Since July 1981 the Company's executive offices have been located at 475 Metro Place North, Dublin, Ohio. The four-story office building has been owned by ALIC and consists of approximately 80,000 square feet of office space. The industry segments as identified in "Note J" in the Notes to Consolidated Financial Statements most recently utilized approximately 30,000 square feet of the building. Approximately 45,000 square feet had been leased to unaffiliated parties through year-end 1995. The remaining 5,000 square feet remained available for lease. See "Note R" in the Notes to Consolidated Financial Statements.
------------------------------------------------ (Thousands of dollars, except per share data & ratios) Gross premiums written $ 55,443 $ 60,504 $ 95,766 $122,101 $130,239 Premiums ceded (12,147) (12,495) (30,261) (45,116) (48,828) Net premiums written 43,296 48,009 65,505 76,985 81,411 Premiums earned 40,853 47,600 61,649 80,426 85,644 Net investment income: Interest and dividends 6,488 6,678 8,397 11,831 13,129 Realized gains (losses) 455 808 1,336 701 462 Total revenue 50,475 57,519 74,810 96,043 102,131 Policy benefits 20,118 24,997 38,431 71,472 57,923 Income (loss) before taxes and other items (1,101) (4,905) (5,626) (25,075) 150 Cumulative effect of change in accounting for income taxes - - - (3,067) - Net income (loss) (1,460) (5,238) (5,281) (22,124) 1,034
Book value per common share $ 4.62 $ 3.46 $ 6.43 $ 7.28 $12.48
* Net income (loss) per common share is computed using the weighted average number of common shares outstanding during the year after giving effect to the preferred stock dividend requirement. The inclusion of common stock equivalents (options) would not be dilutive.
** The 1995, 1994 and 1993 data reflects the adoption of the Financial Accounting Standards Board's ("FASB") Statement No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts" ("Statement No. 113").
The loss before income taxes and other items for 1995 was $1,101,000. This loss was primarily driven by three factors: Foremost was adverse loss development on discontinued property and casualty products. This adverse development aggregated $2,400,000 which included a $1,200,000 year end reserve increase on the discontinued realtors' errors and omissions product. This adverse development was partially offset by a $500,000 favorable development on the discontinued medical business. The second factor was the incurral of legal fees related to the E&O program litigation during 1995, including the Company's legal action against the entities involved in the E&O program. These actions caused the incurral of legal fees of $550,000 in 1995. The Company was awarded $5.1 million against the marketing organization involved in the E&O program. No amounts have been received by the Company on its judgment and therefore the award has not been reflected in the 1995 consolidated statement of operations. Lastly, during 1995 the Company incurred approximately $350,000 in severance expenses related to departed employees.
Gross premium writings for 1994 were $60.5 million compared to $95.8 million for 1993. The decrease in 1994 can be attributed to the following: vendor's single interest declined $13.1 million, medical products declined $8.7 million, discontinued property and casualty lines declined $3.4 million and Galaxy declined $12.4 million. As noted in Table II, there was approximately $5.5 million of return premium related to the VSI program. This was the result of entering into assumption reinsurance treaties with unaffiliated reinsurance companies, whereby the reinsurers assumed the in force unearned
premium reserve and related claim liabilities. Since the profit margin on this line of business was minimal, the effect of this transaction had no material effect on the statements of operations for the periods presented. The credit and extended service contract products increased in 1994 by $2.4 million when compared to 1993.
The Company has also experienced decreases in net investment income, excluding realized gains, since 1993. These decreases were caused by a decrease in invested assets due primarily to the run off of discontinued lines of business.
The Company's cash flows from operations have generally been adequate for its current operating needs. Cash flows from operating activities in 1995 were adversely impacted by the reinsurance transaction dated December 29, 1995 described in Note F in the Notes to Consolidated Financial Statements. The Company's credit insurance policy terms and related liabilities are generally limited to a four-year period during which the consumer makes payments on the loan. The Company's liability on extended service contracts typically extends for either one-year or five-year periods. The Company, therefore, maintains liquidity in its investment portfolio to correspond with the liability outstanding on its lines of business. At December 31, 1995, the average maturity of investments in debt securities was approximately 4.8 years to the nearest call date.
During September 1994, the revolving loans under the Credit Agreement were converted to a $13,000,000 term loan, payable in full on September 23, 1998. At December 31, 1994, the effective interest rate and outstanding loan balance were 8.75% and $13,000,000, respectively. The fair value of this term loan approximated $13,000,000 at December 31, 1994.
At December 31, 1995, the loan had an unpaid balance of $525,239. The market value of the underlying shares was $161,000. The Company has revalued this loan to market value as of December 31, 1995. This will allow the release of shares to participants' accounts at an average price which more closely approximates recent market values on the Company's stock. The decrease in the loan has been reflected through a decrease in additional paid-in capital in the accompanying consolidated balance sheets. The unpaid balance of the loan ($161,000 at December 31, 1995) has been reflected as a reduction in common stockholders' equity in the accompanying consolidated financial statements.
During 1995, 1994 and 1993, the Company incurred ESOP contribution expenses of $198,000, $178,000 and $160,000, respectively.
During November 1989, ACCEL's Board of Directors also approved a stock buy back program to purchase up to 1,000,000 common shares in open market purchases. As of December 31, 1995, ACCEL had purchased 229,185 shares at a cost of $1,722,000 under this program. The buy back program had been funded from internal funds. No shares have been purchased since 1992.
1996. The Company does not expect the impact of either of these FASB Statements to be material to the financial condition of the Company.
WRITE OFF OF INVESTMENT IN RGL AND GALAXY: During December 1986, ACCEL invested $1,370,000 (a 20% interest) in RGL. RGL was formed to acquire all the outstanding shares of Galaxy Reinsurance Company, the name was ultimately changed to Galaxy. Galaxy was writing commercial property insurance, property and casualty, and assumed treaty reinsurance.
As a result of the unsatisfactory underwriting performance of Galaxy and the moratorium placed on Galaxy's underwriting operations by the New York Department, the Company elected to write-off the unamortized goodwill related to Galaxy, which resulted in a charge to operations (general and administrative expenses) for 1993 of $1,643,000. Due to significant loss development during 1994 on Galaxy's liability lines of business, the Company contracted with an independent actuarial consultant to review the adequacy of Galaxy's loss and LAE reserves as of June 30, 1994. The findings of this review indicated the need for additional reserves which resulted in the statutory insolvency of Galaxy at June 30, 1994. Statutory capital and surplus after the reserve strengthening was a negative $2.3 million.
Consolidated Results ---------------------------- (Thousands of dollars, except ratios) 1995 1994 1993 -------- -------- -------- Gross premiums written $ 55,443 $ 60,504 $ 95,766 ======== ======== ========
Taxes, licenses and fees to gross premiums written 3.1% 3.1% 2.5%
We have audited the consolidated financial statements of ACCEL International Corporation and subsidiaries (the Company) as of December 31, 1995 and 1994, and for each of the years in the two-year period ended December 31, 1995, as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as of December 31, 1995 and 1994, and for each of the years in the two-year period ended December 31, 1995, as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
As discussed in Note D to the consolidated financial statements, on March 30, 1994, the Company and its principal lender agreed to waive compliance with certain loan agreement covenants through January 1, 1995. On February 7, 1995 the Company and the lender again renegotiated the credit agreement and certain of the covenants. The amended agreement stated that the loan was payable in full on June 30, 1997. On December 29, 1995, the Company issued senior notes with a different lender and retired the aforementioned credit agreement. The most recent loan agreement requires that during the period the loan is outstanding, the Company maintain consolidated tangible net worth, as defined. At December 31, 1995, required tangible net worth was $15,000,000 and the Company's consolidated tangible net worth, as defined, was $19,738,000.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of ACCEL International Corporation and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the years in the two-year period ended December 31, 1995, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules as of December 31, 1995 and 1994, and for each of the years in the two-year period ended December 31, 1995, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein.
As more fully described in "Note D", at December 31, 1993, the Company did not meet all the requirements of certain covenants contained in a loan agreement with its principal lender. On March 30, 1994, the Company and the lender agreed to waive compliance with these covenants at December 31, 1993 and through January 1, 1995. The loan agreement also requires that during the period the loan is outstanding, the Company maintain consolidated tangible net worth, as defined in the agreement. At December 31, 1993, required tangible net worth was $27,500,000. At December 31, 1993, the Company's consolidated tangible net worth, as defined, was $27,549,000.
As discussed in Note A to the consolidated financial statements, in 1993, the Company adopted the provisions of Financial Accounting Standards Board Statement No. 115 "Accounting for Certain Investments in Debt and Equity Securities".
Investments--Notes B and F: Investments available for sale, at fair value Fixed maturities (cost: 1995--$53,427,000; 1994--$91,422,000) $ 53,204 $ 84,782 Equity securities (cost: 1995--$5,433,000; 1994--$5,191,000) 5,451 5,159 Short-term investments (cost: 1995--$4,278,000; 1994--$7,684,000) 4,278 7,684 Other invested assets (cost: 1995--$364,000; 1994--$564,000) 364 564 --------- --------- 63,297 98,189
Property occupied by the Company--at cost, less accumulated depreciation (1995--$2,382,000; 1994--$2,226,000) 3,167 3,303
Other assets: Cost in excess of fair value of net assets of subsidiaries at dates of acquisition ($4,448,000) less accumulated amortization--Note K 822 929 Funds held under reinsurance agreements--Note F 829 1,098 Other 273 787 --------- --------- 1,924 2,814 --------- --------- $ 183,507 $ 179,948 ========= =========
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of ACCEL and its wholly-owned subsidiaries, except for Randjill Group Ltd. ("RGL") (see Note K). All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements.
DESCRIPTION OF BUSINESS: ACCEL is an insurance holding company incorporated in Delaware in June 1978 as the successor to an Ohio corporation, formerly Acceleration Corporation, organized in 1969. The Company has been engaged in the sale and underwriting of credit life and credit accident and health insurance, extended service contracts, vendor's single interest and other specialty casualty products. The credit insurance and extended service contract products continue to be offered to consumers, principally through automobile dealers, financial institutions and other business entities. The Company is subject to competition from other insurers throughout the states in which it writes business. The Company is also subject to regulation by the Insurance Departments of states in which it is licensed, and undergoes periodic examinations by those departments.
The following is a description of the most significant risks facing life and health and property/casualty insurers and how the Company mitigates those risks:
LEGAL/REGULATORY RISK is the risk that changes in the legal or regulatory environment in which an insurer operates will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those currently recorded in the consolidated financial statements. The Company mitigates this risk by operating throughout the United States, thus reducing its exposure to any single jurisdiction, and also by employing underwriting and loss adjusting practices which identify and minimize the adverse impact of this risk.
CREDIT RISK is the risk that issuers of securities owned by the Company will default or that other parties, including reinsurers, which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies and by providing for any amounts deemed uncollectible.
The most significant estimates include those used in determining deferred policy acquisition costs and the liability for unearned premium reserves and insurance claims. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. The estimates are continually reviewed and adjusted as necessary. Such adjustments are generally reflected in current operations.
INVESTMENTS: The Company classifies all of its fixed maturity and equity securities as available for sale, therefore these securities are carried at fair value and the unrealized appreciation or depreciation is reported as a separate component of common stockholders' equity after giving effect to applicable income taxes.
Short-term investments which include U.S. Treasury securities, commercial paper and certificates of deposit are carried at cost which approximates fair value.
Fair value for fixed maturity, equity and mortgage backed securities are based on quoted market prices, where available. If quoted market prices are not
GOODWILL AMORTIZATION: Cost in excess of fair value of net assets of subsidiaries at dates of acquisition is being amortized primarily over a thirty-five year period. It is the Company's policy to account for goodwill at the lower of amortized cost or fair value. On an ongoing basis, management reviews the valuation and amortization of its goodwill. As a part of its ongoing review, management estimates the fair value of the Company's goodwill, taking into consideration any events and circumstances which might have diminished fair value. Believing such an event and circumstance had occurred in 1993, management reduced the carrying amount of its goodwill at December 31, 1993 by $1.6 million. See Note K regarding the write down of goodwill.
PREMIUM INCOME RECOGNITION AND UNEARNED PREMIUM RESERVES: Unearned premium reserves on credit life and credit accident and health insurance are calculated primarily under the "Rule of 78's Method", which method results in premium income being recognized in decreasing proportions over the terms of the policies, which approximates the pattern of policy benefits incurred.
Unearned premium reserves on the extended service contracts are based on the historical emergence pattern of claims. The Company's primary liability on new car contracts exists subsequent to the expiration of manufacturers' warranties. This method results in premium being recognized in direct proportion to the emergence of benefits on these contracts.
FEDERAL INCOME TAXES: ACCEL and its subsidiaries file a consolidated federal income tax return. The provision for income taxes is based on income for
REINSURANCE: Reinsurance premiums ceded and reinsurance recoveries on policy benefits incurred are deducted from the respective income and expense accounts. Assets and liabilities related to reinsurance ceded are reported on a gross basis. Amounts related to reinsurance contracts, where it is not reasonably possible for the reinsurer to realize a significant loss, are recorded based on the deposit accounting method.
DEFERRED REINSURANCE COMMISSIONS: Commissions and ceding fees received in connection with premiums ceded are deferred and amortized in a manner related to the recognition of premiums earned. Substantially all such commissions and ceding fees are amortized within a four-year period. Earned ceding fees, commissions and claims recovered are reported as reinsurance expense recoveries in the consolidated statements of operations.
EARNINGS PER COMMON SHARE: Net income and net loss per common share are computed using the weighted average number of common shares outstanding during the period. The inclusion of common stock equivalents (options) would not be dilutive.
Equity securities - - (245) ------- ------- ------- $ 6,467 $(8,168) $ 1,301 ======= ======= =======
Securities available for sale: Fixed maturities: Gross realized gains $ 607 $ 194 $ 1,479 Gross realized losses (284) (35) (184)
Fixed maturities $ 5,669 $ 6,307 $ 8,079 Equity securities 181 113 Short-term investments 927 333 478 Other 431 469 402 ------- ------- ------- 7,208 7,222 9,006 Investment expenses (720) (544) (609) ------- ------- ------- Net investment income $ 6,488 $ 6,678 $ 8,397 ======= ======= =======
The amortized cost and estimated fair value of fixed maturity securities, all of which were available for sale, at December 31, 1995, by contractual maturity, are summarized as follows:
The expected maturities in the foregoing table will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. Mortgage-backed securities owned have an expected weighted average maturity of over 5 years.
Proceeds from the sale of securities available-for-sale during 1995, 1994 and 1993 were $45,531,000, $26,283,000 and $66,083,000, respectively. Gross gains of $713,000 ($342,000 in 1994 and $1,520,000 in 1993) and gross losses of $284,000 ($35,000 in 1994 and $184,000 in 1993) were realized on those sales.
insurance subsidiaries are available for transfer, subject to regulatory approval, in the form of dividends, loans or advances to ACCEL (total statutory net assets of the consolidated insurance subsidiaries was $23,047,000 at December 31, 1995).
The total outstanding Subordinated Notes were $6,031,000 and $5,462,000 ($5,347,000 and $4,841,000 held by related parties at December 31, 1995 and 1994, respectively) and the fair value of these notes approximated $5,783,000 and $5,237,000 at December 31, 1995 and 1994, respectively.
On February 7, 1995 the Company renegotiated the terms of the Credit Agreement. Under the amended Credit Agreement, the quarterly principal payments scheduled to begin in 1995 were waived. Specific principal payments totaling up to $1.5 million were due on June 30, 1995 and December 31, 1995, respectively, from the liquidation of Acceleration Insurance Company Limited ("AICL"), a United Kingdom subsidiary, and the projected sale of the building used as the corporate home office. The loan was to be payable in full on June 30, 1997. The Credit Agreement also required that during the period the loan was outstanding, the Company maintain consolidated tangible net worth, as defined in the agreement. At December 31, 1994, required tangible net worth was $13,000,000. At December 31, 1994, the Company's consolidated tangible net worth, as defined, was $14,438,000.
On December 29, 1995, the Company issued senior notes (the "Senior Notes") totaling $16,500,000 at 9.50%, maturing on April 1, 2001. The proceeds from these notes were used to retire the loan outstanding under the aforementioned Credit Agreement and to liquidate an intercompany loan between ACCEL and an insurance subsidiary. In addition, as of January 1, 1996, a subsidiary of the Company entered into a reinsurance agreement with an unaffiliated company to reinsure the in-force Credit Business. This agreement is structured, such, that as future profits emerge on this block of business, the Company's share of the profits will be used over the next four to five years to pay the interest thereon and redeem these Senior Notes.
At January 1, 1994, ACCEL had $900,000 principal amount of sinking fund debentures outstanding bearing interest at 10 1/2% and maturing on September 1, 1994. These debentures were fully paid in 1994.
The ceding of insurance through reinsurance agreements does not discharge the primary liability of the original underwriter to the insured, but it is the practice of insurers to treat risks that have been reinsured with other companies, to the extent of the reinsurance, as though they were not risks for which the original insurer is liable. Should the reinsurer not be able to
meet its obligations, those obligations are the ultimate responsibility of the Company. Therefore, in financial statement presentation, premiums and policy benefits are presented net of that portion of risks reinsured with other companies.
On January 1, 1996 the Company terminated this quota share reinsurance agreement and elected to recapture the liabilities subject to this treaty. The liabilities recaptured thereunder were then available for cession under the treaty described below. The unearned premium reserves and claim liabilities recaptured were $29,753,000 and $8,424,000, respectively.
Prior to December 31, 1995, a security fund had been maintained, primarily comprised of fixed maturities, for the benefit of the reinsurer. Pursuant to the termination of the agreement effective January 1, 1996, as discussed above, certain investments were liquidated from the security fund on December 29, 1995. Proceeds from this liquidation, along with other funds, were transferred on December 29, 1995 to the reinsurer who is party to the agreement dated January 1, 1996. These amounts are included in "Reinsurance Premium Deposits" on the accompanying consolidated balance sheets as of December 31, 1995.
DIRECT BUSINESS CEDED--OTHER QUOTA SHARE: The Company reinsures a portion of its group life and health care insurance with several unaffiliated companies. The effect of this reinsurance is to transfer the risk, the underwriting
income or loss, and the investment income related to the premiums ceded. In 1993, the Company entered into reinsurance agreements with unaffiliated reinsurers related to certain additional product lines. The effect of such reinsurance arrangements is to transfer 100% of the related risk to the reinsurers. Premiums ceded associated with these agreements and included in the accompanying consolidated statements of operations amounted to $694,000, $980,000 and $4,588,000 in 1995, 1994 and 1993, respectively.
Written premiums included in the accompanying consolidated statements of operations that have been ceded, or which are subject to cession under all such agreements, amounted to $7,429,000, $10,284,000 and $8,855,000 in 1995, 1994 and 1993, respectively.
As of December 31, 1992, the Company entered into a reinsurance agreement with unaffiliated reinsurers whereby the Company cedes 100% of the premiums written in connection with vendor's single interest insurance. In mid 1994, a substantial part of the remaining in-force business was assumed by an unaffiliated reinsurer, and resulted in a return of premiums. The VSI product was forced-placed when the borrower could not demonstrate coverage for the automobile that was securing the loan with the lending institution. Premiums ceded under this agreement were $(858,000), $(6,024,000) and $6,082,000 for 1995, 1994 and 1993, respectively. Policy benefit expense in 1995, 1994 and 1993, respectively, has been reduced by $104,000, $1,407,000 and $3,081,000 in conjunction with these agreements.
The federal income tax expense for 1995 includes a credit of $11,000 of foreign taxes related to AICL ($41,000 expense in 1994 and $36,000 credit in 1993).
December 31 1995 1994 ---- ---- Deferred Tax Liabilities: Deferred policy acquisition costs $ 10,656 $ 10,461 Other 2,621 3,631 -------- -------- 13,277 14,092 -------- -------- Deferred Tax Assets: Deferred reinsurance commissions 5,420 6,149 Net operating loss carryforward 1,370 741 Insurance reserves 1,029 1,231 Unrealized losses on investments 119 2,287 Service contracts 1,757 1,482 Other 95 902 -------- -------- Total deferred tax assets 9,790 12,792 Valuation allowance (1,537) (3,638) -------- -------- Net deferred tax assets 8,253 9,154 -------- -------- Net deferred tax liability $ 5,024 $ 4,938 ======== ========
RECONCILIATION OF LIABILITY FOR INSURANCE CLAIMS 1995 1994 1993 -------------------------------- (In thousands) Liability for insurance claims at beginning of year $ 23,159 $ 49,919 $ 65,235
Policy benefits incurred for events of the current year 19,602 24,914 40,915
Policy benefits incurred for events of prior years 516 83 (2,484) -------- --------- --------
Policy benefits for insured events of the current year 10,860 20,556 30,960
During November 1989, ACCEL's Board of Directors also approved a stock buy back program to repurchase up to 1,000,000 common shares in the open market. ACCEL has purchased 229,185 shares at a cost of $1,722,000 under this program. The buy back program was funded from internally generated funds. No shares have been purchased since 1992.
During 1982, ACCEL adopted a stock option plan (the "82 Plan") under which shares of common stock are available to eligible officers and key personnel. Under the terms of the 82 Plan, the option price must be at least 100% of the fair market value at the date of grant, and, accordingly, there have been no charges to income resulting from grants. Options were granted at prices ranging from $2.769 to $11.750 per share from April 1982 through April 1992. The options become exercisable after one year of continuous employment in installments of 50% at the end of the first and the second year from the date of grant and expire ten years from the date of grant. A total of 300,000 (349,672 after giving effect to all subsequent stock dividends) shares have been reserved for options under the 82 Plan. The following table summarizes activity under this plan.
Of the 67,401 options outstanding under the 82 Plan at December 31, 1995, 67,401 were exercisable. No additional shares may be granted under the 82 Plan.
During 1987, ACCEL adopted the 1987 Incentive Stock Option Plan (the "87 Plan"). The 87 Plan provided for incentive stock options with respect to a maximum of 300,000 (347,287 after giving effect to all subsequent stock dividends) shares of common stock of ACCEL prior to the expiration of the 87 Plan in April 1997. During June of 1991, ACCEL's Board of Directors and shareholders approved the First Restatement of the 1987 Stock Incentive Plan (the "Restated Plan"). The Restated Plan replaced the 87 Plan except as to options granted and outstanding under the 87 Plan. The Restated Plan reserved an additional 450,000 shares for key employees and 50,000 shares for non- employee directors. Options may be granted prior to expiration of the Restated Plan covering shares subject to lapsed or terminated options. Of the 539,569 options outstanding under the Restated Plan, 455,819 were exercisable at December 31, 1995. At December 31, 1995, 275,643 shares were reserved for
---- ---- ---- Options granted 231,500 89,000 144,000 Average option price per share $ 2.125 $ 4.50 $ 3.8125 Options lapsed 25,000 118,759 51,842
The Company operates primarily in the life/health and property/casualty insurance industries. There are no intersegment sales.
-------- -------- -------- Total $ 50,475 $ 57,519 $ 74,810 ======== ======== ========
-------- -------- ------ (Thousands of dollars) Identifiable assets: Life/Health $144,164 $139,262 $139,557 Property/Casualty 38,977 40,428 94,983 Other 366 258 1,641 -------- -------- -------- Total $183,507 $179,948 $236,181 ======== ======== ========
During December 1986, ACCEL invested $1,370,000 (a 20% interest) in RGL. RGL was formed to acquire all the outstanding shares of Galaxy Reinsurance Company, the name was ultimately changed to Galaxy, a New York domiciled property and casualty insurance company. Galaxy wrote commercial property insurance, property and casualty, and assumed treaty reinsurance.
During the second quarter of 1991, the Company purchased 11,000 additional common shares of RGL at a cost of $992,000. The additional investment increased the Company's ownership to 31% at June 30, 1991. In July 1991, the Company purchased the remaining 69% of RGL for cash and subordinated notes (see Note D) of $2.1 million and $5.8 million, respectively. The purchase price included goodwill of $1.2 million.
Pursuant to an Order of Liquidation dated October 7, 1994, issued by the Supreme Court of the State of New York, the Liquidation Bureau of the New York Department took control of Galaxy on October 11, 1994.
At December 31, 1995, the loan had an unpaid balance of $525,000. The market value of the underlying shares was $161,000. The Company has revalued this loan to market value as of December 31, 1995. This will release shares to participants accounts at an average price which more closely approximates recent market values on the Company's stock. The decrease in the loan has been reflected through a decrease in paid in capital in the accompanying consolidated balance sheets. The unpaid balance of the loan ($161,000 at December 31, 1995), has been reflected as a reduction in common stockholders' equity.
The financial statements of AICL have been translated into U.S. dollars using the British pound as the functional currency. The balance sheets of AICL have been translated into U.S. dollars using exchange rates at December 31, 1995 and 1994, respectively.
Included in foreign currency translation adjustments are unrealized exchange gains of $85,000 in 1995 and $96,000 in 1994.
In late 1995, the Company was awarded $5.3 million in damages related to certain litigation involving the discontinued Realtors' Errors and Omissions Program. $5.1 million of this award was obtained against the marketing organization; the remainder against a broker defendant. A settlement has been reached with the broker defendant, however, the remaining defendant has indicated its intention to appeal the verdict. The Company is aggressively pursuing efforts to collect on the remaining judgement. As the judgement is currently under negotiation, no amounts have been recognized in the 1995 consolidated statement of operations.
The Company currently leases office space under an operating lease which expires in 2000. The lease is accounted for as an operating lease. Minimum rental commitments in effect at December 31, 1995 are as follows:
Year Payable Annual Minimum Rentals ------------ ---------------------- 1996 $ 67,706 1997 69,308 1998 70,910 1999 72,513 2000 55,286 -------- Total $335,723 ========
The amount of rent charged to operations was $19,902 in 1995.
Quarterly consolidated results of operations for 1995 and 1994 are summarized as follows: First Second Third Fourth Quarter Quarter Quarter Quarter
------- ------- ------- ------- (Thousands of dollars, except per share data) ---- Premiums written $13,247 $15,125 $15,297 $11,774 Premiums earned 9,787 9,833 10,321 10,912 Benefits and expenses 11,688 11,738 12,273 15,877 Net income (loss) 268 399 165 (2,292)
On March 21, 1996, the property occupied by the Company was sold by ALIC for a price of $3.5 million. The Company will remain in the building and occupy approximately 16,000 square feet of home office space under a five-year lease at an annual rental of approximately $256,000.
Mr. Friedberg joined the Company on May 23, 1995, when he was appointed Chairman, President & CEO. Prior thereto, he was Chairman, President and CEO of Ranger Insurance Company, Houston, Texas for more than five years.
Mr. Main was named Senior Vice President in 1992 and prior thereto was Vice President of the Company for more than five years.
Mr. Mueller was named Vice President and Controller of the Company in 1994 and prior thereto had been Vice President- General Accounting of the subsidiaries of the Company for more than five years. Mr. Weiner was named Treasurer of the Company in 1994 and prior thereto had been Vice President- Reinsurance Accounting of the subsidiaries of the Company for more than five years.
In accordance with General Instruction G(3), the information required by this Item 12 is incorporated by reference herein from the material under the headings "Security Ownership and Certain Beneficial Owners" contained in the Company's definitive proxy statement filed with the Commission relating to the Company's annual meeting of stockholders to be held on June 11, 1996.
In accordance with General Instruction G(3), the information required by this Item 13 is incorporated by reference herein from the material under the heading "Certain Relationships" contained in the Company's definitive proxy statement filed with the Commission relating to the Company's annual meeting of stockholders to be held on June 11, 1996.