Total investments $16,935 $27,994 $121,036 $181,818 $188,280 Total assets 46,502 67,041 257,315 305,018 265,305 Reserves for losses and loss adjustment expenses (1) 30,974 47,165 200,845 160,857 131,159 Total stockholders' equity (deficiency) 145 (56,252) (19,251) 58,908 65,804
(1) Reserves for loss and loss adjustment expenses have been restated for the years ended December 31, 1992 and 1991, to reflect the gross reporting provisions of Statement of Financial Accounting Standard No. 113 "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts".
The year 1995 represented a substantial turnaround compared with 1994 and 1993 which were the most difficult and challenging in the history of the Lawrence Insurance Group, Inc. (Company or LIG) although it was unfortunate that the Company was compelled by circumstances to agree to placing United Community Insurance Company (UCIC) into liquidation. This action was taken in order for the Company to devote its focus and resources to the healthy parts of the Company. The Company recorded a net loss before extraordinary gain of $642,000 for the year. This compares with a net loss of $7,091,000 in 1994, and a net loss of $77,104,000 for 1993. The Company also recorded an extraordinary gain of $38,387,000 in 1995 related to the liquidation of UCIC. The losses in 1994 and 1993 were essentially attributable to the operations of UCIC.
The consolidated financial statements for 1993 include the accounts of LIG and all of its wholly owned subsidiaries. All significant intercompany transactions have been eliminated in consolidation. Amounts in 1994 exclude UCIC except as follows. On July 7, 1994 UCIC, with the consent of UCIC management, was placed in Rehabilitation by court order. Consequently, LIG and UCIC management no longer exercised any decision making authority or control over UCIC. These functions were the responsibility of the New York Insurance Department (NYID). As a result of this loss of control, the Company has included the financial results of UCIC only through the date of the Order of Rehabilitation and then on an unconsolidated basis (ie. results of operations are reflected as "Equity in loss of non-consolidated subsidiary" and the Company's investment as "Deficit of non-consolidated subsidiary"). In 1995, as a result of the formal order of liquidation entered on November 10, 1995 the Company reversed these amounts resulting in the extraordinary gain described above.
The Texas Department of Insurance (TDI) conducted its regular examination of United Republic Insurance Company (URIC) as of March 31, 1993. TDI issued its audit report on May 25, 1994. As a result of that report URIC was placed under confidential supervision on June 22, 1994 by the TDI. This order was based upon disagreements with valuations of several assets, chief among them Alpha Trust, in financial statements filed by URIC with the TDI and upon net operating losses reported during the first quarter of 1994. On August 25, 1995 this Order was lifted. In exchange the Company agreed to certain minimum financial targets. URIC met the interim goals but has not met the December 31, 1995 policyholder
surplus target of $8.0 million. If URIC does not meet this target, the TDI can place URIC into conservatorship without the consent of the Company, although it has not evinced any inclination to do so.
For 1995, the Company recorded net income of $37,745,000 including the extraordinary gain related to UCIC of $38,387,000. Net loss from ongoing operations was $642,000. The loss was attributable to the adverse development related to URIC's pooling agreement with UCIC partially offset by Company,s ability to commute several reinsurance agreements at favorable terms.
Net Premiums Earned: Net premiums earned represent the pro rata portion of the business written in the calendar year plus amounts carried over from the prior year that are taken into revenue in the current period reduced by applicable reinsurance. Net earned premiums for 1995 totaled $5,533,000 compared with $5,221,000 for 1994. The increase from 1994 was attributable primarily to favorable adjustments to URIC assumed premiums partially offset by the decrease in Senate Insurance Company's (Senate) stop loss business. For 1994, net premiums earned decreased by $35,180,000 excluding UCIC vs. 1993. The decrease was attributable primarily to the termination of the pooling agreement between URIC and UCIC and the impact of the halt by URIC and Global Insurance Company (Global) on writing new and renewal business. Senate's premiums earned declined by $419,000 primarily due to adverse publicity surrounding UCIC and some customers self-insuring at higher retention levels.
During 1993 and 1992, UCIC had been a party to several different quota share reinsurance treaties which covered all lines of business written by UCIC. The Company ceded $21,700,000 of premiums and $12,902,000 in losses and earned $8,380,000 in commissions in 1993. UCIC determined that the contract did not pass the risk transfer criteria of SFAS No. 113. Accordingly, the Company applied deposit accounting to this contract in 1993 and the premiums, losses and commissions are excluded from the income statements and reflected as a net deposit on the balance sheet at December 31, 1993.
All securities in the Company's fixed investment portfolio at December 1995, are rated A or better by Standard & Poor's Corporation or Moody's Investor Services.
During 1992, the Company purchased approximately 49% of the outstanding common stock of Mechanical Technology, Inc. (MTI) for $4,757,500. This investment in common stock, was presented in the Consolidated Balance Sheets as Equity in Common Stock of Investee, and accounted for under the equity method. Accordingly, the Company's pro rata share of MTI's undistributed earnings for 1993 which amounted to $632,000 has been included in the accompanying Consolidated Statements of Operations for the year ended December 31, 1993. After December 31, 1993, MTI reported a substantial loss. The Company as of December 31, 1993 wrote down its investment in MTI to $216,000, which represented the fair value of the Company's investment in MTI's stock. The fair value was
determined by the average quoted market value of the stock on November 1, 1994. During 1994, the remaining investment balance was reduced to $0.
During December 1993, UCIC made a loan to First Commercial Credit Corp. (FCCC), an unrelated finance company in the principal amount of $5,000,000. Because FCCC's unencumbered assets consisted largely of the claim participation receivable guaranteed by MTI, a commensurate portion of UCIC's term loan with FCCC was considered to be collateral dependent. As of December 31, 1993, UCIC wrote down its investment in connection with this loan by $3,500,000.
Each member carrier essentially guarantees its share of the solvency of the pool. The pool administrator collects the premium, pays the losses and administrative costs, and passes a proportionate share of the costs to each member. If the losses and expenses exceed the premiums, the members may be subject to an assessment by the pool to fund the pool's deficit.
The Company's expense for government pool losses, which represents the net assessments from various pools to fund their deficits, was approximately $897,000 in 1993. These amounts were related to UCIC.
Policy Acquisition Costs: Commissions and other acquisition expenses were approximately $1,863,000 in 1995, $2,068,000 in 1994, $35,378,000 in 1993. The changes in policy acquisition costs for these years are attributable to the change in the volume of business, changes in the mix of business from premium with a lower commission rate to premium with a higher commission rate and changes in reinsurance ceding commission income. The Company offsets reinsurance ceding commission income against commissions and other acquisition costs to arrive at the Company's net expense The Company's net expense is impacted by changes in reinsurance ceding commission, in addition to changes in direct commissions associated with the Company's direct and assumed premium.
Policy acquisition expenses for 1995 decreased by $205,000 compared with 1994 primarily as a result of lower premium volume at Senate. Policy acquisition expenses for 1994 were $2,068,000 compared with $7,821,000 for 1993, excluding UCIC. The decrease
Other Operating Expenses: The Company's other operating expenses were approximately $1,769,000, $1,360,000 and $14,771,000 for the years ended December 31, 1995, 1994 and 1993, respectively. Other operating expenses for 1995 reflected increased costs of litigation relative to URIC and the TDI as well as costs associated with complying with other regulatory agencies as well as additional costs associated with positioning the company to be able to move forward in 1996. The Company's other operating expenses were $1,360,000 for the year 1994, compared with $5,962,000 for the year 1993, exclusive of UCIC. The decrease is attributable primarily to the termination of the pooling agreement between URIC and UCIC effective January 1, 1994 and cost reduction efforts related to reduced business activity. Under that agreement URIC was allocated a portion of UCIC's operating expenses as well as premiums and loss and LAE. Excluding the impact of pooling in 1993, operating expenses decreased by approximately $1,232,000.
Equity in Earnings of Investee: During 1992, the Company acquired 49% of the outstanding common stock of MTI, a high-technology manufacturer primarily within the defense/aerospace industry. The Company's pro rata share of MTI's undistributed earnings since the date of acquisition has been included in the Company's operating results in the amount of $(102,000) for 1994 and $632,000 for 1993. Based upon events subsequent to December 31, 1993, the investment was written down as of December 31, 1993 to reflect an impairment.
Income Taxes: For 1995 the company recorded a tax benefit of $282,000 representing an amount recoverable against prior expense by URIC partially offset by a provision for state income taxes of Senate. For 1994, the Company recorded a tax expense of approximately $168,000 which consisted of state income taxes due. For 1993, the Company recorded a tax expense of approximately $962,000 which consisted of a deferred tax expense of $6,568,000 principally related to the establishment of a tax valuation allowance partially offset by a tax benefit of $5,605,000 resulting from a tax loss carryback against prior years income. The statutory Federal rate was 34% for 1995, 1994 and 1993.
from short-term to long-term, reflecting the varying duration of insurance liabilities for losses, as well as the investment market conditions.
During 1994 the Company implemented SFAS No. 115 - "Accounting for Certain Investment in Debt and Equity Securities." This requires that fixed investments be classified into categories for financial statement presentation: Fixed Maturities Held to Maturity and Fixed Maturities Available for Sale. Fixed Maturities Held to Maturity are carried at amortized cost. Securities to be held for indefinite periods of time and not intended to be held to maturity are classified as available for sale. Securities available for sale include securities that Management intends to use as part of its asset/liability management strategy and that may be sold in response to changes in interest rates, prepayment risk and other similar economic factors, as well as to fund catastrophic losses and other unexpected cash needs. Fixed Maturities Available for Sale are carried at fair value after 1993. For 1995 the Company considered all fixed investments to be available for sale.
For 1993, the positive cash flow from investing activities served to offset the negative cash flow from operations, to finance the payment of dividends to stockholders of approximately $3,813,000 and to purchase equipment of $617,000, net of disposals. The positive cash flow from investing activities resulted in a decrease in the Company's invested asset portfolio of approximately $57,670,000, net of disposals; and excluding realized gains, changes in net unrealized gains/losses and equity in earnings of investee. The net effect of these activities in 1993 was to generate cash of approximately $29,019,000.
A significant portion of the parent company's internal sources of funds historically consisted of dividends from its subsidiaries. Since the insurance subsidiaries are subject to regulatory restrictions on the amount of dividends that may be paid, their earnings are not necessarily available to the Company on a current basis. The restrictions are generally based on specific levels of statutory surplus and investment income, as determined under statutory insurance accounting practices. Based upon their restrictions as of December 31, 1995, the insurance subsidiaries will not be able to pay any dividends to the Company during 1996 without prior approval of regulatory authorities. Dividend payments from the Company's subsidiaries have been suspended since the fourth quarter of 1993 due to statutory limitations. Dividends from the Company to its shareholders have also been suspended pending future dividends from the subsidiaries. During 1993, the insurance subsidiaries paid $3,915,000 in dividends to the Company.
In the absence of dividends from its subsidiaries the Company has had to rely on tax refunds and other miscellaneous sources of cash to fund its own activities. While these requirements are not substantial it is uncertain to what degree they can be met in the future. The insurance subsidiaries are deemed to have ample cash and invested assets to meet their foreseeable cash requirements.