Empire has subleased 133,140 square feet of the office space to its parent, Leucadia, at similar terms as in the original lease. In 2000, Empire subleased an additional 64,340 square feet of the office space to the Board of Education of the City School District of the City of New York. Both sublease agreements expire in 2018.
The Group also conducts limited operations from branch offices located in Rochester, New York, Mineola, New York and Boston, Massachusetts. The rental charged to the Company for these facilities is prorated in accordance with the pooling agreement described in "Pooling Agreement" under Item 1, herein.
Report of Independent Accountants Consolidated Balance Sheets as of December 31, 2000 and 1999 Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 2000, 1999 and 1998 Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 Notes to Consolidated Financial Statements -F25
Schedule VI- Supplemental Insurance Information Concerning Property/Casualty Insurance Operations for the years ended December 31, 2000, 1999 and 1998
Allcity Insurance Company ("Allcity" or the "Company") is a property and casualty insurer and includes the results of its subsidiary, Empall Agency, Inc. ("Empall"). Empire Insurance Company ("Empire"), a property and casualty insurer owns approximately 84.6% of the outstanding common shares of the Company and 100% of the outstanding common shares of Centurion Insurance Company ("Centurion"). Empire's common shares are 100% owned and controlled, through subsidiaries, by Leucadia National Corporation ("Leucadia"). Additionally, Leucadia indirectly owns an additional 6.7% of the outstanding common shares of the Company. The Company, Empire and Centurion are sometimes hereinafter collectively referred to as the Group.
The property and casualty insurance business written by Empire and Allcity is subject to a pooling agreement under which premiums, losses, loss adjustment expenses and other underwriting expenses, net of reinsurance, are shared on the basis of 70% to Empire and 30% to Allcity. The pooling percentages have been changed from time to time and may be changed in the future subject to New York Insurance Department approval. Allcity has no employees of its own. Empire provides administrative services and 30% of the related expenses are allocated to Allcity.
Historically, the Group has specialized in commercial and personal property and casualty insurance business primarily in the New York metropolitan area. The Group has offered insurance products for vehicles (including medallion and radio-controlled livery vehicles), general liability coverage, property coverage (including mercantile and multi-family residential real estate) and workers' compensation to commercial accounts and private passenger automobile and homeowners products to individuals. The business of the Group is organized into three divisions: the Small Business Division, the Personal Lines Division and the Mid-Market Division. Each of these divisions has separate management teams responsible for all underwriting decisions within their divisions with the Small Business Division focusing on commercial package products for small businesses; the Personal Lines Division focusing on personal automobile and homeowners insurance; and the Mid-Market Division focusing on commercial automobile, commercial package and workers' compensation insurance for larger accounts. Based on the Company's net earned premiums for the year ended December 31, 2000, approximately 39%, 43% and 18% of such premiums were for the Personal Lines, Mid-Market and Small Business lines of business, respectively.
The Company and Empire are licensed to transact insurance in the State of New York with Empire being additionally licensed in Connecticut, Massachusetts, Missouri, New Hampshire and New Jersey. Based on direct premiums written, approximately 6%, 6% and 4% of the property and casualty business written by the Group were from sources outside New York State for the years ended December 31, 2000, 1999 and 1998, respectively.
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Empall. The preparation of financial statements in conformity with generally accepted accounting principles ("GAAP") requires management to make estimates and assumptions that affect the reported amounts in the financial statements and disclosures of contingent assets and liabilities at the date of the financial statements. Actual results could differ from those estimates.
At December 31, 2000 and 1999, investments in fixed maturities on deposit with the New York Insurance Department, which the Company has the intent and ability to hold to maturity, are classified as "Investments held to maturity". Investment income is reported when earned.
Net securities gains or losses on the sales of investments are determined on a specific identification basis. Investments with an impairment in value considered to be other than temporary are written down to estimated net realizable values.
Reinsurance: Unpaid losses, unpaid loss adjustment expenses and unearned premiums are stated gross of reinsurance ceded. Premiums written and earned, losses and LAE paid and incurred, and other underwriting expenses are stated net of reinsurance ceded.
Policy Acquisition Costs: Policy acquisition costs, which consist of commissions, premium taxes and certain other underwriting expenses (net of reinsurance allowances), are deferred and amortized ratably over the terms of the related policies. Deferred policy acquisition costs are limited to their net realizable value after consideration of investment income on the related premium. If recoverability of such costs from future premiums and related investment income is not anticipated, the amounts not considered recoverable are charged to operations.
Participating Policies: Participating business on workers' compensation lines constitutes approximately 1.3% of the Company's policies in force and net premiums written. Amounts transferred to the participating policyholders' funds are determined by means of specific identification based upon premium volume and loss experience. The amount of dividends to be paid to participating policyholders is approved quarterly by the Board of Directors. The amount of policyholders' dividends paid on participating policies was $59,000 $133,000 and $212,000 in 2000, 1999 and 1998, respectively. Unpaid dividends to participating policyholders are included as a liability in the consolidated balance sheets.
Service fee income for the administrative services, including underwriting, policy issuance, premium collection and claims services, provided to the New York Public Auto Pool (the "NYPAP") was recorded as a reduction to other underwriting and loss adjustment expenses and is earned over the life of the policies issued. The premiums and losses processed by the Company on behalf of the NYPAP, which are not reflected in the consolidated financial statements for the years ended December 31, are as follows (in thousands):
2000 1999 1998 Premiums Earned $ - $ - $ 4,091 Losses Incurred 231 (12,972) 23,543 Unpaid Losses 21,781 32,250 70,469
The premiums, losses and expenses of the business for which the Company provides administrative services are reflected on the financial statements of those insurance companies, including the Company, in New York State which are required to participate in the NYPAP. In its role as a servicing carrier, the Company is liable only for the loss adjustment expenses which are incurred to adjust and settle the claims processed on behalf of the NYPAP. Liabilities for these loss adjustment expenses are determined using case basis evaluations and statistical analyses.
Earnings Per Share: Earnings per share ("EPS") are based on the weighted average number of common shares outstanding. There were no outstanding common stock equivalents during 2000, 1999 and 1998 and therefore, basic and diluted EPS are the same.
New Pronouncements: In June 1999, the Financial Accounting Standards Board issued Financial Accounting Standards No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective date of FASB Statement No. 133 ("SFAS 133")", which will be effective for fiscal years beginning after June 15, 2000. Under SFAS 133, the Company will have to reflect derivative financial instruments at fair value. The Company has reviewed the impact of the implementation of SFAS 133 and does not expect it to have a material effect on the Company's financial position or results of operations.
NOTE 3-SURPLUS NOTE The Company issued a surplus note to Empire in 1980. The surplus note provides, among other things, for interest to be accrued on the principal of the note based on a bank's prime rate at the end of the current calendar quarter. Neither the principal amount of the surplus note nor the accrued interest may be paid, in whole or in part, without the consent of the Superintendent of Insurance of the State of New York ("Superintendent") and must be repaid, in whole or in part, when so ordered by the Superintendent
The Company sold certain fixed maturities classified as available for sale during 2000, 1999 and 1998 and realized gross capital gains of $661,000, $148,000 and $6,227,000, respectively, and gross capital losses of $874,000, $1,820,000 and $91,000, respectively, before income taxes.
The changes in unrealized appreciation/(depreciation) on investments available for sale were $4,115,000 and ($4,235,000) before taxes for the years ended December 31, 2000 and 1999, respectively.
As of December 31, 2000 and 1999, a security with an amortized cost of approximately $486,000 and $492,000 respectively, was on deposit with the New York Insurance Department.
In 1998, the National Association of Insurance Comissioners ("NAIC") adopted the Codification of Statutory Accounting Principles ("Codification"), which replaces the current Accounting Practices and Procedures manual as the NAIC's primary guidance on statutory accounting as of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. The New York Insurance Department recently adopted the Codification guidance (Regulation 172), effective January 1, 2001, but did not adopt several key provisions of the guidance. The Company will reflect the cumulative effect of the Codification guidance in its statutory financial statements as a direct adjustment to statutory surplus for the quarter ending March 31, 2001, to be filed with the New York Insurance Department by May 15, 2001. The Company is in the process of determining the potential effects of the codification.
Activity affecting the allowance for uncollectible agents' balances for the years ended December 31, 2000, 1999 and 1998 is summarized as follows (in thousands):
The Company has relied upon standard actuarial ultimate loss projection techniques to obtain estimates of liabilities for losses and LAE. These projections include the extrapolation of both losses paid and incurred by business line and accident year and implicitly consider the impact of inflation and claims settlement patterns upon ultimate claim costs based upon historical patterns. In addition, methods based upon average loss costs, reported claim counts and pure premiums are reviewed in order to obtain a range of estimates for setting the reserve levels. For further input, changes in operations in pertinent areas including underwriting standards, product mix, claims management and legal climate are periodically reviewed.
During 2000, the Company experienced unfavorable development principally in the 1996 through 1999 accident years in the private passenger automobile line ($2.8 million), the commercial automobile line ($1.9 million), the assigned risk automobile line ($1.4 million) and the commercial package policies line ($4.5 million). In addition, the Company increased its estimate for loss adjustment expenses by $3.3 million as a result of the decision to outsource a significant amount of claim handling functions in 2000. Claim files for workers' compensation, automobile no-fault and automobile and other liability claims were outsourced at a cost greater than the reserves previously recorded to handle the claims internally. The Group has outsourced almost two-thirds of its claims. Currently, the Group is primarily handling complex claims, first party claims and certain automobile liability and general liability claims internally. Complex claims generally consist of those that have potentially large settlement exposure and are not expected to settle quickly. The Company has also increased its reserve estimate for claims handled internally.
Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policy liability, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The Company's reinsurance generally has been placed with certain of the largest reinsurance companies, including (with their respective A.M Best & Co. ratings) General Reinsurance Corporation (A++) and Zurich Reinsurance (NA), Inc. (A+). The Company believes its reinsurers to be financially capable of meeting their respective obligations. However, to the extent that any reinsuring company is unable to meet its obligations, the Company would be liable for the reinsured risks. The Company has established reserves, which the Company believes are adequate, for any nonrecoverable reinsurance.
Effective January 1, 1997 Empire entered into a quota share reinsurance agreement with its subsidiary, Centurion. Under this agreement, Empire assumes 50% up to July 1, 1997 and 75% thereafter of the effective period premiums and losses of Centurion and grants Centurion a ceding commission. Under the pooling agreement, 70% of such business assumed will be retained by Empire and 30% will be ceded to the Company.
Premiums written 65,794 32,812 473 59,520 6,747 32,812 Losses paid 130,845 56,034 958 124,513 7,290 56,034 LAE Paid 13,289 12,673 107 12,853 543 12,673
Premiums earned $142,065 $ 67,512 $100 $135,419 $ 6,746 $67,512 Losses incurred 173,235 62,282 409 155,446 18,198 62,282 LAE incurred 17,202 7,307 74 15,963 1,313 7,307 Commissions incurred 15,886 8,438 10 14,795 1,101 8,438
(a) Amounts as reflected in the consolidated balance sheets can be derived by adding together amounts for direct and assumed and subtracting from this sum 30% of the amount ceded to Empire. The Company remains primarily liable for amounts ceded to reinsurers for unpaid losses, LAE and unearned premiums to the extent that the assuming reinsuring companies are unable to meet their obligations.
An analysis of the effect of reinsurance on premiums by business segment for the years ended December 31, 2000, 1999 and 1998 are summarized as follows (in thousands):
(a)Includes $(13), $473 and $48 assumed from non-affiliates in 2000, 1999 and 1998, respectively, before the effects of the pooling agreement described in Note 1.
For the years 2000, 1999 and 1998, the difference between the "expected" statutory federal income tax applicable to continuing operations and the actual income tax expense is as follows (in thousands):
Benefits accrued under the prior pension plan were frozen as of December 31, 1998. The prior pension plan was merged with the Leucadia plan effective January 1, 1999. As a result of the curtailment of the pension benefits in 1998, the Group recognized a gain of $6,548,000. In accordance with the pooling agreement, the Company's share of prepaid pension and net periodic pension cost is 30% of the amounts reflected above.
The following table sets forth certain information, before the effects of the pooling arrangements, relating to Empire's prior pension plan for the year ended December 31, 1998 (in thousands).
Discount rate 6.75% Rate of increase in future compensation N/A Long-term rate of return on plan assets 7.50%
The following table sets forth certain information, before the effects of the pooling arrangement, relating to Empire's unfunded substantive plan for postretirement benefits (in thousands):
In 1994, Empire established a Salary Cap Restoration Plan ("SCRP") for certain corporate officers. Under the SCRP, Empire provided these officers with an additional benefit, to be paid in a lump-sum upon retirement, equal to the difference between the actuarially determined lump-sum benefits, as computed under the prior pension plan, of the officer's highest five year average compensation (not to exceed $320,000, adjusted for the cost of living) at retirement and the current Internal Revenue Service maximum compensation limit of $160,000. The SCRP is an unfunded plan. In 2000, 1999 and 1998 Empire expensed $0, $98,000 and $74,000, respectively. Along with the prior plan, the benefits under SCRP were curtailed as of December 31, 1998. Under the pooling arrangement, the Company is obligated to pay 30% of the cost of the SCRP.
Empire has subleased four floors consisting of 133,140 square feet of the office space to its parent, Leucadia, at similar terms as are in the original lease. An additional two floors consisting of 64,340 square feet have been subleased to the Board of Education of the City School District of the City of New York.
Allcity operates in three business segments-Personal Lines, Mid-Market and Small Business. Results by business segment for each year ended December 31, 2000, 1999 and 1998 are summarized as follows (in thousands):
Direct investment portfolios are not maintained for each segment and accordingly, allocation of assets to each segment is not performed.
The Company's only material financial instruments are investments for which the fair values are disclosed in Note 4 and the surplus note and short-term investments, for which the carrying amounts approximate fair value.
The Company is a party to legal proceedings that are considered to be either ordinary, routine litigation or incidental to its business. Based on discussions with counsel, the Company does not believe that such litigation will have a material effect on its financial position, results of operations or cash flows.
[FN] (a) Liabilities for losses for certain long - term disability payments under workers' compensation insurance are discounted at a maximum of 6%. The liabilities discounted are deemed insignificant and do not have a material effect on reported income.