<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
(MARK ONE)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 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: 0-22000
--------------------------------------------------
TITAN HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
Texas 74-2289827
- -------------------------------------------------------------------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2700 N.E. Loop 410, Suite 500
San Antonio, Texas 78217
- -------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(210)527-2700
- -------------------------------------------------------------------------------
(Registrant's telephone number, including area code)
- -------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 periods 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
------- -------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
On August 12, 1997 there were outstanding 10,074,090 shares of Common Stock,
$.01 par value of the registrant.
<PAGE> 2
PART I
FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
Condensed Consolidated Balance Sheets 2
Condensed Consolidated Statements of Income 3
Condensed Consolidated Statements of Cash Flows 4
Notes to Condensed Consolidated Financial Statements 5
</TABLE>
<PAGE> 3
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
-------- ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Investments:
Fixed maturities available for sale, at market value
(amortized cost: $154,583 and $145,990)........................................ $153,729 $ 145,531
Fixed maturities held to maturity, at amortized cost
(market value: $13,612 and $16,104) ........................................... 13,621 16,114
Equity securities, at market value (cost: $14,253 and $17,088) ...................... 13,964 16,479
Short-term investments, at cost which approximates market value ..................... 270 270
Cash and cash equivalents ........................................................... 3,473 3,682
Premium finance contracts ........................................................... 43,924 23,469
Mortgage notes receivable ........................................................... 17,396 15,935
Other invested assets ............................................................... 2,345 3,313
-------- --------
Total investments ...................................................... 248,722 224,793
Amounts due from reinsurers .............................................................. 52,827 47,393
Receivables .............................................................................. 35,085 26,765
Deferred tax assets, net ................................................................. 5,098 4,427
Property and equipment, net .............................................................. 21,159 18,852
Deferred policy acquisition costs ........................................................ 15,205 12,498
Other assets ............................................................................. 6,193 6,032
Goodwill and non-competition agreements .................................................. 21,091 21,195
-------- --------
$405,380 $361,955
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Liabilities:
Reserve for unpaid losses and loss expenses.......................................... $156,565 $ 141,871
Unearned premiums ................................................................... 67,685 55,333
Notes payable and capitalized lease obligations ..................................... 19,862 24,024
Notes payable - premium finance subsidiary .......................................... 29,945 15,750
Other liabilities ................................................................... 12,739 13,109
-------- --------
Total liabilities ...................................................... 286,796 250,087
-------- --------
Shareholders' equity:
Preferred stock, $.01 par value. Authorized 5,000 shares;
no shares issued or outstanding ............................................. -- --
Common stock, $.01 par value. Authorized 40,000 shares; issued and
outstanding; 1997 - 10,056 shares; 1996 - 9,521 shares ........................ 101 95
Additional paid-in capital .......................................................... 71,086 62,141
Retained earnings ................................................................... 47,869 50,054
Net unrealized loss on investments, net of deferred
tax benefit of $254 and $227 .................................................. (472) (422)
-------- ---------
Total shareholders' equity .......................................................... 118,584 111,868
-------- ---------
$405,380 $ 361,955
======== =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
2
<PAGE> 4
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
(in thousands, except per share data)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
1997 1996 1997 1996
--------- ----------- --------- --------
<S> <C> <C> <C> <C>
Revenues and other income:
Premiums written ......................... $ 54,995 $ 39,403 $ 112,069 $ 86,056
Premiums ceded ........................... (5,685) (2,604) (8,082) (4,894)
--------- --------- --------- ---------
Net premiums written ................... 49,310 36,799 103,987 81,162
Change in unearned premiums .............. (763) 864 (12,465) (8,683)
--------- --------- --------- ---------
Premiums earned .......................... 48,547 37,663 91,522 72,479
Fee and ceding commission income ......... 3,791 2,522 6,089 3,561
Net investment income .................... 4,512 3,036 8,202 6,180
Net realized gains on sales of investments 340 391 547 473
--------- --------- --------- ---------
Total revenues and other income .... 57,190 43,612 106,360 82,693
--------- --------- --------- ---------
Expenses:
Losses and loss expenses ................. 32,012 23,365 59,870 45,840
Agents' commissions ...................... 5,355 4,794 10,078 8,780
Other operating expenses ................. 14,048 10,109 25,408 18,243
--------- --------- --------- ---------
Total expenses ....................... 51,415 38,268 95,356 72,863
--------- --------- --------- ---------
Income before income tax expense ..... 5,775 5,344 11,004 9,830
Income tax expense .......................... 1,819 1,652 3,466 3,052
--------- --------- --------- ---------
Net income ........................... $ 3,956 $ 3,692 $ 7,538 $ 6,778
========= ========= ========= =========
Net income per share ........................ $ .38 $ .37 $ .73 $ .67
========= ========= ========= =========
Weighted average shares outstanding ......... 10,394 10,087 10,315 10,068
========= ========= ========= =========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
3
<PAGE> 5
TITAN HOLDINGS, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
(in thousands)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
--------------------
1997 1996
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net income .......................................................... $ 7,538 $ 6,778
Adjustments to reconcile net income to net cash provided by
operating activities:
Receivables ..................................................... (13,754) (9,989)
Deferred income taxes ........................................... (644) (606)
Deferred policy acquisition costs ............................... (2,707) (1,620)
Reserve for unpaid losses and loss expenses ..................... 14,694 11,026
Unearned premiums ............................................... 12,352 8,746
Depreciation and amortization ................................... 1,148 703
Other ........................................................... 213 (2,019)
-------- --------
Net cash provided by operating activities ..................... 18,840 13,019
-------- --------
Cash flows from investing activities:
Purchases of investments ............................................ (85,653) (49,838)
Proceeds from sales and maturities of investments, available for sale 73,479 38,870
Proceeds from fixed maturities, held to maturity, called by issuer .. 2,344 --
Payable for securities .............................................. -- 555
Contingent consideration paid, related to 1992
purchase transaction .............................................. -- (6,832)
Business acquired in purchase transactions .......................... (16,390) (2,019)
Purchases of property and equipment ................................. (3,578) (2,953)
Other ............................................................... 1,488 2,723
-------- --------
Net cash used by investing activities ......................... (28,310) (19,494)
-------- --------
Cash flows from financing activities:
Proceeds from borrowings ............................................ 750 --
Proceeds from borrowings - premium finance subsidiary ............... 14,195 4,000
Repayments of borrowings ............................................ (4,912) (133)
Proceeds from sale of common stock issued for exercise of options ... 758 76
Payment of dividends ................................................ (1,530) (1,356)
-------- --------
Net cash provided (used) by financing activities .............. 9,261 2,587
-------- --------
Net decrease in cash and cash equivalents ..................... (209) (3,888)
Cash and cash equivalents:
Beginning of the period ............................................. 3,682 11,008
-------- --------
End of the period ................................................... $ 3,473 $ 7,120
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements.
4
<PAGE> 6
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
(1) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Titan Holdings, Inc. and subsidiaries ("the Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange
Commission. In management's opinion, all adjustments, consisting of normal
recurring adjustments, which are necessary for a fair presentation of financial
position and results of operations have been made. It is recommended that these
condensed consolidated financial statements be read in conjunction with the
consolidated financial statements and notes related thereto included in the
Company's December 31, 1996 Annual Report on Form 10-K. Certain prior period
amounts have been reclassified for comparative purposes.
(2) NET INCOME PER SHARE
Net income per share is computed by dividing net income by the weighted
average number of shares of common stock outstanding during the period,
calculated on a daily basis. The weighted average shares outstanding include
common stock equivalents relating to dilutive outstanding stock options and
warrants. On May 13, 1997 the Company effected a 5% stock dividend. Prior
period weighted average shares outstanding and per share amounts have been
restated accordingly.
In February 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 128, "Earnings per Share" (FAS
128). FAS 128 establishes standards for computing and presenting earnings per
share (EPS). FAS 128 replaces primary EPS, as computed under APB No. 15,
"Earnings per Share," with basic EPS and also requires dual presentation of
basic EPS and diluted EPS on the income statement. FAS 128 is effective for
financial statements ending after December 15, 1997 and requires restatement of
all prior-period EPS data. Basic EPS for the three months ended June 30, 1997
and 1996 would have been $.39, and $.37, respectively. Basic EPS for the six
months ended June 30, 1997 and 1996 would have been $.75 and $.68,
respectively. Dilutive earnings per share approximate the amounts shown on the
Condensed Consolidated Statements of Income.
(3) NOTE PAYABLE - PREMIUM FINANCE SUBSIDIARY
In February 1997, Westchester Premium Acceptance Corporation ("West-Pac")
executed an agreement to acquire a premium finance company, Elite Premium
Services, Inc. ("Elite") for approximately $400,000 in cash and additional
consideration to be determined as a function of future amounts financed through
sources provided by Elite. In connection with the purchase, West-Pac increased
the limit of its credit facility to $50 million and increased its borrowings
under the credit facility by approximately $11.5 million for finance contracts
acquired.
(4) SUBSEQUENT EVENT
On August 7, 1997, Holdings entered into an Agreement and Plan of Merger
(the "Merger Agreement"), by and among the Company, USF&G Corporation ("USF&G")
and United States Fidelity and Guaranty Company, a wholly owned subsidiary of
USF&G ("Purchaser"), pursuant to which, among other things, the Company will
merge with and into the Purchaser (the "Merger").
The Merger Agreement provides that each outstanding share of common stock
of the Company will be converted into the right to receive, at the election of
the holder and subject to the prorations and adjustments described below, (i)
$11.60 in cash (the "Standard Cash Consideration") and 0.46516 (the "Standard
Exchange Ratio") of a share of USF&G common stock, (ii) $23.20 (two times the
Standard Cash Consideration) in cash, or (iii) 0.93032 (two times the Standard
Exchange Ratio) of a share of USF&G common stock. The above exchange ratio is
based on a value for the USF&G common stock of $24.9375 per share (the "Base
Share Price") which was the closing price of the USF&G common stock on July 29,
1997, the day before USF&G made its original offer to the Company. The
5
<PAGE> 7
TITAN HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
THREE AND SIX MONTHS ENDED JUNE 30, 1997
(UNAUDITED)
Merger is intended to qualify as a tax-free reorganization under the Internal
Revenue Code of 1986, as amended, and provide tax deferral to the extent the
Company's shareholders receive shares of USF&G common stock in the Merger.
The actual value of the consideration to be received in the Merger will be
subject to adjustment based upon the average closing price of the USF&G common
stock for the ten consecutive trading days ending on the third trading day
prior to the effective time of the Merger (the "Average Closing Price"). If the
Average Closing Price is not greater than $28.68 (15% above the Base Share
Price) or less than $21.20 (15% below the Base Share Price), the allocation of
the consideration between stock and cash will be adjusted to maintain a 50%
stock, 50% cash relationship by adjusting the Standard Cash Consideration to an
amount equal to one-half of the product of (a) $23.20 and (b) 1 plus the
product of (i) 0.50 and (ii) a fraction, the numerator of which is the Average
Stock Price minus the Base Share Price and the denominator of which is the Base
Share Price and adjusting the Standard Exchange Ratio to an amount equal to the
quotient of (i) the Standard Cash Consideration as so adjusted and (ii) the
Average Stock Price. For example, if the Average Closing Price is $28.68, the
aggregate value per share of Titan common stock to be received by all holders
will be $24.94, the Standard Cash Consideration will be $12.47 and the Standard
Exchange Ratio will be 0.43480. If the Average Closing Price is less than
$21.20 ( but not less than $17.46 ) or greater than $28.68, the value of the
consideration will be fixed at $21.46 or $24.94, respectively, the Standard
Cash Consideration will be $10.73 or $12.47, respectively, and the Standard
Exchange Ratio will be adjusted to provide a fraction of a USF&G share of
common stock having a value of $10.73 or $12.47, respectively, based upon the
Average Closing Price. If the Average Closing Price is less than $17.46, the
Standard Cash Consideration will be $10.73 and the Standard Exchange Ratio will
be 0.61455. In addition, if the Average Closing Price is less than $17.46 (30%
below the Base Share Price) or greater than $32.42 (30% above the Base Share
Price), each party has the right to terminate the Merger Agreement. The actual
cash and stock distributed will depend on the total per share consideration as
calculated above and as adjusted to maintain a 50% stock, 50% cash relationship
to maintain the tax-free nature of the transaction.
The consummation of the Merger is subject to certain conditions including,
among other things, the approval by the affirmative vote of at least 66 2/3% of
the outstanding shares of the Company common stock entitled to vote, as well as
the approval of certain regulatory agencies. Mark E. Watson, Jr., the Chairman,
President and Chief Executive Officer of the Company, in his capacity as a
shareholder of the Company who owns or controls approximately 25.6% of the
outstanding shares of Titan common stock, has agreed to vote his shares of Titan
common stock for approval of the Merger Agreement and, until August 7, 1998,
against any transaction in opposition to or inconsistent with the Merger.
6
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Titan Holdings, Inc. ("Holdings" or "the Company") operates specialty
property and casualty insurance companies and related service companies.
Through its insurance subsidiaries (Titan Indemnity Company and Titan Insurance
Company), Holdings provides personal lines nonstandard automobile insurance in
the midwest and southwest and property and casualty insurance for small to
medium-sized cities, towns, counties and other public entities nationwide.
Another wholly-owned subsidiary, Westchester Premium Acceptance Corporation
("West-Pac"), provides commercial property and casualty premium financing. The
Company refers to its nonstandard automobile insurance program collectively as
"Titan Auto" and the Public Entity program as "Titan Public Entity."
Public entity insurance is somewhat seasonal in that public entities tend
to purchase insurance to coincide with the start of their fiscal years
(typically January, July or October). Therefore, these months have historically
produced the most premium volume for the Company. Nonstandard automobile
insurance does not tend to be highly seasonal.
On August 7, 1997, the Company entered into an Agreement and Plan of
Merger (the "Merger Agreement"), by and among Holdings, USF&G Corporation
("USF&G") and United States Fidelity and Guaranty Company, a wholly owned
subsidiary of USF&G ("Purchaser"), pursuant to which, among other things, the
Company will merge with and into the Purchaser (the "Merger"). Holdings
shareholders may elect to receive cash, shares of USF&G common stock or a
combination of cash and shares of USF&G common stock in the Merger. See Note 4
to the financial statements for a further description of the consideration to
be paid to Titan shareholders in the Merger. The Merger is intended to qualify
as a tax-free reorganization under the Internal Revenue Code of 1986, as
amended, and provide tax deferral to the extent Holdings shareholders receive
shares of USF&G common stock in the Merger. The consummation of the Merger is
subject to certain conditions including, among other things, the approval by
the affirmative vote of at least 66 2/3% of the outstanding shares of Holdings
common stock entitled to vote, as well as the approval of certain regulatory
agencies. Mark E. Watson, Jr., the Chairman, President and Chief Executive
Officer of the Company, in his capacity as a shareholder of the Company who owns
or controls approximately 25.6% of the outstanding shares of Holdings common
stock, has agreed to vote his shares of Holdings common stock for approval of
the Merger Agreement and, until August 7, 1998, against any transaction in
opposition to or inconsistent with the Merger.
The following section contains forward-looking statements regarding
premium growth and other matters, which involve risks and uncertainties that
may affect the Company's actual results of operations.
The following important factors, among others, could cause actual results
to differ materially from those set forth in the forward-looking statements:
claims frequency, claims severity, severe adverse weather conditions,
economics, competitive pricing and the regulatory environment in which the
Company operates.
RESULTS OF OPERATIONS
Premiums by Line
The following table presents the dollar amount and percentage of total
premiums written and premiums earned, by principal line of business for the
periods indicated.
7
<PAGE> 9
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- -------------------------
1997 1996 1997 1996
-------- -------- -------- --------
( IN THOUSANDS )
<S> <C> <C> <C> <C>
TITAN AUTO
Premiums written $ 38,546 $ 24,963 $ 73,431 $ 50,537
Premiums earned 34,546 23,141 63,417 43,821
TITAN PUBLIC ENTITY
Premiums written 14,553 13,076 35,474 33,014
Premiums earned 14,004 13,538 28,159 26,652
TOTAL (INCLUDING OTHER LINES)
Premiums written 54,995 39,403 112,069 86,056
Premiums earned 48,547 37,663 91,522 72,479
</TABLE>
Premiums Written
For the three and six month periods ended June 30, 1997, premiums written
were $55.0 million and $112.1 million, which represent increases of 40% and
30%, respectively over $39.4 million and $86.1 million of the same periods of
1996. These increases relate primarily to Titan Auto operations.
Titan Auto premiums written for the second quarter of 1997 increased 54%
to $38.5 million over the same quarter of 1996. For the six months ended June
30, 1997, Titan Auto's premiums written increased 45% to $73.4 million as
growth was experienced across all distribution channels. Premiums written
through independent agencies and strategic alliances, for the three months
ended June 30, 1997, totaled $25.5 million compared to $19.5 million for the
same period of 1996. This growth was principally the result of further
penetration through independent agents and strategic alliances in Michigan.
Premiums written through the Direct Response Centers ("DRCs") for the three
months ended June 30,1997 were $13.0 million versus $5.5 million in the
comparable three months of 1996. The DRC growth relates primarily to business
written in Texas, Nevada, Colorado and New Mexico, states in which the Company
did not write any significant business prior to June 30, 1996.
For the six months ended June 30, 1997 premiums written by independent
agents and strategic alliances totaled $48.5 million and DRCs accounted for
$24.9 million compared to the six months ended June 30, 1996 of $39.7 million
and $10.9 million, respectively. The growth is attributable to the same factors
discussed above.
Titan Public Entity premium writings increased 11% to $14.6 million and 7%
to $35.5 million for the three and six months ended June 30, 1997,
respectively. Such increases relate to the expansion of the workers
compensation program and increased marketing efforts.
Premium growth experienced for the first six months of 1997 of 30% is
consistent with Company expectations and should continue as Titan Auto
continues its expansion through DRCs, independent agencies and strategic
alliances as well as existing and new markets. Titan Public Entity's growth is
anticipated to continue at a moderate pace as the Company remains selective
with underwriting decisions in a highly competitive and price sensitive
environment.
Premiums Earned
Premiums earned for the three months ended June 30, 1997, increased 29% to
$48.5 million and for the six months ended June 30, 1997 increased 26% to $91.5
million. The growth experienced in Titan Auto premiums earned for the three
months ended June 30, 1997, increased 49% to $ 34.5 million from $23.1 million
of a year ago. For
8
<PAGE> 10
the six months ended June 30, 1997, Titan Auto premiums earned increased 45% to
$63.4 million from $43.8 million for the six months ended June 30, 1996. Titan
Public Entity premiums earned increased 3% to $14.0 million and 6% to $28.2
million for the three and six months ended June 30, 1997 over comparable
periods of 1996. Such increases are basically attributable to the increases in
premiums written.
Fee and Ceding Commission Income
Titan Auto's operations generate policy and billing fee income which
comprise the majority of fee and ceding commission income. Ceding commissions
received from reinsurers represent the reimbursement of policy acquisition
expenses or profit commissions based on loss experience. Fee and ceding
commission income increased 50% to $3.8 million for the three months ended June
30, 1997 and 71% to $6.1 million for the six months ended June 30, 1997. Fee
income generated by Titan Auto is more significant in states other than
Michigan, and accordingly fee income increased more than written premium for
both periods in connection with premium growth outside of Michigan.
The Company expects fee income to continue to increase, although not
necessarily at the same rate experienced in the first six months of 1997, in
conjunction with the growth and expansion of its auto program into additional
states.
Net Investment Income
Net investment income is comprised of income from the investment portfolio
as well as the Company's premium finance contracts. Net investment income
increased 49% to $4.5 million for the three months ended June 30, 1997 and 33%
to $8.2 million for the six month period ended June 30, 1997. The increases
experienced during 1997 relate to growth in the size of the Company's premium
finance operation and to a lesser extent, an increase in the overall size of
the Company's investment portfolio as a result of cash generated from
operations. In February 1997, West-Pac acquired Elite Premium Services, Inc.
and income on premium finance contracts increased to $1.3 million for the three
months ended June 30, 1997 versus $.5 million for the same period in 1996. For
the six months ended June 30, 1997, income on premium finance contracts was
$2.4 million compared to $1.0 million for the six months ended June 30, 1996.
Interest rate movements have not had a significant impact on investment
income when comparing the results of 1997 to 1996. The Company continues to
maintain a relatively short duration of 3.6 years in its investment portfolio.
Combined Ratio
The following table sets forth the Company's combined ratio and the
components thereof by principal line of business under generally accepted
accounting principles ("GAAP") for the periods indicated.
9
<PAGE> 11
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- --------------------------
1997 1996 1997 1996
------- ------- ------ ------
<S> <C> <C> <C> <C>
TITAN AUTO
Loss 63.7 % 57.7 % 63.1 % 56.8 %
Expense 26.8 27.5 27.4 27.7
------- ------- ------ ------
Combined 90.5 85.2 90.5 84.5
======= ======= ====== ======
TITAN PUBLIC ENTITY
Loss 69.9 66.7 68.8 71.3
Expense 32.0 30.8 30.6 29.6
------- ------- ------ ------
Combined 101.9 97.5 99.4 100.9
======= ======= ====== ======
TOTAL (INCLUDING OTHER LINES)
Loss 65.4 62.0 65.4 63.2
Expense 27.8 29.0 27.7 28.6
------- ------- ------ ------
Combined 93.2 % 91.0 % 93.1 % 91.8 %
======= ======= ====== ======
</TABLE>
The Company's overall combined ratio increased somewhat for both the
three months ended June 30, 1997 and the six months ended June 30, 1997 as
improvement in the expense ratio component was offset by an increase in the
loss ratio component for both periods. For the three months ended June 30,
1997, the overall combined ratio increased to 93.2% from 91.0% and for the six
months ended June 30, 1997, increased to 93.1% from 91.8%.
For the three months ended June 30, 1997, Titan Auto's overall
combined ratio increased to 90.5% from 85.2% compared to the corresponding
three months in 1996. Titan Auto's loss ratio component for the three months
ended June 30, 1997 increased to 63.7% from 57.7% in the comparable quarter of
1996. States which generate more fee income (which serves as a reduction to
expenses) enable the Company to price its product to a higher loss ratio and
maintain the same combined ratio as it experiences in other states. The
increases in the loss ratios in 1997 versus 1996 for Titan Auto are associated
with expansion into states outside of Michigan, which are underwritten at a
higher loss ratio and lower expense ratio than the Michigan business due to fee
income. Consistent with the Company's strategy, Titan Auto's expense ratio
improved to 26.8% for the three months ended June 30, 1997 from 27.5% for the
second quarter of 1996. For the six months ended June 30, 1997, Titan Auto's
expense ratio and loss ratio experienced similar trends due to the factors
discussed previously, although the improvement in the expense ratio did not
totally offset the increase in the loss ratio. The loss ratio for the first six
months of 1996 of 56.8% resulted, in part, from favorable development
experienced in the first quarter of 1996, which resulted in the lowest
quarterly loss ratio of 1996.
The Company believes that as Titan Auto expands into additional
markets, which in certain instances will be underwritten at a higher loss ratio
than its Michigan business, the loss ratio should continue to increase slightly
while the expense ratio improves.
Titan Public Entity's overall combined ratio for the second quarter of
1997 increased to 101.9% from 97.5% for the same quarter of 1996, as both the
loss ratio and expense ratio increased. The loss ratio increase primarily
relates to adverse development of approximately $3.0 million on prior accident
years in specific liability lines of business. Such development relates to
certain claims in 1991 and prior years, ultimately settled at amounts exceeding
Company estimates. The expense ratio for Titan Public Entity experienced a
slight increase to 32.0% for the three months ended June 30, 1997 compared to
30.8% for the three months ended June 30, 1996. For the six months ended
10
<PAGE> 12
June 30, 1997, Titan Public Entity's combined ratio improved to 99.4% versus
100.9% in the same period of 1996. The loss ratio for the six months ended 1997
improved slightly to 68.8% compared to 71.3% of a year ago. The loss ratio in
the first six months of 1996 was adversely affected by property damage
associated with winter storms in the first quarter of 1996, coupled with
approximately $1.1 million in development on prior accident years experienced
in the second quarter of 1996.
Agents' Commissions
Commissions paid to independent insurance agents currently represent the
Company's most significant policy acquisition cost. For the three and six
months ended June 30, 1997, agents' commissions were 11.0% of premiums earned,
respectively, versus 12.7% and 12.1% of premiums earned, respectively, for the
comparable periods of 1996. The decrease relates primarily to the expansion of
Titan Auto's DRC operations which are not subject to commission expense. The
Company anticipates this trend to continue as DRC production becomes more
material to the overall Titan Auto business.
Net Income
Net income for the three months ended June 30, 1997 was $4.0 million
versus $3.7 million and net income for the six months ended June 30, 1997 was
$7.5 million versus $6.8 million for the same period a year ago.
Net income per share was $.38 for the three months ended June 30, 1997 and
$.37 per share for the three months ended June 30, 1996. For the six months
ended June 30, 1997, earnings per share were $.73, up from $.67 for the first
six months of 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's insurance subsidiaries receive substantial cash from
premiums and, to a lesser extent, investment income. The principal cash
outflows are for the payment of claims, reinsurance premiums, policy
acquisition costs and other operating expenses. Net cash provided by operating
activities was $18.8 million for six months ended June 30, 1997 versus $13.0
million for the same period in 1996. The increase experienced in 1997 primarily
relates to the increase in premiums written.
Cash of $9.3 million provided by financing activities is basically
attributable to borrowings under West-Pac's line of credit concurrent with its
purchase of Elite Premium Services, Inc. in February 1997. At that time
West-Pac's credit facility was increased to $50 million and its outstanding
borrowings increased by approximately $11.5 million. The line of credit was
extended in July 1997 at substantially the same terms and expires December 15,
1997.
Holdings credit facility consists of a $10 million revolving line of
credit ($4.5 million currently outstanding) until July 30, 2001 and a $20
million amortizing term loan ($18 million outstanding). Debt service on the
term loan (payable in $4 million increments annually through 2001, when the
term loan will be fully amortized) would be repaid through dividends from the
insurance companies to Holdings. Management will continue to evaluate the
insurance companies' underwriting leverage ratio and evaluate whether
additional financing is appropriate to increase underwriting capacity.
Subsequent to June 30, 1997, the Company borrowed $4.5 million on its revolving
line of credit for working capital purposes which included a $1.0 million break
fee paid to an investment banking firm as a result of the merger discussed in
Note 4 to the condensed consolidated financial statements. Additionally the
Company paid $1.0 million for the settlement of a lawsuit, see - legal
proceedings, as well as other operating expenses.
The Company's insurance subsidiaries are subject to state insurance laws
that restrict their ability to pay dividends. In 1997 Holdings could receive
approximately $8.0 million in dividends without regulatory approval. To date in
1997, Holdings has received $5.5 million in dividends from the insurance
subsidiaries. Based on the current working capital needs of Holdings,
management expects that the payment of dividends available without regulatory
11
<PAGE> 13
approval from the insurance companies coupled with the availability of the
existing line of credit will be sufficient to meet its current liquidity needs.
Cash used by investing activities of $28.3 million for the six months
ended June 30, 1997 includes $15.3 million for West-Pac's purchase of Elite
Premium Services, Inc. as well as the investment of cash provided by
operations. In addition Titan Indemnity expended approximately $3.6 million in
EDP equipment, furniture and fixtures and improvements to its home office
building.
During the six months ended June 30, 1997, the net unrealized loss in
investments changed insignificantly from December 31, 1996. Although a
significant portion of the Company's investment portfolio is considered
available for sale, management does not intend to liquidate the fixed maturity
portfolio.
FUTURE APPLICATION OF ACCOUNTING STANDARDS
In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" (FAS 130). FAS 130 establishes standards for reporting and display of
comprehensive income and its components in general purpose financial
statements. FAS 130 requires that the components of comprehensive income be
reported in a financial statement that is displayed in equal prominence with
other financial statements. FAS 130 is effective for both interim and annual
periods beginning after December 15, 1997. The Company will adopt FAS 130 in
the first quarter of 1998.
Also in June 1997, the FASB issued FAS No. 131, "Disclosure about Segments
of an Enterprise and Related Information" (FAS 131). FAS 131 replaces existing
standards for the way public business enterprises report information about
operating segments in annual financial statements and requires reporting
selected information about operating segments in interim financial reports to
shareholders. It also establishes standards for related disclosures about
products and services, geographic areas, and major customers. FAS 131 is
effective for financial statements for periods beginning after December 15,
1997, however, it need not apply to interim periods in the initial year of
application. The Company does not believe that the new standard will affect its
identification of industry segments, however, certain new disclosures will be
necessary. The Company plans to adopt FAS 131 as of December 31, 1997.
12
<PAGE> 14
PART II
OTHER INFORMATION
ITEM 1 - LEGAL PROCEEDINGS
On August 7, 1997 the Chancery Court of Cook County, Illinois, the court
responsible for the oversight of the liquidation of the estate of Millers
National Insurance Company, approved the settlement of the lawsuit filed by the
liquidator against the Company in consideration of the payment of $1.0 million
to the estate. The basis for the lawsuit is more fully described in the
Company's December 31, 1996 Annual Report on Form 10-K.
ITEM 2 - CHANGES IN SECURITIES
Not applicable.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
Not applicable.
ITEM 4 - SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- --------------------------------------------------------------
Not applicable.
ITEM 5 - OTHER INFORMATION
Not applicable.
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
27.2 - Financial Data Schedule - June 30, 1997
(b) During the quarter ended June 30, 1997, there were no current reports
on Form 8-K filed. A form 8-K was filed on August 15, 1997 subsequent
to the end of the fiscal quarter.
13
<PAGE> 15
SIGNATURES
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.
TITAN HOLDINGS, INC.
(Registrant)
Date August 12, 1997 By: /s/ MARK E. WATSON, JR.
---------------------------------
Mark E. Watson, Jr.
President and
Chief Executive Officer
Date August 12, 1997 By: /s/ MICHAEL W. GRANDSTAFF
----------------------------------
Michael W. Grandstaff
Senior Vice President and
Chief Financial Officer
14
<PAGE> 16
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
27.2 Financial Data Schedule
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 153,729
<DEBT-CARRYING-VALUE> 13,621
<DEBT-MARKET-VALUE> 13,612
<EQUITIES> 13,964
<MORTGAGE> 17,396
<REAL-ESTATE> 0
<TOTAL-INVEST> 248,722
<CASH> 3,473
<RECOVER-REINSURE> 775
<DEFERRED-ACQUISITION> 15,205
<TOTAL-ASSETS> 405,380
<POLICY-LOSSES> 156,565
<UNEARNED-PREMIUMS> 67,685
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 49,807
0
0
<COMMON> 101
<OTHER-SE> 118,483
<TOTAL-LIABILITY-AND-EQUITY> 405,380
112,069
<INVESTMENT-INCOME> 8,202
<INVESTMENT-GAINS> 547
<OTHER-INCOME> 6,089
<BENEFITS> 59,870
<UNDERWRITING-AMORTIZATION> 25,408
<UNDERWRITING-OTHER> 0
<INCOME-PRETAX> 11,004
<INCOME-TAX> 3,466
<INCOME-CONTINUING> 7,538
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 7,538
<EPS-PRIMARY> .73
<EPS-DILUTED> .73
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
