Per common share*: Cumulative effect of change in accounting for income taxes - - - (.69) - Net income (loss) (.33) (1.18) (1.19) (4.98) .23 Cash dividends - - - .07 .24
At end of year: Invested assets 63,297 98,189 126,590 139,244 161,861 Total assets 183,507 179,948 236,181 204,209 230,752 Policy reserves and liabilities 104,852 106,936 146,257 90,616 96,268 Total debt 22,531 18,462 18,847 22,000 23,348 Redeemable preferred stock - - - 73 145 Common stockholders' equity 20,560 15,366 28,583 32,361 55,367
Return on average common stockholders' equity (8.13)% (23.84)% (17.32)% (52.29)% 1.85%
The loss before income taxes and other items for 1994 was $4,905,000. A significant portion of the 1994 loss is related to the write off of Galaxy ($3,829,000) and Galaxy's first quarter loss ($205,000), or a total Galaxy loss of $4,034,000. In addition, several discontinued property and casualty lines continued to show adverse loss development in 1994, partially offset by positive results from the credit and extended service contract product lines.
The Company made concerted efforts in the last three years to reduce general and administrative expenses. Staffing has been reduced by 20%, 26% and 43% in 1995, 1994 and 1993, respectively. These expense control initiatives have allowed the Company to concentrate on its traditional profit producing lines of business (credit insurance and extended service contracts) and to begin programs in selected Property & Casualty lines in which the current management team has experience and expertise.
The Company plans to concentrate its efforts on growing the credit, extended service contract and the newly introduced program product lines.
The Company limits the extent of its risks on fixed maturity securities by generally avoiding securities whose cost significantly exceeds par, by purchasing securities which are backed by stable collateral, and by concentrating on securities that are either planned amortization or sequential pay classes. The collateralized mortgage obligations and asset backed securities owned have primarily short to intermediate average lives. At December 31, 1995, the Company did not have a significant amount of higher risk mortgage or asset backed securities. There are negligible default risks on the mortgage and asset backed security portfolio as a whole as the vast majority of the assets are either guaranteed by U.S. government-sponsored entities or are supported in the securitization structure by junior securities enabling the assets to achieve high investment grade status.
Ohio domiciled insurance companies are subject to Ohio law which regulates the ability of insurance companies to pay dividends. The regulation limits the annual dividend or distribution of an insurer to the greater of (1) net income of the previous year or (2) 10% of unassigned surplus as of the end of the previous year. In addition, all dividends must come from earned surplus to qualify as a non-extraordinary dividend. Amounts greater than this would be considered extraordinary dividends and could not be paid without permission of the Department of Insurance of the State of Ohio ("Ohio Department"). Based on this regulation, ALIC could pay a dividend of $8,000 and ANIC would require Ohio Department approval to pay any dividend to the registrant during 1996.
The Company's cash flow projections for 1996 assume that certain events will take place in order to have sufficient cash to meet its debt service and other requirements. These events include the liquidation of AICL. The liquidation was in fact concluded in the first quarter of 1996. The Company will monitor its current and future debt service requirements to coincide with cash flow availability as well as explore various capital raising alternatives. The Company intends to use any proceeds from a judgement entered in its favor in a legal proceeding (see CERTAIN EVENTS) to repay $3,700,000 in advances received in 1992 and 1993 from the registrant's subsidiaries which are eliminated in consolidation.
In July 1991, ACCEL issued $5,848,000 of subordinated notes (the "Subordinated Notes") in connection with the purchase of all outstanding common shares of RGL. See "Note K" in the Notes to Consolidated Financial Statements. The Subordinated Notes have a nine-year term with no principal payable until maturity, and bear interest at 10.125% per annum. Effective June 30, 1992, ACCEL amended the notes to permit the issuance of additional notes for the purpose of making interest payments, provided, however, that ACCEL could at its option pay cash in lieu of issuing additional notes in any denomination of less than $1,000. As a result, ACCEL issued additional notes totaling $569,000 and $515,000 for the 1995 and 1994 interest payments, respectively.
Of the Subordinated Notes described above, $5,371,000 were initially issued to Ranger Insurance Company ("Ranger"), a company related through common ownership by a stockholder and director of the Company. In 1993, Ranger sold all of the subordinated notes held by it to Chase Insurance Holdings Corporation ("CIHC"). Additional Subordinated Notes in the amount of $506,000 and $458,000 were issued to related parties for the 1995 and 1994 interest payments, respectively.
At December 31, 1994, the Company had an outstanding loan balance of $13,000,000 under the terms of a credit agreement (the "Credit Agreement") with a bank, and the effective interest rate was 6.25%. During 1993, the Company did not meet all the requirements contained in the various financial tests under the covenants contained in the Credit Agreement. On March 30, 1994, the bank and the Company agreed to a waiver of certain covenants of the Credit Agreement such that the Company would not be in default at December 31, 1993 and through January 1, 1995.
Proceeds from the Credit Agreement were partially used in the purchase of RGL, and to fund general operating activities.
On February 7, 1995 the Company renegotiated the terms of its 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 AICL 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 had to 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.
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 ALIC entered into a reinsurance agreement with an unaffiliated company to reinsure its in-force Credit Business. This agreement is structured, such, that as future profits emerge on this block of business, a substantial portion of 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.
ACCEL's Board of Directors approved an Employee Stock Ownership Plan ("ESOP") during 1989. In 1990, the ESOP entered into an agreement with ALIC to borrow up to $1,000,000 for the purchase of ACCEL's common stock. Company contributions into the ESOP have been used to pay down the loan from ALIC and release shares into the participants' accounts as the Company's matching contribution. The ESOP purchased 136,887 shares (adjusted for the 1990 5% common stock dividend) under this loan agreement with ALIC at a cost of $1,000,000. In addition to the shares purchased under the loan agreement, the ESOP purchased 90,088 common shares at a cost of $603,000. The loan bears interest at 10%.
The Company currently has two business lines that are in run-off status: the realtors' errors and omissions line and the farmowner's multi-peril and ancillary inland marine products. Also, for information regarding Galaxy, see "Note K" in the Notes to Consolidated Financial Statements.
The estimates for policy reserves are continually under review and adjusted as necessary, and as experience develops or new information becomes known, such adjustments are included in current operations. These liabilities are necessarily subject to the impact of future changes in claim severity, frequency and other factors. Although considerable variability is inherent in such estimates, based on recent evaluations conducted by experienced consultants and internal reviews, management believes that the current level of policy reserves will be adequate to cover anticipated claim liabilities. However, because the realtors' errors and omission risk was written from the first quarter 1986 through the first quarter of 1991; and considering the length of time involved in the settlement of some claims, there remains a lack of credible experience needed to determine whether actual incurred policy benefits will conform to the assumptions inherent in the determination of these liabilities. Accordingly, the ultimate amounts required for settlement of policy benefits may vary significantly from the amounts included in the accompanying consolidated financial statements.
Although the cumulative effects of inflation on premium growth cannot be fully determined, increases in the retail price of automobiles have generally resulted in increased amounts being financed which constitute the basis of premiums charged for credit insurance. Anticipated increases in automobile repairs also provides the primary basis for increases in extended service contract premium rates.
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" in the Notes to Consolidated Financial Statements) of $2.1 million and $5.8 million, respectively. The purchase price included goodwill of $1.2 million.
For the three years ended December 31, 1993, RGL recorded losses and Galaxy's underwriting results deteriorated. The statutory capital and surplus of Galaxy declined significantly (from $7.3 million to $6.1 million to $2.9 million at December 31, 1991, 1992 and 1993, respectively), resulting in the New York Department of Insurance ("New York Department") placing a moratorium on all new business as of February 28, 1994.
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
ANIC, in the normal course of business, issued certain policy endorsements on Galaxy policies in 1992, some of which had pending claims open at the time of liquidation. Management believes that these endorsements will not have a material impact on the Company's financial condition. As of December 31, 1995, ANIC had not incurred any costs related to these endorsements.
DISCONTINUED REALTORS' ERRORS AND OMISSIONS PROGRAM: As a result of the losses sustained in the realtors' errors and omissions program, and in particular, conduct discovered by the Company after it assumed responsibility for claims processing and handling, the Company filed suit in November 1991 against the non-affiliated marketing organization and broker involved in the program.
The lawsuit sought to recover funds improperly withdrawn from the account established for the payment of claims under the program; for damages due to business expenses improperly charged against such funds; and for improper administration of the program. ACCEL and ANIC entered into an arrangement whereby ANIC's rights under the lawsuit were transferred to the Company in exchange for a $4,000,000 collateral loan issued to ANIC which was recorded as a capital contribution. The transaction and related agreements were approved by the Ohio Department. The loan agreement and accompanying promissory note called for interest at the 13 week Treasury Bill rate plus 100 basis points. The principal of $4,000,000 was paid in full on December 29, 1995.
ACCEL pursued the litigation vigorously and in late 1995 ANIC was awarded $5.3 million in damages with $5.1 million thereof being obtained against the marketing organization. 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.
Net premiums earned $ 40,853 $ 47,600 $ 61,649 ======== ======== ========
RATIOS: Policy benefits to net premiums earned 49.2% 52.5% 62.3% Commissions and selling expenses and general and administrative expenses to gross premiums written 52.9% 47.8% 46.2% Commissions and selling expenses, reinsurance expense recovery and change in deferred policy acquisition costs to net premiums earned 49.3% 43.6% 38.3%
We have audited the consolidated financial statements of ACCEL International Corporation and subsidiaries (the Company) for the year ended December 31, 1993, as listed in the accompanying index to financial statements (Item 14(a)). In connection with our audit of the consolidated financial statements, we also have audited the financial statement schedules as of December 31, 1993 and for the year then ended, as listed in the accompanying index. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audit.
In our opinion, the financial statements of ACCEL International Corporation and subsidiaries listed in the accompanying index to financial statements (Item 14(a)) present fairly, in all material respects, the consolidated results of their operations and their cash flows for the year ended December 31, 1993, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules as of December 31, 1993 and for the year ended December 31, 1993, 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.
Receivables: Premiums in process of transmittal, less allowance (1995--$279,000; 1994--$255,000) 1,779 3,592 Amounts due from reinsurers--Note F 9,119 7,826 Recoverable federal income taxes--Note G 70 - --------- --------- 10,968 11,418
Policy Reserves and Liabilities: Unearned premium reserves--Note F $ 82,080 $ 83,762 Insurance claims--Notes F and H 22,761 23,159 Other 11 15 -------- -------- 104,852 106,936
Other Liabilities: Funds held under reinsurance agreements--Note F 3,072 3,633 Accounts payable and other liabilities 2,353 2,257 Commissions payable 5,010 4,015 Amounts due reinsurers--Note F 4,442 6,459 Federal income taxes--Note G: Current - 52 Deferred 5,024 4,938 Deferred reinsurance commissions--Note F 15,663 17,830 Notes payable--Note D 22,531 18,462 -------- -------- 58,095 57,646
Redeemable Preferred Stock: Authorized shares--1,000,000; no issued or outstanding shares - -
Common stockholders' equity--Notes C, D, G and I: Common stock, $.10 par value Authorized shares--10,000,000 Issued shares--5,243,852 524 524 Additional paid-in capital 23,702 24,066 Retained earnings 3,299 4,759 Less 797,420 treasury shares at cost (6,599) (6,599) ESOP loan--Note L (161) (627) Net unrealized depreciation on investment securities--Note B (205) (6,672) Foreign currency translation adjustments--Note M - (85) -------- -------- Net common stockholders' equity 20,560 15,366 -------- -------- $183,507 $179,948 ======== ========
---------- ---------- ------- (Thousands of dollars, except per share data) REVENUE:
Gross premiums written--Note F $ 55,443 $ 60,504 $ 95,766 Less reinsurance ceded--Note F 12,147 12,495 30,261 ---------- ---------- ---------- Net premiums written 43,296 48,009 65,505 Increase in unearned premium reserves (2,443) (409) (3,856) ---------- ---------- ---------- Premiums earned--Note F 40,853 47,600 61,649 Net investment income--Note B: Interest and dividends 6,488 6,678 8,397 Realized gains 455 808 1,336 Service fees on extended service contracts 2,137 2,063 1,819 Other income 542 370 1,609 ---------- --------- ---------- 50,475 57,519 74,810 BENEFITS AND EXPENSES: Policy benefits--Notes F and H 20,118 24,997 38,431 Commissions and selling expenses 21,526 19,612 29,929 Reinsurance expense recovery--Note F (626) (927) (4,276) General and administrative--Note K 7,817 9,336 14,327 Taxes, licenses and fees 1,743 1,903 2,430 Interest--Note D 1,748 1,589 1,653 Decrease (increase) in deferred policy acquisition costs (750) 2,085 (2,058) Write off of subsidiary--Note K - 3,829 - ---------- ---------- ---------- 51,576 62,424 80,436 ---------- ---------- ----------
Federal income taxes--Note G: Current (benefit) 273 219 (703) Deferred 86 114 358 ---------- ---------- ---------- 359 333 (345) ---------- ---------- ----------
Net loss per common share $ (.33) $ (1.18) $ (1.19) ========== ========== ==========
Weighted average number of common shares outstanding 4,446,432 4,446,432 4,446,432 ========== ========== ==========
Net loss $ (1,460) $ (5,238) $ (5,281) Adjustments to reconcile net loss to net cash used in operating activities: Change in premiums receivable 1,789 3,266 (3,100) Change in accrued investment income 250 191 338 Change in prepaid reinsurance premiums 3,812 9,208 (27,915) Change in reinsurance premium deposits (39,289) (1,251) (11,094) Change in funds held under reinsurance agreements (292) (1,196) (20,502) Change in unearned premium reserves (1,682) (7,449) 52,437 Change in insurance claim reserves (398) (12,435) 3,205 Change in amounts due reinsurers and amounts due from reinsurers (3,310) 7,298 (8,772) Change in other assets, other liabilities and accrued income taxes 1,683 (860) 5,606 Interest paid in kind 569 515 657 Accrual of discount on bonds (461) (128) (781) Amortization of premium on bonds 172 116 306 Amortization of deferred policy acquisition costs 20,743 24,414 25,518 Policy acquisition costs deferred (21,493) (22,329) (27,576) Reinsurance commissions earned (13,329) (12,763) (13,775) Reinsurance commissions received 11,162 11,708 16,786 Provision for depreciation and amortization 412 528 2,334 Write off of subsidiary - 3,829 - Net realized gains on investments (455) (808) (1,336) -------- -------- -------- NET CASH USED IN OPERATING ACTIVITIES (41,577) (3,384) (12,945) -------- -------- -------- INVESTING ACTIVITIES: Sale of investments available for sale 49,159 38,103 82,345 Purchase of investments available for sale (7,067) (35,574) (68,406) Other, net (122) (59) (29) -------- -------- -------- NET CASH PROVIDED BY INVESTING ACTIVITIES 41,970 2,470 13,910 -------- -------- -------- FINANCING ACTIVITIES: Payment on ESOP loan 102 93 83 Repayment of notes payable (13,000) - (1,000) Issuance of notes payable 16,500 - - Debentures redeemed - (900) (800) Redemption of redeemable stock - - (73) Cash dividends - - (6) -------- -------- -------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 3,602 (807) (1,796) -------- -------- -------- NET INCREASE (DECREASE) IN CASH 3,995 (1,721) (831) Cash at beginning of year 1,044 2,765 3,596 -------- -------- -------- CASH AT END OF YEAR $ 5,039 $ 1,044 $ 2,765 ======== ======== ========
BASIS OF PRESENTATION: The accompanying consolidated financial statements of ACCEL International Corporation ("ACCEL") and subsidiaries (collectively
ACCOUNTING ESTIMATES: In preparing the consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the consolidated financial statements and revenues and expenses for the reporting period. Actual results could differ significantly from those estimates.
When an other than temporary decline in value is recognized, the specific investment is carried at estimated realizable value and its original book value is reduced to reflect such impairment of the investment. Such reductions in book value are reflected in realized investment losses for the period in which they were written down. For mortgage backed securities, the Company's accounting follows the provisions of Financial Accounting Standards Board Emerging Issues Tasks Force ("EITF") Consensus No. 93-18. This EITF requires that when the present value of estimated future cash flows discounted at a risk-free rate of return is less than the cost basis of the investment an impairment loss is to be recognized by writing the investment down to its fair value.
available, fair values are based on quoted market prices of comparable instruments at amortized value.
The fair value of notes payable is estimated using discounted cash flow analyses, based on ACCEL's current incremental borrowing rates for similar types of borrowing arrangements.
DEFERRED POLICY ACQUISITION COSTS: The costs (principally commissions and certain expenses of policy issuance) of acquiring or renewing insurance business, all of which vary with and are directly related to the production of business, have been deferred. These deferred policy acquisition costs are amortized in a manner related to the recognition of premiums earned. Substantially all such deferred costs are amortized within a four-year period. Anticipated investment income is considered in determining recoverability of deferred costs.
PROPERTY OCCUPIED BY COMPANY: Home office property is carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over an estimated life of thirty-five years.
financial reporting purposes, after permanent differences. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized.
At December 31, 1995 and 1994, investments in cash and securities with a carrying value of $9,108,000 and $8,428,000, respectively, were on deposit with state insurance departments to satisfy regulatory requirements. Cash and securities with a carrying value of $19,879,000 and $39,710,000 at December 31, 1995 and 1994, respectively, were on deposit in security funds in connection with reinsurance treaties.
Equity securities: Gross realized gains 106 148 41 Gross realized losses - - -
December 31, 1995 ----------------- U.S. Treasury and U.S. government agency securities $ 9,310 $ 274 $ - $ 9,584 State and political subdivision securities 1,255 35 - 1,290 Mortgage-backed securities 41,214 322 (914) 40,622 U.S. corporate securities 1,000 26 - 1,026
Redeemable preferred stocks 648 34 - 682 -------- -------- -------- -------- Total $ 53,427 $ 691 $ (914) $ 53,204 ======== ======== ======== ========
December 31, 1994 ----------------- U.S. Treasury and U.S. government agency securities $ 11,465 $ 8 $ (355) $ 11,118 State and political subdivision securities 1,515 - (35) 1,480 Mortgage-backed securities 72,002 7 (5,992) 66,017 U.S. corporate securities 5,691 - (360) 5,331 Redeemable preferred stocks 749 87 - 836 -------- -------- -------- -------- Total $ 91,422 $ 102 $ (6,742) $ 84,782 ======== ======== ======== ========
Amortized Fair Maturity cost value -------- --------- -------- (Thousands of dollars) Due in one year or less $ 1,227 $ 1,240 Due after one year through five years 8,632 8,847 Due after five years through ten years 1,845 1,961 Due after ten years 509 534 Mortgage-backed securities 41,214 40,622 -------- -------- Total $ 53,427 $ 53,204 ======== ========
Generally, the net assets of the consolidated insurance subsidiaries available for transfer to ACCEL are limited to the amounts that the insurance subsidiaries' net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital and surplus requirements; however, payments of such amounts as dividends from each insurance subsidiary are currently subject to regulation by Ohio law. Based on this law, ALIC could pay a dividend of $8,000 and ANIC would require Ohio Department approval to pay any dividend to the registrant during 1996. At December 31, 1995, $18,047,000 of net assets, as determined in accordance with prescribed and permitted statutory accounting practices, of the consolidated
The statutory basis capital and surplus and net income (loss) of the consolidated insurance subsidiaries, as reported to insurance regulatory authorities, are summarized as follows: Life/ Property/ Health Casualty ------ -------- (Thousands of dollars) Statutory capital and surplus at December 31: 1995 $13,010 $10,037 1994 13,841 14,190
Of the Subordinated Notes described above, $5,371,000 were initially issued to Ranger Insurance Company ("Ranger"), a company related through common ownership by a stockholder and director of the Company. In 1993, Ranger sold all of the Subordinated Notes held by it to Chase Insurance Holdings Corporation ("CIHC"), another company related through common ownership by a stockholder and director of the Company. Additional Subordinated Notes in the amount of $506,000 and $458,000 were issued to related parties for the 1995 and 1994 interest payments, respectively.
Proceeds from the Credit Agreement were partially used in the purchase of RGL, and to fund general operating activities. 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.
DIRECT BUSINESS CEDED--CREDIT BUSINESS QUOTA SHARE: The Company has an agreement in place which covers a substantial portion of its credit insurance business. The agreement contains an experience adjustment computation that results in the ultimate cost of this agreement being a stated percentage related to the business covered by the agreement. The Company ultimately retains a substantial part of the insurance risk, the underwriting income or loss and the investment income on net funds, all of which are retained by the Company.
The other effect of this agreement is to increase statutory capital and surplus of Acceleration Life Insurance Company ("ALIC"), a wholly owned subsidiary of ACCEL, by $14,512,000 and $15,740,000 as of December 31, 1995 and 1994, respectively.
DIRECT BUSINESS CEDED--TO PRODUCER-OWNED REINSURANCE COMPANIES: The Company has agreements to cede certain credit life and credit accident and health insurance to reinsurance companies owned by certain automobile dealers, financial institutions or agents. Under these arrangements, the assuming entities participate in the profits or losses of the insurance produced by them, and the Company may retain a nominal percentage of the applicable business. These treaties generally provide that the Company receives a ceding fee and is reimbursed for certain commissions and claims.
The Company also entered into reinsurance agreements with several unaffiliated reinsurers related to certain property and casualty lines of business written by the Company. Unearned premium reserves and the liability for insurance claims associated with these agreements at December 31, 1995 are $2,645,000 and $2,240,000, respectively ($6,242,000 and $889,000 at December 31, 1994, respectively).
The following data summarizes certain aspects of the Company's reinsurance activity for 1995, 1994 and 1993.
-------- -------- -------- -------- -------- -------- (In thousands) Direct $ 49,135 $ 50,265 $ 52,864 $ 59,789 $ 87,546 $ 78,773 Assumed 6,308 6,864 7,640 7,004 8,220 9,309 Ceded (12,147) (16,276) (12,495) (19,193) (30,261) (26,433) -------- -------- -------- -------- -------- -------- Net premiums $ 43,296 $ 40,853 $ 48,009 $ 47,600 $ 65,505 $ 61,649 ======== ======== ======== ======== ======== ========
Policy benefits incurred in 1995, 1994 and 1993 are summarized as follows:
1995 1994 1993 ---- ---- ---- (In thousands) Direct $ 24,900 $ 31,567 $ 44,952 Assumed 3,973 3,754 5,240 Ceded (8,755) (10,324) (11,761) -------- -------- --------
Net policy benefits $ 20,118 $ 24,997 $ 38,431 ======== ======== ========
In 1995 and 1994, the Company paid $410,000 and $140,000, respectively, in federal income taxes. In 1993 the Company received a refund of $3,910,000 for federal income taxes.
Total income tax expense (benefit) differed from the amount computed by applying the statutory federal income tax rate to loss before taxes as follows:
-------- -------- ---- (Thousands of dollars) Income tax (benefit) at statutory rate $ (374) $ (1,668) $ (1,913) Amortization of goodwill 36 36 605 Dividends-received deduction (54) (38) (37) Special deductions of life insurance subsidiaries - (297) (41) Tax-exempt interest (18) (21) (30) Valuation allowance 66 (1,130) 745 Write off of subsidiary - 1,302 - Benefit of non-life companies not utilized 622 531 - Other, net 81 1,618 326 -------- -------- -------- Federal income tax expense (benefit) $ 359 $ 333 $ (345) ======== ======== ========
The Company had recorded a valuation allowance of $2,484,000 and $1,739,000 as of December 31, 1993 and January 1, 1993, respectively.
The Company has $4,028,000 of net operating losses that are available to reduce future income taxes; $479,000, $35,000, $1,229,000 and $2,285,000 of the losses expire in 2007, 2008, 2009 and 2010, respectively.
The following table provides a reconciliation of beginning and ending liability balances for the Company's insurance claims for 1995, 1994 and 1993.
Policy benefits for insured events in prior years 10,097 10,498 16,067 -------- --------- --------
Liability for insurance claims at end of year $ 22,761 $ 23,159 $ 49,919 ======== ========= ========
currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated continually.
On June 2, 1992, the Board of Directors voted to suspend payment of cash dividends on the common stock until the Company returns to a level of profitability that will sustain the payment of cash dividends.
Information relating to revenue, loss before income taxes, and identifiable assets by segment are summarized as follows (see Note K regarding 1994 Property/Casualty amounts):
Year Ended December 31, 1995 1994 1993 -------- -------- ------ (Thousands of dollars) Revenue: Life/Health $ 38,878 $ 37,097 $ 45,093 Property/Casualty 11,454 20,185 29,282 Other 143 237 435
Loss before income taxes: Life/Health $ 3,055 $ 3,123 $ 1,407 Property/Casualty (2,236) (6,333) (4,484) Other (1,920) (1,695) (2,549) -------- -------- -------- Total $ (1,101) $ (4,905) $ (5,626) ======== ======== ========
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 loss adjustment expense 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.
Due to the significance of the statutory loss and the loss of the Company's control of Galaxy as a result of the insolvency, the Company wrote off its investment in RGL ($3.8 million) during the second quarter of 1994. As a result of this action, the consolidated results of operations for 1994 include a charge to operations of $3.8 million, representing the Company's net investment in Galaxy as of April 1, 1994, in addition to operating losses of $205,000 incurred during the first quarter. The Company wrote its investment in RGL to zero and deconsolidated RGL as of April 1, 1994.
Acceleration National Insurance Company ("ANIC"), a wholly owned subsidiary of ACCEL, in the normal course of business, issued certain policy endorsements on Galaxy policies in 1992, some of which had pending claims open at the time of liquidation. Management believes that these endorsements will not have a material impact on the Company's financial condition. As of December 31, 1995, ANIC had not incurred any costs related to these endorsements.
The Acceleration Retirement Savings Plan became effective in 1985. During 1989, ACCEL's Board of Directors approved changes to this plan to include an ESOP and concurrently changed the plan name to the "Acceleration Retirement Savings and Stock Ownership Plan" ("PLAN"). For 1993, ACCEL's Board of Directors authorized a contribution to the plan of $160,000. For 1994 and 1995 the Board authorized contributions to the PLAN at a level that would fund a 100% match of the first 6% of each participating employees tax deferred contributions. The Company incurred a contribution expense for 1995, 1994 and 1993 of $198,000, $178,000 and $160,000, respectively.
The PLAN allows all employees who meet certain eligibility requirements and choose to participate to defer a percentage of their salary and contribute to the PLAN on a tax deferred basis. The employee contributions to the PLAN are used to fund the savings element of the PLAN. The Company contributions become part of the Plan and are used to purchase shares of ACCEL's common stock in the open market.
In 1990, the PLAN entered into an agreement with ALIC to borrow up to $1,000,000 for the purchase of ACCEL's common stock. The PLAN purchased 136,887 shares (adjusted for the 1990 5% common stock dividend) under this loan agreement with ALIC at a cost of $1,000,000. In addition to the shares purchased under the loan agreement, the Plan has purchased 90,088 common shares at a cost of $603,000. The loan, which bears interest at 10%, is being repaid from Company contributions to the PLAN.
During 1995, the Company redeemed most of its shares of AICL, which resulted in proceeds approximating the Company's original investment in AICL. The transaction was approved by the Department of Trade and Insurance (United Kingdom). On February 7, 1996, the Company received the final proceeds for redemption of its remaining shares, and AICL ceased to exist.
As more fully described in Note D, the Company currently has subordinated notes outstanding with CIHC. At December 31, 1995 and 1994, total subordinated notes outstanding to related parties were 5,347,000 and 4,841,000, respectively. Interest expense on these subordinated notes was $509,000, $461,000 and $608,000 for 1995, 1994 and 1993, respectively.
In 1993, the National Association of Insurance Commissioners ("NAIC") adopted the life and health and property and casualty Risk-Based Capital (RBC) formulas. These model acts require every insurer to calculate its total adjusted capital and RBC requirement, and provides for an insurance commissioner to intervene if the insurer experiences financial difficulty. These model acts will become law in Ohio, the Company's insurance subsidiaries' state of domicile, in March, 1996. The formula includes components for asset risk, liability risk, interest rate exposure, and other factors. Each of the Company's insurance subsidiaries exceed all required RBC levels as of December 31, 1995.
----Premiums written $16,606 $16,990 $11,188 $15,720 Premiums earned 13,008 11,359 11,231 12,002 Benefits and expenses 15,792 17,834 13,894 14,904 Net income (loss) 255 (4,244) (662) (587)
In accordance with General Instruction G(3), the information required by this Item 10 is incorporated by reference herein from the material under the headings "Election of Directors" and "Executive Compensation" contained in the Company's definitive proxy statement filed with the Commission relating to the annual meeting of stockholders to be held on June 11, 1996.
The executive officers, their respective ages and business experience are as follows: Thomas H. Friedberg (56), Chairman of the Board, President and Chief Executive Officer; Douglas J. Coats (62), Executive Vice President; Nicholas Z. Alexander (60), Senior Vice President, Secretary and General Counsel; Larry L. Main (47), Senior Vice President-Auto After Market Group; Kurt L. Mueller (47), Vice President and Controller; and Alan M. Weiner (45), Vice President and Treasurer.
In accordance with General Instruction G(3), the information required by this Item 11 is incorporated by reference herein from the material under the headings "Executive Compensation" and "Incentive Stock Option Plans" 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.