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 MARCH 31, 1996
[ ] 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 April 30, 1996, there were 4,456,432 shares of Common Stock, $.10 par
value per Share outstanding.
COMMISSION FILE NO. 0-8162
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
MARCH 31, 1996
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements Page
----
Unaudited Consolidated Balance Sheets (March 31, 1996
and December 31, 1995) 1 - 2
Unaudited Consolidated Statements of Income (Three months
ended March 31, 1996 and 1995) 3
Unaudited Consolidated Statements of Common Stockholders'
Equity (Three months ended March 31, 1996 and year ended
December 31, 1995) 4
Unaudited Consolidated Statements of Cash Flows (Three
months ended March 31, 1996 and 1995) 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
March 31, December
31,
1996 1995
--------- ---------
(Thousands of dollars)
ASSETS
Investments:
Investments available for sale, at fair value
Fixed maturities (cost: 1996--$53,902,000;
1995--$53,427,000) $ 52,649 $ 53,204
Equity securities (cost: 1996--$5,628,000;
1995--$5,433,000) 5,622 5,451
Short-term investments (cost: 1996--$10,446,000;
1995--$4,278,000) 10,446 4,278
Other invested assets (cost: 1996--$379,000;
1995--$364,000) 379 364
--------- ---------
69,096 63,297
Cash 550 5,039
Receivables:
Premiums in process of transmittal, less
allowance (1996--$287,000; 1995--$279,000) 5,952 1,779
Amounts due from reinsurers 22,785 9,119
Recoverable federal income taxes - 70
--------- ---------
28,737 10,968
Accrued investment income 625 557
Prepaid reinsurance premiums 44,641 14,895
Reinsurance premium deposits 2,136 51,634
Deferred policy acquisition costs 32,084 31,839
Equipment--at cost, less accumulated
depreciation (1996--$563,000;
1995--$564,000) 213 187
Leasehold improvements 175 -
Property occupied by the Company--at cost, less
accumulated depreciation
(1995--$2,382,000) - 3,167
Other assets:
Cost in excess of fair value of net
assets of subsidiaries at dates of
acquisition ($4,448,000) less
accumulated amortization 796 822
Funds held under reinsurance agreements 1,906 829
Other 446 273
--------- ---------
3,148 1,924
--------- ---------
$ 181,405 $ 183,507
========= =========
(Continued)
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
March 31, December 31,
1996 1995
--------- ---------
(Thousands of dollars)
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Policy Reserves and Liabilities:
Unearned premium reserves $ 84,069 $ 82,080
Insurance claims 23,120 22,761
Other 10 11
--------- --------
107,199 104,852
Other Liabilities:
Funds held under reinsurance agreements 58 3,072
Accounts payable and other liabilities 2,266 2,353
Commissions payable 5,014 5,010
Amounts due reinsurers 5,843 4,442
Federal income taxes:
Current 50 -
Deferred 4,896 5,024
Deferred reinsurance commissions 13,787 15,663
Notes payable--Note D 22,682 22,531
--------- --------
54,596 58,095
Commitments and Contingencies
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 (1996--5,253,852;
1995--5,243,852) 525 524
Additional paid-in capital 23,722 23,702
Retained earnings 3,345 3,299
Less 797,420 treasury shares at cost (6,599) (6,599)
ESOP loan (124) (161)
Net unrealized depreciation on
investment securities (1,259) (205)
--------- ---------
Total Common Stockholders' Equity 19,610 20,560
--------- ---------
$ 181,405 $ 183,507
See notes to unaudited consolidated financial statements.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
1996 1995
---------- ----------
(Thousands of dollars,
except per share data)
REVENUE:
Gross premiums written--Note E $ 16,697 $ 13,247
Less reinsurance ceded--Note E 9,070 3,530
---------- ----------
Net premiums written 7,627 9,717
(Increase) decrease in unearned
premium reserves (4,114) 70
---------- ----------
Premiums earned--Note E 3,513 9,787
Net investment income:
Interest and dividends 1,002 1,567
Realized gains 288 68
Service fees on extended service
contracts 585 484
Other income 236 45
---------- ----------
5,624 11,951
BENEFITS AND EXPENSES:
Policy benefits--Note E 2,336 4,138
Commissions and selling expenses 5,209 4,827
Reinsurance expense recovery (4,471) (301)
General and administrative 1,704 1,877
Taxes, licenses and fees 513 483
Interest 540 442
(Increase) decrease in deferred policy
acquisition costs (245) 222
---------- ----------
5,586 11,688
---------- ----------
INCOME BEFORE FEDERAL INCOME TAXES 38 263
Federal income taxes:
Current 120 64
Deferred (benefit) (128) (69)
---------- ----------
(8) (5)
NET INCOME $ 46 $ 268
========== ==========
Net income per common share $ .01 $ .06
========== ==========
Weighted average number of common shares
outstanding 4,453,932 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, 1994 $ 524 $ 24,066 $ 4,759 $ (6,599) $ (627) $(6,672) $ (85) $ 15,366
Payments on and write down
of ESOP loan - (364) - - 466 - - 102
Change in net unrealized
depreciation on
investment securities - - - - - 6,467 - 6,467
Change in foreign currency
translation adjustment - - - - - - 85 85
Net loss - - (1,460) - - - - (1,460)
----- ------- -------- ---------- ------- ------- ------ --------
Balances at December 31, 1995 524 23,702 3,299 (6,599) (161) (205) - 20,560
Payments on ESOP loan - - - - 37 - - 37
Issuance of 10,000 shares of
Common Stock under Common
Stock Option Plan 1 20 - - - - - 21
Change in net unrealized
depreciation on
investment securities - - - - - (1,054) - (1,054)
Net income - - 46 - - - - 46
------ -------- ------- ---------- ------- ------- ------ ---------
Balances at March 31, 1996 $ 525 $ 23,722 $ 3,345 $ (6,599) $ (124) $(1,259) $ - $ 19,610
====== ======== ======= ========== ======= ======= ====== =========
<FN>
See notes to unaudited consolidated financial statements.
</TABLE>
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
1996 1995
---------- ----------
(Thousands of dollars,
except per share data)
OPERATING ACTIVITIES:
Net Income $ 46 $ 268
Adjustments to reconcile net income
to net cash used in operating activities:
Change in premiums receivable (4,181) 181
Change in accrued investment income (68) 18
Change in prepaid reinsurance premiums (29,746) 749
Change in reinsurance premium deposits 49,498 264
Change in funds held under reinsurance
agreements (4,091) (400)
Change in unearned premium reserves 1,989 1,000)
Change in insurance claim reserves 359 (515)
Change in amounts due reinsurers
and amounts due from reinsurers (12,265) (950)
Change in other assets, other liabilities,
and accrued income taxes (270) (172)
Interest paid in kind 151 137
Accrual of discount on bonds (46) (24)
Amortization of premium on bonds 22 21
Amortization of deferred policy acquisition
costs 4,758 5,320
Policy acquisition costs deferred (5,003) (5,098)
Reinsurance commissions earned 663 (3,304)
Reinsurance commissions received (2,539) 2,664
Provision for depreciation and amortization 98 132
Net realized gains on investments (288) (68)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (913) (1,777)
INVESTING ACTIVITIES:
Sale of investments available for sale 3,415 4,863
Purchase of investments available for sale (10,113) (3,515)
Sale of property occupied by the Company 3,298 -
Other, net (234) (25)
---------- ----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,634) 1,323
FINANCING ACTIVITIES:
Payment on ESOP loan 37 24
Issuance of Common Stock under Stock Option Plan 21 -
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 58 24
---------- ----------
NET DECREASE IN CASH (4,489) (430)
Cash at beginning of period 5,039 1,044
---------- ----------
CASH AT END OF PERIOD $ 550 $ 614
========== ===========
See notes to unaudited consolidated financial statements.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 1996
NOTE A--SIGNIFICANT 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, 1995.
PRINCIPLES OF CONSOLIDATION: The accompanying unaudited consolidated
financial statements include the accounts of ACCEL and its wholly-owned
subsidiaries, except for Randjill Group Ltd. ("RGL"). All significant
intercompany accounts and transactions have been eliminated in the unaudited
consolidated financial statements.
DESCRIPTION OF BUSINESS: ACCEL is an insurance holding company incorporated
in Delaware in June 1978 as the successor to an Ohio corporation, formerly
Acceleration Corporation, organized in 1969. The Company has been engaged in
the sale and underwriting of credit life and credit accident and health
insurance, extended service contracts, vendor's single interest and other
specialty casualty products. Beginning in the first quarter of 1996, the
Company began to offer coverages for long haul trucking and commercial buses.
The credit insurance and extended service contract products continue to be
offered to consumers, principally through automobile dealers, financial
institutions and other business entities. The Company is subject to
competition from other insurers throughout the states in which it writes
business. The Company is also subject to regulation by the Insurance
Departments of states in which it is licensed, and undergoes periodic
examinations by those departments.
The following is a description of the most significant risks facing life and
health and property/casualty insurers and how the Company mitigates those
risks:
LEGAL/REGULATORY RISK is the risk that changes in the legal or regulatory
environment in which an insurer operates will create additional expenses
not anticipated by the insurer in pricing its products. That is,
regulatory initiatives designed to reduce insurer profits, new legal
theories or insurance company insolvencies through guaranty fund
assessments may create costs for the insurer beyond those currently
recorded in the unaudited consolidated financial statements. The Company
mitigates this risk by operating throughout the United States, thus
reducing its exposure to any single jurisdiction, and also by employing
underwriting and loss adjusting practices which identify and minimize the
adverse impact of this risk.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
CREDIT RISK is the risk that issuers of securities owned by the Company
will default or that other parties, including reinsurers, which owe the
Company money, will not pay. The Company minimizes this risk by adhering
to a conservative investment strategy, by maintaining sound reinsurance and
credit and collection policies and by providing for any amounts deemed
uncollectible.
INTEREST RATE RISK is the risk that interest rates will change and cause a
decrease in the value of an insurer's investments. The Company mitigates
this risk by attempting to match the maturity schedule of its assets with
the expected payouts of its liabilities. To the extent that liabilities
come due more quickly than assets mature, an insurer would have to borrow
funds or sell assets prior to maturity and potentially recognize a gain or
loss.
ACCOUNTING ESTIMATES: In preparing the unaudited 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 unaudited consolidated
financial statements and revenues and expenses for the reporting period.
Actual results could differ significantly from those estimates.
The most significant estimates include those used in determining deferred
policy acquisition costs and the liability for unearned premium reserves and
insurance claims. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate. The estimates are
continually reviewed and adjusted as necessary. Such adjustments are
generally reflected in current operations.
INVESTMENTS: The Company classifies all of its fixed maturity and equity
securities as available for sale, therefore these securities are carried at
fair value and the unrealized appreciation or depreciation is reported as a
separate component of common stockholders' equity after giving effect to
applicable income taxes.
Short-term investments which include U.S. Treasury securities, commercial
paper and certificates of deposit are carried at cost which approximates fair
value.
Other invested assets are carried at cost which approximates fair value.
Realized gains and losses on the disposal of investments are determined by
specific identification and are included in the unaudited consolidated
statements of operations.
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)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
FEDERAL INCOME TAXES: Deferred tax assets and liabilities are recognized for
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.
EARNINGS PER COMMON SHARE: Net income and net loss 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.
RECLASSIFICATIONS: Certain amounts in the 1995 unaudited consolidated
financial statements have been reclassified to conform with the 1996
presentation.
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 as of the date of the
unaudited consolidated financial statements. 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 $85,000 in 1995.
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.
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.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
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. 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
$151,000 and $569,000 for the three months ended March 31, 1996 and the full
year 1995, 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 $134,000 and $506,000 were issued as interest payments to related
parties for the three months ended March 31, 1996 and the full year 1995,
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. On February 7, 1995 the Company renegotiated the terms of the
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 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.
On December 29, 1995, the Company issued senior notes (the "Senior Notes")
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, a subsidiary of the
Company entered into a reinsurance agreement with an unaffiliated company to
reinsure the 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.
NOTE E--REINSURANCE
During 1995, the Company had an agreement in place which covered a substantial
portion of its credit insurance business. The agreement contained an
experience adjustment computation that resulted in the ultimate cost of this
agreement being a stated percentage related to the business covered by the
agreement. The Company ultimately retained a substantial part of the
insurance risk, the underwriting income or loss and the investment income on
net funds.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE E--REINSURANCE--(CONTINUED)
The Company determined that deposit accounting is the appropriate method of
accounting for this agreement since it is not reasonably possible for the
reinsurer to realize a significant loss from the transaction. The unaudited
consolidated financial statements have been prepared on this basis.
On January 1, 1996 the Company terminated this quota share reinsurance
agreement and elected to recapture the liabilities subject to this treaty.
The liabilities recaptured thereunder were then available for cession under
the treaty described below.
Concurrent with this termination, the Company entered into a reinsurance
agreement with a different unaffiliated reinsurer (which is also the buyer of
the Senior Notes discussed in Note D) to reinsure a substantial portion of the
in-force credit life and accident and health insurance business, including the
amounts recaptured.
This agreement is structured in such a way 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 fees and interest
to the reinsurer and redeem the new Senior Notes of $16,500,000. In
connection with this agreement, approximately $40,000,000 of assets were
transferred to the reinsurer on December 29, 1995, as agreed to by all
parties. The unearned premium reserves and liability for insurance claims
subject to cession under this treaty were $43,107,000 and $9,868,000,
respectively, as of March 31, 1996.
Prior to December 31, 1995, a security fund had been maintained, primarily
comprised of fixed maturities, for the benefit of the reinsurer. Pursuant to
the termination of the agreement effective January 1, 1996, as discussed
above, certain investments were liquidated from the security fund on December
29, 1995. Proceeds from this liquidation, along with other funds, were
transferred on December 29, 1995 to the reinsurer who is party to the
agreement dated January 1, 1996. These amounts are included in "Reinsurance
Premium Deposits" on the accompanying unaudited consolidated balance sheets as
of December 31, 1995.
Effective January 1, 1996, the Company entered into a reinsurance agreement
with the same unaffiliated reinsurer referenced above to reinsure a
substantial portion of the credit life and accident and health insurance
produced in 1996. This 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 following data summarizes certain aspects of the Company's reinsurance
activity for the periods presented.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE E--REINSURANCE--(CONTINUED)
Premiums written and earned in 1996 and 1995 are summarized as follows:
WRITTEN EARNED
Three months ended March 31,
1996 1995 1996 1995
---- ---- ---- ----
(Thousands of dollars)
Direct $ 15,862 $ 11,816 $ 13,620 $ 12,690
Assumed 835 1,431 1,088 1,558
Ceded 9,070 3,530 11,195 4,461
-------- -------- -------- --------
Net premiums $ 7,627 $ 9,717 $ 3,513 $ 9,787
======== ======== ======== ========
Policy benefits incurred for the periods presented are as follows:
Three months ended March 31,
1996 1995
-------- --------
(Thousands of dollars)
Direct $ 5,052 $ 5,688
Assumed 831 874
Ceded 3,547 2,424
-------- --------
Net policy benefits $ 2,336 $ 4,138
======== ========
NOTE F--PROPERTIES
Since July 1981 the Company's executive offices have been located at 475 Metro
Place North, Dublin, Ohio. The four-story office building has been owned by
Acceleration Life Insurance Company ("ALIC"), a wholly owned subsidiary of
ACCEL, and consists of approximately 80,000 square feet of office space.
On March 21, 1996, the building was sold by ALIC to an unrelated party for a
price of $3.5 million. The Company realized a pre-tax gain of $170,000 on
this sale. The Company will remain in the building and occupy approximately
16,000 square feet of home office space under a five-year lease at an annual
rental of approximately $256,000.
NOTE G--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 will not be materially
affected by the ultimate outcome of any legal proceedings or contingent
liabilities.
Acceleration National Insurance Company ("ANIC"), a wholly owned subsidiary of
ACCEL, in the normal course of business, issued certain policy endorsements on
Galaxy Insurance Company 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
March 31, 1996, ANIC had not incurred any costs related to these endorsements.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Operating Results for the Three Months Ended
March 31, 1996 and March 31, 1995
OPERATING RESULTS
The income before federal income taxes for 1996 was $38,000 compared to income
of $263,000 in 1995. The reduction in income in 1996 can be attributed to
increased policy benefits on the Company's credit business and continuing
expenses related to the realtors' errors and omissions litigation.
The Company's new Property and Casualty programs, while producing $4,600,000
of annualized premium in the first quarter, have not yet matured to the point
of having a material bottom line impact.
The Company's concerted efforts to reduce general and administrative expenses
were manifested in the quarterly expense numbers. Operating expenses
(excluding taxes, licenses and fees) decreased by 9.2% when compared to the
first quarter of 1995. These expense savings are primarily the result of
staff reductions, the benefit of which is now being realized by the Company.
REVENUE
Premium writings for 1996 were $16.7 million compared to $13.2 million for
1995. The increase in 1996 was the result of marketing new Property and
Casualty programs and an increase in extended service contract premiums.
These increases were partially offset by a $1.4 million decrease in premium
written on credit insurance.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows from operations have generally been adequate for its
current operating needs. Cash flows from operating activities in 1995 were
adversely impacted by the reinsurance transaction dated December 29, 1995
described in Note E in the notes to unaudited consolidated financial
statements. 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. The Company's liability on extended
service contracts typically extends for either one-year or five-year periods.
The Company, therefore, maintains liquidity in its investment portfolio to
correspond with the liability outstanding on its lines of business.
The mortgage and asset-backed securities held by the Company are subject to
risks associated with variable prepayments. As such, those securities may
have a different actual maturity and yield than planned at the time of
purchase. The degree to which a security is susceptible to either gains or
losses is influenced by the difference between its amortized cost and par
value, relative sensitivity of the underlying mortgages to prepayment risk in
a changing interest rate environment and relative priority of the securities
in the overall securitization.
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 March
31, 1996, 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, Acceleration Life Insurance Company ("ALIC") could pay a
dividend of $8,000 and Acceleration National Insurance Company ("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. One of these events included the liquidation of Acceleration
Insurance Company Limited ("AICL"), which 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. These advances are eliminated in consolidation.
In July 1991, ACCEL International Corporation ("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"). 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
$151,000 and $569,000 for the three months ended 1996 and the full year 1995
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"), a company related through common ownership by a
stockholder and director of the Company. Additional Subordinated Notes in the
amount of $134,000 and $506,000 were issued to related parties for the three
months ended 1996 and the full year 1995 interest payments, respectively.
The total outstanding Subordinated Notes were $6,182,000 and $6,031,000
($5,481,000 and $5,347,000 held by related parties at March 31, 1996 and
December 31, 1995, respectively) and the fair value of these notes
approximated $6,447,000 and $5,783,000 at March 31, 1996 and December 31,
1995, 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. 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.
On December 29, 1995, the Company issued new senior notes (the "Senior Notes")
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%.
At December 31, 1995, the loan had an unpaid balance of $525,239. The market
value of the underlying shares was $161,000. The Company revalued this loan
to market value as of December 31, 1995. This will allow the release of
shares to participants' accounts at an average price which more closely
approximates recent market values on the Company's stock. The decrease in the
loan has been reflected through a decrease in additional paid-in capital in
the accompanying unaudited consolidated balance sheets. The unpaid balance of
the loan ($124,000 at March 31, 1996 and $161,000 at December 31, 1995) has
been reflected as a reduction in common stockholders' equity in the
accompanying unaudited consolidated financial statements.
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.
The estimates for policy reserves are continually under review and adjusted as
necessary 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 unaudited consolidated financial statements.
The Company has reviewed Financial Accounting Standards Board ("FASB")
Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of" which becomes effective in 1996. The
Company has also reviewed FASB Statement No. 123, "Accounting for Stock-Based
Compensation" which becomes effective in 1996. The Company does not expect
the impact of either of these FASB Statements to be material to the financial
condition of the Company.
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 provide the primary basis for increases in extended service
contract premium rates.
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 Reinsurance Company, the name was ultimately
changed to Galaxy Insurance Company ("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 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, 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 LAE 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 down 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.
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 March 31, 1996,
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 ("REO"), 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.
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 March 31, 1996.
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: May 15, 1996 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 first quarter 1996 Form 10-Q and is qualified in its
entirety by reference to such Form 10-Q.
</LEGEND>
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<NAME> ACCEL INTERNATIONAL CORPORATION
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