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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the Fiscal Year Ended December 31, 1993
Commission File Number 1-7461
ACCEPTANCE INSURANCE COMPANIES INC.
(Exact Name of Registrant As Specified in Its Charter)
DELAWARE 31-0742926
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
222 S. 15th Street, Suite 600 North
Omaha, Nebraska 68102
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (402)
344-8800
________
Securities Registered Pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
___________________ _____________________________
Common Stock $.40 New York Stock Exchange, Inc.
Par Value
Warrants to Purchase New York Stock Exchange, Inc.
Common Stock
Securities Registered Pursuant to Section 12(g) of the Act: None
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 has been required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] 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 Registrant's voting stock held
by non-affiliates (6,380,313 shares) on March 21, 1994 was
$72,576,060.
The number of shares of each class of the Registrant's common
stock outstanding on March 21, 1994 was:
Class of Common Stock No. of Shares Outstanding
_____________________ _________________________
Common Stock, $.40 9,955,629
Par Value
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement for the Registrant's 1994 Annual
Meeting of Shareholders are incorporated by reference into Part
III. Exhibits in Registrant's Annual Reports on Form 10-K for
the fiscal years ended December 31, 1992, 1991 and 1990; in
Registrant's Registration Statement on Form S-1, Registration No.
33-53730; Registrant's Quarterly Reports on Form 10-Q for the
periods ended May 31, 1990, November 30, 1990, and March 16,
1992; are incorporated by reference in the Exhibit Index attached
hereto.
GLOSSARY OF INSURANCE TERMS
Admitted Insurer: An insurance company licensed by a state
regulatory authority to transact insurance business in that
state. An admitted insurer is subject to the rules and
regulations of each state in which it is licensed governing
virtually all aspects of its insurance operations and financial
condition. A nonadmitted insurer, known as an excess and surplus
lines insurer, is not licensed to transact insurance business in
a given state but may be permitted to write certain business in
that state in accordance with the provisions of excess and
surplus lines insurance laws which generally permit comparatively
greater freedom from rate, form and operational regulation.
Collectively, admitted insurers are often referred to as the
"standard market."
Aggregate Limit: A definition of the limit of liability offered
under an insurance policy which provides that coverage during the
policy period will not exceed a specified amount in the aggregate
whether responding to a single claim or multiple claims. An
aggregate limit may be imposed in addition to a per occurrence
limit which specifies the maximum amount recoverable in respect
of a single occurrence.
Catastrophe Reinsurance: A form of excess of loss reinsurance
whereby, subject to a specified limit, the reinsurer agrees to
indemnify the ceding company for the amount of losses in excess
of a specified retention with respect to an accumulation of
losses resulting from a catastrophic event or series of events
(e.g., a hurricane).
Claims-Made Form: A type of liability insurance policy that
generally insures only claims that are reported to either the
insured or the insurer during the policy period, or reported
during any extended reporting period provided in the policy or
any endorsement thereto, but only if the claims arise from
incidents that occurred after a retroactive date stated in the
policy. A claims-made form is to be distinguished from an
"occurrence form."
Combined Ratio: The sum of (i) the expense ratio, which is the
ratio of underwriting expenses to premiums earned and (ii) the
loss ratio, which is the ratio of losses and LAE (hereinafter
defined) incurred to premiums earned. All amounts are net of
reinsurance.
Direct Written Premiums: Total premiums collected in respect of
policies issued by an insurer during a given period without any
reduction for premiums ceded to reinsurers.
Excess Insurance: Insurance coverage which covers the insured
only for losses in excess of a stated amount or of a specified
primary policy.
Excess and Surplus Lines Insurance: The business of insuring
risks for which insurance is unavailable from admitted insurers
in whole or in part. Such business is placed by the broker or
agent with nonadmitted insurers in accordance with the excess and
surplus lines provisions of state insurance laws.
Excess of Loss Reinsurance: A form of reinsurance whereby the
reinsurer(s), subject to a specified limit, agrees to indemnify
the ceding company for the amount of each loss, on a defined
class of business, that exceeds a specified retention.
Federal Crop Insurance Corporation ("FCIC"): A division of the
United States Department of Agriculture which provides
reinsurance for the MPCI program.
Federal Emergency Management Agency ("FEMA"): An independent
federal agency headed by a director who reports directly to the
President. FEMA contains federal emergency response offices,
national security offices, disaster assistance offices and the
Federal Insurance Administration (FIA).
Federal Insurance Administration ("FIA"): The office within FEMA
which is responsible for administering two federal insurance
programs, the National Flood Insurance Program ("NFIP") and the
Federal Crime Insurance Program.
Generally Accepted Accounting Principles ("GAAP"): Accounting
practices as set forth in opinions and pronouncements of the
Accounting Principles Board of the American Institute of
Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board or as accepted by a
significant segment of the accounting profession.
Gross Written Premiums: Direct written premiums plus premiums
collected in respect of policies assumed, in whole or in part,
from other insurance carriers.
Incurred But Not Reported ("IBNR") Reserves: The liability for
future payments on losses, which have already occurred but have
not yet been reported in the insurer's records. IBNR reserves
include LAE (hereinafter defined) related to such losses and may
also provide for future adverse loss development on reported
claims.
Loss Adjustment Expenses ("LAE"): Expenses incurred in the
settlement of claims, including outside adjustment expenses,
legal fees and internal administrative costs associated with the
claims adjustment process, but not including general overhead
expenses.
Loss Development: The difference between the value placed on a
claim when initially reported to the insurer and its subsequent
valuation at a later date or at the time of its final settlement.
Loss and LAE Reserves: The liabilities for unpaid losses and LAE
including the estimated future indemnity payments for reported
claims, IBNR reserves and related LAE.
Managing General Agent: An agent to whom an insurer grants
authority to manage some or all of the insurer's business. Such
authority may include two or more of the following:
underwriting, binding, premium collection, claims adjustment and
claims payment.
Multi-Peril Crop Insurance ("MPCI"): Crop insurance that insures
a producer of crops for various percentages, up to 75%, of his or
her prior ten year's average yield, for substantially all natural
perils to growing crops.
Net Earned Premiums: The portion of net written premiums
applicable to the expired period of policies and, accordingly,
recognized as income during a given period.
Net Written Premiums: Total premiums for insurance written (less
any return premiums) during a given period, reduced by premiums
ceded in respect of liability reinsured by other carriers.
Occurrence Form: A type of liability insurance policy that
generally insures claims that arise from incidents that occurred
during the policy period irrespective of when the claims are
reported.
Policyholders' or Statutory Surplus: As determined under SAP
(hereinafter defined), the excess of total assets over total
liabilities.
Premiums-to-Surplus Ratio: The ratio of net written premiums to
policyholders' surplus, if determined in accordance with SAP, or
the ratio of net written premiums to shareholders' equity, if
determined in accordance with GAAP.
Primary Insurance: Insurance coverage which covers the insured
from the first dollar of a loss, often after a deductible or
self-insured retention, as distinguished from excess insurance.
Quota Share Reinsurance: A form of reinsurance whereby the
reinsurer agrees to indemnify the cedent for a stated percentage
of each loss, subject to a specified limit the cedent pays, on a
defined class of business.
Reinsurance: The practice whereby a company called the
"reinsurer" assumes, for a share of the premium, all or part of a
risk originally undertaken by another insurer called the "ceding"
company or "cedent." Reinsurance may be affected by "treaty"
reinsurance, where a standing agreement between the ceding and
reinsuring companies automatically covers all risks of a defined
category, amount and type, or by "facultative" reinsurance where
reinsurance is negotiated and accepted on a risk-by-risk basis.
Retention: This term may be used in connection with limits of
liability, premiums or losses and refers to the amount of
liability, premiums or losses which an insurance company keeps
for its own account after application of reinsurance.
Self-Insured Retention: The net amount of each loss which an
insured keeps for its own account in excess of which an insurance
company provides coverage.
Stop Loss Reinsurance: A form of reinsurance, similar to Excess
Loss Reinsurance, whereby the primary insurer caps its loss on a
particular risk by purchasing reinsurance in excess of such cap.
Statutory Accounting Principles ("SAP"): Accounting practices
which consist of recording transactions and preparing financial
statements in accordance with the rules and procedures prescribed
or permitted by state regulatory authorities, generally
reflecting a liquidating rather than a going concern concept of
accounting.
Surplus Reinsurance: A form of pro rata reinsurance indemnifying
the ceding company against loss for liability exceeding a set
exposure limit. The reinsurer's pro rata share of insurance on
risks will increase as the amount of insurance premiums
increases.
Umbrella Insurance: A form of excess liability insurance which
typically covers all forms of liability to which the insured may
be subject in excess of the limits of primary policies, other
excess policies, or specified amounts not covered by other
insurance.
Wholesale Broker: An insurance broker who normally represents
specialty or excess and surplus lines insurers to which retail
insurance brokers do not have access. A wholesale broker does
not solicit business directly from a policyholder and normally
has no direct communication with the policyholder, whereas a
retail broker provides direct service and communication to the
policyholder.
PART I
ITEM 1. BUSINESS.
The Company
Acceptance Insurance Companies Inc. (the "Company") is a
holding company engaged in the specialty property and casualty
insurance business through its operating subsidiaries. At
December 31, 1993, the Company had total assets of approximately
$409 million and gross written premiums of approximately $256
million for the year then ended. The Company concentrates its
efforts on insurance programs in which special underwriting,
marketing or claims handling approaches give it a competitive
advantage in underwriting particular risks and serving the needs
of particular geographic regions or groups of insureds or
particular insurance agents.
Recent Developments
Effective March 31, 1994, the Company entered into an
Agreement and Plan of Merger with Statewide Insurance
Corporation, the exclusive general agent for the Company's non-
standard automobile insurance program underwritten by Phoenix
Indemnity Insurance Company ("Phoenix Indemnity"), and the owner
of 20% of the outstanding shares of common stock of Phoenix
Indemnity, pursuant to which the Company will acquire by merger
(the "Merger"), in consideration of shares of common stock,
Statewide Insurance Corporation (except for certain assets and
liabilities relating to its agency operations other than the non-
standard automobile program, which will be divested prior to the
Merger).
Fiscal Year 1993 Developments
On January 27, 1993, the Company completed a Rights Offering
to its shareholders resulting in the issuance of 3,992,480 units,
for a subscription price of $8.00 per unit, consisting of one
share of common stock and one warrant for the purchase of one
share of common stock exercisable at $11.00 per share until
January 27, 1997, resulting in net proceeds of approximately
$31.2 million. Proceeds were used to retire $9.5 million of
Secured Subordinated Notes and to provide capital to the
Company's insurance subsidiaries. See Note 2 to the Notes to
Consolidated Financial Statements.
Effective April 15, 1993, a $7 million secured subordinated
note issued by a subsidiary of the Company was exchanged for
875,000 units identical to those issued in the Rights Offering.
See Note 2 to the Notes to Consolidated Financial Statements.
On August 13, 1993, the Company completed the acquisition of
100% of the outstanding common and preferred stock and common
stock purchase warrants of The Redland Group, Inc. ("Redland"), a
Council Bluffs, Iowa-based holding company engaged through its
subsidiaries in the specialty property and casualty insurance
business, concentrating on crop insurance coverages and other
insurance products marketed to farmers and the rural community.
The effective date of this acquisition was July 1, 1993, and the
financial and other data set forth herein include the operations
of Redland commencing July 1, 1993. See Note 3 to the Notes to
Consolidated Financial Statements.
Historical Development
The Company was incorporated in 1968 in Ohio under the name
National Fast Food Corp. In 1969, it was reincorporated in
Delaware and thereafter operated under the names NFF Corp. (1971
to 1973), Orange-co, Inc. (1973 to 1987), Stoneridge Resources,
Inc. (1987 to 1992), and Acceptance Insurance Companies Inc. from
December 1992 until the present.
In April 1990, the Company acquired Acceptance Insurance
Holdings Inc. ("Acceptance"), a Nebraska corporation which owns
as operating subsidiaries Acceptance Insurance Company, a
Nebraska-domiciled insurance company; Acceptance Insurance
Services, Inc. a Nebraska-domiciled licensed third-party
administrator; Phoenix Indemnity, an Arizona-domiciled insurance
company (80% owned); Acceptance Indemnity Insurance Company, a
Nebraska-domiciled insurance company, and Seaboard Underwriters,
Inc., a North Carolina specialty insurance managing general
agency. See "Recent Developments" for a description of the
Company's plans to acquire the remaining 20% of Phoenix Indemnity
along with certain agency operations of Statewide Insurance
Corporation, owner of 20% of Phoenix Indemnity.
Effective July 1, 1993, the Company acquired Redland in an
exchange of its common stock. Redland owns as operating
subsidiaries Redland Insurance Company, an Iowa-domiciled
insurance company; American Growers Insurance Company, a
Nebraska-domiciled insurance company; American Agrisurance, Inc.,
an Iowa-domiciled marketer of crop insurance; Agro International,
Inc., an Iowa-domiciled insurance consulting group (80% owned);
American Agrijusters Co., an Iowa-domiciled provider of crop
insurance adjusting services; U.S. Ag Insurance Services, Inc., a
Texas-domiciled marketer of crop insurance (60% owned); and Crop
Insurance Marketing, Inc., an Iowa-domiciled marketer of crop
insurance.
The insurance underwriting operations of both Acceptance and
Redland commenced in 1979 with, as to Acceptance, the formation
of Acceptance Insurance Company, and, as to Redland, the
formation of Redland Insurance Company.
Prior to becoming involved in the specialty property and
casualty insurance business through the acquisitions described
above, the Company had been actively engaged in the real estate
business, principally in Florida, and in the citrus business in
Florida.
Insurance Programs
The Company is a Nebraska-based specialty property and
casualty insurance company concentrating on specialty insurance
programs principally in the excess and surplus lines of business.
The Company's insurance operations are conducted through its
subsidiaries domiciled in Nebraska, Iowa, Texas, North Carolina
and Arizona. The Company concentrates its efforts on insurance
programs in which special underwriting, marketing or claims
handling approaches give it a competitive advantage in
underwriting a particular risk or serving the needs of a
particular geographic region or group of insureds or particular
insurance agents.
The table below sets forth the amount of net written (net of
reinsurance) and gross written premium, respectively, for the
specialty insurance programs underwritten by the Company's
insurance subsidiaries for the periods set forth below. The
Company does not write environmental pollution coverages,
specifically excludes environmental pollution risks in
substantially all of its policies, and has not experienced any
material exposure to environmental pollution claims.
Years Ended December 31,
________________________________________________________________
1993 1992 1991
____________________ ____________________ ____________________
Net Written Written Net Written Written Net Written Written
Premium Premium Premium Premium Premium Premium
___________ _______ ___________ _______ ___________ _______
(in thousands)
Specialty general agent programs $ 63,635 $ 71,793 $45,543 $ 65,316 $38,104 $ 57,941
Non-standard automobile 30,858 29,933 17,193 28,212 11,943 17,054
Transportation insurance (1) 15,984 20,693 10,180 14,863 6,583 8,028
Acceptance Risk Managers 8,915 31,094 4,150 22,400 960 5,167
Workers' compensation 7,360 15,658 6,334 20,615 5,100 16,371
Crop programs (1) 4,581 74,691 -- -- -- --
Specialty lines (1) 2,972 5,115 -- -- -- --
Rural agents programs (1) 2,081 5,946 -- -- -- --
Other 1,119 1,119 685 685 292 292
_______ _______ ______ _______ ______ _______
Total $137,505 $256,042 $84,085 $152,091 $62,982 $104,853
======= ======= ====== ======= ====== =======
_______________
(1) Premiums for the Redland programs are included beginning July 1, 1993, following the Company's
acquisition of Redland. See "Business Fiscal Year 1993 Developments."
Specialty General Agent Programs. The Company offers a
variety of specialty insurance coverages through its network of
independent general agents. The Company attempts to select
general agents who are experienced in specialty coverages written
by the Company and can help screen risks written on behalf of the
Company and to price the Company's lines of insurance adequately
to guard against unanticipated risk exposure. The principal
types of specialty insurance coverages written by the independent
general agent network include: (1) specialty automobile lines
(property and casualty coverages for high value automobiles,
local haulers of specialized freight and other motor vehicle
coverages not normally underwritten by standard carriers); (2)
surplus lines liability and substandard property coverages for
small businesses normally not actively sought out by larger
insurers; (3) liquor liability or dram shop coverages for liquor
stores and taverns and restaurants serving alcoholic beverages
insuring against personal injuries and property damage caused by
intoxicated persons served alcoholic beverages in insured
facilities; (4) used car dealer and automobile repair shop
property and casualty coverages; and (5) excess liability,
including commercial umbrella policies (covering liability
exposure in excess of underlying policies or self-insurance
retention) and policies providing a layer of coverage in excess
of limits provided by primary liability carriers.
Non-Standard Automobile. The Company writes non-standard
private passenger automobile coverages principally in the
southwest United States and expects continued growth in written
premiums from this line of business in future periods through
geographic expansion. This program provides minimum coverages
for drivers who do not qualify for standard or preferred
treatment with standard line companies.
Transportation Insurance. The Company's transportation
coverages include property and casualty coverages written by
Seaboard for long haul truckers, generally dry freight haulers,
operating throughout the United States, and upper-midwest
regional and national truck companies underwritten through the
Redland agency network, principally for rural products, e.g.,
livestock, processed meat and grains.
Acceptance Risk Managers, Inc. ("ARM"). ARM is an
independent general agency which began operations in late 1991
specializing in underwriting difficult general liability risks,
including products liability coverages, unique professional
liability and excess liability coverages, on a surplus lines
(non-admitted) basis. ARM currently writes business exclusively
on behalf of the Company. The two founders of ARM have each been
actively involved with these lines of business as insurance
company executives for over 30 years. ARM operations are
controlled both contractually and operationally to insure
maintenance of proper underwriting standards. Contractually,
officers of the Company comprise over 50% of the members of the
board of directors of ARM, and the authority of ARM is limited to
specific types of insurance detailed in reinsurance treaties
written for this business unit. All claims are reported to the
Company, and key policy and claims information is maintained in
the Company's data base. Policy payments are deposited to a
Company lock box account and all claims are funded individually
by the Company into a Company controlled account. In addition,
the Company requires weekly management reports from ARM. The
Company and each of the four reinsurers participating in this
business periodically audit the underwriting operations of ARM,
and each has conducted at least two audits in the past twelve
months. The reinsurers participating in this business are
Constitution Reinsurance Corporation, ReCapital Reinsurance
Corporation, Northstar Reinsurance Corporation and Christiana
General Insurance Corporation, each of which is liable only for
its own retention.
Workers Compensation. The Company writes limited specialty
workers' compensation insurance coverages principally in
Minnesota. The Company's workers' compensation insurance program
attempts to control losses through the application of stringent
return to work claims management programs. Prior to April 1992,
the return to work program was administered by an independent
third party claims manager under an agreement which was
terminated, as the workers' compensation program was not
profitable because of the high expense ratios incurred with the
third party claims manager.
Redland Insurance Programs
Multi-Peril Crop Insurance ("MPCI") and Hail Insurance. The
written premium from MPCI and crop hail insurance represents the
bulk of premium revenues for the Redland group of companies.
MPCI insures a percentage (up to 75%) of the historic yield on
growing crops against substantially all natural perils while crop
hail insurance insures spot losses on growing crops resulting
from hail storms.
Rural Agents Programs. This program is designed to offer to
the network of Redland agents (historically crop agents) standard
basic property and casualty coverages (home, automobile and
limited commercial coverages) underwritten by one of the
Company's subsidiaries. The Company has found that larger
insurance companies concentrate more on high volume agencies, and
that many rural agencies experience difficulty in finding markets
for their insureds.
Specialty Lines. A variety of specialty insurance programs
are offered by the Redland insurance companies through an
independent agent network developed over a number of years by
Redland management. These insurance programs include property
and casualty coverages for race tracks, automobile repair shops,
temporary help agencies and animal mortality coverages. The
program also offers insurance covering damage from floods in
rural areas covered by Redland general agents.
Seaboard Underwriters, Inc.
In October 1991, The Company acquired Seaboard, a North
Carolina insurance agency acting as a general agent for insurance
companies, including one or more of the Company's subsidiaries,
specializing principally in the writing of property and casualty
insurance coverages for long haul truckers. During the year
ended December 31, 1993, Seaboard received commission income of
$4,119,000, and incurred operating expenses of $3,794,000.
Reinsurance
The Company limits its exposure under individual policies by
purchasing excess of loss and quota share reinsurance from other
insurance companies, and it maintains catastrophe reinsurance to
protect against catastrophic occurrences where claims can arise
under several policies due to a single event. Reinsurance does
not legally discharge the Company from its primary liability to
the insured for the full amount of a claim, but it does make the
reinsurer liable to the Company to the extent of the reinsured
portion of any loss ultimately incurred.
The Company retains the first $500,000 of risk under its
casualty lines, ceding the next $2,500,000 to reinsurers. Under
its property lines, the Company retains 25% of the first $500,000
of risk, ceding the other 75% to quota share reinsurers and the
next $1,000,000 to other reinsurers. For workers' compensation
lines the Company reinsures 50% of the first $230,000 of each
risk, and 100% of any excess. The Company also maintains a
separate 80% quota share treaty for business written through ARM.
To the extent that individual policies in any line exceed
reinsurance treaty limits, the Company purchases individual
reinsurance on a facultative (specific policy) basis.
The Company maintains catastrophe reinsurance for its
casualty lines which provide coverages of $3,000,000 in excess of
$3,000,000 of risk retained by the Company and its reinsurers and
for its property lines which provide catastrophe coverages of 95%
of $6,500,000 in excess of the $1,000,000 of risk retained by the
Company. Under its non-standard automobile program, the Company
maintains catastrophe reinsurance which provides coverages of 95%
of $1,000,000 in excess of the $100,000 of risk retained by the
Company for physical damage coverage and 100% of $900,000 in
excess of the $100,000 of risk retained by the Company for
liability coverage.
A substantial portion (approximately 87%) of the Company's
crop hail business is reinsured through quota share agreements
supplemented by surplus and stop loss contracts. Surplus
agreements limit quota share exposure to $1,500,000 per county or
township. The stop loss reinsurance reduces the Company's net
retained (not reinsured) quota share exposure by 95% once net
retained losses exceed 90% of retained premiums.
The Company's MPCI business is reinsured by the FCIC.
Under FCIC's reinsurance program, the Company may (at the
Company's election) cede to FCIC levels of exposure under MPCI
policies, ranging from 0 to 80% of such exposure. In 1993, the
average level of the Company's retention was 53.3% of such
exposure. The reinsurance agreement also contains provisions
that further reduce net retentions non-proportionally on a state-
by-state basis. Net underwriting gains or losses are allocated
to the company by the FCIC annually. The Company's net exposure
on MPCI business is further reduced by privately placed stop loss
reinsurance.
The Company's farmowners business is reinsured by a 70%
quota share contract. Quota share retentions are further
reinsured by excess of loss and catastrophe loss contracts.
Other non-crop property and casualty lines are reinsured by
excess of loss agreements that limit net exposure to $250,000 per
risk.
Federal flood insurance is reinsured 100% by the Federal
Emergency Management Administration ("FEMA") through its sub-
agency, Federal Insurance Administration ("FIA").
Reinsurance treaties are renegotiated and renewed annually
by the Company. The Company closely monitors the quality and
performance of its reinsurers and for the year ended December 31,
1993, approximately 80% of the Company's reinsurance business was
ceded to reinsurance companies rated A- (Excellent) by A.M. Best
Company, or was reinsured by FCIC or FEMA.
Investments
The Company's investment results for the periods indicated
are set forth below:
Years Ended December 31,
______________________________________
1993 1992 1991
________ ________ _______
(in thousands, except percentages)
Average investment portfolio (1) $173,182 $113,024 $97,460
Investment income 10,844 8,220 6,103
Return on average investment portfolio 6.3% 7.3% 6.3%
Realized gains 2,250 1,046 1,953
______________________
(1) Average investment portfolio represents the average of the beginning and ending
investment portfolio (excluding real estate) computed on a quarterly basis.
The Company's investment portfolio at December 31,
1993, consisted of the following:
Carrying
Type of Investment Amount
__________________ ________
(in thousands)
Fixed maturities held for investment (1) $ 51,756
Fixed maturities available for sale (1) 95,836
Common stock 5,426
Preferred stock 8,446
Real estate 4,266
Mortgage loans and other investments 2,852
Short-term investments:
Commercial Paper 4,668
U.S. Government/Agency securities 14,000
Certificate of Deposit 551
Money Market Account 185
_______
Total short-term investments 19,404
_______
Total investments (2) $187,986
=======
______________________
(1) At December 31, 1993, approximately 68% of the fixed
maturities were invested in United States Treasury and
government agency securities and collateralized mortgage
obligations backed by U.S. government agency securities.
(2) All investments are carried at amortized cost, except common
stock and preferred stock, which are carried at market value
and fixed maturities held for sale which are carried at the
lower of cost or market.
GAAP Combined Loss and Expense Ratio
The Company's underwriting experience is indicated by its
"combined ratio" which is the sum of (1) the ratio of losses and
loss adjustment expenses incurred to net premiums earned (the
"Loss Ratio") and (2) the ratio of policy acquisition costs,
other underwriting costs, and other expenses incurred to net
premiums written (the "Expense Ratio"). The Company's ratios,
computed in accordance with generally accepted accounting
principles ("GAAP"), are set forth in the following table (a
combined ratio below 100% indicates a profit from underwriting
activities):
Years Ended December 31,
______________________________
1993 1992 1991
______ __________ ______
Loss Ratio 72.5% 75.8% (1) 72.0%
Expense Ratio 28.4 29.1 29.0
_____ _____ _____
Combined Ratio 100.9% 104.9% 101.0%
===== ===== =====
_______________
(1) The higher loss ratio for 1992 resulted in part from an
approximate $2.1 million strengthening of the Company's loss
and loss adjustment expense reserves for its workers'
compensation and liquor liability lines, and $1.7 million of
incurred losses relating to Hurricanes Andrew and Iniki,
collectively 4.8% of the 1992 loss ratio.
Losses and Loss Adjustment Expense Reserves
The Company maintains reserves for estimates of liability
for reported losses, losses which have occurred but which have
not yet been reported, and for the expenses of investigating,
processing and settling claims under outstanding policies. Such
reserves are estimates by the Company primarily based on company
and industry experience with the types of risks involved,
knowledge of the circumstances surrounding individual claims, and
company and industry experience with respect to the probable
number and nature of claims arising from losses not yet reported.
The effects of inflation are implicitly reflected in these loss
reserves through the industry data utilized in establishing such
reserves. Since 1985, the Company has annually obtained an
independent review of its loss reserving process and reserve
estimates by a professional actuary as part of the annual audit
of its financial statements.
The Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 113, "Accounting and Reporting for
Reinsurance for Short-Duration and Long-Duration Contracts,"
effective January 1, 1993. The effect of the application of SFAS
No. 113 resulted in the reclassification of amounts ceded to
reinsurance previously reported as a reduction in unearned
premium and unpaid losses and loss adjustment expenses, to assets
on the consolidated balance sheet. The table below includes a
reconciliation of net loss and loss adjustment expense reserves
to amounts presented on the consolidated balance sheet after
reclassifications related to the adoption of SFAS No. 113. The
gross cumulative redundancy in the table on the following page is
presented for 1992, the only year on the table for which the
Company has restated amounts in accordance with SFAS No. 113.
The following table presents an analysis of the Company's
reserves, reconciling beginning and ending reserve balances for
the periods indicated:
Years Ended December 31,
_____________________________________
1993 1992 1991
________ ________ ________
(in thousands)
Net loss and loss adjustment expense
reserves at beginning of year $ 77,627 $ 66,132 $ 58,439
_______ _______ _______
Net loss and loss adjustment expense
reserves of Redland at date of
acquisition 13,499 -- --
_______ _______ _______
Provisions for net losses and loss
adjustment expenses for claims
occurring in the current year 90,250 57,678 46,719
Increase (Decrease) in net reserves
for claims occurring in prior years 2,555 2,347 198
_______ _______ _______
92,805 60,025 46,917
_______ _______ _______
Net losses and loss adjustment expenses
paid for claims occurring during:
The current year (40,209) (18,328) (15,487)
Prior years (28,008) (30,202) (23,737)
_______ _______ _______
(68,217) (48,530) (39,224)
_______ _______ _______
Net loss and loss adjustment expense
reserves at end of year 115,714 77,627 66,132
Reinsurance recoverable on unpaid
loss and loss adjustment expenses 95,886 50,039 N/A
_______ _______
Gross loss and loss adjustment
expense reserves $211,600 $127,666 N/A
======= =======
The following table presents the development of balance
sheet loss reserves from calendar years 1983 through 1992. The
top line of the table shows the loss reserves at the balance
sheet date for each of the indicated years. These amounts are
the estimates of losses and loss adjustment expenses for claims
arising in all prior years that are unpaid at the balance sheet
date, including losses that had been incurred but not yet
reported to the Company. The middle section of the table shows
the cumulative amount paid with respect to previously recorded
reserves as of the end of each succeeding year. The lower
section of the table shows the reestimated amount of the
previously recorded reserves based on experience as of the end of
each succeeding year. The "Cumulative redundancy (deficiency)"
caption represents the aggregate change in the estimates over all
prior years. Conditions and trends that have affected the
development of loss reserves in the past may not necessarily
occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on this
information. The Company computes the cumulative redundancy
(deficiency) annually on a calendar year basis.
Years Ended December 31,
____________________________________________________
1983 1984 1985 1986 1987 1988
_______ _______ _______ _______ _______ _______
(in thousands)
Net reserves for unpaid
losses and loss
adjustment expenses $ 2,029 $ 2,764 $ 7,894 $17,373 $27,730 $34,092
Cumulative amount of net
liability paid through:
One year later 2,111 2,475 3,857 5,641 8,490 10,413
Two years later 3,041 4,510 6,408 10,955 15,710 17,765
Three years later 3,769 5,463 8,609 14,721 20,207 23,436
Four years later 4,077 6,193 9,868 16,229 22,691 26,254
Five years later 4,274 6,514 9,970 17,385 23,486 27,802
Six years later 4,323 6,563 10,123 17,464 24,153
Seven years later 4,328 6,658 10,113 17,521
Eight years later 4,380 6,624 10,137
Nine years later 4,382 6,652
Ten years later 4,383
Net reserves reestimated as of:
One year later 2,827 5,221 8,720 17,260 26,778 33,360
Two years later 3,825 6,020 9,490 18,196 27,066 31,482
Three years later 4,170 6,378 10,589 18,648 25,326 29,761
Four years later 4,325 6,775 10,606 17,894 24,885 28,936
Five years later 4,368 6,647 10,224 17,996 24,431 29,081
Six years later 4,362 6,618 10,256 17,802 24,619
Seven years later 4,349 6,686 10,183 17,845
Eight years later 4,392 6,663 10,179
Nine years later 4,398 6,674
Ten years later 4,394
Net cumulative redundancy
(deficiency) $(2,365) $(3,910) $(2,285) $ (472) $ 3,111 $ 5,011
Gross reserves for unpaid loss and
loss adjustment expenses
Reinsurance recoverable on unpaid
loss and loss adjustment expenses
Net reserves for unpaid loss and
loss adjustment expenses
Reestimated gross reserves for unpaid
loss and loss adjustment expenses
Reestimated reinsurance recoverable
on unpaid loss and loss adjustment
expenses
Reestimated net reserves for unpaid
loss and loss adjustment expenses
Gross cumulative redundancy
Years Ended December 31,
__________________________________
1989 1990 1991 1992
_______ _______ _______ _______
(in thousands)
Net reserves for unpaid
losses and loss
adjustment expenses $43,380 $58,439 $66,132 $ 77,627
Cumulative amount of net
liability paid through:
One year later 13,026 23,737 30,202 28,008
Two years later 25,790 41,391 47,803
Three years later 33,005 51,703
Four years later 36,676
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Net reserves reestimated
as of:
One year later 42,969 58,637 68,479 80,182
Two years later 41,307 59,775 72,712
Three years later 39,670 62,752
Four years later 40,132
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Net cumulative
redundancy
(deficiency) $ 3,248 $(4,313) $(6,580) $ (2,555)
Gross reserves for unpaid loss and
loss adjustment expenses $127,666
Reinsurance recoverable on unpaid
loss and loss adjustment expenses 50,039
_______
Net reserves for unpaid loss and
loss adjustment expenses 77,627
Reestimated gross reserves for unpaid
loss and loss adjustment expenses $123,750
Reestimated reinsurance recoverable on
unpaid loss and loss adjustment
expenses 43,568
_______
Reestimated net reserves for unpaid loss
and loss adjustment expenses 80,182
Gross cumulative redundancy $ 3,916
=======
Uncertainties Affecting the Insurance Business
The property and casualty insurance business is highly
competitive, with over 3,000 insurance companies transacting such
business in the United States, many of whom have substantially
greater financial and other resources, and may offer a broader
variety of coverages than those offered by the Company.
Beginning in the latter half of the 1980s, there has been severe
price competition in the insurance industry which has resulted in
a reduction in the volume of premiums written by the Company in
some of its lines of businesses, because of its unwillingness to
reduce prices to meet competition. The specialty property and
casualty coverages underwritten by the Company may involve
greater risks than more standard property and casualty lines.
These risks may include a lack of predictability, and in some
instances, the absence of a long-term, reliable historical data
base upon which to estimate losses. The Company's strategy is to
offer specialized property and casualty insurance programs as to
which there is limited competition from larger insurers.
Pricing in the property and casualty insurance industry is
cyclical in nature, fluctuating from periods of intense price
competition, which led to record underwriting losses during the
early 1980's, to periods of increased market opportunity as some
carriers withdrew from certain market segments. Despite
increased price competition in recent years, the Company has
maintained consistent earned premium income during such periods,
principally through geographic expansion and implementation of
new insurance programs.
The Company's results also may be influenced by factors
influencing the insurance industry generally and which are
largely beyond the Company's control. Such factors include (a)
weather related catastrophes; (b) taxation and regulatory reform
at both the federal and state level; (c) changes in industry
standards regarding rating and policy forms; (d) significant
changes in judicial attitudes towards liability claims; (e) the
cyclical nature of pricing in the industry; and (f) changes in
the rate of inflation, interest rates and general economic
conditions.
Adverse loss experience in two lines of insurance written by
the Company resulted in a strengthening of loss and loss
adjustment expense reserves in 1992 by approximately $2.1
million. The crop insurance coverages underwritten by the
Redland group of companies has experienced adverse loss
experience over the last two years largely because of unusual and
adverse weather conditions which affected crop yields. During
the second fiscal quarter of 1993, Redland strengthened loss and
loss adjustment reserves by $3 million, partly as a result of
suggestions made by the Company in the course of the negotiations
leading to the acquisition of Redland. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" for discussion of the impact of these uncertainties
on the Company's financial condition and operating results.
Marketing
The Company generally markets the insurance products of the
Acceptance group of companies through independent general agents.
These agents deal with local agents and brokers who are in direct
contact with insurance buyers. The number of general agents
marketing the Company's Acceptance insurance lines has increased
from approximately 58 in 1988 to approximately 104 in 1993.
General agents are compensated on a commission basis. Workers'
compensation coverages are written directly through agents who
are in direct contact with insurance buyers.
The Company writes the insurance products of the Acceptance
group of companies in 22 states as an admitted carrier and in 37
states as an approved non-admitted carrier. Non-admitted
carriers are normally restricted to writing lines of business not
regularly written in the standard admitted market, but have
greater freedom to design policy provisions and charge
appropriate premiums on an unregulated basis. The Company
generally seeks to have an insurance subsidiary licensed as an
admitted carrier, as well as another insurance subsidiary
operating as an approved non-admitted carrier in each state in
which it writes insurance, in order to offer insurance products
in both the admitted as well as the non-admitted market. For the
years ended December 31, 1993 and 1992, the Company wrote 51% of
its written premiums from the Acceptance group as a non-admitted
carrier and 49% as an admitted carrier.
The Company has expanded the geographic distribution of its
business from the Acceptance group in recent years from 18 states
in 1986 to 39 states in 1993. New insurance programs in liquor
liability, workers' compensation and non-standard automobile
coverages, initiated in 1989, and business written through
Seaboard and ARM beginning in 1991, has led to further geographic
expansion.
The crop and other rural coverages underwritten by the
Redland group are marketed through a network of approximately
2,500 independent agents in 43 states who sell MPCI, hail and
flood insurance directly to farmers, as well as other insurance
products underwritten by the Redland group of companies. The
Company intends to offer standard basic property and casualty
coverages (home, automobile and limited commercial coverages)
underwritten by one of the Company's subsidiaries to the Redland
network of rural agents.
With the acquisition of Redland, at December 31, 1993, the
Company now offers its insurance products, through an admitted
carrier in 44 states and the District of Columbia, and through a
non-admitted carrier in 41 states and the District of Columbia.
During the year ended December 31, 1993, five agents
produced approximately 34% of the Company's direct written
premiums. Two of these agents, Acceptance Risk Managers, Inc.
and Statewide Insurance Corporation produced, respectively,
approximately 12% and 12%, of the direct written premiums for the
year ended December 31, 1993. No other agent produced more than
10% of direct written premiums for that year. See "Recent
Developments" for a discussion of the Company's plans to acquire
in a stock merger Statewide Insurance Corporation.
The states in which the Company wrote more than 5% of its
written premium in 1993 are shown below with the amounts written
in such states in the two prior years.
Years Ended December 31,
_________________________________
1993 1992 1991
_____ _____ _____
Texas 13.5% 14.5% 12.0%
Minnesota 8.5 15.9 19.7
California 7.5 6.5 4.5
Nebraska 7.1 1.5 1.7
Illinois 5.8 4.3 5.3
Arizona 5.6 12.0 12.9
Iowa 5.5 4.1 5.7
Regulation
Insurance companies operate in a highly regulated industry
and are subject to a variety of governmental regulations and the
supervision of regulatory agencies in the states in which they
conduct business. The primary purpose of such regulations is the
protection of policyholders and claimants rather than
shareholders. State insurance departments have broad regulatory
authority over insurance companies selling insurance in their
states. Depending on whether the insurance company is domiciled
in the state and whether it is an admitted or non-admitted
insurer, such authority may extend to such things as (i) periodic
financial examination; (ii) approval of rates and policy forms;
(iii) monitoring loss reserve adequacy; (iv) solvency monitoring;
(v) restrictions on the payment of dividends; (vi) approval of
changes in control and (vii) authorization of investments.
The Company is also subject to statutes governing insurance
holding companies. These statutes require the Company, among
other things, to file periodic information with state regulatory
authorities including information concerning its capital
structure, ownership, financial condition and general business
operations; limit certain transactions between the Company, its
affiliates and its insurance subsidiaries; and restrict the
ability of any one person to acquire certain levels of the
Company's voting securities without prior regulatory approval.
Nebraska law limits Nebraska insurance companies' capacity
to pay dividends and conduct other financial transactions with
their shareholders and affiliates without prior regulatory
approval. Dividends or distributions made within the preceding
12 months may not exceed the lesser of (a) 10% of the
policyholders' surplus as of the December 31 preceding the date
of determination or (b) net income, not including realized
capital gains, for the twelve-month period ending on December 31
preceding the date of determination. In determining net income
available for dividends, an insurer may carry forward net income
from the second and third full calendar years preceding the date
of determination, again excluding realized capital gains, less
dividends paid in such prior calendar years preceding the date of
determination.
The States of Iowa and Arizona regulate insurance companies'
capacity to pay dividends and to conduct other financial
transactions with their shareholders and affiliates, without
prior regulatory approval, in a manner substantially similar to
Nebraska.
The Company's MPCI and federal flood insurance programs are
federally regulated insurance products. Consequently, these
programs are subject to oversight by the legislative and
executive branches of the federal government. These regulations
generally require compliance with federal guidelines with respect
to underwriting, rating and claims administration. The Company
is required to perform continuous internal audit procedures and
is subject to audit by several federal government agencies.
Employees
At March 21, 1994 the Company and its subsidiaries employed
30 salaried executive and 534 salaried administrative personnel.
The Merger with Statewide Insurance Corporation (see "Recent
Developments") will result in the addition of 98 additional
salaried administrative personnel in Phoenix. Acceptance
believes that relations with its employees are satisfactory.
There are no longer any individuals employed by the Company at
the parent level.
ITEM 2. PROPERTIES.
The following table sets forth certain information regarding
the principal properties of the Company.
General
Location Character Size Leased/Owned
___________________ _________ ______________ ____________
Omaha, NE Office 44,000 sq. ft. Leased(1)
Council Bluffs, IA Office 62,000 sq. ft. Leased(1)
Burlington, NC Office 15,000 sq. ft. Leased(1)
Phoenix, AZ Office 6,500 sq. ft. Month-to-Month
Rental
Scottsdale, AZ Office 11,000 sq. ft. Leased(1)
______________________
(1) The range of expiration dates for these leases is
November 30, 2001 (Omaha), February 1, 1996 (Burlington),
December, 1998 (Scottsdale), and June 30, 1997 (Council
Bluffs).
(2) The Company leases, generally on a month-to-month rental
basis, small facilities in various parts of the United
States in connection with its crop insurance operations.
ITEM 3. LEGAL PROCEEDINGS.
There are no material legal proceedings pending involving
the Company or any of its subsidiaries which require reporting
pursuant to this Item.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of security holders
during the fourth quarter of the fiscal year ended December 31,
1993.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is listed and traded on the NYSE.
The following table sets forth the high and low closing sales
prices per share of Common Stock as reported on the NYSE
Composite Tape for the fiscal quarters indicated. The prices set
forth below through December 22, 1992, in the fourth quarter of
the fiscal year ended December 31, 1992, reflect the prices of
the shares of Common Stock on the NYSE prior to the one-for-four
reverse stock split effected December 22, 1992. The prices set
forth beginning December 23, 1992 reflect the prices of the
shares of Common Stock after the reverse stock split.
High Low
____ ___
Year Ended December 31, 1992
First Quarter 2-7/8 2
Second Quarter 2-7/8 2-1/4
Third Quarter 2-1/2 1-5/8
Fourth Quarter (through
December 22, 1992, pre-split) 3-1/2 1-5/8
Fourth Quarter (beginning
December 23, 1992, post-split) 10-5/8 9-5/8
Year Ended December 31, 1993
First Quarter 13-1/4 8-1/4
Second Quarter 14-1/3 12
Third Quarter 15-1/4 12-1/2
Fourth Quarter 15-5/8 11-1/4
Year Ended December 31, 1994
First Quarter (through
March 21, 1994) 13-3/4 11-1/4
The closing sales price of the Common Stock on March 21,
1994, as reported on the NYSE Composite Tape, was $11.375 per
share. As of March 21, 1994, there were approximately 1,900
holders of record of the Common Stock.
As a holding company, the Company is dependent for cash
flows upon dividends or other distributions from its operating
subsidiaries. To the extent that the Company experiences
positive cash flows from its operations, it intends, generally,
to reinvest any such excess cash in the Company's insurance
operations.
The Company has not paid cash dividends during the periods
indicated above and does not anticipate that it will pay cash
dividends in the foreseeable future. Because of regulatory
restrictions and the terms of the Company's loan agreements,
dividends or other cash flow from the insurance subsidiaries in
the foreseeable future is not anticipated. The foregoing
obligations of the Company prohibit the declaration or payment of
dividends to the Company by its subsidiaries, or payment of
dividends by the Company to its shareholders, without approval of
the bank lenders. See Note 14 to the Notes to Consolidated
Financial Statements.
ITEM 6. SELECTED FINANCIAL DATA.
The following tables set forth certain information
concerning the insurance operations of the Company and its
general operations, and should be read in conjunction with, and
are qualified in their entirety by, the Consolidated Financial
Statements and the notes thereto appearing elsewhere in this
report. This selected financial data has been derived from the
audited Consolidated Financial Statements of the Company and its
subsidiaries. The "Pre-Acquisition" information set forth below
is not included in the Company's Consolidated Financial
Statements relating to periods prior to the Company's acquisition
of Acceptance in April 1990.
Insurance Operations
(In thousands except ratios)
Post-Acquisition
__________________________________________________
Nine Months
Years Ended Ended
December 31, December 31,
_________________________________
1993 1992(3) 1991 1990
________ _______ _______ ____________
Operating Statement Data:
Net premiums earned $128,082 $79,164 $65,164 $51,310
Net investment income 12,717 9,266 8,056 7,159(4)
Agency income 4,119 3,992 1,645 0
_______ ______ ______ ______
Total revenues 144,918 92,422 74,865 58,469
Losses and loss adjustment expenses 92,805 60,025 46,917 36,674
Underwriting and other expenses(1) 36,414 23,032 18,942 14,392
Agency Expense 3,794 3,736 1,624 0
Interest Expense(2) 1,184 767 36 0
_______ ______ ______ ______
Total expenses 134,197 87,560 67,519 51,066
_______ ______ ______ ______
Operating Income $ 10,721 $ 4,862 $ 7,346 $ 7,403
======= ====== ====== ======
December 31,
__________________________________________________
1993 1992(3) 1991 1990
________ _______ _______ ____________
Balance Sheet Data:
Investments $183,750 $119,312 $108,689 $ 93,245(4)
Loss and loss adjustment
expense reserves(5) 211,600 127,666 N/A N/A
Reinsurance recoverable on unpaid
loss and loss adjustment expense
reserves(5) 95,886 50,039 N/A N/A
_______ _______
Net loss and loss adjustment
expense reserves 115,714 77,627 66,132 58,439
Unearned premiums(5) 60,114 41,709 N/A N/A
Prepaid reinsurance premiums(5) 15,448 16,830 N/A N/A
_______ _______
Net unearned premiums 44,666 24,879 19,958 22,140
Ratios:
Loss Ratio 72.5% 75.8% 72.0% 71.5%
Expense Ratio 28.4 29.1 29.0 28.0
_____ _____ _____ ____
Combined Loss & Expense Ratio 100.9% 104.9% 101.0% 99.5%
Insurance Operations
(In thousands except ratios)
Pre-Acquisition
___________________________
Three Months
Ended Year Ended
March 31, December 31,
1990 1989
____________ ____________
Operating Statement Data:
Net premiums earned $13,129 $42,211
Net investment income 1,543 5,569
Agency income 0 0
______ ______
Total revenues 14,672 47,780
Losses and loss adjustment expenses 9,137 28,953
Underwriting and other expenses(1) 3,773 13,852
Agency Expense 0 0
Interest Expense(2) 64 244
______ ______
Total expenses 12,974 43,049
______ ______
Operating Income $ 1,698 $ 4,731
====== ======
March 31, December 31,
1990 1989
____________ ____________
Balance Sheet Data:
Investments $ 78,366 $73,469
Loss and loss adjustment
expense reserves(5) N/A N/A
Reinsurance recoverable on unpaid
loss and loss adjustment expense
reserves(5) N/A N/A
Net loss and loss adjustment
expense reserves 46,245 43,380
Unearned premiums(5) N/A N/A
Prepaid reinsurance premiums(5) N/A N/A
Net unearned premiums 19,883 16,943
Ratios:
Loss Ratio 69.6% 68.6%
Expense Ratio 28.7 32.8
____ _____
Combined Loss & Expense Ratio 98.3% 101.4%
______________________________
(1) Excludes approximately $491,000, for the years ended December 31, 1993, 1992 and 1991 in
amortization of excess cost over acquired assets related to the Company's acquisition of
Acceptance and not related to the Company's insurance operations.
(2) Excludes approximately $885,000, $1,173,000 and $1,853,000 for the years ended December 31,
1993, 1992 and 1991, in interest expense related to the acquisition loan incurred in connection
with the acquisition of Acceptance, and the refinancing of such loan, which loans do not
represent funds borrowed for insurance operations.
(3) Operating Income was reduced in 1992 by the addition of approximately $2.1 million to reserves
for losses on two lines of insurance written by the Company and $1.7 million of incurred losses
relating to Hurricanes Andrew and Iniki. See "Business -- GAAP Combined Loss and Expense
Ratio."
(4) As a result of the acquisition of Acceptance, effective April 1, 1990, the Company's investment
portfolio was adjusted to market value in accordance with generally accepted accounting
principles. At December 31, 1990, substantially all of the adjustment had been recognized in
net investment income.
(5) During 1993 the Company adopted Statement of Financial Accounting Standards No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." This
resulted in the reclassification of amounts ceded to reinsurers, as assets on the consolidated
balance sheet, instead of a reduction in liabilities for 1993 and 1992.
General Operations
(Consolidated with Insurance Operations)
(In thousands except per share date)
Four Months
Years Ended Ended
December 31, December 31,
____________________________________
1993 1992 1991 1990(3)
________ ________ ________ ____________
Income Statement Data:
Revenues(1) $145,295 $ 95,032 $ 80,686 $ 28,382
Income (loss) from continuing
operations(1) 7,586 (826) (23,110)(2) (832)
Income (loss) per share
from continuing
operations: Primary(1) .86 (0.24) (6.78)(2) (0.25)
Fully diluted(1) .85 (0.24) (6.78) (0.25)
Net income (loss) 7,586 (909) (42,919) (1,336)
Net income (loss) per share
Primary .86 (0.26) (12.59) (0.40)
Fully diluted .85 (0.26) (12.59) (0.40)
Balance Sheet Data:
Total assets(4) $409,385 $257,734 $207,532 (1) $330,379
Borrowings and
term debt 18,951 33,567 55,473 (1) 103,658
Stockholders' equity(5) 95,717 34,523 35,042 77,883
Years Ended
August 31,
_______________________
1990 1989
_________ _________
Income Statement Data:
Revenues(1) $ 33,579 $ --
Income (loss) from continuing
operations(1) (5,658) (5,679)
Income (loss) per share
from continuing
operations: Primary(1) (1.82) (2.68)
Fully diluted(1) (1.82) (2.68)
Net income (loss) (9,760) (4,670)
Net income (loss) per share
Primary (3.14) (2.20)
Fully diluted (3.14) (2.20)
Balance Sheet Data:
Total assets(4) $334,512 $243,318
Borrowings and
term debt 102,214 113,133
Stockholders' equity(5) 79,252 60,745
___________________________
(1) On May 28, 1992, the Company sold its approximate 52% interest in Orange-co to an unaffiliated
third party for $31 million in cash. The decision to sell its Orange-co interest had been made
in December 1991. As a result, in the Consolidated Financial Statements at December 31, 1991,
and for the year then ended, (i) the Company's share of the net income (loss) of Orange-co has
been reflected as a discontinued operation, and (ii) the assets and liabilities of Orange-co
have been classified as net assets of discontinued operations held for sale. The Company
recorded a provision for the expected loss on disposal of its investment in Orange-co of
approximately $19,600,000, or $(5.75) per share, in 1991 which is excluded from loss and loss
per share from continuing operations and per share data presented above (see Note 16 to the
Notes to Consolidated Financial Statements).
(2) Included in loss from continuing operations for the year ended December 31, 1991, is a non-cash
charge of $15,300,000, or $(4.49) per share, to reflect the Company's equity investment in
Major Realty Corporation at estimated net realizable value (see Note 6 to the Notes to
Consolidated Financial Statements).
(3) Effective September 1, 1990, the Company changed its annual reporting period from a year ending
August 31 to a year ending December 31, and the Company also changed the method by which it
reports the results of operations and financial position of certain subsidiaries in its
consolidated financial statements effective September 1, 1990. As a result, the Company
recorded an adjustment for the cumulative effect of the accounting change of a loss of
$1,114,000, or $0.33 per share, which is excluded from loss and loss per share from continuing
operations presented above for the four months ended December 31, 1990.
(4) During 1993 the Company adopted Statement of Financial Accounting Standards No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." This
resulted in the reclassification of accounts ceded to reinsurers, as assets on the consolidated
balance sheet, instead of a reduction in liabilities. These reclassifications amounted to
$111,334,000 and $66,869,000 as of December 31, 1993 and 1992, respectively.
(5) Acceptance did not pay any cash dividends on its common stock in the periods indicated above.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition
and results of operations of the Company and its consolidated
subsidiaries is based upon the consolidated financial statements,
and the notes thereto included herein.
Results of Operations
Year Ended December 31, 1993
Compared to Year Ended December 31, 1992.
The Company's net income increased by $8.5 million from 1992
to 1993 as net income improved from a loss of $.9 million for the
year ended December 31, 1992 to income of $7.6 million for the
year ended December 31, 1993. This increase was attributable
primarily to four factors: 1) improved underwriting results
combined with an increase in premiums earned, 2) growth in the
investment income of the Company, 3) continued reduction in the
general and administrative expenses of the Company, and 4) a
reduction in interest expense. In addition, the real estate
interests of the Company had very little impact on the change in
net income for 1993 as compared to 1992.
Insurance premiums earned increased by 61.8% from 1992 to
1993. Excluding the increase in premiums written resulting from
the merger with The Redland Group, Inc. ("Redland"), the
Company's direct written premiums increased a modest 11.9%. Net
premiums, however, increased 45.2% due to the Company's ability
to retain more premiums as a result of increased capital from the
Equity Rights Offering completed in January, 1993 which raised
$31.2 million. In addition, during 1993, the new Redland
operations added $16.2 million in earned premiums to the
Company's revenues. With the inclusion of the Redland operations
for an entire year, the expansion of the Company's general agency
programs as a result of the opening of a new branch office in
Scottsdale, Arizona and the business opportunities developed from
the Company's merger with Redland, it is expected that the growth
in premium revenue will continue during 1994.
This increase in earned premium revenue translated into
improved results in 1993 as compared to 1992 as the Company
experienced a reduced combined loss and expense ratio from
insurance operations of 100.9% during the twelve months ended
December 31, 1993 as compared to 104.9% during the same period in
1992. With the inclusion of Redland, the Company's expense ratio
fell slightly from 29.1% in 1992 to 28.4% in 1993. The Company's
loss ratio decreased from 75.8% during 1992 to 72.5% during 1993.
The results in 1992 were affected by Hurricane's Andrew and Iniki
as well as reserve strengthening in the Company's workers'
compensation and liquor liability lines. These events did not
reoccur during 1993 contributing to the decline in the Company's
loss ratio. The seasonal nature of crop insurance writings
combined with unpredictable weather patterns are expected to
create more volatility in the Company's quarter to quarter
earnings in the future, and thus, results in one quarter will
provide a less reliable forecast of subsequent quarterly results.
The Company's investment income increased 41.3% from the
year ended December 31, 1992 to the year ended December 31, 1993.
This increase is attributable primarily to the increase in the
Company's investment portfolio from an average of $113 million
during 1992 to an average portfolio of $173 million during 1993.
This increase in the size of the portfolio resulted from a
capital infusion of funds derived from the Company's Equity
Rights Offering completed in January, 1993, the Company's ability
to cede less of its premium to reinsurers as a result of this
capital infusion, growth in the Company's direct premiums, and
additional investment assets acquired in the merger with Redland.
In terms of generating investment income, the increase in the
size of the portfolio more than offset the reduction in the
average yield on the investment portfolio from 7.3% during the
year ended December 31, 1992 to 6.3% during the 1993 year. This
reduction in average yield primarily was due to the reduced
yields available for investment grade securities in the
marketplace, the addition to the Company's portfolio of tax free
securities which, in general, have a lower yield than equivalent
taxable securities, the short term nature of Redland's portfolio,
and amortization of premiums paid for certain of the Company's
mortgage backed securities caused by an acceleration in the
prepayment speed of the underlying mortgages. If the Company's
net tax operating losses continue to diminish, the Company will
seek additional opportunities in the tax free investment sector.
During 1993, the Company was able to further reduce its
general and administrative expenses as compared to those
experienced in 1992. Two factors served to decrease the general
and administrative expenses. First, the Company combined its
real estate and portfolio management operations during 1993, thus
reducing administrative expenses associated with real estate
activities. In addition, the Company continued to reduce
expenses as a result of the consolidation of operations between
the parent Company and its insurance company subsidiaries. This
consolidation was initiated by the movement of the Company's home
office from Bloomfield Hills, Michigan to Omaha, Nebraska in
July, 1992. Offsetting decreases in general and administrative
expenses were increases associated with Redland. These expenses
include normal administrative expenses associated with the
running of the Redland operations as well as the amortization of
certain identifiable intangible assets and the excess of costs
over acquired net assets. The Company does not expect further
reductions in its general and administrative expenses during
1994.
The Company's interest expense continued to decline during
1993 compared to 1992. This was due primarily to a decrease in
the Company's outstanding debt as well as a reduction in the
Company's average interest costs on such debt. On May 28, 1992,
the Company completed the sale of its 5,355,166 shares of Common
Stock of Orange-co for $31 million in cash, resulting in net
proceeds of approximately $29 million. The Company applied
approximately $22.4 million to retire its bank term loan. On
January 27, 1993, the Company successfully completed a $31.9
million Common Stock Rights Offering. Proceeds from this
offering were used to retire $9.5 million of secured subordinated
notes plus accrued interest thereon. Effective April 15, 1993
the holder of a $7 million secured subordinated note of one of
the Company's subsidiaries, which had been assumed by the
Company, exchanged such note for 875,000 shares of Common Stock
and Warrants to purchase, at a price of $11 per share during a
period ending January 27, 1997, 875,000 additional shares of
Common Stock. All of these events reduced debt carried at higher
interest rates than the Company's other bank borrowings, and
therefore, with the retirement of these debts, the Company also
reduced the average cost of its outstanding debt.
In March, 1994, the Company agreed to amend borrowing
arrangements with its bank lenders. The new structure is a $35
million line of credit with interest payable quarterly at the
prime rate or at LIBOR plus a margin of 1% to 1.75%, depending on
the Company's debt to equity ratio. The line of credit will
mature in four years and may be extended to five years by the
bank lenders. The line of credit will be consummated once final
legal documentation is completed which is anticipated to be in
April, 1994. Such facility will increase the Company's borrowing
capacity and, in the current interest rate environment, should
reduce the interest rate which the Company pays on its debt.
Since the interest rate is a floating rate, the Company has no
guarantee that such reduction will be a permanent one.
Year Ended December 31, 1992
Compared to Year Ended December 31, 1991
The Company's net loss decreased $42 million to $.9 million
for the year ended December 31, 1992 as compared to $42.9 million
for the previous year. This decrease was mainly attributable to
a $19.6 million provision for the expected loss on disposal of
the Company's investment in Orange-co and a $15.3 million write-
down of the Company's equity investment in Major Realty to
estimated net realizable value, both recorded during the year
ended December 31, 1991. The remaining approximate $7.1 million
related to a decrease in general and administrative expenses of
$5.7 million, a decrease in other expense of $2.6 million,
principally related to a loss in 1991 which did not reoccur in
1992, a decrease in interest expense of $1.3 million, and an
increase in investment income of $1.2 million. These
improvements were partially offset by a $2.1 million reserve
strengthening in the insurance operations and a $1.7 million
incurred loss from Hurricanes Andrew and Iniki.
Insurance premiums earned increased 21.5% to $79.2 million
for the year ended December 31, 1992 from $65.2 million in the
previous year. This increase is attributable primarily to growth
in workers' compensation, non-standard private passenger and
specialty automobile and the Acceptance Risk Managers programs.
During the year ended December 31, 1992, loss and loss
adjustment expenses increased 27.9% as compared to the previous
year. This higher rate of growth in losses (27.9%) compared to
premium revenues (21.5%) was attributable primarily to increased
loss development in the Company's workers' compensation and
liquor liability lines as well as losses incurred from Hurricanes
Andrew and Iniki.
During 1992, through analysis of additional claims
information and additional data processing capability which came
"on-line," it became apparent that the liquor and workers'
compensation lines of business were developing worse than had
been anticipated. This judgment was based upon several factors:
discussion with the claims staff and counsel regarding specific
claims, adjudicated cases and the estimated effect thereof as
precedents for similar claims, additional claims filed, the
severity thereof, and the effect of these new claims as an
indicator of additional incurred but not reported loss
development. Management believes that the reserves recorded for
these lines of business and events now provide adequate reserves
for future payments.
Insurance operational expense ratios for the years ended
December 31, 1992 and 1991 remained consistent at 29.1% and
29.0%, respectively.
In October 1991, Acceptance acquired Seaboard Underwriters,
Inc. ("Seaboard"), a North Carolina-based managing general agency
specializing in transportation business. Seaboard's agency
commissions during the year ended December 31, 1992, aggregated
approximately $4.0 million while agency expenses totaled
approximately $3.7 million. Acceptance's insurance subsidiaries
have been underwriting a portion of the business produced by
Seaboard.
During the year ended December 31, 1991, the Company's
investment strategy provided for investment principally in U.S.
Government securities with maturities of two years or less as
well as realizing gains within the portfolio as the interest rate
environment changed. During the year ended December 31, 1992,
the Company changed its investment strategy to one whereby
various securities of the U.S. Government, U.S. Government
agencies, corporate securities and collateralized mortgage
obligations backed by U.S. Government Agency Securities were
combined to result in an average duration for the entire
portfolio of between 3.5 and 4 years. This change in strategy as
well as an overall increase in the size of the portfolio resulted
in an increase in the interest income of the portfolio. These
factors combined to create an overall increase in the Company's
net investment income for the year ended December 31, 1992, as
compared to the previous year. U.S. Government Securities and
collateralized mortgage obligations backed by U.S. Government
Agency Securities comprised 74% of the entire investment
portfolio as of December 31, 1992.
Revenues from the Company's real estate operations for the
year ended December 31, 1992, were $2,610,000 of which $1,522,000
related to fees earned in connection with Major Group's
management and real estate advisory agreement with Major Realty
which terminated June 30, 1992. Included in the $1,522,000 is a
non-recurring fee of $925,000 paid by Major Realty to Major Group
in the form of a promissory note recorded in connection with the
settlement and termination of the advisory agreement with Major
Realty.
On September 25, 1992, the Company completed the merger with
The Major Group, Inc. Pursuant to Settlement Agreements among
the Company, Major Group and certain secured creditors (the "Term
Sheet Creditors"), Major Group (1) conveyed substantially all of
its assets, except for certain property located in Fort
Lauderdale, Florida (the "Fort Lauderdale Commerce Center
Property") and two promissory notes from Major Realty Corporation
(the "Major Realty Notes"), to the Term Sheet Creditors in
satisfaction of all of Major Group's obligations due to them; (2)
the Fort Lauderdale Commerce Center Property and the Major Realty
Notes were transferred to the Company in satisfaction of all
amounts due the Company under a note of a subsidiary of Major
Group, which was secured by a mortgage on the Fort Lauderdale
Commerce Center Property and guaranteed by Major Group; and (3)
the Company issued a promissory note in the principal amount of
$500,000 payable in installments over one year to the Term Sheet
Creditors in exchange for all of the Major Group preferred stock
held by the Term Sheet Creditors. Assets conveyed to the Term
Sheet Creditors and liabilities satisfied approximated $5.7
million. Immediately upon conclusion of these transactions,
Major Group was merged into a wholly owned subsidiary of the
Company.
In addition, Major Group settled certain claims by agreeing
to pay $150,000 in cash and other consideration, payment of which
is guaranteed by the Company, payable over a two year period and
payment of the net cash proceeds from the sale of certain sewer
connections not to exceed $150,000. In connection with the
above, the Company issued approximately 52,000 shares of Common
Stock to complete the merger.
The net effect of the transactions among Major Group, the
Term Sheet Creditors and the Company upon the results of
operations was insignificant.
Consolidated interest expense decreased $1.3 million from
the prior year to $4.4 million for the year ended December 31,
1992. Total indebtedness was $33.6 million at December 31, 1992,
a decrease of $21.9 million from $55.5 million at December 31,
1991.
At December 31, 1992, the Company had approximately $23.7
million of net operating loss carryforwards for financial
reporting purposes and $14 million of net operating loss
carryforwards for tax reporting purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company has included a discussion of the liquidity and
capital resources requirement of the Company and the Company's
insurance subsidiaries.
The Company -- Parent Only
On January 27, 1993, the Company completed a $31.9 million
Common Stock Equity Rights Offering. This resulted in the
issuance of 3,992,480 shares of Common Stock and an equal amount
of Warrants, each Warrant providing for the purchase of one share
of Common Stock exercisable at $11.00 until January 27, 1997,
unless called under certain conditions. The net proceeds of
approximately $31.2 million were used to retire $9.5 million of
secured subordinated notes plus accrued interest thereon and
increase the insurance subsidiaries capital by $12.5 million with
the balance retained as working capital. With this addition to
working capital, the Company has been able to meet all short term
cash needs, and as of December 31, 1993 has no long term
liabilities or long term commitments. The Company also assumed a
$7 million secured subordinated note outstanding from one of its
insurance company subsidiaries and subsequently retired said note
in April, 1993 in exchange for 875,000 shares of Common Stock and
875,000 Warrants identical to those issued in the Rights
Offering.
Dividends from the insurance subsidiaries are not available to
the Company because of restrictive covenants set forth in the
term and revolving loan agreements of the Company's insurance
subsidiaries which prohibit dividends from the insurance
subsidiaries to the Company without the expressed consent from
the holders of the debt obligation. In March, 1994, the Company
agreed to amend its borrowing arrangements with its bank lenders.
The new arrangements will transfer the debt obligations from the
holding companies of the insurance subsidiaries to the parent
company. At such time, the new loan agreements will no longer
impose restrictions on dividends from the insurance subsidiaries
to the Company. The new structure is a $35 million line of
credit with interest payable quarterly at the prime rate or at
LIBOR plus a margin of 1% to 1.75% depending on the Company's
debt to equity ratio. The line of credit will mature in four
years and may be extended to five years by the bank lenders.
This line of credit will be consummated once final legal
documentation is completed which is anticipated to be in April,
1994.
In addition, dividends from the insurance subsidiaries to
the Company are regulated by the state regulatory authorities of
the states in which each insurance subsidiary is domiciled. The
laws of such states generally restrict dividends from insurance
companies to parent companies to certain statutorily approved
limits. As of December 31, 1993, the statutory limitations on
dividends from the insurance company subsidiaries to the parent
without further insurance department approval are approximately
$3.4 million.
Insurance Subsidiaries
The Company's insurance subsidiaries are highly liquid and
are able to meet their cash requirements on a timely basis. At
December 31, 1993, the insurance subsidiaries outstanding debt
consisted of a $12 million term loan note, a $6,597,000 revolving
promissory note and $354,000 of other borrowings. The $12
million note was collateralized by the Company's Acceptance
Common Stock, with principal of $1 million plus interest at prime
plus .5% or at the Company's option LIBOR plus 2.5% payable
quarterly with a maturity of October 1, 1996. The revolving
promissory note was collateralized by Redland Common Stock with
interest payable at the Federal funds rate plus 2.75%, maturing
on January 5, 1995. Both of these borrowings will be replaced in
April, 1994 with the funds from the new loan arrangement
described above. Servicing of these debt obligations of the
insurance subsidiaries has been provided by funds derived either
from tax sharing payments made by the operating subsidiaries to
the Company which are sheltered by the Company's tax net
operating loss carryforwards and reinvested in the insurance
holding company or through dividends and/or advances.
On a longer term basis, the principal liquidity needs of the
insurance company subsidiaries are to fund loss payments and loss
adjustment expenses required in the operation of its insurance
business. Primarily, the available sources to fund these
obligations are new premiums received and to a lesser extent cash
flows from the Company's portfolio operations. The Company
monitors its cash flow carefully and attempts to maintain its
portfolio at a duration which approximates the estimated cash
requirements for loss and loss adjustment expenses. The seasonal
nature of the Company's crop business generates a reverse cash
flow with acquisition costs in the first part of the year, losses
being paid over the summer months, and the related premium not
collected until after the fall harvest. Cash flows from the crop
programs are similar in nature to cash flows in the farming
business.
Changes in Financial Condition
Four events occurring during 1993 strengthened the financial
condition of the Company at December 31, 1993 as compared to the
Company's position at December 31, 1992. These events were the
completion of the Company's Equity Rights Offering, the
conversion of certain subordinated notes to equity, the merger of
the Company with Redland and the Company's profitable operating
results for 1993.
As described earlier, the Company completed a $31.9 million
Common Stock Rights Offering in January, 1993. The net proceeds
of approximately $31.2 million were used to retire $9.5 million
of secured subordinated notes plus accrued interest thereon and
increased the insurance subsidiaries capital by $12.5 million
with the balance retained as working capital.
In April, 1993, the Company retired $7 million of secured
subordinated notes outstanding in exchange for 875,000 shares of
Common Stock and 875,000 Warrants identical to those issued in
the Equity Rights Offering.
In August, 1993, the Company completed an Exchange Agreement
whereby the holders of 100% of the outstanding Redland Class B
Preferred Stock, Warrants to purchase Redland Common Stock and
100% of the outstanding Redland Common Stock were validly
tendered in exchange for shares of the Company's Common Stock.
The Company's acquisition of Redland resulted in an increase of
approximately $112 million in total assets and $96 million in
total liabilities at December 31, 1993. The most significant
increases in the components comprising total assets were $11
million of investments, $21 million of receivables, $54 million
of reinsurance recoverable on unpaid loss and loss adjustment
expenses, $5 million of prepaid reinsurance premiums and $14
million of excess of cost over acquired net assets. The most
significant increase in components comprising total liabilities
were $66 million of loss and loss adjustment expenses, $14
million of unearned premiums, $6 million of accounts payable on
accrued liabilities and $7 million of bank borrowings.
In addition, during 1993, Company operating profit of $10.6
million and net income of $7.6 million also improved the
Company's financial condition, with stockholders equity
increasing 177% from $34.5 million at December 31, 1992 to $95.7
million at December 31, 1993.
These four factors combined to effect the size of the
Company's investment portfolio, with investments increasing by
51.2% at December 31, 1993 as compared to the same date in 1992.
Within the portfolio, the Company also restructured the
distribution of its investments in order to more accurately
reflect the characteristics of its operating businesses as well
as to provide added flexibility to respond to changes in the
Company's tax position, business mix and the interest rate
environment for fixed income securities. Accordingly, the
Company changed its investment policy to emphasize securities
categorized as available for sale, with this category accounting
for 64.9% of its securities at December 31, 1993 as compared to
32.1% of its securities at December 31, 1992. The enlargement of
this category of securities will provide more flexibility for the
Company to respond to the changing interest rate environment as
well as to allow its portfolio to more accurately reflect the
characteristics of its changing business mix. In addition, short
term investments increased 153.4% from 1993 to 1992. This was
principally due to the nature of the portfolio which was added
from Redland. Redland's principal business operations require
near term payment of most of its losses, and therefore, require a
greater amount of securities kept in short term investments. In
addition, the more adequate capitalization provided by the
aforementioned events allowed the Company to expand its equity
portfolio 323.6% from December 31, 1992 as compared to December
31, 1993. The Company believes that the increased volatility and
risk of this increased equity portfolio was reasonable
considering the improvement in its capital position and will
allow the Company to enhance the overall yield of its investment
portfolio over time.
As of December 31, 1993 and 1992, the Company held an
approximate 33% equity investment in Major Realty, a publicly
traded real estate company engaged in the ownership and
development of its undeveloped land in Orlando, Florida. At
December 31, 1993, the carrying value of the Company's investment
in Major Realty approximated $5.4 million or $2.36 per share.
Additionally at that date, Major Realty had stockholders equity
of approximately $14,000 and the quoted market price of Major
Realty on NASDAQ was $1.69 per share. The Company expects to
realize a minimum of its carrying value in Major Realty based on
the estimated net realizable value of Major Realty's underlying
assets. The Company's estimate of net realizable value is based
upon several factors including estimates from Major Realty's
management, assets, appraisals and sales to date of Major
Realty's assets. During 1993 and the first quarter of 1994,
Major Realty sold five parcels of land amounting to 297.83 acres
of land with gross sale proceeds of approximately $58.5 million.
All of these sales and proceeds supported the Company's estimate
of net realizable value of its investment in Major Realty.
Consolidated Cash Flows
The Company's net cash provided by operating activities
increased from a negative $.7 million during 1992 to a positive
$24.6 million for the year ended December 31, 1993. The
Company's improved operating cash flow for the 1993 year resulted
primarily from the insurance subsidiaries retaining more of their
direct premium while ceding less to reinsurers. Cash flows from
investing activities were effected by the investment of the
proceeds from the Company's Rights Offering in January, 1993, an
emphasis on purchasing securities categorized as available for
sale, and faster than expected prepayments of certain of the
Company's mortgage backed securities. Cash flows from financing
activities were impacted by the Equity Rights Offering completed
in January, 1993 including the retirement of $9.5 million of term
notes from the proceeds of such Offering.
Inflation
The Company does not believe that inflation has had a
material impact on its financial condition or the results of
operations.
Impact of Recently Adopted Accounting Standards
The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 109, "Accounting for Income Taxes",
effective January 1, 1993. The prospective application of SFAS
No. 109 resulted in no effect upon net income for the year ended
December 31, 1993. SFAS No. 109 requires that the Company
recognize a deferred tax asset for all temporary differences and
net operating loss carryforwards and a related valuation
allowance account when realization of the asset is uncertain.
The Company's deferred tax asset at December 31, 1993 is $16.3
million which is offset by the valuation allowance of $16.3
million.
The Company adopted Statement of Financial Accounting
Standards (SFAS) No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts",
effective January 1, 1993. The effect of the application of SFAS
No. 113 resulted in the reclassification of amounts ceded to
reinsurers previously reported as a reduction in unearned premium
and unpaid losses and loss adjustment expenses, to assets on the
consolidated balance sheet. The application included a
restatement of amounts as of December 31, 1992.
In April, 1993, the Financial Accounting Standards Board
approved for issuance Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and
Equity Securities". The standard will be adopted effective
January 1, 1994. The effect of adoption of this pronouncement
will be that securities designated as available for sale will be
reported at market value with unrealized gains and losses
reported as a separate component of stockholders' equity which is
not expected to be significant.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
See Item 14 hereof and the Consolidated Financial Statements
attached hereto.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
The disclosure called for by Item 9 was previously reported
under Item 4 in the Registrant's current Report on Form 8-K,
dated March 11, 1992, which is incorporated herein by reference.
There have been no disagreements with the Registrant's former
independent accountants of the nature calling for disclosure
under Item 9.
PART III.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by Item 10 with respect to the
Registrant's executive officers and directors will be set forth
under the captions "Election of Directors" and "Executive
Officers" in the Company's 1994 Proxy Statement included as
Exhibit 99.4 hereto and incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 will be set forth under
the caption "Compensation of Executive Officers and Directors" in
the Company's 1994 Proxy Statement included as Exhibit 99.4
hereto and incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The information required by Item 12 will be set forth under
the caption "Security Ownership of Certain Beneficial Owners and
Management" in the Company's 1994 Proxy Statement included as
Exhibit 99.4 hereto and incorporated herein reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 will be set forth under
the caption "Certain Transactions" in the Company's 1994 Proxy
Statement included as Exhibit 99.4 hereto and 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 a part of this Report:
1. Financial Statements. The Company's audited
Consolidated Financial Statements for the years ended
December 31, 1993 and 1992 consisting of the following:
Reports of Independent Accountants
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Cash Flows
Consolidated Statements of Stockholders' Equity
Notes to Consolidated Financial Statements
2. Financial Statement Schedules. The Company's Financial
Statement Schedules as of December 31, 1993 and 1992,
consisting of the following:
I. Summary of Investments
II. Amounts Receivable From Related Parties
III. Condensed Financial Information of Registrant
IV. Indebtedness to Related Parties -- Not Current
V. Supplemental Insurance Information
VIII. Valuation Accounts
IX. Short-Term Borrowings
X. Supplementary Income Statement Information
All other schedules to the Consolidated Financial
Statements required by Article 12 of Regulation S-X are
not required under the related instruction or are
inapplicable and therefore have been omitted, or are
included in the Consolidated Financial Statements.
3. The Exhibits filed herewith are set forth in the
Exhibit Index attached hereto.
(b) No Current Reports on Form 8-K have been filed during the
last fiscal quarter of the period covered by this Report.
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.
ACCEPTANCE INSURANCE COMPANIES INC.
Kenneth C. Coon
By __________________________________ Dated: March 24, 1994
Kenneth C. Coon
Chairman, President and Chief Executive Officer
Georgia M. Mace
By __________________________________ Dated: March 24, 1994
Georgia M. Mace
Treasurer and Chief Accounting Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this Report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the
dates indicated.
Jay A. Bielfield
Dated: March 24, 1994 ___________________________________
Jay A. Bielfield, Director
Kenneth C. Coon
Dated: March 24, 1994 ___________________________________
Kenneth C. Coon, Director
Edward W. Elliott, Jr.
Dated: March 24, 1994 ___________________________________
Edward W. Elliott, Jr., Director
Robert LeBuhn
Dated: March 24, 1994 ___________________________________
Robert LeBuhn, Director
Michael R. McCarthy
Dated: March 24, 1994 ___________________________________
Michael R. McCarthy, Director
John P. Nelson
Dated: March 24, 1994 ___________________________________
John P. Nelson, Director
R. L. Richards
Dated: March 24, 1994 ___________________________________
R. L. Richards, Director
David L. Treadwell
Dated: March 24, 1994 ___________________________________
David L. Treadwell, Director
Doug T. Valassis
Dated: March 24, 1994 ___________________________________
Doug T. Valassis, Director
ACCEPTANCE INSURANCE COMPANIES INC.
ANNUAL REPORT ON FORM 10-K
FISCAL YEAR ENDED DECEMBER 31, 1993
EXHIBIT INDEX
NUMBER EXHIBIT DESCRIPTION
3.1 Restated Certificate of Incorporation of Acceptance
Insurance Companies Inc.
3.2 Restated By-laws of Acceptance Insurance Companies Inc.
4.1 Form of Stock Certificate representing shares of
Acceptance Insurance Companies Inc., Common Stock, $.40
par value. Incorporated by reference to Exhibit 4.1 to
Registrant's Annual Report on Form 10-K for the fiscal
year ended December 31, 1992.
4.2 Form of Warrant Certificate representing Acceptance
Insurance Companies Inc., Warrants. Incorporated by
reference to Exhibit 4.2 to Registrant's Annual Report
on Form 10-K for the fiscal year ended December 31,
1992.
4.3 Warrant Agreement dated as of December 22, 1992, between
Stoneridge Resources, Inc., (now, by change of name,
Acceptance Insurance Companies Inc.) and Society
National Bank, Cleveland, Ohio as Warrant Agent
incorporated by reference to Exhibit 10.25 to the
Stoneridge Resources, Inc. Registration Statement on
Form S-1, Registration No. 33-53730.
4.4 Amendment to Warrant Agreement made as of February 2,
1993, to Warrant Agreement dated as of December 22,
1992, between Stoneridge Resources, Inc. (now, by change
of name, Acceptance Insurance Companies Inc.), and
Society National Bank, Cleveland, Ohio, as Warrant
Agent. Incorporated by reference to Exhibit 10.19 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
8 Opinion of Deloitte & Touche, Accountants and Auditors
for the Registrant, dated October 21, 1992, relating to
tax matters. Incorporated by reference to Exhibit 5.2
to the Stoneridge Resources, Inc. (now, by change of
name, Acceptance Insurance Companies Inc.) Registration
Statement on Form S-1, Registration No. 33-53730.
10.1 Office Building Lease dated July 19, 1991, between State
of California Public Employees' Retirement System and
Acceptance Insurance Company. Incorporated by reference
to Exhibit 10.7 to the Stoneridge Resources, Inc. Annual
Report on Form 10-K for the fiscal year ended
December 31, 1991.
10.2 Intercompany Federal Income Tax Allocation Agreement
between Acceptance Insurance Holdings Inc. and its
subsidiaries and Stoneridge Resources, Inc. dated April
12, 1990, and related agreements. Incorporated by
reference to Exhibit 10i to Stoneridge Resources, Inc.'s
Annual Report on Form 10-K for the fiscal year ended
August 31, 1990.
10.3 Warrant to purchase 489,919 shares of common stock ($.10
par value) of Stoneridge Resources, Inc., dated March
14, 1990, issued by Stoneridge Resources, Inc. to
Samelson Development Company. Incorporated by reference
to Exhibit 4a to Stoneridge Resources, Inc.'s Quarterly
Report on Form 10-Q for the period ended May 31, 1990.
10.4 Amended and Restated Registration Rights Agreement,
dated April 9, 1990, between Stoneridge Resources, Inc.
and Patricia Investments, Inc. Incorporated by
reference to Exhibit 10d to Stoneridge Resources, Inc.'s
Quarterly Report on Form 10-Q for the period ended May
31, 1990.
10.5 Warrants to purchase a total of 389,507 shares of common
stock ($.10 par value) of Stoneridge Resources, Inc.
dated April 10, 1992, issued by Stoneridge Resources,
Inc. to the various purchasers of the Floating Rate
Secured Subordinated Notes, due 1993, Series A and B.
Incorporated by reference to Exhibit 10.41 to the
Stoneridge Resources, Inc., Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10.6 Term Loan Agreement dated April 10, 1992, by and among
Acceptance Insurance Holdings Inc., NBD Bank, N.A.,
First National Bank of Omaha, Manufacturers Bank, N.A.,
Comerica Bank, First Bank and NBD, N.A., as Agent.
Incorporated by reference to Exhibit 10.44 to the
Stoneridge Resources, Inc., Annual Report on Form 10-K
for the fiscal year ended December 31, 1991.
10.7 First Amendment to Term Loan Agreement, dated as of June
1, 1992, by and among Acceptance Insurance Holdings
Inc., NBD Bank, N.A., First National Bank of Omaha,
Manufacturers Bank, N.A., First Bank and NBD, N.A., as
Agent. Incorporated by reference to Exhibit 10.11 to
the Registrant's Annual Report on Form 10-K for the
fiscal year ended December 31, 1992.
10.8 Second Amendment to Term Loan Agreement, dated as of
November 15, 1992, by and among Acceptance Insurance
Holdings Inc., NBD Bank, N.A., First National Bank of
Omaha, Manufacturers Bank, N.A., First Bank and NBD,
N.A., as Agent. Incorporated by reference to Exhibit
10.12 to the Registrant's Annual Report on Form 10-K for
the fiscal year ended December 31, 1992.
10.9 Stock Option Agreement between Stoneridge Resources,
Inc. and Robert W. Anestis, dated July 2, 1991.
Incorporated by reference to Exhibit 10.5 to Stoneridge
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991.
10.10 Stock Option Agreement between Stoneridge Resources,
Inc. and Thomas L. Kelly, II, dated July 2, 1991.
Incorporated by reference to Exhibit 10.6 to Stoneridge
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended June 30, 1991.
10.11 Employment Agreement dated February 19, 1990 between
Acceptance Insurance Holdings Inc., Stoneridge
Resources, Inc. and Kenneth C. Coon. Incorporated by
reference to Exhibit 10.65 to the Stoneridge Resources,
Inc., Annual Report on Form 10-K for the fiscal year
ended December 31, 1991.
11 Computation of Income (Loss) per share.
16 Letter to the Securities and Exchange Commission from
Coopers & Lybrand dated March 16, 1992, with respect to
changes in Stoneridge Resources, Inc.'s certifying
accountant. Incorporated by reference to Exhibit 16.1
to Stoneridge Resources, Inc.'s Current Report on Form
8-K dated March 16, 1992.
21 Subsidiaries of the Registrant.
23.1 Consent of Deloitte & Touche.
23.2 Report on schedules of Deloitte & Touche.
23.3 Consent of Crosby, Guenzel, Davis, Kessner & Kuester.
28P Schedule P -- Analysis of Losses and Loss Expenses of
Consolidated Annual Statement for the year 1993.
99.1 Acceptance Insurance Companies Inc., 1992 Incentive
Stock Option Plan effective as of December 22, 1992.
Incorporated by reference to Exhibit 10.1 to the
Stoneridge Resources, Inc. (now, by change of name,
Acceptance Insurance Companies Inc.) Registration
Statement on Form S-1, Registration No. 33-53730.
99.2 Acceptance Insurance Companies Inc., Employee Stock
Purchase Plan, effective as of December 22, 1992.
Incorporated by reference to Exhibit 10.2 to the
Stoneridge Resources, Inc. (now, by change of name,
Acceptance Insurance Companies Inc.) Registration
Statement on Form S-1, Registration No. 33-53730.
99.3 Acceptance Insurance Companies Inc., Employee Stock
Ownership and Tax Deferred Savings Plan as merged,
amended and restated effective October 1, 1990.
Incorporated by reference as Exhibit 10.4 to Stoneridge
Resources, Inc.'s Quarterly Report on Form 10-Q for the
quarter ended November 30, 1990.
99.4 First Amendment to Acceptance Insurance Companies Inc.
Employee Stock Ownership and Tax Deferred Savings Plan.
99.5 Second Amendment to Acceptance Insurance Companies Inc.
Employee Stock Ownership and Tax Deferred Savings Plan.
99.6 Proxy Statement for 1994 Annual Meeting of Shareholders
filed on or prior to April 30, 1994.
INDEPENDENT AUDITORS' REPORT
To the Board of Directors and Stockholders
of Acceptance Insurance Companies Inc.
We have audited the accompanying consolidated balance sheets of
Acceptance Insurance Companies Inc. and its subsidiaries as of
December 31, 1993 and 1992, and the related consolidated statements of
operations, stockholders' equity and cash flows for each of the three
years in the period ended December 31, 1993. These consolidated
financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly,
in all material respects, the financial position of Acceptance
Insurance Companies Inc. and subsidiaries as of December 31, 1993 and
1992, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles.
As discussed in Note 1 to the consolidated financial statements, in
1993 the Company adopted Statement of Financial Accounting Standards
No. 113, Accounting and Reporting of Reinsurance for Short-Duration
and Long-Duration Contracts.
DELOITTE & TOUCHE
Omaha, Nebraska
March 28, 1994
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED BALANCE SHEETS (dollars in thousands except per share data)
DECEMBER 31, 1993 AND 1992
ASSETS 1993 1992
Investments (Note 4):
Fixed maturities held for investment $ 51,756 $ 71,248
Fixed maturities available for sale 95,836 33,743
Marketable equity securities 13,872 3,275
Mortgage loans and other investments 2,852 3,391
Real estate 4,266 4,998
Short-term investments, at cost, which approximates market 19,404 7,656
-------- --------
187,986 124,311
Cash 2,894 5,042
Receivables, net (Note 5) 48,166 26,526
Equity investment in Major Realty Corporation (Note 6) 5,376 5,677
Property and equipment, net of accumulated depreciation of $1,557
and $790, respectively 3,200 1,527
Deferred policy acquisition costs 11,815 6,152
Reinsurance recoverable on unpaid loss and loss adjustment expenses 95,886 50,039
Prepaid reinsurance premiums 15,448 16,830
Excess of cost over acquired net assets 33,254 19,409
Other assets 5,360 2,221
-------- --------
$409,385 $257,734
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Losses and loss adjustment expenses $211,600 $127,666
Unearned premiums 60,114 41,709
Amounts payable to reinsurers 7,186 10,200
Accounts payable and accrued liabilities 13,343 8,753
Bank borrowings, term debt and other borrowings (Note 7) 18,951 17,067
Notes payable to affiliates (Note 7) - 16,500
-------- --------
Total liabilities 311,194 221,895
-------- -------
Contingencies (Note 17)
Minority interests 2,474 1,316
-------- -------
Stockholders' equity (Note 2):
Preferred stock, no par value, 5,000,000 shares authorized, none issued - -
Common stock, $.40 par value, 20,000,000 shares authorized;
9,976,415 and 3,517,027 shares issued 3,991 1,407
Capital in excess of par value 140,002 86,527
Unrealized gain (loss) on marketable equity securities 66 (183)
Accumulated deficit (44,078) (51,664)
-------- --------
99,981 36,087
Less:
Treasury stock, at cost, 35,559 shares (1,564) (1,564)
Contingent stock, 240,000 shares (Note 3) (2,700) -
-------- --------
Total stockholders' equity 95,717 34,523
-------- --------
$409,385 $257,734
======== ========
The accompanying notes are an integral part of the consolidated financial statements.
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands)
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
1993 1992 1991
Revenues:
Insurance premiums earned (Note 12) $128,082 $79,164 $ 65,164
Insurance agency commissions 4,119 3,992 1,645
Real estate revenues - 2,610 5,824
Net investment income (Note 4) 13,094 9,266 8,056
-------- ------- -------
145,295 95,032 80,689
Costs and expenses: -------- ------- -------
Cost of revenues:
Insurance losses and loss adjustment expenses (Note 12) 92,805 60,025 46,917
Insurance agency costs 3,794 3,736 1,624
Insurance underwriting expenses 35,083 22,054 17,883
Real estate costs - 818 3,620
General and administrative expenses 3,047 3,758 9,463
-------- ------- -------
134,729 90,391 79,507
-------- ------- -------
Operating profit 10,566 4,641 1,182
-------- ------- -------
Other income (expense):
Interest expense (2,235) (4,428) (5,712)
Share of net loss of investee (Note 6) (301) (1,165) (1,179)
Major Realty valuation adjustment (Note 6) - - (15,300)
Other, net (39) 342 (2,249)
-------- ------- -------
(2,575) (5,251) (24,440)
-------- ------- -------
Income (loss) from continuing operations before
income taxes and minority interests 7,991 (610) (23,258)
Provision for income taxes (Note 8) 167 - -
Minority interests in net income (loss) of consolidated
subsidiaries 238 216 (148)
-------- ------- --------
Income (loss) from continuing operations 7,586 (826) (23,110)
-------- ------- --------
Discontinued operations (Note 16):
Net loss from discontinued operations - - (721)
Loss on disposal of discontinued operations - (83) (19,600)
-------- ------- --------
Loss from discontinued operations - (83) (20,321)
-------- ------- --------
Income (loss) before extraordinary item 7,586 (909) (43,431)
Extraordinary item (Note 6) - - 512
-------- ------- --------
Net income (loss) $ 7,586 $ (909) $(42,919)
======== ======= ========
The accompanying notes are an integral part of the consolidated financial statements.
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (Continued)
1993 1992 1991
Net income (loss) per share:
Primary:
Continuing operations $0.86 $(0.24) $ (6.78)
Discontinued operations - (0.02) (5.96)
----- ------ -------
Income (loss) before extraordinary item 0.86 (0.26) (12.74)
Extraordinary item - - 0.15
----- ------ -------
Net income (loss) per share $0.86 $(0.26) $(12.59)
===== ====== =======
Fully diluted:
Continuing operations $0.85 $(0.24) $ (6.78)
Discontinued operations - (0.02) (5.96)
----- ------ -------
Income (loss) before extraordinary item 0.85 (0.26) (12.74)
Extraordinary item - - 0.15
----- ------ -------
Net income (loss) per share $0.85 $(0.26) $(12.59)
===== ====== =======
The accompanying notes are an integral part of the consolidated financial statements.
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS STOCKHOLDERS' EQUITY
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (in thousands)
Unrealized
Gain
(Loss) on Retained
Capital in Marketable Earnings
Common Excess of Equity (Accumulated
Stock Par Value Securities Deficit)
Balance at January 1, 1991 $1,370 $ 86,414 $ (150) $ (7,836)
Issuance of common stock under employee benefit plans 13 317 - -
Change in unrealized gain (loss) on marketable equity securities - - (327) -
Net loss - - - (42,919)
------ -------- ------ --------
Balance at December 31, 1991 1,383 86,731 (477) (50,755)
Issuance of common stock under employee benefit plans 3 27 - -
Issuance of common stock in connection with Major Group merger 21 - - -
Issuance of common stock in settlement of expenses - (231) - -
Change in unrealized gain (loss) on marketable equity securities - - 294 -
Net loss - - - (909)
------ -------- ------ --------
Balance at December 31, 1992 1,407 86,527 (183) (51,664)
Issuance of common stock from rights offering 1,597 29,568 - -
Issuance of common stock from note payable conversion 350 6,650 - -
Issuance of common stock in connection with Redland acquisition 632 17,132 - -
Issuance of common stock under employee benefit plans 5 125 - -
Change in unrealized gain (loss) on marketable equity securities - - 249 -
Net income - - - 7,586
------ -------- ------ --------
Balance at December 31, 1993 $3,991 $140,002 $ 66 $(44,078)
====== ======== ====== ========
Total
Treasury Contingent Stockholders'
Stock Stock Equity
Balance at January 1, 1991 $(1,915) $ - $ 77,883
Issuance of common stock under employee benefit plans 75 - 405
Change in unrealized gain (loss) on marketable equity securities - - (327)
Net loss - - (42,919)
------- ------- --------
Balance at December 31, 1991 (1,840) - 35,042
Issuance of common stock under employee benefit plans - - 30
Issuance of common stock in connection with Major Group merger - - 21
Issuance of common stock in settlement of expenses 276 - 45
Change in unrealized gain (loss) on marketable equity securities - - 294
Net loss - - (909)
------- ------- --------
Balance at December 31, 1992 (1,564) - 34,523
Issuance of common stock from rights offering - - 31,165
Issuance of common stock from note payable conversion - - 7,000
Issuance of common stock in connection with Redland acquisition - (2,700) 15,064
Issuance of common stock under employee benefit plans - - 130
Change in unrealized gain (loss) on marketable equity securities - - 249
Net income - - 7,586
------- ------- --------
Balance at December 31, 1993 $(1,564) $(2,700) $ 95,717
======= ======= ========
The accompanying notes are an integral part of the consolidated financial statements.
ACCEPTANCE INSURANCE COMPANIES INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991 (in thousands)
1993 1992 1991
Cash flows from operating activities:
Net income (loss) from continuing operations $ 7,586 $ (826) $ (23,110)
Adjustments to reconcile net loss from continuing operations
to net cash provided by (used for) operating activities:
Depreciation and amortization 3,533 1,552 2,572
Major Realty valuation adjustment - - 15,300
Share of net loss of investee 301 1,165 1,179
Minority interests 238 216 (148)
Policy acquisition costs incurred (37,147) (21,785) (18,302)
Amortization of policy acquisition costs 31,484 21,033 18,661
Gain on sale of investments (2,250) (1,046) (1,953)
Increase (decrease) in cash attributable to changes in assets and
liabilities, net of effects of purchase of companies:
Receivables 8,138 (6,784) (7,299)
Net losses and loss adjustment expenses 24,588 11,495 7,693
Net unearned premiums 9,424 4,921 (2,182)
Amounts payable to reinsurers (25,600) (4,068) 10,479
Accounts payable and accrued liabilities 3,137 (6,227) 3,470
Net operating cash flows of discontinued operations - - 5,183
Other, net 1,141 (379) 3,110
--------- -------- ---------
Net cash provided by (used for) operating activities 24,573 (733) 14,653
--------- -------- ---------
Cash flows from investing activities:
Proceeds from sales of investments 22,230 18,962 246,185
Proceeds from sales of investments available for sale 115,339 60,351 -
Proceeds from maturities of investments 37,854 15,902 1,329
Purchases of investments (36,124) (65,082) (240,137)
Purchases of investments available for sale (173,695) (88,494) -
Proceeds from sale of discontinued operations - 28,970 -
Purchase of companies, net of cash and short-term investments acquired (4,165) - 2,908
Net investing cash flows of discontinued operations - - 7,535
Other, net (794) (764) 2,721
--------- -------- ---------
Net cash provided by (used for) investing activities (39,355) (30,155) 20,541
--------- -------- ---------
Cash flows from financing activities:
Proceeds from bank borrowings 6,597 16,000 1,293
Repayments of bank borrowings (8,086) (40,320) (8,145)
Proceeds from term debt, other borrowings and notes payable to affiliates - 16,519 8,521
Repayments of term debt, other borrowings and notes payable to affiliates (10,764) (8,918) (3,568)
Proceeds from issuance of common stock 31,295 32 66
Net financing cash flows of discontinued operations - - (13,059)
Minority interests 830 47 49
--------- -------- ---------
Net cash provided by (used for) financing activities 19,872 (16,640) (14,843)
--------- -------- ---------
Net increase (decrease) in cash and short-term investments 5,090 (47,528) 20,351
Cash and short-term investments at beginning of period 12,471 59,999 39,648
--------- -------- ---------
Cash and short-term investments at end of period $ 17,561 $ 12,471 $ 59,999
========= ======== =========
Non-cash financing activities:
Note payable to affiliate converted to equity $ 7,000 $ - $ -
========= ======== =========
Issuance of common stock for acquisition of Redland $ 15,064 $ - $ -
========= ======== =========
The accompanying notes are an integral part of the consolidated financial statements.
ACCEPTANCE INSURANCE COMPANIES INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Operations - Acceptance Insurance Companies Inc.
(the "Company") is primarily engaged in the specialty property and
casualty insurance business through its wholly-owned subsidiaries,
Acceptance Insurance Holdings Inc. ("Acceptance") and The Redland
Group, Inc. ("Redland"), which the Company acquired on April 11,
1990 and August 13, 1993, respectively. The Company previously
conducted citrus operations through its approximate 52% owned
subsidiary, Orange-co, Inc. ("Orange-co"). In December 1991, the
Company decided to sell its interest in Orange-co and in May 1992
its interest was sold. As a result, the Company's share of the
net loss of Orange-co is presented separately as discontinued
operations on the consolidated statements of operations.
The Company holds a 33% equity investment in Major Realty
Corporation ("Major Realty"), a Florida based real estate company.
Principles of Consolidation - The Company's consolidated financial
statements include the accounts of its majority-owned
subsidiaries. All significant intercompany transactions have been
eliminated.
Insurance Accounting - Premiums are recognized as income ratably
over the terms of the related policies. Benefits and expenses are
associated with premiums earned, resulting in the recognition of
profits over the term of the policies. This association is
accomplished through amortization of deferred policy acquisition
costs and provisions for unearned premiums and loss reserves.
The liability for unearned premiums represents the portion of
premiums written which relates to future periods and is calculated
generally using the pro rata method. The Company also provides a
liability for policy claims based on its review of individual
claim cases and the estimated ultimate settlement amounts. This
liability also includes estimates of claims incurred but not
reported based on Company and industry paid and reported claim and
settlement expense experience. Differences which arise between
the ultimate liability for claims incurred and the liability
established will be reflected in the statement of operations of
future periods as additional claim information becomes available.
Certain costs of acquiring new insurance business, principally
commissions, premium taxes, and other underwriting expenses, have
been deferred. Such costs are being amortized as the premiums are
earned. Anticipated investment income is considered in computing
premium deficiencies, if any.
Statements of Cash Flows - The Company aggregates cash and short-
term investments with maturity dates of three months or less from
the date of purchase for purposes of reporting cash flows. As of
December 31, 1993 and 1992, approximately $4,737,000 and $227,000
of short-term investments had maturity dates at acquisition of
greater than three months.
Investments - Effective September 30, 1992, the Company has
designated fixed maturities as either securities held for
investment or securities available for sale. Securities held for
investment represent those securities which the Company has the
intent and ability to hold to maturity. Securities available for
sale represent those securities which might be sold in response to
changes in various economic conditions to maintain a portfolio
duration which approximates the estimated settlement of reserves
for loss and loss adjustment expenses. Securities held for
investment are valued at amortized cost while securities available
for sale are valued at the lower of amortized cost or market
value.
Marketable equity securities are carried at market and any net
unrealized gain or loss is reflected separately as a component of
stockholders' equity. Mortgage loans are carried at the lower of
their unpaid principal balance or their estimated net realizable
value.
Real estate is stated at the lower of cost or estimated net
realizable value and is non-income producing.
Property and Equipment - Property and equipment are stated at
cost, net of accumulated depreciation. Depreciation is recognized
principally using the straight-line method over a period of five
to ten years.
Excess of Cost Over Acquired Net Assets - The excess of cost over
equity in acquired net assets is being amortized principally using
the straight-line method over periods not exceeding 40 years.
Fair Value of Financial Instruments - Estimated fair values of
financial instruments have been determined by the Company, using
available market information and appropriate valuation
methodologies. However, judgment is necessarily required in
interpreting market data to develop the estimates of fair value.
Accordingly, the estimates presented herein are not necessarily
indicative of the amounts that the Company could realize in a
current market exchange. The use of different market assumptions
may have an effect on the estimated fair value amounts presented.
The fair value of fixed maturities and equity securities disclosed
in the financial statements are determined by the quoted market
price or modeling techniques for asset-backed securities not
actively traded. The book value of mortgage loans, short-term
investments, and other investments approximate fair value at
December 31, 1993.
The book value of cash, receivables, equity investment in Major
Realty Corporation, accounts payable and borrowings approximate
fair value.
Per Share Data - Primary earnings per share and fully diluted
earnings per share are based on weighted average shares
outstanding of approximately 11.6 million and 11.9 million,
respectively, for the year ended December 31, 1993, and
approximately 3.4 million for the years ended December 31, 1992
and 1991. Included in weighted average shares outstanding in 1993
is the assumed conversion of all outstanding options and warrants
utilizing the treasury stock method with appropriate adjustment to
net income attributable to the assumed use of proceeds.
Recent Statements of Financial Accounting Standards - The Company
adopted Statement of Financial Accounting Standards (SFAS) No.
113, "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts", effective January 1, 1993. The
effect of the application of SFAS No. 113 resulted in the
reclassification of amounts ceded to reinsurers previously
reported as a reduction in unearned premium and unpaid losses and
loss adjustment expenses, to assets on the consolidated balance
sheet. The application included a restatement of amounts as of
December 31, 1992.
In April 1993, the Financial Accounting Standards Board approved
for issuance Statement of Financial Accounting Standards (SFAS)
No. 115, "Accounting for Certain Investments in Debt and Equity
Securities". The standard will be adopted effective January 1,
1994. The effect of adoption of this pronouncement will be that
securities designated as available for sale will be reported at
market value with unrealized gains and losses reported as a
separate component of stockholders' equity which is not expected
to be significant.
Reclassifications - Certain prior period accounts have been
reclassified to conform with current year presentation.
2. COMMON STOCK ISSUED
On January 27, 1993, the Company completed a Common Stock Rights
Offering to raise additional equity capital. The Rights Offering
was fully subscribed resulting in the issuance of 3,992,480 units,
at $8.00 per unit, consisting of one share of common stock and a
warrant for the purchase of one share of common stock exercisable
at $11.00 until January 27, 1997, unless called under certain
provisions. Net proceeds of approximately $31.2 million were used
to retire $9.5 million of Secured Subordinated Notes (see Note 7).
Effective April 15, 1993, the holder of a $7,000,000 Secured
Subordinated Note of one of the Company's subsidiaries, which had
been assumed by the Company, exchanged such note for 875,000
shares of common stock and warrants to purchase, at a price of
$11.00 per share during a period ending January 27, 1997, 875,000
additional shares of common stock. The shares of common stock and
warrants were identical to the shares and warrants issued in the
Company's Rights Offering.
3. REDLAND ACQUISITION
On August 13, 1993, the Company acquired all of the outstanding
common stock, warrants to purchase common stock, and preferred
stock of Redland pursuant to an Exchange Agreement. Redland
underwrites multi-peril crop, crop hail, specialty automobile, and
farmowner insurance coverages. The acquisition of Redland was
accounted for as a purchase transaction. The purchase price of
approximately $15.4 million, comprised of 1,339,000 shares of the
Company's common stock and acquisition related costs of $306,000,
was allocated based upon the estimated fair market value of assets
acquired and liabilities assumed. The purchase price in excess of
the fair market value of the net assets acquired is being
amortized using the straight-line method over 40 years.
The results of operations for Redland are included in the
accompanying financial statements effective July 1, 1993. The
purchase price does not reflect 240,000 shares issued by the
Company and held in escrow pursuant to the Exchange Agreement, as
a fund against which the Company may assert certain claims. The
primary contingency under which claims may be asserted is the
ultimate development of Redland's liability for losses and loss
adjustment expenses. Upon resolution of contingencies related to
the acquisition, such shares will be returned to the Company or
released to former Redland stockholders.
The pro forma financial data, which gives effect to the
acquisition of Redland as though it had been completed January 1,
1993, for the year ended December 31, 1993 and January 1, 1992,
for the year ended December 31, 1992, is as follows (in thousands,
except per share data):
1993 1992
Revenues $157,299 $123,598
======== ========
Loss from continuing operations $ (1,292) $ (3,649)
======== ========
Net loss $ (1,292) $ (3,732)
======== ========
Earnings per share:
Primary and fully diluted:
Continuing operations $ (0.14) $ (0.76)
Discontinued operations - (0.02)
-------- --------
Net loss per share $ (0.14) $ (0.78)
======== ========
The pro forma financial data for the year ended December 31, 1993,
is not necessarily indicative of the results had the Company
actually acquired Redland on January 1, 1993, as the financial
data includes $3.9 million of charges to earnings taken by Redland
in the first and second quarters of 1993. The charges were
comprised of a $900,000 write-down of a marketable equity security
and a $3.0 million strengthening of reserves, both of which would
have been adjusted to their fair market value on January 1, 1993,
and thus would have been excluded from the 1993 results of
operations.
4. INVESTMENTS
A summary of net investment income earned on the investment
portfolio for the years ended December 31, 1993, 1992 and 1991 is
as follows (in thousands):
1993 1992 1991
Interest on fixed maturities $ 9,177 $7,339 $4,692
Interest on short-term investments 711 659 1,600
Net realized gains on sales of investments 2,250 1,046 1,953
Other 1,338 391 328
------- ------ ------
13,476 9,435 8,573
Investment expenses (382) (169) (517)
------- ------ ------
Net investment income $13,094 $9,266 $8,056
======= ====== ======
The amortized cost and related market values of fixed maturities
in the accompanying balance sheets are as follows (in thousands):
Gross Gross
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
December 31, 1993:
Fixed maturities held for investment:
U.S. Treasury and government securities $ 9,076 $ 360 $ - $ 9,436
States, municipalities and political subdivisions 504 26 - 530
Mortgage-backed securities 33,070 1,330 81 34,319
Other debt securities 9,106 663 - 9,769
------- ------ ------ -------
$51,756 $2,379 $ 81 $54,054
======= ====== ====== =======
Fixed maturities available for sale:
U.S. Treasury and government securities $17,379 $ 241 $ 206 $17,414
States, municipalities and political subdivisions 33,370 407 4 33,773
Mortgage-backed securities 40,687 302 203 40,786
Other debt securities 4,400 88 11 4,477
------- ------ ------ -------
$95,836 $1,038 $ 424 $96,450
======= ====== ====== =======
Marketable equity securities $13,806 $ 526 $ 460 $13,872
======= ====== ====== =======
December 31, 1992:
Fixed maturities held for investment:
U.S. Treasury and government securities $10,154 $ 98 $ 144 $10,108
Mortgage-backed securities 43,109 454 254 43,309
Other debt securities 17,985 355 32 18,308
------- ------ ------ -------
$71,248 $ 907 $ 430 $71,725
======= ====== ====== =======
Fixed maturities available for sale:
U.S. Treasury and government securities $12,045 $ 207 $ 72 $12,180
Mortgage-backed securities 17,649 18 94 17,573
Other debt securities 4,049 38 12 4,075
------- ------ ------ -------
$33,743 $ 263 $ 178 $33,828
======= ====== ====== =======
Marketable equity securities $ 3,458 $ 106 $ 289 $ 3,275
======= ====== ====== =======
The amortized cost and related market values of the debt
securities as of December 31, 1993 are shown below by stated
maturity dates. Actual maturities may differ from stated
maturities because the borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Amortized Market
Cost Value
(in thousands)
Fixed maturities held for investment:
Due after one year through five years $ 7,345 $ 7,672
Due after five years through ten years 10,837 11,533
Due after ten years 504 530
------- -------
18,686 19,735
Mortgage-backed securities 33,070 34,319
------- -------
$51,756 $54,054
======= =======
Fixed maturities available for sale:
Due after one year through five years $21,382 $21,452
Due after five years through ten years 10,071 10,225
Due after ten years 23,696 23,987
------- -------
55,149 55,664
Mortgage-backed securities 40,687 40,786
------- -------
$95,836 $96,450
======= =======
As of December 31, 1993, the weighted average duration of the
mortgage-backed securities is expected to be less than four years.
Proceeds from sales of debt securities during the years ended
December 31, 1993, 1992 and 1991 were approximately $115,339,000,
$76,457,000 and $241,216,000, respectively. Gross realized gains
on sales of debt securities were approximately $2,023,000,
$1,362,000 and $2,688,000, and gross realized losses on sales of
debt securities were approximately $17,000, $85,000 and $506,000
during the years ended December 31, 1993, 1992 and 1991,
respectively.
On May 31, 1993, all of the Company's investments in fixed
maturities of financial service entities were transferred to
securities available for sale from securities held for investment.
The Company's core business is inherently subject to the same
market fluctuations as the financial services industry.
Consequently, the Company believes this action is prudent to
mitigate its aggregate industry exposure. The amortized cost and
market value at date of transfer aggregated approximately
$9,704,000 and $10,206,000, respectively.
As required by insurance regulatory laws, certain bonds with an
amortized cost of approximately $11,401,000 and short-term
investments of approximately $376,000 at December 31, 1993 were
deposited in trust with regulatory agencies.
5. RECEIVABLES
The major components of receivables are summarized at December 31
as follows (in thousands):
1993 1992
Insurance premiums and agents' balances due $33,801 $18,841
Amounts recoverable from reinsurers on paid losses 10,978 5,617
Accrued interest 2,126 1,308
Installment notes receivable 1,768 1,197
Other 1,586 770
Less allowance for doubtful accounts (2,093) (1,207)
------- -------
$48,166 $26,526
======= =======
6. EQUITY INVESTMENT IN MAJOR REALTY CORPORATION
As of December 31, 1993 and 1992, the Company held an approximate
33% equity investment in Major Realty, a publicly traded real
estate company engaged in the ownership and development of its
undeveloped land in Orlando, Florida.
In accordance with Accounting Principles Board Opinion No. 18 and
other authoritative pronouncements, the Company recorded a non-
cash charge of $15,300,000 in the accompanying consolidated
statement of operations for the year ended December 31, 1991 to
reflect its equity investment in Major Realty at estimated net
realizable value. This provision was necessitated by the weak
economic conditions surrounding the real estate industry
generally, which have negatively impacted the financial condition
and prospects of Major Realty which, at that time, raised doubt
about its ability to continue to meet its obligations as they came
due.
At December 31, 1993, the carrying value of the Company's
investment in Major Realty approximated $5.4 million or $2.36 per
share. Additionally at that date, Major Realty had a
stockholders' equity of approximately $14,000 and the quoted
market price of Major Realty on NASDAQ was $1.69 per share. The
Company expects to realize a minimum of its carrying value in
Major Realty based on the estimated net realizable values of Major
Realty's underlying assets. The Company's estimate of net
realizable value is based upon several factors including estimates
from Major Realty's management, assets appraisals and sales to
date of Major Realty's assets. Commencing in 1992, the Company
has not recognized its share of net gains realized by Major Realty
on sales of real estate but continues to recognize its share of
expenses recorded by Major Realty.
The extraordinary item reflected in the accompanying consolidated
statement of operations for the year ended December 31, 1991
represents the Company's interest in an extraordinary gain
recorded at Major Realty in February 1991. This extraordinary
gain resulted from the conveyance of Major Realty's interest in
the Major Centre Plaza office building and the payment of $170,000
in cash to the mortgage note holder in exchange for the full
satisfaction and release of an $8,080,000 mortgage note. No
related federal income tax provision was provided since this
extraordinary gain was offset by losses incurred at Major Realty
during the year ended December 31, 1991.
The following summary financial data for Major Realty as of and
for the years ended December 31, 1993 and 1992 was obtained from
Major Realty's consolidated financial statements (in thousands):
1993 1992
Land held for sale or development $ 7,283 $56,442
Other assets 3,621 1,741
------- -------
Total assets $10,904 $58,183
======= =======
Mortgage and other notes payable $ 9,438 $51,745
Other liabilities 1,452 7,315
Stockholders' deficit 14 (877)
------- -------
Total liabilities and stockholders' $10,904 $58,183
equity ======= =======
Total revenues $55,199 $ 4,794
======= =======
Gross profit $ 2,895 $ 1,640
======= =======
Net income (loss) $ 891 $(3,671)
======= =======
7. BANK BORROWINGS, TERM DEBT AND OTHER BORROWINGS AND NOTES PAYABLE
TO AFFILIATES
In March 1994, the Company agreed to amend its borrowing
arrangements with its bank lenders. The proposed structure is a
$35 million line of credit with interest payable quarterly at the
prime rate or at LIBOR plus a margin of 1% to 1.75%, depending on
the Company's debt to equity ratio. The line of credit will
mature in four years and may be extended to five years by the bank
lenders. The line of credit will be consummated once final legal
documentation is completed which is anticipated to be in April
1994.
The following information relates to the debt agreements in effect
as of December 31, 1993 and 1992:
December 31,
1993 1992
(in thousands)
Bank borrowings:
Term loan at the prime rate of interest plus .5%
or at the Company's option, LIBOR plus 2.5% $12,000 $15,500
Revolving promissory note at the federal funds rate 6,597 -
plus 2.75%
Notes payable to affiliates:
Secured subordinated notes at the prime rate
of interest plus 6% - 9,500
Secured subordinated convertible note at the prime
rate
of interest plus 6% - 7,000
Term debt and other borrowings 354 1,567
------- -------
$18,951 $33,567
======= =======
At December 31, 1993, the $12.0 million note payable was
collateralized by the Company's Acceptance common stock.
Principal of $1,000,000 and interest on the note is due quarterly
with a maturity of October 1, 1996.
In August 1993, Redland refinanced its existing notes payable to a
bank with a new $7,500,000 revolving promissory note with a
maturity of January 5, 1995 which is collateralized by Redland
common stock. At December 31, 1993, $6,597,000 was outstanding
under this agreement.
The Company issued $9.5 million of Secured Subordinated Notes to
certain directors or stockholders in April 1992 through the
exchange of previously issued secured and unsecured notes
aggregating approximately $8.3 million and cash. Additionally,
the Company issued to the holders of the Secured Subordinated
Notes approximately 97,500 common stock warrants exercisable for
five years at a price of $9.50 per share. In January 1993, these
notes were redeemed.
In April 1992, Acceptance issued a $7 million secured subordinated
convertible note maturing in 1997. In April, 1993, this note was
converted into 875,000 units of common stock and warrants
identical to those issued in the Rights Offering (see Note 2).
Aggregate maturities are as follows (in thousands):
1994 $ 4,354
1995 10,597
1996 4,000
-------
$18,951
=======
Cash payments for interest were approximately $2.5 million, $4.2
million and $5.7 million during the years ended December 31, 1993,
1992 and 1991, respectively.
8. INCOME TAXES
The Company adopted Statement of Financial Accounting Standards
(SFAS) No. 109, "Accounting for Income Taxes", effective January
1, 1993. The prospective application of SFAS No. 109 resulted in
no effect upon net income for the year ended December 31, 1993.
SFAS No. 109 requires that the Company recognize a deferred tax
asset for all temporary differences and net operating loss
carryforwards and a related valuation allowance account when
realization of the asset is uncertain. Accordingly, a valuation
allowance has been recorded for the full amount of the deferred
tax asset. During 1993, the valuation allowance decreased
$1,560,000, the same amount the net deferred tax asset decreased.
The significant items comprising the Company's net deferred tax
asset as of December 31, 1993 are as follows (in thousands):
Net operating loss carryforwards expiring in varying
amounts through 2006 $ 2,440
Unpaid losses and loss adjustment expenses 6,581
Unearned premiums 3,037
Allowances for doubtful accounts 712
Major Realty basis difference 7,531
--------
Deferred tax asset 20,301
--------
Deferred policy acquisition costs (4,017)
Other (23)
--------
Deferred tax liability (4,040)
--------
16,261
Valuation allowance (16,261)
--------
Net deferred tax asset $ -
========
The Company recognized a current tax expense of approximately
$167,000 for the year ended December 31, 1993 as a result of
amounts due under alternative minimum taxable income provisions
which limit net operating loss carryforwards. Cash payments for
income taxes were approximately $232,000 during the year ended
December 31, 1993.
9. OPERATING LEASES
The Company leases office space and certain furniture and
equipment under various operating leases. Future minimum
obligations under these operating leases are as follows (in
thousands):
1994 $1,675
1995 1,494
1996 1,355
1997 1,176
1998 899
Thereafter 1,886
------
$8,485
======
Rental expense totaled approximately $1,169,000, $1,014,000 and
$569,000 for the years ended December 31, 1993, 1992 and 1991,
respectively.
10. STOCK OPTIONS AND AWARDS
In December 1992, stockholders approved an incentive stock option
plan under which options granted to employees vest over the four
years following the date of grant, options granted to non-employee
directors are vested one year from the date of grant and all
options terminate ten years from the date of grant. A maximum of
500,000 shares are available for the plan and 94,500 options were
granted during 1993.
On January 27, 1993, certain executive officers of the Company
were awarded non-qualified options entitling these officers to
purchase a total of 72,500 shares of the Company's Common Stock at
a price of $8.75 per share, which are currently exercisable
through January 27, 1998.
In connection with consulting agreements entered into in May 1991
with certain of its directors, the Company incurred approximately
$100,000 and $528,000 of expense during the years ended
December 31, 1992 and 1991, respectively. Under the same
agreements and in addition to the above, these directors received
a total of 62,210 options to purchase Company common stock at a
price of $10.25 per share, subject to certain antidilution
provisions, which are exercisable through May 1996.
Changes in stock options are as follows:
Number of Shares Option Price
-------------------- Per Share
Reserved Granted
Balance at January 1, 1991 213,909 154,099 $ 3.92 - $38.50
Granted 62,210 74,710 $ 10.25
Canceled - (6,513)
Exercised (15,290) (15,290) $ 4.32
------- -------
Balance at December 31, 1991 260,829 207,006 $ 3.92 - $38.50
Reserved 500,000 -
Canceled (58,455) (4,632)
Exercised (7,643) (7,643) $ 3.92
------- -------
Balance at December 31, 1992 694,731 194,731 $ 12.76 - $38.50
Granted 72,500 167,000 $ 8.75 - $13.00
Canceled (87,500) (87,500)
------- -------
Balance at December 31, 1993 679,731 274,231 $ 8.75 - $38.50
======= =======
All shares under option at December 31, 1993 were exercisable,
except for 94,500 options issued in 1993 under the incentive stock
option plan.
In December 1992, stockholders approved an employee stock purchase
plan whereby eligible employees will be given the opportunity to
subscribe for the purchase of the Company's common stock for 85%
of its fair market value as defined. During 1993, 12,639 shares
were issued under this plan.
11. RELATED PARTY TRANSACTIONS
Included in real estate revenues for the years ended December 31,
1992 and 1991, is fee income totaling approximately $1,522,000 and
$1,850,000, respectively, for real estate advisory services
provided by Major Group to Major Realty. Revenues for the year
ended December 31, 1992 included a non-recurring fee of $925,000
associated with the settlement and termination of the advisory
agreement in March 1992, effective January 1, 1992. As part of
the termination and settlement agreement, Major Realty issued two
promissory notes aggregating $1,514,581 to Major Group
representing payment of all deferred fees and interest thereon and
payment of the termination fee. The promissory notes bear
interest at 12%, mature in 1997 and are collateralized by second
and third mortgages on certain real property owned by Major
Realty. One note, on which principal and accrued interest totals
approximately $143,000 at December 31, 1993, is convertible into
Major Realty common stock at any time, while the remaining note,
on which principal and accrued interest totals approximately
$278,000 at December 31, 1993, may be converted into Major Realty
common stock beginning March 1995.
12. INSURANCE PREMIUMS AND CLAIMS
Insurance premiums written and earned by the Company's insurance
subsidiaries at December 31, 1993, 1992 and 1991 are as follows
(in thousands):
1993 1992 1991
Direct premiums written $253,359 $144,464 $103,594
Assumed premiums written 2,683 7,627 1,259
Ceded premiums written (118,537) (68,006) (41,871)
-------- -------- --------
Net premiums written $137,505 $ 84,085 $ 62,982
======== ======== ========
Direct premiums earned $250,074 $134,551 $100,109
Assumed premiums earned 3,642 7,048 908
Ceded premiums earned (125,634) (62,435) (35,853)
-------- -------- --------
Net premiums earned $128,082 $ 79,164 $ 65,164
======== ======== ========
Insurance loss and loss adjustment expenses have been reduced by
recoveries recognized under reinsurance contracts of $216,246,000
for the year ended December 31, 1993.
Five insurance agencies produced direct premiums written
aggregating approximately 34%, 51% and 46% of total direct
premiums during the years ended December 31, 1993, 1992 and 1991,
respectively.
Insurance loss and loss adjustment expenses paid totaled
approximately $68,217,000, $48,530,000 and $39,224,000 during the
years ended December 31, 1993, 1992 and 1991, respectively.
13. REINSURANCE
The Company's insurance subsidiaries cede insurance to other
companies under quota share, excess of risk and facultative
treaties. The insurance subsidiaries also maintain catastrophe
reinsurance to protect against catastrophic occurrences where
claims can arise under numerous policies due to a single event.
The reinsurance agreements are tailored to the various programs
offered by the insurance subsidiaries. The largest amount
retained in any one risk by the insurance subsidiaries during 1993
was $500,000. The insurance subsidiaries are contingently liable
if the reinsurance companies are unable to meet their obligations.
The methods used for recognizing income and expenses related to
reinsurance contracts have been applied in a manner consistent
with the recognition of income and expense on the underlying
direct and assumed business.
14. DIVIDEND RESTRICTIONS AND REGULATORY MATTERS
Dividends from the Acceptance insurance subsidiaries and Redland
insurance subsidiaries are not available to the Company because of
restrictive covenants set forth in loan agreements which prohibit
dividends from Acceptance or Redland to the Company without the
express consent of the respective holders of these obligations.
Acceptance's insurance subsidiaries reported to regulatory
authorities total policyholders' surplus of approximately
$57,044,000 and $33,324,000 at December 31, 1993 and 1992,
respectively, and total statutory net income of $2,712,000 and
$1,304,000 for the years ended December 31, 1993 and 1992,
respectively. Redland's insurance subsidiaries reported to
regulatory authorities total policyholders' surplus of
approximately $14,719,000 at December 31, 1993 and statutory net
loss of approximately $5,052,000 for the year ended December 31,
1993.
15. MAJOR GROUP ACQUISITION
On September 25, 1992, the Company completed a merger with Major
Group which increased the Company's ownership interest to 100%.
Pursuant to Settlement Agreements among the Company, Major Group
and certain secured creditors (the "Term Sheet Creditors"), Major
Group (1) conveyed substantially all of its assets, except for
certain property located in Fort Lauderdale, Florida (the "Fort
Lauderdale Commerce Center Property") and two promissory notes
from Major Realty Corporation (the "Major Realty Notes"), to the
Term Sheet Creditors in satisfaction of all of Major Group's
obligations due to them; (2) the Fort Lauderdale Commerce Center
Property and the Major Realty Notes were transferred to the
Company in satisfaction of all amounts due the Company under a
note of a subsidiary of Major Group, which was secured by a
mortgage on the Fort Lauderdale Commerce Center Property and
guaranteed by Major Group; and (3) the Company issued a promissory
note in the principal amount of $500,000 payable in installments
over one year to the Term Sheet Creditors in exchange for all of
the Major Group preferred stock held by the Term Sheet Creditors.
Assets conveyed to the Term Sheet Creditors and liabilities
satisfied approximated $5.7 million. Immediately upon conclusion
of these transactions, Major Group was merged into a wholly-owned
subsidiary of the Company.
In addition, Major Group settled certain claims by agreeing to pay
$150,000 in cash and other consideration, payment of which is
guaranteed by the Company, payable over a two year period and
payment of the net cash proceeds from the sale of certain sewer
connections not to exceed $150,000. In connection with the above,
the Company issued approximately 52,000 shares of common stock to
complete the merger. The Company recorded approximately $494,000
of excess of cost over acquired net assets which is being
amortized over five years. The net effect of the transactions
among Major Group, the Term Sheet Creditors and the Company upon
results of operations was insignificant.
16. DISCONTINUED OPERATIONS
In December 1991, the Company decided to sell its approximate 52%
interest in Orange-co, its Florida based subsidiary primarily
engaged in growing and processing citrus products as well as
packaging and marketing these citrus and other beverage products.
The Company, therefore, recorded a provision for the expected loss
on disposal, including estimated costs of disposition, of
approximately $19,600,000, with no related federal income tax
effect. Additionally, revenues and expenses of Orange-co were
reclassified as net income (loss) from discontinued operations.
The Company's interest in the estimated earnings of Orange-co
during the disposal period were not recognized because such
earnings were not expected to be realized.
On May 28, 1992, the Company consummated the sale of Orange-co for
$31,000,000. After payment of expenses of the transaction,
$2,030,000, the Company realized a loss on the transaction of
$83,000.
Net sales of Orange-co for the year ended December 31, 1991, were
$80,357,000.
17. CONTINGENCIES
The Company is involved in various insurance related claims and
other legal actions arising from the normal conduct of business.
Management believes that the outcome of these proceedings will not
have a material effect on the consolidated financial statements of
the Company.
A subsidiary of the Company has guaranteed debt of $775,000
relating to a real estate partnership in which the subsidiary has
a limited partnership interest.
18. INTERIM FINANCIAL INFORMATION (UNAUDITED)
Fully
Primary Diluted
Net Net
Net Income Income
Income (Loss) (Loss)
Quarters Ended Revenues (Loss) Per Share Per Share
(In thousands, except per share data)
1993:
December 31 $ 43,821 $ 2,152 $ 0.21 $ 0.21
September 30 38,460 2,167 0.22 0.22
June 30 32,581 1,715 0.20 0.20
March 31 30,433 1,552 0.24 0.23
-------- ------- ------- -------
$145,295 $ 7,586 $ 0.86 (2) $ 0.85 (2)
======== ======= ======== =======
1992:
December 31 $ 24,434 $ 814 $ 0.24 $ 0.24
September 30 25,280 756 0.22 0.22
June 30 23,182 (2,608) (1) (0.76) (0.76)
March 31 22,136 129 0.04 0.04
-------- ------- -------- -------
$ 95,032 $ (909) $ (0.26) $ (0.26)
======== ======= ======== =======
(1) The net loss for the quarter ended June 30, 1992 was primarily
due to the $2,100,000 strengthening of the Company's loss
reserves for its workers' compensation and liquor liability
business.
(2) Quarterly net income per share numbers for 1993 do not add to
the annual net income per share due to rounding.
19. SUBSEQUENT EVENT
In March 1994, the Company entered into an Agreement and Plan of
Merger with Statewide Insurance Corporation, the exclusive general
agent for the Company's non-standard automobile insurance program
underwritten by Phoenix Indemnity Insurance Company ("Phoenix
Indemnity"), and the owner of 20% of the outstanding shares of
common stock of Phoenix Indemnity pursuant to which the Company
will acquire by merger (the "Merger") Statewide Insurance
Corporation (except for certain assets and liabilities relating to
its agency operations other than the non-standard automobile
program which will be divested prior to the merger). The
effective date of the Merger is March 31, 1994.
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE I
SUMMARY OF INVESTMENTS - DECEMBER 31, 1993
(In Thousands)
Column A Column B Column C Column D
Amount
at Which
Shown
in the
Balance
Type of Investment Cost Value Sheet
Fixed maturities held for investment:
Bonds:
United States Government and government agencies and
authorities $ 9,076 $ 9,436 $ 9,076
States, municipalities and political subdivisions 504 530 504
Mortgage-backed securities 33,070 34,319 33,070
All other corporate bonds 9,106 9,769 9,106
-------- -------- --------
Total fixed maturities held for investment 51,756 54,054 51,756
-------- -------- --------
Fixed maturities available for sale:
Bonds:
United States Government and government agencies
and authorities 17,379 17,414 17,379
States, municipalities and political subdivisions 33,370 33,773 33,370
Mortgage-backed securities 40,687 40,786 40,687
All other corporate bonds 4,400 4,477 4,400
-------- -------- --------
Total fixed maturities available for sale 95,836 96,450 95,836
-------- -------- --------
Marketable equity securities:
Common stocks:
Public utilities 106 105 105
Banks, trust and insurance companies 680 739 739
Industrial and miscellaneous 4,652 4,582 4,582
Nonredeemable preferred stocks 8,368 8,446 8,446
-------- -------- --------
Total marketable equity securities 13,806 13,872 13,872
-------- -------- --------
Mortgage loans and other investments 2,852 XXXXX 2,852
Real estate 4,266 XXXXX 4,266
Short-term investments 19,404 XXXXX 19,404
-------- ------- --------
Total investments $187,920 XXXXX $187,986
======== ======= ========
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE II
AMOUNTS RECEIVABLE FROM RELATED PARTIES
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991,
(In Thousands)
Column A Column B Column C Column D Column E
Balance
at Balance
Beginning at
of End of
Name of Debtor Period Additions Deductions Period
Year Ended December 31, 1993 Major Realty Corporation $1,205 $ - $ 784 $ 421
====== ====== ====== ======
Year Ended December 31, 1992 Major Realty Corporation $ 579 $1,649 $1,023 $1,205
====== ====== ====== ======
Year Ended December 31, 1991 Major Realty Corporation $ (24) $1,929 $1,326 $ 579
====== ====== ====== ======
The amounts receivable from Major Realty Corporation are comprised of two notes bearing interest at 12%,
maturing in 1997, and are collateralized by second and third mortgages on certain real property owned
Major Realty. One note, $143,000 at December 31, 1993, is convertible into Major Realty common stock at any
time, while the remaining note, $278,000 at December 31, 1993, may be converted into Major Realty common
stock beginning March 1995.
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE III
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DECEMBER 31, 1993 AND 1992
BALANCE SHEETS (Parent Company Only)
(In Thousands)
ASSETS 1993 1992
Cash and short-term investments $ 238 $ 273
Receivables, net 3,074 2,497
Investments in subsidiaries 79,958 45,103
Excess of cost over acquired net assets 14,639 238
Other assets 1,043 783
--------- --------
$ 98,952 $ 48,894
========= ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable and accrued liabilities 278 901
Intercompany payables 2,957 3,474
Term debt and other borrowings - 496
Notes payable to affiliates - 9,500
--------- --------
Total liabilities 3,235 14,371
Stockholders' equity:
Preferred stock, no par value, 5,000,000 shares authorized, none issued - -
Common stock, $.40 par value, 20,000,000 shares authorized; 9,976,415
and 3,517,027 shares issued 3,991 1,407
Capital in excess of par value 140,002 86,527
Unrealized gain (loss) on marketable equity securities 66 (183)
Accumulated deficit (44,078) (51,664)
-------- --------
99,981 36,087
Less:
Treasury stock, at cost, 35,559 shares (1,564) (1,564)
Contingent stock, 240,000 shares (2,700) -
-------- --------
Total stockholders' equity 95,717 34,523
-------- --------
$ 98,952 $ 48,894
======== ========
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE III - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
STATEMENTS OF OPERATIONS (Parent Company Only)
(In Thousands)
1993 1992 1991
Revenues $ - $ - $ -
Costs and expenses:
General and administrative expenses 1,442 1,416 6,149
------- ------- --------
Operating loss (1,442) (1,416) (6,149)
------- ------- --------
Other income (expense):
Interest expense (973) (2,182) (3,033)
Loss on Settlement Agreement with Major Group - (1,113) -
Share of net income (loss) of subsidiaries 9,490 3,567 (14,096)
Other 465 318 168
------- ------- --------
8,982 590 (16,961)
------- ------- --------
Income (loss) from continuing operations before
income taxes 7,540 (826) (23,110)
Provisions for income taxes (46) - -
------- ------- --------
Income (loss) from continuing operations 7,586 (826) (23,110)
Discontinued operations:
Loss from discontinued operations - - (721)
Loss on disposal of discontinued operations - (83) (19,600)
------- ------- --------
Loss from discontinued operations - (83) (20,321)
------- ------- --------
Income (loss) before extraordinary item 7,586 (909) (43,431)
Extraordinary item - - 512
------- ------- --------
Net income (loss) $ 7,586 $ (909) $(42,919)
======= ======= ========
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE III - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
STATEMENTS OF CASH FLOWS (Parent Company Only)
(In Thousands)
1993 1992 1991
Cash flows from operating activities:
Net income (loss) from continuing operations $ 7,586 $ (826) $(23,110)
Adjustments to reconcile net income (loss) from continuing
operations to net cash used for operating activities:
Depreciation and amortization 382 55 1,106
Share of net (income) loss of subsidiaries (9,490) (3,567) 14,096
Loss on Settlement Agreement with Major Group - 1,113 -
Increase (decrease) in cash attributable to changes in
assets and liabilities:
Receivables (577) 3,420 (4,089)
Payables (1,140) (2,363) 3,404
Other, net 700 16 114
Net operating cash flows of discontinued operations - - 21
Net cash used for operating activities (2,539) (2,152) (8,458)
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of discontinued operations - 27,550 -
Contributions to investments in subsidiaries (18,489) (3,155) (119)
Receipts from investments in subsidiaries - - 2,099
Costs of acquiring Redland (306) - -
-------- -------- --------
Net cash provided by (used for) investing activities (18,795) 24,395 1,980
Cash flows from financing activities:
Proceeds from bank borrowings - - 1,083
Repayments of bank borrowings - (23,808) (2,135)
Proceeds from term debt, other borrowings and notes payable
to affiliates - 9,500 7,657
Repayments of term debt, other borrowings and notes payable
to affiliates (9,996) (7,796) (458)
Proceeds from issuance of common stock 31,295 32 266
------- -------- --------
Net cash provided by (used for) financing activities 21,299 (22,072) 6,413
------- -------- --------
Net increase (decrease) in cash and short-term investments (35) 171 (65)
Cash and short-term investments at beginning of year 273 102 167
------- -------- --------
Cash and short-term investments at end of year $ 238 $ 273 $ 102
======= ======== ========
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE III - (Continued)
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
STATEMENTS OF CASH FLOWS (Parent Company Only)
In January 1993, the Company assumed a $7 million note from one of its
subsidiaries. In April 1993, this note was exchanged for 875,000
shares of common stock and warrants to purchase common stock. (See
Note 2 to the Consolidated Financial Statements.)
In August 1993, the Company acquired Redland and the purchase price of
$15.4 million was comprised of 1,339,000 shares of the Company's
common stock and acquisition related costs of $306,000. (See Note 3
to the Consolidated Financial Statements.)
In September 1992, the Settlement Agreement and merger with Major
Group resulted in non-cash transactions in which (1) the Company
received certain real estate and notes receivable from Major Realty in
satisfaction of a note receivable due the Company from Major Group;
(2) a promissory note in the principal amount of $500,000 was issued
by the Company in exchange for all of the Major Group preferred stock;
and (3) the Company issued approximately 52,000 shares of common stock
which increased its ownership interest in Major Group from
approximately 51% to 100%. In addition, the Company contributed the
notes receivable from Major Realty of approximately $1.3 million to
Acceptance in September 1992. (See Note 15 to the Consolidated
Financial Statements.)
Cash payments for interest were $1,019,000, $1,960,000 and $3,253,000
during the years ended December 31, 1993, 1992 and 1991, respectively.
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE IV
INDEBTEDNESS TO RELATED PARTIES - NOT CURRENT
YEARS ENDED DECEMBER 31, 1993 AND 1992
Column A Column F Column G Column H Column I
Balance
at Balance
Name Beginning Additions Deductions at End
Year Ended December 31, Acceptance Investors
1993 Limited Partnership $ 7,000,000 $ - $7,000,000 $ -
=========== ============ ========== ============
Year Ended December 31, Acceptance Investors
1992 Limited Partnership $ - $ 7,000,000 $ - $ 7,000,000
=========== ============ ========== ============
In April 1993, the $7,000,000 note was exchanged for 875,000 shares of common stock
and warrants identical to those issued in the Company's Rights Offering.
(See Note 2 to the Consolidated Financial Statements).
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE V
SUPPLEMENTAL INSURANCE INFORMATION
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(In Thousands)
Net Claims and Claim
Adjustment
Expenses Incurred
Related to
------------------
(1) (2) Other
Current Prior Operating
Year Years Expenses
Year Ended December 31, 1993 $90,250 $2,555 $1,821
Year Ended December 31, 1992 $57,678 $2,347 $1,466
Year Ended December 31, 1991 $46,719 $ 198 $1,550
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE VIII
VALUATION ACCOUNTS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(In Thousands)
Column A Column B Column C Column D Column E
Balance
at Balance
Beginning at
of End of
Period Additions Deductions Period
Allowance for doubtful accounts:
Year ended December 31, 1993 $1,207 $1,000 (A) $ 114 $2,093
Year Ended December 31, 1992 $3,586 $ 641 $3,020 (B) $1,207
Year Ended December 31, 1991 $6,986 $ 200 $3,600 (C) $3,586
(A) Includes allowance for doubtful accounts related to Redland of $663 at date of acquisition.
(B) Includes $2,993 deductions related to Major Group which is a result of various
write-offs and the conveyance of receivables to Term Sheet Creditors, in
September 1992 (see Note 15 to the Consolidated Financial Statements).
(C) Includes $1,607 related to the Company's discontinued citrus operations and $1,916
related to write-offs and cash collections.
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE IX
SHORT-TERM BORROWINGS
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(In Thousands)
Column A Column B Column C Column D Column E Column F
Average
Maximum Amount Weighted
Amount Outstanding Average
Balance Weighted Outstanding During Interest
at End Average During the During
Category of Aggregate of Interest the Period Period
Short-Term Borrowings Period Rate Period (A) (A)
Year ended December 31, 1993:
Other borrowings $ - - $ 496 $ 245 6.0 %
Notes payable to affiliates $ - - $ 9,500 $ 703 12.0 %
Year ended December 31, 1992:
Bank borrowings $ - - $ 210 $ 156 6.5 %
Other borrowings 496 6.0% $ 500 $ 131 6.0 %
Notes payable to affiliates $9,500 12.0% $ 9,500 $ 9,070 11.1 %
Year ended December 31, 1991:
Bank borrowings $ 210 6.5% $26,863 $17,622 10.4 %
Notes payable to affiliates $7,430 7.0% $ 7,430 $ 765 8.1 %
(A) Based on weighted average outstanding borrowings during the period.
ACCEPTANCE INSURANCE COMPANIES INC.
SCHEDULE X
SUPPLEMENTARY INCOME STATEMENT INFORMATION
YEARS ENDED DECEMBER 31, 1993, 1992 AND 1991
(In Thousands)
Column B
Charged to Costs
and Expenses
-----------------------
1993 1992 1991
Depreciation and amortization $3,533 $1,552 $2,572
Taxes, other than payroll and income taxes $3,748 $1,859 $1,403
Other captions provided for under this schedule are excluded as the amounts
related to such caption are not material.