UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTER ENDED SEPTEMBER 30, 1995
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________
COMMISSION FILE NUMBER 0-8162
ACCEL INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 31-0788334
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
475 METRO PLACE NORTH, DUBLIN, OHIO 43017
(Address of principal executive offices) (Zip Code)
614-764-7000
(Registrant's Telephone Number)
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Title of each class
COMMON STOCK, $.10 PAR VALUE
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulations S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-Q or any amendment to this
Form 10-Q. _____
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
As of October 31, 1995, there were 4,446,432 shares of Common Stock, $.10 par
value per Share outstanding.
COMMISSION FILE NO. 0-8162
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
SEPTEMBER 30, 1995
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
Unaudited Consolidated Balance Sheets
(September 30, 1995 and December 31, 1994) 1 - 2
Unaudited Consolidated Statements of Operations (Nine months
ended September 30, 1995 and 1994) 3
Unaudited Consolidated Statements of Common Stockholders'
Equity (Nine months ended September 30, 1995 and year
ended December 31, 1994) 4
Unaudited Consolidated Statements of Cash Flows (Nine months
ended September 30, 1995 and 1994) 5
Notes to Unaudited Consolidated Financial Statements 6 - 11
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 12 - 17
PART II OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K 18
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
September 30, December 31,
1995 1994
-------- --------
(Thousands of dollars)
ASSETS
Investments:
Investments available for sale, at fair value:
Fixed maturities (cost: 1995--$72,891,000;
1994--$91,422,000) $ 72,017 $84,782
Equity securities (cost: 1995--$4,949,000;
1994--$5,191,000) 4,960 5,159
Short-term investments (cost: 1995--$24,906,000;
1994--$7,684,000) 24,944 7,684
Other invested assets (cost: 1995--$371,000;
1994--$564,000) 358 564
--------- ---------
102,279 98,189
Cash 494 1,044
Receivables:
Premiums in process of transmittal, less
allowance (1995--$304,000; 1994--$255,000) 3,021 3,592
Amounts due from reinsurers 9,131 7,826
--------- --------
12,152 11,418
Accrued investment income 691 807
Prepaid reinsurance premiums 16,267 18,707
Reinsurance premium deposits 12,044 12,345
Deferred policy acquisition costs 32,334 31,089
Equipment--at cost, less accumulated
depreciation (1995--$511,000;
1994--$628,000) 142 232
Property occupied by the Company--at cost, less
accumulated depreciation (1995--$2,343,000;
1994--$2,138,000) 3,206 3,303
Other assets:
Cost in excess of fair value of net
assets of subsidiaries at dates of
acquisition ($4,448,000) less
accumulated amortization 849 929
Funds held under reinsurance agreements 978 1,098
Other 507 787
--------- ---------
2,334 2,814
--------- ---------
$ 181,943 $ 179,948
(Continued)
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
September 30, December 31,
1995 1994
-------- --------
(Thousands of dollars)
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Policy Reserves and Liabilities:
Unearned premium reserves $ 84,281 $ 83,762
Insurance claims 21,279 23,159
Other 13 15
--------- ---------
105,573 106,936
Other Liabilities:
Funds held under reinsurance agreements 3,132 3,633
Accounts payable and other liabilities 1,870 2,257
Commissions payable 4,606 4,015
Amounts due reinsurers 4,396 6,459
Federal income taxes:
Current - 52
Deferred 4,974 4,938
Deferred reinsurance commissions 16,581 17,830
Notes payable--Note D 18,684 18,462
--------- ---------
54,243 57,646
Commitments and Contingencies--Note E
Redeemable Preferred Stock:
Authorized shares--1,000,000;
no issued or outstanding shares - -
Common Stockholders' Equity:
Common Stock, $.10 par value
Authorized shares--10,000,000
Issued shares--5,243,852 524 524
Additional paid-in capital 24,066 24,066
Retained earnings 5,591 4,759
Less 797,420 treasury shares at cost (6,599) (6,599)
ESOP loan (551) (627)
Net unrealized depreciation on
investment securities (838) (6,672)
Foreign currency translation adjustments--Note B
(66) (85)
--------- ---------
Total Common Stockholders' Equity 22,127 15,366
--------- ---------
$181,943 $179,948
See notes to unaudited consolidated financial statements.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
1995 1994 1995 1994
------------------ -------------------
(Thousands of dollars, except per share data)
REVENUE:
Gross premiums written--Note F $ 15,297 $11,188 $43,669 $44,784
Less reinsurance ceded--Note F 3,413 (2,034) 10,454 6,548
--------- -------- --------- ---------
Net premiums written 11,884 13,222 33,215 38,236
Increase in unearned
premium reserves (1,563) (1,992) (3,274) (2,638)
--------- ------ --------- ---------
Premiums earned--Note F 10,321 11,230 29,941 35,598
Net investment income:
Interest and dividends 1,556 1,479 4,644 4,951
Realized gains (losses) 24 (11) 303 759
Service fees on extended
service contracts 594 578 1,645 1,535
Other income 253 66 375 354
--------- -------- --------- ---------
12,748 13,342 36,908 43,197
BENEFITS AND EXPENSES:
Policy benefits--Note F 4,820 5,626 12,931 18,904
Commissions and selling expenses 5,873 3,366 16,689 14,294
Reinsurance expense recovery (454) 118 (710) (1,316)
General and administrative 1,807 2,380 5,348 7,024
Taxes, licenses and fees 437 416 1,398 1,498
Interest 414 410 1,288 1,187
Decrease (increase) in deferred
policy acquisition costs (624) 1,577 (1,245) 2,100
Loss on write off of
subsidiary--Note G - - - 3,829
--------- -------- --------- ---------
12,273 13,893 35,699 47,520
--------- -------- --------- ---------
INCOME (LOSS) BEFORE
FEDERAL INCOME TAX 475 (551) 1,209 (4,323)
Federal income tax:
Current 84 14 341 116
Deferred 226 97 36 212
--------- -------- --------- ---------
310 111 377 328
--------- -------- --------- ---------
NET INCOME (LOSS) $ 165 $ (662) $ 832 $(4,651)
Per Common Share:
Net Income (Loss) $ .04 $ (.15) $ .19 $ (1.05)
Weighted average number of common
shares outstanding 4,446,432 4,446,432 4,446,432 4,446,432
See notes to unaudited consolidated financial statements.
<TABLE>
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<CAPTION>
Net
unrealized
appreciation Foreign
Common (depreci- currency
Additional stock ation) on translation
Common paid-in Retained held in ESOP investment adjust-
stock capital earnings treasury loan securities ments Total
----- ------- -------- -------- ---- ---------- ----- -------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1993 $ 524 $ 24,066 $ 9,997 $ (6,599) $ (720) $ 1,496 $(181) $ 28,583
Payments on ESOP loan - - - - 93 - - 93
Change in net unrealized
depreciation on
equity securities - - - - - (8,168) - (8,168)
Change in foreign currency
translation adjustment - - - - - - 96 96
Net loss - - (5,238) - - - - (5,238)
----- ------- -------- -------- ------- ------- ------ --------
Balances at December 31, 1994 524 24,066 4,759 (6,599) (627) (6,672) (85) 15,366
Payments on ESOP loan - - - - 76 - - 76
Change in net unrealized
depreciation on
equity securities - - - - - 5,834 - 5,834
Change in foreign currency
translation adjustment - - - - - - 19 19
Net income - - 832 - - - - 832
------ -------- ------- -------- ------- ------- ------ --------
Balances at September 30, 1995 $ 524 $ 24,066 $ 5,591 $ (6,599) $ (551) $ (838) $ (66) $ 22,127
<FN>
See notes to unaudited consolidated financial statements.
</TABLE>
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Nine Months Ended
September 30,
1995 1994
---------- ---------
(Thousands of dollars)
OPERATING ACTIVITIES:
Net Income (Loss) $ 832 $ (4,651)
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Change in premiums receivable 522 2,629
Change in accrued investment income 116 195
Change in prepaid reinsurance premiums 2,440 10,922
Change in reinsurance premium deposit 301 (134)
Change in unearned premium reserves 519 (7,526)
Change in claim reserves (1,880) (12,633)
Change in amounts due reinsurers
and amounts due from reinsurers (3,368) 4,634
Change in funds held under reinsurance
agreements (381) (976)
Change in other assets, other liabilities,
and accrued income taxes 581 (1,025)
Interest paid in kind 422 381
Accrual of discount on bonds (85) (109)
Amortization of premium on bonds 61 95
Amortization of deferred policy acquisition
costs 15,286 18,419
Policy acquisition costs deferred (16,567) (16,319)
Reinsurance commissions earned (10,189) (9,625)
Reinsurance commissions received 8,940 6,877
Provision for depreciation and amortization 312 407
Write off of subsidiary - 3,829
Net realized gains on investments (303) (759)
-------- --------
NET CASH USED IN OPERATING ACTIVITIES (2,441) (5,369)
INVESTING ACTIVITIES:
INVESTMENTS - AVAILABLE FOR SALE:
Sale of investments 25,137 35,725
Purchase of investments (23,079) (32,161)
Other, net (43) (59)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES 2,015 3,505
FINANCING ACTIVITIES:
Payment on ESOP loan 76 69
Repayment of notes payable (200) -
Debentures redeemed - (900)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (124) (831)
-------- --------
NET DECREASE IN CASH (550) (2,695)
Cash at beginning of period 1,044 2,765
-------- --------
CASH AT END OF PERIOD $ 494 $ 70
See notes to unaudited consolidated financial statements.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1995
NOTE A--BASIS OF PRESENTATION AND ACCOUNTING POLICIES
Basis of Presentation: The accompanying unaudited consolidated financial
statements of ACCEL International Corporation ("ACCEL") and subsidiaries
(collectively referred to herein as the "Company") have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X which, as to the insurance company subsidiaries, differ in some respects
from statutory accounting practices prescribed or permitted by state insurance
departments. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair presentation have
been included. Operating results for all periods presented are not necessarily
indicative of the results that may be expected for the full year. For further
information, refer to the consolidated financial statements and footnotes
thereto included the Company's annual report on Form 10-K for the year ended
December 31, 1994.
Principles of Consolidation: The unaudited consolidated financial statements
include the accounts of ACCEL and its wholly-owned subsidiaries, except for
Randjill Group Ltd. ("RGL") (see Note G of Notes to Unaudited Consolidated
Financial Statements). All significant intercompany accounts and transactions
with consolidated subsidiaries have been eliminated in the unaudited
consolidated financial statements.
Reclassification: Certain amounts in the 1994 unaudited consolidated financial
statements have been reclassified to conform with the 1995 presentation.
Federal Income Taxes: Deferred taxes are provided for the effects of temporary
differences in reporting income for tax purposes and financial reporting
purposes.
Earnings Per Common Share: Earnings per common share are computed using the
weighted average number of common shares outstanding during the period. The
inclusion of common stock equivalents (options) would not be dilutive.
Investment Portfolio - Valuation: 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.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
SEPTEMBER 30, 1995
NOTE B--FOREIGN CURRENCY TRANSLATION
The financial statements of Acceleration Insurance Company Limited ("AICL"), a
United Kingdom subsidiary, have been translated into U.S. dollars using the
British pound as the functional currency. The balance sheets of AICL have been
translated into U.S. Dollars using exchange rates at September 30, 1995 and
December 31, 1994, respectively. The operating results of AICL have been
translated into U.S. dollars using the average exchange rates in effect during
the respective periods.
Included in foreign currency translation adjustments are unrealized exchange
gains of $19,000 in 1995 and unrealized exchange losses of $96,000 in 1994.
NOTE C--FEDERAL INCOME TAXES
The Company files a consolidated federal income tax return. The provision for
income taxes is based on income for financial reporting purposes, after
permanent differences.
NOTE D--NOTES PAYABLE
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 G). 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 may 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 $422,000
and $515,000 for the nine months of 1995 and the full year 1994, 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"),
another company related through common ownership by a stockholder and director
of the Company. Additional Subordinated Notes in the amount of $375,000 and
$458,000 were issued as interest payments to related parties for the nine months
of 1995 and the full year 1994, respectively.
Pursuant to a transaction authorized and approved by ACCEL's Board of Directors,
and effective December 31, 1993, the Company sold its investment in Selective
American Financial Enterprises, Inc. ("SAFE"), a company controlled by a
stockholder and director of the Company, in exchange for $2,010,000 principal
amount of the Subordinated Notes, effective as of December 31, 1993. Such
amount of the Subordinated Notes held by CIHC were cancelled concurrently with
the completion of the sale of the SAFE shares as of December 31, 1993. After
giving effect to the foregoing transaction, the total outstanding Subordinated
Notes were $5,884,000 and $5,462,000 ($5,216,000 and $4,841,000 held by related
parties) at September 30, 1995 and December 31, 1994, respectively.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
SEPTEMBER 30, 1995
NOTE D--NOTES PAYABLE--(CONTINUED)
During 1991, the Company renegotiated its credit agreement (the "Credit
Agreement") with a bank and borrowed an additional $5,900,000 bringing the total
outstanding under the Credit Agreement to $15,000,000. That agreement was
subsequently renegotiated to a commitment limit of $14,000,000 effective
December 31, 1992. During the first quarter of 1993, ACCEL made a principal
payment of $1,000,000.
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. The loan agreement also
requires that during the period the loan is outstanding, the Company maintain
consolidated tangible net worth, as defined in the agreement. At December 31,
1993, required tangible net worth was $27,500,000.
At December 31, 1993, the Company's consolidated tangible net worth, as defined,
was $27,549,000.
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.
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 the fourth quarter of 1994 were waived. Specific principal payments
totaling up to $1.5 million are due on June 30, 1995 and December 31, 1995,
respectively, from the liquidation of AICL and the sale of the building used as
the corporate home office. During the second quarter of 1995, ACCEL made the
required principal payment of $200,000, reducing the outstanding bank
indebtedness to $12,800,000. The loan is payable in full on June 30, 1997. On
or prior to that date, the Company also is committed to complete certain
actions. These include pursuing capital transactions with other companies or
the sale of significant operating assets that will permit it to pay the loan in
full by June 30, 1997. Alternatively, in the case of a merger or other capital
transaction, the agreement can provide for the modification of the terms of the
Credit Agreement in a manner satisfactory to the bank. The Credit Agreement
also requires that during the period the loan is outstanding, the Company
maintain consolidated tangible net worth, as defined in the agreement. At
September 30, 1995, required tangible net worth was $13,416,000. At September
30, 1995, the Company's consolidated tangible net worth, as defined, was
$21,278,000. Accordingly, as of September 30, 1995, the loan was current and
all covenants under the amended Credit Agreement were satisfied.
NOTE E--COMMITMENTS AND CONTINGENCIES
Due to the nature of its operations, the Company is at all times subject to
pending and threatened legal actions which arise in the normal course of its
activities. In management's opinion, based on the advice of outside counsel,
the unaudited consolidated financial statements would not be materially affected
by the ultimate outcome of any legal proceedings or contingent liabilities.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
SEPTEMBER 30, 1995
NOTE F--REINSURANCE
The following data summarizes certain aspects of the Company's reinsurance
activity for the periods presented.
Premiums written and earned in 1995 and 1994 are summarized as follows:
WRITTEN EARNED
---------------------------------- --------------------------------
Period Ended September 30,
----------------------------------
Nine Months Three Months Nine Months Three Months
Ended Ended Ended Ended
1995 1994 1995 1994 1995 1994 1995 1994
---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
Direct $39,145 $39,385 $13,527 $ 9,012 $38,444 $46,567 $13,849 $13,398
Assumed 4,524 5,399 1,770 2,176 4,645 4,581 1,732 1,721
Ceded 10,454 6,548 3,413 (2,034) 13,148 15,550 5,260 3,889
-------- ------- -------- ------- -------- ------- ------- --------
Net $33,215 $38,236 $11,884 $13,222 $29,941 $35,598 $10,321 $11,230
Policy benefits incurred for the periods presented are as follows:
Nine Months Ended Three Months Ended
------------------- -------------------
1995 1994 1995 1994
------- ------- ------- -------
(In thousands)
Direct $18,494 $25,228 $ 6,385 $ 7,988
Assumed 2,680 2,625 1,026 1,002
Ceded 8,243 8,949 2,591 3,364
------- --------- --------- ------
Net $12,931 $18,904 $ 4,820 $ 5,626
NOTE G--WRITE OFF OF INVESTMENT IN RGL AND GALAXY
During December 1986, the Company invested $1,370,000 (a 20% interest) in RGL.
RGL was formed to acquire all the outstanding shares of Galaxy Reinsurance
Company (the name was ultimately changed to Galaxy Insurance Company ("Galaxy"),
a New York domiciled property and casualty insurance company. Galaxy was
writing commercial property insurance, property and casualty, and assumed treaty
reinsurance.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
SEPTEMBER 30, 1995
NOTE G--WRITE OFF OF INVESTMENT IN RGL AND GALAXY--(CONTINUED)
During the second quarter of 1991, ACCEL purchased 11,000 additional common
shares of RGL at a cost of $992,000. The additional investment increased
ACCEL's ownership to 31% at June 30, 1991. In July 1991, ACCEL purchased the
remaining 69% of RGL for cash and subordinated notes (See Note D) of $2.1
million and $5.8 million, respectively. The purchase price included goodwill of
$1.2 million.
Members of CIHC held a 45% interest in RGL prior to the acquisition by ACCEL.
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.
As a result of the unsatisfactory underwriting performance of Galaxy and the
moratorium placed on Galaxy's underwriting operations by the New York
Department, ACCEL 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, ACCEL 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 ACCEL's control of
Galaxy as a result of the insolvency, ACCEL wrote off its investment in RGL
($3.8 million) during the second quarter of 1994. As a result of this action,
the unaudited consolidated results of operations for 1994 include a charge to
operations of $3.8 million, representing ACCEL's net investment in Galaxy as of
April 1, 1994, in addition to operating losses of $205,000 incurred during the
first quarter of 1994. ACCEL wrote its investment in RGL to zero and
deconsolidated RGL as of April 1, 1994.
Pursuant to an Order of Liquidation dated October 7, 1994, issued by the Supreme
Court of the State of New York, the Liquidation Bureau of the New York
Department took control of Galaxy on October 11, 1994.
Acceleration National Insurance Company ("ANIC"), a wholly owned subsidiary of
ACCEL, in the normal course of business, issued certain policy endorsements on
Galaxy policies in 1992, some of which had pending claims open at the time of
liquidation. Management believes that these endorsements will not have a
material impact on the Company's financial condition. As of September 30, 1995,
ANIC had not incurred any costs related to these endorsements.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
SEPTEMBER 30, 1995
NOTE H--AGREEMENT WITH CONSUMERS FINANCIAL CORPORATION
On August 18, 1995, ACCEL and Consumers Financial Corporation, Camp Hill,
Pennsylvania ("Consumers") announced that they entered into a letter of intent
for Consumers to acquire the in-force credit insurance business of Acceleration
Life Insurance Company ("ALIC") and to purchase all of the issued and
outstanding shares of ALIC from ACCEL.
In conjunction with the proposed sale, The Guardian Life Insurance Company of
America has agreed in principle with Consumers and ACCEL to reinsure, on an
indemnity basis, 100% of the in-force credit insurance of ALIC prior to the
acquisition by Consumers.
Consumers, pursuant to the letter of intent, has undertaken a due diligence
effort. At the formal conclusion of that due diligence, the parties contemplate
negotiation of a definitive stock purchase agreement. The closing of the
transaction will be subject to regulatory approvals and approval by ACCEL's
stockholders.
The transaction does not include the sale of ACCEL's Co$tguard extended service
contract product insured by ANIC. The letter of intent indicates that Consumers
will continue marketing the Co$tguard product for at least five years.
NOTE I--STOCK OPTION AGREEMENT
On May 23, 1995, an action was taken by the Board of Directors ("Board") of
ACCEL to enlarge the Board from its then current nine to eleven members.
Messrs. Thomas H. Friedberg and Douglas J. Coats were elected to fill these new
seats. Mr. Friedberg was then elected Chairman & CEO of ACCEL and Mr. Coats was
elected Executive Vice President.
At that time, both Mr. Friedberg and Mr. Coats became Key Employees under
ACCEL's 1987 Stock Incentive Plan. Under the terms of their arrangement with
ACCEL, both were granted stock options for ACCEL's common stock in lieu of
salary for their first year of service. Mr. Friedberg was granted an option for
100,000 shares and Mr. Coats for 50,000 shares. The grant price for both
options was $2.125, the fair value of ACCEL's common stock on the date of grant.
The options vest immediately and become exercisable one year following the date
of grant; however, they would become exercisable immediately upon either a) a
change of control of ACCEL, or b) an involuntary termination. The options would
be forfeited if employment with ACCEL was voluntarily terminated prior to May
23, 1996. The options lapse five years from the effective date of the grant.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OPERATING RESULTS FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 1995 AND SEPTEMBER 30, 1994
OPERATING RESULTS
The income (loss) before federal income tax for the nine months ended September
30, 1995 was $1,209,000 compared to ($4,323,000) for the same period in 1994.
The income (loss) before federal income tax for the three months ended September
30, 1995 was $475,000 compared to ($551,000) for the same period in 1994. The
income for nine months and three months ended September 30, 1995 can be
attributed to the continued positive performance of ACCEL International
Corporation ("ACCEL") and subsidiaries (collectively referred to herein as the
"Company") core product lines: credit insurance and extended service contracts
("Co$tguard"). The results in 1994 reflect a loss of $3,829,000 in the second
quarter exclusive of the $205,000 net loss in the first quarter, related to a
write off of a subsidiary -- Randjill Group Ltd. ("RGL"), parent to Galaxy
Insurance Company ("Galaxy"). Galaxy sustained continued negative development
on its business in 1994 and as of June 30, 1994 became statutorily insolvent.
As a result of this insolvency, ACCEL wrote off of its investment in RGL in the
second quarter of 1994. Additional information on this event can be found in
Note G of the Notes to Unaudited Consolidated Financial Statements and under
Certain Events of this section.
In addition, the results for the nine months ended September 30, 1994, include
income of $750,000 related to an arbitration award, and the recognition of a
realized gain of $501,000 related to the sale of the Company's investment in a
real estate partnership venture. These gains were more than offset by continued
losses in the runoff lines of business -- principally the realtors' errors and
omissions line of business.
As to the core product lines, the continued positive performance is attributable
to increased earned premium and improved loss ratios. The combined loss ratios
for the nine months ended September 30, 1995 compared to September 30, 1994 are
41.4% and 50.9%, respectively. The core product lines also experienced an
increase of approximately 7% in premiums earned.
The increase in income before federal income tax of $1,026,000 for the three
months ended September 30, 1995 compared to the same period in 1994 is again
primarily attributable to improved loss ratios on the Company's core lines of
business. The loss ratios for the third quarter of 1995 compared to the third
quarter of 1994 are 44.7% and 50.6%, respectively.
In addition, beginning in 1993, the Company made a concerted effort to reduce
general and administrative expenses. Operating expenses (excluding taxes,
licenses and fees) decreased by 24% in the first nine months of 1995 compared to
1994 and decreased 24% in the third quarter of 1995 when compared to 1994. This
was, in part, due to staff reductions, the results of which have continued to be
evidenced in 1995. These actions, along with the termination and/or reinsurance
of substantially all of the remaining property and casualty and medical lines of
business will allow the Company to concentrate its efforts on further developing
profitable blocks of business.
In summary, the primary causes for the change in income before federal income
tax are identified by reviewing Table I on page 17. Table I includes core
product lines and all runoff product lines with the exception of Galaxy results
in 1994.
REVENUE
Premium writings for the nine months ended September 30, 1995 were $43,700,000
compared to $44,800,000 for the same period in 1994. The decrease in 1995 was a
result of discontinuing marketing efforts for all medical lines, property and
casualty lines and Galaxy. The premium related to medical lines, property and
casualty lines and Galaxy decreased by $900,000, $2,300,000 and $1,900,000,
respectively. Offsetting these decreases was a decrease in premium
cancellations of $4,300,000 related to the Company's vendor single interest
("VSI") business. The VSI business is in runoff and has had no material effect
on the statements of operations for the periods presented.
Premium writings for the three months ended September 30, 1995 were $15,300,000
compared to $11,200,000 for the same period in 1994. The increase is due to the
decrease in cancellations of $5,300,000 related to the VSI business and was
partially offset by decreased premium writings of $900,000 related to the
discontinued agricultural lines of business.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows from operations have been adequate for its current
operating needs. The Company's credit insurance policy terms and related
liabilities are generally limited to a four-year period during which the
consumer makes payments on the loan, and the Company's liability on extended
service contracts typically extends for either one-year or five-years. The
Company, therefore, maintains liquidity in its investment portfolio to
correspond with the liability outstanding on its lines of business.
The Company's fixed maturity securities include mortgage backed securities,
collateralized mortgage obligations and asset backed securities. At September
30, 1995 the Company had $19.0 million in mortgage backed securities, $16.4
million in collateralized mortgage obligations and $20.9 million in asset backed
securities. Those securities are subject to risks associated with variable
prepayments. This may result in these securities having a different actual cash
flow and average life than planned at the time of purchase.
The Company limits the extent of its risks on these types of 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
September 30, 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.
In 1993, the Ohio legislature passed legislation which regulates the ability of
Ohio domiciled insurance companies to pay dividends. The regulation limits the
annual dividend or distribution by an insurer to the greater of (1) net income
of the previous year or (2) 10% of capital and surplus as of the end of the
previous year. In addition, all dividends must come from earned surplus to
qualify as non-extraordinary dividends. 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 ("the Department"). Based on
this regulation, the Company believes Acceleration National Insurance Company
("ANIC"), a wholly owned subsidiary of ACCEL, would require Department approval
to pay any dividend to the Registrant during 1995, however, Acceleration Life
Insurance Company ("ALIC"), a wholly owned subsidiary of ACCEL, could pay
approximately $906,000 during 1995 without regulatory approval.
The Registrant's cash flow projections for 1995 assume that certain events take
place in order to have sufficient cash to meet its debt service and other
requirements. These events include the sale/liquidation of ACCEL's wholly owned
United Kingdom subsidiary, Acceleration Insurance Company Limited ("AICL"), and
the payment of a dividend from an insurance subsidiary to ACCEL. 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 1995 cash flow does not anticipate the availability of sufficient funds to
repay $4,000,000 in advances received in 1992 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
Randjill Group Ltd. ("RGL") (see Note G of Notes to Unaudited 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 may 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 $422,000 and $515,000 for the first nine months of 1995 and the full
year 1994, 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"),
another company related through common ownership by a stockholder and director
of the Company. Additional Subordinated Notes in the amount of $375,000 and
$458,000 were issued as interest payments to related parties for the nine months
1995 and the full year 1994, respectively.
Pursuant to a transaction authorized and approved by ACCEL's Board of Directors,
and effective December 31, 1993, the Company sold its investment in Selective
American Financial Enterprises, Inc. ("SAFE"), a company controlled by a
stockholder and director of the Company, in exchange for $2,010,000 principal
amount of the Subordinated Notes, effective as of December 31, 1993. Such
amount of the Subordinated Notes held by CIHC were cancelled concurrently with
the completion of the sale of the SAFE shares as of December 31, 1993. After
giving effect to the foregoing transaction, the total outstanding Subordinated
Notes were $5,884,000 and $5,462,000 ($5,216,000 and $4,841,000 held by related
parties) at September 30, 1995 and December 31, 1994, respectively.
During 1991, the Company renegotiated its credit agreement (the "Credit
Agreement") with a bank and borrowed an additional $5,900,000 bringing the total
outstanding under the Credit Agreement to $15,000,000. That agreement was
subsequently renegotiated to a commitment limit of $14,000,000 effective
December 31, 1992. During the first quarter of 1993, ACCEL made a principal
payment of $1,000,000.
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. The loan agreement also
requires that during the period the loan is outstanding, the Company maintain
consolidated tangible net worth, as defined in the agreement. At December 31,
1993, required tangible net worth was $27,500,000.
At December 31, 1993, the Company's consolidated tangible net worth, as defined,
was $27,549,000.
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.
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 the fourth quarter of 1994 were waived. Specific principal payments
totaling up to $1.5 million are due on June 30, 1995 and December 31, 1995,
respectively, from the liquidation of AICL and the sale of the building used as
the corporate home office. During the second quarter of 1995, ACCEL made the
required principal payment of $200,000, reducing the outstanding bank
indebtedness to $12,800,000. The loan is payable in full on June 30, 1997. On
or prior to that date, the Company also is committed to complete certain
actions. These include pursuing capital transactions with other companies or
the sale of significant operating assets that will permit it to pay the loan in
full by June 30, 1997. Alternatively, in the case of a merger or other capital
transaction, the agreement can provide for the modification of the terms of the
Credit Agreement in a manner satisfactory to the bank. The Credit Agreement
also requires that during the period the loan is outstanding, the Company
maintain consolidated tangible net worth, as defined in the agreement. At
September 30, 1995, required tangible net worth was $13,416,000. At September
30, 1995, the Company's consolidated tangible net worth, as defined, was
$21,278,000. Accordingly, as of September 30, 1995, the loan was current and
all covenants under the amended Credit Agreement were satisfied.
The Company currently has three business lines that are in runoff status: the
realtors' errors and omission line, the medical product lines and all property
and casualty lines except for Co$tguard. 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.
On August 18, 1995, ACCEL and Consumers Financial Corporation, Camp Hill,
Pennsylvania ("Consumers") announced that they entered into a letter of intent
for Consumers to acquire the in-force credit insurance business of Acceleration
Life Insurance Company ("ALIC") and to purchase all of the issued and
outstanding shares of ALIC from ACCEL.
In conjunction with the proposed sale, The Guardian Life Insurance Company of
America has agreed in principle with Consumers and ACCEL to reinsure, on an
indemnity basis, 100% of the in-force credit insurance of ALIC prior to the
acquisition by Consumers.
Consumers, pursuant to the letter of intent, has undertaken a due diligence
effort. At the formal conclusion of that due diligence, the parties contemplate
negotiation of a definitive stock purchase agreement. The closing of the
transaction will be subject to regulatory approvals and approval by ACCEL's
stockholders.
The transaction does not include the sale of ACCEL's Co$tguard extended service
contract product insured by ANIC. The letter of intent indicates that Consumers
will continue marketing the Co$tguard product for at least five years.
Concurrent with this proposed transaction, the Company is pursuing expanding its
property and casualty product lines and geographic marketing plan of operations.
CERTAIN EVENTS
WRITE OFF OF INVESTMENT IN RGL AND GALAXY: During December 1986, ACCEL invested
$1,370,000 (a 20% interest) in RGL. RGL was formed to acquire all the
outstanding shares of Galaxy. Galaxy was writing commercial property insurance,
property and casualty, and assumed treaty reinsurance.
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 Unaudited Consolidated Financial Statements) of $2.1 million and
$5.8 million, respectively. The purchase price included goodwill of $1.2
million.
Members of CIHC held a 45% interest in RGL prior to the acquisition by ACCEL.
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.
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. The
unaudited consolidated statement of operations for the first quarter of 1994
includes operating losses of $205,000 related to RGL.
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
Department took control of Galaxy on October 11, 1994.
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. Based on information currently available, management believes that
these endorsements will not materially impact the Company's financial condition.
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 seeks 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 Department. The loan agreement and accompanying promissory note call for
interest at the 13 week Treasury Bill rate plus 100 basis points, and principal
of $4,000,000 to be paid on December 31, 1995. The security for such collateral
loan consists of 190 shares (47.5%) of ALIC common stock.
ACCEL is pursuing the litigation vigorously and believes that it has a sound
basis for its claims, trial is currently scheduled for November 1995. If ACCEL
is unable to satisfy the principal payment due by year-end 1995 it will transfer
the appropriate value of collateral pledged under the loan agreement to ANIC.
Interest on the note is paid and current.
TABLE I
Several key operating ratios of the Company are as follows:
Unaudited Consolidated Results
------------------------------
(Thousands of dollars except ratios)
Nine months ended September 30,
---------------------------------
1995 1994 (1)
-------- ---------
Gross premiums written $43,669 $ 42,839
Net premiums earned $29,941 $ 33,699
RATIOS:
1. Policy benefits to net premiums earned 43.2% 51.7%
2. Commissions and selling expenses and
general and administrative expenses
to gross premiums written 50.5% 48.1%
3. Commissions and selling expenses,
reinsurance expense recovery and
change in deferred policy acquisition
costs to net earned premium (2) 49.2% 43.4%
4. Taxes, licenses and fees to gross
written premium 3.2% 3.2%
(1) For comparative purposes, the 1994 data excludes the results of Galaxy.
(2) The 1995 results reflect a higher concentration of credit business,
which typically has a higher acquisition cost.
PART II. OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K
(b) No reports on Form 8-K have been filed by the Registrant during the
quarter ended September 30, 1995.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACCEL INTERNATIONAL CORPORATION
Dated: November 13, 1995 By: /S/ Kurt L. Mueller
------------------------------ ----------------------------
Kurt L. Mueller
Vice President and Controller*
_____
* Mr. Mueller is Vice President and Controller and has been duly authorized to
execute the report on behalf of the Registrant.
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from ACCEL
International Corporation's 3rd Quarter 1995 Form 10-Q and is qualified in its
entirety by reference to such 10-Q.
</LEGEND>
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<NAME> ACCEL INTERNATIONAL CORPORATION
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