Item 1. Business.
General
The Company is an insurance holding company which, through its direct or indirect wholly-owned subsidiaries, Frontier Insurance Company ("Frontier Insurance"), Medical Professional Liability Agency, Ltd. ("Med Pro"), Pioneer Claim Management, Inc. ("Pioneer"), Frontier Pacific Insurance Company ("Frontier Pacific," formerly Contractors' Surety Company), Spencer Douglass Insurance Associates ("SDIA"), United Capitol Holding Company ("United Capitol Holding"), United Capitol Insurance Company ("United Capitol"), Olympic Underwriting Managers, Inc. ("Olympic"), Fischer Underwriting Group, Inc. ("Fischer"), Regency Financial Corporation ("Regency Financial"), Regency Insurance Company ("Regency") and Emrol Installment Premium Discount, Inc. ("Emrol"), and its 50% ownership of Douglass/Frontier LLC ("Douglass/Frontier"), conducts business as a specialty property and casualty insurer and reinsurer, and performs claims adjusting and management services. Frontier Insurance, the Company's principal insurance company subsidiary, was acquired by the Company in April 1986. Med Pro, which underwrites the majority of the Company's medical and dental malpractice programs, was acquired by the Company in June 1987. Pioneer, which performs claims adjusting and claims management services for the Company's insurance lines, was organized and commenced business in October 1989 as the successor to a claims adjusting company. Frontier Pacific, the Company's California insurance company subsidiary, was acquired by Frontier Insurance in October 1991 and changed its name from Contractors' Surety Company in September 1993. SDIA was acquired by the Company in April 1994 and is involved in placing and servicing license and permit bond business in California and other western states. Douglass/Frontier was formed as a joint venture in May 1995 and is involved in placing and servicing bail bond business. United Capitol Holding, which was acquired by Frontier Insurance in May 1996, through its subsidiaries, United Capitol, Olympic and Fischer, conducts business as an excess and surplus lines insurer and as an underwriting management company for directors' and officers' liability and property coverages. Regency Financial was organized by the Company in June 1996 to acquire Regency, a non-standard automobile insurer and Emrol, a premium finance company, which were so acquired in September 1996. In February 1996, the Company acquired a 33% ownership interest in Townsquare Title Insurance Services, which owns United General Title Insurance Company ("United General"). In October 1996, the Company formed Frontier Financing Trust, a Delaware statutory business trust, for the sole purpose of issuing certain convertible preferred securities and investing the proceeds thereof in an equivalent amount of convertible subordinated debentures of the Company. The financial statements of Frontier Financing Trust have been consolidated with those of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources," and NOTE M of the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS.
The Company's underwriting strategy is to identify niche markets or programs that are unattractive to other insurers due to the limited potential market or perceived excessive risks, which the Company
believes afford favorable opportunities for profitability due to limited potential competition and the Company's innovative underwriting and value added services, principally risk management, coverage enhancements and specialized claims management. The Company underwrites specialty niche market programs, including medical and dental malpractice for physicians, social service care providers, alternative risk physicians, psychiatrists, chiropractors and dentists, predominantly in New York, Florida, Illinois, Ohio, Texas, and Michigan. The Company also underwrites a variety of specialty programs under general liability, together with workers' compensation, surety bonds for small contractors, contractor license bonds, license and permit bonds, bail bonds, custom bonds, commercial earthquake and other miscellaneous lines. The medical and dental malpractice programs are currently produced on a direct basis through Med Pro and are also marketed, together with all other lines, through a network of independent general agents and retail brokers.
Frontier Insurance is licensed as a property and casualty insurer in 49 states, the District of Columbia, Puerto Rico and the Virgin Islands, and is rated A- (Excellent) by A.M. Best Company, Inc ("A.M. Best"). Additionally, Standard & Poor's Insurance Rating Services has given Frontier Insurance an Insurer Claims-Paying Ability Rating of A+ (Excellent). Frontier Pacific is licensed in California and Nevada and is rated A- (Excellent) by A.M. Best. United Capitol is licensed as a property and casualty writer in Arizona and Wisconsin, is an approved excess and surplus lines insurer in 47 states and is rated A-(Excellent) by A.M. Best; Regency is licensed as a property and casualty writer in North Carolina and South Carolina and is rated A- (Excellent) by A.M. Best; and United General is licensed as a title insurer in 30 states and is not rated by A.M. Best. A.M. Best's and Standard & Poor's ratings are based on an analysis of the financial condition and operations of an insurance company as they relate to the industry in general, are not designed for the protection of investors and do not constitute recommendations to buy, sell or hold any security.
The following chart provides examples of typical niche markets/programs underwritten by the Company for specific types of customers:
Insurance Lines
The following table sets forth the gross and net premiums by principal lines of insurance written by the Company and the related percentages of the total such premiums represented thereby for the year ended December 31, 1996:
Medical Malpractice
The Company commenced underwriting medical malpractice insurance in 1981 under programs developed for physicians with varied practices, which include part-time physicians, internists, physicians and other health care professionals providing medical services to clients of social service care facilities (mental health, home care, etc.), family practitioners, psychiatrists, chiropractors, dermatologists, and other specialists. Physicians covered under the Company's programs generally must be members of a national, state, or county society for their particular specialty and must limit their practice to such specialty, or be employed by a social services care facility, or be in practice or employed on a part-time basis. The Company has implemented strict underwriting guidelines in an attempt to screen-out undesirable risks and reduce its exposure. Medical malpractice insurance is written by the Company on both an occurrence and a claims made basis predominantly in New York, Florida, Illinois, Ohio, Texas, and Michigan. Additionally, the Company markets a specialty program for physicians unable to obtain traditional malpractice coverage as a result of excessive malpractice claims, professional disciplinary proceedings and/or drug or alcohol abuse. Coverage under this program is written with a deductible and is priced substantially higher than the Company's standard medical malpractice programs.
At December 31, 1996, approximately 17,500 physicians were insured by the Company, of whom 600, or 3.4%, were employed as faculty members at medical schools of the State University of New York ("SUNY"), 12,300, or 70.3%, were physicians who were members of 19 medical associations which endorsed or approved the Company's medical malpractice insurance program, and 4,600, or 26.3% were physicians and other health care professionals providing medical services covered by the Company's social services care insurance program. Since December 31, 1990, the number of SUNY physicians insured by the Company has decreased by approximately 430, attributable to increased competition and other factors, including a 1990 decision by the New York State Court of Claims relating to SUNY physicians in favor of the Company. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Litigation with the State of New York."
Dental Malpractice
In August 1987, the Company commenced underwriting dental malpractice insurance for dentists viewed by the Company as preferred risks. Dentists who practice oral surgery or who utilize anesthesia to render their patients unconscious are, among others, not viewed as preferred risks and, accordingly,
are not eligible for coverage. As with medical malpractice, the endorsement of related professional organizations is a key element in marketing; the endorsement by the Academy of General Dentistry in 1994 has proven especially beneficial. Dental malpractice is written by the Company predominantly in New York, Florida, and Ohio. At December 31, 1996, approximately 4,900 dentists were insured by the Company under its dental malpractice program.
General Liability
The Company underwrites general liability coverages for day care centers, crane operators, white water rafting, health and social services programs, pest control operators, fire protection equipment dealers and installers, security guards, excess workers' compensation/employer's liability for self-insured employers, and a variety of other programs. Further, the Company underwrites umbrella coverage up to $5 million over an underlying $1 million general liability coverage. The Company's specialty insurance programs include environmental policies covering enumerated hazards with stated policy limits. Although the Company believes that such policies, together with the Company's general, professional and other liability policies, do not subject the Company to material exposure for environmental pollution claims, there can be no such assurance in view of the expansion of liability for environmental claims in recent litigation.
Surety
The Company directly underwrites surety bonds for small contractors, customs bonds, contractor license bonds, bail bonds, license and permit bonds, and self-insured employer's workers' compensation bonds.
Workers' Compensation
The Company underwrites workers' compensation coverage for cotton gins, jockeys, feed lots, and other specialty niches. Additionally, the Company assumes workers' compensation business as a result of its required participation in the National Workers' Compensation Reinsurance Pool and other residual market mechanisms. Due to adverse underwriting results, competitive pricing and competition, the Company discontinued all workers' compensation business in 1993 except its cotton gin and feedlot programs in Texas, its New Jersey jockey program, and its social services program. During 1996, the Company established an alternative risk division and commenced underwriting workers' compensation coverage in conjunction with other programs.
Commercial Earthquake
In July 1995, the Company commenced underwriting difference in conditions ("DIC") commercial earthquake policies under an agreement with a subsidiary of Associated International Insurance Company ("Associated"). Pursuant to the agreement, the Company and Associated underwrite DIC commercial earthquake policies through a companion carrier facility with combined limits of $7.5 million, with two-thirds of the new and renewal policies being underwritten by Associated and one-third by the Company. The agreement may be terminated by either party upon 90 days' notice.
Other
The Company underwrites other lines of insurance, including commercial multi-peril, inland marine, ocean marine, property, specialty homeowners, non-standard auto, and excess of loss group accident and health. In 1996 the Company began to assume, on a quota share basis, homeowners business underwritten by Omega Insurance Company.
Reinsurance
On July 1, 1996, the Company obtained catastrophe reinsurance coverage for its homeowners business written, which provides coverage in the amount of $14 million excess of a $1 million retention.
The Company reinsures its ocean marine and international risks under multiple layers of excess reinsurance which provides coverage up to $9.95 million excess of $50,000 per occurrence, excess of an aggregate retention of $200,000 of loss occurrences in excess of $50,000. Prior to 1997, the Company also reinsured ocean marine business written by its subsidiary, United Capitol, retaining the first $250,000 per occurrence and ceding up to $7.75 million excess of $250,000, per occurrence under a program led by Underwriters at Lloyds on a losses occurring basis. Effective January 1, 1997, this program was replaced by a similar program written on a risks attaching basis by Munich American Reinsurance Company and Munich Reinsurance Company, U.S. branch.
The Company cedes 100% of its environmental liability business to Underwriters Reinsurance Company. The Company reassumes 10% of this business, together with 10% of the environmental liability business underwritten by Commercial Underwriters Insurance Company and Underwriters Reinsurance Company. During 1995 and 1996, the Company assumed mobile homeowners business from Omega Insurance Company, errors and omission business which it acquired from Bankers Multiple Line Insurance Company ("BMLIC"), in 1995. The Company also assumes reinsurance from its required participation in residual market pools such as the National Workers' Compensation Reinsurance Pool.
Effective January 1, 1995, the Company entered into a stop loss reinsurance contract with Centre Reinsurance Company of New York ("Centre Re") for 1995, 1996 and 1997. Under the terms of the agreement, Centre Re provides reinsurance protection for losses and LAE in excess of a predetermined ratio of these expenses to net premiums earned for a given accident year for all lines of business except certain classes of surety bonds, realtors errors and omissions and all of the net premiums earned from United Capitol and Regency. The loss and LAE ratio above which the reinsurance provides coverage is 66%, 65%, and 64% for accident years 1995 through 1997, respectively. The maximum amount recoverable for an accident year is 175% of the reinsurance premium paid for that accident year, or $162.5 million in the aggregate for the three years. The additional reinsurance coverages described herein are underlying reinsurance coverages which inure to the benefit of this stop loss contract.
Effective July 15, 1995, the Company implemented a program, with 26 reinsurers for its commercial Difference in Condition ("DIC") earthquake program, through a per risk excess of loss agreement and four layers of inuring catastrophe reinsurance. The catastrophe layers attach at $2.5 million per occurrence up to $40 million per occurrence and allow one full reinstatement per year. The Company retains $50,000 per risk, $2.5 million per occurrence.
Effective January 1, 1996, the Company entered into a clash reinsurance agreement with Mutual Assurance, Inc., the Doctors' Insurance Company, and Reliance Insurance Company with respect to its medical malpractice business. Under the agreement, reinsurance is provided to the Company for occurrences involving multiple physicians for $3 million excess of $2 million per occurrence, subject to an aggregate of $6 million.
The majority of the Company's ceded business is reinsured by Centre Reinsurance Company of New York, Swiss Reinsurance America Corporation, and its umbrella liability business by Munich American Reinsurance Company. During 1996, the Company reinsured a large workers' compensation program with the Commercial Risk Re-Insurance Company.
Munich American Reinsurance Company is currently rated A+ (Superior), and Centre Reinsurance Company of New York and Swiss Reinsurance America Corporation are currently rated A (Excellent) by A.M. Best Company, Inc.
The following table is a summary of the maximum amount of loss typically retained and ceded by the Company's insurance subsidiaries as of December 31, 1996 (exclusive of facultative reinsurance and the Centre Re stop loss contract):
- ---------- (1) For certain risks and policy years, the maximum retained loss per occurrence is $.5 million. On a very limited basis, the maximum retained loss per occurrence is $2 million.
(2) Amounts relate to the contract effective January 1, 1997, which catastrophe layers in excess of $2.5 million are subject to a 5% coinsurance.
(3) Effective December 1, 1995, a layer of excess reinsurance was added for a maximum limit of $10 million per principal on a direct basis, $2.1 million on a net basis.
(4) Amount indicated is the maximum face amount (limit) on the bond issued, which represents the value of goods being imported that are subject to U.S. Customs duty. The actual exposure to the Company is the amount of any unpaid duty on the goods imported, which is generally approximately 15% of the face value of the goods, and any penalties associated with the late payment of the duty.
(5) Subject to a catastrophe retention of $3 million per occurrence and a maximum ceded loss of $40 million per occurrence.
(6) Excludes the effects of the Company's 5% retention of $14 million in losses in excess of $1 million.
Marketing
The Company relies on multiple distribution channels to market its insurance products. Medical malpractice and dental malpractice insurance are produced on a direct basis by Med Pro and by independent brokers and agents. License and permit bonds are marketed directly by Frontier Pacific and SDIA, and through independent brokers and agents. Bail bonds are produced by Douglass/Frontier through a nationwide network of bail bondsmen.
The Company relies primarily on independent insurance agencies and insurance brokerage firms to generate sales of its remaining lines of business. General liability, workers' compensation, multi-peril and property policies are produced through general agents, principally in California, Florida, New Jersey, New York, Pennsylvania, and Texas, and selected small agencies in New York on a brokerage basis. Surety bonds for small contractors are produced through independent insurance agents acting as retail brokers and general agents and several small insurance companies which also act as reinsurers on the business they produce. Custom bonds are produced through a specialty agency in New York which derives the business from a nationwide network of customs brokers located in the various ports of entry.
The following tables set forth for the three years ended December 31, 1996, the gross and net premiums written produced internally and by independent agencies and brokerage firms, no one of which accounted for more than 5% of such premiums:
Operating Ratios
Statutory Combined Ratio
The statutory combined ratio is the traditional measure of underwriting experience for insurance companies. Generally, if the statutory combined ratio is below 100%, an insurance company has an underwriting profit and if it is above 100%, the insurer has an underwriting loss.
The following table reflects the consolidated statutory loss ratios, expense ratios and combined ratios of the Company's primary insurance operating subsidiaries, Frontier Insurance, Frontier Pacific and, from May and July 1996, United Capitol and Regency, respectively, determined in accordance with statutory accounting practices, together with the property and casualty industry-wide statutory combined ratios after policyholders' dividends as compiled by A.M. Best, for the years indicated:
Premium-to-Surplus Ratio
While there are no statutory provisions governing premium-to-surplus ratios, regulatory authorities regard this ratio as an important indicator since the lower the ratio, the greater the insurer's ability to withstand abnormal loss experience. Guidelines established by the National Association of Insurance Commissioners provide that an insurer's premium-to-surplus ratio is satisfactory if it is below 3 to 1.
The following table sets forth the ratio of net premiums written during the year to policyholders' surplus at the end of the year for Frontier Insurance, Frontier Pacific, United Capitol and Regency for the years indicated:
Loss and LAE Reserves
Significant periods of time, ranging up to several years, may elapse between the occurrence of an insured loss, the reporting of the loss to the Company and its payment of such loss. Medical malpractice and general liability usually have a much longer period of time between occurrence of a loss and payment than property lines. To recognize liabilities for unpaid losses, the Company establishes reserves, which are balance sheet liabilities representing estimates of amounts needed to pay claims and related expenses with respect to insured events which have occurred, including those not yet reported ("IBNR").
All claims are investigated, supervised and adjusted by personnel of Pioneer, which selects counsel and outside adjusting firms, if required, and monitors the case and approves any settlement. Any payment in excess of $50,000 requires approval by an officer of the Company. The Company believes claims management is critical to controlling the amount of paid losses and has an internal staff of experienced claims adjusters and attorneys assigned exclusively to managing and adjusting claims.
When a claim is reported, the Company's claims adjusting personnel establish a formula case reserve, which is based on historical average claim costs, for the estimated amount to be paid. As more pertinent information becomes available on a claim, adjusting personnel change the reserve from a formula reserve to a case basis reserve. This case basis reserve is an estimate of the amount of ultimate payment which reflects the informed judgment of such personnel, based on the Company's reserving practices and the experience and knowledge of such personnel regarding the nature and value of the specific type of claim. Additionally, reserves are established by the Company on an aggregate basis to provide for IBNR losses and to maintain the overall adequacy of reserves. The Company also establishes a related loss adjustment expense ("LAE") reserve on an aggregate basis representing the estimated expense of settling claims, including legal and other fees and general expenses of administering the claims adjustment process with respect to reported and unreported losses. Virtually all of the Company's LAE is classified as allocated LAE as a result of its method of handling claims through Pioneer. The Company does not discount its reserves either on the basis of generally accepted accounting practices ("GAAP") or statutory accounting practices.
The reserves for losses and LAE are estimated using loss evaluations and actuarial projections and represent estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effect of trends in claims severity and frequency and are continually reviewed. As part of this process, historical data are reviewed and consideration is given to the anticipated impact of various factors, such as legal developments, changes in social attitudes, and economic conditions, including the effects of inflation and anticipated subrogation recoveries with respect to the surety line of business. As experience develops and other data becomes available, these estimates are revised, as required, resulting in increases or decreases in reserves for insured events of prior years. Future adjustments, if any, will be reflected in the results of operations in the period in which recognized.
The following table sets forth a reconciliation of the beginning and ending loss and LAE reserve balances, net of reinsurance ceded, for each of the three years in the period ended December 31, 1996:
The Company's net reserves for unpaid losses and LAE, net of related reinsurance recoverable, at December 31, 1995 and 1994 were decreased in the following year by approximately $4.5 million and $7.5 million, respectively, and at December 31, 1993 were increased in the following year by approximately $13.9 million, for claims that had occurred on or prior to the balance sheet dates. No premiums have been accrued as a result of the changes to prior-year loss and LAE reserves.
The net $4.5 million decrease in prior years' reserves in 1996 was the result of favorable claims development on the workers' compensation line of business. Included in the net development was an increase in prior years' reserves of approximately $13 million which was entirely offset by subrogation recoverables recognized in connection with a favorable court ruling in 1995. See NOTE C of the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. The significant increase in the reinsurance recoverables in 1996 was due to the contribution to the recoverables as result of the acquisition of United Capitol and Regency, which were acquired in 1996, and the change in the type of reinsurance from an aggregate claim excess of loss to a stop loss for the majority of the Company's losses.
The net $7.5 million decrease in the prior years' reserves in 1995 was the result of favorable claims development on the general liability and workers' compensation lines and to subrogation recoveries in the surety line of business in excess of expectations. Included in the net development was an increase in prior years' reserves of approximately $19 million which was entirely offset by subrogation recoverables recognized in connection with a favorable court ruling in 1995. See NOTE C of the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. The significant increase in the reinsurance recoverable in 1995 was due to a change in the type of reinsurance from an aggregate claim excess of loss to a stop loss for the majority of the Company's losses. See "Reinsurance".
The $13.9 million increase in prior years' reserves in 1994 resulted from a $17.5 million increase in the reserves attributable to adverse medical malpractice claims development in Florida as a result of higher
than anticipated dollar settlements and from redundancies in other lines.
The following table reflects the Company's loss and LAE reserves development, net of estimated subrogation recoverable through December 31, 1996, for each of the preceding ten years:
The loss and LAE reserves of Frontier Insurance, Frontier Pacific, United Capitol and Regency as reported in their Annual Statements prepared in accordance with statutory accounting practices and filed with state insurance departments are identical with those reflected in the Company's financial statements prepared in accordance with GAAP included herein, before elimination of inter-company transactions and except for a change resulting from the rescission by Frontier Insurance in April 1986 of an offer to assume reinsurance under a proposed treaty with another insurer which has been given retroactive effect herein but was not reflected in the statutory filing with the New York Insurance Department until the March 31, 1986 quarterly statement, thereby reducing the GAAP reserves at December 31, 1985, by $861,000 from the statutory reserves at such date. Further, at December 31, 1986, Frontier Insurance's loss and LAE reserves under GAAP were lower by $138,000 than its 1986 statutory reserves as a result of the revision of certain estimates with respect to liquor law liability claims.
Investments
Funds, including reserve funds, are invested until required for the Company's operations, subject to restrictions on permissible investments established by applicable state insurance codes. The Company's investment strategy is to maximize after-tax income while generally limiting investments to investment grade securities with high liquidity. Prior to 1996, the Company's investment portfolio was managed by Asset Allocation and Management Company ("Asset Allocation") and General Re New England Asset Management, Inc.("New England"), registered investment advisors which specialize in insurance company portfolio management, pursuant to guidelines established by the Company. In 1996, the Company hired a Chief Investment Officer and the core fixed income portfolio is now being managed internally. Asset Allocation and New England provide investment advisory and related services to the Company in asset classes such as mortgage-backed securities, sinking fund preferred stocks, and other special classes of securities.
The following table contains information concerning the Company's investment portfolio at December 31, 1996:
- ---------- (1) Original cost of equity and short-term securities and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts.
The following table sets forth a profile of the Company's fixed maturity investment portfolio by rating at December 31, 1996:
- ----------
(1) Ratings are as assigned primarily by Standard & Poor's Corporation, with remaining ratings as assigned by Moody's Investors Service Inc.
The following table sets forth the maturity profile of the Company's portfolio of fixed maturity investments at December 31, 1996:
The following table summarizes the Company's investment results for the five years ended December 31, 1996, calculated on the mean of total investments as of the first and last day of each calendar quarter:
Regulation
Frontier Insurance, Frontier Pacific, United Capitol and Regency are subject to varying degrees of regulation and supervision in the jurisdictions in which they transact business under statutes which delegate regulatory, supervisory and administrative powers to state insurance commissioners. Such regulation generally is designed to protect policyholders rather than investors and relates to such matters as the standards of solvency which must be met and maintained; the licensing of insurers and their agents; the nature of and examination of the affairs of insurance companies, which includes periodic market conduct examinations by the regulatory authorities; annual and other reports, prepared on a statutory accounting basis, required to be filed on the financial condition of insurers or for other purposes; establishment and maintenance of reserves for unearned premiums and losses; and requirements regarding numerous other matters. In general, Frontier Insurance, Frontier Pacific, Regency and United Capitol must file all rates for insurance directly underwritten with the insurance department of each state in which they operate on an admitted basis; reinsurance generally is not subject to rate regulation. Medical malpractice rates in New York are established by the New York State Insurance Department (the "Department"). Further, state insurance statutes typically place limitations on the amount of dividends or other distributions payable by insurance companies in order to protect their solvency. New York, the jurisdiction of incorporation of Frontier Insurance, requires that dividends be paid only out of earned surplus and limits the annual amount payable without the prior approval of the Department to the lesser of 10% of policyholders' surplus or 100% of adjusted net investment income. California, the jurisdiction of incorporation of Frontier Pacific, currently limits the annual amount of dividends payable without the prior approval of the California Insurance Department to the greater of
10% of policyholders' surplus at the end of the previous calendar year or 100% of net income for the previous calendar year. Wisconsin, the jurisdiction of incorporation of United Capitol, precludes the Company from paying dividends without prior approval of the Commissioner of Insurance. North Carolina, the jurisdiction of incorporation of Regency, limits the amount payable without prior approval and is limited to the lesser of 10% of statutory surplus or net income.
The Company is also subject to statutes governing insurance holding company systems in various jurisdictions. Typically, such statutes require the Company to file information periodically with the state insurance regulatory authorities, including information concerning its capital structure, ownership, financial condition and general business operations. Under the terms of applicable state statutes, any person or entity desiring to purchase more than a specified percentage (commonly 10%) of the Company's outstanding voting securities is required to obtain regulatory approval for the purchase. Article 15 of the New York Insurance Law relating to holding companies, to which the Company is subject, requires, inter alia, disclosure of transactions between Frontier Insurance and the Company or any of its subsidiaries, that such transactions satisfy certain standards, including that they be fair, equitable and reasonable and that certain material transactions be specifically non-disapproved by the Department. Further, prior approval by the Department is required of affiliated sales, purchases, exchanges, loans or extensions of credit, or investments, any of which involve 5% or more of Frontier Insurance's admitted assets as of the preceding December 31st. In addition, any documents relating to the offering of securities by the Company, the proceeds of which will be used for Frontier Insurance, must be approved by the Department. With respect to Frontier Pacific, United Capitol and Regency, California, Wisconsin and North Carolina law with respect to holding companies is substantially equivalent to that of New York.
The National Association of Insurance Commissioners ("NAIC") has established eleven financial ratios to assist state insurance departments in their oversight of the financial condition of insurance companies operating in their respective states. The NAIC calculates these ratios based on information submitted by insurers on an annual basis and shares the information with the applicable state insurance departments. The ratios relate to leverage, profitability, liquidity and loss reserve development. Frontier Insurance's percentage increase in surplus exceeded the acceptable range during 1996 due to a $64 million capital infusion by the Company. United Capitol's percentage decrease in surplus was outside the acceptable range during 1996 due to a $49.8 million dividend paid to its previous parent prior to the acquisition by the Company, partially offset by net income of $4.9 million and a $27.2 million capital contribution by the Company. United Capitol's percentage increase in net written premiums exceeded the acceptable range during 1996 due to the exceptionally low net written premiums from under utilization of capital in previous years. Frontier Pacific's percentage increase in surplus exceeded the acceptable range during 1996 due to a $5.1 million dollar capital infusion by its parent, Frontier Insurance. Frontier Pacific's increase in net written premiums and percentage of agents balances were outside the acceptable range due to the increased writings in California in the majority of the Company's programs, of which approximately fifty percent was written in the fourth quarter. See "Management's Discussion and Analysis of Financial Condition and Results of Operations."
In their ongoing effort to improve solvency regulation, the NAIC and individual states have enacted certain laws and statutory financial statement reporting requirements. For example, NAIC rules require audited statutory financial statements as well as actuarial certification of loss and LAE reserves therein. Other activities are focused on greater disclosure of an insurer's reliance on reinsurance and changes in its reinsurance programs and tighter rules on accounting for certain overdue reinsurance. In addition, the NAIC has implemented risk-based capital requirements for property and casualty insurance companies commencing in 1995 (see below). These regulatory initiatives and the overall focus on solvency may intensify the restructuring and consolidation of the insurance industry. It is also possible that Congress may enact legislation regulating the insurance industry. While the impact of these regulatory efforts on the Company's operations cannot be quantified until enacted, the Company believes it will be adequately positioned to compete in an environment of more stringent regulation.
In 1994, the NAIC implemented a risk-based capital measurement formula to be applied, commencing
in 1995, to all property/casualty insurance companies, which formula calculates a minimum required statutory net worth based on the underwriting, investment, credit loss reserve and other business risks applicable to the insurance company's operations. An insurance company that does not meet threshold risk-based capital measurement standards could be required to reduce the scope of its operations and ultimately could become subject to statutory receivership proceedings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Regulation."
Competition
The property and casualty insurance business is highly competitive, principally in terms of price and extent of coverage. In New York State, there are three major competitors, as well as a number of other insurers, writing medical malpractice insurance for physicians, the Company's principal insurance program, and in Florida such coverage is offered by a larger number of insurers. However, the Company benefits from the endorsement or approval of various medical associations, many of whose physician members are insured by the Company. Moreover, the Company's program, unlike those of its competitors, is limited to specified classes of physicians. Dental malpractice coverage in all jurisdictions is significantly more competitive than medical malpractice with respect to rates and terms of coverage. Although the Company's underwriting strategy is to underwrite specialty programs for niche markets, it nevertheless encounters competition from carriers engaged in insuring risks in the broader lines of business which encompass niche programs.
Employees
The Company currently has 749 full-time employees, 7 of whom are executive management, and 33 part-time employees. The Company is not a party to any collective bargaining agreement and believes its relationship with its employees to be good.
Item 2.
Item 2. Properties.
The Company owns a three-story office building at 195 Lake Louise Marie Road, Rock Hill, New York, in which its executive offices and insurance operations for Frontier Insurance are located. A 50,000 square foot addition is under construction and is anticipated to be completed in September 1997. The Company also owns a one-story building in Rock Hill, New York, which it uses for storage and a portion of which is rented, and an airplane for which it leases facilities at a local airport.
The Company owns a one-story 6,000 sq. ft. building in Charlotte, North Carolina where Regency Financial Corporation conducts its insurance operations.
The Company leases office space at eighteen locations in 11 states at an aggregate monthly rental of approximately $133,000.
The Company believes that upon completion of the addition at Rock Hill, New York, it will have adequate space for expansion of its existing operations.
Item 3.
Item 3. Legal Proceedings.
See "Management's Discussion and Analysis of Financial Condition and Results of Operations- -Shareholder Litigation"
Item 4.
Item 4. Submission of Matters to a Vote of Security Holders.
On December 30, 1996, the Company held a Special Meeting of Stockholders to vote upon proposals (i) to approve and ratify a financing transaction involving a $172,500,000 offering of Convertible Trust Originated Preferred Securities issued by the Company's financing vehicle, Frontier Financing Trust, and (ii) to adopt an amendment to the Company's Certificate of Incorporation increasing the authorized number of shares of Common Stock to 50,000,000 shares.
Present at the Special Meeting in person or by proxy were holders of 13,273,611 shares of the 14,688,064 shares of the Company's Common Stock issued and outstanding on November 22, 1996, the record date for the Special Meeting.
The vote on the proposals was as follows:
1) To approve and ratify the financing transaction description in the Proxy Statement:
For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 11,005,986 36,220 13,421 2,217,984
2) To adopt an amendment to the Company's Certificate of Incorporation to increase the authorized number of shares of Common Stock to 50,000,000 shares:
For Against Abstain Broker Non-Votes --- ------- ------- ---------------- 11,950,398 1,311,789 11,424 -0-
PART II
Item 5.
Item 5. Market for the Registrant's Common Stock and Related Security Holder Matters.
The Company's Common Stock is traded on the New York Stock Exchange under the symbol FTR. The following table sets forth the high and low sales prices for the Company's Common Stock, as reported by the New York Stock Exchange, for each calendar quarter during the periods indicated, as adjusted to reflect stock dividends paid and stock splits:
On March 18,1997, the Company had approximately 896 holders of record of its Common Stock, which did not include beneficial owners for shares registered in nominee or street name.
During 1996, the Company declared three quarterly cash dividends of $.13 per share and one quarterly cash dividend of $.11 per share (adjusted for stock dividend), constituting the sixteenth consecutive quarterly cash dividends. (See "Business-Regulation" for restrictions on the payment of dividends by the Company's insurance subsidiaries.)
Item 6.
Item 6. Selected Financial Data
The following selected financial data are derived from the Company's consolidated financial statements. The data should be read in conjunction with the consolidated financial statements, related notes, and other financial information included elsewhere in this report.
Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes thereto included elsewhere in this report.
Results of Operations
The following table sets forth the Company's net premiums earned by principal lines of insurance for the three years indicated and the dollar amount and percentage of change therein from year to year:
The following table sets forth the expense components of the Company's combined ratio calculated as a percentage of net premiums earned on the basis of generally accepted accounting principles ("GAAP Combined Ratio") for the three years indicated:
Calendar Year 1996 Compared to Calendar Year 1995
A variety of factors accounted for the 35.6% growth in net premiums earned, the principal factor being increases in the majority of the Company's core and new program business, partially offset by a decrease in workers' compensation, particularly the cotton gin program, and by the increased ceding of net premiums earned under the Company's aggregate excess of loss reinsurance contract effective January 1, 1996, pursuant to which 13.5% and 14% of net premiums earned in 1996 and 1995, respectively, was ceded for all lines of business, except certain classes of surety bonds, realtors' errors and omissions and all of the net premiums earned by United Capitol and Regency.
The increase in medical malpractice net premiums earned was primarily attributable to an increase in the number of physicians insured, principally those associated with mental health, home care and other social service organizations, growth in the programs for psychiatrists and alternative risks, geographical expansion in Ohio, Texas, Michigan and Illinois, growth in the dental program endorsed by the Academy of General Dentistry, and rate increases in Florida.
Net premiums earned for the general liability line increased primarily because of increases in various programs, including social services, alarms and guards, demolition contractors, pest control, excess employer's liability and asbestos abatement as a result of the acquisition of United Capitol in May 1996. These increases were partially offset by a decrease in net premiums earned in the umbrella and crane
operator liability programs.
Growth in the surety net premiums earned continued in 1996, primarily attributable to expanded writings of license and permit bonds, small contractors bonds, miscellaneous bonds, custom bonds and bail bonds.
Net premiums earned for the workers' compensation line decreased primarily as a result of decreases in the specialty niche program for cotton gins and feed lots, decreases in the social services programs due to price competition, and a lesser required participation in the National Workers' Compensation Reinsurance Pools. These decreases were partially offset by increases in workers' compensation from the alternative risk program which the Company initiated in 1996.
Net premiums earned for the commercial earthquake program increased primarily due to the growth in the number of policies written in 1996 over the comparable period in 1995, when the program was initiated.
Net premiums earned for the other lines of business increased primarily due to increased volume in commercial package policies in the social services program, and in the mobile homeowners program and auto physical damage business as a result of the acquisition of Regency effective in June 1996. These increases were partially offset by decreases in other miscellaneous small programs.
Net investment income before realized capital gains and losses increased 23.9% due principally to increases in invested assets resulting from the proceeds of the issuance of Convertible Trust Originated Preferred Securities ("Convertible TOPrS") in October 1996, cash inflow from regular operations, and the contribution to net investment income by United Capitol and Regency, partially offset by the interest charge on funds held by the Company for the benefit of the reinsurer of the Company's aggregate excess of loss reinsurance contract. Total net investment income increased 29.5% due to the aforementioned increase in net investment income and an increase in realized capital gains. The average annual pre-tax yield on investments, excluding the charge for funds held under the aggregate excess of loss reinsurance contract and realized capital gains and losses, was 6.4%, unchanged from the previous year. The average annual after-tax yield on investments, excluding the charge for funds held under the aggregate excess of loss reinsurance contract and realized capital gains and losses, was 4.8%, as compared to the previous year.
Gross claims adjusting income decreased 57.7% primarily as a result of a decrease in claim services provided to outside companies, principally Markel Corporation.
Total revenues increased 34.7% as a result of the above.
Total expenses increased by 35.6%, similar to the 35.6% increase in net premiums earned. Losses and loss adjustment expenses ("LAE") increased by 30.8% which included a 8.5% increase in losses and a 97.5% increase in LAE. The increase in losses was substantially lower than for net premiums earned as a result of a one-time reallocation of loss reserves to LAE reserves, favorable reserve development in accident years prior to 1996 for general liability and workers' compensation and recoveries under the aggregate excess of loss reinsurance contract which provides coverage for certain losses and LAE in excess of 65% of the net premiums earned for the 1996 accident year, partially offset by higher loss and LAE ratios for business written in 1996. The Company also increased prior years' reserves by approximately $13 million, which was entirely offset by an increase in the same amount of the subrogation recoverable recognized in conjunction with the favorable December 1995 ruling in the New York Court of Appeals, described in Note C of the Notes to Consolidated Financial Statements. Such increase in the subrogation recoverable resulted from further documentation and verification in the second quarter of 1996 of claims already paid by the Company and reserves held by the Company that the Company believes are reimbursable by the State of New York. The 97.5% increase in LAE resulted from the increase in loss and LAE ratios, a one-time reallocation of loss reserves to LAE reserves, partially offset by a change in the line of business mix to those having a lower percentage relationship
of LAE to losses and the allocation of recoveries under the aggregate excess of loss contract. Due to the disproportionate relationship of losses and LAE to net premiums earned, the loss and LAE component of the GAAP Combined Ratio was 2.1 percentage points lower than in the comparable 1995 period. The 40% increase in the amortization of policy acquisition costs, underwriting and other expenses was attributable primarily to an increase in direct commission expense resulting from growth in programs with higher commission rates, a decrease in reinsurance contingent commissions, increased staffing and marketing expenses related to expansion, a reduction in assessment recoveries from the Texas Workers' Compensation Insurance Facility, and salary increases. The 120% increase in interest expense was primarily the result of increased interest expense associated with the borrowing under the line of credit. The Company also incurred approximately $2,277,000 of expenses in 1996 associated with the Convertible TOPrS. See NOTE M of the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. As the non-claim related component of the GAAP Combined Ratio increased at a greater rate than premiums earned, the non-claim component was 1.2 percentage points higher than in the comparable 1995 period. The total GAAP Combined Ratio decreased by .9 percentage points to 91.8% as a result of the above.
The foregoing changes resulted in income before income taxes of $56.7 million for the year ended 1996, a 30.9% increase from the comparable 1995 period. Net income for the year increased by $8.9 million, or 28.4%.
Calendar Year 1995 Compared to Calendar Year 1994
A variety of factors accounted for the 25.2% growth in net premiums earned, the principal factor being increases in the majority of the Company's core and new program business, partially offset by a decrease in workers' compensation, particularly the cotton gin program, and by the increased ceding of earned premiums under the Company's aggregate excess of loss reinsurance contract effective January 1, 1995, pursuant to which 14% of earned premium for all lines of business, except bail, customs, license and permit, and miscellaneous surety bonds is ceded.
The increase in medical malpractice net premiums earned was primarily attributable to an increase in the number of physicians insured, principally those associated with mental health, home care, and other social service organizations, growth in the program for psychiatrists, greater penetration of the Ohio physician market, growth in the dental program endorsed by the Academy of General Dentistry, and rate increases in Florida and other geographic areas.
Net premiums earned for the general liability line increased primarily because of increases in various programs, including social services, alarms and guards, pest control and excess employer's liability. These increases were partially offset by a decrease in net written premiums earned in the umbrella and in the crane operator liability programs.
Growth in the surety net premiums earned continued in 1995, primarily attributable to expanded writings of license and permit bonds, with bonds for small contractors, miscellaneous bonds, and bail bonds also showing substantial percentage increases. The increase in license and permit bonds was primarily attributable to the Company's acquisition in April 1994 of the license and permit bond business of a California insurance agency.
Net premiums earned for the workers' compensation line decreased primarily as a result of decreases in the specialty niche program for cotton gins caused by a weather-related reduction in the cotton crop, and decreases in other smaller programs due to the Company's decision not to renew accounts deemed unprofitable, and decreased required participation in the National Workers' Compensation Reinsurance Pools. These decreases were partially offset by increases in workers' compensation premiums written in the social services programs.
Net premiums earned for the other lines of business increased primarily due to increased volume in commercial package policies in the social services program, and the recent start-up of an earthquake
program. These increases were partially offset by decreases in other miscellaneous small programs.
Net investment income before realized capital gains and losses increased 22.8% due principally to increases in invested assets resulting from the proceeds of the $25 million borrowing under a line of credit facility, the January 1995 commutation of certain medical malpractice reinsurance treaties, and cash inflow from regular operations, partially offset by the interest charge on funds held by the Company for the benefit of the reinsurer of the Company's aggregate excess of loss reinsurance contract. Total net investment income increased 30.8% due to the aforementioned increase in net investment income and a decrease in realized capital losses. The average annual pre-tax yield on investments, excluding the charge for funds held under the aggregate excess of loss reinsurance contract and realized capital gains and losses, decreased to 6.4% from 6.6%. This decrease is primarily the result of generally lower interest rates available for funds invested in 1994 and 1995, and a decrease in the Company's holdings of higher yielding investments, as a result of maturities and calls for redemption. The average annual after-tax yield on investments, excluding the charge for funds held under the aggregate excess of loss reinsurance contract and realized capital gains and losses, decreased to 4.9% from 5.4%, primarily for the reasons described above.
Gross claims adjusting income decreased 49.0% primarily as a result of a decrease in claim services provided to outside companies, principally Markel Corporation.
Total revenues increased 25.8% as a result of the above.
Total expenses increased by 15.4% compared to the 25.2% increase in net premiums earned. Losses and loss adjustment expenses ("LAE") increased by 7.5% as a result of a 5.5% increase in losses and a 14.1% increase in LAE. The increase in losses was substantially lower than that for net premiums earned as a result of the one-time addition of $17.5 million to the 1994 loss reserves applicable to the Company's medical malpractice business in Florida, subrogation recoveries in the surety line of business in excess of expectations, favorable reserve development in accident years prior to 1995 for general liability and workers' compensation and recoveries under the aggregate excess of loss reinsurance contract which provides coverage for certain losses and LAE in excess of 66% of the net earned premium for the 1995 accident year. These decreases were partially offset by carrying higher loss and LAE ratios to premiums earned for 1995 business. The Company also increased prior years reserves by approximately $19.0 million, offset by subrogation recoverable of like amount, recognized in conjunction with the favorable ruling in the New York Court of Appeals as more fully described in Note--C of the Notes to Consolidated Financial Statements. The 14.1% increase in LAE resulted from the increase in loss and LAE ratios, partially offset by a change in the line of business mix to those having a lower percentage relationship of LAE to losses and the allocation of recoveries under the aggregate excess of loss contract and the favorable court ruling mentioned above. Due to the disproportionate relationship of losses and LAE to earned premium, the loss and LAE component of the GAAP Combined Ratio was 9.6 percentage points lower than in the comparable 1994 period. The 38.7% increase in the amortization of policy acquisition costs was attributable primarily to an increase in direct commission expense resulting from growth in programs with higher commission rates, a decrease in reinsurance contingent commissions, increased staffing and marketing expenses related to expansion, and salary increases, partially offset by a decrease in assumed commission expense resulting from the continued decrease in assumed written premiums. The 25.1% increase in underwriting, other expenses and interest expense was primarily the result of the interest expense associated with the borrowing under the line of credit facility, an increase in the additions to allowance for bad debts, increased staffing, increased facilities, equipment and materials expense necessitated by the Company's growth, a reduction in assessment recoveries from the Texas Workers' Compensation Insurance Facility, and salary increases, partially offset by a decrease in policyholder dividends. As the non-claim related component of the GAAP Combined Ratio increased at a greater rate than premiums earned, the non-claim component was 1.7 percentage points higher than in the comparable 1994 period. The total GAAP Combined Ratio decreased by 8.3 percentage points to 92.7% as a result of the above.
The foregoing changes resulted in income before income taxes of $43.3 million for the year ended 1995,
a 102.9% increase from the comparable 1994 period. Net income for the year increased by $14.2 million, or 83.8%. The comparative results were significantly impacted by the $17.5 million addition to loss reserves in the third quarter of 1994 reflected above, which resulted in a disproportionately lower net income for the 1994 period.
Asset Portfolio Review
At December 31, 1996, the Company's total assets of $1.25 billion was comprised of the following: cash and investments, 67.9%; reinsurance recoverables, 15.5%; premiums receivable and agents balances, 6.2%; deferred expenses (policy acquisition costs and deferred federal income taxes), 4.9%; home office building, property and equipment, 3.0%; and other assets, 2.5%.
The Company generally invests in securities with fixed maturities with the objective of providing reasonable returns while limiting liquidity and credit risk. As a result, its investment portfolio consists primarily of government and governmental agency securities and high-quality marketable corporate securities which are rated at investment grade levels. At December 31, 1996, the Company held rated, or better-than-investment grade, fixed income debt securities with a carrying amount of $ 685.3 million, constituting 100.0% of the Company's fixed maturity investments.
At December 31, 1996 and 1995, the Company's fixed maturity securities included mortgage-backed bonds of $297.8 million and $192.1 million, respectively, which are subject to risks associated with variable prepayments of the underlying mortgage loans. Prepayments cause those securities to have different actual maturities than that expected at the time of purchase. Securities that have an amortized cost greater than par that are backed by mortgages that prepay faster than expected will incur a reduction in yield or loss, while securities that have an amortized cost less than par that are backed by mortgages that prepay faster than expected will generate an increase in yield or gain. The degree to which a security is susceptible to either gains or losses is influenced by the difference between its amortized cost and par, the relative sensitivity of the underlying mortgages backing the assets to prepayments in a changing interest rate environment and the repayment priority of the securities in the overall securitization structure.
The Company limits the extent of its credit risk by purchasing securities that are backed by stable collateral and by concentrating on securities with enhanced priority in the securitization structure. Such securities with reduced risk typically have a lower yield (but higher liquidity) than higher-risk mortgage-backed bonds (i.e., mortgage-backed bonds structured to share in residual cash flows or which cover interest only payments). At selected times, higher-risk securities may be purchased if they do not compromise the safety of the Company's general portfolio. There are negligible default risks in the Company's mortgage-backed bond portfolio as the vast majority of these bonds are either guaranteed by U.S. government-sponsored entities or are supported in the securitization structure by junior securities resulting in the bonds having high investment grade status.
At December 31, 1996, the following table provides a profile of the Company's fixed maturity investment portfolio by rating:
Prior to January 1, 1994, the Company classified fixed maturity securities in accordance with the then existing accounting standards and, accordingly, those fixed maturity securities that were not intended to be held-to-maturity were designated as actively managed, and were carried at fair value with unrealized holding gains and losses reported in a separate caption in shareholders' equity. Other fixed maturity securities were carried at amortized cost, since the Company had both the ability and intent to hold those securities until maturity.
As of January 1, 1994, the Company adopted FASB Statement 115 and reclassified a portion of its fixed maturity securities portfolio as "available-for-sale," with the remainder being classified as "held-to-maturity." Under the reclassification, the fixed maturity securities classified as "available-for-sale" are carried at fair value and changes in fair values, net of applicable income taxes, are charged or credited directly to shareholders' equity. "Held-to-maturity" securities are reported at amortized cost. The adoption of Statement 115 increased shareholders' equity by $3.65 million at January 1, 1994.
In December 1995, the Company reclassified all of its previously held securities classified as held-to-maturity, to available-for-sale as permitted by the FASB's Special Report, A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equities - Questions and Answers. The reclassification increased shareholders' equity by $2.75 million at December 31, 1995.
Liquidity and Capital Resources
The Company is a holding company, receiving cash principally through sales of equities, borrowings, and dividends from its subsidiaries, certain of which are subject to dividend restrictions described in Note I of the Notes to the Consolidated Financial Statements. The ability of insurance and reinsurance companies to underwrite insurance and reinsurance is based on maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for the Company's subsidiaries are funds generated from insurance and reinsurance premiums, investment income, commission and fee income, capital contributions from the Company and proceeds from sales and maturities of portfolio investments. The principal expenditures are for payment of losses and LAE, underwriting and other operating expenses, commissions, and dividends to shareholders and policyholders.
The Company's subsidiaries maintain liquid operating positions and follow investment guidelines that are intended to provide for an acceptable return on investment while preserving capital, maintaining sufficient liquidity to meet their obligations, and as to the Company's insurance subsidiaries, maintaining a sufficient margin of capital and surplus to ensure their unimpaired ability to write insurance and assume reinsurance.
Cash flow generated from operations for 1996, 1995, and 1994 was $116.5 million, $105.0 million, and $81.9 million, respectively, amounts adequate to meet all of the Company's obligations.
In January 1994 and 1995, investment funds were increased by $9.0 million and $3.9 million, respectively, from the commutation of the 1990, and 1991 treaty years under the medical malpractice reinsurance treaties, resulting in the receipt of $6.1 million and $3.9 million, respectively, in cash and a concomitant increase in reserves for unpaid losses and LAE, with the balance received from the collection of contingent commissions earned by the Company for the 1994 treaty year.
In April 1994, the Company completed the acquisition of Spencer Douglass Insurance Associates, Inc., a California license and permit bond insurance agency, for $3.2 million and entered into a five-year consulting agreement with the owner/principal of the agency. Personnel of the agency involved in placing and servicing the acquired business have become employees of the Company, operating from their respective locations in Phoenix, Arizona; Reno and Las Vegas, Nevada; and San Jose, Orange County and La Jolla, California. All new and renewal policies with respect to the approximately $5 million to $6 million of license and permit bond business acquired are issued by the Company.
In May 1995, the Company and R. Spencer Douglas III ("Douglass") formed a California limited liability corporation, Douglass/Frontier, LLC ("Douglass/Frontier"), a bail bond insurance agency to which the Company contributed $2.4 million in cash and Douglass contributed the assets of his wholly-owned existing bail bond agency. The Company and Douglass share equally in the ownership of Douglass/Frontier.
On June 29, 1995, the Company obtained a 4 1/2 year, $35 million line of credit facility from The Bank of New York, under which it borrowed $25 million at an interest rate of 6.87% per annum, payable quarterly. In June and September 1996, the Company borrowed an additional $4.2 million and $2.9 million from The Bank of New York (outside of the line of credit) at annual interest rates of 6.125% and 6.3125%, respectively, payable quarterly, due October 1996. In the fourth quarter, the Company repaid all borrowings and terminated the facility.
As a result of a review by AM Best of Frontier Insurance Company's A- (Excellent) rating, the Company agreed with AM Best to make a $45 million capital infusion to Frontier Insurance Company by June 30, 1995 in order to fund its projected growth and retain its A- rating. At June 30, 1995, the Company had completed the $45 million capital infusion, utilizing a combination of funds previously held by the Company and loan proceeds from The Bank of New York loan.
In November 1995, the Company acquired the realtors' errors and omissions book of business from Bankers Multiple Line Insurance Company ("BMLIC") for $400,000. The personnel of BMLIC involved in placing and servicing the acquired business have become employees of the Company and will continue to operate from their location in Louisville, Kentucky.
In May 1996, the Company completed the acquisition of United Capitol Holding Company ("United Capitol Holding"), the direct or indirect parent of United Capitol Insurance Company, United Capitol Managers, Inc. (renamed Olympic Underwriting Mangers, Inc.) and Fischer Underwriting Group, Inc., for $31.0 million. United Capitol Holding, through its subsidiaries, underwrites specialty risks such as asbestos abatement, environmental liability and directors' and officers' liability.
Effective June 1996, the Company completed the acquisition of Regency Insurance Company and Emrol Premium Discount, Inc. in exchange for 238,087 shares of the Company's Common Stock. Regency underwrites non-standard automobile insurance principally in North Carolina and Emrol finances premiums primarily for policyholders of Regency.
In October 1996, the Company completed a $172.5 million offering of Convertible TOPrS, issued through Frontier Financing Trust, a Delaware business trust formed by the Company for the purpose of the transaction. The Convertible TOPrS have a dividend rate of 6 1/4% and are convertible into 1.0663 shares of the Company's Common Stock, equivalent to a conversion price of $46.89 per share. See NOTE M of the NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS. Net proceeds to the Company from this offering were $166.9 million of which $32.1 million was applied to repay bank debt, $60 million was contributed to the surplus of Frontier Insurance and the remaining balance was available for general corporate purposes.
During 1996, the Company expended $1.2 million in connection with the construction of an addition to its home office building. The Company plans to occupy the addition in 1997 and will expend approximately $11.3 million to complete the facility.
In March 1992, the Company commenced quarterly cash dividend payments. Cash dividends declared in 1996, 1995 and 1994 were $7,300,000, $6,200,000, and $6,000,000, respectively.
On November 10, 1994, the Company authorized a stock repurchase program to purchase up to 1,000,000 shares of its Common Stock at such times and prices as the Company deems advantageous, in compliance with SEC Rule 10b-18 at the discretion of the Chairman of the Board. There is no commitment or obligation on the part of the Company to purchase any particular number of shares, and
the program may be suspended at any time at the Company's discretion. The Company did not purchase any shares in 1996. In 1995 and 1994, in conjunction with this repurchase program, the Company purchased 6,600 and 38,940 shares of its Common Stock at a cost of $134,000 and $654,000, respectively.
On March 31, 1997, the Company announced that it executed a definitive agreement to acquire 100% of the stock of Lyndon Property Insurance Company and its six subsidiaries, Lyndon Life Insurance Company, Twin Mercury Life Insurance Company, Gulfco Life Insurance Company, Lyndon Southern Insurance Company, Lyndon-DFS Warranty Services, Inc. and Lyndon General Agency of Texas, Inc., subject to certain closing conditions and regulatory approval, at a purchase price of approximately $92,000,000. The purchase price will be financed by Company funds and bank borrowings.
Reinsurance
Effective January 1, 1995, the Company entered into a stop loss reinsurance contract with Centre Reinsurance Company of New York ("Centre Re") for accident years' commencing 1995. Under the agreement, Centre Re provides reinsurance protection within certain accident year and contract aggregate dollar limits for losses and LAE in excess of a predetermined ratio of these expenses to net premiums earned for a given accident year for all lines of business, except certain classes of surety bonds, and net premiums earned from United Capitol and Regency. The loss and LAE ratio above which the reinsurance provides coverage is 66%, 65%, and 64% for accident years 1995 through 1997, respectively. The maximum amount recoverable for an accident year is 175% of the reinsurance premium paid for the accident year, or $162,500,000 in the aggregate for the three years.
Litigation with the State of New York
In December 1990, the New York State Court of Claims rendered a decision in favor of the Company holding that a State University of New York ("SUNY") medical school faculty member engaged in the clinical practice of medicine at a SUNY medical facility, corollary to such physician's faculty activities, was within the scope of such physician's employment by SUNY and was protected against malpractice claims arising out of such activity by the State of New York and not under the Company's medical malpractice policy. The decision was affirmed on appeal by the New York State Appellate Division in November 1991 and not appealed by the State. In July 1992, the State of New York enacted legislation eliminating medical school faculty members of SUNY engaged in the clinical practice of medicine at a SUNY medical facility from indemnification by the State with respect to malpractice claims arising out of such activity, retroactive to July 1, 1991. In an opinion filed on September 3, 1993 the Court of Claims of the State of New York held, inter alia, that the July 1992 legislation by the State of New York eliminating SUNY medical school faculty members engaged in the clinical practice of medicine, as part of their employment by SUNY, from indemnification by the State with respect to malpractice claims arising out of such activity, was not to be applied retroactively. This decision was affirmed by the New York State Appellate Division in April 1994. Subsequently, in February 1995, the Appellate Division granted leave to Frontier and the State of New York to have the issues of Frontier's entitlement to recover its costs of defense and its costs of settlement ruled on by the State's highest Court, the New York Court of Appeals. In December 1995, the New York Court of Appeals ruled on this issue and concluded that Frontier was entitled to recoveries from the State for such medical malpractice claims. As a result of this decision, the Company believes that it will benefit economically by not being ultimately responsible for certain claims against SUNY physicians for whom it presently carries reserves is entitled to reimbursement of certain claims previously paid; accordingly, effective June 30, 1996 and December 31, 1995, Frontier recorded subrogation recoverables of approximately $13,000,000 and $19,000,000, respectively, representing the amount of claims already paid and the reserves currently held by Frontier on open cases that management believes are reimbursable by the State of New York. In January 1997, the New York Court of Claims rendered a decision granting summary judgement to the Company on three SUNY cases that were previously paid by the Company. This decision has been appealed by the State of New York. To the extent that the amount of the actual recovery varies, such difference will be reported in the period recognized. The Company is continuing to defend all SUNY faculty members against malpractice claims that have been asserted and is maintaining reserves therefor adjusted for the anticipated recoveries.
Regulation
In its ongoing effort to improve solvency regulation, the National Association of Insurance Commissioners ("NAIC") and individual states have enacted certain laws and financial statement changes. The NAIC has adopted Risk-Based Capital ("RBC") requirements for property/casualty insurance companies to evaluate the adequacy of statutory capital and surplus in relation to investment and insurance risks such as asset quality, mortality and morbidity, asset and liability matching, benefit and loss reserve adequacy, and other business factors. The RBC formula is used by state insurance regulators as an early warning tool to identify, for the purpose of initiating regulatory action, insurance companies that potentially are inadequately capitalized. In addition, the formula defines new minimum capital standards that supplement the current system of low fixed minimum capital and surplus requirements on a state-by-state basis. Regulatory compliance is determined by a ratio of the enterprise's regulatory total adjusted capital, as defined by the NAIC, to its authorized control level RBC, as defined by the NAIC. Companies below specific trigger points or ratios are classified within certain levels, each of which requires specific corrective action. The levels and ratios are as follows:
The ratios of total adjusted capital to authorized control level RBC for the Company's insurance subsidiaries were all in excess of 3:1 at both December 31, 1996 and 1995.
The NAIC currently is in the process of recodifying statutory accounting practices, the result of which is expected to constitute the only source of "prescribed" statutory accounting practices. Accordingly, that project, which is expected to completed in 1997, will likely change, to some extent, prescribed statutory accounting practices, and may result in changes in the Company's insurance subsidiaries statutory surplus.
The thrust of these regulatory efforts at all levels is to improve the solvency of insurers. These regulatory initiatives, and the overall focus on solvency, may intensify the restructuring and consolidation of the insurance industry. While the impact of these regulatory efforts on the Company's operations cannot be quantified until enacted, the Company believes it will be adequately positioned to compete in an environment of more stringent regulation.
Impact of Inflation
Property and casualty insurance premiums are established before the amount of losses and LAE, or the extent to which inflation may affect such expenses, are known. Consequently, the Company attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, the Company may be limited in raising its premiums commensurate with anticipated inflation, in which event the Company, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on the Company's investment portfolio with a corresponding effect on the Company's investment income.
Environmental Issues
The Company, through its subsidiary, United Capitol, in the ordinary course of business, writes insurance on accounts which have hazardous, unique or unusual risk characteristics. Since United Capitol's organization in 1986, its liability policies have included an absolute pollution coverage exclusions, except for policies providing pollution liability coverage to contractors involved in the remediation of pre-existing pollution. In addition, United Capitol's product liability and other primary general liability policies contain exclusions for coverage of claims for bodily injury or property damage caused by exposure to asbestos, other than for the policies providing coverage to asbestos abatement contractors for third party claims alleging bodily injury or property damage as a result of exposure to asbestos. Employees of the insured contractor and others required to be in the abatement area are excluded from coverage.
Although the Company believes that such policies, together with the Company's general, professional and other liability policies, do not subject it to material exposure for environmental pollution claims, there can be no assurance of the Company's continued protection in view of the expansion of liability for environmental claims in recent litigation in the insurance industry.
Shareholder Litigation
The Company has been served with several purported class actions alleging violations of federal securities laws by the Company and, in some cases, by certain of its officers and directors; certain other actions also allege violations of the common law. The complaints relate to the Company's November 5, 1994 announcement of its third-quarter financial results and allege that the Company previously had omitted and/or misrepresented material facts with respect to its earnings and profits. The Company believes the suits are without merit and has retained special legal counsel to contest them vigorously and believes that the Company's exposure to liability under such lawsuits, if any, would not have a material adverse effect on the Company's financial condition.
Item 8.
Item 8. Financial Statements and Supplementary Data.
See List of Financial Statements and Financial Statement Schedules on Page.
Item 9.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
PART III
Item 10.
Item 10. Directors and Executive Officers of the Registrant.
The following table lists each director and each executive officer of the Company, together with their respective age and office(s) held:
Name Age Office - ------------------- --- -------------------------------------- Walter A. Rhulen 65 President and Chairman of the Board Peter L. Rhulen 58 Vice President and Director Harry W. Rhulen 33 Executive Vice President Peter H. Foley 49 Executive Vice President - M & A Mark H. Mishler 38 Vice President - Finance and Treasurer Thomas J. Dietz 55 Vice President Linda Markovits 48 Vice President - Investor Relations James E. Kroh 53 Vice President - Human Resources Lawrence E. O'Brien 56 Director Douglas C. Moat 65 Director Alan Gerry 68 Director
Walter A. Rhulen has been the President and Chairman of the Board of the Company since commencement of its operations in July 1986 and the President of Frontier Insurance since 1976. Mr. Rhulen was also the President of Rhulen Agency, a position he held for more than 22 years, which office he resigned in 1986. Mr. Rhulen, a chartered property and casualty underwriter (CPCU), has more than 40 years experience in the insurance business.
Peter L. Rhulen has been a Vice President and director of the Company since commencement of its operations in July 1986 and a Vice President of Frontier Insurance since 1976. Mr. Rhulen was formerly Vice Chairman of Markel/Rhulen, a position he held from October 1989 to September 1992, and now acts as an independent insurance consultant. Mr. Rhulen is also Vice Chairman of the Board and President of RAI Partners, Inc. (formerly Rhulen Agency), a firm of which he has been an executive officer for more than 25 years. Mr. Rhulen devotes only minimal time to the affairs of the Company in his capacity as Vice President.
Harry W. Rhulen was elected Executive Vice President of the Company in October 1996, having been a Vice President of the Company since June 1990 and an employee since June 1989. Mr. Rhulen also serves as Chief Executive Officer of United Capitol from its acquisition in May 1996.
Peter H. Foley was elected Executive Vice President of the Company in October 1996, having been a Vice President of the Company since June 1995. Prior thereto, Mr. Foley served as Vice President of Aegis Security Insurance Company from September 1993 to June 1995, Executive Vice President and co-founder of Connecticut Surety Insurance Company from May 1993 to September 1993, and Senior Vice President of E.W. Blanch, Inc. from November 1991 to May 1993. Mr. Foley has served in various executive officer positions in the insurance industry for more than 22 years, and has served as principal of his own consulting firm.
Mark H. Mishler was elected Vice President - Finance and Treasurer of the Company in October 1996, having been the Vice President and Controller of Frontier Insurance Company since 1995, and an employee of the Company since 1987. Mr. Mishler has more than 15 years experience in the insurance business.
Thomas J. Dietz has been a Vice President of the Company since July 1990 and the President of Med Pro since its inception in 1986. For more than five years prior thereto, Mr. Dietz was a Vice President of Medical Quadrangle, Inc., an insurance agency which acted as a broker to the Company through February 1987. Mr. Dietz, a CPCU, has more than 29 years' experience in the insurance business.
Linda Markovits has been an employee of the Company since 1987, was elected an Assistant Vice President in January 1991 and a Vice President in June 1993. Ms. Markovits has 18 years of experience in the insurance business.
James E. Kroh was elected Vice President - Human Resources of the Company in May 1996, and joined the Company in 1995. Prior thereto, Mr. Kroh served for in excess of five years as Vice President for PHICO Insurance Company.
Lawrence E. O'Brien has been a director of the Company since June 1990 and a member of the Audit Committee since that date. Mr. O'Brien, a CPCU, is the President of O'Brien Management Company, Inc., an insurance consulting firm, a position he has held since January 1988, and was a co-founder and a director of Underwriter Management Associates, a managing general insurance agency with which he had been associated since its inception in 1983 until its sale in September 1990. From 1976 to 1987, Mr. O'Brien was Executive Vice President of Associated Risk Managers, a New York statewide affiliation of independent insurance agents marketing specialized insurance programs.
Douglas C. Moat has been a director of the Company since August 1991 and a member of the Audit Committee since that date. Mr. Moat, a JD, CLU, and FLMI, is Chairman of the Manhattan Group, Inc., an insurance and financial services firm. Mr. Moat has over 40 years' experience in insurance and financial services sales and management, including 13 years as a private consultant. During his career, he has held positions as Executive Vice President, The Home Group; Director Financial Services Corporate Staff, ITT Corp.; Vice President, USLIFE Corp., and President of USLIFE's mutual fund subsidiary; Vice President, The Glens Falls Group and the National Life Assurance Company of Canada. Mr. Moat is a member of the New York State Bar Association, serves on several insurance and banking committees, and writes and speaks extensively on insurance topics, often acting as an expert witness.
Alan Gerry was elected a director of the Company in March 1996. Mr. Gerry was the founder of Cablevision Industries Corporation, the eighth largest multiple cable system operator in the United States and its Chairman of the Board and Chief Executive Officer until its merger with Time Warner Entertainment in January 1996. Mr. Gerry is a member of the Board of Directors of Time Warner Entertainment, the National Cable Television Association, and C-SPAN, the industry public affairs programming network. He was a founding member of the Board of the Cable Alliance for Education and is a past President of the New York State Cable Television Association.
----------------------
Messrs. Walter A. Rhulen and Peter L. Rhulen are brothers and Mr. Harry W. Rhulen is the son of Walter A. Rhulen.
All directors hold office until the next annual meeting of shareholders and until their successors are elected and qualified. Officers are elected annually and serve at the pleasure of the Board of Directors, subject to rights, if any, under contracts of employment.
Item 11.
Item 11. Executive Compensation
The following table sets forth a summary of the compensation earned by the Company's Chief Executive Officer and its four other most highly compensated executive officers during the year ended December 31, 1996 and the two preceding years.
Summary Compensation Table
- ----------------------
(1) Represents the allocable amount accrued for contribution by the Company to its profit sharing plan and the allocable amount of the Company's contribution to its 401K plan. The allocable amount accrued for contribution to the Company's profit sharing plan for Messrs. W. Rhulen, Dietz, Foley, H. Rhulen and Mishler was $9,500, $9,500, $9,500, $9,400 and $6,700, respectively, and the allocable amount contributed to the Company's 401K Plan for Messrs. W. Rhulen, Dietz, Foley, H. Rhulen and Mishler was $20,500, $10,500, $7,500, $4,600 and $4,600, respectively.
(2) Exercisable cumulatively at the rate of approximately 10% of the underlying shares per year, commencing June 30, 1997.
(3) Exercisable cumulatively at the rate of 25% of the underlying shares per year, commencing June 5, 1996.
(4) Exercisable cumulatively at the rate of 25% of the underlying shares per year, commencing March 3, 1996.
----------------------
The following table presents the value of unexercised options held at December 31, 1996 by the individuals named in the Summary Compensation Table:
Options Value Table
Value of Number of Unexercised Unexercised In-the-Money Options Options at Year-End (#) at Year-End ($)* Exercisable (E)/ Exercisable (E)/ Name Unexercisable (U) Unexercisable (U) - --------------------- ----------------- ---------------- Walter A. Rhulen -- --
Thomas J. Dietz 74,250 (E) -0- (E)
Peter H. Foley 2,750 (E) 43,938 (E) 28,250 (U) 136,813 (U)
Harry W. Rhulen 105,854 (E)(1) 40,663 (E) 2,744 (U) 49,105 (U)
Mark H. Mishler 2,049 (E) 31,559 (E) 2,516 (U) 46,053 (U)
- ------------ * Values are calculated by subtracting the exercise price from the fair market value of the Common Stock at year-end.
(1) Includes 103,215 shares purchasable at $45.45 per share upon exercise of options granted to Mr. Walter A. Rhulen, his father, and gifted to Mr. Harry W. Rhulen by his father.
----------------------
Mr. Harry W. Rhulen is the son of Mr. Walter A. Rhulen
Item 12.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth the beneficial ownership of the Company's Common Stock at December 31, 1996 by (i) each person known by the Company to own beneficially five percent or more of such shares, (ii) each director, (iii) each person named in the Summary Compensation Table under "Executive Compensation" on page 32, and (iv) all directors and executive officers as a group, together with their respective percentage ownership of the outstanding shares:
Amount and Nature of Beneficial Ownership
- ------------------------------------ * Less than 1%
(1) Reflects number of shares of Common Stock acquirable upon exercise of options.
(2) Address is 195 Lake Louise Marie Road, Rock Hill, NY 12775-8000.
(3) Does not include 5,072 shares of Common Stock owned by the wife of Walter A. Rhulen, the beneficial ownership of which Mr. Rhulen disclaims.
(4) Does not include 13,216 shares of Common Stock owned by the wife of Peter L. Rhulen, 245,391 shares owned by the children of Peter L. Rhulen, 26,200 shares of Common Stock owned by The Eileen and Peter Rhulen Foundation of which Mr. Rhulen is President, and 12,650 shares of Common Stock owned by a charitable foundation for which Mr. Rhulen acts as trustee. Mr. Rhulen disclaims beneficial ownership of the aforementioned shares.
(5) Includes 3,394 shares owned by a daughter of Mr. Harry W. Rhulen for whom he acts as custodian under the Uniform Gifts to Minors Act. Does not include 5,459 shares of Common Stock owned by Mr. Rhulen's wife, as to which Mr. Rhulen disclaims beneficial ownership.
(6) Includes 103,125 shares purchasable at $45.45 per share upon exercise of options granted to Mr. Walter A. Rhulen, his father, and gifted to Mr. Harry W. Rhulen by his father.
(7) Information is from Schedule 13G, dated February 10, 1997, filed by Denver Investment Advisors, LLC, which reflects shared dispositive power with respect to 1,218,726 shares.
(8) Information is from a Schedule 13G, dated January 24, 1997, filed by Wellington Management Company, which reflects shared dispositive power with respect to 1,139,071 shares.
Item 13.
Item 13. Certain Relationships and Related Transactions
Not applicable.
PART IV
Item 14.
Item 14. Exhibits, Financial Statements, Schedules, and Reports on Form 8-K
(a) List of documents filed as part of this Report.
(1), (2) Financial Statements and Schedules.
See List of Financial Statements and Financial Statement Schedules on page.
(3) The list of exhibits required to be filed with this Report is set forth in the Index to Exhibits herein.
(b) Reports on Form 8-K.
None.
(c) Exhibits.
See Index to Exhibits
ANNUAL REPORT ON FORM 10-K
ITEM 8, ITEM 14(a)(1) and (2), (c), and (d)
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
CERTAIN EXHIBITS
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1996
FRONTIER INSURANCE GROUP, INC.
ROCK HILL, NEW YORK
FORM 10-K--ITEM 14(a)(1) AND (2)
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES
The following consolidated financial statements and supplemental data of Frontier Insurance Group, Inc. and subsidiaries are included in Item 8:
Consolidated Balance Sheets--December 31, 1996 and 1995.....................F-3 Consolidated Statements of Income--Years Ended December 31, 1996, 1995 and 1994........................................F-5 Consolidated Statements of Shareholders' Equity--Three Years Ended December 31, 1996.......................................................F-6 Consolidated Statements of Cash Flows--Years Ended December 31, 1996, 1995 and 1994........................................F-7 Notes to the Consolidated Financial Statements..............................F-8 Supplemental Data--Quarterly Results of Operations (Unaudited)..............F-30
The following consolidated financial statement schedules of Frontier Insurance Group, Inc. and subsidiaries are included in Item 14(a):
Schedule II --Condensed Financial Information of Registrant................F-31 Schedule IV --Reinsurance...................................................F-34 Schedule V --Valuation and Qualifying Accounts.............................F-35 Schedule VI --Supplemental Information Concerning Property/Casualty Insurance Operations.......................F-36
All other schedules for which provision is made in Article 7 of Regulation S-X are not required under the related instructions, are inapplicable, or required information is included in the consolidated financial statements, and therefore, have been omitted.
REPORT OF INDEPENDENT AUDITORS
Board of Directors and Shareholders Frontier Insurance Group, Inc.
We have audited the accompanying consolidated balance sheets of Frontier Insurance Group, Inc. and subsidiaries as of December 31, 1996 and 1995, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended December 31, 1996. Our audits also included the financial statement schedules listed in the Index at Item 14(a). These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules 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 consolidated financial position of Frontier Insurance Group, Inc. and subsidiaries at December 31, 1996 and 1995, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1996, in conformity with generally accepted accounting principles. Also, in our opinion, the related financial statement schedules, when considered in relation to the basic financial statements taken as a whole, present fairly in all material respects the information set forth therein.
As described in Note B to the consolidated financial statements, effective January 1, 1994, the Company adopted Financial Accounting Standards Board Statement 115, "Accounting for Certain Investments in Debt and Equity Securities."
/S/ Ernst & Young LLP -------------------------
New York, New York March 26, 1997, except for Note O, as to which the date is March 31, 1997
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (dollar amounts in thousands)
ASSETS
See notes to the consolidated financial statements.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS--Continued (dollar amounts in thousands, except per share data)
LIABILITIES AND SHAREHOLDERS' EQUITY
See notes to the consolidated financial statements.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (dollar amounts in thousands, except per share data)
See notes to the consolidated financial statements.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (dollar amounts in thousands, except per share data)
See notes to the consolidated financial statements.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (dollar amounts in thousands)
See notes to the consolidated financial statements.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
NOTE A--OPERATIONS AND ACQUISITIONS
Frontier Insurance Group, Inc., and its subsidiaries (the "Company"), is principally a specialty property and casualty insurer operating in 50 states. The Company's principal lines of business are medical malpractice, general liability, surety, and commercial earthquake accounting for approximately 34.6%, 28.2% , 16.2% and 4.1% of gross premiums written in 1996, respectively. The medical malpractice programs are marketed principally through the Company's wholly-owned subsidiary, Medical Professional Liability Agency, Ltd ("Med Pro"). The Company also has a bail bond program, which is marketed through Douglass/Frontier LLC, a fifty percent owned entity (see below). The Company's remaining lines of business are marketed primarily through independent agents.
In April 1994, the Company completed the acquisition of certain assets of Spencer Douglass Insurance Associates, Inc. ("SDIA") constituting that company's California license and permit bond insurance agency business for $3,200,000 and entered into a five-year consulting agreement with the owner/principal. This acquisition was accounted for as a purchase. The purchase price of $3,200,000 exceeded by the same amount the net book value of the business acquired.
In May 1995, the Company and R. Spencer Douglas III ("Douglass") formed a California limited liability corporation, Douglass/Frontier LLC ("Douglass/Frontier"), a bail bond insurance agency. The Company made an initial cash investment of $2,400,000, and Douglass contributed the assets and liabilities of his wholly owned existing bail bond agency. The Company and Douglass share equally in the ownership of Douglass/Frontier. All of the Company's bail bond business is written through Douglass/Frontier and for the years ended December 31, 1996 and 1995, was approximately $7,608,000 and $4,800,000, respectively. At December 31, 1996 and 1995, Douglass/Frontier had premium balances due the Company in the normal course of business of $2,358,000 and $1,271,000, and notes payable to the Company of $3,291,000 and $212,000, respectively. At December 31, 1996, the Company had an interest of $537,000 in the undistributed earnings of Douglass/Frontier.
In December 1995, the Company purchased certain assets from Bankers Multiple Line Insurance Company ("BMLIC") constituting BMLIC's realtors' errors and omissions ("Realtors' E & O") business for $400,000. The purchase agreement provides that, if certain conditions cease to exist in future years, the purchase price may be reduced. In addition, the Company was paid approximately $8,000,000 to assume BMLIC's obligations under its existing Realtors' E & O policies consisting of $2,287,000 of unearned premium reserves and $5,713,000 of undiscounted loss and loss adjustment expense ("LAE") reserves at the acquisition date. The Company's maximum liability relative to its assumption of the loss and LAE reserves is $7,141,000 with BMLIC retaining the liability for any losses in excess of this amount. During 1996, the Company earned the previously assumed unearned premiums and paid $3,948,000 in losses and LAE, and at December 31, 1996 holds related reserves of $1,765,000.
In May 1996, the Company completed the acquisition of United Capitol Holding Company ("United Capitol Holding") and its wholly-owned subsidiaries, United Capitol Insurance Company ("United Capitol"), United Capitol Managers, Inc. (renamed Olympic Underwriting Managers, Inc.) and Fischer Underwriting Group, Inc., for $31,020,000, which exceeded the fair value of the net assets acquired by approximately $7,700,000. From its headquarters in Atlanta, Georgia, these entities underwrite specialty risks such as asbestos abatement, environmental liability and directors' and officers' liability. This acquisition was accounted for as a purchase.
In September 1996, the Company completed the acquisition of Regency Insurance Company ("Regency") and Emrol Installment Premium Discount, Inc. ("Emrol") in exchange for 238,087 shares
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--OPERATIONS AND ACQUISITIONS--Continued
of the Company's Common Stock, which had a market value per share of $33.92 on June 11, 1996, the effective date of the agreement. The purchase price, which is inclusive of $221,000 of capitalized acquisition costs, exceeded the fair value of the net assets acquired by approximately $2,400,000. Regency, an underwriter of non-standard automobile insurance is located in Charlotte, North Carolina. Emrol finances premiums primarily for policyholders of Regency. This acquisition was accounted for as a purchase.
The assets acquired, liabilities assumed and the related goodwill of the companies purchased in 1996, are summarized in the following table (in thousands):
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE A--OPERATIONS AND ACQUISITIONS--Continued
The following schedule summarizes the Company's pro forma unaudited results of operations for the years ended December 31, 1996 and 1995, assuming the purchase of United Capitol Holding, Regency and Emrol had been consummated as of January 1, 1995 (in thousands, except per share data):
The foregoing pro forma financial information has been prepared for informational purposes only and includes certain adjustments relating to investment income, amortization of goodwill, and also for 1995, loss and other expenses, together with the related income tax effects. The pro forma financial information is not necessarily indicative of the results of operations as they would have been had the transactions been consummated on the assumed dates.
The Company's Preferred Stock may be issued from time to time by the Board of Directors in one or more series and classes and with such dividend rights, conversion rights, voting rights, redemption provisions, liquidation preferences, and other rights and restrictions as the Board of Directors may determine.
On December 31, 1996, the Company held a Special Meeting of Stockholders and voted to adopt an amendment to the Company's Certificate of Incorporation to increase the authorized number of shares of the Company's Common Stock from 20,000,000 to 50,000,000.
NOTE B--SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation: The accompanying financial statements have been prepared in accordance with generally accepted accounting principles ("GAAP"), which, as to insurance companies, differ from the statutory accounting practices prescribed or permitted by regulatory authorities. The consolidated financial statements include the accounts and operations of Frontier Insurance Group, Inc. and all subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
Use of Estimates: The preparation of financial statements requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Such estimates and assumptions could change in the future as more information becomes known which could impact the amounts reported and disclosed herein.
Recognition of Premium Revenues: Direct, assumed, and ceded reinsurance premiums written are recognized as earned pro rata over the terms of the related insurance policies.
Investments: Effective January 1, 1994, the Company adopted Financial Accounting Standards Board ("FASB") Statement 115, "Accounting for Certain Investments in Debt and Equity Securities" ("FASB 115"). Under FASB 115, investments in fixed maturities are classified in three categories: held-to-maturity, trading and available-for-sale; investments in equity securities are classified as either available-for-sale or trading. Held-to-maturity securities are reported at cost, adjusted for amortization of premium or discount; trading securities are reported at fair value, with unrealized gains and losses included in earnings; and available-for-sale securities are reported at fair value with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity, net of applicable income taxes. This change in accounting had no effect on net income; however, the accounting change increased shareholders' equity at January 1, 1994 by $3,651,000, net of applicable income taxes, representing the amount of unrealized gains on fixed-maturity investments classified as available-for-sale. Under the former rules, debt securities (principally bonds, notes and redeemable preferred stocks) were carried at cost, adjusted for the amortization of premium or discount and other-than-temporary market value declines. Unrealized gains and losses were excluded from both earnings and shareholders' equity.
In December 1995, the Company reclassified all of its securities classified as held-to-maturity to the available-for-sale category as permitted by the FASB's Special Report, "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities - Questions and Answers." The securities reclassified had a carrying value of $190,474,000 and a market value of $194,709,000 at the date of transfer. This reclassification resulted in a $2,753,000 increase, net of applicable income taxes, in shareholders' equity.
Fixed maturities available-for-sale (principally bonds and notes) are carried at fair value. Fair values for available-for-sale fixed maturity securities are based on quoted market prices, where available.
For fixed maturity securities not actively traded, fair values are estimated using values obtained from independent pricing services. For mortgage backed securities, the Company considers estimates of future principal prepayments in the calculation of the constant effective yield necessary to apply the interest method. If a difference arises between the prepayments anticipated and actual prepayments received, the Company recalculates the effective yield to reflect the actual payments received and the anticipated future payments. Equity securities (principally common and nonredeemable preferred stocks) are carried at fair value, based on quoted market prices. Short-term investments are carried at their principal balances, which approximates their fair value. Realized gains and losses from the sales or liquidation of investments are determined using the specific identification basis. Changes in the fair value of available-for-sale securities are reflected as unrealized gains or losses directly in shareholders' equity net of federal income tax.
The investment in Douglass/Frontier is accounted for under the equity method based on Douglas/Frontier's GAAP results of operations.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
Home Office Building, Property and Equipment: Home office building is stated at cost, net of accumulated depreciation computed, for both financial reporting and federal income tax purposes, on the straight-line basis over an estimated useful life of 31.5 years. Property and equipment is stated at cost net of accumulated depreciation and amortization computed, for financial reporting purposes, on the straight-line basis over estimated useful lives between three to ten years and, for federal income tax purposes, using accelerated methods and guideline lives ranging from three to seven years. During 1996, 1995, and 1994, depreciation and amortization expense was $3,413,000, $2,440,000, and $1,939,000, respectively.
In April 1993 and in July 1996, the Company put into service and began to occupy its new home office facility and purchased a corporate jet, respectively. The cost of the facility's construction and purchase of the jet was financed internally by the Company. However, to receive favorable tax status, title to the facility and jet resides with the County of Sullivan Industrial Development Agency ("IDA") which, in turn, issued to the Company its twenty-year bonds with a face value equal to the total cost of the facility and jet. Under the provisions of related agreements, title to the facility and jet reverts to the Company on maturity of the bonds, or sooner for a nominal fee, should the Company so desire. Accordingly, as a result of these agreements, the home office facility and corporate jet are reported in the accompanying financial statements as, "Home office building, property and equipment." As of December 31, 1996, the outstanding, par value of the IDA bonds was $24,574,000; which approximates the carrying values of such assets.
Deferred Policy Acquisition Costs: Recoverable policy acquisition costs that vary with and are directly related to the production of business, such as commissions and premium taxes, net of reinsurance allowances, are deferred and amortized to income as the related premiums are earned. Anticipated losses, LAE, and policy maintenance expenses, based on historical and current experience, are considered in determining the recoverability of such deferred policy acquisition costs. When the anticipated losses, LAE, acquisition and policy maintenance expenses exceed the related unearned premiums, without considering anticipated investment income, a provision for the indicated deficiency is recorded.
Intangible Assets: Intangible assets are stated at cost, net of accumulated amortization computed on a straight-line basis over estimated useful lives ranging from two to seven years for insurance renewal rights and five to fifteen years for other intangible assets, including goodwill. The Company assesses the recoverability of intangible assets by determining whether the amortization of the balance over its remaining life can be recovered through the undiscounted future operating cash flows of the acquired operations.
Unpaid Losses and LAE: The liabilities for unpaid losses and LAE represent the estimated liabilities for reported claims, claims incurred but not yet reported ("IBNR"), and the related LAE. The liabilities for unpaid losses and LAE are determined using case-basis evaluations and actuarial analyses and represent estimates of the ultimate expected cost of all losses and LAE unpaid at the balance sheet dates.
The liabilities for unpaid losses and LAE have been reduced by estimated salvage and subrogation recoverable and have not been reduced from their ultimate values by the effects of discounting estimated ultimate payments to their present value.
Reinsurance: Assumed reinsurance premiums written, commissions, and unpaid losses are accounted
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
for based principally on the reports received from the ceding insurance companies and in a manner consistent with the terms of the related reinsurance agreements. Liabilities for unpaid losses, LAE and unearned premiums are stated gross of ceded reinsurance recoverables. Deferred policy acquisition costs are stated net of the amounts of reinsurance ceded, as are premiums written and earned, losses and LAE incurred, and amortized acquisition costs.
Contingent Reinsurance Commissions: Contingent reinsurance commissions are accounted for on an earned basis and are accrued, in accordance with the terms of the applicable reinsurance agreement, based on the estimated level of profitability relating to such reinsured business. Accordingly, the profitability of the reinsured business is continually reviewed and as adjustments become necessary, such adjustments are reflected in current operations. Contingent reinsurance commissions are included in other assets and other liabilities.
Income Taxes: Income tax provisions are based on income reported for financial statement purposes, adjusted for permanent differences between financial and taxable income. Deferred federal income taxes are recognized using the liability method, whereby tax rates are applied to the temporary differences between the financial reporting and tax bases of assets and liabilities. Deferred tax assets and liabilities are adjusted for changes in tax rates or laws, and the adjustment is reflected in income during the period in which such change is enacted.
Earnings per Share: Primary earnings per common share are computed by dividing net income by the weighted average common shares outstanding during the period. The weighted average shares outstanding have been adjusted retroactively to reflect the effects of stock splits and stock dividends. The effect of common stock equivalents (stock options) is excluded from the calculations because their effect is not material. Fully diluted earnings per common share assume the conversion of all securities whose contingent issuance would have a dilutive effect on earnings.
Gross Claims Adjusting Income: Claims adjusting income is accounted for on an accrual basis, gross of related expenses. During 1996, 1995, and 1994, operating expenses included with underwriting and other expenses associated with claims adjusting income amounted to $637,000, and $203,000, and $331,000, respectively.
Impact of Recently Issued Accounting Standards: In June 1996, the Financial Accounting Standards Board issued Statement 125, Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities, which provides accounting and reporting standards for sales, securitizations, and servicing of receivables and other financial assets, secured borrowing and collateral transactions, and the extinguishments of liabilities. The Statement is to be applied to transactions occurring after December 31, 1996 including transfers of assets pursuant to securitization structures that previously were entered into. However, the FASB has issued a proposed amendment that would delay until 1998 the effective date of certain of the statement's provisions that deal with securities lending, repurchase and dollar repurchase agreements and the recognition of collateral. The Company will adopt Statement 125 in the first quarter 1997, excluding the provisions that deal with securities lending, repurchase and dollar repurchase agreements, and the recognition of collateral, which will be adopted in 1998 pursuant to the proposed amendment. The Company does not believe the effect of the adoption will be material to its financial position or results of operations.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE B--SIGNIFICANT ACCOUNTING POLICIES--Continued
Reclassifications: Certain prior year amounts have been reclassified to conform to the 1996 presentation.
NOTE C--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES
The liabilities for unpaid losses and LAE are estimated by management utilizing methods and procedures which they believe are reasonable. These liabilities are necessarily subject to the impact of future changes in claim severity and frequency, as well as numerous other factors. Although management believes that the estimated liabilities for unpaid losses and LAE are reasonable, because of the extended period of time over which such losses are reported and settled, the subsequent development of these liabilities may not conform to the assumptions inherent in their determination and, accordingly, may vary from the estimated amounts included in the accompanying financial statements. To the extent that the actual emerging loss experience varies from the assumptions used in the determination of these liabilities, they are adjusted to reflect actual experience. Such adjustments, to the extent they occur, are reported in the period recognized.
The anticipated effect of inflation is implicitly considered when estimating reserves for losses and LAE.
Although anticipated price increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the types of policies written. Average severities are projected based on historical trends adjusted for implemented changes in underwriting standards, policy provisions, and general economic trends. Those anticipated trends are monitored based on actual development and are adjusted as necessary. The effects of such adjustments are reported in the period recognized.
In December 1990, the New York State Court of Claims rendered a decision in favor of the Company holding that a State University of New York ("SUNY") medical school faculty member engaged in the clinical practice of medicine at a SUNY medical facility, corollary to such physician's faculty activities, was within the scope of such physician's employment by SUNY and was protected against malpractice claims arising out of such activity by the State of New York and not under the Company's medical malpractice policy. The decision was affirmed on appeal by the New York State Appellate Division in November 1991 and not appealed by the State. In July 1992, the State of New York enacted legislation eliminating medical school faculty members of SUNY engaged in the clinical practice of medicine at a SUNY medical facility from indemnification by the State with respect to malpractice claims arising out of such activity, retroactive to July 1, 1991. In an opinion filed on September 3, 1993 the Court of Claims of the State of New York held, inter alia, that the July 1992 legislation by the State of New York eliminating SUNY medical school faculty members engaged in the clinical practice of medicine, as part of their employment by SUNY, from indemnification by the State with respect to malpractice claims arising out of such activity was not to be applied retroactively. This decision was affirmed by the New York State Appellate Division in April 1994. Subsequently, in February 1995, the Appellate Division granted leave to the Company and the State of New York to have the issues of the Company's entitlement to recover its costs of defense and its costs of settlement ruled on by the State's highest Court, the New York Court of Appeals. In December 1995, the New York Court of Appeals ruled on this issue and concluded that the Company was entitled to recoveries from the State for such medical malpractice claims. As a result of this decision, the Company believes that it will benefit economically by not being ultimately responsible for certain claims against SUNY physicians for whom it presently carries reserves and be entitled to reimbursement for certain claims previously paid; accordingly, in 1996 and 1995, the Company recorded subrogation recoverables of approximately $13,000,000 and
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE C--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES--Continued
$19,000,000, respectively, representing the amount of claims already paid and the reserves currently held by the Company on the cases that management believes are reimbursable by the State of New York. In January 1997, the New York Court of Claims rendered a decision granting summary judgement to the Company on three SUNY cases that were previously paid by the Company. This decision has been appealed by the State of New York. To the extent the amount of the actual recovery varies, such difference will be reported in the period recognized. The Company is continuing to defend all SUNY faculty members against malpractice claims that have been asserted and is maintaining reserves therefor adjusted for the anticipated recoveries.
The following table sets forth a reconciliation of the beginning and ending loss and LAE reserve balances, net of reinsurance ceded, for each of the three years in the period ended December 31, 1996 (in thousands):
The Company's reserves for unpaid losses and LAE, net of related reinsurance recoverable, at December 31, 1995 and 1994 were decreased in the following year by approximately $4,479,000 and $7,514,000, respectively, and at December 31, 1993 the reserves were increased in the following year by approximately $13,900,000, for claims that had occurred prior to the balance sheet dates. No premiums have been accrued as a result of the changes to prior year loss and LAE reserves.
The $4,479,000 decrease in prior years' reserves in 1996 was the result of favorable claims development on the workers' compensation line of business. Included in the net development is an
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE C--UNPAID LOSSES AND LOSS ADJUSTMENT EXPENSES--Continued
increase in prior years' reserves of approximately $13,000,000 which was entirely offset by subrogation recoverables recognized in connection with a favorable court ruling in 1995. The significant increase in the reinsurance recoverable in 1996 was due to the contribution to the recoverable by United Capitol and Regency, which were acquired in 1996, and the change in the type of reinsurance from an aggregate claim excess of loss, to a stop loss for the majority of the Company's losses.
The $7,514,000 decrease in the prior years' reserves in 1995 was the result of favorable claims development on the general liability and worker's compensation lines and to subrogation recoveries in the surety line of business in excess of expectations. Included in the net development, was an increase in prior years' reserves of approximately $19,000,000, which was entirely offset by additional subrogation recoverables recognized in connection with the favorable court ruling in 1995. The significant increase in the reinsurance recoverable in 1995 was due to the change in the type of reinsurance from an aggregate claim excess of loss, to a stop loss for the majority of the Company's losses.
The $13,874,000 increase in prior years' reserves in 1994 resulted from a $17,500,000 increase in the reserves attributable to adverse medical malpractice claims development in Florida from higher than anticipated dollar settlements and from redundancies in other lines.
Because of the adverse development experienced in 1994, the Company has significantly restructured the manner in which it adjudicates its claims. The change in process included, among other things, placing more reliance on internal claim examiners and in-house attorneys than on third parties, especially for the Company's medical malpractice claims in Florida. Management believes that the revised process will result in better control over the ultimate costs to adjudicate its claims and the related indemnity costs enabling management to settle such claims for amounts reflected in the accompanying financial statements. However, management recognizes that many factors could impact the successful implementation of its revised process, and to the extent, future claim costs are not reduced from current levels as anticipated in the implementation plan, actual ultimate claim costs could vary, perhaps significantly, from those included in the accompanying financial statements.
NOTE D--REINSURANCE
The Company maintains reinsurance with various unrelated insurance companies, principally for its direct business written, whereby amounts written in excess of certain retention limits are ceded to those companies generally under reinsurance treaty arrangements. Beginning in 1995, the Company entered into a three-year stop loss reinsurance contract with Centre Reinsurance Company of New York ("Centre Re"). Under the terms of the agreement, Centre Re provides reinsurance protection within certain accident year and contract aggregate dollar limits for losses and LAE in excess of a predetermined ratio of these expenses to earned premiums for a given accident year for all lines of business except bail, customs, license and permit, and miscellaneous surety bonds. The loss and LAE ratio above which the reinsurance provides coverage is 66%, 65%, and 64% for accident years 1995 through 1997, respectively.
Although the reinsurance companies are liable to the Company for the amounts reinsured, the Company remains liable to its insureds for the full amount of the policies written whether or not the reinsurance companies meet their obligations. Consequently, allowances are established for amounts deemed uncollectible. To minimize its exposure to significant losses from reinsurance insolvencies, the Company evaluates the financial condition of its reinsurers and monitors concentration of credit risk from similar geographic regions, activities or economic characteristics of the reinsurers. At December
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE D--REINSURANCE--Continued
31, 1996, the Company has outstanding gross reinsurance recoverables of $74,002,000 from its largest reinsurer, Centre Re; however, under the terms of the reinsurance arrangements, the Company is withholding $63,766,000 of funds due Centre Re. Accordingly, the net outstanding recoverable from Centre Re is $10,236,000. Of the remaining net reinsurance recoverables balance, approximately 43% is due from three reinsurers; one rated A+ (Superior) and two rated A (Excellent) by A.M. Best Company, Inc.
The following is a summary of the maximum amount of loss retained and ceded by the Company for new and renewal policies as of December 31, 1996, 1995, and 1994 (exclusive of facultative reinsurance and the Centre Re stop loss contract) (in thousands):
(1) For certain risks and policy years, the maximum retained loss per occurrence is $500,000. On a very limited basis, the maximum retained loss per occurrence is $2,000,000.
(2) Amounts relate to the contract effective January 1, 1997, which catastrophe layers in excess of $2,500,000 are subject to 5% coinsurance.
(3) Amount indicated is the maximum face amount (limit) on the bond issued, which represents the value of goods being imported that are subject to U.S. Customs duty. The actual exposure to the Company is the amount of any unpaid duty on the goods imported, which is generally approximately 15% of the face value of the goods, and any penalties associated with the late payment of the duty.
(4) Subject to a catastrophe retention of $3,000,000 per occurrence and a maximum ceded loss of $40,000,000 per occurrence.
(5) Effective December 1, 1995, two layers of excess reinsurance were added for a maximum limit of $10,000,000 per principal on a direct basis, $2,100,000 on a net basis.
(6) Excludes the effect of the Company's 5% retention of $14,000,000 in losses in excess of $1,000,000.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE D--REINSURANCE--Continued
Prior to 1994, the Company assumed reinsurance under various reinsurance treaty arrangements and through mandatory participation in various states' residual market pools and reinsurance facilities. The amount of risk assumed by the Company varies in amount by treaty and does not exceed $500,000 per occurrence/risk/surety bond principal after retrocessions. As part of its acquisition of BMLIC's realtors errors and omissions business, the Company is reinsuring policies issued by BMLIC until such time as the program is filed and can be underwritten on the Company's policies. In 1996, the Company began to assume, on a quota share basis, homeowners business underwritten by Omega Insurance Company.
The Company also reinsured ocean marine business written by its subsidiary, United Capitol. The Company retained the first $250,000 per occurrence and ceded up to $9,750,000 excess of $250,000 per occurrence. The reinsurance program was led by underwriters at Lloyds on a losses occurring basis. Effective January 1, 1997, this program was replaced by a similar program written on a risks attaching basis by Munich American Reinsurance Company and Munich Reinsurance Company, U.S. branch.
On July 1, 1996, the Company implemented a catastrophe reinsurance program for its homeowners business written in the state of Florida. The program provides coverage in the amount of $14,000,000 excess of a $1,000,000 retention.
In 1996, the Company began assuming and writing on a direct basis ocean marine business. The Company reinsures its ocean marine and international risks under multiple layers of excess reinsurance. Coverage is provided up to $9,950,000 excess of $50,000 per occurrence, excess of an aggregate retention of $200,000 of loss occurrences in excess of $50,000.
The Company cedes 100% of its environmental liability business to Underwriters Reinsurance Company. The Company reassumes 10% of this business, along with 10% of environmental liability business underwritten by Commercial Underwriters Insurance Company and Underwriters Reinsurance Company.
In 1995 and 1994, the Company's medical malpractice reinsurers agreed to a commutation for treaty years 1991 and 1990, respectively. As a result of their commutation, the Company recaptured its liability for ceded unpaid losses and LAE of approximately $3,900,000 and $6,100,000 for treaty years 1991 and 1990, respectively, and received cash of an equal amount, resulting in no gain or loss. After the commutation, there was no change in the net incurred losses or loss ratios as a result of these transactions.
In 1996, 1995, and 1994, the Company recognized and accrued (reduced) reinsurance contingent profit commissions earned of $773,000, ($783,000), and ($337,000), respectively.
The components of the net reinsurance recoverable balances included in the accompanying balance sheets are as follows (in thousands):
Year Ended December 31 ---------------------------- 1996 1995 -------- ------- Ceded paid losses & LAE recoverable $ 7,519 $ 2,639 Ceded unpaid losses and LAE 165,467 73,043 Ceded unearned premiums 32,403 5,541 Ceded reinsurance payable (12,820) (4,268) -------- ------- TOTAL $192,569 $76,955 ======== =======
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE D--REINSURANCE--Continued
The reinsurance ceded components of the amounts reflected in the accompanying statements of income are as follows (in thousands):
Year Ended December 31 ------------------------------------------- 1996 1995 1994 ------- ------- ------- Ceded premiums earned $73,643 $42,086 $17,562 Ceded incurred losses 56,597 25,557 14,114 Ceded incurred LAE 18,240 11,700 3,664
The effect of reinsurance on premiums written and earned in 1996, 1995 and 1994 was as follows (in thousands):
NOTE E--INCOME TAXES
State income taxes represent the amount of current state income taxes incurred.
The Company files a consolidated federal income tax return, which includes the income and expenses of its subsidiaries from the dates of their acquisition.
The components of federal income tax expense are as follows (in thousands):
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E--INCOME TAXES--Continued.
A reconciliation of federal income tax, based on the prevailing corporate income tax rate of 35%, to the federal income tax expense reflected in the accompanying financial statements is as follows (in thousands):
Year Ended December 31 ------------------------------------- 1996 1995 1994 ------- ------- ------- Tax rate applied to pre-tax income $19,831 $15,148 $ 7,465 Add (deduct) tax effect of: Tax-exempt interest income (3,026) (2,754) (2,726) Dividend received deduction (752) (634) (805) State income taxes (253) (410) (194) Other 69 (454) 56 ------- ------- ------- FEDERAL INCOME TAX EXPENSE $15,869 $10,896 $ 3,796 ======= ======= =======
Significant components of the Company's deferred tax assets and liabilities at December 31, 1996, 1995 and 1994 are as follows (in thousands):
December 31 ------------------------------------- 1996 1995 1994 ------- ------- ------- Deferred tax assets: Reserve discounting, including salvage and subrogation $30,515 $26,466 $26,341 Unearned premium reserve 10,732 7,121 5,404 Net unrealized losses on available- for-sale securities 3,396 Other 2,624 1,879 437 ------- ------- ------- Total deferred tax assets 43,871 35,466 35,578
Deferred tax liabilities: Deferred policy acquisition costs 11,504 6,579 4,625 Net unrealized gains on available- for-sale securities 2,588 4,284 Other 2,159 976 186 ------- ------- -------
Total deferred tax liabilities 16,251 11,839 4,811 ------- ------- -------
Net deferred tax assets $27,620 $23,627 $30,767 ======= ======= =======
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE E--INCOME TAXES--Continued
Deferred federal income taxes result from timing differences in the recognition of certain income and expenses for tax and financial statement purposes and are summarized as follows (in thousands):
Year Ended December 31 ------------------------------------- 1996 1995 1994 ------- ------- ------- Reserve discounting, including salvage and subrogation $ 119 $ (125) $(4,997) Unearned premium reserve (3,211) (1,718) (2,137) Deferred policy acquisition costs 4,666 1,954 2,258 Excess depreciation expense 120 220 64 Bad debt expense (credit) 279 (404) (354) Other 306 (102) 4 ------- ------- -------
TOTAL DEFERRED FEDERAL INCOME TAX EXPENSE (BENEFIT) $ 2,279 $ (175) $(5,162) ======= ======= =======
The Company made income tax payments of $17,021,000, $12,829,000 and $9,330,000, in 1996, 1995, and 1994, respectively.
NOTE F--CREDIT FACILITY AND OTHER DEBT
In 1995, the Company obtained a variable rate line of credit for $35,000,000 with the Bank of New York. Under this arrangement, the Company borrowed $7,100,000 and $25,000,000 in 1996 and 1995, respectively. The credit facility agreement was terminated in 1996.
The Company also extinguished approximately $1,700,000 of long-term debt in 1996, which was assumed in conjunction with the acquisition of Emrol.
Interest incurred during 1996 and 1995 is as follows (in thousands):
1996 1995 ------ ---- Bank credit facility $1,892 $895 Other long-term debt 78 ------ ---- TOTAL $1,970 $895 ====== ====
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE G--STATUTORY FINANCIAL INFORMATION
A reconciliation of the consolidated amounts of insurance subsidiaries' policyholders' surplus as of December 31, 1996 and 1995, and net income for each of the years ended December 31, 1996, 1995 and 1994, on a statutory accounting basis ("SAP") as reported to insurance regulatory authorities, to the GAAP shareholders' equity and net income included in the accompanying consolidated financial statements, is as follows (in thousands):
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--INVESTMENTS
The major categories of total net investment income are summarized as follows (in thousands):
Gross realized capital gains on available-for-sale securities in 1996, 1995 and 1994 were $3,882,000, $2,509,000, and $987,000, respectively. Gross realized capital losses on available-for-sale securities in 1996, 1995 and 1994 were $2,175,000, $3,164,000, and $2,604,000, respectively. Also, gross realized capital gains in 1995 and 1994 on held-to-maturity securities were $675,000 and $27,000, respectively, and gross realized capital losses were $86,000 in 1994.
The change in net unrealized gains/(losses) on fixed-maturity securities was $(6,350,000), $28,490,000 and $(25,177,000) in 1996, 1995 and 1994, respectively; the corresponding amounts for equity securities were $1,508,000, $4,704,000 and $(3,896,000).
At December 31, 1996, bonds and notes with an amortized cost of $25,911,000 were on deposit with various regulatory authorities to meet statutory requirements.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--INVESTMENTS--Continued
Investments in available-for-sale securities are summarized as follows (in thousands):
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE H--INVESTMENTS--Continued
At December 31, 1996, the amortized cost and estimated market value of debt securities, by contractual maturity, are shown below (in thousands). Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
NOTE I--DIVIDEND AND CAPITAL RESTRICTIONS
The Company's insurance subsidiaries are subject to certain regulatory supervision by their respective domiciliary states. Such regulation is generally designed to protect policyholders and includes such matters as maintenance of minimum statutory surplus and restrictions on the payments of dividends. At December 31, 1996, the maximum dividend that may be paid to the Company in 1997 without regulatory approval is approximately $27,000,000.
Additionally, the insurance subsidiaries are subject to certain Risk-Based Capital ("RBC") requirements as specified by the NAIC. Under those requirements, the amount of capital and surplus maintained by the insurance companies is to be determined based on the various risk factors related to it. At December 31, 1996, the Company met the RBC requirements.
NOTE J--STOCK OPTIONS
The Company has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related interpretations in accounting for its employee stock options because, as discussed below, the alternative fair value accounting provided for under FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires use of option valuation models that were not developed for use in valuing employee stock options. Under APB 25, because the exercise price of the Company's employee stock options equals the market price of the underlying stock on the date of grant, no compensation expense is recognized.
The Company has adopted stock option plans (the "Plans") under which 800,051 shares of common stock are reserved for issuance upon exercise of options granted pursuant to the Plans. Under the Plans, incentive stock options may be granted to employees and nonqualified stock options may be granted to employees, directors, and such other persons as the Board of Directors (or a committee appointed by the Board) determines will assist the Company's business endeavors, at exercise prices equal to at least 100% of the fair market value of the common stock on the date of grant. Incentive
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--STOCK OPTIONS-- Continued
stock options granted under the Plans are not exercisable until one year after grant and expire five years after the date of grant. In addition to selecting the optionees, the Board (or such committee) determines the number of shares subject to each option, the expiration date and vesting periods of nonqualified stock options and otherwise administers the Plans. Certain of the Company's officers are ineligible to participate in the Plans. Incentive stock options have been granted at various times and for varying amounts.
During 1993, the Company granted the President and Chairman of the Board, and a Vice President, separate stock options outside of the Plans to purchase 412,500 and 74,250 shares, respectively, of the Company's Common Stock at $45.45 per share at any time through December 31, 1999, which options were outstanding at December 31, 1996.
Pro forma information regarding net income and earnings per share is required by Statement 123, which also requires that the information be determined as if the Company has accounted for its employee stock options granted subsequent to December 31, 1994 under the fair value method of that Statement. The fair value for these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions for 1996 and 1995, respectively; risk-free interest rates of 6.20% and 7.05%; a dividend yield of 1.25%; volatility factors of the expected market price of the Company's Common Stock of .25 and .25; and a weighted-average expected life of the option of 5 years.
The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options which have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because the Company's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. The Company's pro forma information follows (in thousands, except per share data):
For purposes of pro forma disclosure, the estimated fair value of the options is amortized to expense over the options' vesting period and does not include grants prior to January 1, 1995. As such, the pro forma net income and earnings per share are not indications of future years.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE J--STOCK OPTIONS--Continued
A summary of the Company's stock option activity, and related information for the years ended December 31 follows:
The weighted average fair value of options granted during 1996 and 1995 were $10.26 and $6.15, respectively. Exercise prices for options outstanding as of December 31, 1996 ranged from $18.86 to $39.75. The weighted-average contractual life of those options is 3.8 years.
NOTE K--EMPLOYEE BENEFIT PLANS
The Company sponsors an employee savings plan (401(k)) whereby the Company contributes a base of 2% of the salary of all full-time employees and matches 50% of the employee's personal contribution up to 2% of the employee's salary. The maximum Company contribution, base and match, is 4% of an employee's salary. In addition, the Company has a noncontributory profit sharing plan. At the discretion of the Board of Directors, the Company may contribute up to 4% of the eligible salaries of full-time employees who have completed one year of service.
The Company's total expense related to employee benefit plan contributions for 1996, 1995 and 1994 was $1,691,000, $1,221,000 and $1,030,000, respectively.
NOTE L--COMMITMENTS AND CONTINGENCIES
At December 31, 1996, the future minimum rental commitment for operating leases was as follows: 1997--$1,600,000; 1998--$1,356,000; 1999--$1,298,000; 2000--$857,000; 2001--$563,000, and 2002 and thereafter--$328,000. These leases are for the rental of office space, the initial terms of which run five years, with a negotiated renewal option at the end of the term. Total rental expense for 1996, 1995, and 1994 amounted to $1,112,000, $720,000 and $479,000, respectively.
In 1996, the Company entered into certain contractual agreements with several contractors and vendors in connection with the construction of an addition to its home office building and the purchase of office equipment. The remaining commitments that will be paid in 1997 total approximately $11,300,000.
The Company has been served with several purported class actions alleging violations of federal securities laws by the Company and, in some cases, by certain of its officers and directors; certain other actions also allege violations of the common law. The complaints relate to the Company's announcement
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE L--COMMITMENTS AND CONTINGENCIES--Continued
of its third quarter, 1994 financial results and allege that the Company previously had omitted and/or misrepresented material facts with respect to its earnings and profits.
The amount of potential loss is not possible to estimate as of the present due to the fact that these actions allege differing class periods, and until an actual class is certified in the consolidation action, the number of shares impacted by the claims cannot be ascertained. The Company believes the suits are without merit and has retained special legal counsel to contest them vigorously. The Company is involved in other unrelated litigation which is considered incidental to its business. The ultimate outcome of all litigation is not expected to be material in relation to the Company's financial position and results of operations.
The insurance subsidiaries record guaranty assessments when such assessments are billed by the respective guaranty funds. In addition, each insurance subsidiary's policy is to accrue for any significant insolvencies when the loss is probable and the assessment amount can be reasonably estimated. In the case of most insurance insolvencies, the ability of each insurance subsidiary to reasonably estimate the insolvent insurer's liabilities or develop a meaningful range of the insolvent's liabilities is significantly impaired by inadequate financial data with respect to the state of the insolvent company as supplied by the guaranty funds.
On November 10, 1994, the Company authorized a stock repurchase program to purchase up to 1,000,000 shares of its Common Stock at such times and prices the Company deems advantageous in compliance with SEC Rule 10b-18 at the discretion of the Chairman of the Board. There is no commitment or obligation on the part of the Company to purchase any particular number of shares, and the program may be suspended at any time at the Company's discretion. In 1995 and 1994, in conjunction with this repurchase program, the Company acquired 6,600 and 38,940 shares at a cost of $134,000 and $654,000, respectively.
NOTE M--GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S CONVERTIBLE SUBORDINATED DEBENTURES
In October 1996, the Company completed a $172,500,000 offering of 3,450,000 shares of 6 1/4% Convertible Trust Originated Preferred Securities ("TOPrS") through its wholly-owned consolidated subsidiary, Frontier Financing Trust, a statutory business trust formed by the Company for the sole purpose of issuing the TOPrS and investing the proceeds thereof in an equivalent amount of 6 1/4% Convertible Subordinated Debentures (the "Debentures") of the Company which mature on October 16, 2026. The initial purchasers' discount of $4,744,000 was deducted from the proceeds of the offering. The Company also incurred $842,000 of additional offering costs in connection with this transaction, resulting in net proceeds of $166,914,000 to the Company. The total offering costs have been capitalized and are being amortized on a straight-line basis over a 30 year period, in conjunction with the maturity date of the Debentures. The TOPrS are carried on the balance sheet net of the unamortized offering costs, which at December 31, 1996 amounted to approximately $5,500,000.
The TOPrS are mandatorily redeemable under certain conditions and amounts due to holders are fully and unconditionally guaranteed by the Company. The Debentures (the sole assets of the trust) are
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS--Continued
NOTE M--GUARANTEED PREFERRED BENEFICIAL INTEREST IN COMPANY'S CONVERTIBLE SUBORDINATED DEBENTURES--Continued
subordinate to all Company debt and to the claims of creditors and policyholders of the Company's subsidiaries. The TOPrS are convertible into shares of the Company's Common Stock at an initial conversion rate of 1.0663 shares of Company Common Stock for each preferred share which is equivalent to a conversion price of $46.89 per common share (or 3,678,735 shares of Common Stock in total). Holders of the TOPrS have no voting rights.
The Debentures are redeemable by the Company, at its option, in whole or in part at a redemption price on or after October 16, 1999, provided the closing price of the Company's Common Stock is at least 150% of the per share conversion price, for a minimum of 20 trading days within a period of 30 consecutive trading days ending on the fifth trading day price to the notice of redemption or anytime on or after October 16, 2000. The Company has the right to defer interest payments on the Debentures at any time by extending the interest payment date for up to 20 consecutive quarters, but not beyond the maturity date of the Debentures.
Holders of the TOPrS are entitled to receive cumulative cash distributions at an annual rate of 6 1/4% of the liquidation amount of $50 per share, accruing from the date of original issuance and payable quarterly in arrears. Such distributions are made from interest received on the Debentures, which have terms that parallel the terms of the TOPrS. During 1996, the Company accrued $2,246,000 payable to holders of the TOPrS and amortized a portion of the capitalized offering costs. The corresponding expenses are reported as "Minority interest in income of consolidated subsidiary trust" in the accompanying consolidated statement of income.
NOTE N--CONCENTRATIONS
The Company, which is licensed to conduct business in 50 states, attempts to diversify its exposures geographically, as well as across various types of risks. However, its medical malpractice business in the Florida marketplace comprises 7.2% of the Company's gross premiums written and its surety and bond business, which is focused primarily in the California marketplace, accounts for 16.2% of its gross premiums written in 1996. Also, the Company relies primarily on a small number of reinsurers. At December 31, 1996, the Company has outstanding gross reinsurance recoverables of $74,002,000 from its largest reinsurer, Centre Re; however, under the terms of the reinsurance arrangements, Frontier is withholding $63,766,000 of funds due Centre Re. Accordingly, the net outstanding recoverable from Centre Re is $10,236,000.
NOTE O--SUBSEQUENT EVENT
On March 31, 1997, the Company announced that it executed a definitive agreement to acquire 100% of the stock of Lyndon Property Insurance Company and its six subsidiaries, Lyndon Life Insurance Company, Twin Mercury Life Insurance Company, Gulfco Life Insurance Company, Lyndon Southern Insurance Company, Lyndon - DFS Warranty Services, Inc. and Lyndon General Agency of Texas, Inc., subject to certain closing conditions and regulatory approval, at a purchase price of approximately $92,000,000.
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
SUPPLEMENTAL DATA
QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The following is a summary of unaudited quarterly results of operations for 1996 and 1995 (in thousands, except per share data):
Earnings per share information is based on the weighted average number of shares outstanding for the period and have been adjusted to reflect the effects of stock dividends and stock splits.
Due to changes in the number of average common stock and equivalent shares outstanding, quarterly earnings per share may not add to the totals for the years.
In the second quarter of 1996 and the fourth quarter 1995, the Company increased reserves related to prior years' by approximately $13,000,000 and $19,000,000, respectively, which was entirely offset by subrogation recoverable recognized in connection with the favorable Court of Appeals decision.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT
FRONTIER INSURANCE GROUP, INC. (PARENT COMPANY)
BALANCE SHEETS (dollar amounts in thousands, except per share data)
These condensed financial statements should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--Continued
FRONTIER INSURANCE GROUP, INC. (PARENT COMPANY)
STATEMENTS OF INCOME (dollar amounts in thousands)
(1) Under the terms of its tax-sharing agreement with its subsidiaries, income tax provisions for the individual companies are computed on a separate company basis. Accordingly, the Company's income tax benefit results from the utilization of the parent company separate return loss to reduce the consolidated taxable income of the Company and its subsidiaries.
These condensed financial statements should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
SCHEDULE II--CONDENSED FINANCIAL INFORMATION OF REGISTRANT--Continued
FRONTIER INSURANCE GROUP, INC. (PARENT COMPANY)
STATEMENTS OF CASH FLOWS (dollar amounts in thousands)
(1) In conjunction with the cash capital contribution, the Company transferred $28.0 million of equity securities to its subsidiary, for a total contribution of $47.4 million.
These condensed financial statements should be read in conjunction with the accompanying consolidated financial statements and notes thereto.
SCHEDULE IV--REINSURANCE
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
(dollar amounts in thousands)
SCHEDULE V--VALUATION AND QUALIFYING ACCOUNTS
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES
(dollar amounts in thousands)
(A) Amounts charged off.
SCHEDULE VI--SUPPLEMENTAL INFORMATION CONCERNING PROPERTY/CASUALTY INSURANCE OPERATIONS
FRONTIER INSURANCE GROUP, INC. AND SUBSIDIARIES (Net of Reinsurance)
(amounts in thousands)
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.
FRONTIER INSURANCE GROUP, INC.
By: /s/ WALTER A. RHULEN ------------------------------------ Walter A. Rhulen Chairman of the Board and President
Date: March 27, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this annual report on Form 10-K has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature and Title Date
/s/ WALTER A. RHULEN March 27, 1997 --------------------------------------- Walter A. Rhulen Chairman of the Board, President and Director (Principal Executive Officer)
/s/ PETER L. RHULEN March 27, 1997 --------------------------------------- Peter L. Rhulen Vice President and Director
/s/ LAWRENCE E. O'BRIEN March 27, 1997 --------------------------------------- Lawrence E. O'Brien Director
/s/ DOUGLAS C. MOAT March 27, 1997 --------------------------------------- Douglas C. Moat Director
/s/ ALAN GERRY March 27, 1997 --------------------------------------- Alan Gerry Director
/s/ MARK H. MISHLER March 27, 1997 --------------------------------------- Mark H. Mishler Vice President - Finance and Treasurer (Principal Financial and Accounting Officer)
FRONTIER INSURANCE GROUP, INC. ------------------------------
EXHIBITS TO
ANNUAL REPORT ON FORM 10-K
FOR THE FISCAL YEAR ENDED
DECEMBER 31, 1996
INDEX TO EXHIBITS
(1) Filed as the same numbered Exhibit to the Registrant's Registration Statement on Form S-1 (File No. 33-7340) and incorporated herein by reference.
(2) Filed as the same numbered Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1988 and incorporated herein by reference.
(3) Filed as the same numbered Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1989 and incorporated herein by reference.
(4) Filed as the same numbered Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1992 and incorporated herein by reference.
(5) Filed as the same numbered Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1993 and incorporated herein by reference.
(6) Filed as the same numbered Exhibit to the Registrant's Annual Report on Form 10-K for the year ended December 31, 1995.
(7) Filed as the same numbered Exhibit to the Registrant's Report on Form 8-K dated May 22, 1996 and incorporated herein by reference.
(8) Filed as the same numbered Exhibit to the Registrants Report on Form 8-K dated October 16, 1996 and incorporated herein by reference.