The Company and its subsidiaries lease numerous manufacturing, warehousing, office and headquarters facilities. The facilities vary in size and have leases expiring at various times, subject, in certain instances, to renewal options. See Notes to Consolidated Financial Statements.
(b) The Combined Ratio does not reflect the effect of investment income. For 1998, the difference in the accounting treatment for curtailment gains relating to the defined benefit pension plans was the principal reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1996 and 1995, a change in the statutory accounting treatment for retrospectively rated reinsurance agreements was the principal reason for the difference between the GAAP Combined Ratios and the SAP Combined Ratios. Additionally in 1999, 1998, 1997 and 1996, the difference relates to the accounting for certain costs which are treated differently under SAP and GAAP.
Except for the Euro denominated debt of Fidei, which is non-recourse to the Company, the Parent maintains the principal borrowings for the Company and its non-banking subsidiaries and has provided working capital to certain of its subsidiaries. These borrowings have primarily been made from banks through various credit agreement facilities and through public financings.
In February 1999, PepsiCo, Inc. exercised its option to purchase the Company's equity interest in PIB, its joint venture with PepsiCo, for $39,190,000, including interest. The Company recognized a pre-tax gain of $29,545,000 in connection with the purchase.
In March 1999, the Company sold all of its interest in Caja to Assicurazioni Generali Group, an Italian insurance company, for $126,000,000 in cash and a $40,000,000 collateralized note maturing April 2001 from its Argentine partner. The Company recorded a pre-tax gain of $120,800,000 on this sale.
In July 1999, the Company sold its discontinued life insurance subsidiaries, Charter and Intramerica, to Allstate Life Insurance Company for statutory surplus, as adjusted, at the date of sale ($39,560,000), plus $3,575,000. Income in 1999 from these operations, net of taxes, was $24,201,000, of which $15,582,000 resulted from the sale, including the recognition of deferred gains from prior reinsurance transactions.
In 1999, net cash was provided by operations. In 1998, net cash was used for operations, principally to purchase investments classified as trading and for the payment of income taxes, partially offset by the repayment of the Company's bridge financing to PIB.
The investment portfolio of the Company's insurance subsidiaries principally consists of fixed maturity investments; the balance of their portfolio consists largely of preferred securities. Of the fixed maturity
securities, the majority consists of those rated "investment grade" or U.S. governmental agency issued or guaranteed obligations, although limited investments in "non-rated" or rated less than investment grade securities have been made from time to time.
The Company provides collateralized automobile loans to individuals with poor credit histories. The Company's investment in automobile loans was $277,100,000 and $140,400,000 at December 31, 1999 and 1998, respectively. Investments in auto loans increased in 1999 due to the purchase of Tranex's subprime automobile portfolio and due to increased new loan originations. The Company has expanded into new locations and is offering new programs. The Company believes its new loan volume has benefited from a decline in competition due to the failure of certain competitors and a reduction in capital available for securitizations.
In January 2000, the Company committed to invest up to $100,000,000 in the equity of a limited liability company ("LLC"). The LLC is managed and controlled by a third party investment manager and will invest in high yield securities. The Company may redeem its interest in the LLC annually beginning on Decmeber 31, 2001, or otherwise in certain specified circumstances. The Company will account for this investment on the equity method.
The Company's most significant operation is its insurance business, where it is a provider of property and casualty insurance primarily in the New York metropolitan area. For the year ended December 31, 1999, the Company's insurance segment contributed 26% of total revenues from continuing operations and, at December 31, 1999, constituted 26% of total assets.
($24,100,000), voluntary private passenger automobile ($26,900,000) and commercial package policies ($11,600,000). As a result of poor operating results, the Empire Group is no longer entering into new assigned risk contracts. Effective January 1, 2000, all policy renewal obligations have been assigned to another insurance company. However, the Empire Group remains liable for the claim settlement costs for assigned risk claims that occurred during the policy term. The Empire Group believes it has provided adequate reserves for such liabilities, including loss adjustment expenses. The decline in voluntary private passenger automobile resulted from tighter underwriting standards, increased competition and the Empire Group's decision to no longer accept new policies from those agents who historically have had poor underwriting results. The Empire Group's termination of certain unprofitable agents has also adversely affected premium volume in other lines of business.
The Empire Group's combined ratios as determined under GAAP and SAP were as follows:
Year Ended December 31, ----------------------- 1999 1998 1997 ---- ---- ----
$13,000,000 for workers' compensation, $14,000,000 for commercial automobile and $14,000,000 for other commercial liability lines of business.
As a consequence of its reserve increases, the Empire Group has reduced premiums and pre-tax profits to recognize reinsurance premiums due for 1995 and prior years under retrospectively rated reinsurance agreements. Such amounts totaled $4,569,000, $1,976,000, and $5,479,000 for the years ended December 31, 1999, 1998 and 1997, respectively. The Empire Group has not entered into retrospectively rated reinsurance agreements after 1995.
Equity in income (losses) of associated companies declined in 1999 and improved in 1998, primarily due to income of $30,800,000 from an investment partnership that was liquidated in 1999. In addition, in 1998, equity in income (losses) of associated companies improved as compared to 1997 due to a reduction of $48,400,000 in the Company's equity losses related to PIB.
Interest expense primarily reflects the level of external borrowings outstanding throughout the periods, which increased primarily due to Fidei's outstanding debt, partially offset by the Company's debt repurchases described above.
The increase in selling, general and other expenses in 1999 principally relates to expenses incurred by Fidei, higher provisions for loan losses, expenses incurred in connection with the Dividend and the recognition in 1998 of net curtailment gains. The decrease in selling, general and other expenses in 1998 as compared to 1997 principally reflects decreased expenses of the manufacturing segment principally as a result of the sale of certain divisions in 1997, decreased pension expense due to the recognition of net curtailment gains of $6,500,000 in 1998, a 1997 charge for estimated costs to settle litigation relating to a lending program that has been liquidated and lower provisions for loan losses.
contingencies. Income taxes for 1998 reflect a benefit of $39,000,000 for a change in the Company's estimated 1997 federal tax liability and the favorable resolution of certain contingencies. The 1997 income tax benefit was greater than the expected normal corporate tax rate primarily due to the favorable resolution of certain contingencies.