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 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.
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
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.
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.
program. These increases were partially offset by decreases in other miscellaneous small programs.
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.
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.
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.
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.
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.
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.
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.
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.
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.