-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, TpFYg38uS5xD1Ctnr/sB3GMaznzr2fAkj7ETCvV+fQm8KdD5v/j4CDHq4qcSn1wk 9rmPTHjVoeG7F7/yft1M9A== 0000950117-96-000460.txt : 19960517 0000950117-96-000460.hdr.sgml : 19960517 ACCESSION NUMBER: 0000950117-96-000460 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: FRONTIER INSURANCE GROUP INC CENTRAL INDEX KEY: 0000797496 STANDARD INDUSTRIAL CLASSIFICATION: SURETY INSURANCE [6351] IRS NUMBER: 141681606 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-15022 FILM NUMBER: 96564715 BUSINESS ADDRESS: STREET 1: 195 LAKE LOUISE MARIE RD CITY: ROCK HILL STATE: NY ZIP: 12775 BUSINESS PHONE: 9147962100 MAIL ADDRESS: STREET 1: 195 LAKE LOUISE MARIE RD CITY: ROCK HILL STATE: NY ZIP: 12775 FORMER COMPANY: FORMER CONFORMED NAME: FRONTIER FINANCIAL CORP /DE/ DATE OF NAME CHANGE: 19860904 10-Q 1 FRONTIER INSURANCE GROUP, INC. - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q [x] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended March 31, 1996 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to COMMISSION FILE NUMBER 0-15022 FRONTIER INSURANCE GROUP, INC. (Exact name of Registrant as specified in its charter) DELAWARE 14-1681606 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 195 LAKE LOUISE MARIE ROAD, ROCK HILL, NEW YORK 12775-8000 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (914) 796-2100 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [x] Yes [ ] No The aggregate number of shares of the Registrant's Common Stock, $.01 par value, outstanding on May 13,1996 was 13,111,516. - ------------------------------------------------------------------------------- Page 1 of 16 pages -1- FRONTIER INSURANCE GROUP, INC.
INDEX PAGE ----- ---- PART I- FINANCIAL INFORMATION Item 1. Consolidated Financial Statements Consolidated Balance Sheets at (Unaudited) March 31, 1996 and December 31, 1995....................... 3-4 Consolidated Statements of Income (Unaudited) for the Three Months Ended March 31, 1996 and 1995......................... 5 Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 1996 and 1995..................... 6 Notes to Consolidated Financial Statements (Unaudited)................. 7-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.......................... 10-14 PART II- OTHER INFORMATION Item 1. Legal Proceedings...................................................... 15 Item 2. Changes in Securities.................................................. 15 Item 3. Defaults upon Senior Securities........................................ 15 Item 4. Submission of Matters to a Vote of Security Holders.................... 15 Item 5. Other Information...................................................... 15 Item 6. Exhibits and Reports on Form 8-K....................................... 15 Signature ....................................................................... 16
-2- PART I - FINANCIAL INFORMATION Item 1. Consolidated Financial Statements FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
ASSETS (in thousands) March 31, December 31, 1996 1995 --------- ------------ (Unaudited) Investments: Securities, Available for sale--at fair value Fixed maturities (amortized cost: 1996--$525,105; 1995--$510,056) $527,661 $521,402 Equity securities-(cost 1996 $23,617 1995--$20,132); 24,381 21,024 Short-term investments--at principal balances, which approximate fair value 9,546 7,353 Investment in limited liability corporation 3,115 2,935 -------- -------- TOTAL INVESTMENTS 564,703 552,714 Cash Agents' balances due, less 2,532 5,115 allowances for doubtful accounts (1996--$3,478; 1995--$3,346) 25,014 25,779 Premiums receivable from insureds, less allowances for doubtful accounts (1996--$30; 1995--$105) 25,024 24,177 Deferred federal income tax benefits 25,395 23,627 Accrued investment income 6,824 7,458 Deferred policy acquisition costs 21,155 18,797 Net reinsurance recoverables less allowances for possible uncollectible amounts (1996--$115; 1995--$115) 91,154 76,955 Data processing equipment and software--at cost, less accumulated depreciation and amortization (1996--$2,387; 1995--$2,259) 1,381 1,434 Insurance renewal and claims adjusting rights and other intangible assets, less accumulated amortization (1996--$2,587; 1995--$2,370) 2,865 3,082 Home office building and equipment-- at cost, less accumulated depreciation (1996--$5,513; 1995--$5,031) 27,721 28,043 Federal income taxes recoverable 217 Other assets 4,881 5,950 -------- -------- TOTAL ASSETS $798,649 $773,348 ======== ========
See notes to consolidated financial statements (unaudited). -3- FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--Continued LIABILITIES AND CAPITAL (dollar amounts in thousands, except per share data)
March 31, December 31, 1996 1995 -------- ------------ (Unaudited) LIABILITIES Policy liabilities: Unpaid losses $322,561 $309,164 Unpaid loss adjustment expenses 60,670 58,272 Unearned premiums 110,241 107,282 ------- --------- TOTAL POLICY LIABILITIES 493,472 474,718 Note payable 25,000 25,000 Funds withheld under reinsurance contract 34,208 28,226 Federal income taxes payable 1,829 Cash dividend payable to shareholders 1,573 1,568 Other liabilities 10,431 14,103 -------- --------- TOTAL LIABILITIES 566,513 543,615 COMMITMENTS AND CONTINGENT LIABILITIES CAPITAL-- Preferred Stock, par value $.01 per share; authorized and unissued--1,000,000 shares Common Stock, par value $.01 per share; authorized--20,000,000 shares; issued (1996--13,068,205 shares; 1995--13,062,501 shares) 131 130 Additional paid-in capital 168,090 167,587 Net unrealized appreciation/(depreciation) of investments in available-for-sale securities 2,158 7,955 Retained earnings 62,545 54,849 -------- --------- SUBTOTAL 232,924 230,521 Less: Treasury stock--at cost (1996--41,400 shares; 1995--41,400 shares) (788) (788) -------- --------- TOTAL CAPITAL 232,136 229,733 -------- --------- TOTAL LIABILITIES AND CAPITAL $798,649 $773,348 ======== ======== Book Value per share $17.76 $17.59 ====== ======
See notes to consolidated financial statements (unaudited). -4- FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (in thousands, except per share data)
Three Months Ended March 31, ----------------------- 1996 1995 ---- ---- REVENUES Premiums written $74,860 $57,258 Premiums ceded (13,131) (9,088) ------- ------ NET PREMIUMS WRITTEN 61,729 48,170 Increase in unearned premiums (3,435) (2,416) ------- ------- NET PREMIUMS EARNED 58,294 45,754 Net investment income 7,786 6,737 Net realized capital gains (losses) 691 (756) ------- -------- TOTAL NET INVESTMENT INCOME 8,477 5,981 Gross claims adjusting income 25 36 ------- -------- TOTAL REVENUES 66,796 51,771 EXPENSES Losses 26,512 21,493 Loss adjustment expenses 8,931 6,942 Amortization of policy acquisition costs 12,381 9,689 Underwriting and other expenses 5,791 4,593 Interest Expense 441 ------- ------- TOTAL EXPENSE 54,056 42,717 INCOME BEFORE INCOME TAXES 12,740 9,054 INCOME TAXES State 115 (49) Federal 3,361 2,217 ------- -------- TOTAL INCOME TAXES 3,476 2,168 ------- -------- NET INCOME $9,264 $6,886 ====== ====== PER SHARE DATA Operating Income $.68 $.57 Net realized capital gains (losses) .03 (.04) ---- ---- NET INCOME $.71 $.53 ==== ==== WEIGHTED AVERAGE SHARES OUTSTANDING 13,047 12,997 ====== ======
See notes to consolidated financial statements (unaudited). -5- FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (in thousands)
Three Months Ended March 31, ------------------------- 1996 1995 ---- ---- OPERATING ACTIVITIES Net income $9,264 $ 6,886 Adjustments to reconcile net income to net cash provided by operating activities: Increase in policy liabilities 18,754 15,039 Increase (decrease) in federal income taxes 278 4,814 Decrease (increase) in reinsurance balances (8,217) (1,132) (Increase) decrease in agents' balances and premiums receivable (82) 2,423 Change in deferred policy acquisition costs (2,358) (581) Decrease (increase) in accrued investment income 634 (98) Depreciation and amortization 938 671 Realized capital (gains) losses (691) 756 Other (2,675) (273) -------- -------- NET CASH PROVIDED BY OPERATING ACTIVITIES 15,845 28,505 INVESTING ACTIVITIES Sales of equity securities 5,534 1,256 Sales of available for sale securities 17,217 6,412 Calls, maturities and paydowns of fixed maturities 21,825 33,521 Purchases of securities (59,512) (61,449) Net( purchases) sales of short-term investments (2,193) (10,050) Purchase of home office building and equipment (160) 725 Purchase of data processing equipment and software (75) 90 -------- -------- NET CASH (USED IN) INVESTING ACTIVITIES (17,364) (29,495) FINANCING ACTIVITIES Cash dividends paid (1,568) (1,563) Issuance of Common Stock 504 226 -------- -------- NET CASH (USED IN) FINANCING ACTIVITIES (1,064) (1,337) -------- -------- INCREASE (DECREASE) IN CASH (2,583) (2,327) CASH AT BEGINNING OF PERIOD 5,115 6,362 -------- -------- CASH AT END OF PERIOD $2,532 $4,035 ====== ======
See notes to consolidated financial statements (unaudited). -6- FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) 1. The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X and, accordingly, do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements and should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1995. In the opinion of management, all adjustments (consisting of only normal, recurring accruals) considered necessary for a fair presentation have been included. Certain amounts in the 1995 financial statements have been reclassified to conform to the 1996 presentation. All share and per share information presented in the accompanying financial statements and these notes thereto have been adjusted to give effect to stock dividends and stock splits. Operating results for the three-month period ended March 31, 1996 are not necessarily indicative of the results that may be expected for the year ending December 31, 1996. 2. Earnings per share information is presented on the basis of weighted average shares outstanding for the period. 3. Dividends have been declared by the Board of Directors and paid by the Company during the periods presented in the accompanying financial statements, as follows:
Declaration Record Payment Type of Cash Number of Date Date Date Dividend Paid Shares Issued ----------- ------ ------- -------- ---- ------------- 08/11/94 09/30/94 10/20/94 $.12 per share cash $1,562 N/A 11/22/94 12/30/94 01/19/95 $.12 per share cash $1,558 N/A 03/16/95 03/31/95 04/20/95 $.12 per share cash $1,561 N/A 05/18/95 06/30/95 07/20/95 $.12 per share cash $1,567 N/A 08/17/95 09/29/95 10/19/95 $.12 per share cash $1,567 N/A 11/16/95 12/29/95 01/18/96 $.12 per share cash $1,568 N/A 03/28/96 04/08/96 04/30/96 $.12 per share cash $1,573 N/A
4. At March 31, 1996, options to purchase 274,696 shares of Common Stock, at per share exercise prices ranging from $12.79 to $31.88, were outstanding, compared to options to purchase 338,549 shares of Common Stock, at per share exercise prices ranging from $7.87 to $30.33, outstanding at March 31, 1995 under the Company's stock option plans (the "Plans"). Options to purchase 96,576 and 96,541 shares of Common Stock were exercisable at March 31, 1996 and March 31, 1995, respectively, under the Plans. During 1993, the Company granted the President and Chairman of the Board, and a Vice President, separate stock options outside of the Plans to purchase 375,000 and 67,500 shares, respectively, of the Company's Common Stock at $50.00 per share at any time through December 31, 1999, which options were outstanding at March 31, 1996. The number of shares subject to options and the per share option prices have been adjusted to reflect stock dividends. Exercisable options are nondilutive to earnings per share presented in the accompanying financial statements. -7- Item 1. Notes to Consolidated Financial Statements (Unaudited)--Continued 5. Contingent reinsurance commissions are accounted for on an earned basis and are accrued, in accordance with the terms of the applicable reinsurance agreement, based on the estimated level of profitability relating to such reinsured business. During the three months ended March 31, 1996 and 1995, such earned commissions accrued were $92,000 and ($186,000), respectively. The estimated profitability of the reinsured business is continually reviewed and as adjustments become necessary, such adjustments are reflected in current operations. 6. Claims adjusting income is accounted for on an accrual basis, before deducting the related expenses. During the three months ended March 31, 1996 and 1995, claims adjusting expenses included with underwriting and other expenses amounted to $44,000 and $94,000, respectively. 7. The components of the net reinsurance recoverables balances in the accompanying balance sheets were as follows:
March 31, 1996 December 31, 1995 -------------- ----------------- (in thousands) Ceded paid losses recoverable $ 6,730 $ 2,639 Ceded unpaid losses and LAE 80,509 73,043 Ceded unearned premiums 5,065 5,541 Ceded reinsurance payable (1,150) (4,268) ------- -------- TOTAL $91,154 $76,955 ======= =======
The reinsurance ceded components of the amounts relating to the accompanying income statements were as follows:
Three Months Ended March 31, -------------------------------- 1996 1995 ---- ---- (in thousands) Ceded premiums earned $ 12,292 $9,112 Ceded incurred losses $ 9,647 $5,082 Ceded incurred LAE $ 3,218 $2,257
-8- Item 1. Notes to Consolidated Financial Statements (Unaudited)--Continued The effect of reinsurance on premiums written and earned at March 31, 1996 and 1995 was as follows:
Three Months Ended March 31, -------------------------------------------------------- 1996 1995 Premiums Premiums ----------------------- ----------------------- Written Earned Written Earned -------- -------- ------- -------- (in thousands) Direct $73,395 $68,140 $56,055 $54,256 Assumed 1,465 2,446 1,203 610 Ceded (13,131) (12,292) (9,088) (9,112) ------- ------- ------ ----- Net $61,729 $58,294 $48,170 $45,754 ======= ======= ======= =======
8. During the first quarter of 1996, the Company adopted FASB statement No. 121, "Accounting for the Impairment of Long-Lived Assets an for Long-Lived Assets to be Disposed of, "("FASB 121") requires impairment losses to be recorded on long-lived assets, certain identifiable intangibles, and goodwill related to those assets, when indicators of impairment are present and the undiscounted cash flows estimated to be generated by those assets are less than the assets carrying amount. The adoption of FASB 121 did not have a material impact on the accounting for Long-Lived Assets. -9- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this Report and with the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1995. Three Months Ended March 31, 1996 Compared to Three Months Ended March 31, 1995 The following table sets forth the net premiums earned by the principal lines of insurance written by the Company for the periods indicated and the dollar amount and percentage of change therein from period to period:
Three Months Increase(Decrease) Ended March 31, 1995 to 1996 ----------------------- ----------------- 1996 1995 Amount % ------ ------ -------- ----- (dollar amounts in thousands) Medical malpractice (including dental malpractice) $24,098 $20,527 $3,571 17.4 General liability 16,910 10,040 6,870 68.4 Surety 11,648 9,653 1,995 20.7 Workers' compensation 3,049 3,895 (846) (21.7) Other 2,589 1,639 950 58.0 --------- -------- ---------- Total $58,294 $45,754 $12,540 27.4 ======= ======= =======
The following table sets forth the Company's combined ratio calculated on a statutory basis ("Statutory Combined Ratio") and on the basis of generally accepted accounting principles ("GAAP Combined Ratio") for the periods indicated:
Statutory Combined Ratio GAAP Combined Ratio ------------------------ ------------------- Three Months Three Months Ended March 31, Ended March 31, ------------------------ -------------------- 1996 1995 1996 1995 ---- ---- ---- ---- Losses 45.5% 47.0% 45.5% 47.0% Loss adjustment expenses (LAE) 14.0 14.3 15.3 15.2 ---- ---- ---- ---- Losses and LAE 59.5 61.3 60.8 62.2 Acquisition, underwriting, interest, and other expenses 31.9 30.3 31.2 31.2 ---- ---- ---- ---- Total combined ratio 91.4% 91.6% 92.0% 93.4% ==== ==== ==== ====
A variety of factors accounted for the 27.4% growth in net premiums earned, the principal factor being increases in the Company's core and new program business, partially offset by a decrease in worker's compensation and by the ceding of earned premiums under the Company's aggregate excess of loss reinsurance contract, pursuant to which 13.5% of earned premiums for all lines of business except bail, customs, license and permit, and miscellaneous surety bonds are ceded. The increase in medical malpractice net premiums earned was primarily attributable to an increase in the number of physicians insured, principally those associated with mental health, home care, and other social service organizations, growth in the Company's program for psychiatrists, greater penetration of the Ohio physician market, growth in the dental program endorsed by the Academy of General Dentistry, rate increases in Florida and expansion in other geographic areas. -10- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--Continued Net premiums earned for the general liability line increased primarily because of increases in various programs, including social services, alarms and guards, pest control, umbrella, and excess employer's liability. These increases were partially offset by a decrease in net premiums earned in the crane operator liability program. Growth in surety net premiums earned continued in 1996, and was primarily attributable to expanded writings of license and permit bonds, and of bonds for small contractors, miscellaneous bonds, and bail bonds also showing substantial percentage increases. Net premiums earned for the workers' compensation line decreased primarily as a result of decreases in the specialty niche program for cotton gins and other smaller programs due to the Company's decision not to renew accounts deemed unprofitable, and decreased required participation in the National Workers' Compensation Reinsurance Pools. The decrease was partially offset by increases in workers' compensation premiums written in the social services programs. Net premiums earned for the other lines of business increased primarily due to increased volume in commercial package policies in the social service program, and in the earthquake program. These increases were partially offset by decreases in other miscellaneous small programs. Net investment income before realized capital gains increased 15.6% due principally to increases in investable assets resulting from the proceeds of the $25 million borrowed in June, 1995, under a line of credit facility, and cash inflow from regular operations, partially offset by the interest charge on funds held by the Company for the benefit of the reinsurer associated with the Company's aggregate excess of loss reinsurance contract. Total net investment income increased 41.7% due to the aforementioned increase in net investment income and the realization of capital gains in the 1996 period compared to realized capital losses in the 1995 period. The average annual pre-tax yield on investments, excluding the charge for funds held under the aggregate excess of loss reinsurance contract and realized capital gains and losses, decreased to 6.5% from 6.9%, primarily as the result of generally lower interest rates available for funds invested in 1995 and early 1996, and the impact of higher yielding investments which mature or which are called for redemption being reinvested at the lower rates. The average annual after-tax yield on investments, excluding the charge for funds held under the aggregate excess of loss reinsurance contract and realized gains and losses, decreased to 4.9% from 5.5%, primarily for the reasons described above. Gross claims adjusting income decreased 30.6% primarily as a result of a decrease in claim services provided to outside companies, partially offset by an increase in the rates charged for certain services. Total revenues increased 29.0% as a result of the above. -11- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--Continued Total expenses increased by 26.5% compared to the 27.4% increase in net premiums earned. Losses and loss adjustment expenses ("LAE") increased at a 24.6% rate as a result of a 23.4% increase in losses and a 28.7% increase in LAE. The increase in losses and LAE was disproportionate to that of net earned premiums due to the aggregate excess of loss reinsurance contract which provides coverage for losses and LAE in excess of 65% and 66% for the 1996 and 1995 accident years, respectively, which resulted in a loss and LAE component of the GAAP Combined Ratio 1.4 percentage points lower than in the comparable 1995 period. The 28.7% increase in LAE resulted from a change in the line of business mix to those having a higher percentage relationship of LAE to losses. The 27.8% increase in the amortization of policy acquisition costs was attributable primarily to an increase in direct commission expense resulting from growth in programs with higher commission rates, a decrease in reinsurance commissions, increased staffing and marketing expenses related to expansion, and salary increases. The 26.1% increase in underwriting, other expenses, and interest expense was primarily the result of the interest asssociated with the $25 million borrowed under the line of credit facility, an increase in the additions to allowance for bad debts, increased staffing, increased facilities, equipment and materials expense necessitated by the Company's growth and salary increases. Since the non- claim related expenses increased at a percentage equivalent to that of earned premiums, the non-claim related component of the GAAP Combined Ratio was comparable to the 1995 period. The total GAAP Combined Ratio decreased by 1.4 percentage points to 92.0% as a result of the above. The foregoing changes resulted in income before taxes of $12,740,000 for the 1996 quarter. A 41.5% increase from the comparable 1995 quarter. Net income for the period increased by $2,378,000 or 34.5%. Liquidity and Capital Resources The Company is a holding company, receiving cash principally through sales of equities, borrowings, and dividends from its subsidiaries, certain of which are subject to dividend restrictions. The ability of insurance and reinsurance companies to underwrite insurance and reinsurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for the Company's subsidiaries are funds generated from insurance and reinsurance premiums, investment income, commission and fee income, capital contributions from the Company and proceeds from sales and maturities of portfolio investments. The principal expenditures are for payment of losses and LAE, operating expenses, commissions, and dividends to shareholders. At March 31, 1996, $798.6 million in total assets were comprised of the following: 71.0% cash and investments, 11.4% net reinsurance recoverables, 6.3% premiums receivable, 3.5% home office building and equipment, 5.8% deferred expenses (federal income taxes and policy acquisition costs), and 2.0% other assets. The Company's subsidiaries maintain liquid operating positions and follow investment guidelines that are intended to provide for an acceptable return on investment while preserving capital, maintaining sufficient liquidity to meet their obligations, and as to the Company's insurance subsidiaries, maintaining a sufficient margin of capital and surplus to ensure their unimpaired ability to write insurance and assume reinsurance. -12- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--Continued The following table provides a profile of the Company's fixed maturities investment portfolio by rating at March 31, 1996:
Amount Market Reflected on Percent of S&P's/Moody's Rating Value Balance Sheet Portfolio -------------------- ------ ------------- ---------- (dollar amounts in thousands) AAA/Aaa (including U.S. Treasuries of $15,266) $324,207 $324,207 61.5% AA/Aa 83,868 83,868 15.9 A/A 81,380 81,380 15.4 BBB/Baa 37,418 37,418 7.1 All other 788 788 0.1 -------- -------- ----- Total $527,661 $527,661 100.0% ======== ======== =====
Cash flow generated from operations for the three-month periods ended March 31, 1996 and 1995 was $15.8 million, and $28.5 million, respectively, amounts adequate to meet all obligations during the periods. In April 1992, the Company commenced paying quarterly cash dividends to shareholders. Cash dividends declared in the three-month periods ended March 31, 1996 and 1995 were $1,573,000 and $1,562,000, respectively. Reinsurance Frontier has entered into a stop loss reinsurance contract with Centre Reinsurance Company of New York ("Centre Re") for 1995 and future years. Under the terms of the agreement, Centre Re provides reinsurance protection within certain accident year and contract aggregate dollar limits for losses and LAE in excess of a predetermined ratio of these expenses to net premiums earned for a given accident year for all lines of business except bail, customs, license and permit, and miscellaneous surety bonds. The loss and LAE ratio above which the reinsurance provides coverage is 66%, 65%, and 64% for accident years 1995 through 1997, respectively. The maximum amount recoverable for an accident year is 175% of the reinsurance premium paid for the accident year, or $162,500,000 in the aggregate for the three years. During the first quarter 1996 and 1995 the Company ceded 13.5% and 14% of the earned premiums from the covered lines of business to Centre Re, respectively. -13- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations--Continued Litigation with the State of New York In December 1990, the New York State Court of Claims rendered a decision in favor of the Company holding that a State University of New York ("SUNY") medical school faculty member engaged in the clinical practice of medicine at a SUNY medical facility, corollary to such physician's faculty activities, was within the scope of such physician's employment by SUNY and was protected against malpractice claims arising out of such activity by the State of New York and not under the Company's medical malpractice policy. The decision was affirmed on appeal by the New York State Appellate Division in November 1991 and not appealed by the State. In July 1992, the State of New York enacted legislation eliminating medical school faculty members of SUNY engaged in the clinical practice of medicine at a SUNY medical facility from indemnification by the State with respect to malpractice claims arising out of such activity, retroactive to July 1, 1991. In an opinion filed on September 3, 1993 the Court of Claims of the State of New York held, inter alia, that the July 1992 legislation by the State of New York eliminating SUNY medical school faculty members engaged in the clinical practice of medicine, as part of their employment by SUNY, from indemnification by the State with respect to malpractice claims arising out of such activity was not to be applied retroactively. This decision was affirmed by the New York State Appellate Division in April 1994. Subsequently, in February 1995, the Appellate Division granted leave to Frontier and the State of New York to have the issues of Frontier's entitlement to recover its costs of defense and its costs of settlement ruled on by the State's highest Court, the New York Court of Appeals. In December 1995, the New York Court of Appeals ruled on this issue and concluded that Frontier was entitled to recoveries from the State for such medical malpractice claims. As a result of this decision, the Company believes the above-referenced decisions are controlling precedents and that it will benefit economically by not being ultimately responsible for certain claims against SUNY physicians for whom it presently carries reserves and be entitled to reimbursements of certain claims previously paid; accordingly, effective December 31, 1995, Frontier recorded a subrogation recoverable of approximately $19,000,000 representing the amount of claims already paid and the reserves currently held by Frontier on open cases that management believes are reimbursable by the State of New York. To the extent that the amount of the actual recovery varies, such difference will be reported in the period recognized. The Company is continuing to defend all SUNY faculty members against malpractice claims that have been asserted and is maintaining reserves therefor adjusted for the anticipated recoveries. Shareholder Litigation The Company has been served with several purported class actions alleging violations of federal securities laws by the Company and, in some cases, by certain of its officers and directors; certain actions also allege violations of the common law. The complaints relate to the Company's November 8, 1994 announcement of its third quarter financial results and allege that the Company previously had omitted and/or misrepresented material facts with respect to its earnings and profits. The Company believes the suits are without merit and has retained special legal counsel to contest them vigorously. -14- PART II - OTHER INFORMATION Item 1. Legal Proceedings Not applicable. Item 2. Changes in Securities Not applicable. Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information On February 29, 1996, the Company announced that it executed definitive agreements to acquire, through its wholly owned subsidiary, Frontier Insurance Company, 100% of the stock of United Capital Holding Company, and pursuant to a second and independent transaction a 33% ownership interest in Townsquare Title Insurance Services. The acquisition of United Capital for $30.92 million includes its respective subsidiaries, United Capital Insurance Company, United Capital Managers, Inc., and Fischer Underwriting Group, Incorporated. The transaction, subject to regulatory approval, is expected to close in May 1996. Item 6. Exhibits and Reports on Form 8-K a. Exhibits. None. b. Reports on Form 8-K. None. -15- SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. DATE: May 13, 1996 Frontier Insurance Group, Inc. ------------------------------ (Registrant) By: /s/ Walter A. Rhulen ---------------------------- Walter A. Rhulen Chairman of the Board and President and Acting Principal Financial Officer -16- EX-27 2 ARTICLE 7 FDS FOR 10-Q
7 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 0 527,661 0 24,381 0 0 564,703 2,532 6,730 21,155 798,649 383,231 110,241 0 0 0 0 0 131 232,136 798,649 58,294 7,786 691 25 34,443 12,381 5,791 12,740 3,476 9,264 0 0 0 9,264 0.71 0.71 294,393 37,239 0 213 25,117 303,268 3,034
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