In 1995 the business activities of USCG and its subsidiaries was conducted through leased office space located in White Plains, Purchase, and Medford, New York; Trumbull, Connecticut; and Galway, Ireland. No difficulty is anticipated in negotiating renewals on leases expiring or in finding other satisfactory space if warranted. Insurance company management is currently maintained at the company's Purchase, New York office.
USCG is a holding company which, through its subsidiaries, engages in primary insurance underwriting, reinsurance underwriting, and a range of services to other insurance and reinsurance companies. Primary insurance underwriting is being generated by U.S. Capital Insurance Company ("USCIC"), which accounted for 98% of the USCG's earned premiums in 1995 and 90% of total revenues in 1995. The other Companies in USCG whose books of business are currently in run off are Pan Atlantic Investors Ltd. ("PAIL"), Pan Atlantic Insurance Company ("PAICO"), and Pan Atlantic Reinsurance Company, Ltd ("PARCO").
Consolidated net loss in 1995 amounted to $9.5 million or $16.97 per share, as compared to net income of $.2 million or $.33 per share in 1994 and net income of $.4 million or $.63 per share in 1993. Included in the $9.5 million net loss at year end 1995 is an approximately $13.4 million loss attributable to the recognition of the Settlement agreement. See "Note I" to the "Notes to the Consolidated Financial Statements".
USCIC's plan in 1995 was to replace the canceled Louisiana program with commercial business and with private passenger automobile insurance from independent producers. This change of business source is responsible for the volatility in USCIC's earned premium income, which increased in 1995 to $37.1 million after a decrease from $35.5 million in 1993 to $20.8 million in 1994.
USCIC combined loss and expense ratio for 1995 was 110.8% as compared to 103.3% in 1994 and 114.7% in 1993. Statutory underwriting loss from operations was $7.6 million in 1995, $2.1 million in 1994 and $4.9 million in 1993. The 1995 underwriting loss from operations was due principally to adverse development on two programs in run-off since 1993 and 1994, and the Company's strengthening of its Incurred-But-Not-Reported ("IBNR") reserves by $7.1 million on a gross basis and $5.9 million on a net basis.
Underwriting expenses increased $4.1 million in 1995, of which assigned risk expense accounted for $1.1 million. The balance of the increase is due to expenses incurred on the increased premium volume written by the Company in 1995, such as commissions and premium taxes.
Investment Income - ----------------- USCG's investment portfolio generated net dividends and interest income of $6.1 million in 1995, compared to $6.7 million in 1994 and $7.5 million in 1993. The decrease is due primarily to lower interest rates in 1995 and the sale of securities valued at $9.2 million on an amortized cost basis, to meet operational needs in 1995. These figures do not include realized capital gains of $1.0 million in 1995, $0.3 million in 1994, and $4.5 million in 1993.
At December 31, 1995, USCG's invested assets were distributed as follows: cash equivalents - 26%; Treasury issues - 24%; mortgaged backed issues - - 34%; foreign issues - 3%; corporate issues - 29%; and equities - 1%. The weighted average maturity of the portfolio was approximately 7.0 years; with a weighted average current yield of approximately 6.6%, as compared to 7.7% in 1994, and 7.5% in 1993.
At December 31, 1995, USCG's total assets of $155.8 million were distributed as follows: 54.7% - cash and investments; 34.5% - receivables; and other assets - 10.8%. All of the subsidiaries maintain liquid operating positions and follow investment guidelines that are intended to provide for an acceptable return on investment while preserving capital and maintaining sufficient liquidity to meet their obligations. USCIC, the principal insurance underwriter, maintains a sufficient margin of capital and surplus to ensure its unimpaired ability to write insurance and assume reinsurance.
As of September 30, 1995, the company's minority interest in GoldStreet Syndicate Corporation was transferred to Republic. The results of GoldStreet's operations for the nine months ended September 30, 1995 are included in the Company's statement of operations, using the equity method of accounting. For the nine months ended September 30, 1995 and the years ended December 31, 1994, and 1993, the Company's equity in GoldStreet's net income was $(6,000), $506,000, and $196,000, respectively.
In its ongoing effort to improve solvency regulation, the National Association of Insurance Commissioners ("NAIC") and individual states have enacted certain laws and financial statement changes. The most recent activity was aimed at greater disclosure of an insurer's reliance upon reinsurance and changes in its reinsurance programs, and tighter rules on accounting for certain overdue reinsurance.
Property and casualty insurance premiums are established before the total losses and loss adjustment expenses, or the extent to which inflation may affect such expenses, are known. Consequently, USCG attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, USCG may be limited in raising its premium levels commensurate with anticipated inflation. In such an event USCG, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on the investment portfolio, with a corresponding effect on the investment income.
The FASB has issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan". This statement requires that an impaired loan be measured on the basis of the present value of expected future cash flows, using the loans effective interest rate and Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures", which amends Statement No. 114 methods of recognizing interest income on impaired loans. Both of these Statements are effective for fiscal years beginning after December 15, 1994, and did not have a material impact on the financial statements of the Company.
The Company adopted SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments". The adoption of this Statement in 1994 had no material impact on the financial statements of the Company, and the Company had no derivative activities to disclose.
The Company also adopted the American Institute of Certified Public Accountants' Statement of Position 94-5, "Disclosure of Certain Matters in the Financial Statements of Insurance Enterprises" and 94-6, "Disclosures of Certain Significant Risks and Uncertainties."
During 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which requires that an impairment loss be recognized when the expected future cash flows resulting from the use of the asset is less than the carrying amount.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 allows companies to continue to account for their stock plans in accordance with APB Opinion 25 but encourages the adoption of a new accounting method based on the estimated fair value of employee stock options. Companies electing not to follow the new fair value based method are required to provide expanded footnote disclosures, including pro forma net income and earnings per share, determined as if the company had applied the new method. SFAS No. 123 is required to be adopted prospectively for its stock option plans in accordance with APB Opinion 25 and provide supplemental disclosures as required by SFAS No. 123, beginning in 1996.
Unaudited quarterly financial data is included in Note O of the Consolidated Financial Statements. Other Supplementary Data required by Item 302 of Regulation S-K is not required under the related instructions, and therefore has been omitted.