GAINSCO Notes Q3 Results

Texas-based GAINSCO, INC. reported net income for the third quarter 2003 of approximately $1.0 million. After the accretion of the discount on the redeemable preferred stock of approximately $0.8 million and the accrual of dividends on the redeemable preferred stock of approximately $0.2 million, net income applicable to common shareholders and net income per common share, basic and diluted, were approximately break-even.

For the nine months ended Sept. 30, 2003, net income was approximately $1.9 million. After the accretion of the discount on the redeemable preferred stock of approximately $2.2 million and the accrual of dividends on the redeemable preferred stock of approximately $0.6 million, net loss applicable to common shareholders was approximately $0.9 million, or $0.04 per common share, basic and diluted.

For the third quarter 2002, net income was approximately $0.2 million. After the accretion of the discount on the redeemable preferred stock of approximately $0.7 million and the accrual of dividends on the redeemable preferred stock of approximately $0.2 million, net loss applicable to common shareholders for the third quarter 2002 was approximately $0.6 million, or $0.03 per common share, basic and diluted. For the nine months ended Sept. 30, 2002, net loss was approximately $8.8 million. After including the effect of the accretion of the discount on the redeemable preferred stock of approximately $2.0 million and the accrual of dividends on the redeemable preferred stock of approximately $0.5 million, net loss applicable to common shareholders for the nine months ended Sept. 30, 2002 was approximately $11.2 million, or $0.53 per common share, basic and diluted. For all periods presented, the effects of common stock equivalents and convertible preferred stock are antidilutive. Therefore, basic and diluted per share results are reported as the same number.

“This past quarter our company decided to pursue the diversification of our nonstandard personal automobile insurance business. The company’s nonstandard auto business is currently profitable, and the company believes meaningful potential opportunities exist to enhance future earnings through a geographic diversification strategy of this business,” said Glenn Anderson, GAINSCO’s president and CEO.

“The company’s nonstandard automobile business is currently written entirely in the state of Florida. In furtherance of the objective to diversify our nonstandard auto business to targeted territories, the company recently hired experienced managers for the states of Texas and Arizona. Steps are now underway to implement this market diversification in late 2003 and 2004,” said Anderson.

The company continued to exit the commercial lines business. As of Sept. 30, 2003, 600 commercial claims remained, compared to 681 at June 30, 2003 and 1,198 at Sept. 30, 2002.

The company’s net unpaid claims and claims adjustment expenses at Sept. 30, 2003 were $79.0 million, compared to approximately $84.4 million at June 30, 2003. These balances do not include the beneficial effect of ceded reserves to a reinsurer under a reserve reinsurance cover agreement in the amount of approximately $15.4 million at Sept. 30, 2003 and approximately $17.9 million at June 30, 2003. The principal components of the net reduction in the reserve balances from June 30, 2003 to Sept. 30, 2003 are the settlement in normal course of claims related to the continued runoff of the commercial insurance business, a decrease in ultimate expected liabilities in the personal auto line, and an increase in ultimate expected liabilities in commercial lines.

The combined ratio under generally accepted accounting principles (“GAAP”) for the third quarter of 2003 was 97.9%, compared to a combined ratio of 132.8% for the 2002 third quarter. The GAAP claims and claims adjustment expenses ratio for the 2003 third quarter was 63.0%, compared with 101.3% for the third quarter of 2002. For the nine months ended 2003, the GAAP combined ratio was 106.8%, compared to 127.0% for the same period in 2002. The GAAP claims and claims adjustment expenses ratio for the nine months ended 2003 was 70.9%, versus 97.0% for the nine months ended 2002.

In the session of the Texas Legislature ended June 2, 2003, changes were made in the statutes governing the regulatory treatment of county mutual insurance companies in Texas. These changes prejudice the rights of the company to receive contingent payments of up to $9 million through Sept. 2009 pursuant to a Dec. 2, 2002 agreement to sell the management contract controlling GAINSCO County Mutual Insurance Company to an affiliate of Liberty Mutual Insurance Company (“Liberty”), depending upon how the statutory changes and the Company’s agreement with Liberty are interpreted. The company contacted Liberty to discuss their obligation to make the contingent payments in light of the recent legislation. Liberty’s position is that they have no obligation to make any of the $9 million contingent payments under the agreement.