ITEM 1. BUSINESS
GENERAL DESCRIPTION
GAINSCO, INC. is a holding company, the only operations of which are to provide administrative and financial services for its wholly-owned subsidiaries. The term "Company" as used in this document includes GAINSCO, INC. and its subsidiaries, unless the context otherwise requires. The Company was incorporated in Texas on October 11, 1978. It completed its initial public offering on November 14, 1986.
The Company is a property and casualty insurance company concentrating its efforts on certain specialty excess and surplus markets within the commercial auto, auto garage and general liability insurance lines. The Company's insurance operations are conducted through three insurance companies, General Agents Insurance Company of America, Inc., an Oklahoma corporation, MGA Insurance Company, Inc., a Texas corporation, and GAINSCO County Mutual Insurance Company, a Texas chartered company. The Company is approved to write insurance in 49 states and the District of Columbia on a non-admitted basis and in 43 states on an admitted basis. The Company markets its lines of insurance through 180 non-affiliated general agents' offices. Approximately 76% of the Company's gross premiums written during 1995 resulted from risks located in Arkansas, California, Florida, Georgia, Kentucky, Louisiana, Pennsylvania, Tennessee, Texas and West Virginia.
Excess and surplus lines of insurance are generally written on classes of risks which admitted insurers will not write; many of which are too small in premium size for larger companies to handle efficiently. For a description of the product lines presently written by the Company, see "Business-Product Lines." Because of the lack of availability of coverage from admitted insurers, premium levels for excess and surplus policies are generally higher than for standard coverages provided by admitted insurers. State insurance authorities permit excess and surplus lines companies greater rate and policy form flexibility than admitted companies. The Company, therefore, sets its policy premiums by applying its own judgment after consideration of the risks involved. Part of its analysis includes the review of historical premium rate and loss cost information as compiled and reported by independent rating bureaus. The Company's current premiums typically range from 160% to 275% of the loss costs published by the rating organizations. These loss cost multipliers approximate a range of 100% to 170% of manual rates.
The strategy of the Company is to identify various types of risks where it can price its coverages favorably and maximize the potential for underwriting profit. This strategy has resulted in changes in product mix and product design from time to time.
The Company is currently writing 20 classes of general liability on a claims-made basis. The remaining classes of general liability are written on an occurrence basis. At December 31, 1995, approximately 4% of the Company's general liability policies in force were on a claims-made basis. The claims-made form of policy provides that coverage applies only to claims which occur and claims that are made during the term of the policy. Once the policy period is over in claims-made policies, the approximate extent of the insurer's liability is known. The occurrence form of policy provides coverage for losses from claims which occurred during the policy period, regardless of when the claims are asserted. Under the claims-made basis the insurer has greater certainty in predicting the extent of its liability for claims. The Company has had no legal challenges on the enforceability of its claims-made policies where denial of coverage was made by the Company under the limited reporting period provision. The Company does have a 60 day grace period provision for reporting claims after the policy expiration date on its claims-made form of policy. The Company feels this provision remedies it against issues of enforceability in recent court decisions. In the reserving process, claims-made coverages are reserved separately from occurrence coverages. By examining the separate payout patterns, the average outstanding claims, and the distribution of claims by age of claim, IBNR reserves are set to reflect the coverage differences.
The Company, through a wholly-owned subsidiary, has developed and is marketing a computer software package related to general agency operations. Through another wholly-owned subsidiary, the Company is engaged in the premium finance business. Through MGA Insurance Company, Inc., a wholly-owned subsidiary, the Company earns fee revenues by acting as a servicing carrier for the Commercial Automobile Insurance Procedures of Arkansas, California, Louisiana, and Mississippi and the Commercial Assignment Procedure of Pennsylvania. Through GAINSCO County Mutual Insurance Company, the Company entered into fronting agreements with two non-affiliated insurance companies. The business written under these agreements is ceded 100% to reinsurers rated "A- (Excellent)" or better by A. M. Best and 100% of the liabilities are fully collateralized with pledged investment grade securities or letters of credit.
PRODUCT LINES
The Company's principal products serve certain specialty markets within the commercial auto, auto garage and general liability insurance lines. The following table sets forth, for each product line, gross premiums written (before ceding any amounts to reinsurers), percentage of gross premiums written for the periods indicated and the number of policies in force at the end of each period.
Commercial Auto The commercial auto coverage underwritten by the Company includes risks associated with local haulers of specialized freight (e.g. sand and gravel), tradespersons' vehicles and trucking companies (other than long haulers). Policies are written only for vehicles primarily operated within the state of garaging and one state beyond or 1,000 miles, whichever is the greater distance. Liability and physical damage coverages for these risks are currently limited to $1,000,000 per accident and $100,000 per unit, respectively.
Auto Garage The Company's auto garage program includes garage liability, garage keepers' legal liability and dealers' open lot coverages. The maximum limit on these coverages is $1,000,000. The Company targets its coverage to used car dealers, recreational vehicle dealers, automobile repair shops and wrecker/towing risks.
General Liability The Company underwrites general liability insurance with liability limits up to $1,000,000 for small businesses such as car washes, janitorial services, small contractors, apartment buildings, rental dwellings and retail stores. The Company does not underwrite professional liability, manufacturers' products liability, liquor liability, heavy contracting liability, oil well drilling liability, marine liability or municipality risks.
Other Lines The Company also issues a variety of other property and casualty insurance coverages including monoline property insurance. The Company's restricted commercial property policy covers fire, extended coverage, vandalism and malicious mischief for commercial establishments. This policy covers property damage up to $200,000.
REINSURANCE
The Company purchases reinsurance in order to reduce its liability on individual risks and to protect against catastrophe claims. A reinsurance transaction takes place when an insurance company transfers, or "cedes", to another insurer a portion or all of its exposure. The reinsurer assumes the exposure in return for a portion or all of the premium. The ceding of insurance does not legally discharge the insurer from its primary liability for the full amount of the policies, and the ceding company is required to pay the claim if the reinsurer fails to meet its obligations under the reinsurance agreement.
During 1993 and 1994, the Company reinsured its business under a 5% quota-share reinsurance treaty which was not renewed in 1995. Under the quota-share reinsurance treaties, the Company and its reinsurers share the premium and claims proportionately and the reinsurers pay the Company a ceding commission for their share of acquisition and operating expenses. In 1995 the Company commuted its 1993 and 1994 quota-share treaties thereby reassuming all risks and relieving the reinsurers of any further liability under those treaties.
In 1991 the Company wrote casualty policy limits of $1,000,000. For policies having effective dates of January 1 through September 30, 1991, the Company has excess reinsurance for 80% of casualty claims in excess of $200,000 but not exceeding $500,000 and 95% of casualty claims in excess of $500,000 up to the $1,000,000 policy limits. For policies with an effective date of October 1, 1991 through December 31, 1994, the Company has excess reinsurance for 100% of casualty claims exceeding $300,000 up to the $1,000,000 policy limits. For policies with an effective date of January 1, 1995 or
after, the Company has excess reinsurance for 100% of casualty claims exceeding $500,000 up to the $1,000,000 policy limits which results in a maximum net claim retention per risk of $500,000. The Company's maximum net claim retention per risk is $285,000 for policies with an effective date of January 1, 1991 through September 30, 1991 and $300,000 for policies with an effective date of October 1, 1991 through December 31, 1994.
Excess casualty reinsurance carried by the Company includes "extra-contractual obligations" coverage. This coverage protects the Company against claims arising out of certain legal liability theories not directly based on the terms and conditions of the Company's policies of insurance. Extra-contractual obligation claims are covered 90% under the excess casualty reinsurance treaty up to its respective limits. The Company carries catastrophe property reinsurance to protect it against catastrophe occurrences for 95% of the property claims which exceed $500,000 but do not exceed $8,000,000. From time to time the Company makes use of facultative reinsurance to cede unusual risks on a negotiated basis.
The Company has signed contracts in force for its reinsurance treaties for all years through 1995. The Company has written confirmations from reinsurers for 1996 from its reinsurance intermediaries regarding the basic terms and provisions under which they will cede the Company's risks, but, as of the date hereof, formal reinsurance treaty contracts with these reinsurers have not been executed. It is customary in the industry for insurance companies and reinsurers to operate under such commitments pending the execution of formal reinsurance treaties. No assurance can be given that such reinsurance treaties will be executed or, if executed, that the terms and provisions thereof will not be modified.
The Company is operating under excess casualty reinsurance treaties with two reinsurance companies, each of which reinsures a given percentage of ceded risks. The Company's excess reinsurance is provided in varying amounts by reinsurers rated "A (Excellent)" or better by A.M. Best Company (Best's). See "Business--Rating." The following table identifies each such reinsurer and sets forth the percentage of the coverage assumed by each of them:
MARKETING AND DISTRIBUTION
The Company markets its insurance products through 180 non-affiliated general agents' offices, commonly referred to as wholesale agents. These general agents each represent several insurance companies, some of which may compete with the Company. The general agents solicit business from
independent local agents or brokers, commonly referred to as retail agents, who are in direct contact with insurance buyers.
The Company has elected to utilize general agents to market its insurance products in order to avoid the fixed costs of a branch office system. These general agents have experience in the specialty lines of coverages in which the Company concentrates and, in many instances, a long business history with members of the Company's management. The Company requires that its general agents have a specified level of errors and omissions insurance coverage, which indirectly protects the Company against certain negligence on the part of general agents. The Company performs annual financial reviews and does limited quarterly reviews on each of its agent entities. The Company has errors and omissions insurance coverage to protect against negligence on the part of its employees.
The Company has developed underwriting manuals to be used by its general agents. The general agents are authorized to commit the Company to provide insurance if the risks and terms involved in the particular coverage are within the underwriting guidelines set forth in the Company's underwriting manuals. The Company has devoted extensive resources to the development of detailed underwriting manuals so that its general agents can consistently price and select risks, and the Company believes its manuals have been a significant factor in consistently producing superior underwriting results. All manuals stipulate minimum rates to be charged for the various classes of coverage offered.
The general agents are compensated on a commission basis which varies by line of business. In addition, the general agency contracts between the Company and its general agents contain significant profit contingency inducements designed to reward those general agents with superior claim ratios who write certain minimum levels of premium with the Company. The general agents also retain a portion of the payment made by the insured as policy fee in connection with the issuance of most of the Company's non- admitted policies.
Certain coverages, such as auto liability, may only be written in some states by companies with the authority to write insurance on an admitted basis in such states. The Company currently is approved to write insurance on an admitted basis in 41 states and plans to seek authority to write insurance on an admitted basis in virtually all of the remaining states, but no assurance can be given of when or if this goal will be reached.
UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
The Company maintains reserves for the payment of claims and claim adjustment expenses for both reported and unreported claims. Claim reserves are estimates, at a given point in time, of amounts that the Company expects to pay on incurred claims based on facts and circumstances then known. The amount of claim reserves for reported claims is primarily based upon a case-by-case evaluation of the type of claim involved, the circumstances surrounding the claim, and the policy provisions relating to the type of claim. The amount of claim reserves for unreported claims and case reserve development is determined on the basis of historical information and anticipated future conditions by lines of insurance and actuarial review. Reserves for claim adjustment expenses are intended to cover the ultimate costs of settling claims, including investigation and defense of lawsuits resulting from such claims. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical
reserve results.
Ultimate liability may be greater or lower than current reserves. Reserves are continually monitored by the Company using new information on reported claims and a variety of statistical techniques. The Company does not discount to present value that portion of its claim reserves expected to be paid in future periods.
The following table sets forth the changes in unpaid claims and claim adjustment expenses, net of reinsurance cessions, as shown in the Company's consolidated financial statements for the periods indicated:
(1) The Company commuted its 1993 and 1994 quota-share reinsurance treaties in 1995, respectively, and thereby reassumed all risks and the related unpaid claims and claim adjustment expenses of $2,223,000 (see note 4 to the consolidated financial statements). This was accounted for using the paid claim method, whereby unpaid claims and claim adjustment expenses were increased $2,223,000 and paid claims and claim adjustment expenses were decreased $2,223,000, thus preventing distortion of claims and claim adjustment expenses incurred.
The following table sets forth, as of December 31, 1995, 1994, and 1993, differences between the amount of net unpaid claims and claim adjustment expenses reported in the Company's statements, prepared in accordance with statutory accounting principles ("SAP"), and filed with the various state insurance departments, and those reported in the consolidated financial statements prepared in accordance with generally accepted accounting principles ("GAAP"):
The following table represents the development of GAAP balance sheet reserves for the period 1985 through 1995. The top line of the table shows the reserves for unpaid claims and claim adjustment expenses for all current and prior years as recorded at the balance sheet date for each of the indicated years. The reserves represent the estimated amount of claims and claim adjustment expenses for claims arising in the current and all prior years that are unpaid at the balance sheet date, including claims that have been incurred but not yet reported to the Company.
The upper portion of the following table shows the net cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. The lower portion of the table shows the reestimated amount of the previously recorded net reserves based on experience as of the end of each succeeding year, including net cumulative payments made since the end of the respective year. For example, the 1990 liability for net claims and claim adjustment expenses reestimated five years later (as of December 31, 1995) was $29,022,000 of which $26,970,000 has been paid, leaving a net reserve of $2,052,000 for claims and claim adjustment expenses in 1990 and prior years remaining unpaid as of December 31, 1995.
"Net cumulative redundancy (deficiency)" represents the change in the estimate from the original balance sheet date to the date of the current estimate. For example, the 1990 net reserve for unpaid claims and claim adjustment expenses indicates a $116,000 net deficiency from December 31, 1990 to December 31, 1995 (five years later). Conditions and trends that have affected development of liability 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 table.
The Company has an indicated deficiency of approximately 1% of initial reserves for the 1994 year. Net reserves at December 31, 1995 were approximately $70,361,000, which the Company believes are adequate.
OPERATING RATIOS
CLAIMS, EXPENSE AND COMBINED RATIOS: Claims and expense ratios are traditionally used to interpret the underwriting experience of property and casualty insurance companies.
Statutory Accounting Principles (SAP) Basis - Claims and claim adjustment expenses are stated as a percentage of premiums earned because claims may occur over the life of a particular insurance policy. Underwriting expenses on a SAP basis are stated as a percentage of net premiums written rather than premiums earned because most underwriting expenses are incurred when policies are written and are not spread over the policy period. Underwriting profit margin is achieved when the combined ratio is less than 100%. The Company's claims, expense and combined ratios and the property and casualty industry's claims, expense and combined ratios, both on a SAP basis, are shown in the following table:
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(1) The property and casualty industry as a whole, not companies with comparable lines of coverage, was used in the calculation of these ratios by A.M. Best Company. 1995 is estimated.
The Company has continued to produce favorable claims ratios when compared to the industry. This has resulted from the Company maintaining its high underwriting standards and closely monitoring its pricing structure and adjusting it when needed. Since 1988 the Company has targeted, through its pricing decisions, a claims ratio range of 50-55% and a combined ratio range of 85-90%. The Company has been very successful in attaining these goals and when results have fallen outside of the range, it has been on the favorable side. The unfavorable variance to the industry with regard to the expense ratios is because of the specific lines that the Company writes and the profit contingency inducements. The Company's commission expense ratio is higher than the average of the overall industry on a net premiums written basis. Its higher expense ratios are more than offset by significantly lower claims ratios (favorable by an estimated 31.3 percentage points in 1995 and 33.2 percentage points in 1994, when compared to the industry) which results in the highly favorable combined ratio variances of an estimated 23.2 and 24.8 percentage points in 1995 and 1994, respectively. It should be noted that the Company ratios relate only to insurance operations. The holding company provides administrative and financial services for its wholly-owned subsidiaries. The allocation of the holding company's expenses solely to its insurance companies would have an impact on their results of operations and would also affect the ratios presented.
Generally Accepted Accounting Principles (GAAP) Basis - Claims and claim adjustment expenses are stated as a percentage of premiums earned as they are on a SAP basis. However, earned premiums include net policy fees earned whereas on a SAP basis policy fees earned are recorded on a gross basis. The GAAP expense ratio is based on premiums earned and includes the change in policy acquisition costs and underwriting expenses. Other differences include the treatment of the allowance for doubtful accounts. The following table presents the Company's claims, expense and combined ratios on a GAAP basis:
PREMIUM TO SURPLUS RATIO: The following table shows, for the periods indicated, the Company's statutory ratios of statutory net premiums written to statutory policyholders' surplus. While there is no statutory requirement which establishes a permissible net premiums written to surplus ratio, guidelines established by the National Association of Insurance Commissioners (NAIC) provide that this ratio should be no greater than 3 to 1.
INVESTMENTS
The Company's investment portfolio is under the direction of the Board of Directors acting through the Investment Committee. The Investment Committee establishes the Company's investment policy, which is to maximize after-tax yield while maintaining safety of capital together with adequate liquidity for insurance operations. The investment portfolio consists primarily of fixed maturity tax-exempt municipal bonds and United States Government securities. The Company does not invest in high yield ("junk") securities. As of December 31, 1995 and 1994, the Company had no high-yield fixed maturity securities nor non-performing fixed maturity securities. Furthermore, the Company has never bought nor sold either high-yield fixed maturity securities or derivatives. The Company does not actively trade its bonds, however, it does classify certain bond securities as available for sale. The Company holds no equity securities in issuers of high-yield debt securities.
The following table sets forth, for the periods indicated, the Company's investment results, before income tax effects:
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(1) Average investments is the average of beginning and ending investments at amortized cost, computed on an annual basis.
(2) Includes taxable and tax-exempt securities.
The following table sets forth the composition of the investment portfolio of the Company.
The maturity distribution of the Company's investments in fixed maturities at December 31, 1995 and 1994, is as follows:
RATING
A.M. Best Company ("Best's"), publisher of Best's insurance reports, property-casualty, has currently assigned an "A+ (Superior)" pooled rating to the Company. Best's ratings are based on an analysis of the financial condition and operation of an insurance company as they relate to the industry in general. Best's generally reviews its ratings on a quarterly basis.
GOVERNMENT REGULATION
The Company's insurance companies are subject to varied governmental regulation in the states in which they conduct business. Such regulation is vested in state agencies having broad administrative power dealing with all aspects of the Company's business and is concerned primarily with the protection of policyholders rather than shareholders. It is the Company's position that Proposition 103, which was enacted by the State of California and imposes a roll-back of property and casualty insurance rates, does not apply to the premium writings of the Company since the Company only writes in the surplus lines market in California.
The Company is also subject to statutes governing insurance holding company systems in the states of Oklahoma and Texas. These statutes require the Company to file periodic information with the state regulatory authorities, including information concerning its capital structure, ownership, financial condition and general business operation. These statutes also limit certain transactions between the Company and its insurance companies, including the amount of dividends which may be declared and paid by the insurance companies (see note 6 to the consolidated financial statements). Additionally, the Texas statutes restrict the ability of any one person to acquire 10% or more of the Company's voting securities without prior regulatory approval while the Oklahoma statute restricts the ability of any one person to acquire 15% or more of the Company's voting securities without prior regulatory approval.
COMPETITION
The property and casualty insurance industry is highly competitive, with over 2,500 insurance companies transacting business in the United States. The Company underwrites specialty lines of
insurance on risks not generally insured by many of the large standard property and casualty insurers. However, few barriers exist to prevent property and casualty insurance companies from entering into the Company's segments of the industry. In such event, the Company would be at a competitive disadvantage because many of these companies have substantially greater financial and other resources and could offer a broader variety of specialty risk coverages. The Company's competitive advantages are 1) specialized expertise in its product lines which enables it to price with a great deal of accuracy and 2) superior service in underwriting and claims handling which provides its agents with a competitive advantage and a stable market.
EMPLOYEES
As of December 31, 1995, the Company employed 184 persons, of which 11 were officers, 138 were staff and administrative personnel, and 35 were part-time employees.
EXECUTIVE OFFICERS OF THE REGISTRANT
Information concerning the executive officers of the Company as of February 29, 1996 is set forth below:
Mr. Joseph D. Macchia is the founder of the Company and has served as Chairman of the Board, President and Chief Executive Officer since its formation in 1978. Mr. Macchia has been engaged in the property and casualty insurance business since 1961.
Mr. Jack L. Johnson has served as Senior Vice President of the Company since 1984. From 1979 to 1984, Mr. Johnson served as a Vice President of the Company. Mr. Johnson has been engaged in the property and casualty insurance business since 1962.
Mr. Daniel J. Coots has served as Vice President, Treasurer and Chief Financial Officer of the Company since 1987. In 1991 Mr. Coots was promoted to Senior Vice President. Mr. Coots has been engaged in the property and casualty insurance business since 1983.
Mr. Norman Alberigo has served as Vice President of the Company since 1988. From 1986 to 1988, Mr. Alberigo served as Assistant Vice President of the Company. Mr. Alberigo has been engaged in the property and casualty insurance business since 1970.
Mr. Mark D. Brissman has served as Vice President of the Company since October of 1994. From 1989 to 1994, Mr. Brissman was with State Farm Insurance Company in the position of Senior Associate Actuary. Mr. Brissman has been engaged in the property and casualty insurance business since 1978.
Mr. J. Landis Graham has served as Vice President of the Company since September of 1993. From 1988 to 1993, Mr. Graham was with Maryland Casualty Company in the position of Claim Manager. Mr. Graham has been engaged in the property and casualty insurance business since 1976.
Ms. Carolyn E. Ray has served as Vice President of the Company since 1986. From 1984 to 1985, Ms. Ray served as Assistant Vice President of the Company. Ms. Ray has been engaged in the property and casualty insurance business since 1976.
Mr. Sam Rosen has served as the Secretary of the Company since 1983. Mr. Rosen is a partner with the law firm of Shannon, Gracey, Ratliff & Miller, L.L.P. He has been a partner in that firm or its predecessors since 1966.
ITEM 2.
ITEM 2. PROPERTY
The Company owns its Corporate offices which provide approximately 25,000 square feet of office space, and additionally provides parking. Future expansion will be possible by converting the parking area into office space.
The Company owns a 3.28 acre tract of land in Fort Worth, Texas and all improvements located thereon, including a 10,000 square foot office building, which previously served as its corporate offices. The Company currently has this property under lease.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
In the normal course of its operations, the Company has been named as defendant in various legal actions seeking payments for claims denied by the Company and other monetary damages. In the opinion of the Company's management the ultimate liability, if any, resulting from the disposition of these claims will not have a material adverse effect on the Company's consolidated financial position. The Company's management believes that unpaid claims and claim adjustment expenses are adequate to cover liabilities from claims which arise in the normal course of its insurance business.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
The Company's Common Stock is listed on the American Stock Exchange (Symbol: GNA). The following table sets forth for the fiscal periods indicated the high and low closing sales prices per share of the Common Stock as reported by the American Stock Exchange, as adjusted for stock dividends. The prices reported reflect actual sales transactions on the American Stock Exchange.
In 1991 the Company adopted a policy to declare quarterly cash dividends of $.01 per share until further action by the Board of Directors. In November of 1995, the Board of Directors increased the quarterly cash dividend to $.0125 per share. Cash dividends of $.01 per share were granted to shareholders of record on March 31, June 30, September 30 and December 31, 1993 and 1994 and March 31, June 30 and September 30, 1995. Cash dividends of $.0125 per share were granted to shareholders of record on December 31, 1995. On February 20, 1996, the Company declared a $.0125 per share cash dividend payable to shareholders of record on March 29, 1996. The Company depends on cash flow from cash dividends paid by its subsidiaries.
Stock dividends of 5% were granted to shareholders of record on March 31 and September 30, 1993, 1994 and 1995. In November, 1995, the Board of Directors discontinued the semi-annual stock dividends.
As of February 29, 1996, there were 633 shareholders of record of the Company's Common Stock.
ITEM 6.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The selected consolidated financial data presented below for, and as of the end of each of the years ended December 31, have been derived from the consolidated financial statements of the Company which have been audited by KPMG Peat Marwick LLP, independent certified public accountants. The consolidated balance sheets as of December 31, 1995 and 1994, and the consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995, and the report thereon are included elsewhere in this document. The information presented below should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations," consolidated financial statements and the notes thereto, and the other financial information included herein.
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(1) Excludes premiums of $5,626,000 in 1995, $5,056,000 in 1994, $5,418,000 in 1993, $6,942,000 in 1992 and $4,452,000 in 1991 from the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania under which a subsidiary of the Company is a servicing carrier.
(2) Includes after tax net realized gains of $70,000, $87,000, $3,000, $114,000 and $45,000 for 1995, 1994, 1993, 1992 and 1991, respectively.
(3) All years retroactively adjusted for stock dividends and stock splits effected as stock dividends as follows: two 5% in 1995, two 5% in 1994, two 5% in 1993, one 5% and one 50% in 1992 and one 50% in 1991.
(4) Certain reclassifications have been made to years prior to 1993 to comply with Statement of Financial Accounting Standards No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" which the Company implemented in the first quarter of 1993.
(5) Based on number of shares outstanding at the end of each year, retroactively adjusted for stock dividends and stock splits effected as stock dividends.
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BUSINESS OPERATIONS
Net income in 1995 increased 16% to $17,627,855, or $.81 per share compared to 1994 net income of $15,168,800, or $.70 per share and 1993 net income of $13,240,254, or $.61 per share. The Company recorded a 22% return on beginning equity and a GAAP combined ratio of 82.9% in 1995.
The discussion below primarily relates to the Company's insurance operations, although the selected consolidated financial data appearing elsewhere is on a consolidated basis. The revenue item "Insurance services" includes net revenues from the computer software operation, the plan servicing operation and the premium finance operation. The expense item "Underwriting and operating expenses" includes the operating expenses of these operations.
RESULTS OF OPERATIONS
Gross premiums written in 1995 of $108,071,871 were 10% above the $98,163,684 recorded in 1994. In 1994, gross premiums written increased 15% over the 1993 level. The following table compares the product line mix between the years for gross premiums written:
COMMERCIAL AUTO increased 8% in 1995 from 1994 after recording a 13% increase in 1994 from 1993. Significant growth continued for this product in Kentucky and Pennsylvania in 1995, as it had in 1994, with New Jersey contributing in 1995. The AUTO GARAGE product line produced a 26% increase in 1995 after a 25% increase in 1994. Florida and Pennsylvania continued to provide significant growth in 1995, as was the case in 1994. Entry into the Connecticut market and significant growth in Kentucky in 1995 also contributed. The GENERAL LIABILITY line continues to record increases with 3% in 1995 after an increase of 14% in 1994. For 1995, gross written percentages by significant state/product line are as follows: Texas commercial auto (23%), Pennsylvania commercial auto (7%), Texas general liability (7%), and Kentucky commercial auto (5%) with no other individual state/product line comprising 5% or more. The persistency rate increased for all major product lines, overall the rate went from 44% in 1994 to 47% in 1995. Premiums earned increased 15% in 1995 to $97,254,816 and increased 11% in 1994 to $84,394,874 as a direct result of the continued increase in writings.
Net investment income increased 19% in 1995 over 1994 and increased 12% in 1994 over 1993.
These increases are the result of growth in the portfolio due to continued positive cash flows from operations. The return on average investments for 1995 is 4.8% versus 4.6% in 1994 and 4.8% in 1993. The increase from 1994 to 1995 is attributable to the reinvestment of maturing securities at higher yields. The decrease from 1993 to 1994 is related to the Company maintaining larger than usual balances in short-term funds (which have lower yields than bonds), during the third quarter of 1994 in anticipation of an increase in interest rates. Inflation can cause interest rates to increase, which would cause the Company's interest income to increase. Because of the Company's profitability in the underwriting operations, the Company achieves the highest after tax net income by investing predominantly in tax-exempt securities. At December 31, 1995, 89% of the Company's investments were in investment grade tax-exempt bonds with an average maturity of approximately 3.5 years. Since the majority of the Company's investments are tax-exempt, the yields appear lower than those of the industry; however, the industry as a whole has a significantly larger percentage of investments in taxable securities with substantially longer maturities. On a taxable equivalent basis the return on average investments was 6.6% in 1995, 6.4% in 1994 and 6.6% in 1993. The Company has the ability to hold its fixed maturity securities until their maturity date. The Company does not actively trade its bonds, however, it does classify certain bond securities as available for sale. At December 31, 1995, approximately 5% of the Company's investments were in U.S. Treasury securities and 5% were in short-term money market funds. The Company has not and does not intend to invest in derivatives or high-yield ("junk") securities, nor equity securities in issuers of "junk" debt securities. The Company does not have any non-performing fixed maturity securities.
Insurance services revenue increased $126,152 from 1994 to 1995 following a decrease of $331,175 in 1994 from 1993. The table below presents the components.
Revenues in the computer software operation were 15% below 1994 following an increase in revenues of 9% in 1994 over 1993. New management was brought in during the third quarter of 1995 to improve this operation.
Revenues from the premium finance operation are up 83% in 1995 over the 1994 level which was 3% below the 1993 level. Intensified marketing efforts implemented in 1995 account for the increase in 1995. The decrease in 1994 was the result of the run- off of a book of business produced in 1993. Amounts financed in 1995 were 84% above 1994 which had increased 48% over 1993. Premium finance notes receivable were approximately $2,015,000 at December 31, 1995 versus $977,000 at December 31, 1994 and the average return was 19% for 1995 versus 18% in 1994 and 13% in 1993.
Plan servicing revenues from commercial automobile plans increased 2% in 1995 over 1994 following a 21% decrease in 1994. The Louisiana plan continued to depopulate in 1995, but its decrease was more
than offset by the addition of the California plan in the second quarter of 1995. The decrease in 1994 was largely due to a decrease in premium writings in the Louisiana plan. In 1994, the Pennsylvania and Mississippi plans recorded significant increases in premium writings but fell short of the decrease in the Louisiana plan. The Company continues to pursue management contracts with other states to administer their commercial automobile plans.
Claims and claim adjustment expenses (C & CAE) increased $7,276,443 in 1995 over 1994 and $1,949,774 in 1994 over 1993. The increase in both years was largely due to the Company's increased levels of writings. The C & CAE ratio was 49.8% in 1995, 48.8% in 1994 and 51.7% in 1993. While the Company writes a material amount of business in areas where catastrophes have recently occurred, the gross and net claims incurred from these events were immaterial because the Company primarily writes liability coverages. Five separate hailstorms, which occurred during the second quarter of 1995, accounted for approximately .9 points of the 1995 C & CAE ratio. With regard to environmental and product liability claims, the Company has an immaterial amount of exposure. The Company does not provide environmental impairment coverage and excludes pollution and asbestos related coverages in its policies. Less than .1% of the Company's premium writings are for product liability coverages and this is limited to non-manufacturing risks only. Inflation impacts the Company by causing higher claim settlements than may have originally been estimated. Inflation is implicitly reflected in the reserving process through analysis of cost trends and review of historical reserve results.
Commissions increased in 1995 over 1994 as a result of the increase in written premiums between these years and as a result of commission income from the 1994 5% quota share treaty (which was not renewed in 1995) only reducing commission expense approximately $200,000 in 1995, whereas it decreased commission expense in 1994 by approximately $2,364,000. The increase in commissions from 1993 to 1994 is directly related to the increase in gross premiums written. The ratio of commissions to gross premiums written increased to 20% in 1995 from the 19% level in 1994 and 1993 as a result of the decrease in commission income in 1995 discussed previously. The ratio of commissions to premiums earned was 23% for 1995 as compared to 22% for the 1994 and 1993 years. The increase in 1995 was related to the decrease in commission income in 1995.
The change in deferred policy acquisition costs and deferred ceding commission income (DAC) resulted in a net increase to income of $2,284,138, $1,321,946 and $305,495 for 1995, 1994 and 1993, respectively. The change in the amount of the increase in DAC between the comparable periods is directly related to the rate at which unearned premiums are growing as a result of the growth rate of premium writings. Since DAC (asset) is a function of unearned premiums (liability), an increase in the growth rate of unearned premiums would correspondingly result in an increase in the growth rate of DAC and vice versa. The ratio of DAC to net unearned premiums was 25.5%, 25.4% and 25.3% at December 31, 1995, 1994 and 1993, respectively.
Underwriting and operating expenses increased for each of the years, but remain in a 16-17% range (as a percent of premiums earned and insurance services revenues) as they have been for the previous two years.
The effective tax rate of the Company was 26% in 1995, 26% in 1994 and 21% in 1993. The 21% rate in 1993 is primarily due to a tax benefit generated from the exercise of stock options by insiders during the first quarter of 1993. This was a permanent tax difference which was deducted for tax but not for book purposes. For the Company, the fresh start adjustment (tax benefit) was immaterial for all years presented. A reconciliation between income taxes computed at the Federal statutory rates and the
provision for income taxes is included in Note 5 of Notes to Consolidated Financial Statements.
The cumulative effect of change in accounting principle is the result of the Company implementing Financial Accounting Standards Board Statement 109 "Accounting for Income Taxes" on a cumulative basis during the first quarter of 1993. The major portion of the $216,278 deferred tax benefit is attributable to the increase in the tax discount of unpaid claim and claim adjustment expenses.
The Company has, for the 11th consecutive year, achieved a return on beginning equity of at least 22% and for the tenth consecutive year recorded a GAAP combined ratio at 86% or below. For 1996 the Company is targeting premiums written to be within a $110-120 million range with a GAAP combined ratio of 82-85% and a return on beginning equity of 20-22%. While the Company is optimistic these forward-looking goals can be attained no assurances can be given they will occur.
LIQUIDITY AND CAPITAL RESOURCES
The primary sources of the Company's liquidity are funds generated from insurance premiums, net investment income and maturing investments. The short-term investments and cash are intended to provide adequate funds to pay claims without selling fixed maturity investments. At December 31, 1995, the Company held short-term investments and cash of $7,750,020 which the Company believes is adequate liquidity for the payment of claims and other short-term commitments.
With regard to long term liquidity, the average duration of the investment portfolio is approximately 2.8 years. The fair value of the fixed maturity portfolio at December 31, 1995 was $2,772,216 above amortized cost. With regard to the availability of funds to the holding company, see Note 6 of Notes to Consolidated Financial Statements for restrictions on the payment of dividends by the insurance companies.
The Company's fronting arrangements require that it maintain escrow accounts to assure payment of the unearned premiums and unpaid claims and claim adjustment expenses relating to risks insured through such fronting arrangements and assumed by the Company. At December 31, 1995 and 1994, the balance in such escrow accounts totalled approximately $1,100,000. In addition, various insurance departments of states in which the Company operates require the deposit of funds to protect policyholders within those states. At December 31, 1995 and 1994, the balance on deposit for the benefit of such policyholders totalled approximately $11,860,000 and $11,010,000, respectively.
The increase in investments is primarily attributable to continued positive cash flows from operating activities which are the result of continued and substantial underwriting profits. Premiums receivable increased as a result of the large increase in premium writings late in the fourth quarter of 1995 over the amounts written in the comparable 1994 period. Also contributing to this increase was the large increase in premium finance notes receivable mentioned previously. Deferred policy acquisition costs (DAC) increased primarily as a result of the increase in premium writings. DAC is 25.5% and 25.4% of unearned premiums at December 31, 1995 and 1994, respectively.
Unpaid claims and claim adjustment expenses have increased as a result of an increase in incurred but not reported reserves under the excess casualty treaty and because of the increase in writings. Unearned premiums increased because of the increase in writings. Reinsurance balances payable decreased largely due to the commutation in 1995 of the 5% quota share treaty that was in effect for the 1993 and 1994 years. Under the terms of the treaty, the Company held the funds due to the reinsurers and recorded them as reinsurance balances payable. When the Company commuted this treaty the liability was released. Drafts payable decreased because drafts were issued late in the fourth quarter of
1994 to pay several large claims, there were no exceptionally large claim settlements made late in 1995. The note payable decreased as a result of principal repayment during the second quarter (see Note 3 of Notes to Consolidated Financial Statements). The Company's liquidity position remains strong as a result of cash flows from underwriting and investment activities.
The increase in common stock is largely the result of the 5% stock dividends paid on April 14 and October 16, 1995. This also accounts for the increase in additional paid-in capital and the decrease in retained earnings.
Financial Accounting Standards Board Statement 115, "Accounting for Certain Investments in Debt and Equity Securities" was adopted by the Company in the first quarter of 1994. This Statement specifies the accounting and reporting for investments in equity securities that have readily determinable fair values and for all investments in debt securities. Under this statement, the Company classifies certain debt securities as "available for sale" and records them at fair value. As a result of the "Implementation Guide" for Statement 115, in December, 1995, the Company transferred certain fixed maturity securities from the held to maturity classification to the available for sale classification. The amortized cost of these transfers was $18,519,856 with unrealized gains of $93,803, net of tax.
The unrealized gains or losses on fixed maturities available for sale are presented, net of tax, as a separate component of shareholders' equity (see Note 2 of Notes to Consolidated Financial Statements). The net unrealized gain on the fixed maturities classified as held to maturity was $1,120,527 at December 31, 1995.
In October 1994, the FASB issued Statement 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." The Statement was effective for years ending after December 15, 1994 and did not have any impact on the financial statements.
In March 1995, the FASB issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The Statement was effective for years ending after December 15, 1995, and did not have any impact on the financial statements.
In October 1995, the FASB issued Statement 123, "Accounting for Stock-Based Compensation." The Statement is effective for years beginning after December 15, 1994, if awards are granted in the fiscal year. The Company did not grant any awards during 1995.
The Company is not aware of any current recommendations by the regulatory authorities, which if implemented, would have a material effect on the Company's liquidity, capital resources or results of operations. The Company's statutory capital significantly exceeds the benchmark capital level under the Risk Based Capital formula.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The following consolidated Financial Statements are on pages 33 through 56:
Page ---- Report of Management 33 Independent Auditors' Report 34
Consolidated Balance Sheets as of December 31, 1995 and 1994 35-36
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994, and 1993 37
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994, and 1993 38-39
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994, and 1993 40-41
Notes to Consolidated Financial Statements December 31, 1995, 1994, and 1993 42-56
The following Consolidated Financial Statements Schedules are on pages 57 through 68:
Schedule Page -------- ----
Independent Auditors' Report on Supplementary Information 57
I Summary of Investments 58
II Condensed Financial Information of the Registrant 59-65
III Supplementary Insurance Information 66
IV Reinsurance 67
VI Supplemental Information 68
ITEM 9.
ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this item with regard to Executive Officers is included in Part 1 of this report under the heading "Executive Officers of the Registrant".
The other information required by this item is hereby incorporated by reference from the Registrant's definitive 1996 Proxy Statement.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is hereby incorporated by reference from the Registrant's definitive 1996 Proxy Statement.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this item is hereby incorporated by reference from the Registrant's definitive 1996 Proxy Statement.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this item is hereby incorporated by reference from the Registrant's definitive 1996 Proxy Statement.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as part of the report:
1. The following financial statements filed under Part II, Item 8:
Independent Auditors' Report
Consolidated Balance Sheets as of December 31, 1995 and 1994
Consolidated Statements of Operations for the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 1995, 1994 and 1993
Consolidated Statements of Cash Flows for the Years Ended December 31, 1995, 1994 and 1993
Notes to Consolidated Financial Statements, December 31, 1995, 1994 and 1993
2. The following Consolidated Financial Statement Schedules are filed Under Part II, Item 8:
Schedule Description -------- -----------
I Summary of Investments
II Condensed Financial Information of the Registrant
III Supplementary Insurance Information
IV Reinsurance
VI Supplemental Information
3. The following Exhibits:
Exhibit No.
3.1 Restated Articles of Incorporation of Registrant (Exhibit 3.1)(1)
3.2 Articles of Amendment to the Articles of Incorporation dated June 9, 1988 (Exhibit 3.2)(2)
3.3 Restated Bylaws of Registrant (Exhibit 3.2)(1)
3.4 Amendment to the Bylaws dated June 10, 1988 (Exhibit 3.4)(2)
3.5 Sections 2.06 and 2.07 of the Bylaws as Amended on May 25, 1993 (Exhibit 3.5)(7)
3.6 Articles of Amendment to Articles of Incorporation effective August 13, 1993 (Exhibit 3.6)(7)
4.2 Rights Agreement, dated as of March 3, 1988, between the Registrant and Team Bank/Fort Worth, N.A. (incorporated by reference to Exhibit 1 to the Registrant's Current Report on Form 8-K filed with the Securities and Exchange Commission on March 15, 1988) (Exhibit 4.2)(3)
4.3 Amendment No. 1 dated as of March 5, 1990 to Rights Agreement dated as of March 3, 1988 between GAINSCO, INC. and Team Bank as Rights Agent (Exhibit 4.2)(5)
4.4 Amendment No. 2 dated as of May 25, 1993 to Rights Agreement between GAINSCO, INC. and Society National Bank (successor to Team Bank (formerly Texas American Bank/Fort Worth, N.A.)), as Rights Agent (Exhibit 4.4)(7)
4.5 Stock certificate as amended to give notice of Amendment No. 2 to Rights Agreement (Exhibit 4.5)(7)
10.2 (Restated) Incentive Compensation Plan of the Registrant (Exhibit 10.2)(2)
10.14 Profit Sharing Plan and Trust of GAINSCO, INC. effective January 1, 1985, as amended, and Adoption Agreement (Exhibit 10.14)(4)
10.16 1990 Stock Option Plan of the Registrant (Exhibit 10.16)(4)
10.17 Loan Agreement and Amendment No. 1 to Loan Agreement between GAINSCO Service Corp., GAINSCO, INC. and BankOne Texas, N.A. (Exhibit 10.17)(6)
10.18 Promissory Note made by GAINSCO Service Corp. payable to BankOne, Texas, N.A. (Exhibit 10.18)(6)
10.19 Guaranty Agreement executed by GAINSCO, INC., in favor of BankOne Texas, N.A. (Exhibit 10.19)(6)
10.20 Negative Pledge Agreement executed by GAINSCO, INC. (Exhibit 10.20)(6)
10.21 Negative Pledge Agreement executed by GAINSCO Service Corp. (Exhibit 10.21)(6)
10.23 Surplus Debenture issued by GAINSCO County Mutual Insurance Company. (Exhibit 10.23)(6)
10.24 Management Contract between GAINSCO County Mutual Insurance Company and GAINSCO Service Corp. (Exhibit 10.24)(6)
10.25 Certificate of Authority and accompanying Commissioner's Order granting Certificate of Authority, allowing for charter amendments and extension of charter (Exhibit 10.25)(6)
10.26 Contract between GAINSCO, INC. and International Business Machines Corporation covering the Company's acquisition and installation of the WINS software package and of the AS/400 hardware and systems software required to support it for use by the Company (Exhibit 10.26)(7)
10.27 Amendment to Surplus Debenture issued by GAINSCO County Mutual Insurance Company (Exhibit 10.27)(7)
10.28 Agreement dated August 26, 1994 appointing Continental Stock Transfer & Trust Company transfer agent and registrar (Exhibit 10.28)(8).
10.29 Amendment No. 3 to Rights Agreement and appointment of Continental Stock Transfer & Trust Company as Successor Rights Agent, made September 30, 1994 (Exhibit 10.29)(8).
10.30 Second Amendment to Loan Agreement among GAINSCO Service Corp., GAINSCO, INC. and BankOne Texas, N.A. made on July 26, 1990 (Exhibit 10.30)(8)
10.31 1995 Stock Option Plan of the Registrant (9)
10.32 Clarification to the GAINSCO, INC. Executive Incentive Compensation Plan (9)
11 (Not required to be filed as an Exhibit. See footnote (1)(j) on page 47 of this 10-K Report for information called for by number 11 of the Exhibit Table to Item 601 of S-K)
22.2 Subsidiaries of Registrant (9)
24.2 Consent of KPMG Peat Marwick LLP to incorporation by reference (9)
25.1 Powers of Attorney (9)
27 Financial Data Schedule (9)
28.8 Schedule P from the 1995 Annual Statement of General Agents Insurance Company of America, Inc. (10)
28.9 Schedule P from the 1995 Annual Statement of MGA Insurance Company, Inc. (10)
28.10 Schedule P from the 1995 Annual Statement of GAINSCO County Mutual Insurance Company (10)
(1) Incorporated by reference to the Exhibit shown in parenthesis filed in Registration Statement No. 33-7846 on Form S-1, and amendments thereto, filed by the Company with the Securities and Exchange Commission and effective November 6, 1986.
(2) Incorporated by reference to the Exhibit shown in parenthesis filed in Registration 33-25226 on Form S-1, and amendments thereto, filed by the Company with the Securities and Exchange Commission and effective November 14, 1988.
(3) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1988.
(4) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1990.
(5) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1991.
(6) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1992.
(7) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1993.
(8) Incorporated by reference to the Exhibit shown in parenthesis filed in the Registrant's Annual Report on Form 10-K for the fiscal year ended December 31, 1994.
(9) Filed herewith, See Exhibit Index.
(10) Filed under Form SE.
(b) Reports on Form 8-K
During the last quarter of the fiscal year ended December 31, 1995, no reports on Form 8-K have been filed by the Company.
(c) Exhibits required by Item 601 of Regulation SK
The exhibits listed in Item 14(a) 3 of this Report, and not incorporated by reference to a separate file are filed herewith.
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.
GAINSCO, INC. (Registrant)
/s/ Joseph D. Macchia - --------------------------------- By: Joseph D. Macchia, President
Date: 3/28/96
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.
*By: /s/ Joseph D. Macchia ------------------------------------- Joseph D. Macchia, Attorney in-fact Under Power of Attorney
Subsequent to the filing of the Annual Report on this Form, an Annual Report to Security Holders covering the Registrant's last fiscal year and a Proxy Statement and Form of Proxy will be sent to more than ten of the Registrant's security holders with respect to the Annual Meeting.
REPORT OF MANAGEMENT
The accompanying consolidated financial statements were prepared by the Company, which is responsible for their integrity and objectivity. The statements have been prepared in conformity with generally accepted accounting principles and include some amounts that are based upon the Company's best estimates and judgement. Financial information presented elsewhere in this report is consistent with the accompanying consolidated financial statements.
The accounting systems and controls of the Company are designed to provide reasonable assurance that transactions are executed in accordance with management's criteria, that the financial records are reliable for preparing financial statements and maintaining accountability for assets, and that assets are safeguarded against claims from unauthorized use or disposition.
The Company's consolidated financial statements have been audited by KPMG Peat Marwick LLP, independent auditors. The auditors have full access to each member of management in conducting their audits.
The Audit Committee of the Board of Directors, comprised solely of directors from outside of the Company, meets regularly with management and the independent auditors to review the work and procedures of each. The auditors have free access to the Audit Committee, without management being present, to discuss the results of their work as well as the adequacy of the Company's accounting controls and the quality of the Company's financial reporting. The Board of Directors, upon recommendation of the Audit Committee, appoints the independent auditors, subject to shareholder approval.
/s/ Joseph D. Macchia ------------------------------------ Joseph D. Macchia Chairman of the Board, President and Chief Executive Officer
/s/ Daniel J. Coots ------------------------------------ Daniel J. Coots Senior Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Shareholders GAINSCO, INC.:
We have audited the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GAINSCO, INC. and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1995, in conformity with generally accepted accounting principles.
We have also previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1993, 1992, and 1991, and the related consolidated statements of operations, shareholders' equity and cash flows for the years ended December 31, 1992, and 1991, and we expressed unqualified opinions on those consolidated financial statements.
In our opinion, the information set forth in the selected consolidated financial data for each of the years in the five-year period ended December 31, 1995, appearing on pages 17 and 18, is fairly presented, in all material respects, in relation to the consolidated financial statements from which it has been derived.
KPMG Peat Marwick LLP
Dallas, Texas February 26, 1996
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Balance Sheets
December 31, 1995 and 1994
See accompanying notes to consolidated financial statements.
GAINSCO, INC. AND SUBSIDIARIES Consolidated Balance Sheets
December 31, 1995 and 1994
See accompanying notes to consolidated financial statements.
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Operations
Years ended December 31, 1995, 1994 and 1993
See accompanying notes to consolidated financial statements.
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994, and 1993
(continued) GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1995, 1994, and 1993
See accompanying notes to consolidated financial statements.
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
(continued)
GAINSCO, INC. AND SUBSIDIARIES
Consolidated Statements of Cash Flows
Years ended December 31, 1995, 1994 and 1993
See accompanying notes to consolidated financial statements.
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(1) SUMMARY OF ACCOUNTING POLICIES
(a) Basis of Consolidation
The accompanying consolidated financial statements include the accounts of GAINSCO, INC. (the Company) and its wholly-owned subsidiaries, General Agents Insurance Company of America, Inc. (General Agents), General Agents Premium Finance Company (GAPFCO), Agents Processing Systems, Inc., Risk Retention Administrators, Inc. and GAINSCO Service Corp. (GSC). General Agents has one wholly-owned subsidiary, MGA Insurance Company, Inc. (MGAI) which, in turn, owns 100% of MGA Agency, Inc. GSC has one wholly-owned subsidiary, MGA Premium Finance Company. GSC also owns the management contract and charter of GAINSCO County Mutual Insurance Company (GCM) and its accounts have been included in the accompanying consolidated financial statements. All significant intercompany accounts have been eliminated in consolidation.
The accompanying consolidated financial statements are prepared in conformity with generally accepted accounting principles. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
(b) Nature of Operations
The Company is predominantly a property and casualty insurance company concentrating its efforts on certain specialty excess and surplus markets within the commercial auto, auto garage and general liability insurance lines. The Company is approved to write insurance in 49 states and the District of Columbia on a non-admitted basis and in 41 states on an admitted basis. The Company markets its lines of insurance through 180 non-affiliated general agents' offices. Approximately 76% of the Company's gross premiums written during 1995 resulted from risks located in Arkansas, California, Florida, Georgia, Kentucky, Louisiana, Pennsylvania, Tennessee, Texas and West Virginia.
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(c) Investments
Bonds held to maturity are stated at amortized cost, bonds available for sale are stated at fair value. Short-term investments are stated at cost. The "specific identification" method is used to determine costs of investments sold. Since investments not available for sale are generally held until maturity or recovery of fair value, provisions for possible losses are recorded only when the values have experienced impairment considered "other than temporary". Proceeds from the sale of debt securities totalled $10,741,080, $6,378,737 and $4,869,622 in 1995, 1994 and 1993, respectively. The realized gains were $108,024, $134,641 and $3,841 in 1995, 1994 and 1993, respectively. There were no realized losses in any of the years presented.
(d) Financial Instruments
For premiums receivable, which include premium finance notes receivable, and all other accounts (except investments) defined as financial instruments in Financial Accounting Standards Board (FASB) Statement 107, "Disclosures About Fair Values of Financial Instruments," the carrying amount approximates fair value due to the short-term nature of these instruments. These balances are disclosed on the face of the balance sheet.
Fair values for investments, disclosed in note 2, were obtained from independent brokers and published valuation guides.
(e) Deferred Policy Acquisition Costs and Deferred Ceding Commission Income
Policy acquisition costs, principally commissions, marketing and underwriting expenses, are deferred and charged to operations over periods in which the related premiums are earned. Ceding commission income, which is realized on a written basis, is deferred and recognized over periods in which the premiums are earned. Deferred ceding commission income is netted against deferred policy acquisition costs. The marketing expenses are predominately salaries, salary related expenses and travel expenses of the Company's marketing representatives who actively solicit business from the independent general agents.
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The change in the resulting deferred asset or liability is charged (credited) to operations. Information relating to these net deferred amounts, as of and for the years ended December 31, 1995, 1994 and 1993 is summarized as follows:
(f) Property and Equipment
Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets (30 years for buildings and primarily 5 years for furniture, equipment and software).
The following schedule summarizes the components of property and equipment:
There are no material capital leases.
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(g) Software Costs
The Company capitalizes certain costs of developing computer software intended for resale. Costs relating to programs for internal use are recorded in property and equipment and are amortized using the straight-line method over five years or the estimated useful life, whichever is shorter. The deferred cost is also reduced by incidental sales of programs developed for internal use.
(h) Premium Revenues
Premiums are recognized as earned on a pro rata basis over the period the Company is at risk under the related policy. Unearned premiums represent the portion of premiums written which are applicable to the unexpired terms of policies in force.
(i) Claims and Claim Adjustment Expenses
Claims and claim adjustment expenses, less related reinsurance, are provided for as claims are incurred. The provision for unpaid claims and claim adjustment expenses includes: (1) the accumulation of individual case estimates for claims and claim adjustment expenses reported prior to the close of the accounting period; (2) estimates for unreported claims based on past experience modified for current trends; and (3) estimates of expenses for investigating and adjusting claims based on past experience.
Liabilities for unpaid claims and claim adjustment expenses are based on estimates of ultimate cost of settlement. Changes in claim estimates resulting from the continuous review process and differences between estimates and ultimate payments are reflected in expense for the year in which the revision of these estimates first became known.
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The following table sets forth the changes in unpaid claims and claim adjustment expenses, net of reinsurance cessions, as shown in the Company's consolidated financial statements for the periods indicated:
(1) The Company commuted its 1993 and 1994 quota-share reinsurance treaties in 1995 and thereby reassumed all risks and the related unpaid claims and claim adjustment expenses of $2,223,000 (see note 4 to the consolidated financial statements). This was accounted for using the paid claim method, whereby unpaid claims and claim adjustment expenses were increased $2,223,000 and paid claims and claim adjustment expenses were decreased $2,223,000, thus preventing distortion of claims and claim adjustment expenses incurred.
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(j) Income Taxes
The Company and its subsidiaries file a consolidated Federal income tax return. Deferred income tax items are accounted for under the deferred method which provides for timing differences between the reporting of earnings for financial statement purposes and for tax purposes, primarily deferred policy acquisition costs, the discount on unpaid claims and claim adjustment expenses and the nondeductible portion of the change in unearned premiums. The Company paid income taxes of $5,413,486, $5,500,787 and $3,860,000 during 1995, 1994 and 1993, respectively.
(k) Earnings Per Share
The weighted average number of shares outstanding for the years ending December 31, 1995, 1994 and 1993 were 21,512,741, 21,437,031 and 21,379,098, respectively. Primary earnings per share were $.81, $.70 and $.61 based on the weighted average number of shares outstanding and common stock equivalents (which consist of stock options), when dilutive, of 309,549, 278,490, and 438,963 for the years ending December 31, 1995, 1994, and 1993, respectively. The calculations were made after giving retroactive effect to the stock dividends and stock splits granted to shareholders (note 6).
(l) Accounting Pronouncements
In October 1994, the FASB issued Statement 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments." The Statement was effective for years ending after December 15, 1994 and did not have any impact on the financial statements.
In March 1995, the FASB issued Statement 121, "Accounting for the Impairment of Long-Lived Assets and for Long- Lived Assets to Be Disposed Of." The Statement was effective for years ending after December 15, 1995, and did not have any impact on the financial statements.
(2) INVESTMENTS
The following schedule summarizes the components of net investment income:
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The following schedule summarizes the amortized cost and estimated fair values of investments in debt securities:
The amortized cost and estimated fair value of debt securities at December 31, 1995 and 1994, by maturity, are shown below.
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
Investments of $1,100,000 were maintained in escrow at December 31, 1995 and 1994 on behalf of certain insurance companies under the terms of their reinsurance agreements with General Agents. In addition, investments of $11,860,000 and $11,010,000, at December 31, 1995 and 1994, respectively, were on deposit with various regulatory bodies as required by law.
The Financial Accounting Standards Board has issued Statement 115 "Accounting for Certain Investments in Debt and Equity Securities" (Statement 115). Under this statement, the Company carries certain debt securities classified as "available for sale" at fair value. The unrealized gain or loss, net of tax, is presented as a separate component of shareholders' equity.
During 1995, as a result of the Statement 115 "Implementation Guide," the Company transferred certain fixed maturities from the held to maturity portfolio to the available for sale portfolio. The amortized cost of securities transferred was $18,519,856 and the unrealized gain on the date of transfer was $93,803, net of taxes. There were no transfers during 1994.
(3) NOTE PAYABLE TO BANK
The Company made principal payments of $1,750,000 and $1,000,000 in June, 1995 and May, 1994, respectively. The note payable balance of $1,750,000 is due in one installment on June 1, 1996. Interest is paid monthly at a rate that approximates the prime lending rate. The Company recorded interest expense (which approximates interest paid) of $221,934, $273,552 and $275,250 in 1995, 1994 and 1993, respectively. The note payable is stated at book value which approximates fair value.
(4) REINSURANCE
In 1995, 1994 and 1993, General Agents and MGAI (the Insurers) wrote casualty policy limits of $1,000,000. For policies with an effective date of January 1, 1992 through December 31, 1994, the Insurers have excess reinsurance for 100% of casualty claims exceeding $300,000 up to the $1,000,000 policy limits. For policies with an effective date of January 1, 1995 or after, the Insurers have excess reinsurance for 100% of casualty claims exceeding $500,000 up to the $1,000,000 policy limits.
In 1995, the Insurers terminated the quota-share reinsurance treaties that were in effect for 1994 and 1993. Under the terms of the termination agreement, the reinsurer returned assets to the Insurers equal to the remaining unpaid claims and claim adjustment expenses of $2,223,000. The Insurers reassumed all risks and the reinsurer was relieved of any further liability with respect to risks previously covered by the contract.
During 1995, GCM entered into fronting arrangements with two non-affiliated insurance companies. GCM retains no liability as the business written under these agreements is 100% ceded. Although these cessions are made to authorized reinsurers rated "A- (Excellent)" or better by A. M. Best Company, the agreements require that collateral accounts be maintained to assure
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
payment of the unearned premiums and unpaid claims and claim adjustment expenses relating to the risks insured under these fronting arrangements. At December 31, 1995, the balance in such accounts totalled approximately $3,527,000.
The amounts deducted in the consolidated financial statements for reinsurance ceded as of and for the years ended December 31, 1995, 1994, and 1993 respectively, are set forth in the following table. Premiums and claims ceded to the commercial automobile plans of Arkansas, California, Louisiana, Mississippi and Pennsylvania are designated as "plan servicing".
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The amounts included in the Consolidated Balance Sheets for reinsurance ceded under fronting arrangements and reinsurance ceded to the commercial automobile plans of Arkansas, California, Louisiana, Mississippi, and Pennsylvania were as follows:
The Insurers remain directly liable to their policyholders for all policy obligations and the reinsuring companies are obligated to the Insurers to the extent of the reinsured portion of the risks.
The Insurers, for years prior to 1993, utilized reinsurance arrangements with various non-affiliated admitted insurance companies, whereby the Insurers underwrote the coverage and assumed the policies 100% from the companies. During 1993, 1994 and 1995, the business generated from these arrangements was in a run-off position. These arrangements require that the Insurers maintain escrow accounts to assure payment of the unearned premiums and unpaid claims and claim adjustment expenses relating to risks insured through such arrangements and assumed by the Insurers. For each of the years ended December 31, 1995, 1994, and 1993, the balance in such escrow accounts totalled $1,100,000. For 1995, 1994 and 1993, the premiums earned by assumption were $(2,496), $0, and $11,233,000, respectively and the assumed unpaid claims and claim adjustment expenses were $4,427,000, $6,804,000 and $20,850,000, respectively.
The Company has not and does not intend to utilize retrospectively rated reinsurance contracts with indefinite renewal terms. This form of reinsurance is commonly known as a "funded cover". Under a funded cover reinsurance arrangement, an insurance company essentially deposits money with a reinsurer to help cover future losses and records the "deposit" as an expense instead of as an asset; or, the insurance company can borrow from a reinsurer recording the "loan" as income instead of as a liability with the future "loan" payments recorded as expense when the payments are made.
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
(5) FEDERAL INCOME TAXES
In the accompanying consolidated statements of operations, the provisions for Federal income tax as a percent of related pretax income differ from the Federal statutory income tax rate. A reconciliation of income tax expense using the Federal statutory rates to actual income tax expense follows:
The fresh start adjustment represents the tax effect of the discount on the portion of the 1986 unpaid claims and claim adjustment expenses that changed in 1995, 1994 and 1993, respectively.
The Financial Accounting Standards Board issued Statement 109 "Accounting for Income Taxes" which changed the Company's method of accounting for income taxes. Under Accounting Principles Board (APB) Opinion 11, the primary objective was to match the tax expense with pre-tax operating income on the statement of operations. Under Statement 109, the primary objective is to establish deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. As a consequence, the portion of the tax expense which is a result of the change in the deferred tax asset or liability may not always be consistent with the income reported on the statement of operations. The Company implemented Statement 109 in 1993, the cumulative effect of which resulted in a $216,278 tax benefit ($.01 per share) which has been reported in the consolidated Statement of Operations as a "cumulative effect of a change in accounting principle". In the Company's opinion, there will be adequate earnings in future years to recover its deferred tax asset and as such, the Company has not established a valuation allowance.
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
The following table represents the tax effect of temporary differences giving rise to the net deferred tax asset established under Statement 109.
(6) SHAREHOLDERS' EQUITY
In May, 1993, the shareholders approved an amendment to the Company's Articles of Incorporation to increase the number of shares of authorized $.10 par value common stock from 50,000,000 shares to 250,000,000 shares. Of the authorized shares, 21,637,481 and 19,611,368 were issued as of December 31, 1995 and 1994, respectively and 21,525,221 and 19,509,544 were outstanding as of December 31, 1995 and 1994, respectively. The Company also has 10,000,000 shares of preferred stock with $100 par value authorized of which no shares have been issued. The Board of Directors can designate the relative rights and preferences of the authorized preferred stock to be issued.
In 1991, the Company adopted a policy to pay a quarterly cash dividend of $.01 per share on its common stock every quarter until further action by the Board of Directors. In November of 1995, the Board of Directors increased the cash dividend to $.0125 per share and announced the discontinuance of the semi-annual stock dividends. The Board of Directors granted 5% stock dividends to shareholders of record on March 31, 1995, September 30, 1995, March 31, 1994, September 30, 1994, March 31, 1993 and September 30, 1993. The market value of the stock dividends was charged to retained earnings, common stock was credited for the par value, the excess of market value over par value was credited to additional paid-in capital and cash was paid in lieu of fractional shares for the stock dividends and the shares were cancelled. The earnings per share computation and the number of stock options and their exercise price have been
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
retroactively adjusted for the effect of the stock dividends.
The amount of consolidated statutory shareholder's equity or policyholders' surplus of General Agents and MGAI was $47,880,301, $40,100,250, and $33,777,209 at December 31, 1995, 1994 and 1993, respectively, and the amount of consolidated statutory net income was $15,167,151, $13,909,896, and $12,107,933 for the years ended 1995, 1994, and 1993, respectively. The amount of policyholders' surplus of GCM was $2,260,001, $2,250,001 and $2,128,748 at December 31, 1995, 1994 and 1993, respectively, and the amount of statutory net income was $369,356, $644,257 and $50,782 for the years ended December 31, 1995, 1994 and 1993, respectively. The Company's statutory capital significantly exceeds the benchmark capital level under the Risk Based Capital formula.
Statutes in Texas and Oklahoma restrict the payment of dividends by the insurance company subsidiaries to the available surplus funds derived from their realized net profits. The maximum amount of cash dividends that each subsidiary may declare without regulatory approval in any 12-month period is the lesser of net income for the 12-month period ended the previous December 31 or ten percent (10%) of policyholders' surplus as of the previous December 31. At December 31, 1995, General Agents, the Oklahoma subsidiary, had net income of $10,425,054 and policyholders' surplus of $47,880,301 and MGAI, the Texas subsidiary, had net income of $4,742,096 and policyholders' surplus of $15,545,587.
In 1988, the Board of Directors declared, pursuant to a Rights Plan, a dividend distribution of one common share purchase right on each outstanding share of $.10 par value common stock. The dividend distribution was made on March 18, 1988, payable to shareholders of record on that date. In 1993, the Board of Directors amended the Rights Plan and extended the expiration date of these rights from March 18, 1998 to May 25, 2003. Each right, as amended during 1993, has an exercise price of $70. The rights are not exercisable until the Distribution Date (as defined in the Rights Plan). The Rights Plan provides, among other things, that if any person or group (other than the Company, one of its subsidiaries or an employee benefit plan of the Company or a subsidiary) acquires 20% or more of the Company's common stock (except pursuant to an offer for all outstanding common stock which the Continuing Directors (as defined in the Rights Plan) have determined to be in the best interests of the Company and its shareholders), if a 20% holder engages in certain self-dealing transactions or if a holder of 15% or more of the Company's common stock is declared an Adverse Person (as defined in the Rights Plan) by the Board of Directors, each holder of a right (other than the 20% holder or the Adverse Person, whose rights would become null and void) would have the right to receive, upon exercise of the right, common stock having a market value of two times the exercise price of the right. The Company is able to redeem rights under certain conditions set forth in the Rights Plan. If, following a public announcement that a person has acquired 20% or more of the common stock, the Company is acquired in a merger (other than a merger which follows an offer approved by the Continuing Directors as described above) or other business combination transaction or if 50% of the assets or earning power of the Company is sold, each right (except rights which have previously become null and void as described above), will entitle its holder to purchase, at the right's then-current
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
exercise price, shares of the acquiring Company's common stock having a market value of two times the exercise price of the right.
(7) BENEFIT PLANS
On May 16, 1995, the Board of Directors adopted the GAINSCO, INC. 1995 Stock Option Plan (the "Plan") subject to approval by the shareholders no later than May 15, 1996. Under the Plan, 1,020,000 shares were reserved for issuance upon the exercise of these nonqualified stock options.
Under the 1990 Stock Option Plan of the Company, no options were granted in 1995, 6,784 options were granted in 1994, and 20,508 options were granted in 1993. These options were granted at fair market value on the date of grant. During 1995, options for 16,316 shares of common stock were exercised at a price of $38,489 and the shares were issued. Options outstanding (after adjusting for stock dividends) at December 31, 1995, 1994 and 1993 were 401,277, 427,863 and 612,810, respectively. The options outstanding at December 31, 1995 are exercisable at an average price of $2.60.
In October 1995, the FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). SFAS 123 defines a fair value based method of accounting for an employee stock option or similar equity instrument. Under SFAS 123, the Company will elect to measure compensation costs using the intrinsic value based method of accounting prescribed by Accounting Principles Board Opinion No. 25. SFAS is effective for financial statements for fiscal years beginning after December 15, 1995.
The Company has a profit sharing and trust plan for the benefit of its eligible employees. Contributions are made in such amounts as the Company elects. The annual contributions amounted to $605,935, $536,124, and $494,727 for 1995, 1994 and 1993, respectively.
The Company has an incentive compensation plan in which certain key officers of the Company participate and earn bonuses. The fund from which bonuses are paid is comprised of net income for the current year that is in excess of ten percent (10%) of beginning shareholders' equity for the current year, with the fund not to exceed ten percent (10%) of net income for the current year.
(8) CONTINGENCIES
In the normal course of its operations, the Company has been named as defendant in various legal actions seeking payments for claims denied by the Company and other monetary damages. The Company's management believes that unpaid claims and claim adjustment expenses are adequate to cover possible liability from lawsuits which arise in the normal course of its insurance business. In the opinion of the Company's management the ultimate liability, if any, resulting from the disposition of all claims will not have a material adverse effect on the Company's
GAINSCO, INC. AND SUBSIDIARIES
Notes to Consolidated Financial Statements
December 31, 1995, 1994 and 1993
consolidated financial position. The Company does not have any financial instruments where there is off-balance-sheet-risk of accounting loss due to credit or market risk. There is credit risk in the premiums receivable and reinsurance balances receivable of the Company. At December 31, 1995 and 1994 the Company did not have a premiums receivable balance nor a reinsurance balance receivable from any one entity that was material with regard to shareholders' equity.
(9) QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table contains selected unaudited consolidated financial data for each quarter (in thousands, except per share data):
(a) Adjusted for stock dividends and stock splits effected as stock dividends. (b) As reported by the American Stock Exchange.
INDEPENDENT AUDITORS' REPORT ON SUPPLEMENTARY INFORMATION
The Board of Directors and Shareholders GAINSCO, INC:
Under date of February 26, 1996, we reported on the consolidated balance sheets of GAINSCO, INC. and subsidiaries as of December 31, 1995 and 1994 and the related consolidated statements of operations, shareholders' equity and cash flows for each of the years in the three-year period ended December 31, 1995. In connection with our audits of the aforementioned consolidated financial statements, we also audited the related financial statement schedules as listed in the accompanying index. These financial statement schedules are the responsibility of the company's management. Our responsibility is to express an opinion on these financial statement schedules based on our audits.
In our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Dallas, Texas February 26, 1996
Schedule I
GAINSCO, INC. AND SUBSIDIARIES
Summary of Investments - Other Than Investments in Related Parties
(Amounts in thousands)
See accompanying independent auditors' report on supplementary information.
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC. (PARENT COMPANY)
Balance Sheets December 31, 1995 and 1994
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC. (PARENT COMPANY)
Statements of Operations Years ended December 31, 1995, 1994 and 1993
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC. (PARENT COMPANY)
Statements of Shareholders' Equity Years ended December 31, 1995, 1994 and 1993
(continued)
Schedule II CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC. (PARENT COMPANY)
Statements of Shareholders' Equity Years ended December 31, 1995, 1994 and 1993
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC. (PARENT COMPANY)
Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993
(continued)
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC. (PARENT COMPANY)
Statements of Cash Flows Years ended December 31, 1995, 1994 and 1993
See accompanying notes to condensed financial statements.
See accompanying independent auditors' report on supplementary information.
Schedule II
CONDENSED FINANCIAL INFORMATION OF THE REGISTRANT
GAINSCO, INC. (PARENT COMPANY)
Notes to Condensed Financial Statements December 31, 1995, 1994 and 1993
(1) GENERAL
The accompanying condensed financial statements should be read in conjunction with the notes to the consolidated financial statements for the years ended December 31, 1995, 1994 and 1993 included elsewhere in this Annual Report.
(2) RELATED PARTIES
During 1994, the Company made a cash capital contribution to Risk Retention Administrators, Inc. in the amount of $900 and a capital contribution to General Agents Premium Finance Company in the amount of $100,000.
See accompanying independent auditors' report on supplementary information.
Schedule III
GAINSCO, INC. AND SUBSIDIARIES
Supplementary Insurance Information
Years ended December, 1995, 1994 and 1993 (Amounts in thousands)
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
Schedule IV
GAINSCO, INC. AND SUBSIDIARIES
Reinsurance
Years ended December 31, 1995, 1994 and 1993 (Amounts in thousands, except percentages)
See accompanying independent auditors' report on supplementary information.
Schedule VI
GAINSCO, INC. AND SUBSIDIARIES
Supplemental Information
Years ended December 31, 1995, 1994 and 1993 (Amounts in thousands)
(1) Net of the amortization of deferred ceding commission income.
See accompanying independent auditors' report on supplementary information.
EXHIBIT INDEX -------------