GAINSCO Reports Q2 Results
GAINSCO Inc., headquartered in Dallas, reported net income for the second quarter 2004 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 $0.3 million, net loss applicable to common shareholders for the second quarter 2004 was approximately $0.1 million, or $0.01 per common share, basic and diluted.
For the six months ended June 30, 2004, net income was approximately $2.1 million. After the accretion of the discount on the redeemable preferred stock of approximately $1.7 million and the accrual of dividends on the redeemable preferred stock of approximately $0.5 million, net loss applicable to common shareholders for the six months ended June 30, 2004 was approximately $0.1 million, or $0.01 per common share, basic and diluted.
“Our insurance operations continued to be profitable for the quarter due to the company’s nonstandard personal automobile insurance business. We also continued to exit the unprofitable commercial lines business through the ongoing process of settling and reducing our remaining inventory of commercial claims. Finally, the company is working diligently on its capital structure issues,” said Glenn W. Anderson, GAINSCO’s president and chief executive officer.
The Board of Directors has continued to focus on the company’s obligations to the holders of the Preferred Stock, which are affiliates of three of the company’s eight directors. The Series A Preferred Stock has been called for redemption so that on January 1, 2006 the Company will be obligated to pay approximately $31.6 million to the holder of the Series A Preferred Stock, subject to certain conditions.
The Series B and Series C Preferred Stock become redeemable at the option of holders commencing March 23, 2007 for the aggregate liquidation amount of $6.0 million plus accrued dividends, also subject to certain conditions. The company does not have, or expect that its operations will generate, sufficient funds to redeem the Series A Preferred Stock on January 1, 2006.
The Board of Directors has considered how the need for capital to satisfy the obligations on the Preferred Stock may limit the company’s ability to pursue opportunities to further expand the company’s nonstandard personal auto business. The interests of the holders of the Preferred Stock in assuring that these obligations are met in a timely manner may differ from those of other shareholders.
As a result, the Board of Directors formed a Special Committee of independent directors to address the alternatives for providing for these obligations. The Special Committee first considered, with the assistance of an investment banking firm, proposals from holders of Preferred Stock for the recapitalization of the company, including a proposal that would have involved an investment by two consultants and the president of the company. No agreement was reached with the holders of the Preferred Stock, and all recapitalization proposals were withdrawn.
The Board of Directors then expanded the mandate of the Special Committee to consider alternatives that might be available with unaffiliated third parties. The Special Committee then engaged the investment banking firm to advise it as to alternatives that could be available to the company. As a result of its consideration of the alternatives, the Special Committee is again negotiating a restructuring with the holders of the company’s Preferred Stock and a consultant. There can be no assurance that these negotiations will be successful or as to the outcome or length of the process.
As of June 30, 2004, approximately $0.7 million had been recognized for financial advisory and legal expenses and fees to those directors serving on the Special Committee in respect of the Special Committee’s consideration of alternatives for dealing with its obligations to the holders of its Preferred Stock, of which approximately $0.4 million was expensed in the quarter ended March 31, 2004 because the proposals to which the amount related had been withdrawn and approximately $0.3 million was recorded as deferred expenses in Other assets at June 30, 2004 because the negotiations to which this amount related were ongoing.
The company paid dividends aggregating $2.1 million on the Series B and Series C Preferred Stock on April 1, 2004, which brought dividends current to that point. From and after April 1, 2004, dividends accrue at the rate of 20 percent per annum, of which at least half must be paid quarterly (or at least $150,000 in the aggregate in respect of the Series B and Series C Preferred Stock). The company paid dividends of $300,000 in respect of the Series B and Series C Preferred Stock on July 1, 2004.
The company’s capital base (total assets less total liabilities) at June 30, 2004 was approximately $44.5 million. This amount consisted of Shareholders’ Equity of approximately $12.3 million and three series of Redeemable Preferred Stock, which are classified under generally accepted accounting principles (“GAAP”) as mezzanine financing in the aggregate amount of approximately $32.2 million. At June 30, 2004, $5.7 million of unaccreted discount on Redeemable Preferred Stock was included in Shareholders’ Equity. Almost all of this unaccreted discount will be accreted from Shareholders’ Equity to Redeemable Preferred Stock by January 1, 2006, the redemption date of the Series A Preferred Stock. At June 30, 2004, Shareholders’ Equity per common share was approximately $0.58 (which includes unaccreted discount on Redeemable Preferred Stock of $0.27 per common share). Shareholders’ Equity less such unaccreted discount was approximately $6.6 million or $0.31 per common share. The aggregate redemption value of Redeemable Preferred Stock was approximately $37.9 million ($37.6 million stated value plus accrued dividends of approximately $0.3 million) at June 30, 2004.
Combined statutory policyholders’ surplus at the end of the second quarter 2004 was $38.6 million and compares to combined statutory policyholders’ surplus at March 31, 2004 of $38.2 million. The combined statutory policyholders’ surplus at the end of the second quarter 2004 does not include approximately $0.9 million of after-tax, unrealized capital gains that existed in the statutory bond portfolios.
The company’s net unpaid claims and claim adjustment expenses (Unpaid claims and claim adjustment expenses less Ceded unpaid claims and claim adjustment expenses) at June 30, 2004 were $64.8 million, compared to approximately $68.3 million at March 31, 2004. 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 $9.2 million at June 30, 2004, and approximately $10.6 million at March 31, 2004 (the balances of which are included in Reinsurance balances receivable). The principal components of the net reduction in the reserve balances from March 31, 2004 to June 30, 2004 are the settlement of claims in the normal course of business and favorable development in 2004 for nonstandard personal auto estimated ultimate liabilities. As of June 30, 2004, 356 commercial claims remained, compared to 442 at March 31, 2004 and 681 at June 30, 2003.
The GAAP combined ratio for the second quarter of 2004 was 99.7 percent, compared to a combined ratio of 102.2 percent for the 2003 second quarter, in each case including both the commercial lines business from which the company is exiting and the continuing personal lines business. The GAAP claims and claim adjustment expenses ratio for the 2004 second quarter was 73.1 percent, compared with 62.2 percent for the second quarter of 2003. The GAAP expense ratio for the second quarter 2004 was 26.6 percent, compared to 40.0 percent for the 2003 second quarter. For the six months ended June 30, 2004, the GAAP combined ratio was 97.4 percent, compared to 111.1 percent for the same period in 2003. The GAAP claims and claim adjustment expenses ratio for the six months ended June 30, 2004 was 68.8 percent, versus 74.8 percent for the same six months ended 2003. The GAAP expense ratio for the six months ended June 30, 2004 was 28.6 percent versus 36.3 percent for the same period in 2003. The GAAP combined ratios and GAAP expense ratios presented above do not include expenses of the holding company.
For the second quarter 2003, net income was approximately $0.8 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 second quarter 2003 was approximately $0.1 million, or $0.01 per common share, basic and diluted.
For the six months ended June 30, 2003, net income was approximately $0.9 million. After including the effect of the accretion of the discount on the redeemable preferred stock of approximately $1.4 million and the accrual of dividends on the redeemable preferred stock of approximately $0.4 million, net loss applicable to common shareholders for the six months ended June 30, 2003 was approximately $0.9 million, or $0.04 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.