net investment income increased 16.6% from $7.8 million in 1996 to $9.0
million in 1997 as a result of the $108.7 million increase in average invested
assets. This higher level of invested assets was partially offset by lower
yields. The pre-tax yield of the portfolio was 5.9% in 1997 compared to 6.1% in
1996. The percentage of cash and invested assets invested in tax-exempt
securities was 21.2% and 21.3% in 1997 and 1996, respectively. In addition to
the variances discussed above, there were pre-tax net realized investment losses
of $.5 million in 1997 compared to pre-tax net realized investment gains of $2.1
million in 1996.
Other income less other expenses decreased from income of $.1 million in
1996 to an expense of $.2 million in 1997 due primarily to a decline in premium
finance income.
Interest expense increased 3.8% from $3.6 million in 1996 to $3.8 million
in 1997 due to increased short-term borrowings.
Page 11
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (Continued)
Federal income taxes decreased $19.5 million from $1.5 million tax
expense in 1996 to an $18.0 million tax benefit in 1997 due to a loss from
operations before federal income tax. The effective tax rate increased from
30.1% in 1996 to 35.8% in 1997 due primarily to the underwriting loss in 1997.
The deferred tax asset in the amount of $29.3 million has not been
reduced by a valuation allowance. Based on available information, the Company
has concluded it is more likely than not that all of the deferred tax asset will
be realized. In evaluating the need for a valuation allowance, refunds available
for carryback of losses to offset taxable income in prior years were considered
as well as future taxable income.
Distributions on capital securities of subsidiary trust resulted in an
after-tax charge of $.9 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.
Net income decreased $36.8 million from $3.4 million in 1996 to a loss
of $33.4 million in 1997 .
Page 12
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
Analysis of Financial Condition
Information regarding the Company's investment portfolio at March 31,
1997 is as follows:
March 31, 1997
Type/Ratings of Investments (1) Carrying Amount (2) Percentage
- ------------------------------- ------------------- ----------
(in thousands)
Fixed maturities:
Government and agencies................ $158,741 24.0%
Aaa 173,934 26.3%
Aa ................................... 79,772 12.1%
A (3).................................. 199,863 30.2%
Baa 10,266 1.6%
-------- -----
Total investment grade............. 622,576 94.2%
Below investment grade................. 2,528 0.4%
-------- -----
Subtotal........................... 625,104 94.6%
Other long-term investments................ 2,815 0.4%
Short-term investments..................... 5,720 0.9
Cash and cash equivalents.................. 27,816 4.1
-------- -----
Total invested assets.............. $661,455 100.0%
======== =====
(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 March
31, 1997 was 6.5%.
(2) Carrying amount is estimated market value for fixed maturities
available for sale.
(3) The "A" category includes $17.7 million of securities which were not
rated by Moody's or S&P, but were rated "1" by the NAIC.
Page 13
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
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 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. 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 3.07x
for the twelve months ended March 31, 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 of March 31, 1997, Integon Corporation, the parent company, had approximately
$2.5 million of cash and cash equivalents that were available for general
corporate purposes, including debt service, dividend payments and working
capital. The Company believes that the sources of funds available to it,
including the
Page 14
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
$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
three months ended March 31, 1997 and 1996 were $31.7 million and $28.4 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 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.
Page 15
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
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
of Notes to Financial Statements.
Investments. In accordance with the Company's investment policy, the
Company's investments at March 31, 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 March 31, 1997 amounted
to $27.8 million, or 4.1% of total cash and invested assets.
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 March 31, 1997 were $625.1
million and $636.1 million, respectively.
Management believes that the securities in the Company's investment portfolio at
March 31, 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
Page 16
<PAGE>
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations. (continued)
preceding 12 months. The Company's insurance subsidiaries have made no payments
of ordinary dividends during the twelve months ended March 31, 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 17
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
<TABLE>
<CAPTION>
Filed Herewith (*),
Nonapplicable (NA), or
Incorporated by Reference from
------------------------------
Integon
Exhibit Registration Sequential
Number Exhibit No. or Report Page Number
- ------- ------- -------------- -----------
<C> <S> <C> <C> <C>
10.1 Letter Agreement entered into between 10.1 1997 First
the Company and Steven C. Andrews dated Quarter
February 13, 1997 regarding severance Form 10-Q
10.2 Letter Agreement entered into between 10.2 1997 First
the Company and Donald F. McKee dated Quarter
February 13, 1997 regarding severance Form 10-Q
10.3 Form of Letter Agreement entered into 10.3 1997 First
between the Company and each of John B.Yorke, Quarter
Arthur S. Lyon, Jr., Brian T. Sheekey, Form 10-Q
John C. Beattie and Kenneth J. Jakubowski
dated February 13, 1997 regarding severance
10.4 Amendment No. 2 to the Integon Corporation 10.4 1997 First
1992 Stock Option Plan Quarter
Form 10-Q
10.5 Integon Corporation Amended and Restated 10.5 1997 First
Omnibus Long-Term Performance Incentive Quarter
Compensation Plan Form 10-Q
10.6 Amendment No. 1 to the Integon Corporation 10.6 1997 First
Amended and Restated Omnibus Long-Term Quarter
Performance Incentive Compensation Plan Form 10-Q
</TABLE>
Page 18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K. (continued)
a. Exhibits
<TABLE>
<CAPTION>
Filed Herewith (*),
Nonapplicable (NA), or
Incorporated by Reference from
-----------------------------
Integon
Exhibit Registration Sequential
Number Exhibit No. or Report Page Number
- ------- ------- ------------- -----------
<C> <S> <C> <C> <C>
10.7 Integon Corporation Executive 10.7 1997 First
Salary Deferral Plan Quarter
Form 10-Q
10.8 Integon Corporation Severance Policy 10.8 1997 First
Quarter
Form 10-Q
10.9 Integon Corporation Amended and 10.9 1997 First
Restated Annual Incentive Award Plan Quarter
Form 10-Q
11.1 Computation of Earnings per Share 11.1 1997 First
Quarter
Form 10-Q
27 Financial Data Schedule
</TABLE>
b. Reports on Form 8-K.
The following reports on Form 8-K were filed during the quarter ended March 31,
1997.
Filing Date Item No. Description
- ----------- ---------- -----------
January 23, 1997 5 Other Events. Copy of press release
concerning fourth quarter 1996 results.
January 29, 1997 5 Other Events. Securities offering by
Integon Capital I.
January 31, 1997 5 Other Events. Rights Agreement.
Page 19
<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
September 12, 1997 /s/ Brian T. Sheekey
--------------------
Brian T. Sheekey
(Duly Authorized Officer
and Principal Accounting Officer)
Page 20
<PAGE>
INDEX TO EXHIBITS
Filed Herewith (*),
Nonapplicable (NA), or
Incorporated by Reference from
-------------------------------------
Integon
Exhibit Registration Sequential
Number Exhibit No. or Report Page Number
- ------- --------- ------------- -----------
10.1 Letter Agreement entered into 10.1 1997 First
between the Company and Steven Quarter
C. Andrews dated February 13, Form 10-Q
1997 regarding severance
10.2 Letter Agreement entered into 10.2 1997 First
between the Company and Donald Quarter
F. McKee dated February 13, Form 10-Q
1997 regarding severance
10.3 Form of Letter Agreement 10.3 1997 First
entered into between the Company Quarter
and each of John B. Yorke, Form 10-Q
Arthur S. Lyon, Jr., Brian T.
Sheekey, John C Beattie, and
Kenneth J. Jakubowski dated
February 13, 1997 regarding severance
10.4 Amendment No. 2 to the Integon 10.4 1997 First
Corporation 1992 Stock Option Plan Quarter
Form 10-Q
10.5 Integon Corporation Amended and 10.5 1997 First
Restated Omnibus Long-Term Quarter
Performance Incentive Form 10-Q
Compensation Plan
10.6 Amendment No. 1 to the Integon 10.6 1997 First
Corporation Amended and Restated Quarter
OmnibusLong-Term Performance Form 10-Q
Incentive Compensation Plan
<PAGE>
INDEX TO EXHIBITS (continued)
Filed Herewith (*),
Nonapplicable (NA), or
Incorporated by Reference from
-------------------------------------
Integon
Exhibit Registration Sequential
Number Exhibit No. or Report Page Number
- ------- --------- ------------- -----------
10.7 Integon Corporation Executive 10.7 1997 First
Salary Deferral Plan Quarter
Form 10-Q
10.8 Integon Corporation 10.8 1997 First
Severance Policy Quarter
Form 10-Q
10.9 Integon Corporation Amended 10.9 1997 First
and Restated Annual Quarter
Incentive Award Plan Form 10-Q
11.1 Computation of Earnings 11.1 1997 First
Per Share Quarter
Form 10-Q
27 Financial Data Schedule
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 7
<LEGEND>
This statement contains summary financial information
extracted from Integon Corporation's March 31, 1997
financial statements and is qualified in its entirety
by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-Mos
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-START> Jan-1-1997
<PERIOD-END> Mar-31-1997
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 625,104
<DEBT-CARRYING-VALUE> 625,104
<DEBT-MARKET-VALUE> 625,104
<EQUITIES> 0
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 627,919
<CASH> 33,536
<RECOVER-REINSURE> 176,839
<DEFERRED-ACQUISITION> 52,215
<TOTAL-ASSETS> 1,480,277
<POLICY-LOSSES> 523,554
<UNEARNED-PREMIUMS> 374,194
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 150,705
0
14
<COMMON> 173
<OTHER-SE> 172,817
<TOTAL-LIABILITY-AND-EQUITY> 1,480,277
246,479
<INVESTMENT-INCOME> 9,043
<INVESTMENT-GAINS> (481)
<OTHER-INCOME> 4,540
<BENEFITS> 199,238
<UNDERWRITING-AMORTIZATION> 0
<UNDERWRITING-OTHER> 199,238
<INCOME-PRETAX> (51,963)
<INCOME-TAX> (18,575)
<INCOME-CONTINUING> (33,388)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (33,388)
<EPS-PRIMARY> (2.21)
<EPS-DILUTED> (2.21)
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
