UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1996
[ ] 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 000-22142
OMNI INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Georgia 58-1680624
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Parkwood Circle, Atlanta, Georgia 30339
(Address of Principal executive offices) (Zip Code)
(770)-952-4500
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $.01
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to
this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 21, 1997 was approximately $21.7 million. The number of
shares of the registrant's Common Stock, par value $.01, outstanding as of
March 21, 1997 was 5,700,150.
DOCUMENTS INCORPORATED BY REFERENCE
Exhibits to Form S-1 Registration Statement Under the Securities Act of 1933
which has been filed with the Securities and Exchange Commission and declared
effective on July 29, 1993 (Commission file # 33-64346) are incorporated by
reference into Part IV - Item 14 of this Form 10-K.
Portions of the registrant's Proxy Statement sent to shareholders for the
Annual Meeting to be held on May 13, 1997 and filed with the Securities and
Exchange Commission within 120 days of December 31, 1996 ("Proxy") are
incorporated by reference into Part III of this Form 10-K.
Portions of the registrant's 1996 Annual Report to Shareholders ("Annual
Report") are incorporated by reference into Parts I and II of this Form 10-K.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Part I: Page
----
<S> <C>
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
Part II:
Item 5. Market for the Registrant's Common Equity and
Related Stockholder Matters 14
Item 6. Selected Financial Data 14
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
Item 8. Financial Statements and Supplementary Data 14
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 14
Part III:
Item 10. Directors and Executive Officers of the Registrant 15
Item 11. Executive Compensation 15
Item 12. Security Ownership of Certain Beneficial Owners
and Management 15
Item 13. Certain Relationships and Related Transactions 15
Part IV:
Item 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K 16
</TABLE>
2
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
BACKGROUND
Omni Insurance Group, Inc. ("Company", "Omni") was organized in June 1986 by
Dudley L. Moore, Jr., an insurance executive with extensive experience in the
nonstandard automobile insurance industry, and Hannover Holdings, Inc.
("Hannover"), a subsidiary of Vereinigte Haftpflicht Versicherung ("VHV"), a
major property and casualty insurer in Germany, for the purpose of marketing
and underwriting nonstandard automobile insurance.
The Company consists of two property and casualty subsidiaries and a managing
general agency. Omni Insurance Company ("Omni Insurance"), which was acquired
by the Company soon after the Company was incorporated, was organized in June
1980 to serve as a reinsurance subsidiary of Hannover. Until acquired by the
Company, Omni Insurance's activity was limited to reinsuring a small portion of
the direct written premiums of VHV. All such reinsurance activity was
terminated prior to Omni Insurance's acquisition by the Company. Omni
Indemnity Company was an inactive subsidiary of Omni Insurance until it began
writing business in September 1993. During 1995, the Company began business in
Texas through the county mutual system. The county mutual system is unique to
Texas but provides for rate flexibility not afforded outside this system. This
system requires a county mutual insurance company to act as the "Insurer" and a
managing general agency to act as the selling agent for the Insurer. Omni
Insurance established Omni General Agency, Inc. ("Agency") to act as the
managing general agency. Since no new county mutual insurance companies can be
formed, Omni Insurance contracted with a company rated A+ by A.M. Best to
front this business. In turn, Omni Insurance assumes 100% of Agency's business
written through the Insurer.
SHARE PURCHASE
On June 8, 1993, the Company purchased 2,534,483 shares of Common Stock (42% of
all such shares then outstanding) from Hannover for cash consideration of $7.4
million and the repayment by the Company of indebtedness in the amount of $2.8
million owed to Dresdner Bank A.G., Grand Cayman Branch ("Dresdner
Indebtedness"). The consideration was determined based on arm's-length
negotiations between representatives of Hannover, VHV and the Company. The
Company acquired its shares from Hannover because management believed such
acquisition represented an opportunity to acquire the shares on advantageous
terms. The Company, Hannover and Dudley L. Moore, Jr., a principal stockholder
of the Company, were joint and several obligors with respect to the Dresdner
Indebtedness, which was originally incurred in March 1987 to provide the
Company with operating capital. The Dresdner Indebtedness was secured by a
pledge of all of the outstanding shares of the Company's Common Stock owned by
Mr. Moore and Hannover.
Funds utilized to purchase the Company's Common Stock from Hannover and to
retire the Dresdner Indebtedness were borrowed from First Union National Bank
of North Carolina ("First Union") under the terms of a loan agreement dated
June 8, 1993 ("Loan Agreement"), between the Company and First Union providing
for a line of credit in an amount up to $10.5 million ("First Union Loan"), of
which $10.2 million was drawn. The loan was repaid on August 5, 1993.
SHARE TRANSFER
Pursuant to a Share Transfer Agreement dated June 8, 1993 between the Company,
Mr. Moore, the chairman of the Board of Directors of the Company, and J. Paul
Kennedy, the Company's President, Mr. Moore transferred 451,434 shares of
Common Stock to Mr. Kennedy, effective for accounting purposes March 31, 1993,
as compensation for his services to the Company. Pursuant to such Share
Transfer Agreement, the Company paid to Mr. Kennedy an amount equal to the
reduction in the Company's federal and state income taxes resulting from this
transaction. In connection with the transfer, the Company recorded $1.3
million of nonrecurring, noncash compensation expense and $679,000 of
nonrecurring cash compensation expense (which represented the expected tax
benefits) for 1993. This transaction did not impact total stockholders'
equity.
3
<PAGE>
INITIAL PUBLIC OFFERING
On July 29, 1993, the Company completed its initial public offering of
2,000,000 shares of common stock. After commissions, professional fees and
related expenses, the offering resulted in net proceeds to the Company of $25.5
million. The proceeds were utilized to repay the $10.2 million First Union
Loan and to increase the capital of Omni Insurance.
UNDERWRITER'S OVERALLOTMENT
On August 26, 1993, 200,000 shares were purchased under the terms of the
overallotment granted to the underwriter at the initial public offering price
of $14.00 per share. This resulted in net proceeds to the Company of $2.6
million and brought total shares outstanding to 5,700,000. These additional
proceeds were utilized to further increase the capital of Omni Insurance
Company.
NARRATIVE DESCRIPTION OF BUSINESS
OVERVIEW
The Company is a specialty insurer which markets and underwrites nonstandard
automobile insurance to individuals. Nonstandard automobile insurance is
designed for drivers who are unable to purchase insurance in the preferred or
standard insurance markets due to lapse of previous automobile insurance,
limited driving experience, unsatisfactory prior driving records or other
restrictive underwriting criteria. The Company's policyholders are ordinarily
charged higher rates and carry lower liability limits than preferred or
standard risk drivers.
The Company's business strategy is to be a low-cost provider of nonstandard
automobile insurance while providing superior service to agents and insureds.
The Company pursues this strategy by concentrating on the following:
- PRICING - Product pricing is a significant factor in the nonstandard
automobile segment of the insurance industry. The Company utilizes an
extensive proprietary database and specially designed software to
analyze a broad range of loss and expense-related variables to assist
the Company in establishing, monitoring and adjusting prices.
- AUTOMATION - A high degree of automation supports the activities of
agents and employees, helps maintain expenses lower than industry
averages and assists the Company in marketing its insurance products
at competitive rates, while maintaining desirable profit margins.
- MARKETING - The Company markets insurance directly to independent
agents, without relying on wholesale distributors such as managing
general agents, thereby maintaining a direct relationship with each
agent who represents the Company and a closer relationship with the
Company's policyholders.
- SERVICE - The Company emphasizes the quality and extent of its service
to independent agents as a means of assisting agents in lowering their
costs and increasing their profits. Service to policyholders is
intended to foster customer satisfaction and policy renewals.
4
<PAGE>
The Company operates through approximately 3,200 independent agents located in
Alabama, Florida, Georgia, Kentucky, Louisiana, Mississippi, Tennessee, Texas
and Virginia. The following table sets forth, for each of the years indicated,
the amount of gross premiums written by state:
Gross Premiums Written
Years Ended December 31,
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Alabama................... $17,586,499 20,076,197 17,172,069
Florida................... 31,139,958 35,619,209 39,435,554
Georgia................... 2,349,765 3,975,869 5,483,472
Kentucky.................. 9,167,214 10,728,724 14,937,492
Louisiana................. 2,886,632 1,905,015 969,795
Mississippi............... 3,655,308 3,149,226 3,964,460
Tennessee................. 4,405,207 954,494 415,159
Texas..................... 23,527,196 3,231,103 --
Virginia.................. 20,673,725 12,266,295 13,517,737
------------ ------------ ----------
$115,391,504 91,906,132 95,895,738
============ ============ ============
</TABLE>
GROWTH STRATEGY
Management believes the Company's future growth will depend primarily upon the
continuation of the same products and marketing methods employed by the Company
since it was organized. The Company's ability to achieve additional growth and
profitability will depend, in the opinion of management, upon the Company's
ability to increase sales of its products within the states in which the
Company presently operates and upon the Company's ability to enter successfully
the market for its products in additional states. Besides the states in which
it is presently engaged in business, the Company was licensed in the District
of Columbia and the following fifteen states at December 31, 1996: Arkansas,
California, Connecticut, Illinois, Indiana, Missouri, Nevada, North Carolina,
Ohio, Oklahoma, Oregon, Pennsylvania, South Carolina, Washington and Wisconsin.
Although management of the Company believes significant opportunities for
growth continue to exist within its current marketing territories, the Company
intends to seek entry into selected additional states based upon a number of
factors. Such factors include the size of the nonstandard automobile market,
the history and profitability of insurance companies presently operating in
such states, geographic proximity to the Company's present marketing
territories, management's prior experience with the state, where applicable,
and the legislative climate affecting the Company's business.
The Company will continue its efforts to provide superior service to agents and
policyholders while seeking to further improve operating efficiencies and lower
costs. The Company intends to accomplish these objectives by continuing to
stress reliance on efficiency and automation of the Company's pricing,
underwriting, administrative, marketing and claims activities.
5
<PAGE>
While the Company has always considered acquisitions to be one element of its
growth strategy, the Company has not been an aggressive acquiror to date. With
the trend toward consolidation in the industry and with the Company's modest
levels of reinsurance and no debt, acquisitions provide opportunities to
further leverage results. The Company has clearly defined acquisition criteria
and will selectively pursue opportunities in the future.
NONSTANDARD AUTOMOBILE INSURANCE
The nonstandard automobile insurance business is influenced by many factors,
including state insurance laws, market conditions for standard automobile
insurance and state assigned risk and residual market plans. Underwriting
standards for preferred and standard risks have become more restrictive,
thereby requiring more drivers to seek coverage in the nonstandard market.
These factors have contributed to an increase in the size of the nonstandard
automobile market. Based on information provided by A.M. Best Company, Inc.
("Best"), from 1985 through 1995, the nonstandard automobile segment grew from
approximately $5.1 billion annually to approximately $17.4 billion annually of
direct premiums written, and from 10.3% to 16.7% of the total private passenger
automobile insurance market. Best is an independent insurance financial rating
agency which rates all significant U.S. property and casualty insurers based on
such factors of concern to policyholders as financial condition and solvency.
MARKETING
Management believes the Company's utilization of independent agents enables it
to maintain more direct contact with agents and policyholders, provides for
greater operating efficiencies and reduces the risks of concentration of
business. A sizable portion of the Company's Texas business has been written
through an independent agency which has multiple branch offices controlled by
common ownership. For the year ended December 31, 1996, this agency produced
11.8% of the Company's total gross premiums written and 8.7% of net premiums
earned.
Selection of agents is a significant factor in the Company's marketing
strategy. Independent agents usually represent more than one nonstandard
insurance company. Although certain of the Company's agents specialize in
nonstandard automobile insurance, the Company seeks to identify and appoint
agents for whom nonstandard automobile insurance is only one of a variety of
products offered by the agent. Management believes such independent agents
represent the fastest growing segment of the nonstandard automobile insurance
market. Because independent insurance agents have significant influence over
which insurance company will write insurance policies for their customers,
management regards independent insurance agents as the Company's primary
customers. The Company believes its relationships with its independent agents
are excellent.
The Company continually monitors the loss ratio of each of the Company's
independent agents. This information provides the Company with an important
means of quality control and allows the Company to communicate with its agents
regarding results.
The Company employs thirteen salaried marketing representatives, each of whom
is responsible for a specific marketing region. Marketing representatives are
responsible for maintaining relationships with existing agents, recruiting new
agents and generally responding to the Company's needs within the territories
in which they serve. The marketing representatives provide support for agents
with respect to products, rating and administration. Each marketing
representative is equipped with a portable computer used for demonstration
purposes, communicating with Company headquarters and for agents' training.
The Company compensates agents based on a fixed percentage (ordinarily 15%) of
premiums written. The Company bills insureds directly for premium payments and
issues Company checks directly to independent agents for the payment of
commissions. As a consequence, agents' balances payable to the Company are not
a significant factor in the Company's operations. Management of the Company
believes this method of collecting premiums and paying agents' commissions is
efficient and enables the Company to avoid risks associated with collecting
balances due from agents.
6
<PAGE>
The Company has developed and provides each of its agents with proprietary
computer software designed for rating prospective risks. Automated
policyholder account status information is provided to agents by means of an
on-line voice response unit or through personal computer interface. Through
this interface, agents are able to perform a variety of functions, including
electronic transfers of installments and renewal down payments. Policyholders
may call the Company directly or access a voice response unit by means of a
touch tone telephone to secure current information concerning the status of
their accounts. The Company seeks to improve service to agents and insureds by
directing all telephone calls to either the customer service or claims
department. In either case, the caller is connected to an employee of the
Company who is trained to handle each inquiry without being referred to another
department.
COMPUTER SYSTEM AND AUTOMATION
The Company's computer operating system ("System") has been designed by the
Company to enhance service to policyholders and agents, to achieve cost
efficiencies and to manage data for pricing and rating. The System is
comprised of IBM AS/400 hardware, personal computers and a local area network.
Upon the Company's receipt of an application for insurance, pertinent
information is entered into the System and is thereafter available for use by
all departments within the Company. Only certain employees may change data
based on controlled data entry codes. Data is entered only once. Information
is accessible on line and the System operates from a common database. The
System is regularly improved by Company employees who have extensive
computer-related experience. Some of the System's significant features are
described below:
- New applications can be entered on personal computers and uploaded to
the System or can be entered directly into the System, permitting
off-site entry and continuing access to the System.
- The System allows collection and analysis of a broad range of variables
for pricing the Company's product.
- The System provides for an array of payment options which may vary as to
frequency of payments, down payments and commissions, thereby providing
flexibility to the agent and customer in selecting a plan which fits the
customer's needs.
- Computer generated documents are stored in an electronic file which can
be accessed by all personnel, permitting responses to customer inquiries
without retrieving paper files. The Company's use of a transaction date
filing system which logs and files transactions into the System by date
permits operations to function without file room personnel.
- The System allows the Company's agents to rate policies with a limited
amount of data entry. Certain agents have the capability of entering
and transmitting application data to the Company by means of a modem.
When submitted applications meet pre-set driving record criteria,
policies can be issued without intervention by Company personnel,
thereby reducing the amount of handling and time required to issue
policies. These efficiencies reduce the Company's costs and enhance the
Company's image for service and responsiveness.
- The System automatically orders driving record information upon entry of
applications, updates driving records and re-rates policies using any
additional information contained in motor vehicle reports. Updated
policies which continue to meet the Company's underwriting criteria may
then be automatically issued.
- The System's voice response unit provides insureds with current
automated account status information by means of a touch tone telephone.
Similar information is available in display format through a personal
computer interface which allows agents with a modem to log onto the
Company's computer. This feature of the System provides extended hours
of service to policyholders and reduces the number of Company personnel
required to provide account status information.
- The System provides a comprehensive reporting program which provides
information necessary to meet the Company's statutory reporting
requirements. Statistical information is downloaded to a personal
computer network to assist in providing the actuarial department with
premium and loss development data.
7
<PAGE>
REINSURANCE
From October 1, 1991, to January 1, 1994, Omni Insurance maintained a 35% quota
share reinsurance treaty with a third-party reinsurer. Effective January 1,
1994, Omni Insurance cancelled this treaty and recaptured the reserves ceded
for accident years 1992 and 1991. The reserves for accident year 1993 were
recaptured effective January 1, 1995. On December 31, 1994, Omni Insurance
entered into a new reinsurance agreement with a third-party reinsurer to limit
its potential losses on insurance contracts. Under this agreement, Omni
Insurance ceded 10% of its unearned premiums on December 31, 1994. Losses
incurred on business in effect on that date were covered by the reinsurer up
to their cession amount of 10%. Effective December 31, 1995, this treaty
expired and all outstanding reserves were recaptured.
The Company also maintains excess of loss reinsurance for amounts in excess of
statutory limits with a reinsurer rated A++ by A.M. Best. This treaty has been
in effect since 1988. The Company intends to maintain this type of reinsurance
coverage.
The Company has not historically maintained catastrophe reinsurance. During
1995, the Company entered Texas, increasing its exposure to catastrophe in the
form of hail. Effective January 1, 1996, Omni entered into a reinsurance
treaty with a reinsurer rated A+ by A.M. Best. This treaty reinsures 80% of
all comprehensive premiums and provides coverage in the event of large
weather-related losses.
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentration of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies.
UNDERWRITING
The Company seeks to classify and price risks into narrowly defined segments by
utilizing actuarial data and a broad range of variables. The pricing of the
Company's policies is accomplished by its actuarial staff based on its
proprietary database containing statistical experience by age, class of driver,
type of automobile, zip code, prior driving history and other rating
characteristics. The Company's database is continually monitored and updated
to enhance the Company's ability to develop more precise rates based on a
larger number of defined segments and variables.
The Company monitors its database and loss experience with a view toward
seeking regular and moderate rate adjustments, whenever it believes necessary.
These procedures generally enable the Company to avoid large rate increases,
which may cause policyholders not to renew their policies. The rate approval
process varies from state to state. Most states permit the use of rates only
after approval by the insurance department, while a limited number of states
allow the use of rates after only an informational filing.
Integrated computer software automates the Company's underwriting and rating
processes. The System screens insureds by comparing data on policy
applications with criteria pre-established by the Company, rates and issues
policies and develops statistical information for use by management.
The Company's independent agents have the authority to bind insurance coverages
in accordance with procedures established by the Company. The Company promptly
reviews all coverages bound by agents and decides whether to continue such
coverages. Since all final underwriting decisions are made by the Company,
management considers the risk in granting agents binding authority to be
minimal.
CLAIMS
All claims adjustments and payments are made by Company employees. The Company
also utilizes independent appraisers to aid in estimating physical damage
claims. However, the number of staff appraisers employed full-time by the
Company is increasing, allowing the utilization of independent appraisers to
continue to decline. Management believes that utilizing Company trained
employees permits faster, more efficient service at a lower effective cost.
8
<PAGE>
Claims settlement authority levels are established for each adjuster or manager
based on the employee's ability and level of experience. Upon receipt, each
claim is reviewed and assigned to an adjuster based on the type and severity of
the claim. All claims-related litigation is monitored by home office
supervisors. The claims policy of the Company emphasizes prompt and fair
settlement of meritorious claims, adequate reserving for claims and controlling
claims adjustment expenses.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Loss reserves are estimates of claims which an insurer expects to pay. The
Company is required to maintain reserves for the payment of estimated losses
and loss adjustment expenses ("LAE") for both reported claims ("case reserves")
and losses estimated to have been incurred but which have not yet been reported
("IBNR"). The Company's ultimate actual liability may be more or less than
current reserve estimates. The Company engages an independent actuary to
review and certify loss reserve estimates.
With respect to reported losses, reserves are established on either a
case-by-case or formula basis depending on the type and circumstances of the
loss. Case-by-case reserve amounts relate to bodily injury claims and are
established based on the Company's reserving practices, taking into account the
circumstances surrounding each claim and policy provision relating to types of
losses. Formula reserve amounts relate to all other types of claims and are
based on factors including historical paid and incurred loss data for similar
claims with provision for trends.
As to incurred claims which have not yet been reported, loss and loss expense
reserves are estimated based on historical information, statistical
projections, inflation, legal developments, general trends in claim severity
and frequency and other factors which could affect the adequacy of loss
reserves. The Company establishes IBNR reserves based on projections of the
number of claims ultimately expected and the average costs by claim type.
Loss reserves are reviewed quarterly by the Company and annually by an
independent actuary, and as new data becomes available, estimates are updated
and corresponding adjustments are made to loss reserves. Adjustments to
reserves are reflected in the operating results of the period during which such
adjustments are made. As there is no precise method for determining the
ultimate liability, the Company uses many resources and methods to estimate
these liabilities. The Company does not discount loss reserves for financial
statement purposes.
Historically, there has been no difference between the Generally Accepted
Accounting Principles ("GAAP") and statutory accounting principles ("SAP")
reserves. As a result of the Company's adoption in 1993 of Statement of
Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts," the 1996 and 1995
GAAP reserves exceed the SAP reserves by $1.5 million and $1.0 million,
respectively. The excess is due to the classification of the ceded unpaid
losses and LAE as an asset on the GAAP financial statements rather than a
reduction in reserves on the statutory financial statements.
The following table sets forth the development of the Company's reserves for
unpaid losses and loss adjustment expenses from 1987 through 1996, net of
reinsurance. "Net liability for losses and LAE estimated as of 12/31" sets
forth the liability at the balance sheet date for each of the indicated years.
This represents the estimated amount of losses and LAE arising in all prior
years which is unpaid at the balance sheet date, including IBNR reserves.
The portion of the table labeled "Net liability re-estimate as of" shows the
re-estimated amount of the previously recorded liability based on experience as
of the succeeding year. This estimate changes and becomes more precise as more
information becomes known about the frequency and severity of still unpaid
claims. During 1996, the Company had approximately $2.0 million of adverse
development on the reserves established at year-end 1995, an improvement over
the $3.4 million adverse development which occurred during 1995 on the
reserves established at year-end 1994. This $2.0 million in development is
primarily attributable to an increase in allocated loss adjustment expenses.
The portion of the table labeled "Cumulative redundancy (deficiency) as of
12/31/96" represents the aggregate change in the estimates over all prior
years. The portion of the table labeled "Paid (cumulative) as of" shows the
cumulative loss and LAE payments made in succeeding years for losses incurred
prior to the balance sheet date.
9
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<TABLE>
<CAPTION>
December 31,
------------
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
-----------------------------------------------------------------------------------
(In thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Net liability for losses
and LAE estimated at 12/31 . . $1,609 $6,231 $11,559 $13,780 $17,409 $17,931 $19,751 $30,886 $32,053 $31,628
Net liability re-estimated
as of:
One year later . . . . . . . . 1,127 6,320 11,815 13,864 16,983 17,316 20,012 34,305 34,062
Two years later . . . . . . . 1,123 6,690 12,112 13,778 16,965 17,459 21,199 35,891
Three years later . . . . . . 1,213 6,923 12,073 13,849 16,879 17,501 22,235
Four years later . . . . . . . 1,215 6,883 12,152 13,828 16,775 17,976
Five years later . . . . . . . 1,220 6,905 12,177 13,706 16,897
Six years later . . . . . . . 1,216 6,897 12,145 13,771
Seven years later . . . . . . 1,211 6,881 12,159
Eight years later . . . . . . 1,197 6,451
Nine years later . . . . . . . 1,197
Cumulative redundancy
(deficiency) as of
12/31/96 . . . . . . . . . . . 412 (220) (600) 9 512 (45) (2,484) (5,005) (2,009)
Paid (cumulative) as of:
One year later . . . . . . . . 762 4,105 7,207 7,504 10,389 11,237 12,646 23,516 24,140
Two years later . . . . . . . 997 5,674 10,037 11,333 14,506 14,373 17,995 32,058
Three years later . . . . . . 1,178 6,460 11,399 12,865 15,957 16,769 21,229
Four years later . . . . . . . 1,187 6,770 11,914 13,455 16,644 17,717
Five years later . . . . . . . 1,188 6,860 12,086 13,660 16,883
Six years later . . . . . . . 1,198 6,884 12,125 13,749
Seven years later . . . . . . 1,200 6,880 12,147
Eight years later . . . . . . 1,197 6,452
Nine years later . . . . . . . 1,197
</TABLE>
Prior year amounts have been reclassified to conform with the current year
presentation.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- ---------
RECONCILIATION TO GAAP LIABILITY FOR LOSSES AND LAE (In thousands)
<S> <C> <C>
SAP liability for losses and LAE estimated at 12/31.................................. $31,628 $32,053
Ceded unpaid losses and LAE.......................................................... 1,549 1,019
------- -------
GAAP liability for losses and LAE.................................................... $33,177 $33,072
======= =======
</TABLE>
10
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INVESTMENTS
The Company pursues investment objectives designed to secure the highest total
rate of return on its invested assets, after income taxes, consistent with
safeguarding capital and surplus on a long-term basis and maintaining adequate
liquidity for insurance operations. The Company's investment policy provides
that at least 90% of the Company's portfolio must be in fixed maturity
securities and no more than ten percent can be invested in equity securities.
At December 31, 1996, 99.6% of the Company's total investment portfolio
consisted of investment grade fixed maturity securities and cash, 0.1%
consisted of non-investment grade or non-rated fixed maturity securities and
0.3% consisted of equity securities. Investments in securities of a single
issuer (except securities issued by the U.S. Government or its agencies) are
limited to five percent of admitted assets. The Company retains an outside
investment advisor to manage its portfolio.
The following table sets forth the ratings of the Company's investment
portfolio at December 31, 1996:
<TABLE>
<CAPTION>
Types/Ratings of Investments (1) Carrying
Amount Percent
------ -------
<S> <C> <C>
U. S. Government and Agencies . . . . . . . . $17,108,199 20.2
Aaa . . . . . . . . . . . . . . . . . . . . . 32,912,889 39.0
Aa . . . . . . . . . . . . . . . . . . . . . . 14,292,796 16.9
A . . . . . . . . . . . . . . . . . . . . . . 14,538,923 17.2
Baa . . . . . . . . . . . . . . . . . . . . . 99,982 0.1
---------- -----
Total Baa or Better . . . . . . . . . . . . 78,952,789 93.4
Ba and Below . . . . . . . . . . . . . . . . . -- 0.0
Non-rated . . . . . . . . . . . . . . . . . . 90,000 0.1
---------- -----
Subtotal . . . . . . . . . . . . . . . . . . 79,042,789 93.5
Invested cash . . . . . . . . . . . . . . . . 5,264,275 6.2
Equity securities . . . . . . . . . . . . . . 212,063 0.3
---------- -----
Total Investments . . . . . . . . . . . . . $84,519,127 100.0
=========== =====
</TABLE>
(1) The ratings set forth above are the ratings assigned by Moody's Investors
Service, Inc. ("Moody's") and, for securities not assigned a rating by
Moody's, comparable ratings by Standard & Poor's Corporation.
11
<PAGE>
The following table summarizes the Company's investment results for the periods
indicated:
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Average invested assets (1) . . . . . $82,144,363 82,369,773 74,097,848
Investment income (2) . . . . . . . . 4,080,717 4,238,596 3,592,721
Average yield . . . . . . . . . . . . 5.0% 5.1% 4.8%
Net realized gains (losses) . . . . . 40,245 (564) 100,375
</TABLE>
(1) Average of the aggregate invested amounts at the beginning and end of
each monthly period.
(2) Net of investment expenses, including investment management fees paid
by the Company to its investment advisor.
REGULATION
The Company and its subsidiaries are subject to the insurance laws and
regulations of Illinois, the domiciliary state of the subsidiaries, and the
insurance laws and regulations of the other states in which the subsidiaries
are licensed to do business. In prior years, Omni Insurance and Omni Indemnity
Company were domiciled in the state of Georgia. Effective December 31, 1994,
Omni Insurance redomiciled from the state of Georgia to the state of Illinois.
Effective June 10, 1996, Omni Indemnity Company also redomiciled to the state
of Illinois. The insurance laws and regulations, as well as the level of
supervisory authority that may be exercised by the various state insurance
departments, vary by jurisdiction, but generally grant broad powers to state
insurance regulators to examine and supervise insurance companies and insurance
holding companies with respect to most significant aspects of the conduct of
the insurance business.
Laws and regulations generally require insurance companies to maintain minimum
standards of solvency, meet certain financial tests, comply with specified
investment requirements and limitations, file rates for approval or prior to
use, file certain reports with regulatory authorities, including information
concerning their capital structure, ownership and financial condition and
require prior approval of certain changes in control of domestic insurance
companies and their direct and indirect parents and give notice and secure
approval of payment of extraordinary dividends and distributions. In addition,
these laws and regulations require approval for certain intercompany transfers
of assets and certain transactions between insurance companies and their direct
and indirect parents and affiliates and generally require that all such
transactions have terms no less favorable than would result from transactions
between parties negotiating at arm's length. Further, many states have enacted
laws which restrict an insurer's underwriting discretion, such as the ability
to terminate policies, terminate agents or reject insurance coverage
applications. These laws may adversely affect the ability of insurance
companies, including the Company, to earn a profit.
Increasing public interest in the availability and affordability of insurance
has prompted legislative, regulatory and judicial activity in several states.
This includes efforts to contain insurance prices, restrict underwriting
practices and risk classifications, mandate rate reductions and refunds,
eliminate or reduce exemptions from antitrust laws and generally expand
regulations. These regulatory and judicial activities could impact the
Company's premium volume.
The Company's subsidiaries file quarterly and annual statutory financial
statements in each jurisdiction in which they are licensed. The accounts and
operations are subject to periodic examination by the Illinois Commissioner of
Insurance and by other state insurance regulatory authorities. Effective with
the 1994 statutory annual statement which is filed with the state Departments
of Insurance, property/casualty insurers must disclose their risk-based capital
("RBC") position. RBC prescribes the level of capital and surplus which
regulators deem necessary in order for an insurance company to prudently
support its business and investment risks. For 1996 the Company's two
insurance subsidiaries each had total adjusted capital in excess of any current
requirement.
12
<PAGE>
Illinois insurance laws and regulations impose certain restrictions on the
amount of dividends that a company domiciled in the state may pay without prior
regulatory approval. As a result, the maximum amount of dividends that Omni
Insurance may pay without prior regulatory approval is the greater of (i) ten
percent of the statutory policyholders' surplus as of the preceding December
31, or (ii) the statutory net income for the preceding calendar year, including
a portion of its capital gains for such year, provided that dividends may only
be paid to the extent of earned surplus. Omni Insurance has the ability to pay
approximately $3.7 million of dividends to the Company during 1997.
Illinois insurance laws and regulations provide that no person may acquire
control of the Company, and thus control of Omni Insurance, without obtaining
the prior approval of the Commissioner. Any person acquiring ten percent or
more of the voting stock of an insurance holding company is deemed to have
acquired control of that company and, consequently, is required to obtain the
approval of the Commissioner before consummating such acquisition.
All states in which Omni Insurance transacts business have guaranty fund laws
pursuant to which insurers doing business in such states are assessed by a
state insurance guaranty association in order to fund liabilities to
policyholders and claimants of insolvent insurance companies. Assessments are
based on an insurer's writings in the particular state in relation to the
writings of all guaranty fund participants in that state. Such assessments
have not been material to the Company.
The Florida legislature recently enacted legislation creating the Florida
Hurricane Catastrophe Fund. Florida later modified this legislation to allow
up to a 4% emergency assessment on all insurers applicable premiums if a state
of emergency occurs with respect to a hurricane. The possible impact of this
legislation, if any, on insurers such as Omni is not determinable.
The Company's profitability may be adversely affected by judicial decisions.
Its premium rates are established using actuarial methods intended to provide
an underwriting profit. Judicial decisions may change the assumptions used in
such analyses and thus alter the projected level of profitability.
RESIDUAL MARKETS
Each state in which the Company operates requires insurers writing private
passenger automobile insurance to participate in such state's residual market
plan. Although regulations vary by state, residual market plans are generally
designed to provide insurance coverage for consumers who are unable to obtain
insurance in the voluntary automobile insurance market. In some states,
companies participate in the administration and profit or loss associated with
those consumers' policies to the extent provided by state regulations. In
other states, assigned risk pools are utilized. Assigned risk pool insureds
are assigned on a rotating basis to automobile insurers based on the individual
insurer's share of the total automobile insurance market for that state.
Insurers then issue and service those individual insurance risks assigned to
them and accept the profit or loss for those policies. Residual markets have
not had a material effect on the business or results of operations of the
Company.
COMPETITION
The Company competes with both large national and smaller regional insurers for
agents and insureds in each state in which it operates. Many of these
competitors are larger, have greater financial and marketing resources and may
offer lower rates and higher commissions than the Company.
Management believes the principal competitive factors affecting the Company's
business are price, service to agents and policyholders, agents' commissions
and financial stability of the insurer. The nonstandard automobile insurance
business is price sensitive. Certain of the Company's competitors may from
time to time seek to acquire or increase their market share by pricing their
products at levels below those required for profitability, thereby creating
downward pressure with respect to pricing. Downward pressure on pricing can
also result from competitors establishing rates based upon insufficient or
faulty actuarial data. The Company believes it can compete successfully
notwithstanding such factors, but such occurrences may nevertheless adversely
affect the Company and cause fluctuations in the Company's results of
operations. Management believes that the Company's prices are generally
competitive.
13
<PAGE>
A.M. BEST RATING
In 1993, its first year of eligibility, Omni Insurance received a rating of "A-
Excellent" by Best, an independent nationally recognized insurance publishing
and rating service. The following year, Omni Indemnity Company received its
first rating. It also was an "A- Excellent." These ratings were affirmed in
1996. Best's ratings are industry ratings based on a comparative analysis of
the financial condition and operating performance of insurance companies as
determined by their publicly available reports. Best's ratings are based upon
factors of concern to insureds and are not directed toward the protection of
investors.
EMPLOYEES
As of March 15, 1997, the Company had 231 full-time and 4 part-time employees,
none of whom were covered by collective bargaining agreements. Management
believes Omni's relationship with its employees is excellent.
FORWARD LOOKING STATEMENTS
This report includes "forward looking" statements within the meaning of the
Securities Act of 1933 and the Securities Exchange Act of 1934 related to the
Company that involve risks and uncertainties including, but not limited to,
fluctuations in loss and loss adjustment expense reserves, regulation, the
nature of the property and casualty insurance industry and other risks. For
further information about these and other factors that could affect the
Company's future results, please see Exhibit 99.1 to this Form 10-K.
Investors are cautioned that any forward looking statements are not guarantees
of future performance and involve risks and uncertainties and that actual
results may differ materially from those contemplated by such forward looking
statements.
ITEM 2. PROPERTIES
The corporate headquarters are located in approximately 42,000 square feet of
leased office space in Atlanta, Georgia. Approximately 8,000 square feet of
this space is subleased to an unrelated third party. The Company also has a
small office in Dallas, Texas leased under a one-year term. The Company owns
no real properties and believes that its leased facilities are adequate for its
needs.
ITEM 3. LEGAL PROCEEDINGS
Note 10 on page 27 of the Registrant's 1996 Annual Report to Shareholders is
incorporated herein by reference.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the last quarter
of the period covered by this report.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS
"Stockholder Information" appearing on page 31 of the Registrant's 1996 Annual
Report to Shareholders is incorporated herein by reference.
ITEM 6. SELECTED FINANCIAL DATA
"Selected Financial Data" appearing on page 8 of the Registrant's 1996 Annual
Report to Shareholders is incorporated herein by reference.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" appearing on pages 9 to 13 of the Registrant's 1996 Annual Report
to Shareholders is incorporated herein by reference.
14
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements set forth on pages 14 to 29 of the Registrant's 1996
Annual Report to Shareholders are incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
Not Applicable
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information regarding the Registrant's Directors appearing under the caption
"Nominees for Election as Director" of the Registrant's Proxy relating to the
annual meeting of shareholders to be held on May 13, 1997 is incorporated
herein by reference.
EXECUTIVE OFFICERS OF THE REGISTRANT
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE COMPANY
---- --- -------------------------
<S> <C> <C>
Dudley L. Moore, Jr. 60 Chairman of the Board, Chief Executive Officer and Director, officer since 1986
J. Paul Kennedy 48 President, Chief Operating Officer and Director, officer since 1986
Lawrence J. Korth 54 Senior Vice President - Sales and Marketing, officer since 1989
Carl J. Leo 48 Senior Vice President - Actuarial, officer since 1995
David S. Peters 52 Senior Vice President - Customer Service and Human Resources, officer since 1986
Susan H. Scalf 38 Senior Vice President - Finance, Legal and Regulatory Services and Treasurer, officer
since 1989
Lowell E. Sims 54 Senior Vice President - Data Processing and Administrative Services, officer since 1986
Mary E. Skeeles 39 Senior Vice President - Claims, officer since 1989
K. Renee Weese 41 Senior Vice President - Product Management and Secretary, officer since 1986
</TABLE>
Executive officers serve at the pleasure of the Board of Directors.
ITEM 11. EXECUTIVE COMPENSATION
The information appearing under the captions "Executive Compensation" and
"Directors Compensation" of the Registrant's Proxy is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information appearing under the caption "Security Ownership of Certain
Beneficial Owners and Management" of the Registrant's Proxy is incorporated
herein by reference.
15
<PAGE>
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information appearing under the caption "Certain Transactions" of the
Registrant's Proxy is incorporated herein by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this Annual Report on
Form 10-K:
1. Financial Statements incorporated by reference into Part II, Item 8 of
this report:
Consolidated Balance Sheets - December 31, 1996 and 1995
Consolidated Statements of Earnings - Years ended December 31, 1996,
1995 and 1994
Consolidated Statements of Stockholders' Equity - Years ended
December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows - Years ended
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Report of Independent Auditors
2. Financial Statement Schedules
Independent Auditors' Report on Financial Statement
Schedules
Schedule I. Summary of Investments - Other Than Investments in
Related Parties - at December 31, 1996
Schedule II. Condensed Financial Information of Registrant - at
December 31, 1996 and 1995 and for the years ended
December 31, 1996, 1995 and 1994
Schedule IV. Reinsurance - for the years ended December 31, 1996,
1995 and 1994
Schedule V. Valuation and Qualifying Accounts - for the years
ended December 31, 1996, 1995 and 1994
Schedule VI. Supplemental Information Concerning Property-Casualty
Insurance Operations - for the years ended December
31, 1996, 1995 and 1994
All other schedules are omitted because they are not applicable, not
required or the information is included elsewhere in the Financial
Statements or Notes thereto.
3. The following exhibits are incorporated herein by reference:
<TABLE>
<CAPTION>
FILED HEREWITH (*),
NONAPPLICABLE (NA), OR
INCORPORATED BY REFERENCE FROM
-------------------------------
OMGR
EXHIBIT REGISTRATION NO. EXHIBIT
NUMBER OR REPORT NUMBER
- ------- --------- ------
<S> <C> <C> <C>
2.0 Plan of acquisition, reorganization, arrangement, liquidation or succession NA
3.1 Articles of Incorporation of the Company, as amended 33-64346 3.1
3.2 By-laws of the Company, as amended 33-64346 3.2
4.1 Specimen certificate of the Registrant's Common Stock 33-64346 4.1
9.0 Voting trust agreement NA
10.1 Charter of Omni Insurance Company 33-64346 10.1
</TABLE>
16
<PAGE>
<TABLE>
<S> <C> <C> <C>
10.2 By-laws of Omni Insurance Company 33-64346 10.2
10.3 Amended and Restated Loan Agreement between Omni Insurance
Group, Inc. and Dresdner Bank A.G., Grand Cayman Branch, dated
September 8, 1988 33-64346 10.3
10.4 Promissory Note in the original principal amount of $5,500,000 payable
by the Company, Dudley L. Moore, Jr. and Hannover Holdings, Inc. to
Dresdner Bank A.G., Grand Cayman Branch dated September 8, 1988 33-64346 10.4
10.5 Lease Agreement between Omni Insurance Group, Inc. and Boston
Parkwood Company dated August 21, 1991, as amended by letter
agreement dated January 30, 1992 33-64346 10.5
10.5A First Amendment to Lease between Omni Insurance Group, Inc. and
Boston Parkwood Company dated August 21, 1991, and amended by
letter agreement dated January 30, 1992 1994 Form 10-K 10.5A
10.5B Second Amendment to Lease between Omni Insurance Group, Inc. and
Boston Parkwood Company dated August 21, 1991, and amended by
letter agreement dated January 30, 1992 1994 Form 10-K 10.5B
10.5C Sublease between Omni Insurance Company and Suburban Lodges of September 30, 1996
America, Inc. Form 10-Q 10.5C
10.6 Employment Agreement between Omni Insurance Group, Inc. and
J. Paul Kennedy dated April 28, 1986 as amended 33-64346 10.6
10.7 Stock Purchase Agreement among the Company, Dudley L. Moore, Jr.
and Hannover Holdings, Inc. dated May 19, 1993 33-64346 10.7
10.8 Promissory Note of the Company payable to First Union National
Bank of North Carolina in the principal amount of $10,500,000
dated June 8, 1993 33-64346 10.8
10.9 Loan Agreement between Omni Insurance Group, Inc. and First
Union National Bank of North Carolina dated June 8, 1993 33-64346 10.9
10.10 Pledge Agreement between Dudley L. Moore, Jr. and First Union
National Bank of North Carolina dated June 8, 1993 33-64346 10.10
10.11 Pledge Agreement between J. Paul Kennedy and First Union
National Bank of North Carolina dated June 8, 1993 33-64346 10.11
10.12 Share Transfer Agreement effective March 31, 1993 among
Dudley L. Moore, Jr., J. Paul Kennedy and the Company 33-64346 10.12
10.13 Omni Insurance Group 401(k) Retirement Plan 33-64346 10.13
10.14 1993 Incentive Stock Option Plan of the Company 33-64346 10.14
10.15 1993 Nonqualified Stock Option Plan of the Company 33-64346 10.15
10.16 1993 Nonemployee Director Nonqualified Stock Option Plan of
the Company 33-64346 10.16
</TABLE>
17
<PAGE>
<TABLE>
<S> <C> <C>
10.17 Executive Split-Dollar Insurance Plan of the Company 33-64346 10.17
10.18 Agreement of Reinsurance between General Reinsurance Corporation
and Omni Insurance Company 33-64346 10.18
10.18A Endorsements Nos. 4, 5 and 6 to the Agreement of Reinsurance between
General Reinsurance Corporation and Omni Insurance Company *
10.19 Private Passenger Automobile Quota Share Reinsurance Agreement
between Omni Insurance Company and Transatlantic Reinsurance
Company 33-64346 10.19
10.20 Cover Note No. CT 1297-95 regarding reinsurance agreements between
Omni Insurance Company and Reliance Insurance Company 1994 Form 10-K 10.20
10.20A Quota Share Reinsurance Agreement between Omni Insurance
Company and Reliance Insurance Company 1995 Form 10-K 10.20A
10.21 Not used
10.22 Agency Agreement between Omni General Agency, Inc. and September 30,1995
Gainsco County Mutual Insurance Company Form 10-Q 10.22
10.22A Amendment 1 to the Agency Agreement between Omni General June 30, 1996
Agency, Inc. and Gainsco County Mutual Insurance Company Form 10-Q 10.22A
10.23 Quota Share Reinsurance Agreement between Gainsco County September 30,1995
Mutual Insurance Company and Omni Insurance Company Form 10-Q 10.23
10.23A Amendment 2 to the Quota Share Reinsurance Agreement between
Gainsco County Mutual Insurance Company and Omni Insurance June 30, 1996
Company Form 10-Q 10.23A
10.24 Management and Service Agreement between Omni General Agency, September 30,1995
Inc. and Omni Insurance Company Form 10-Q 10.24
10.25 Trust Agreement between Gainsco County Mutual Insurance September 30,1995
Company, Omni Insurance Company and The Northern Trust Company Form 10-Q 10.25
10.26 Split-Dollar Insurance Agreement between Omni Insurance Company March 31,1996
and D. Jack Sawyer, Jr. as Trustee under The DLMB Family Trust Form 10-Q 10.26
10.27 Cover Note CT1350-96 regarding reinsurance agreement between Omni March 31, 1996
Insurance Company and Transatlantic Reinsurance Company Form 10-Q 10.27
10.27A Automobile Physical Damage Quota Share Reinsurance Agreement between
Omni Insurance Company, Omni Indemnity Company and Transatlantic June 30, 1996
Reinsurance Company Form 10-Q 10.27A
10.28 Executive Incentive Common Stock Plan of Omni Insurance Group, Inc. June 30, 1996
Form 10-Q 10.28
11.0 Statement regarding computation of per share earnings NA
12.0 Statement regarding computation of ratios NA
</TABLE>
18
<PAGE>
<TABLE>
<S> <C> <C>
13.1 The Registrant's 1996 Annual Report to Shareholders. *
Except as expressly incorporated by reference in this report on Form 10-K,
such annual report is furnished only for the information of the Securities
and Exchange Commission and is not to be deemed "filed" as part of this report.
The following portions of such annual report are incorporated by reference in
the indicated items of this report:
Items in
Portions of the Annual Report for the Year Ended December 31, 1996 this Report
------------------------------------------------------------------ -----------
Commitments and Contingencies 3
Stockholder Information 5
Selected Financial Data 6
Management's Discussion and Analysis of Financial Condition and
Results of Operations 7
Consolidated Financial Statements 8
16.0 Letter regarding change in certifying accountant NA
18.0 Letter regarding change in accounting principles NA
21.1A List of subsidiaries of the Registrant (as amended) 1995 Form 10-K21.1A
22.0 Published report regarding matters submitted to vote of security holders NA
23.0 Consents of accountants, experts and counsel NA
24.0 Power of attorney NA
27.1 Financial data schedule (electronic filers only) *
99.1 Forward Looking Statements *
</TABLE>
(b) Reports on Form 8-K.
None
19
<PAGE>
(d) Financial Statement Schedules
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Omni Insurance Group, Inc.:
Under date of February 14, 1997, we reported on the consolidated balance sheets
of Omni Insurance Group, Inc. and subsidiaries (the "Company") as of December
31, 1996 and 1995, and the related consolidated statements of earnings,
stockholders' equity and cash flows for each of the years in the three-year
period ended December 31, 1996, as contained in the 1996 annual report to
stockholders. These consolidated financial statements and our report thereon
are incorporated by reference in the annual report on Form 10-K for the year
1996. In connection with our audits of the aforementioned consolidated
financial statements, we also have audited the related financial statement
schedules as listed in Item 14 (a) 2. The financial statement schedules are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation
to the basic consolidated financial statements taken as a whole, present
fairly, in all material respects, the information set forth therein.
As discussed in note 1 to the consolidated financial statements, the Company
adopted the provisions of Statement of Financial Accounting Standards No. 115,
"Accounting for Certain Investments in Debt and Equity Securities" as of
January 1, 1994.
KPMG PEAT MARWICK LLP
Atlanta, Georgia
February 14, 1997
20
<PAGE>
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES SCHEDULE I
OMNI INSURANCE GROUP INC.
AS OF DECEMBER 31, 1996
<TABLE>
<CAPTION>
AMOUNT AT
ESTIMATED WHICH SHOWN
AMORTIZED FAIR IN THE
TYPE OF INVESTMENT COST VALUE BALANCE SHEET
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities:
U. S. Treasury securities and obligations of U. S.
Government corporations and agencies $ 17,248,024 17,108,199 17,108,199
Obligations of state and political subdivisions 43,195,299 43,791,938 43,791,938
Public utilities 4,836,184 4,894,911 4,894,911
Corporate securities 12,936,415 13,047,741 13,047,741
Certificates of deposit 200,000 200,000 200,000
----------- ----------- -----------
Total fixed maturities 78,415,922 79,042,789 79,042,789
Equity securities 89,174 212,063 212,063
Invested cash 5,264,275 5,264,275 5,264,275
----------- ----------- -----------
Total investments $ 83,769,371 84,519,127 84,519,127
=========== =========== ===========
</TABLE>
21
<PAGE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II
OMNI INSURANCE GROUP, INC. (PARENT ONLY)
CONDENSED BALANCE SHEETS
AS OF DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
1996 1995
---- ----
ASSETS
<S> <C> <C>
Investments:
Investment in subsidiary $ 51,212,340 47,041,469
Invested cash 93,000 562,000
------------ ------------
Total investments 51,305,340 47,603,469
Federal income taxes receivable 64,942 --
Other assets 813,261 852,496
------------ ------------
Total assets $ 52,183,543 48,455,965
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Accounts payable and accrued expenses $ 2,431 176,299
Federal income taxes payable -- 280,878
------------ ------------
Total liabilities 2,431 457,177
------------ ------------
Stockholders' equity:
Common stock, par value $.01, authorized 15,000,000 shares;
issued and outstanding 5,700,150 shares 57,002 57,002
Additional paid-in capital 28,937,173 28,937,173
Net unrealized (depreciation) appreciation of securities (5,245) 674,182
Retained earnings 23,192,182 18,330,431
------------ ------------
Total stockholders' equity 52,181,112 47,998,788
------------ ------------
Total liabilities and stockholders' equity $ 52,183,543 48,455,965
============ ============
</TABLE>
22
<PAGE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II (CONTINUED)
OMNI INSURANCE GROUP, INC. (PARENT ONLY)
CONDENSED STATEMENTS OF EARNINGS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Revenues:
Net investment income $ 32,167 63,843 16,720
---------- ---------- ----------
Total revenues 32,167 63,843 16,720
---------- ---------- ----------
Expenses:
Administrative and other operating expenses 470,068 191,357 347,572
---------- ---------- ----------
Total expenses 470,068 191,357 347,572
---------- ---------- ----------
Loss before income taxes (437,901) (127,514) (330,852)
Income tax (expense) benefit 449,355 (457,664) 117,165
---------- ---------- ----------
Earnings (loss) before equity in earnings
of subsidiary 11,454 (585,178) (213,687)
Equity in net earnings of subsidiary 4,850,297 3,273,708 2,959,534
---------- ---------- ----------
Consolidated net earnings $4,861,751 2,688,530 2,745,847
========== ========== ==========
</TABLE>
23
<PAGE>
CONDENSED FINANCIAL INFORMATION OF REGISTRANT SCHEDULE II (CONTINUED)
OMNI INSURANCE GROUP, INC. (PARENT ONLY)
CONDENSED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Cash flows from operating activities:
Net earnings (loss) before equity in earnings
of subsidiary $ 11,454 (585,178) (213,687)
Adjustments to reconcile net earnings to net cash
(used in) provided from operating activities:
(Increase) decrease in federal income
taxes receivable (345,820) 393,878 684,000
(Decrease) increase in accounts payable and
accrued expenses (173,868) 165,383 10,917
Decrease (increase) in receivable from affiliates 30,901 (811,496) (11,512)
Other, net 8,333 4,125
--------- --------- ---------
Net cash (used in) provided by operating
activities (469,000) (833,288) 469,718
--------- --------- ---------
Cash flows from investing activities:
Decrease (increase) in invested cash 469,000 833,288 (471,818)
--------- --------- ---------
Net cash provided by (used in) investing
activities 469,000 833,288 (471,818)
--------- --------- ---------
Cash flows from financing activities:
Exercise of stock options -- -- 2,100
--------- --------- ---------
Net cash provided by financing activities -- -- 2,100
--------- --------- ---------
Change in cash
Cash at beginning of year -- -- --
--------- --------- ---------
Cash at end of year $ -- -- --
========= ========= =========
Supplemental disclosure of noncash financing activities:
Retirement of treasury stock $ -- 7,400,000 --
========= ========= =========
</TABLE>
24
<PAGE>
REINSURANCE SCHEDULE IV
OMNI INSURANCE GROUP, INC.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
PROPERTY-
LIABILITY PERCENTAGE
INSURANCE ASSUMED FROM OF AMOUNT
PREMIUMS GROSS CEDED TO OTHER OTHER NET ASSUMED
EARNED: AMOUNT COMPANIES COMPANIES AMOUNT TO NET
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1996 $ 85,689,271 9,394,285 14,585,350 90,880,336 16.0%
============ =========== ============ ============= ========
1995 $ 92,915,902 5,892,656 571,182 87,594,428 0.7%
============ =========== ============ ============= ========
1994 $ 85,772,653 2,068,821 -- 83,703,832 --
============ =========== ============ ============= ========
</TABLE>
25
<PAGE>
VALUATION AND QUALIFYING ACCOUNTS
SCHEDULE V
OMNI INSURANCE GROUP, INC.
YEARS ENDED DECEMBER 31, 1996 AND 1995
<TABLE>
<CAPTION>
ADDITIONS
---------------------------------
BALANCE AT CHARGED TO CHARGED TO BALANCE
BEGINNING COSTS AND OTHER AT END
DESCRIPTION OF YEAR EXPENSES ACCOUNTS OF YEAR
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts
1996 $ 2,938,626 1,726,279 -- 4,664,905
=========== ========== ======== =========
1995 $ 1,891,562 1,047,064 -- 2,938,626
=========== ========== ======== =========
1994 $ 1,126,370 812,110 -- 1,891,562
=========== ========== ======== =========
</TABLE>
26
<PAGE>
SUPPLEMENTARY INFORMATION CONCERNING SCHEDULE VI
PROPERTY - CASUALTY INSURANCE UNDERWRITERS
OMNI INSURANCE GROUP, INC.
AS OF DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
AFFILIATION DEFERRED POLICY RESERVES FOR UNPAID
WITH ACQUISITION CLAIMS AND CLAIMS DISCOUNT ON LOSS UNEARNED
BALANCE SHEET DATE REGISTRANT COSTS ADJUSTMENT EXPENSES RESERVES PREMIUMS
--------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
December 31, 1996 (a) $ 9,542,558 33,176,563 -- 49,722,892
=========== =========== ====== ==========
December 31, 1995 (a) $ 7,672,865 33,072,391 -- 34,606,009
=========== =========== ====== ==========
</TABLE>
(a) Consolidated property/casualty entities
27
<PAGE>
SUPPLEMENTARY INFORMATION CONCERNING SCHEDULE VI (CONTINUED)
PROPERTY - CASUALTY INSURANCE UNDERWRITERS
OMNI INSURANCE GROUP, INC.
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
<TABLE>
<CAPTION>
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES INCURRED
RELATED TO
-------------------------
AFFILIATION NET AMORTIZATION OF PAID CLAIMS AND NET
YEAR ENDED WITH NET EARNED INVESTMENT CURRENT PRIOR DEFERRED POLICY CLAIM ADJUSTMENT PREMIUMS
DECEMBER 31, REGISTRANT PREMIUMS INCOME YEAR (B) YEARS (B) ACQUISITION COSTS EXPENSES (B) WRITTEN
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1996 (a) $90,880,336 4,080,717 65,234,919 2,010,384 18,914,549 67,670,551 101,954,184
=========== ========= ========== ========= ========== ========== ===========
1995 (a) $87,594,428 4,238,596 62,900,442 3,420,407 18,882,192 65,153,530 89,517,458
=========== ========= ========== ========= ========== ========== ==========
1994 (a) $83,703,832 3,592,721 63,360,120 261,171 18,860,929 52,487,005 98,810,667
=========== ========= ========== ========= ========== ========== ==========
</TABLE>
(a) Consolidated property/casualty entities
(b) Prior year amounts have been reclassified to conform with the current
year presentation.
28
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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 in the City of Atlanta,
State of Georgia, on March 26, 1997.
OMNI INSURANCE GROUP, INC.
By: /s/ Dudley L. Moore, Jr.
--------------------------------
Dudley L. Moore, Jr.
Chairman of the Board and
Chief Executive Officer
By: /s/ Susan H. Scalf
--------------------------------
Susan H. Scalf
Senior Vice President and
Principal Financial Officer
Pursuant to the requirements of the Securities Act of 1934, this report has
been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Dudley L. Moore, Jr. Chairman of the Board and March 26, 1997
- ------------------------------ Chief Executive Officer
Dudley L. Moore, Jr. (Principal Executive Officer)
/s/ J. Paul Kennedy President and Director March 26, 1997
- ------------------------------ (Chief Operating Officer)
J. Paul Kennedy
/s/ Randolph G. Brown Director March 26, 1997
- ------------------------------
Randolph G. Brown
/s/ John E. Cay, III Director March 26, 1997
- ------------------------------
John E. Cay, III
/s/ Don L. Chapman Director March 26, 1997
- ------------------------------
Don L. Chapman
/s/ John W. Rooker Director March 26, 1997
- ------------------------------
John W. Rooker
/s/ S. Stephen Selig, III Director March 26, 1997
- ------------------------------
S. Stephen Selig, III
</TABLE>
29
<PAGE>
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======================================
OMNI INSURANCE GROUP, INC.
1996 ANNUAL REPORT
<PAGE>
A Decade of Progress
1986-1996
1996
OMGR completes its first decade of service to the independent agent!
Gross premiums written exceed $100 million for the first time.
State of Illinois approves redomestication of Omni Indemnity from Georgia to
Illinois.
Omni Insurance purchases Omni General Agency, Inc., a Texas managing general
agency, and begins operations in Texas through a fronting arrangement with
Gainsco County Mutual Insurance Company.
OMGR expands actuarial and product management staff, providing additional depth
to pricing; builds field adjustment staff, allowing improved claims service
while lowering costs.
State of Illinois approves redomestication of Omni Insurance from Georgia to
Illinois.
Omni Insurance expands its operations to Tennessee.
Omni Indemnity is rated "A- Excellent" by A.M. Best Company.
Omni Indemnity begins operations.
Omni Insurance expands its operations to Louisiana.
Initial public offering is completed on July 28, 1993, raising net proceeds of
$28.1 million. Common stock begins trading on The Nasdaq Stock Market under the
symbol OMGR.
OMGR purchases Hannover's 42% ownership.
Omni Insurance is rated "A- Excellent" by A.M. Best Company, an independent,
nationally recognized publisher and rating service.
Gross premiums written exceed $50 million for the first time.
Omni Insurance expands its operations to Alabama, Florida, Kentucky,
Mississippi and Virginia.
Omni Insurance issues its first policy in December 1986.
Ownership of Sunbelt Life Insurance Company, previously wholly owned by Moore,
is transferred to OMGR. Certificate of Authority amended to underwrite in
Georgia as a direct, multi-line property-casualty insurer. Name later changed to
Omni Indemnity Company (Omni Indemnity).
Omni Insurance Group, Inc. (OMGR) is incorporated under laws of the
state of Georgia as an insurance holding company, owned 58% by Moore and 42% by
HHI. Ownership of Omni Insurance Company (Omni Insurance), previously wholly
owned by HHI, is transferred to OMGR. Certificate of Authority amended to
underwrite in Georgia as a direct, multi-line property-casualty insurer.
Dudley L. Moore, Jr. and Hannover Holdings, Inc. (HHI), a subsidiary of
Vereinigte Haftpflict Versicherung enter into an agreement to form a corporate
holding company to market and underwrite nonstandard automobile insurance.
<PAGE>
Company Profile
Omni Insurance Group, Inc. ~ 1996 Annual Report
Omni Insurance Group, Inc., a holding company formed in 1986, is dedicated
solely to serving a niche segment of the U.S. private passenger automobile
insurance market. Through its licensed and regulated insurance company
subsidiaries, Omni Insurance Company and Omni Indemnity Company, the Company
underwrites insurance for drivers who are unable to obtain coverage from
insurers at standard or preferred rates, designated "nonstandard" for such
reasons as unsatisfactory prior driving records, limited driving experience,
lapsed prior coverage, other restrictive underwriting criteria or abnormal
market conditions. The companies market their product exclusively through more
than 3,200 independent insurance agencies in nine states.
Omni Insurance Company and Omni Indemnity Company are rated "A- Excellent"
by A.M. Best Company, an independent, nationally recognized publisher and rating
service. The common stock of Omni Insurance Group, Inc. is traded on The Nasdaq
Stock Market under the symbol "OMGR."
[MAP of states in which the Company operates and is licensed]
Table of Contents
Financial Highlights 3
Letter to Stockholders 4
Selected Financial Data 8
Management's Discussion and Analysis 9
Consolidated Financial Statements 14
Notes to Consolidated Financial Statements 18
Report of Independent Auditors 29
Directors and Corporate Officers 30
Stockholder Information 31
Core Values 32
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2
<PAGE>
Financial Highlights
Omni Insurance Group, Inc. ~ 1996 Annual Report
<TABLE>
<CAPTION>
1996 1995
- ----------------------------------------------------------------------------
<S> <C> <C>
For the years ended December 31,
Gross premiums written $115,391,504 91,906,132
Net premiums written 101,954,184 89,517,458
Net premiums earned 90,880,336 87,594,428
Total revenues 95,026,034 91,829,238
Net earnings 4,861,751 2,688,530(a)
Earnings per share $ 0.85 0.47
At December 31,
Total assets $149,223,486 125,674,924
Total stockholders' equity 52,181,112 47,998,788
Weighted average shares outstanding 5,700,150 5,700,150
Book value per share $ 9.15 8.42
Key ratios:
Loss ratio 74.0% 75.7%
Expense ratio 23.8 25.2(a)
---------------------------
Combined ratio 97.8 100.9(a)
===========================
</TABLE>
TOTAL REVENUES NET EARNINGS STOCKHOLDERS' EQUITY
[GRAPH] [GRAPH] [GRAPH]
1992 $36.1 1992 $ 3.4 1992 $16.8
1993 $44.4 1993 $ 3.1 1993 $41.9
1994 $87.4 1994 $ 2.7 1994 $42.5
1995 $91.8 1995 $ 3.7 (a) 1995 $48.0
1996 $95.0 1996 $ 4.9 1996 $52.2
(a) Excluding the provision for the premium tax assessment of $1,460,000 before
tax or $999,000 after tax, pro forma net earnings would have been $3,687,530
and the pro forma expense ratio and combined ratio would have been 23.5% and
99.2%, respectively.
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3
<PAGE>
Letter to Stockholders
Omni Insurance Group, Inc. ~ 1996 Annual Report
Dear Stockholder:
The theme of this 1996 Annual Report to Stockholders is "A Decade of
Progress." It is with great pride that we reflect on the accomplishments of Omni
during our first 10 years and set the stage for our continued future growth.
In June 1986, Omni Insurance Group, Inc. was incorporated; in late December
of that same year, Omni Insurance Company sold approximately one dozen policies
amounting to just under $10,000 in premiums! In fact, 1987 was our first full
year of operation. Now, one decade later, we have reached a significant
milestone.total premium volume exceeding $100 million. During this period, we
also have increased stockholders' equity by almost $50 million, including $28
million from the sale of common stock and $22 million from net after-tax
earnings. Since July 29, 1993, our shares have traded on The Nasdaq Stock Market
under the symbol OMGR.
Sales figures alone do not tell an entire story. Consideration of the
quality and profitability of the business must also be taken into account. For
example, a recent evaluation of a competitor revealed that while it was two
times our size in premium volume, it only netted one-third as much profit. While
the higher sales numbers are impressive, their value becomes much less
significant when profit is inadequate.
Premiums Total
Written Assets
1996 $100 million 1996 $149.2 million
1986 $10,000 1986 $10.2 million
Market share is another factor by which some companies operate and measure
their success...if they cannot be among the top three or four underwriters in a
given state, they withdraw. In contrast, Omni strives for profitability in each
of the markets it serves; we don't lower prices and therefore increase risk to
gain market share. This approach means that Omni's business fluctuates from
market to market as rates impact sales. Our goal is to underwrite profitable
business in every market Omni serves, regardless of market share ranking.
Financial Performance
IN CELEBRATING A "DECADE OF PROGRESS," WE'RE PLEASED TO REPORT THAT 1996
WAS A RECORD YEAR FOR OMNI IN TERMS OF PRODUCTION AND PROFITABILITY.
Gross premiums written increased 26% to $115.4 million compared with $91.9
million for 1995. Texas continues to contribute to our production diversity
while sales continue to improve in our existing markets. We have an excellent
foundation for future growth with approximately 50% of current production coming
from renewals. Net earnings for the year increased 81%
[LOGO]
4
<PAGE>
to a record $4.9 million, or $0.85 per share, compared with 1995 net earnings of
$2.7 million, or $0.47 per share. Revenues for 1996 increased to a record $95.0
million compared with $91.8 million for 1995.
The GAAP combined ratio, a key measure of profitability for the insurance
industry, is the total of the expense ratio and the loss and loss adjustment
expense ratio. Omni's GAAP combined ratio for the year improved to 97.8%, from
100.9% for 1995. Our loss and loss adjustment expense ratio for 1996 also
improved to 74.0% compared with 75.7% for 1995. We continue to have one of the
best underwriting expense ratios in our segment of the industry which allows us
to price competitively against even the largest and most efficient competition.
Industry Overview
From 1986 through 1995, the nonstandard segment of the private passenger
automobile insurance market grew from 10.8% to 16.7%, almost three times greater
than the rate of growth of the combined standard and preferred market segment.
We believe that the size and growth of the nonstandard insurance market are a
direct result of the underwriting restrictions and pricing methods used by most
standard and preferred insurers. Other factors which affect the size of the
voluntary nonstandard market are the level of rates adopted by
state-administered involuntary automobile insurance plans, more rigid law
enforcement and growth in driver population.
In 1995, the total private passenger automobile insurance market was $104.2
billion, of which $17.4 billion was nonstandard. Estimates for 1996 are that the
nonstandard portion of the market will be even larger than 1995. The trends we
see today include increasing numbers of youthful drivers, more drivers being
dropped from administered plans and a tiering or classification of drivers into
risk categories. All of these make us confident that the growth of the
nonstandard insurance market will continue.
OUR ABILITY TO REACT QUICKLY AND INNOVATIVELY WITH BETTER PRODUCTS AND
PRICING WILL ENSURE OUR PARTICIPATION IN THE GROWTH OF THIS DYNAMIC INDUSTRY.
As the nonstandard market has grown and as many of the companies
underwriting such risks have shown relative success, competition in our market
continues to increase. With our extensive rate-making databases, actuarial
knowledge, low expense ratio, superior customer service and ample capital
adequacy, we are confident that we can compete effectively against both the
larger and smaller nonstandard companies.
Consolidation within the multi-line insurance industry has begun to
penetrate the nonstandard automobile insurance market. Many of the 300-plus
companies offering nonstandard auto insurance in the U.S. today are small,
stand-alone companies with high expense ratios. As these companies find it more
difficult to compete efficiently, consolidation in our industry can be expected;
the transactions either closed or announced during 1996 are evidence that this
trend is gaining momentum.
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5
<PAGE>
A Decade of Progress
1986 - 1996
The combined captive and independent agency systems generate a significant
majority of the personal lines insurance market. Nevertheless, the delivery
system for insurance continues to evolve, and today we are seeing companies and
agencies experiment with marketing through such channels as the Internet, direct
response and other innovative forums. As we examine delivery alternatives and
changes in technology, a high level of service and professionalism remains
foremost in how our business will be conducted in the future.
1997 ... The Year Ahead
Much has been said about the difficulty our industry will encounter on
January 1, 2000, when computers must be able to distinguish between dates in the
1900s and dates in 2000 and beyond. Omni has been preparing for this watershed
event since 1991; except for a few minor programs within our system which will
be altered during 1997, we are already prepared to work with "YEAR 2000" data.
Technologically, Omni is ahead of its competition in many respects. A
system, however, is only as good as the procedures around which the system is
used, and Omni consistently continues to refine and improve its technology and
its internal systems and procedures. At year end, over 20% of our 3,200
independent agencies were conducting some portion of their business with us
on-line -- applications are submitted, policies and endorsements are issued,
claims are reported, policyholder payments are remitted, electronic mail is
transmitted and many other functions are generated by on-line communication. As
we move ahead in this area, our philosophy remains that excellent service can be
maintained without sacrificing cost-effectiveness.
The use of Omni appraisers allows us to improve our claim service while
lowering cost. In the fourth quarter of 1995, 67% of our total claims were
adjusted by staff appraisers employed full-time by Omni. During the same period
of 1996, this number had increased to 80%. As we are able to attain more
concentration of premium volume in certain areas, we plan for this percentage to
continue to increase.
In November 1996, Omni had its rating by A.M. Best Company reaffirmed as
"A- EXCELLENT." We are gratified by this action and, over time, will continue to
work toward enhancing our rating with this prestigious nonaffiliated firm.
While Omni has always considered acquisitions to be one element of its
growthstrategy, we have not been an aggressive acquiror to date. With the trend
toward consolidation in the industry and with our current modest levels of
reinsurance and no debt, acquisitions provide opportunities to further leverage
our results. We have clearly defined acquisition criteria and will selectively
pursue opportunities in the future.
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6
<PAGE>
With Sincere
Appreciation
As we begin our second decade, it seems appropriate to thank the
constituencies who have contributed so much to our current success. Thanks to
all of our associates for their "get it right" attitude, for their dedication
and enthusiasm and for what they have done and continue to do to make Omni the
independent agent's first choice for specialty auto coverages. Sincere thanks to
our independent agents who sell our fine products with a high degree of
confidence that their customers will be served professionally and promptly.
Thanks also to our shareholders who so diligently monitor our progress and
encourage our success. Your input and feedback give us confidence in the
decisions we make each day. We value this relationship and look forward to our
continued progress.
[PHOTO of Dudley L. Moore, Jr. and J. Paul Kennedy]
Conclusion
Our primary focus remains on internal growth -- increased penetration in
existing markets and selective geographic growth. However, during 1997 we will
more aggressively pursue those opportunities available for combining with
companies who could benefit from operational efficiencies, stronger management
or financial capacity.
During the past 10 years, we have demonstrated that we can meet and
overcome adversity while maintaining a high standard of professionalism. We have
emerged a stronger organization with increased market recognition and enhanced
stockholder value. While gratified with our decade of progress, we recognize
that the very nature of the nonstandard auto business is one of commitment to
day-to-day improvement and consistent excellence in customer service. The
business is constantly changing, and our challenge is to meet or exceed the
challenges of change.
THE EXCITEMENT FOR US IS THAT, OVER THE LONG HAUL, OMNI WILL CONTINUE TO
SUCCEED IN DEALING WITH THESE CHANGES, ENHANCING STOCKHOLDER VALUE AND BUILDING
ON ITS REPUTATION AS A KNOWLEDGEABLE MARKET LEADER.
Sincerely,
/s/ Dudley L. Moore, Jr. /s/ J. Paul Kennedy
- ------------------------------------ -------------------------------------
Dudley L. Moore, Jr. J. Paul Kennedy
Chairman and Chief Executive Officer President and Chief Operating Officer
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7
<PAGE>
Selected Financial Data
Omni Insurance Group, Inc. ~ 1996 Annual Report
<TABLE>
<CAPTION>
Years Ended December 31,
-----------------------------------------------------------------------
1996 1995 1994 1993 1992
-----------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Statement of earnings data:
Gross premiums written $115,391,504 91,906,132 95,895,738 71,756,461 56,865,188
Net premiums written $101,954,184 89,517,458 98,810,667 46,062,986 36,613,338
Net premiums earned $ 90,880,336 87,594,428 83,703,832 41,813,970 34,092,269
Total revenues $ 95,026,034 91,829,238 87,394,359 44,396,682 36,098,385
Net earnings $ 4,861,751 2,688,530(a) 2,745,847 3,122,665 3,441,162
Weighted average
shares outstanding 5,700,150 5,700,150 5,700,106 4,424,932 3,500,000
Net earnings per share $ .85 .47 .48 .71 .98
-----------------------------------------------------------------------
Balance sheet data:
Total fixed maturities $ 79,042,789 75,540,655 64,591,892 51,537,873 33,569,095
Total equity securities $ 212,063 201,763 154,525 135,475 136,238
Invested cash $ 5,264,275 6,349,402 12,807,189 8,711,365 4,399,130
Total assets $149,223,486 125,674,924 120,404,952 102,147,366 68,189,227
Indebtedness $ -- -- -- -- 2,750,000
Stockholders' equity $ 52,181,112 47,998,788 42,459,964 41,918,430 16,753,765
-----------------------------------------------------------------------
Selected GAAP data:
Loss ratio 74.0% 75.7 76.0 69.9 68.5
Expense ratio 23.8 25.2(a) 24.2 20.0 21.5
-----------------------------------------------------------------------
Combined ratio 97.8% 100.9(a) 100.2 89.9 90.0
=======================================================================
</TABLE>
(a) Excluding the provision for the premium tax assessment of $1,460,000
before tax or $999,000 after tax, pro forma net earnings would have been
$3,687,530 and the pro forma expense ratio and combined ratio would have
been 23.5% and 99.2%, respectively.
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8
<PAGE>
Management's Discussion and Analysis
Omni Insurance Group, Inc. ~ 1996 Annual Report
The information in this discussion is presented on the basis of generally
accepted accounting principles ("GAAP") and should be read in conjunction with
the Company's consolidated financial statements and notes thereto.
Overview
Omni Insurance Group, Inc. ("Company" or "Omni") is a holding company
composed of two insurance companies which underwrite nonstandard automobile
insurance for individuals through approximately 3,200 independent insurance
agencies in nine states. The Company's premium volume has increased
substantially since its incorporation in 1986. Omni's growth is attributable to
new policies written and the ability to renew a significant percentage of
expiring policies. In the third quarter of 1995, Omni entered Texas; gross
premiums written in this state grew from approximately $3.2 million in 1995 to
over $23.5 million in 1996. The Company plans to enter two additional states in
1997 with modest volume anticipated in comparison to Texas. Economic,
competitive and regulatory factors which affect the Company vary from state to
state and are subject to change. The volume of the Company's business in
particular states and territories within states is influenced by these factors.
As a consequence, the volume of business in a particular state may fluctuate
over time. The Company seeks to monitor these factors and adjusts its marketing
strategies accordingly in order to maximize profits. The Company's operating
strategy emphasizes profitability over market share. This operating strategy was
reflected in the decrease in gross premiums written in 1995, which was a result
of rate increases taken to improve the Company's margins.
From 1989 through 1994, the Company utilized quota share reinsurance to
manage its premium to surplus ratio and to support expansion of the Company's
business. The capital resources provided by an initial public offering in 1993
enabled the Company to cancel the quota share treaty in effect at the time of
the offering. This cancellation was effective January 1, 1994. Under the terms
of this treaty, the Company was ceding 35% of all business written to the
reinsurer. Effective December 31, 1994, the Company entered into another quota
share treaty which reinsured 10% of all policies in effect on that date. This
treaty expired and all reserves were recaptured effective December 31, 1995.
For 1996, statutory surplus was $36.8 million and sufficient to support the
current volume of business.
Excess of loss reinsurance has been utilized to protect the Company from
individual large losses. This excess of loss treaty has been in effect since
1988 with a reinsurer rated A++ by A.M. Best Company. Effective January 1, 1996,
Omni entered into a reinsurance treaty with a reinsurer rated A+ by A.M. Best
(hereinafter, the "new reinsurance treaty"). This treaty reinsures 80% of all
comprehensive premiums and provides coverage in the event of a large
weather-related loss. The commencement of this treaty impacted a number of the
accounts and ratios during 1996 but resulted in a decrease in net income of only
approximately $0.04 per share.
The Company's investment philosophy is to achieve an attractive rate of
return while preserving principal and maintaining a high level of quality. The
Company maintains a diversified portfolio with over 99% of the portfolio in
investment grade securities. At December 31, 1996 and 1995, the Company's
portfolio consisted primarily of investments in fixed income and short-term
securities.
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9
<PAGE>
Management's Discussion and Analysis
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
Results of Operations
YEAR ENDED DECEMBER 31, 1996, COMPARED WITH YEAR ENDED DECEMBER 31, 1995
Gross premiums written increased 25.6% to a record $115.4 million during
1996 from $91.9 million during 1995. The increase in premiums is primarily
attributable to an increase in the number of policies written and, to a lesser
extent, rate increases. In its first full year of writing business, Texas
produced $23.5 million in premiums written and became the Company's second
largest state behind Florida at $31.1 million. A sizable portion of the Texas
business has been written through an agency which has multiple branch offices
controlled by a common ownership.
Net premiums written increased 13.9% to $102.0 million. The difference in
growth rates for gross and net premiums written reflects the impact of the new
reinsurance treaty whereby approximately $9.9 million in premiums were ceded to
the reinsurer. Net premiums earned increased 3.8% to $90.9 million. Without the
new reinsurance treaty, net premiums earned would have been $97.3 million.
At $4.1 million for the year ended December 31, 1996, net investment
income decreased 3.7%. This was the result of a decrease in the average
investable assets and a decrease in the average investment yield as higher
yielding securities matured and were replaced by lower yielding (predominately
tax-exempt) securities. Due primarily to changes in interest rates, the
Company's unrealized gain in the investment portfolio was approximately
$750,000, a decline from $1.8 million at year-end 1995.
The Company's loss and loss adjustment expense ratio for 1996 was 74.0%
compared with 75.7% in the previous year. Without the new reinsurance treaty,
the net loss and loss adjustment expense ratio would have decreased to 73.2% for
1996. This is due to the premiums ceded having a lower loss and loss adjustment
expense ratio than the Company has in the aggregate. The lower loss and loss
adjustment expense ratio in 1996 was primarily attributable to the improvement
in the Florida personal injury protection business from previous rate increases
and agency management steps taken. Also aiding in the reduction of the loss and
loss adjustment expense ratio was the expanded use of Omni staff appraisers to
adjust our auto damage claims. During 1996, the Company had approximately $2.0
million of adverse development on the reserves established at year-end 1995, an
improvement over the $3.4 million adverse development which occurred during 1995
on the reserves established at year-end 1994. This $2.0 million in development
is primarily attributable to an increase in allocated loss adjustment expenses.
The Company continues to closely monitor the adequacy of its rates and loss
reserves and takes action when it believes necessary.
Acquisition and operating expenses decreased to $21.6 million for the year
ended December 31, 1996, from $22.1 million for the year ended December 31,
1995, for an expense ratio of 23.8% in 1996 compared with 25.2% in the previous
year. Without the new reinsurance treaty, the expense ratio for 1996 would have
been 24.4%; without the 1995 pre-tax provision of $1,460,000 for potential
exposure in connection with the Florida premium tax case (see Note 10 in the
Notes to Consolidated Financial Statements), the expense ratio for 1995 would
have been 23.5%. This increase in the expense ratio is a result of the Company's
operating expenses increasing due primarily to increased staffing levels and
certain other volume-related expenses.
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10
<PAGE>
Management's Discussion and Analysis
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
The effective income tax rate was 21.2% for 1996 compared with 22.0% for
1995, or 24.9% before the 1995 provision for the Florida premium tax assessment.
This decrease is primarily attributable to the release of the Company's tax
reserve established for issues which arose during the 1992 - 1993 Internal
Revenue Service audit (see Note 6 in the Notes to Consolidated Financial
Statements). Without the release of this reserve, the effective tax rate would
have been 26.0%. This increase in the effective tax rate is the result of a
decrease in the tax-exempt interest as a percentage of total income before
taxes.
As a result of the foregoing factors, net earnings increased 80.8% to $4.9
million in 1996 from $2.7 million in 1995. Excluding the provision for the
premium tax assessment, net earnings in 1996 increased 31.8% over 1995.
YEAR ENDED DECEMBER 31, 1995, COMPARED WITH YEAR ENDED DECEMBER 31, 1994
Gross premiums written decreased 4.2% to $91.9 million during 1995 from
$95.9 million during 1994. The decrease in premiums is primarily attributable to
a decline in the number of policies in force as a result of rate increases taken
in Florida and, to a lesser extent, rate increases taken elsewhere. This
reduction in volume was anticipated and resulted from management's operating
strategy to improve margins. This reduction also impacted net premiums written
which decreased 9.4% to $89.5 million during 1995. This decrease in net premiums
written was also due to the impact of the reinsurance transactions which
occurred during 1994. The 1994 treaty cancellation resulted in $8.9 million in
ceded premiums being returned to the Company. Offsetting this transaction was
the cession of $3.5 million in unearned premiums on the quota share treaty that
was effective December 31, 1994.
Net premiums earned increased 4.6% to $87.6 million during 1995 from $83.7
million during 1994. This increase is attributable to the growth in business
which occurred during 1994 that continued to be earned in 1995. Offsetting this
increase were the effects of the quota share reinsurance treaty whereby 10% of
the earned premium related to policies in effect at December 31, 1994 was ceded
to the reinsurer.
Net investment income increased 18.0% to $4.2 million, resulting from an
increase in investable assets and an increase in the investment yield before
investment expenses to 5.6%. The increase in investable assets is primarily
attributable to the return from a reinsurer of $3.6 million which represents
paid losses, ceded loss reserves for accident year 1993 and the contingent
commission due upon the treaty cancellation. Additionally, the Company
experienced an unrealized gain of approximately $4.3 million in its investment
portfolio which resulted in a $1.5 million decrease to deferred income taxes and
an after-tax increase of $2.8 million to stockholders' equity.
The Company's loss and loss adjustment expense ratio for 1995 was 75.7%
compared with 76.0% in the previous year. The decrease is primarily attributable
to the improvement in the Florida personal injury protection business due to
previous rate increases, commission reductions and agency management steps
taken. Also aiding in the reduction of the loss and loss adjustment expense
ratio was our ability to use Omni staff appraisers to adjust our auto damage
claims. Some of Florida's improvement was offset by an increased frequency in
physical damage claims.
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11
<PAGE>
Management's Discussion and Analysis
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
Hurricane Opal resulted in loss payments of less than $200,000 which had a
nominal impact on the loss ratio. Also, during 1995 the Company experienced
adverse development of approximately $3.4 million on year-end 1994 reserves.
This adverse development is attributable to the bodily injury portion of loss
reserves and allocated loss adjustment expenses.
The expense ratio for 1995 was 25.2% compared with 24.2% in the previous
year. The increase is due to a pre-tax provision of $1,460,000 to establish a
reserve for potential exposure in connection with the Florida premium tax case
(see Note 10 in the Notes to Consolidated Financial Statements). Excluding this
provision, the expense ratio decreased to 23.5% which was due in part to a
decrease in agents' commission.
The effective income tax rate remained relatively constant at 22.0% for
1995 compared with 21.6% for 1994.
As a result of the foregoing factors, net earnings remained constant at
$2.7 million in both 1995 and 1994. Excluding the provision for the premium tax
assessment, net earnings would have been $3.7 million for 1995.
Liquidity and Capital Resources
The Company's major sources of operating funds are dividends from Omni
Insurance Company ("Omni Insurance") and payments received pursuant to a
tax-sharing agreement between the Company and its subsidiaries. Therefore, the
Company's liquidity will be dependent upon the earnings of Omni Insurance and
the subsidiaries' ability to pay dividends and make tax-sharing payments to the
Company.
The principal sources of funds for the insurance subsidiaries are net
premiums collected, investment income and proceeds from investments that have
been sold, matured or repaid.
The Company's net cash flows provided by operations for the years ended
December 31, 1996, 1995 and 1994 were $3.8 million, $872,000 and $20.1 million,
respectively. The improvement in cash flow for 1996 is due to the Company's
lower net loss ratio compared to the prior year and the increase in gross
premiums written. Cash flows for 1995 and 1994 were affected by a reinsurance
treaty cancellation which resulted in receipts from the reinsurer of $3.6
million and $8.9 million, respectively. Without the treaty cancellation, cash
flows for these years would have been $(2.7) million and $11.2 million,
respectively. The decrease in cash flow for 1995 compared to 1994 was primarily
the result of (i) the increased level of claim payments in 1995 resulting from
the adverse loss results in 1994, (ii) the reduction in premium volume
experienced in 1995 and (iii) changes in payment plans offered to insureds
which decreased the average down payment received and increased the average
number of installment payments.
The Company's principal uses of funds are the payment of general corporate
expenses. The principal uses of funds for the insurance subsidiaries are the
payment of claims, acquisition and operating expenses and the purchase of
investments.
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12
<PAGE>
Management's Discussion and Analysis
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
Net funds used in investing activities for the years ended December 31,
1996, 1995 and 1994 were $4.4 million, $1.5 million and $20.9 million,
respectively. Company estimates of policy liabilities generally develop and are
resolved over a period of less than three years; therefore, the Company has a
relatively predictable schedule of cash needs. The Company also manages its
investment activities to maintain adequate liquidity for operating purposes and
to protect its policyholders and stockholders (that is, by attempting to match
its liquidity with cash requirements). The Company's portfolio is heavily
weighted toward intermediate fixed maturity securities, substantially all of
which are investment grade. The Company has no real estate investments or
mortgage loans. Historically, the Company has not experienced any "mismatches"
related to liquidity management and none are anticipated. There are no
foreseeable requirements to liquidate any investments prior to their scheduled
maturities.
Illinois (Omni Insurance's state of domicile) insurance laws and
regulations impose certain restrictions on the amount of dividends that a
company domiciled in the state may pay without prior regulatory approval. As a
result, the maximum amount of dividends that Omni Insurance may pay without
prior regulatory approval is the greater of (i) ten percent of the statutory
policyholders' surplus as of the preceding December 31 or (ii) the statutory net
income for the preceding calendar year, including a portion of its capital gains
for such year, provided that dividends may only be paid to the extent of earned
surplus. Omni Insurance has the ability to pay approximately $3.7 million of
dividends to the Company during 1997.
Effective with the 1994 statutory annual statement which is filed with the
state Departments of Insurance, property/casualty insurers must disclose their
risk-based capital ("RBC") position. RBC prescribes the level of capital and
surplus which regulators deem necessary in order for an insurance company to
prudently support its business and investments risks. For 1996, Omni Insurance
and its insurance subsidiary, Omni Indemnity Company, each had total adjusted
capital in excess of any current requirement.
Effects of Inflation
The effect of inflation on the Company has not been material in recent years.
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13
<PAGE>
Consolidated Balance Sheets
Omni Insurance Group, Inc. ~ 1996 Annual Report
<TABLE>
<CAPTION>
DECEMBER 31, December 31,
1996 1995
----------------------------
<S> <C> <C>
ASSETS
Investments:
Available for sale:
Fixed maturities, at fair value $ 79,042,789 75,540,655
Equity securities, at fair value 212,063 201,763
Invested cash 5,264,275 6,349,402
----------------------------
Total investments 84,519,127 82,091,820
Accrued investment income 1,525,704 1,392,261
Accounts receivable, principally premiums 43,696,603 29,458,063
Reinsurance recoverables 1,548,971 1,019,551
Prepaid reinsurance premiums 5,028,048 985,013
Federal income taxes receivable 27,942 --
Deferred policy acquisition costs 9,542,558 7,672,865
Deferred income taxes 1,250,000 795,000
Property and equipment, net 2,084,533 2,260,351
----------------------------
Total assets $ 149,223,486 125,674,924
============================
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 33,176,563 33,072,391
Unearned premiums 49,722,892 34,606,009
Funds held for reinsurance -- 4,832
Accounts payable and accrued expenses 6,543,261 2,821,321
Drafts payable 5,669,661 4,674,154
Federal income taxes payable -- 797,878
Reserve for premium tax assessment 1,460,000 1,460,000
Other liabilities 469,997 239,551
----------------------------
Total liabilities 97,042,374 77,676,136
----------------------------
Stockholders' equity:
Common stock, par value $.01, authorized
15,000,000 shares; issued and outstanding
5,700,150 shares 57,002 57,002
Additional paid-in capital 28,937,173 28,937,173
Net unrealized (depreciation)
appreciation on investment securities (5,245) 674,182
Retained earnings 23,192,182 18,330,431
----------------------------
Total stockholders' equity 52,181,112 47,998,788
Commitments and contingencies (note 10)
----------------------------
Total liabilities and stockholders' equity $ 149,223,486 125,674,924
============================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Consolidated Statements of Earnings
Omni Insurance Group, Inc. ~ 1996 Annual Report
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
GROSS PREMIUMS WRITTEN $ 115,391,504 91,906,132 95,895,738
===========================================
NET PREMIUMS WRITTEN $ 101,954,184 89,517,458 98,810,667
===========================================
REVENUES:
Net premiums earned $ 90,880,336 87,594,428 83,703,832
Net investment income 4,080,717 4,238,596 3,592,721
Realized capital gains (losses) 40,245 (564) 100,375
Other income (loss) 24,736 (3,222) (2,569)
-------------------------------------------
Total revenues 95,026,034 91,829,238 87,394,359
-------------------------------------------
LOSSES AND EXPENSES:
Losses and loss adjustment expenses, net 67,245,303 66,320,849 63,621,291
Acquisition and operating expenses, net 21,612,474 20,599,434 20,269,985
Provision for premium tax assessment -- 1,460,000 --
-------------------------------------------
Total losses and expenses 88,857,777 88,380,283 83,891,276
-------------------------------------------
Earnings before income taxes 6,168,257 3,448,955 3,503,083
-------------------------------------------
INCOME TAXES (BENEFIT):
Current 1,411,506 1,111,425 955,236
Deferred (105,000) (351,000) (198,000)
-------------------------------------------
Total income taxes 1,306,506 760,425 757,236
-------------------------------------------
Net earnings $ 4,861,751 2,688,530 2,745,847
===========================================
Net earnings per share $ 0.85 0.47 0.48
===========================================
Weighted average shares outstanding 5,700,150 5,700,150 5,700,106
===========================================
</TABLE>
See accompanying notes to consolidated financial statements.
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15
<PAGE>
Consolidated Statements of Stockholders' Equity
Omni Insurance Group, Inc. ~ 1996 Annual Report
<TABLE>
<CAPTION>
Common Stock Net unrealized
------------------------- appreciation
Shares Additional (depreciation)
issued and paid-in on investment Retained Treasury
outstanding Amount capital securities earnings stock Total
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
December 31, 1993 8,234,483 $82,345 36,309,730 30,301 12,896,054 (7,400,000) 41,918,430
Exercise of stock options,
at $14.00 per share 150 1 2,099 -- -- -- 2,100
Change in accounting
principle at January 1, 1994
(net of deferred taxes
of $499,000) -- -- -- 968,420 -- -- 968,420
Unrealized (depreciation)
on investment securities
(net of deferred tax
benefit of $879,000) -- -- -- (3,174,833) -- -- (3,174,833)
Net earnings -- -- -- -- 2,745,847 -- 2,745,847
-------------------------------------------------------------------------------------------
Balance at
December 31, 1994 8,234,633 82,346 36,311,829 (2,176,112) 15,641,901 (7,400,000) 42,459,964
Retirement of treasury stock (2,534,483) (25,344) (7,374,656) -- -- 7,400,000 --
Unrealized appreciation
on investment securities
(net of deferred taxes
of $1,469,000) -- -- -- 2,850,294 -- -- 2,850,294
Net earnings -- -- -- -- 2,688,530 -- 2,688,530
-------------------------------------------------------------------------------------------
Balance at
December 31, 1995 5,700,150 57,002 28,937,173 674,182 18,330,431 -- 47,998,788
Unrealized (depreciation)
on investment securities
(net of deferred tax
benefit of $350,000) -- -- -- (679,427) -- -- (679,427)
Net earnings -- -- -- -- 4,861,751 -- 4,861,751
-------------------------------------------------------------------------------------------
Balance at
December 31, 1996 5,700,150 $57,002 28,937,173 (5,245) 23,192,182 -- 52,181,112
===========================================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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<PAGE>
Consolidated Statements of Cash Flows
Omni Insurance Group, Inc. ~ 1996 Annual Report
<TABLE>
<CAPTION>
Years ended December 31,
-----------------------------------------------------------
1996 1995 1994
-----------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 4,861,751 2,688,530 2,745,847
Adjustments to reconcile net
earnings to net cash provided from operating activities:
Amortization and depreciation 1,190,668 576,350 843,250
Deferred income taxes (105,000) (351,000) (198,000)
Changes in:
Accounts receivable, principally premiums (14,238,540) (4,520,838) (7,477,324)
Reinsurance recoverables (529,420) 1,218,090 6,219,066
Prepaid reinsurance premiums (4,043,035) 3,503,982 4,983,749
Federal income taxes (825,820) 1,011,425 (435,631)
Deferred policy acquisition costs (1,869,693) (903,735) (3,532,152)
Unpaid losses and loss adjustment expenses 104,172 (50,771) 4,915,220
Unearned premiums 15,116,883 (1,580,952) 10,123,086
Funds held for reinsurance (4,832) (2,453,016) 2,457,848
Accounts payable and accrued expenses 3,118,097 1,021,376 (1,604,988)
Drafts payable 995,507 70,786 1,612,615
Reserve for premium tax assessment - 1,460,000 -
Other, net 56,754 (817,854) (597,812)
-----------------------------------------------------------
Net cash provided from operating activities 3,827,492 872,373 20,054,774
-----------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of investments (19,294,620) (11,758,231) (26,846,386)
Maturities, calls, and paydowns of fixed maturities 8,632,110 1,917,773 4,953,599
Sales of investments 5,525,025 2,652,421 5,909,626
Decrease (increase) in invested cash 1,085,127 6,457,787 (4,095,824)
Purchases of property and equipment (553,823) (1,358,268) (864,915)
Sales of property and equipment 174,845 557,545 60,177
-----------------------------------------------------------
Net cash used in investing activities (4,431,336) (1,530,973) (20,883,723)
-----------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Exercise of stock options - - 2,100
Cash overdraft 603,844 658,600 533,637
-----------------------------------------------------------
Net cash provided by financing activities 603,844 658,600 535,737
-----------------------------------------------------------
Net decrease in cash - - (293,212)
Cash at beginning of period - - 293,212
-----------------------------------------------------------
Cash at end of period $ - - -
===========================================================
Supplemental cash flow information -
cash payments during year for:
Income taxes $ 1,850,000 600,000 1,390,867
===========================================================
Supplemental schedule of noncash financing activities:
Retirement of treasury stock $ - 7,400,000 -
===========================================================
</TABLE>
See accompanying notes to consolidated financial statements.
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17
<PAGE>
Notes to Consolidated Financial Statements
Omni Insurance Group, Inc. ~ 1996 Annual Report
1. Summary of Significant Accounting Policies
A. BASIS OF PRESENTATION
The consolidated financial statements have been prepared in conformity with
generally accepted accounting principles which differ in some respects from
statutory accounting practices followed in the preparation of financial
statements submitted to state insurance departments (see Note 9).
B. PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Omni Insurance
Group, Inc. ("Company"), a holding company, and its wholly owned insurance
subsidiary, Omni Insurance Company ("Omni Insurance"). Omni Insurance owns all
the issued and outstanding common stock of Omni Indemnity Company and Omni
General Agency, Inc. All significant intercompany balances and transactions have
been eliminated in consolidation.
C. NATURE OF OPERATIONS
The Company operates solely in the nonstandard automobile insurance industry.
Its insurance subsidiaries operate in nine states including: Alabama, Florida,
Georgia, Kentucky, Louisiana, Mississippi, Tennessee, Texas and Virginia. In
1996, the Company wrote a significant amount of business in Florida and Texas,
representing 27% and 20%, respectively, of gross premiums written.
The Company has not historically suffered material losses from severe storms or
other catastrophes. In 1995, Hurricane Opal resulted in losses of less than
$200,000. During 1995, the Company entered Texas, increasing its exposure to
catastrophe in the form of hail. Effective January 1, 1996, the Company entered
into a reinsurance treaty whereby it cedes 80% of its comprehensive premiums to
a third-party reinsurer. The Company considered it prudent to obtain this type
of coverage to minimize its exposure to large weather-related losses.
Increasing public interest in the availability and affordability of insurance
has prompted legislative, regulatory and judicial activity in several states.
This includes efforts to contain insurance prices, restrict underwriting
practices and risk classifications, mandate rate reductions and refunds,
eliminate or reduce exemptions from antitrust laws and generally expand
regulation. These regulatory and judicial activities could impact the Company's
premium volume.
D. INVESTMENTS
Effective January 1, 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, "Accounting for Certain Investments in Debt and Equity
Securities" ("SFAS No. 115"). Under SFAS No. 115, fixed maturity securities for
which a company has the positive intent and ability to hold to maturity are
classified as "held to maturity securities" and are reported at amortized cost.
Fixed maturity and equity securities that are bought and held principally for
the purpose of selling them in the near term are classified as "trading
securities" and are reported at fair value, with unrealized gains and losses
included in earnings. Fixed maturity and equity securities not classified as
either held to maturity securities or trading securities are classified as
"available for sale securities" and are reported at fair value, with unrealized
gains and losses (net of deferred taxes) charged or credited as a separate
component of stockholders' equity. The Company classifies its fixed maturity and
equity securities as available for sale. A decline in the market value of any
security below cost that is deemed other than temporary is charged to income,
resulting in the establishment of a new cost basis for the security.
While it is the Company's intent to hold fixed maturity securities until the
foreseeable future or until maturity, it may sell such securities in response
to, among other things, market conditions, liquidity needs or interest rate
fluctuations. Realized gains or losses on disposal of these investments are
determined on a specific identification basis and are included in revenues.
The Company owns no on-balance sheet or off-balance sheet derivative
instruments.
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18
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
E. DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair
value of each class of financial instruments for which it is practicable:
Cash and Invested Cash
Cash and invested cash are carried at cost which is a reasonable estimate of
fair value due to their short-term maturities.
Investment Securities
For investment securities (bonds and stocks), fair values are based on quoted
market prices or dealer quotes. If a quoted market price is not available, fair
value is estimated using quoted market prices for similar securities.
F. PREMIUMS RECEIVABLE
Premiums receivable represent amounts due from policyholders and are generally
secured by the unearned premiums of the related policy.
G. DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring business, primarily commissions and underwriting
expenses, are deferred (to the extent they are recoverable from future premium
income) and amortized to earnings in relation to the amount of premiums earned.
If necessary, investment income is considered in the determination of the
recoverability of deferred policy acquisition costs.
An analysis of deferred policy acquisition costs follows:
<TABLE>
<CAPTION>
Years ended December 31,
-------------------------------------------
1996 1995 1994
-------------------------------------------
<S> <C> <C> <C>
Balance, beginning of period $ 7,672,865 6,769,130 3,236,978
Acquisition costs deferred 20,784,242 19,785,927 22,393,081
Amortized to expense during the period (18,914,549) (18,882,192) (18,860,929)
------------------------------------------
Balance, end of period $ 9,542,558 7,672,865 6,769,130
==========================================
</TABLE>
H. UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
A liability is provided for unpaid losses based upon aggregate formula and
case-basis estimates for reported claims and an estimate for incurred but not
reported losses based on past experience. A liability for loss adjustment
expenses is provided by estimating future expenses to be incurred in settlement
of the claims provided for in the liability for unpaid losses.
While the Company believes its estimates of unpaid losses and loss adjustment
expenses are adequate, the ultimate settlement of claims may be more or less
than such estimates.
I. REVENUE RECOGNITION
Premiums are recognized on the daily pro rata method over the respective terms
of the policies.
J. INCOME TAXES
Deferred income taxes are recognized for the tax consequences of "temporary
differences" by applying enacted statutory tax rates applicable to future years
to differences between the financial statement carrying amounts and the tax
bases of existing assets and liabilities. The effect on deferred taxes of a
change in tax rates is recognized in income in the period that includes the
enactment date. A consolidated federal income tax return is filed.
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19
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
K. DEPRECIATION
Depreciation on furniture and equipment is provided on a straight-line basis
over the estimated useful lives of the assets (three to seven years).
L. GUARANTY FUNDS
The Company follows the practice of providing for guaranty fund assessments
based upon estimates available for known insolvencies. It also provides for
actual assessments received. Such assessments have not been material to date.
M. EARNINGS PER SHARE
Earnings per common share are based on the weighted average number of common
shares outstanding. The effect of outstanding stock options on earnings per
share is not material.
N. STOCK-BASED COMPENSATION
The Company accounts for its various stock-based compensation in accordance with
the provisions set forth in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations. In
accordance with APB Opinion No. 25, compensation expense is recorded on the
grant date only to the extent that the current market price of the underlying
stock exceeds the exercise price on the grant date.
On October 23, 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS No. 123") which permits entities to recognize as expense
over the vesting period the fair value of all stock-based awards on the date of
the grant. Alternatively, SFAS No. 123 also allows entities to continue to apply
the provisions of APB Opinion No. 25 and provide pro forma net income and pro
forma earnings per share disclosures for employee stock-based grants made in
1995 and future years as if the fair value-based method had been applied as
defined in SFAS No. 123. The Company has elected to continue to apply the
provisions set forth in APB Opinion No. 25 and follow the disclosure provisions
of SFAS No. 123.
O. USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported financial statement balances as well as
the disclosure of contingent assets and liabilities. Actual results could differ
from those estimates.
Similar to most companies with property and casualty insurance operations, the
Company's gross and net reserve for unpaid losses and loss adjustment expenses
and deferred policy acquisition costs, although supported by actuarial
projections and other data, are ultimately based on management's reasonable
expectations of future events. In addition, the realization of the Company's
deferred income tax assets is dependent on generating sufficient future taxable
income. It is reasonably possible that the expectations associated with these
accounts could change in the near term (i.e., within one year) and that the
effect of such changes could be material to the consolidated financial
statements.
P. RECLASSIFICATIONS
Certain items in the prior years' financial statements have been reclassified to
conform with the 1996 presentation.
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20
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
2. Investments
Net investment income is summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C>
Fixed maturities $ 4,133,964 4,134,999 3,517,269
Equity securities 2,126 2,026 1,967
Invested cash 370,821 489,847 464,515
----------------------------------------------------------
Interest and dividend income 4,506,911 4,626,872 3,983,751
Less investment expenses 426,194 388,276 391,030
----------------------------------------------------------
Net investment income $ 4,080,717 4,238,596 3,592,721
==========================================================
</TABLE>
Realized and unrealized investment gains and losses were as follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------------------------
<S> <C> <C> <C>
Realized gains:
Fixed maturities $ 47,915 17,884 17,155
Equity securities -- -- 132,500
----------------------------------------------------------
Total gains 47,915 17,884 149,655
----------------------------------------------------------
Realized losses:
Fixed maturities (7,670) (18,448) (49,280)
Equity securities -- -- --
----------------------------------------------------------
Total losses (7,670) (18,448) (49,280)
----------------------------------------------------------
Net realized investment gains (losses) 40,245 (564) 100,375
----------------------------------------------------------
Changes in unrealized gains (losses):
Fixed maturities (1,039,727) 4,272,057 (4,072,882)
Equity securities 10,300 47,237 19,049
----------------------------------------------------------
Net unrealized gains (losses) (1,029,427) 4,319,294 (4,053,833)
----------------------------------------------------------
Total realized and unrealized gains (losses) $ (989,182) 4,318,730 (3,953,458)
==========================================================
</TABLE>
The amortized cost and estimated fair values of investments as of December 31,
1996 and 1995, are as follows:
<TABLE>
<CAPTION>
1996
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
---------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Fixed maturities:
U.S. Treasury securities and
obligations of U.S. Government
corporations and agencies $17,248,024 121,368 (261,193) 17,108,199
Obligations of states and
political subdivisions 43,195,299 667,093 (70,454) 43,791,938
Corporate securities 17,972,599 223,705 (53,652) 18,142,652
---------------------------------------------------
Total fixed maturities 78,415,922 1,012,166 (385,299) 79,042,789
Equity securities 89,174 122,889 -- 212,063
Invested cash 5,264,275 -- -- 5,264,275
---------------------------------------------------
Total investments $83,769,371 1,135,055 (385,299) 84,519,127
===================================================
</TABLE>
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21
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
<TABLE>
<CAPTION>
1995
-------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Estimated
Cost Gains Losses Fair Value
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Available for sale:
Fixed maturities:
U.S. Treasury securities
and obligations of U.S.
Government corporations
and agencies $ 19,248,063 316,497 (93,820) 19,470,740
Obligations of states and
political subdivision 34,528,031 972,612 (25,867) 35,474,776
Corporate securities 20,042,319 540,973 (47,314) 20,535,978
Mortgage-backed securities 55,648 3,513 - 59,161
-------------------------------------------------------------
Total fixed maturities 73,874,061 1,833,595 (167,001) 75,540,655
Equity securities 89,174 112,589 - 201,763
Invested cash 6,349,402 - - 6,349,402
-------------------------------------------------------------
Total investments $ 80,312,637 1,946,184 (167,001) 82,091,820
=============================================================
</TABLE>
The amortized cost and estimated fair value of fixed maturities at December 31,
1996, by contractual maturity are shown below. Expected maturities will differ
from contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
Amortized Estimated
cost fair value
----------------------------
<S> <C> <C>
Due in one year or less $ 6,761,615 6,817,900
Due after one year through five years 40,237,456 40,298,546
Due after five years through 10 years 15,797,203 15,900,513
Due after 10 years 15,619,648 16,025,830
----------------------------
Total fixed maturities $78,415,922 79,042,789
============================
</TABLE>
An analysis of fixed maturities sold prior to call or maturity follows:
<TABLE>
<CAPTION>
1996 1995 1994
--------------------------------------
<S> <C> <C> <C>
Proceeds from sales $5,525,025 2,652,421 5,777,126
======================================
Gross realized gains on sales 47,915 17,884 14,350
Gross realized losses on sales (6,049) (16,050) (22,126)
--------------------------------------
Net realized gains (losses) $ 41,866 1,834 (7,776)
======================================
</TABLE>
Bonds and certificates of deposit carried at a value of approximately $6,780,000
and $4,083,000 were on deposit with insurance regulatory authorities at December
31, 1996 and 1995, respectively, in accordance with statutory requirements.
[LOGO]
22
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
3. Unpaid Losses and Loss Adjustment Expenses
The following table presents information on changes in the liability for unpaid
losses and loss adjustment expenses of the Company for the periods presented:
<TABLE>
<CAPTION>
Years ended December 31,
------------------------------------------
1996 1995 1994
------------------------------------------
<S> <C> <C> <C>
Liability for losses and loss adjustment expenses
at beginning of year $33,072,391 33,123,162 28,207,942
Less reinsurance recoverables on unpaid
losses and loss adjustment expenses 1,019,551 2,237,641 8,456,707
------------------------------------------
Net liability for losses and loss adjustment
expenses at beginning of year 32,052,840 30,885,521 19,751,235
------------------------------------------
Add:
Losses and loss adjustment expenses
net, for claims occurring:
Current year 65,234,919 62,900,442 63,360,120
Prior years 2,010,384 3,420,407 261,171
------------------------------------------
Total 67,245,303 66,320,849 63,621,291
------------------------------------------
Less:
Loss and loss adjustment expense
payments net, for claims occurring:
Current year 43,528,892 41,637,046 39,841,061
Prior years 24,141,659 23,516,484 12,645,944
------------------------------------------
Total 67,670,551 65,153,530 52,487,005
------------------------------------------
Net liability for losses and loss adjustment
expenses at end of year 31,627,592 32,052,840 30,885,521
Plus reinsurance recoverables on unpaid
losses and loss adjustment expenses 1,548,971 1,019,551 2,237,641
------------------------------------------
Liability for losses and loss adjustment
expenses at end of year $33,176,563 33,072,391 33,123,162
==========================================
</TABLE>
4. Reinsurance
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentration of credit risk to minimize its exposure to
significant losses from reinsurer insolvencies.
From October 1, 1991, to January 1, 1994, Omni Insurance maintained a 35% quota
share reinsurance treaty with a third-party reinsurer. Effective January 1,
1994, Omni Insurance cancelled this treaty and recaptured the reserves ceded for
accident years 1992 and 1991. The reserves for accident year 1993 were
recaptured effective January 1, 1995. On December 31, 1994, Omni Insurance
entered into a new reinsurance agreement with a third-party reinsurer to limit
its potential losses on insurance contracts. Under this agreement, Omni
Insurance ceded 10% of its unearned premiums on December 31, 1994. Losses
incurred on business in effect on that date were covered by the reinsurer up to
their cession amount of 10%. Effective December 31, 1995, this treaty expired
and Omni Insurance recaptured the outstanding reserves. Omni Insurance also
maintains an excess-of-loss contract with another third-party reinsurer.
[LOGO]
23
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
Effective January 1, 1996, the Company entered into a catastrophe reinsurance
treaty with a reinsurer rated A+ by A.M. Best. This treaty reinsures 80% of all
comprehensive premiums and provides protection in the event of a large
weather-related loss.
The effect of reinsurance ceded for the years ended December 31 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------------------------------------------------------------------------------------
WRITTEN EARNED Written Earned Written Earned
-------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Gross premiums $ 115,391,504 100,274,621 91,906,132 93,487,084 95,895,738 85,772,653
Ceded premiums (13,437,320) (9,394,285) (2,388,674) (5,892,656) 2,914,929 (2,068,821)
-------------------------------------------------------------------------------------
Net premiums $ 101,954,184 90,880,336 89,517,458 87,594,428 98,810,667 83,703,832
====================================================================================
</TABLE>
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------
<S> <C> <C> <C>
Losses and loss adjustment expenses incurred $ 4,820,036 3,701,417 577,745
=======================================
Commissions $ 3,361,138 2,170,959 473,591
=======================================
</TABLE>
Reinsurance recoverables consist of the ceded portion of the liability for
unpaid losses and loss adjustment expenses. Prepaid reinsurance premiums
represent ceded unearned premiums.
During 1995, the Company began business in Texas through the county mutual
system. The county mutual system is unique to Texas but provides for rate
flexibility not afforded outside this system. This system requires a county
mutual insurance company to act as the "Insurer" and a managing general agency
to act as the selling agent for the Insurer. Omni Insurance established Omni
General Agency, Inc. to act as the managing general agency. Since no new county
mutual insurance companies can be formed, Omni Insurance has contracted with a
company rated A+ by A.M. Best to front this business. In turn, Omni Insurance
assumes 100% of the Insurer's premiums written.
Premiums assumed from the Insurer for 1996 and 1995 were approximately
$23,500,000 and $3,200,000, respectively, and are included in "gross premiums
written."
5. Stockholders' Equity
On May 9, 1995, the Board of Directors of the Company retired the 2,534,483
shares of common stock held in treasury. This transaction resulted in a decrease
in common stock outstanding to $57,002 at December 31, 1995, compared with
$82,346 at December 31, 1994, and a decrease in additional paid-in capital to
$28,937,173 from $36,311,829 for the same periods, respectively.
The state of Illinois limits dividend distributions which Omni Insurance can pay
to the Company for any 12-month period to the greater of 10% of surplus or
statutory net income, including a portion of capital gains, of the preceding
year. Additionally, the state of Illinois requires dividend distributions be
paid out of earned, as distinguished from contributed, surplus. Accordingly, the
maximum dividend Omni Insurance can pay, without prior approval of the Insurance
Commissioner, is approximately $3,684,000 in 1997.
[LOGO]
24
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
6. Income Taxes
The differences between actual income tax expense and "expected" income tax
expense computed using the statutory federal income tax rate of 35% are as
follows:
<TABLE>
<CAPTION>
1996 1995 1994
----------------------------------------
<S> <C> <C> <C>
Expected federal income tax expense $2,158,890 1,207,134 1,226,079
Increase (decrease) in federal income
tax expense resulting from:
Tax-exempt interest and dividend
received deduction (527,201) (518,985) (420,277)
Surtax exemption (61,683) (34,490) (35,031)
Prior year amounts (300,000) - -
Other, net 36,500 106,766 (13,535)
----------------------------------------
Total income taxes $1,306,506 760,425 757,236
========================================
</TABLE>
The Internal Revenue Service ("IRS") examined the Company's consolidated 1992
and 1993 tax returns and during 1995 issued a Revenue Agent Report submitting
proposed adjustments to the Company's federal taxable income. The Company
disagreed with the IRS's position and appealed the proposed adjustments through
written protest. In order to cover any possible loss exposure from this issue,
the Company established a $500,000 tax reserve.
The Company has subsequently reached a settlement with the IRS regarding these
proposed adjustments. The settlement amount is proposed at less than the
original amount and less than the $500,000 which the Company reserved for in
1995. Consequently, in 1996 the Company released $300,000 of the reserve.
Under SFAS No. 109, deferred income taxes reflect the net tax effects of
temporary differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities as
of December 31, 1996 and 1995, are shown below.
<TABLE>
<CAPTION>
1996 1995
---------------------------
<S> <C> <C>
Deferred tax assets:
Unearned premiums $3,038,000 2,286,000
Loss reserve discounting 1,123,000 1,209,000
Property and equipment - principally due to depreciation allowance 34,000 -
Reserve for premium tax assessment 461,000 461,000
Other, net 98,000 71,000
---------------------------
Total gross deferred tax assets 4,754,000 4,027,000
---------------------------
Deferred tax liabilities:
Deferred policy acquisition costs 3,244,000 2,609,000
Net unrealized gains on fixed maturities 213,000 567,000
Property and equipment - principally due to depreciation allowance - 18,000
Other, net 47,000 38,000
---------------------------
Total gross deferred tax liabilities 3,504,000 3,232,000
---------------------------
Net deferred tax assets $1,250,000 795,000
===========================
</TABLE>
In 1994, a valuation allowance of $500,000 was established which related to the
unrealized depreciation on fixed maturities. In 1995, the Company's
profitability outlook improved, and the change in the interest rate environment
eliminated the net unrealized loss in the portfolio. In light of these changed
circumstances,
[LOGO]
25
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
management considered the valuation allowance to be no longer necessary, and
as of December 31, 1995, it was eliminated. This reversal of the valuation
allowance occurred simultaneously with the establishment of the IRS tax reserve.
7. Leases
The Company leases office space under a noncancellable operating lease expiring
August 31, 2000.
Future minimum lease payments under this lease as of December 31, 1996, are as
follows:
1997 $ 742,152
1998 890,331
1999 974,134
2000 671,252
-----------
Total future minimum lease payments $ 3,277,869
===========
Rent expense for 1996, 1995 and 1994 totaled $642,196, $441,980 and $348,357,
respectively.
On August 9, 1996, the Company entered into a noncancellable sublease agreement
which leases a portion of the Company's office space to an unrelated third
party. The sublease payments for the remaining period of the sublease are
$116,025, $139,805, $144,648 and $98,154 for the years 1997 - 2000,
respectively.
8. Employee Benefit and Incentive Plans
On July 29, 1993, the Company adopted the 1993 Incentive Stock Option Plan, the
1993 Nonqualified Stock Option Plan and the 1993 Nonemployee Director
Nonqualified Stock Option Plan which reserved 100,000, 400,000 and 50,000
shares, respectively, for issuance under the plans. Options granted under the
plans are at a price not less than fair market value at the date of grant, have
a term of ten years and are subject to certain vesting requirements. As of
December 31, 1996, 1995 and 1994, there were 167,068, 168,743 and 167,061
options outstanding, respectively, under these plans. Outstanding options are
exercisable at prices ranging from $6.50 to $14.00 per share. At December 31,
1996, 1995 and 1994, a total of 100,441, 69,002 and 39,552 options,
respectively, were exercisable.
In addition to the stock options, the Company has established a key executive
bonus plan. Awards under this plan are primarily cash awards, with additional
awards of restricted stock based on the total award amount. The number of shares
of restricted stock awarded under this plan during 1996 was not significant;
thus pro forma net income and earnings per share disclosures are not included.
The Company has a defined contribution plan intended to be a qualified plan
under Sections 401(a) and 401(k) of the Internal Revenue Code. Eligible
participants include all officers and employees at least 21 years of age and
with a minimum one year of service. Employee contributions (up to 15% of defined
compensation) are matched 50% by the Company up to a limit of 6% of the
participant's compensation. The participants vest in the Company's matched
contributions in equal increments over a five-year period beginning in the third
year of service. Contribution expense related to the savings plan for the years
ended December 31, 1996, 1995 and 1994 approximated $105,000, $82,000 and
$44,000, respectively.
[LOGO]
26
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
9. Statutory Capital and Surplus
Statutory accounting practices for insurance companies differ from generally
accepted accounting principles ("GAAP"). A reconciliation of the statutory
capital and surplus of the Company's insurance subsidiaries to the Company's
stockholders' equity at December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-----------------------------------------------
<S> <C> <C> <C>
Statutory capital and surplus $36,840,413 35,388,351 34,256,956
GAAP adjustments:
Deferred policy acquisition costs 9,542,558 7,672,865 6,769,130
Unrealized appreciation (depreciation)
on fixed maturities 641,867 1,681,594 (2,589,362)
Non-admitted assets 1,507,503 1,503,661 1,067,743
Deferred income taxes 1,250,000 795,000 1,413,000
Excess of statutory reserves over statement
reserves 1,430,000 - -
-----------------------------------------------
GAAP stockholders' equity 51,212,341 47,041,471 40,917,467
Noninsurance company adjustments:
Other 968,771 957,317 1,542,497
-----------------------------------------------
Stockholders' equity as presented herein $52,181,112 47,998,788 42,459,964
===============================================
</TABLE>
A reconciliation of the statutory net income of the Company's insurance
subsidiaries to the Company's net income for the years ended December 31, 1996,
1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------
<S> <C> <C> <C>
Statutory net income (loss) $2,856,302 1,516,280 (770,618)
GAAP adjustments:
Deferred policy acquisition costs 1,869,693 903,735 3,532,151
Deferred income taxes 105,000 351,000 198,000
---------------------------------------------
GAAP net income 4,830,995 2,771,015 2,959,533
Noninsurance company adjustments:
Income taxes 440,760 40,336 117,166
Other (410,004) (122,821) (330,852)
---------------------------------------------
Net income as presented herein $4,861,751 2,688,530 2,745,847
=============================================
</TABLE>
10. Contingencies
The Florida Department of Revenue ("Department") conducted an audit of the
premium tax returns filed by Omni Insurance for the years 1987 through 1991. The
Department made adjustments to these returns that increase the premium tax
liability, including penalties and interest. No audit has been conducted for
years 1992 and 1993; however, similar issues may exist for these two years which
could result in an additional assessment. Due to the redomestication of Omni
Insurance, no similar exposure exists after 1993.
Omni Insurance administratively protested the assessment proposed by the
Department for the years 1987 through 1991. In May 1995, Omni Insurance received
notice from the Department that it had denied Omni Insurance's protest and
issued a notice of final assessment. As a result, Omni Insurance filed suit
against the
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27
<PAGE>
Notes to Consolidated Financial Statements
(continued)
Omni Insurance Group, Inc. ~ 1996 Annual Report
Department to further contest the assessment. Following the July 1995 filing of
such suit, a Florida trial court rendered a decision in another case involving
similar issues. This decision was adverse to the taxpayer, after the taxpayer
had initially been granted summary judgment in its favor. The taxpayer appealed
that case and filed a brief on appeal of the verdict previously rendered. During
the quarter ended June 30, 1996, the Appeals Court rendered a decision that was
adverse to the taxpayer, denied its claim for rehearing and denied its request
to be heard by the Florida Supreme Court.
Omni Insurance strongly disagreed with the decision of the trial court and filed
an Amicus Brief supporting the unrelated taxpayer's position. Based on the trial
court verdict, Omni management considered it prudent and necessary to establish
a reserve to cover any possible loss exposure related to this issue.
Accordingly, a reserve of $1,460,000 was established during 1995. Omni
Insurance's suit is still pending.
11. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
1996
----------------------------------------------------------------
1ST 2ND 3RD 4TH
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 21,341,232 22,514,862 24,092,007 27,077,933
Earnings before income taxes $ 1,581,591 1,645,815 1,687,354 1,253,497
Net earnings $ 1,157,591 1,207,815 1,234,354 1,261,991
Net earnings per share $ .20 .21 .22 .22
Weighted average shares outstanding 5,700,150 5,700,150 5,700,150 5,700,150
</TABLE>
<TABLE>
<CAPTION>
1995
----------------------------------------------------------------
1ST 2ND 3RD 4TH
----------------------------------------------------------------
<S> <C> <C> <C> <C>
Total revenues $ 21,714,852 23,224,725 23,799,056 23,090,605
Earnings (loss) before income taxes $ 518,579 (463,631) 1,460,466 1,933,541
Net earnings (loss) $ 471,579 (211,631) 1,092,466 1,336,116
Net earnings (loss) per share $ .08 (.04) .19 .23
Weighted average shares outstanding 5,700,150 5,700,150 5,700,150 5,700,150
</TABLE>
[LOGO]
28
<PAGE>
Report of Independent Auditors
Omni Insurance Group, Inc. ~ 1996 Annual Report
The Board of Directors
Omni Insurance Group, Inc.:
We have audited the accompanying consolidated balance sheets of Omni Insurance
Group, Inc. and subsidiaries (the "Company") as of December 31, 1996 and 1995,
and the related consolidated statements of earnings, stockholders' equity, and
cash flows for each of the years in the three-year period ended December 31,
1996. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Omni Insurance
Group, Inc. and subsidiaries at December 31, 1996 and 1995, and the results of
their operations and their cash flows for each of the years in the three-year
period ended December 31, 1996, in conformity with generally accepted accounting
principles.
As discussed in note 1, the Company adopted the provisions of Statement of
Financial Accounting Standards No. 115, Accounting for Certain Investments in
Debt and Equity Securities, in 1994.
/s/ KPMG Peat Marwick LLP
Atlanta, Georgia
February 14, 1997
[LOGO]
29
<PAGE>
Directors and Corporate Officers
Omni Insurance Group, Inc. ~ 1996 Annual Report
Board of Directors
Dudley L. Moore, Jr.
Chairman and Chief Executive Officer
Omni Insurance Group, Inc.
J. Paul Kennedy
President and Chief Operating Officer
Omni Insurance Group, Inc.
Randolph G. Brown(2)
Private Investor
John E. Cay, III(1)
President
Palmer & Cay, Inc.
(insurance brokerage)
Don L. Chapman(1, 2)
President
Tug Manufacturing Corporation
(airline equipment manufacturer)
John W. Rooker(1)
Chairman
John W. Rooker & Associates
(real estate development)
Southern Bonded Warehouse Company
(warehouse and distribution)
S. Stephen Selig, III(2)
Chairman and President
Selig Enterprises, Inc.
(real estate development)
Corporate Officers
Dudley L. Moore, Jr.
Chairman of the Board and
Chief Executive Officer
J. Paul Kennedy
President and Chief Operating Officer
Lawrence J. Korth
Senior Vice President - Sales and Marketing
Carl J. Leo
Senior Vice President - Actuarial
David S. Peters
Senior Vice President - Customer Service
and Human Resources
Susan H. Scalf
Senior Vice President - Finance, Legal and
Regulatory Services and Treasurer
Lowell E. Sims
Senior Vice President - Data Processing and
Administrative Services
Mary E. Skeeles
Senior Vice President - Claims
K. Renee Weese
Senior Vice President - Product Management
and Secretary
(1) Member of the compensation committee
(2) Member of the audit committee
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30
<PAGE>
Stockholder Information
Omni Insurance Group, Inc. ~ 1996 Annual Report
Corporate Offices
Omni Insurance Group, Inc.
1000 Parkwood Circle
Atlanta, Georgia 30339
(770) 952-4500
Registrar and Transfer Agent
First Union National Bank of North Carolina
230 South Tryon Street
Charlotte, North Carolina 28288
(704) 374-6531
Independent Public Accountants
KPMG Peat Marwick LLP
Atlanta, Georgia
Annual Meeting of Stockholders
11:00 a.m. Tuesday, May 13, 1997
Corporate Offices
Annual Report on Form 10-K
A copy of the Annual Report on Form 10-K for Omni Insurance Group, Inc.
for the year ended December 31, 1996, filed with the Securities and Exchange
Commission, may be obtained without charge by writing Susan H. Scalf, Senior
Vice President and Treasurer, at the corporate address.
Market and Dividend Information
Omni Insurance Group, Inc.'s common stock trades on The Nasdaq Stock Market
under the symbol OMGR. As of March 21, 1997, the Company had approximately 1,000
stockholders based on the number of holders of record and an estimate of the
number of individual participants represented by securities position listings.
The following table sets forth the reported high and low sales prices for
Omni's common stock as reported by Nasdaq:
<TABLE>
<CAPTION>
High Low
- ---------------------------------------------------------
<S> <C> <C>
1996
- ----
First Quarter 9 1/2 8 3/8
Second Quarter 10 8 1/4
Third Quarter 9 1/4 7 7/8
Fourth Quarter 10 8 3/4
1995
- ----
First Quarter 9 5 1/2
Second Quarter 8 3/4 6 1/4
Third Quarter 7 1/2 6 1/4
Fourth Quarter 9 3/4 7
</TABLE>
Omni Insurance Group, Inc. did not declare or pay cash dividends on its
common stock during the year ended December 31, 1996. The Company does not
plan to pay cash dividends on its common stock in order to retain earnings to
support the growth of its business.
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31
<PAGE>
Core Values
Excellence
Surpassing others
COMMITMENT
A pledge or promise
Creativity
Imaginative behavior
ENTHUSIASM
Inspiring zeal or excitement
Integrity
Adherence to sound principles
[LOGO]
32
<PAGE>
OMNI
Omni Insurance Group, Inc.
1000 Parkwood Circle
Atlanta, Georgia 30339
(770)952-4500
<PAGE>
ENDORSEMENT NO 4 REVISED
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO.7366
between
GENERAL REINSURANCE CORPORATION
and
OMNI INSURANCE COMPANY
OMM INDEMNITY COMPANY
IT IS MUTUALLY AGREED that, as respects new and renewal policies
becoming effective at and after 12:01 AM., January 1, 1994, the first sentence
of the second paragraph of Section 6 - REINSURANCE PREMIUM AND COMMISSION of
Exhibit A of this Agreement is amended to read as follows:
"The reinsurance premiums in (a) and (b) above shall be subject to a
fixed commission allowance of 40%."
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to
be executed in duplicate this 18th day of January, 1995.
GENERAL REINSURANCE CORPORATION
/s/ John F. Seibert
--------------------------------
Vice President
Attest: /s/ Donna M. DeBitetto
OMNI INSURANCE COMPANY
OMNI INDEMNITY COMPANY
/s/ J. Paul Kennedy
--------------------------------
President
Attest: /s/ Patrice M. Cannon
<PAGE>
ENDORSEMENT NO.5
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO. 7366
between
GENERAL REINSURANCE CORPORATION
and
OMNI INSURANCE COMPANY
OMNI INDEMNITY COMPANY
IT IS MUTUALLY AGREED that, as respects claims and losses resulting
from occurrences, insured under new and renewal policies of the Company written
in the following states effective at and after 12:01 AM. on the following
dates;
<TABLE>
<S> <C> <C>
(a) Louisiana June 1, 1993
(b) Tennessee January 1, 1994
(c) Texas August 1, 1995
</TABLE>
Appendix A (Revised: July 1, 1989), to Exhibit A of this Agreement is replaced
by Appendix A (Revised: June 1, 1993), attached hereto.
IT IS FURTHER AGREED that, as respects claims and losses resulting
from occurrences, insured under new and renewal policies of the Company
effective at and after 12:01 AM., August 1, 1995, exclusion (a) in Section 5 -
EXCLUSIONS of Exhibit A of this Agreement is amended to read as follows:
"(a) Business accepted by the Company as reinsurance from other
insurers, however this exclusion shall not apply to business
assumed from Gainsco County Mutual Insurance Company of
Texas;"
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to
be
<PAGE>
executed in duplicate this 23rd day of October, 1995
GENERAL REINSURANCE CORPORATION
/s/ John F. Seibert
-------------------------------
Vice President
Attest: /s/ Donna DeBitetto
OMNI INSURANCE COMPANY
OMNI INDEMNITY COMPANY
/s/ J. Paul Kennedy
-------------------------------
Attest: /s/ Patrice M. Cannon
<PAGE>
ENDORSEMENT NO. 6
Attached to and made a part of
AGREEMENT OF REINSURANCE
NO. 7366
between
GENERAL REINSURANCE CORPORATION
and
OMNI INSURANCE COMPANY
OMNI INDEMNITY COMPANY
IT IS MUTUALLY AGREED that, effective 12:01 A.M., February 3, 1995,
Exhibit A to this Agreement is amended as follows:
I - As respects claims first made against the Company at and after
such time and date, Section 1 is amended to read:
"Section 1 - LIABILITY OF THE REINSURER
The Reinsurer shall pay to the Company, with respect to personal
automobile liability business of the Company and loss in excess of policy
limits and extra contractual obligations incurred in conjunction therewith, the
amount of net loss in excess of the Company Retention but not exceeding the
Limits of Liability of the Reinsurer as set forth in the Schedule of
Reinsurance.
<TABLE>
<CAPTION>
SCHEDULE OF REINSURANCE
- ---------------------------------------------------------------------------------------------------
Company Limits of Liability
Class of Business Retention of the Reinsurer
- ---------------------------------------------------------------------------------------------------
<S> <C> <C>
Personal Automobile Liability Per Appendix A The difference between
Business $1,000,000 each occurrence
and the Company Retention
Loss in Excess of Policy $350,000 each claim and 95% of $2,000,000 annual
Limits and Extra Contractual $3,000,000 annual aggre- aggregate* in excess of the
Obligations gate* excess of $350,000 Company Retention
each claim
</TABLE>
* The annual aggregate applies to the period from February 3, 1995 to
February 3, 1996 and to each subsequent twelve month period."
- --------------------------------------------------------------------------------
<PAGE>
II - As respects claims first made against the Company at and after
such time and date, the second paragraph under paragraph (b) of
Section 4 - DEFINITIONS is amended to read:
"The date on which a loss in excess of policy limits or extra
contractual obligation is incurred by the Company shall be
deemed, in all circumstances, to be the date the claim is first
made against the Company."
III - The last paragraph of Section 6 - REINSURANCE PREMIUM AND
COMMISSION is amended to read:
"For coverage hereunder for loss in excess of policy limits and extra
contractual obligations, the Company shall pay to the Reinsurer a flat annual
reinsurance premium of $5,000, which shall be payable in the January, 1995
account and in the account for each subsequent January. Such flat annual
reinsurance premium is net, i.e., not subject to commission."
IV - Sub-paragraph (b) of Section 8 - COMMENCEMENT AND TERMINATION is
amended to read:
"(b) The Reinsurer shall not be liable for any claims first made
against the Company for loss in excess of policy limits or extra
contractual obligations at and after the effective time and date
of termination."
IN WITNESS WHEREOF, the parties hereto have caused this Endorsement to
be executed in duplicate this 10th day of September, 1996.
GENERAL REINSURANCE CORPORATION
/s/ John Seibert
-------------------------------
Vice President
Attest: /s/ Donna M. DeBitetto
OMNI INSURANCE COMPANY
OMNI INDEMNITY COMPANY
/s/ J. Paul Kennedy
-------------------------------
Attest: /s/ Patrice M. Cannon
OMNI INSURANCE GROUP, INC. EXHIBIT 99.1
FACTORS AFFECTING FORWARD LOOKING STATEMENTS
The following factors, in addition to the other information available
regarding the Company, should be carefully considered by investors and
prospective investors.
Nature of Property and Casualty Insurance Industry
The property and casualty insurance industry, including the business of
marketing and underwriting non-standard automobile insurance, is affected by
various factors. Many of these factors are beyond the Company's control and
can adversely affect the Company's results of operations. Aggressive pricing
by competitors can result in downward pressure on rates. State regulation of
rates can limit the Company's discretion with respect to the pricing of its
products. Pricing cycles and overcapacity in the industry can result in
reduced rates. General economic conditions, including interest rate
fluctuations, and reduced levels of economic activity may adversely affect the
Company. Judicial decisions relating to insurance coverage issues and the
amount of compensation payable with respect to injuries can also have an
adverse impact on the Company's operations. See "Selected Consolidated
Financial Data," "Management's Discussion and Analysis of Financial Conditions
and Results of Operations" and "Business."
Regulation
Extensive laws and regulations of the states in which the Company conducts
operations govern many aspects of its business, including, but not limited to,
licensing, payment of dividends, establishment of rates, transfer of control
and the Company's participation in residual markets such as assigned risk
pools. Changes in such laws and regulations or the adoption of new laws or
consumer initiatives regarding rates charged for automobile insurance coverage
or other matters could have a material adverse affect on the operations of the
Company. State agencies and officials responsible for administering such laws
and regulations have broad powers which they exercise primarily for the
protection of policyholders. See "Business - Regulation."
The insurance laws of most states, including Illinois, Omni Insurance
Company's state of domicile, regulate the ability of insurers domiciled in
such states as to the payment of dividends or other distributions to stock
holders. Thus, the ability of the Company to receive dividends from Omni
Insurance Company is subject to significant limitations imposed by Illinois
law. See "Market for the Registrant's Common Equity and Related Stockholder
Matters."
Illinois insurance laws and regulations provide that no person may acquire
control of the Company, and thus control of Omni Insurance Company or Omni
Indemnity Company, without obtaining the prior approval of the Commissioner of
Insurance of the State of Illinois (the "Commissioner"). Under Illinois law,
any person acquiring ten percent or more of the voting securities of an
insurance holding company is deemed to have acquired control of that company
and, consequently, is required to obtain the approval of the Commissioner
before consummating such acquisitions.
Loss and Loss Adjustment Expense Reserves
Non-standard automobile risks have higher than average loss costs and a higher
loss frequency than preferred or standard risks. Amounts established by the
Company for loss and loss adjustment expense reserves are estimates of future
costs based on many variables, including historical and statistical
information, inflation, legal developments, economic conditions and general
trends in severity and frequency of claims. Future upward adjustments to loss
and loss adjustment expense reserves which are not anticipated by management
could have a material adverse impact upon the Company's financial condition
and results of operations. The Company engages an independent actuary to
review and certify its reserves on an annual basis. See "Business - Loss and
Loss Adjustment Expense Reserves."
<PAGE>
Competition
The property and casualty insurance industry is highly competitive and the
Company competes with many national and regional insurers. Many of the
Company's competitors have greater financial marketing resources than the
Company. Certain of the Company's competitors may from time to time seek to
acquire or increase market share by pricing their products at levels below
those required for profitability, thereby creating downward pressure on
pricing. Downward pressure on pricing can also result from competitors
establishing rates based upon insufficient or faulty actuarial data. The
Company believes it can compete successfully notwithstanding such factors, but
such occurrences may nevertheless adversely affect the Company and cause
fluctuations in the Company's results of operations. See "Business -
Competition."
Expansion
The Company's future growth will depend on its ability to expand further in
states where it presently does business and to enter other states. This
expansion may be achieved through the acquisition of other companies. There
can be no assurance that the Company will be able to identify suitable
acquisition candidates available for sale at reasonable prices, consummate any
acquisition or successfully integrate any acquired business into the Company's
operations. Future acquisitions may also result in potentially dilutive
issuances of equity securities, the incurrence of debt, and the amortization
of expenses related to goodwill and other intangible assets, all of which
could have a material adverse effect on the Company.
Concentration of Revenues
Significant segments of the Company's gross premiums written in recent years
have been in the states of Florida, Texas, Virginia and Alabama. The loss of
any of these state segments, whether due to regulatory changes or other
reasons, would have a material adverse effect on the Company's operations and
financial results. A significant portion of the Company's business in Texas
in 1996 was written through an independent agency which accounted for 11.8% of
the Company's total gross premiums for the year ended 1996. The loss of this
agency or of any significant group of independent agents would have a material
adverse effect on the Company's operations and financial results. See
"Business - Overview," "Business - Growth Strategy" and "Business -
Marketing."
Reinsurance
The Company maintains excess of loss and catastrophe reinsurance. Under the
excess of loss reinsurance agreement, the Company's liability for any single
occurrence is generally limited to the statutory minimum limits of coverage.
The reinsurer providing the Company's excess of loss coverage is rated A++ by
Best. Under the catastrophe reinsurance agreement, a reinsurer rated A+ by
A.M. Best reinsures 80% of all comprehensive premiums and provides coverage in
the event of large weather-related losses. Each of the assuming reinsurers is
liable to the extend of the reinsurance ceded; however, in the event such
reinsurer does not pay its portion of the loss, the Company, as the ceding
insurer, would be responsible for the entire loss. See "Business -
Reinsurance."
Reliance on Management
The Company is and will be heavily dependent upon its senior management and
the loss of services of one or more of such executives could adversely affect
the Company. The president of the Company has entered into an employment
contract with the Company. The chairman and chief executive officer of the
Company is the Company's majority stockholder. See "Directors and Executive
Officers of the Registrant" and "Security Ownership of Certain Beneficial
Owners and Management."
<PAGE>
Limitations on Change in Control
Illinois law requires that any acquisition of control of the Company be
approved in advance by the Commissioner. Such requirement could discourage
efforts to effect a change in control of the Company. See "Business -
Regulation."
Control by Certain Stockholder
Dudley L. Moore, Jr., the Company's majority stockholder, owns [2,950,000]
shares of Common Stock, representing approximately [51.8%] of all such shares
outstanding. As a result, Mr. Moore has the ability to control the election
of the Company's directors, influence fundamental corporate actions, and
effectively to control the Company. Mr. Moore's ownership of a majority of
the Company's outstanding voting securities and his ability to control the
outcome of proposals requiring stockholder approval could have the effect of
preventing a change in control of the Company and permit Mr. Moore to cause or
prevent significant corporate actions, even if such actions would be
beneficial to the interests of other stockholders. See "Directors and
Executive Officers of the Registrant" and "Security Ownership of Certain
Beneficial Owners and Management."
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Omni
Insurance Group, Inc.'s December 31, 1996 financial statements and is qualifed
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0000906786
<NAME> OMNI INSURANCE GROUP INC
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 79,043
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 212
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 84,519
<CASH> 0
<RECOVER-REINSURE> 1,549
<DEFERRED-ACQUISITION> 9,543
<TOTAL-ASSETS> 149,223
<POLICY-LOSSES> 33,177
<UNEARNED-PREMIUMS> 49,723
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 57
<OTHER-SE> 52,124
<TOTAL-LIABILITY-AND-EQUITY> 149,223
90,880
<INVESTMENT-INCOME> 4,081
<INVESTMENT-GAINS> 40
<OTHER-INCOME> 25
<BENEFITS> 67,245
<UNDERWRITING-AMORTIZATION> 18,915
<UNDERWRITING-OTHER> 2,697
<INCOME-PRETAX> 6,168
<INCOME-TAX> 1,306
<INCOME-CONTINUING> 4,862
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 4,862
<EPS-PRIMARY> 0.85
<EPS-DILUTED> 0.85
<RESERVE-OPEN> 32,053
<PROVISION-CURRENT> 65,235
<PROVISION-PRIOR> 2,010
<PAYMENTS-CURRENT> 43,529
<PAYMENTS-PRIOR> 24,141
<RESERVE-CLOSE> 31,628
<CUMULATIVE-DEFICIENCY> 2,009
</TABLE>
