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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.
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