<PAGE> 1
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES EXCHANGE ACT OF 1934
Filed by the Registrant /X/
Filed by a Party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Revised Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
ACCEL INTERNATIONAL CORPORATION
(Name of Registrant as Specified in Its Charter)
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required.
/ / Fee computed on table below per Exchange Act Rules 14a-6(1)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
______________________________________________________________
2) Aggregate number of securities to which transaction applies:
______________________________________________________________
3) Per unit price or other underlying value of transaction
computed pursuant to Exchange Act Rule 0-11 (Set forth the
amount on which the filing fee is calculated and state how it
was determined):
______________________________________________________________
4) Proposed maximum aggregate value of transaction:
$40,500,000
______________________________________________________________
5) Total fee paid:
$8,100
______________________________________________________________
/X/ Fee paid previously by written preliminary materials.
/ / Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:______________________________________
2) Form Schedule or Registration Statement No.:_________________
3) Filing Party:________________________________________________
4) Date Filed:__________________________________________________
<PAGE> 2
ACCEL INTERNATIONAL CORPORATION
475 METRO PLACE NORTH, SUITE 100
DUBLIN, OHIO 43017
614-764-7000
December 17, 1997
Dear Stockholder:
On behalf of the Board of Directors, I cordially invite you to
attend a Special Meeting of Stockholders (the "Special Meeting") of ACCEL
International Corporation (the "Company"), to be held at 1:00 p.m., local time,
on December 30, 1997, at Lane Executive Center Conference Room, Main Floor, 555
Metro Place North, Dublin, Ohio. Formal notice of the Special Meeting was mailed
on December 5, 1997 to stockholders of record as of November 17, 1997. As
provided in such notice, the Company did not solicit proxies in connection
therewith. The Company's Board of Directors, however, is now soliciting proxies
for use at the Special Meeting and, accordingly, a Proxy Statement is attached
hereto.
At the Special Meeting, you will be asked to approve and
authorize (i) the sale by the Company to Lyndon Insurance Group, Inc. and Lyndon
Life Insurance Company (collectively, "Lyndon") of all of the outstanding
capital stock of the Company's wholly owned subsidiaries, Acceleration Life
Insurance Company, Acceleration National Service Corporation and Dublin
International Limited (collectively, the "Target Corporations"), for the
consideration and upon the terms set forth in the Stock Acquisition Agreement
dated October 20, 1997 by and between the Company and Lyndon attached as Annex I
to the accompanying Proxy Statement (the "Stock Acquisition Agreement"), (ii)
the sale by the Company's wholly owned subsidiary, Acceleration National
Insurance Company ("ANIC"), to Lyndon Property Insurance Company ("Lyndon
Property"), of ANIC's vehicle extended service contract business, for the
consideration and upon the terms set forth in the Asset Purchase Agreement dated
October 20, 1997 among Lyndon Property, the Company and ANIC attached as Annex
II to the accompanying Proxy Statement (the "Asset Purchase Agreement"), and
(iii) certain transactions related thereto (collectively, the "Transaction").
The Transaction must be authorized by a resolution adopted by the holders of a
majority of the outstanding stock of the Company entitled to vote thereon.
Stockholder approval of the Transaction, however, is assured because all of the
current directors and executive officers of the Company, who together with their
affiliates may be deemed to be beneficial owners of a majority of the
outstanding stock of the Company entitled to vote thereon, have indicated that
they will vote in favor of the approval and authorization of the Transaction.
The Stock Acquisition Agreement and the Asset Purchase
Agreement provide that Lyndon and Lyndon Property shall initially pay the
Company $40.5 million in cash at the closing. Within 125 days after the closing,
the purchase price will be decreased by the amount, if any, by which the Target
Corporations combined GAAP stockholders' equity as of December 31, 1997 (the
"Combined GAAP Equity") is less than $31.6 million or, alternatively, in the
event that the Combined GAAP Equity is greater than $31.6 million, the purchase
price will be increased by the amount by which the Combined GAAP Equity exceeds
$31.6 million. Accordingly, the exact amount of the consideration to be received
by the Company will not be known on the date of the Special Meeting. As of
September 30, 1997, the Combined GAAP Equity of the Target Corporations was
$32.185 million, which would result in a net purchase price of $41.085 million
in the event that the Combined GAAP Equity does not change.
The Company shall use a portion of the proceeds from the
Transaction to retire certain senior notes of the Company held by an
unaffiliated company (the "Senior Notes"). The Company will use the balance of
the net proceeds to make a capital contribution to ANIC, the Company's
wholly-owned property and casualty insurance subsidiary, and for general
corporate purposes. Upon consummation of the Transaction, the Company will cease
to be engaged in the auto aftermarket credit insurance and extended service
contract businesses.
Your Board of Directors believes that the Transaction is in
the best interests of the Company and its stockholders because it will enable
the Company to retire its outstanding indebtedness under the Senior Notes and
<PAGE> 3
to use its remaining resources to seek to develop and expand its property and
casualty insurance business. The Board of Directors has unanimously approved the
Transaction and recommends that you vote FOR the proposal to approve and
authorize the Transaction. The Board's approval of the Transaction was based on
a number of factors described in the enclosed Proxy Statement, including the
opinion of CreditRe Corporation, an actuarial consulting firm engaged by the
Board, attached as Annex III to the accompanying Proxy Statement. The opinion of
CreditRe Corporation states that the consideration to be received by the Company
pursuant to the Stock Acquisition Agreement and the Asset Purchase Agreement is
fair and reasonable.
Details of the proposed Transaction and the other items of
business scheduled for the Special Meeting appear in the accompanying Proxy
Statement. Please give this material your careful attention.
Whether or not you plan to attend the Special Meeting, please
complete, sign and date the accompanying proxy card and return it in the
enclosed prepaid envelope. If you attend the Special Meeting, you may vote in
person even if you have previously returned your proxy card. Your prompt
cooperation will be greatly appreciated.
Sincerely yours,
-----------------------
Thomas H. Friedberg
Chairman of the Board,
President and Chief Executive Officer
<PAGE> 4
ACCEL INTERNATIONAL CORPORATION
475 METRO PLACE NORTH, SUITE 100
DUBLIN, OHIO 43017
PROXY STATEMENT
SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER 30, 1997
FURNISHED BY THE BOARD OF DIRECTORS OF THE COMPANY
December 17, 1997
This proxy statement (the "Proxy Statement") is being furnished in
connection with the solicitation of proxies by the Board of Directors of ACCEL
International Corporation, a Delaware corporation (the "Company"), for use at a
special meeting of stockholders (the "Special Meeting") to be held on December
30, 1997, at Lane Executive Center Conference Room, Main Floor, 555 Metro Place
North, Dublin, Ohio, at 1:00 p.m., local time, and at any adjournments or
postponements thereof.
At the Special Meeting, the stockholders will be asked to consider and
vote upon the approval and authorization of (i) the sale by the Company to
Lyndon Insurance Group, Inc. and Lyndon Life Insurance Company (collectively,
"Lyndon") of all of the outstanding capital stock of the Company's wholly owned
subsidiaries, Acceleration Life Insurance Company ("ALIC"), Acceleration
National Service Corporation ("ANSC") and Dublin International Limited
("Dublin"), for the consideration and upon the terms set forth in the Stock
Acquisition Agreement dated October 20, 1997 by and between the Company and
Lyndon attached as Annex I hereto (the "Stock Acquisition Agreement"), (ii) the
sale by the Company's wholly owned subsidiary, Acceleration National Insurance
Company ("ANIC"), to Lyndon Property Insurance Company ("Lyndon Property"), of
ANIC's vehicle extended service contract business, for the consideration and
upon the terms set forth in the Asset Purchase Agreement dated October 20, 1997
among Lyndon Property, the Company and ANIC attached as Annex II hereto (the
"Asset Purchase Agreement"), and (iii) certain transactions related thereto
(collectively, the "Transaction").
The Transaction is subject to the approval of the holders of a majority
of the outstanding shares of Common Stock, $.10 par value, of the Company (the
"Common Stock"), entitled to vote thereon and to the satisfaction of certain
other conditions, including obtaining various regulatory approvals. Under
Delaware law, stockholders do not have dissenter's rights in connection with the
Transaction.
This Proxy Statement is first being mailed to stockholders on or about December
17, 1997.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY ....................................................................................................... 1
Date, Time and Place of Special Meeting of Stockholders............................................... 1
Record Date; Stockholders Entitled to Vote............................................................ 1
Purpose of Special Meeting............................................................................ 1
Vote Required......................................................................................... 1
Parties to the Transaction............................................................................ 1
Terms of Transaction.................................................................................. 2
Use of Proceeds from Transaction....................................................................... 3
Operation of the Company After the Transaction......................................................... 3
Recommendation of the Board of Directors.............................................................. 3
Reasons for the Transaction........................................................................... 3
Opinion of Actuarial Consulting Firm.................................................................. 3
Federal Income Tax Consequences........................................................................ 4
Accounting Treatment................................................................................... 4
No Dissenter's Rights.................................................................................. 4
Regulatory Approvals.................................................................................. 4
THE SPECIAL MEETING............................................................................................ 4
General ............................................................................................. 4
Matters to be Considered at the Special Meeting....................................................... 4
Voting at the Meeting; Record Date.................................................................... 4
THE TRANSACTION................................................................................................ 5
Background of the Transaction......................................................................... 5
Reasons for the Transaction........................................................................... 6
Opinion of Actuarial Consulting Firm.................................................................. 7
Use of Proceeds....................................................................................... 8
Operations of the Company After the Transaction....................................................... 8
Federal Income Tax Consequences....................................................................... 11
Accounting Treatment.................................................................................. 11
THE STOCK ACQUISITION AGREEMENT............................................................................... 11
Terms of the Stock Acquisition Agreement............................................................. 11
Closing; Termination.................................................................................. 12
Representations and Warranties........................................................................ 12
Conduct of Business Prior to Closing.................................................................. 13
No "Shopping" Covenant; Break-up Fee.................................................................. 14
Covenants of Lyndon................................................................................... 14
Employee Benefit Plans................................................................................ 14
Conditions to Consummation of the Transactions Contemplated by the Stock Acquisition
Agreement................................................................................ 14
Survival of Representations and Warranties............................................................ 15
Covenant Not to Compete............................................................................... 16
Indemnification....................................................................................... 16
Tax Matters........................................................................................... 16
Amendment; Waiver..................................................................................... 17
Expenses; Liquidated Damages.......................................................................... 17
</TABLE>
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<TABLE>
<S> <C>
ASSET PURCHASE AGREEMENT....................................................................................... 18
Purchase Price and Acquired Assets.................................................................... 18
Reinsurance Agreements and Liabilities Assumed........................................................ 18
Closing ............................................................................................. 18
Representations and Warranties........................................................................ 18
Additional Agreements of the Company, ANIC and Lyndon Property......................................... 18
Covenant Not to Compete............................................................................... 19
Survival of Representations and Warranties............................................................. 19
Indemnification....................................................................................... 20
Amendment; Waiver..................................................................................... 20
Expenses ............................................................................................. 20
REGULATORY APPROVALS REQUIRED................................................................................... 20
Ohio Department of Insurance.......................................................................... 21
Missouri Department of Insurance...................................................................... 21
HSR Act and Antitrust................................................................................. 21
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION......................................................... 22
Introduction.......................................................................................... 22
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT................................................. 29
==
Beneficial Ownership of Certain Beneficial Owners..................................................... 29
==
Beneficial Ownership of Management.................................................................... 31
==
INDEPENDENT AUDITORS........................................................................................... 32
STOCKHOLDER PROPOSALS........................................................................................... 32
ADDITIONAL INFORMATION REGARDING THE COMPANY.................................................................... 32
Business .............................................................................................. 32
Properties............................................................................................. 38
Legal Proceedings...................................................................................... 38
Market for ACCEL's Common Stock and Related Stockholder Matters........................................ 38
Financial Statements................................................................................... 39
Selected Financial Data................................................................................ 40
Supplementary Financial Information.................................................................... 40
Management's Discussion and Analysis of Financial Condition and Results of Operations.................. 41
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................... 52
Quantitative and Qualitative Disclosures about Market Risk............................................. 52
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS.................................................................... F-1
</TABLE>
ANNEX I -- STOCK ACQUISITION AGREEMENT
ANNEX II -- ASSET PURCHASE AGREEMENT
ANNEX III -- OPINION OF CREDITRE CORPORATION
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SUMMARY
The following summary is not intended to be complete and is qualified
in its entirety by reference to the more detailed information contained
elsewhere in this Proxy Statement and the Annexes hereto in their entirety.
DATE, TIME AND PLACE OF SPECIAL MEETING OF STOCKHOLDERS
The Special Meeting of Stockholders of the Company will be held on
December 30, 1997, at 1:00 p.m., local time, at Lane Executive Center Conference
Room, Main Floor, 555 Metro Place North, Dublin, Ohio.
RECORD DATE; STOCKHOLDERS ENTITLED TO VOTE
Only holders of record of the Common Stock at the close of business on
the Record Date, November 17, 1997, will be entitled to notice of and to vote at
the Special Meeting. On the Record Date, there were 8,637,042 shares of Common
Stock outstanding, each of which will be entitled to one vote on each matter
properly submitted for vote to stockholders at the Special Meeting. See "THE
SPECIAL MEETING -- Voting at the Meeting; Record Date. "
PURPOSE OF SPECIAL MEETING
The purpose of the Special Meeting will be to consider and vote upon
the adoption of a resolution approving and authorizing the Transaction pursuant
to the terms of the Stock Acquisition Agreement and the Asset Purchase Agreement
(collectively, the "Agreements").
VOTE REQUIRED
A majority of the outstanding shares of Common Stock entitled to vote
thereon must vote in favor of the resolution approving and authorizing the
Agreements.
PARTIES TO THE TRANSACTION
The Company is an insurance holding company incorporated under the laws
of Delaware in June 1978. The Company is engaged through its operating
subsidiaries, Acceleration Life Insurance Company ("ALIC") and Acceleration
National Insurance Company ("ANIC"), in the sale and underwriting of selected
life and property/casualty insurance products. ALIC holds licenses to conduct
business in 40 states and the District of Columbia and ANIC holds licenses to
conduct business in 47 states and the District of Columbia. ALIC offers credit
life and credit accident and health insurance. ANIC offers commercial auto
insurance to operators of long haul trucks and charter buses and also offers a
program for vehicle extended service contracts as a complementary product to the
credit insurance products marketed by automobile dealerships. The principal
office of the Company is 475 Metro Place North, Suite 100, Dublin, Ohio 43017
and its telephone number is (614) 764-7000. For a further description of the
business of the Company, see "ADDITIONAL INFORMATION REGARDING THE COMPANY --
Business. "
Lyndon Property, Lyndon Insurance Group, Inc. and Lyndon Life Insurance
Company (collectively, the "Lyndon Group") are direct or indirect subsidiaries
of Frontier Insurance Group, Inc. ("Frontier"), which Frontier acquired on June
3, 1997. Frontier is an insurance holding company which, through its
subsidiaries, conducts business on an admitted and non-admitted basis as a
specialty property and casualty insurer. Frontier currently underwrites in
excess of 130 specialty insurance programs, including (i) malpractice insurance
for physicians, dentists, psychiatrists and chiropractors, (ii) general
liability, (iii) surety (performance bonds, bail bonds, customs bonds and
license and permit bonds), (iv) commercial earthquake, (v) workers' compensation
and (vi) other miscellaneous lines. Frontier's alternative risk division
underwrites excess workers' compensation and excess medical stop loss coverages,
and provides custom designed insurance programs through captive and
rent-a-captive facilities for both Frontier's
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workers' compensation and other insurance lines. At June 30, 1997, Frontier's
total assets were approximately $1.62 billion, its total investments were
approximately $1.06 billion and its total stockholders' equity was $295 million.
The Lyndon Group is based in St. Louis, Missouri and provides
credit-related and specialty insurance products for financial institutions and
specialty insurance markets through a variety of distribution channels,
including other companies, general agents, third-party administrators and joint
venture relationships, with the particular channel designed to fit the specific
product. Credit-related products include collateral protection, credit property,
involuntary unemployment insurance, auto physical damage, credit life, and
credit accident and health coverages. Specialty insurance products include
residual value, non-standard auto and mechanical breakdown. For the year ended
December 31, 1996, the Lyndon Group's revenues were $96.8 million and its net
income was $27.0 million. At June 30, 1997, the Lyndon Group's total assets were
$395.8 million and its total investments were $214.8 million.
TERMS OF TRANSACTION
The Company will sell to Lyndon all of the capital stock of each of
ALIC, ANSC and Dublin (collectively, the "Target Corporations") pursuant to the
terms of the Stock Acquisition Agreement, and the Company and ANIC will sell to
Lyndon Property ANIC's vehicle extended service contract business pursuant to
the terms of the Asset Purchase Agreement. Upon the closing of the Transaction
(the "Closing"), Lyndon Property will own ANIC's vehicle extended service
contract business and Lyndon will own the Target Corporations and all of their
respective assets, including all of the in-force credit premiums of ALIC (the
"In-Force Business") and all of the licenses to conduct business presently held
by ALIC in 40 states and the District of Columbia. The Agreements provide that
Lyndon and Lyndon Property shall pay the Company $40.5 million in cash at the
Closing for all of the capital stock of the Target Corporations and ANIC's
vehicle extended service contract business. The Stock Acquisition Agreement
provides that, prior to the Closing, the Target Corporations may elect to
declare and pay to the Company a special distribution (the "Special
Distribution") equal to the estimated amount by which the Target Corporations
combined stockholders' equity as of December 31, 1997, as determined in
accordance with GAAP, is expected to exceed $31.6 million. The estimated amount
of the Special Distribution will be based on the Target Corporations' combined
GAAP unaudited financial statements as of September 30, 1997. Within 125 days
after the Closing, the amount of the Special Distribution will be adjusted by
the parties to reflect the actual combined stockholders' equity of the Target
Corporations based upon the combined GAAP audited financial statements of the
Target Corporations as of December 31, 1997 to be obtained by the Company by
March 16, 1998.
Because the combined GAAP stockholders' equity of the Target
Corporations was $32.185 million as of September 30, 1997 and is expected to
remain approximately the same as of December 31, 1997, the Company does not
intend to cause the Target Corporations to declare and pay a Special
Distribution prior to the Closing. As a result, within 125 days after the
Closing, the initial purchase price of $40.5 million which will be paid in cash
at the Closing will be decreased by the amount, if any, by which the combined
GAAP stockholders' equity of the Target Corporations as of December 31, 1997 is
less than $31.6 million or, alternatively, in the event that the Target
Corporations' combined GAAP stockholders' equity as of December 31, 1997 is
greater than $31.6 million, the purchase price will be increased by the amount
by which the Target Corporations' combined GAAP stockholders' equity as of
December 31, 1997 exceeds $31.6 million. There is no limitation on the potential
amount of such adjustment. Accordingly, the exact amount of the consideration to
be received by the Company will not be known as of the date of the Special
Meeting. As of September 30, 1997, the combined GAAP stockholders' equity of the
Target Corporations was $32.185 million which would result in a net purchase
price of $41.085 million in the event that the combined GAAP Stockholders'
equity does not change.
The provisions of the Stock Acquisition Agreement include a no
"shopping" covenant which prohibits the Company from negotiating, soliciting or
encouraging transactions with other parties involving the sale of securities or
assets of Target Corporations, and from making available to any other person
information concerning the Target Corporations for such purposes, except to the
extent that the Company's Board of Directors determines in good faith, after
consulting with legal counsel, that the same is required in the exercise of the
Board of Director's fiduciary duties under applicable law. The Company will be
entitled to execute a definitive agreement with such a third party
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<PAGE> 9
relating to the acquisition proposal of such third party and to terminate the
Stock Acquisition Agreement so long as the Company pays Lyndon a fee of
$750,000.
USE OF PROCEEDS FROM TRANSACTION
The Company will use the cash proceeds from the Transaction, which are
estimated to be approximately $40.5 million, to retire all of the outstanding
Senior Notes held by Lincoln National Life Insurance Company in the amount of
$15 million (the "Senior Notes") and to make a capital contribution to ANIC in
an amount necessary to increase its statutory capital and surplus (being
approximately $13.1 million (unaudited) at September 30, 1997) to at least $25
million. The Company will use the balance of the proceeds for general corporate
purposes.
OPERATION OF THE COMPANY AFTER THE TRANSACTION
Following consummation of the Transaction, (i) the Company's
stockholders will remain stockholders of the Company, (ii) ANIC's vehicle
extended service contract business will be owned by Lyndon Property and all of
the shares of capital stock of each of the Target Corporations will be owned by
Lyndon, (iii) the Company will cease to be engaged in the auto aftermarket
credit insurance and extended service contract businesses, and (iv) ANIC will
continue to be owned by the Company. The Company intends to use its remaining
resources to seek to develop and expand the business of ANIC, which is the
Company's property and casualty insurance subsidiary.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors of the Company has unanimously approved the
Transaction pursuant to the terms of the Agreements, believes that the
Transaction is in the best interests of the Company and its stockholders and
recommends that the stockholders vote FOR the approval and authorization of the
Transaction pursuant to the terms of the Agreements. See "THE TRANSACTION --
Background of the Transaction" and "-- Reasons for the Transaction.
"
REASONS FOR THE TRANSACTION
The Board of Directors of the Company believes that the terms of the
Transaction are fair to, and in the best interests of, the Company and its
stockholders because, among other things, the Board believes that the
Transaction will (i) allow the Company to dispose of its Auto Aftermarket Group
at an attractive price in light of the historical financial performance and
business prospects of the Company's Auto Aftermarket Group, (ii) enable the
Company to eliminate its outstanding indebtedness under the Senior Notes, and
(iii) enable ANIC to expand its property and casualty insurance business, which
the Company believes has the potential to provide higher returns than the lines
of business to be sold pursuant to the Transaction. Accordingly, the Board
unanimously approved the Transaction and the Agreements and recommends that the
Company's stockholders vote in favor of the approval and authorization of the
Agreements. For a discussion of the factors considered by the Board in reaching
its decision with respect to the Transaction, see "THE TRANSACTION -- Reasons
for the Transaction."
OPINION OF ACTUARIAL CONSULTING FIRM
On October 15, 1997, CreditRe Corporation delivered its written opinion
to the Company's Board of Directors that the aggregate purchase price of $40.5
million to be received by the Company pursuant to the Agreements is fair and
reasonable and equals or exceeds the value that other likely participants in the
marketplace would pay for the business and assets being sold. The full text of
the written opinion of CreditRe Corporation is attached to this Proxy Statement
as Annex III. Stockholders of the Company are urged to, and should, read such
opinion in its entirety. See "THE TRANSACTION -- Opinion of Actuarial Consulting
Firm."
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FEDERAL INCOME TAX CONSEQUENCES
The Company will recognize a taxable gain upon the consummation of the
Transaction but the stockholders will not recognize any gain or loss upon
consummation of the Transaction nor will such consummation result in any change
in the tax basis of the shares of Common Stock held by them.
ACCOUNTING TREATMENT
The Transaction will be treated by the Company as a disposal of a
segment of a business within the meaning of Accounting Principles Board Opinion
No. 30. Accordingly, upon approval of the Transaction by the requisite vote of
the Company's stockholders, the operating results of the Company's auto
aftermarket credit insurance business will be accounted for by the Company as
discontinued operations. See "THE TRANSACTION -- Accounting Treatment.
"
NO DISSENTER'S RIGHTS
Under Delaware Law, a stockholder who does not vote his or her shares
in favor of the authorization of the Agreements is not entitled to any
dissenters' rights.
REGULATORY APPROVALS
The consummation of the Transaction is subject to prior approval by the
Ohio and Missouri Departments of Insurance and to the expiration or termination
of the relevant waiting period under the Hart-Scott-Rodino Antitrust
Improvements Act of 1976, as amended (the "HSR Act").
THE SPECIAL MEETING
GENERAL
This Proxy Statement is being furnished to the Company's stockholders
in connection with the solicitation of proxies by and on behalf of the Board of
Directors of Company to be voted at the Special Meeting to be held at Lane
Executive Center Conference Room, Main Floor, 555 Metro Place North, Dublin,
Ohio on December 30, 1997, at 10:00 a.m., local time, and any and all
adjournments or postponements thereof. This Proxy Statement and the accompanying
proxy are first being mailed to stockholders on or about December 17, 1997.
MATTERS TO BE CONSIDERED AT THE SPECIAL MEETING
At the Special Meeting, the Company's stockholders will be asked to (i)
consider and vote upon the Transaction pursuant to the terms of the Agreements
and (ii) to act on such other matters as may properly come before the Special
Meeting or any adjournment or postponements thereof.
The Board has unanimously approved the Agreements and the Transaction
and recommends a vote FOR the approval and authorization of the Transaction
pursuant to the terms of the Agreements.
VOTING AT THE MEETING; RECORD DATE
The Board has fixed November 17, 1997 as the Record Date for the
determination of stockholders entitled to notice of and to vote at the Special
Meeting. Accordingly, only holders of record of Common Stock on the Record Date
will be entitled to notice of, and to vote at, the Special Meeting. As of the
Record Date, there were 8,637,042 shares of Common Stock of the Company
outstanding and entitled to vote. Each holder of record of shares of Common
Stock on the Record Date is entitled to cast one vote per share, exercisable in
person or by
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properly executed proxy, on each matter properly submitted for the vote of the
stockholders at the Special Meeting. The presence, in person or by properly
executed proxy, of the holders of a majority of the outstanding Common Stock
entitled to vote at the Special Meeting is necessary to constitute a quorum at
the Special Meeting. Approval and authorization of the Transaction pursuant to
the terms of the Agreements will require the affirmative vote of the holders of
a majority of the outstanding shares of Common Stock.
As of October 31, 1997, directors and executive officers of the Company
and their affiliates may be deemed to be beneficial owners of approximately 52%
(or approximately 60% if the Borrowed Shares described in footnote 4 to the
table under the caption "SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT -- Beneficial Ownership of Certain Beneficial Owners" are included)
of the outstanding Common Stock. Each of the current directors and executive
officers of the Company has indicated that the shares of Common Stock
beneficially owned by him will be voted in favor of the approval and
authorization of the Transaction pursuant to the terms of the Agreements.
Accordingly, stockholder approval of the Transaction is assured.
So far as the Company is aware, no matters other than those described
in this Proxy Statement will be presented to the meeting for action on the part
of the stockholders. However, the enclosed proxy gives discretionary authority
in the event any additional matters should be presented.
The cost of soliciting proxies will be borne by the Company. Officers,
directors and regular employees of the Company may communicate with stockholders
personally or by mail, telephone, telegram or otherwise for the purpose of
soliciting such proxies, but the Company will pay no additional compensation for
such solicitation. The Company and any authorized agent of the Company will
request brokers and other custodians, nominees and fiduciaries to forward proxy
soliciting material to the beneficial owners of shares held of record by such
persons and will reimburse the reasonable out-of-pocket expenses in forwarding
such material.
Any stockholder giving a proxy has the power to revoke it at any time
before it is voted by a later appointment received by the Secretary of the
Company or by giving notice of such revocation to the Secretary of the Company
in writing or in open meeting. All duly executed proxies received prior to the
meeting and not revoked will be voted at the meeting. The enclosed proxy
contains space in which the stockholder may insert instructions as to the way
the stockholder wishes his shares to be voted. When such proxy is properly
executed and returned, the shares it represents will be voted at the meeting as
directed. If no specification is indicated, the shares will be voted "For" the
proposal to approve and authorize the Transaction pursuant to the terms of the
Agreements.
Pursuant to applicable law, broker non-votes and abstaining votes will
not be counted in favor of the proposal to approve and authorize the Transaction
pursuant to the terms of the Agreements. Any stockholder who abstains from
voting on the proposal will in effect be voting against such proposal.
THE TRANSACTION
BACKGROUND OF THE TRANSACTION
In early 1995, the Company began to explore the possibility of selling
its Auto Aftermarket Group, which consists of the Company's auto aftermarket
credit insurance and extended service contract businesses, in order to permit
the Company to repay its outstanding bank loan. The Credit Agreement evidencing
such loan was renegotiated by the Company in February, 1995. As a part of such
renegotiations, the Credit Agreement was modified to require that the Company
pursue capital transactions with other companies or the sale of significant
operating assets that would permit the Company to repay the loan in full by June
30, 1997.
In early 1995, the Company engaged The Advest Group, Inc. ("Advest") to
assist the Company in its efforts to sell its Auto Aftermarket Group. At such
time, Advest identified and contacted several potential purchasers of the
Company's Auto Aftermarket Group. Such process, however, produced only one
interested buyer, Consumers Financial Corporation of Camp Hill, Pennsylvania
("Consumers"). On August 18, 1995, the Company and
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Consumers announced that they had entered into a letter of intent for Consumers
to acquire the in-force credit insurance business of ALIC and to purchase all of
the issued and outstanding shares of ALIC from the Company. The proposed
transaction did not include the sale of the Company's vehicle extended service
contract business. The Company and Consumers, however, were unable to negotiate
the terms of a definitive agreement within the time period established by the
letter of intent and the proposed transaction was abandoned.
In connection with the proposed transaction with Consumers, the Company
engaged CreditRe Corporation to perform actuarial appraisals of its credit
insurance book of business as of December 31, 1994 and June 30, 1995. CreditRe
Corporation's analysis indicated that the purchase price offered by Consumers
would have resulted in a net loss in the range of $2 to $3 million to the
Company on a GAAP basis. The actuarial appraisals prepared by CreditRe
Corporation in connection with the Consumers transaction were utilized by
CreditRe Corporation in the preparation of its fairness opinion regarding the
Transaction. See " -- Opinion of Actuarial Consulting Firm."
In December, 1995, the Company retired the loan outstanding under the
aforementioned Credit Agreement with the proceeds from the Company's issuance of
Senior Notes totalling $16.5 million to an unaffiliated company. In connection
with the issuance of the Senior Notes, ALIC entered into a reinsurance agreement
with the purchaser of the Senior Notes to reinsure its in-force credit business.
Such transactions alleviated the immediate pressure on the Company to sell its
Auto Aftermarket Group.
Following the aborted Consumer's transaction and the issuance of the
Senior Notes, the Company abandoned its efforts to sell its Auto Aftermarket
Group because the Company believed that it would only be able to sell such
business at a loss on a GAAP basis and because the credit insurance market was
continuing to contract, thereby further decreasing the marketability of such
block of business. At such time, the Company determined that it was necessary
for it to substantially increase the critical mass of its credit insurance
business in order to be profitable because, although such business provided
attractive profit margins, the Company's credit insurance sales did not produce
sufficient income in relation to the associated overhead expenses. The Company's
attempts to acquire other blocks of credit insurance business, however, were
generally unsuccessful and the Company was advised by several potential sellers
that they were not interested in entering into any transactions with a company
with an A.M. Best Company ("A.M. Best") rating as low as the Company's. The
Company's efforts to increase its credit insurance sales internally were also
unsuccessful, in part, because financial institutions were reluctant to offer
the Company's products to their customers because of the relatively small size
of ALIC's statutory surplus and its A.M. Best rating of only "B-" (Fair).
Thomas H. Friedberg, Chairman of the Board, President and Chief
Executive Officer of the Company, initially approached Walter Rhulen, Chief
Executive Officer of Frontier, in the spring of 1997 after Frontier had
announced its intention to acquire the insurance operations of Mercury Financial
Group (the "Mercury Transaction"). Mr. Friedberg's purpose in contacting
Frontier was to inquire as to whether or not Frontier would be interested in
discussing the possibility of the Company acquiring from Frontier the credit
insurance business of Lyndon Life Insurance Company, which business Frontier
acquired in the Mercury Transaction. Prior to the Mercury Transaction, the
Company had identified the credit insurance business of Mercury Financial Group
as a potentially attractive book of business. Accordingly, Mr. Friedberg had
hoped that Frontier would consider selling such business because, prior to the
Mercury Transaction, Frontier was principally a property and casualty insurance
company. In the course of these preliminary discussions with Frontier, Mr.
Rhulen, after being advised by Mr. Friedberg that he believed it was necessary
for the Company to increase the critical mass of its credit life insurance
business in order to continue to be successful, inquired of Mr. Friedberg
whether the Company would instead consider selling to Frontier the Company's
Auto Aftermarket Group. These initial discussions led to Frontier's proposal to
acquire the Company's entire Auto Aftermarket Group, which proposal was first
communicated to Mr. Friedberg in a letter dated July 8, 1997.
After receiving the initial offer from Frontier to purchase the
Company's Auto Aftermarket Group, the Company did not attempt to solicit
competing offers from other parties and did not consider any possible strategic
alternatives because of the Company's belief, based upon its recent experiences
in connection with the aborted
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Consumers transaction and its efforts to acquire additional blocks of credit
insurance business, that the Transaction represented the best opportunity
available to the Company. In addition, the Company did not receive any competing
offers, except for an invitation to discuss the potential sale of the Company's
extended service contract business, which invitation the Company declined to
accept because of the Company's belief that it could not sell its credit
insurance business at an advantageous price without its warranty business.
A special telephonic meeting of the Board of Directors of the Company,
which was attended by all of the Company's directors, was held on July 29, 1997
at the request of Mr. Friedberg for the sole purpose of presenting to the Board
of Directors the Transaction. At the meeting, Mr. Friedberg outlined for the
Board of Directors the general terms of the proposal which were set forth in
several letters between Mr. Friedberg and Peter H. Foley, Executive Vice
President of Frontier, dated various dates in July , 1997. Mr. Friedberg also
briefly discussed each of the factors set forth in this Proxy Statement under
"Reasons for the Transaction." At the meeting, the Board of Directors, by a
unanimous vote, authorized Mr. Friedberg to negotiate definitive agreements. No
other material matters were discussed at the meeting. Prior to the meeting, Mr.
Friedberg was the only officer or director of the Company involved in the
negotiations regarding the Transaction, which negotiations were conducted
substantially through the letters referred to above.
In Mr. Foley's letter dated July 8, 1997 to Mr. Friedberg, Frontier
initially offered to purchase the Company's Auto Aftermarket Group for $27
million payable in cash, subject to the condition, among others, that the Target
Corporations would pay a dividend to the Company prior to closing in the range
of $8 to $10 million, thereby leaving the Target Corporations with a least $25
million in stockholders' equity on a GAAP basis.
Mr. Friedberg responded to Mr. Foley's July 8th letter in a letter
dated July 10, 1997 in which Mr. Friedberg generally consented to all of the
conditions of Mr. Foley's offer except for the amount of the proposed purchase
price. Mr. Friedberg explained in his letter that certain adjustments needed to
be made to the financial information previously provided by the Company to
Frontier in order to properly estimate the income generated by the continuing
operations of the businesses to be sold. Mr. Friedberg further noted that
Frontier's offer of $35 to $37 million (after taking into consideration the
proposed pre-closing dividend) was just slightly more than the book value of the
Target Corporations and, as a result, Frontier in effect would be paying almost
nothing for the Company's vehicle extended service contract business. Mr.
Friedberg concluded his letter by suggesting that Frontier increase its offer
based upon the revised financial information noted in his letter. In response to
such suggestion, Mr. Foley in his letter dated July 21, 1997 increased
Frontier's offer to $40 million in cash.
Mr. Friedberg responded to Frontier's increased offer of $40 million in
a letter dated July 21, 1997. In this letter, Mr. Friedberg noted that
Frontier's revised offer of $40 million was slightly less than the price which
Mr. Friedberg believed the Company's Board of Directors would be willing to
accept. Mr. Friedberg proposed that Frontier increase its offer to $37.5 million
in cash plus five annual payments of $1.5 million, which payments together, when
discounted at an annual interest rate of 9%, had a net present value of
approximately $43.3 million. In a letter dated July 28, 1997, Mr. Foley
responded to Mr. Friedberg's counteroffer by repeating Frontier's offer of $40
million in cash with the added condition that the GAAP stockholders' equity of
ALIC would have to be not less than $30 million at the closing. Mr. Friedberg's
letter of even date therewith in response noted that the Company believed that
its Auto Aftermarket Group was worth $42 million, but suggested that the Company
might accept an offer of $40.5 million, the $500,000 increase to Frontier's $40
million offer being necessary to offset the increased tax expense which would be
incurred by the Company as a result of the election under Section 338(h)(10) of
the Code required by Frontier as a condition of its offer. See "THE STOCK
ACQUISITION AGREEMENT --Tax Matters." In a letter dated July 29, 1997, Mr.
Foley, in order to allow the negotiation process to proceed forward, conceded to
Mr. Friedberg's request to increase the purchase price to $40.5 million. As a
result of certain matters which came to Frontier's attention during the
performance of its due diligence, Frontier requested a reduction in the purchase
price, however, the parties ultimately agreed not to change the purchase price,
but to increase the required amount of the Target Corporation's GAAP
stockholders' equity at closing to $31.6 million.
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Following the completion of Frontier's due diligence and the
negotiation of the terms of the Agreements between Mr. Friedberg and Mr. Foley,
a second special telephonic meeting of the Board of Directors of the Company was
held on October 22, 1997 in order to further consider the Transaction and the
Agreements. At this meeting, Mr. Friedberg summarized for the Board of Directors
the advice he had received from the Company's counsel concerning the directors'
fiduciary duties in connection with the Transaction. Mr. Friedberg also outlined
for the directors the material terms of the Agreements and reviewed the
conclusions set forth in the written opinion received by the Company from
CreditRe Corporation, which opinion was theretofore delivered to each director.
See "-- Opinion of Actuarial Consulting Firm." No other written materials
regarding the Transaction were presented to the directors at or before the
meeting. Finally, Mr. Friedberg briefly advised the Board of Directors regarding
the unaudited consolidated pro forma financial statements of the Company which
would be included in this Proxy Statement. After Mr. Friedberg completed his
presentation , the Board of Directors unanimously approved the Transaction and
authorized Mr. Friedberg to execute the Agreements on behalf of the Company. No
other material matters were discussed at the meeting.
REASONS FOR THE TRANSACTION
The Board of Directors has determined that the terms of the Transaction
are fair to, and in the best interests of, the Company and its stockholders and
has recommended that the stockholders vote FOR approval and authorization of the
Transaction pursuant to the terms of the Agreements. In reaching its
determination to approve the Transaction, the Board of Directors considered
various factors. The material factors considered were:
(i) The desire of the Board of Directors to maximize the value of the
Company's Common Stock.
(ii) The determination by the Board of Directors that it is necessary
for the Company to either increase the critical mass of its credit life
insurance business in order to continue to be profitable or to sell such
business, in light of the fact that (a) although such business provides
attractive profit margins, the Company's credit insurance sales do not produce
sufficient income in relation to the associated overhead expenses, and (b) the
sales of the Company's Auto Aftermarket Group have been steadily declining. For
example, the Company's gross premiums, net of refunds, were approximately $14.1
million in 1996, compared to approximately $17.5 million in 1995. In addition,
as described above under "Background of the Transaction," the Company's efforts
to grow its credit insurance business, both internally and through acquisitions,
have been unsuccessful, thereby making it desirable to sell such business. See
"-- Background of the Transaction."
(iii) The belief by the Board of Directors and management of the
Company that the aggregate purchase price of $40.5 million, subject to
adjustment, is attractive in view of the historical financial performance and
business prospects of the Company's Auto Aftermarket Group. The aggregate
consideration to be received by the Company pursuant to the Agreements
substantially exceeds all previous offers received by the Company. Such
consideration also compares favorably with the prior actuarial appraisals of the
Company's Auto Aftermarket Group prepared by CreditRe Corporation in 1995. See
"-- Background of the Transaction." Such appraisals indicated that any likely
sale price would result in a loss to the Company on a GAAP basis, when in fact
the Company expects to realize a net gain of approximately $2.7 million on the
Transaction. See "-- Accounting Treatment." The Board of Directors analyzed the
Transaction as a whole and did not consider the allocation of the combined
purchase price between the Target Corporations and the Acquired Assets (as
defined in the Asset Purchase Agreement). However, the Board of Directors did
consider, as a basis for supporting the fairness of the aggregate purchase, the
fact that such amount represents roughly the sum of the book value of the
Company's auto aftermarket credit insurance business plus ten times the annual
after-tax earnings of ANIC's vehicle extended service contract business
(including fee income).
(iv) The determination by the Board of Directors that the Transaction
is consistent with the Company's plans to increase its revenues and profits from
ANIC's property and casualty insurance business, which the Company believes has
the potential to provide higher returns than the lines of business to be sold
pursuant to the Transaction. The Transaction will allow the Company to eliminate
its outstanding indebtedness under the Senior Notes and to increase the
statutory surplus of ANIC to a level which will enable ANIC to seek a higher
rating from A.M. Best
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than its current rating of "B" (Fair). The Company's management believes that an
increase in ANIC's A.M. Best rating should permit ANIC to market its property
and casualty products through a larger group of quality agents and brokers which
should enhance the ability of the Company to grow such business. In addition,
the Transaction will provide the Company with approximately $5 million to $6
million of cash at the holding company level and increase the Company's net book
value per share, which the Corporation's management believes will further
enhance the Company's ability to grow ANIC's property and casualty business
through acquisitions and strategic alliances. See "-- Use of Proceeds" and
"Operations of the Company After the Transaction."
(v) The opinion of CreditRe Corporation to the Company indicating that
the aggregate purchase price to be received by the Company pursuant to the
Agreements is fair and reasonable, exceeds CreditRe Corporation's estimated
value of $39.3 million, and equals or exceeds the value that other likely
participants in the marketplace would pay for the business and assets being
sold. In addition, the opinion of CreditRe Corporation states that the Company's
credit life and disability insurance business has little value in the
marketplace because it does not provide a competitive return and makes reference
to the fact that over 50 insurers have left the credit life and disability
industry since 1990, with no new entrants. The Board of Directors did not
specifically adopt the opinion of CreditRe Corporation, but agrees with its
conclusions in all material respects. See " -- Opinion of Actuarial Consulting
Firm."
In view of the variety of factors considered in connection with the
evaluation of the Transaction, the Board of Directors did not find it
practicable to and did not quantify or otherwise assign weights to the specific
factors considered in reaching its determination. In making its determination,
the Board of Directors also considered the risks and likelihood of achieving the
results discussed above.
OPINION OF ACTUARIAL CONSULTING FIRM
As described under "--Background of the Transaction" and "--Reasons for
the Transaction," the Company engaged CreditRe Corporation, an actuarial
consulting firm, to provide a fairness opinion in connection with the
Transaction. In this connection, on October 15, 1997, CreditRe Corporation
delivered its written opinion to the Company's Board of Directors that the
aggregate purchase price of $40.5 million to be received by the Company pursuant
to the Agreements was fair and reasonable and equals or exceeds the value that
other likely participants in the marketplace would pay for the business and
assets being sold. The written opinion of CreditRe Corporation further states
that, based solely on (i) the statutory accounting annual financial statements
of ALIC as of and for the year ended December 31, 1996, (ii) the consolidated
GAAP financial statements of the Company as of and for the six months ended June
30, 1997 and (iii) the valuations performed by CreditRe Corporation, the
estimated market value of the Company's auto aftermarket book of business was
$39.3 million. CreditRe Corporation relied, without independent verification,
upon the accuracy and completeness of all of the financial and other information
reviewed by it for purposes of its opinion. CreditRe Corporation was not
requested to, and did not, prepare a current actuarial appraisal. In the opinion
of CreditRe Corporation, aside from the book value of the assets of ALIC and the
value of the state licenses held by ALIC, most, if not all, of the value of such
business relates to the Company's extended service contract business because the
Company's auto aftermarket credit life and disability insurance businesses have
little value in the current marketplace. The full text of CreditRe Corporation's
written opinion is attached hereto as Annex III and is incorporated herein by
reference. The Company's stockholders are urged to, and should, read this
opinion in its entirety.
In connection with its opinion, CreditRe Corporation's analysis was
limited to a review of the following: (i) the actuarial appraisals previously
prepared by CreditRe Corporation as of December 31, 1994 and June 30, 1995; (ii)
the results of the various consulting projects CreditRe Corporation had
previously undertaken for the Company subsequent to such appraisals; (iii) the
financial statements of the Company referenced above; (iv) information relating
to recent sales of credit related insurance lines of business by other insurers;
and (v) information concerning the Company's overall loss experience during the
periods covered by CreditRe Corporation's prior actuarial valuations and periods
subsequent thereto. Based solely on the foregoing information, CreditRe
Corporation determined that there had not been a material change in the
Company's overall loss experience since the prior valuations. Because a current
actuarial appraisal was not prepared, CreditRe's opinion is based on more
limited data
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and review than would be necessary to perform an actuarial appraisal that
conforms with Actuarial Standard of Practice No. 19.
As described above, CreditRe Corporation's opinion to the Board of
Directors of the Company was one of many factors taken into consideration by the
Board of Directors of the Company in making its determination to approve the
Agreements. CreditRe Corporation did not participate in the determination of the
amount of consideration to be paid to the Company. The foregoing summary sets
forth all material analyses performed by CreditRe Corporation , but is qualified
by reference to the written opinion of CreditRe Corporation set forth in Annex
III hereto.
CreditRe Corporation, as part of its actuarial consulting business, is
continually engaged in the valuation of insurance companies that participate in
the sale of credit-related insurance products. The Company selected CreditRe
Corporation to render a fairness opinion because it is a nationally recognized
actuarial consulting firm specializing in credit-related insurance that has
substantial experience in transactions similar to the Transaction. In addition,
CreditRe Corporation had previously performed valuations of the Company's
automobile aftermarket business as of December 31, 1994 and June 30, 1995, and
therefore, already possessed significant information regarding the Company's
operations. Since 1990, in addition to rendering its opinion in connection with
the Transaction, CreditRe Corporation has performed certain consulting services
for the Company in connection with various matters for which the Company paid
CreditRe Corporation a total of $128,000.
On or about October 1, 1997, the Company engaged CreditRe Corporation
to undertake a study to enable it to render its opinion with respect to the
fairness of the consideration to be received by the Company in a possible sale
of its auto aftermarket business to the Lyndon Group. The Company agreed to pay
CreditRe Corporation consulting fees for its services in rendering such opinion
at CreditRe Corporation's standard hourly rates. The total amount of such fees
was $9,700.
USE OF PROCEEDS
The Company will use the cash proceeds from the Transaction, which are
estimated to be approximately $40.5 million, to retire all of the outstanding
Senior Notes held by Lincoln National Life Insurance Company in the amount of
$15 million and to make a capital contribution to ANIC in an amount necessary to
increase its statutory capital and surplus (being approximately $13.1 million
(unaudited) at September 30, 1997) to at least $25 million. The Company will use
the balance of the proceeds for general corporate purposes.
OPERATIONS OF THE COMPANY AFTER THE TRANSACTION
Following consummation of the Transaction, (i) the Company's
stockholders will remain stockholders of the Company, (ii) ANIC's vehicle
extended service contract business will be owned by Lyndon Property and all of
the shares of capital stock of each of the Target Corporations will be owned by
Lyndon, (iii) the Company will cease to be engaged in the auto aftermarket
credit insurance and extended service contract businesses, and (iv) ANIC will
continue to be owned by the Company. The Company intends to use its remaining
resources to seek to develop and expand the business of ANIC. ANIC is the
Company's property and casualty insurance subsidiary which holds licenses to
conduct business in 47 states and the District of Columbia. In 1996, ANIC began
offering commercial automobile coverage to operators of long haul trucks and
charter buses. This program is marketed by an unaffiliated general agent with
extensive experience in this product line. In 1997, ANIC commenced new marketing
initiatives for certain products including a package policy for crane operators
consisting of general liability, inland marine and commercial auto coverages.
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FEDERAL INCOME TAX CONSEQUENCES
The consummation of the Transaction will not be a taxable event for
federal income tax purposes for the stockholders of the Company. The following
is a summary of federal income tax consequences to the Company of consummation
of the Transaction.
Pursuant to the Stock Acquisition Agreement, upon consummation of the
Transaction, (i) the Company will sell all of the stock of each of the Target
Corporations to Lyndon and (ii) the Company will join with Lyndon in the filing
of an election under Section 338(g) and Section 338(h)(10) of the Internal
Revenue Code of 1986, as amended (the "Code"), and any comparable election under
state, local or foreign tax law, to the extent requested by Lyndon. As a result
of these elections, the Transaction will be deemed to be a sale of the Company's
assets for federal income tax purposes with the Company being deemed to have
sold its assets while still a member of the Company's "affiliated group" (as
defined in the Code). Accordingly, the economic burden of taxation resulting
from the deemed asset sale by the Company will be borne by the Company. The
Company expects to pay federal income taxes of approximately $5.25 million as a
result of consummation of the Transaction. The amount of federal, state and
local taxes for which the Company will be liable as a result of the elections
under Sections 338(g) and 338(h)(10) of the Code (and any comparable elections
under state or local tax law) are anticipated to be higher than the amount of
taxes that would have been payable if the Company had sold all of the stock of
the Target Corporations without any such elections being made. The payment of
such additional taxes by the Company was considered by the parties in their
negotiations regarding the purchase price payable by Lyndon under the Stock
Acquisition Agreement.
The Company will recognize a taxable gain upon the consummation of the
Transaction but the stockholders will not recognize any gain or loss upon
consummation of the Transaction nor will such consummation result in any change
in the tax basis of the shares of Common Stock held by them.
ACCOUNTING TREATMENT
The Transaction will be treated by the Company as a disposal of a
segment of business within the meaning of Accounting Principles Board Opinion
No. 30. Accordingly, upon approval of the Transaction by the requisite vote of
the Company's stockholders (see "THE SPECIAL MEETING -- Voting at the Meeting;
Record Date"), the operating results of the Company's auto aftermarket credit
insurance business will be accounted for by the Company as discontinued
operations. See "UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS." The
Company expects to record a net gain of approximately $2.7 million on the
Transaction.
THE STOCK ACQUISITION AGREEMENT
The descriptions in this Proxy Statement of the terms of the Stock
Acquisition Agreement are summaries only and are qualified in their entirety by
reference to the Stock Acquisition Agreement which is attached as Annex I to
this Proxy Statement and is incorporated herein by reference. Terms which are
not otherwise defined in this summary have the meanings set forth in the Stock
Acquisition Agreement.
TERMS OF THE STOCK ACQUISITION AGREEMENT
Pursuant to the terms and conditions of the Stock Acquisition
Agreement, the Company will sell to Lyndon, for an aggregate purchase price,
subject to adjustment, of $30.2 million payable in cash upon the closing of the
transaction (the "Closing"), all of the capital stock of the Target
Corporations. Upon the Closing, Lyndon will own the Target Corporations and all
of their respective assets including all of ALIC's In-Force Business and all of
the licenses to conduct business presently held by ALIC in 40 states and the
District of Columbia. Within 125 days after the Closing, the initial purchase
price of $30.2 million which will be paid in cash at the Closing will be
decreased by the amount, if any, by which the combined GAAP stockholders' equity
of the Target Corporations as of December 31, 1997 is less than $31.6 million
or, alternatively, in the event that the Target Corporations' combined
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GAAP stockholders' equity as of December 31, 1997 is greater than $31.6 million,
the purchase price will be increased by the amount by which the Target
Corporations' combined GAAP stockholders' equity as of December 31, 1997 exceeds
$31.6 million. There is no limitation on the potential amount of such
adjustment. Accordingly, the exact amount of the consideration to be received by
the Company will not be known as of the date of the Special Meeting. As of
September 30, 1997, the combined GAAP stockholders' equity of the Target
Corporations was $32.185 million which would result in a net purchase price
under the Stock Acquisition Agreement of $30.785 million in the event that the
combined GAAP stockholders' equity does not change.
CLOSING; TERMINATION
The Stock Acquisition Agreement provides that the Closing shall occur
effective as of December 31, 1997 (the "Closing Date"). The actual Closing,
however, shall take place within five business days after the satisfaction or
waiver of the last condition to Closing, unless otherwise agreed by the parties,
and in no event later than March 31, 1998. See "-- Conditions to Consummation of
the Transactions Contemplated by the Stock Acquisition Agreement."
If the actual Closing does not occur by March 31, 1998, either party
may terminate the Stock Acquisition Agreement, without liability or penalty. See
"-- Tax Matters" for a discussion of the parties' obligations to reimburse each
other for Taxes related to timing differences between the deemed Closing Date
and the actual Closing Date for tax purposes.
REPRESENTATIONS AND WARRANTIES
The Stock Acquisition Agreement contains various customary
representations and warranties of the parties for transactions of this type.
These include, among other things, representations of the Company as to: (i) the
organization and good standing of each of the Target Corporations; (ii) the
authority of ALIC to transact business as an insurance company; (iii) the
capitalization of each of the Target Corporations; (iv) the nonexistence of any
subsidiaries of the Target Corporations; (v) the correctness and completeness of
the articles of incorporation, regulations, bylaws, stock transfer records,
minute books and corporate records of each of the Target Corporations delivered
to Lyndon; (vi) the obtainment of all consents, orders, licenses, approvals and
exemptions and the making of all governmental filings necessary for the Target
Corporations' consummation of the contemplated transactions; (vii) the
non-contravention of the performance of the Stock Acquisition Agreement with the
articles of incorporation, regulations, by-laws, material contracts and
agreements of the Target Corporations and with any material applicable laws,
judgments, orders or decrees; (viii) the accuracy of certain GAAP and SAP
financial statements of the Target Corporations; (ix) the ownership or lease of
real and personal property of the Target Corporations; (x) the intellectual
property of the Target Corporations; (xi) various tax matters relating to the
Target Corporations; (xii) compliance by the Target Corporations with material
applicable law; (xiii) the obtainment and holding by the Target Corporations of
all material permits and licenses necessary in the conduct of their respective
businesses; (xiv) the contracts, agreements and commitments of the Target
Corporations; (xv) certain pension plan and employee benefit matters of the
Target Corporations; (xvi) certain matters related to insurance policies owned
and maintained by the Target Corporations; (xvii) the accounts payable of the
Target Corporations; (xviii) the liabilities of the Target Corporations; (xix)
litigation involving or affecting the Target Corporations; (xx) matters relating
to the bank accounts, borrowing and payment guarantees of the Target
Corporations; (xxi) the premium sources of ALIC and ANSC; (xxii) the absence of
material adverse changes or events in the business of the Target Corporations;
(xxiii) matters related to the Target Corporations' employee relations; (xxiv)
matters related to transactions between the Company or any Target Corporation
and any of their respective Affiliates; (xxv) the absence of any brokers having
been retained by the Company in connection with the contemplated transactions;
(xxvi) the full and complete disclosure by the Company to Lyndon in connection
with the contemplated transactions; (xxvii) the employees of the Target
Corporations and their salaries and employment arrangements; (xxviii) the
authorization, execution and delivery of the Stock Acquisition Agreement by the
Company; and (xxviv) the Company's ownership of the capital stock of the Target
Corporations.
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The representations and warranties by Lyndon to the Company include,
among other things, representations of Lyndon as to: (a) the organization and
good standing of Lyndon Life Insurance Company and Lyndon Insurance Group, Inc.;
(b) the authorization, execution and delivery of the Stock Acquisition Agreement
by Lyndon Life Insurance Company and Lyndon Insurance Group, Inc., and the
validity and enforceability thereof against such corporations; (c) Lyndon's
purchase of the Target Shares for the purpose of investment only; (d) the
noncontravention of the execution, delivery and performance of the Stock
Acquisition Agreement by Lyndon Life Insurance Company and Lyndon Insurance
Group, Inc. with their respective certificates of incorporation, by-laws,
material contracts and agreements and with any material laws, judgments, orders
or decrees; (e) the availability of funds sufficient to enable Lyndon to
consummate the proposed sale; (f) required governmental or other consents,
approvals or authorizations; (g) the absence of actions, proceedings or claims
likely to materially affect Lyndon's ability to consummate the proposed sale;
and (h) the absence of any brokerage, finder's or other fee or commission
incurred by Lyndon.
For additional information concerning representations and warranties,
see "-- Survival of Representations and Warranties."
CONDUCT OF BUSINESS PRIOR TO CLOSING
The Company has agreed that, during the period from the date of the
Stock Acquisition Agreement until the Closing Date, the Company shall cause each
of the Target Corporations to conduct its business in the ordinary course
consistent with past practice and to: (i) maintain adequate insurance; (ii)
preserve intact its business organization and employees; (iii) maintain
satisfactory relationships with its independent agents, reinsurers and other
persons with which it has a business relationship; (iv) maintain its books and
records in its usual manner; (v) not make any change in its financial reporting
or accounting and reserving practices or policies; and (vi) duly and timely file
all filings, declarations, reports or returns required to be filed with all
government authorities and promptly pay all taxes, assessments and governmental
charges.
The Company has further agreed that, during such period prior to
Closing, none of the Target Corporations shall: (a) issue, sell or deliver, or
agree to issue, sell or deliver, any shares of its capital stock or any options
or other rights with respect thereto; (b) declare or pay any dividend (except
for the Special Distribution); (c) purchase, redeem or otherwise acquire any
shares of its capital stock; (d) make any change in any pension or employee
benefit plan or modify any employment agreements or arrangements; (e) incur or
guarantee any indebtedness for borrowed money; (f) make any capital expenditure
or purchase or lease any property in excess of $50,000; (g) dispose of or pledge
any assets or cancel any debts or claims except in the ordinary course of
business; (h) enter into any acquisitions, mergers or consolidations; (i) alter
the manner of keeping its books, accounts or records; (j) amend its articles of
incorporation, regulations or by-laws (except as otherwise contemplated in the
Stock Acquisition Agreement); (k) settle any claim, action, suit or proceeding
(other than the payment of insured claims in the ordinary course of business)
involving the payment or receipt by a Target Corporation of more than $25,000
individually, or $100,000 in the aggregate; (1) enter into any other transaction
or agreement outside of the ordinary and usual course of business; or (m) agree
or commit to do any of the foregoing.
In addition, the Company has agreed to: (i) afford Lyndon full access
to the offices, properties, books and records of the Company and each of the
Target Corporations and to furnish to Lyndon such financial and operating data
and other information relating to the Target Corporations as Lyndon may
reasonably request; (ii) promptly notify Lyndon of all material proposed
adjustments contained in any tax examination reports received by the Company;
(iii) promptly prepare, file and diligently pursue with the appropriate
governmental agencies all documentation required to consummate the transactions
contemplated by the Stock Acquisition Agreement; (iv) cause certain forms of
non-piracy agreements attached to the Stock Acquisition Agreement to be
distributed to all of the Target Corporations' employees for execution by such
employees; (v) use its reasonable best efforts to cause all of the conditions to
Lyndon's obligation to consummate the Transaction to be satisfied; (vi)
terminate (or, at the Company's election, employ), at the Company's expense, any
employees of the Target Corporations not designated by Lyndon prior to the
Closing for continued employment by Lyndon or one of the Target Corporations
following the Closing; and (viii)
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diligently work towards the completion of the Year 2000 work and other clean-up
work on the Credit Life System prior to Closing and, thereafter, to continue
such work until completion at the Company's expense.
NO "SHOPPING" COVENANT; BREAK-UP FEE
Until the earlier of the Closing or the termination of the Stock
Acquisition Agreement, the Company has agreed not to: (i) sell or arrange for
the acquisition of any capital stock or any other security of, or the business
or all or any substantial portion of, the assets of any of the Target
Corporations; (ii) negotiate, solicit or encourage any proposals relating to the
disposition of the business or assets of any of the Target Corporations, to the
acquisition of securities of any of the Target Corporations, or to a merger or
combination of any of the Target Corporations with any other Person; or (iii)
make available to any other Person any information concerning any of the Target
Corporations for the purpose of disposing of all or any substantial portion of
the assets of any of the Target Corporations or any securities thereof.
Notwithstanding the foregoing, the Company may furnish information to,
and participate in discussions or negotiations with, any third party who submits
a good faith, unsolicited purchase offer to acquire the Target Corporations, if
the Company's Board of Directors determines in good faith, after consulting with
legal counsel, that such furnishing of information and participation in
discussions are required in the exercise of the Board of Directors' fiduciary
duties under applicable law. The Company will be entitled to execute a
definitive agreement with such a third party relating to the acquisition
proposal of such third party and to terminate the Stock Acquisition Agreement so
long as the Company pays Lyndon a fee of $750,000.
COVENANTS OF LYNDON
Lyndon has agreed to: (i) keep confidential all information provided by
the Company and the Target Corporations to Lyndon and its agents; (ii) promptly
prepare and file all documents to obtain state regulatory approvals and use all
reasonable efforts to obtain such regulatory approvals as are necessary to
consummate the transactions contemplated by the Stock Acquisition Agreement; and
(iii) use its reasonable best efforts to cause all of the conditions to the
Company's obligation to consummate the transaction to be satisfied.
EMPLOYEE BENEFIT PLANS
The Company and Lyndon have each agreed to cooperate in causing such
actions to be taken as of the Closing Date as would result in the Target
Corporations to cease to be participating employers as of the Closing Date in
the Company's and its ERISA Affiliate's Employee Benefit Plans in accordance
with the requirements of ERISA. The Company and Lyndon have further agreed that,
except for the Target Corporations' post-Closing Date contributions (and
liabilities therefor) to such Employee Benefit Plans for the time periods
preceding the Closing Date, none of the Target Corporations shall thereafter be
responsible for making any contributions to, or have any other liability with
respect to, such Employee Benefit Plans.
CONDITIONS TO CONSUMMATION OF THE TRANSACTIONS CONTEMPLATED BY THE STOCK
ACQUISITION AGREEMENT
The obligation of Lyndon to consummate the transactions contemplated by
the Stock Acquisition Agreement is subject to the satisfaction or waiver by
Lyndon of certain conditions, including, without limitation, the following: (i)
all representations and warranties of the Company shall be true and correct in
all material respects as of the Closing Date; (ii) the Company shall have
performed and complied with all of the covenants and agreements required to be
performed or complied with by the Company; (iii) as of the Closing, there shall
not be any pending or threatened suit, action, investigation, proceeding or
court order relating to the contemplated transactions; (iv) all governmental
authorities shall have consented to and approved the contemplated transactions
to the extent required by law; (v) all documents delivered and action taken
pursuant to the Stock Acquisition Agreement shall be reasonably satisfactory in
form and substance to Lyndon and its counsel; (vi) the ALIC, Dublin and ANSC
unaudited September 30, 1997 GAAP Financial Statements and the unaudited ALIC
September 30, 1997 SAP Financial Statements shall
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<PAGE> 21
have been delivered to Lyndon at least fifteen days prior to the Closing Date,
and in no event later than November 30, 1997; (vii) the Company's Board of
Directors and stockholders shall have approved the Agreements; (viii) all of the
independent agents of the Target Corporations shall have agreed to maintain
their relationships with such corporations following the Closing unless the
Company notifies Lyndon of any indication otherwise; (ix) Lyndon shall be
satisfied with the results of its due diligence review with respect to certain
matters relating to Dublin and the assets being purchased pursuant to the Asset
Purchase Agreement, and the unaudited September 30, 1997 GAAP Financial
Statements of each of the Target Corporations shall indicate no material adverse
change in the results of operations or financial condition of such companies
taken as a whole from the June 30, 1997 unaudited financial statements
previously provided to Lyndon; (x) the Company and the Target Corporations shall
have conveyed to Lyndon all of their rights to the servicemarks "Costguard" and
"Loanguard" and shall have granted to Lyndon a license to use the "Acceleration"
name and logo in connection with their respective businesses; (xi) the Target
Corporation's combined GAAP Equity shall be not less than $31.6 million at
December 31, 1997; (xii) all intercompany service agreements and tax sharing
agreements between any of the Target Corporations and the Company shall have
been terminated; (xiii) the Lincoln National Life Insurance Company treaty for
reinsurance policies with effective dates of December 31, 1995 and prior shall
have been terminated; (xiv) the articles of incorporation and regulations of
ALIC shall have been amended to eliminate the provisions requiring director
share ownership and Ohio residential requirements; (xv) the Company shall have
entered into a Systems Use Agreement with the Target Corporations pursuant to
which the Target Corporations shall be entitled to utilize the IBM AS 400 system
of the Company as the Target Corporations' mainframe computer and programming
support; (xvi) the Lincoln National Life Insurance Company Reinsurance Agreement
with ALIC dated January 1, 1996, reinsuring policies with effective dates of
January 1, 1996 and thereafter, shall not have been terminated; (xvii) ALIC
shall have entered into a lease for the premises located in Dublin, Ohio which
it currently leases on terms comparable to its current lease for the remaining
term of the current lease, in form and substance acceptable to Lyndon; (xviii)
the Company shall have assumed the obligations of ALIC and ANSC to indemnify
their respective officers; (xix) the Company shall have agreed to provide
continued cooperation after Closing on any litigation matters relating to any of
the Target Corporations; (xx) the waiting period applicable under the HSR Act
shall have expired or been terminated; and (xxi) the transactions contemplated
by the Asset Purchase Agreement shall have closed concurrently with the
transactions contemplated by the Stock Acquisition Agreement. See "ASSET
PURCHASE AGREEMENT."
The obligation of the Company to consummate the transactions
contemplated by the Stock Acquisition Agreement is subject to the satisfaction
or waiver by Lyndon of certain conditions, including, without limitation, the
following: (i) all representations and warranties of Lyndon shall be true and
correct in all material respects as of the Closing Date; (ii) Lyndon shall have
performed and complied with all of the covenants and agreements required to be
performed or complied with by Lyndon; (iii) as of the Closing, there shall not
be any pending or threatened suit, action, investigation, proceeding or court
order relating to the contemplated transactions; (iv) all governmental
authorities shall have consented to and approved the contemplated transactions
to the extent required by law; (v) all documents delivered and action taken
pursuant to the Stock Acquisition Agreement shall be reasonably satisfactory in
form and substance to the Company and its counsel; (vi) the waiting period
applicable under the HSR Act shall have expired or been terminated; and (vii)
the transactions contemplated by the Asset Purchase Agreement shall have closed
concurrently with the transactions contemplated by the Stock Acquisition
Agreement. See "ASSET PURCHASE AGREEMENT."
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
In general, the representations and warranties contained in the Stock
Acquisition Agreement shall survive the Closing until December 31, 1999.
However, Lyndon shall be permitted to make claims against the Company with
respect to Taxes until 60 days following the expiration of the applicable
statute of limitations (See "-- Tax Matters") and to assert claims based on
fraud, willful misrepresentation or with respect to certain representations and
warranties set forth in the agreement relating to the capitalization of the
Target Corporations and the Company's ownership of all of the Target Shares,
free and clear of all Liens, within one year after Lyndon learns of such fraud,
willful misrepresentation or breach.
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<PAGE> 22
COVENANT NOT TO COMPETE
The Company has agreed for a period of three years from the Closing
Date not to, and to cause each of its controlled affiliates not to, directly or
indirectly: (i) engage in activities or businesses which are substantially in
competition with the current business of the Target Corporations; or (ii)
perform any action, activity or course of conduct which is substantially
detrimental to the business or business reputation of the Target Corporations,
including soliciting, recruiting or hiring any employees of any of the Target
Corporations and soliciting or encouraging any employee of any of the Target
Corporations to leave the employment of any of the Target Corporations.
INDEMNIFICATION
The Company has agreed to indemnify and hold harmless Lyndon from and
against all losses, liabilities, damages, obligations, costs and expenses
("Damages") in excess of $100,000 incurred by Lyndon relating to or arising out
of the inaccuracy of any representation or warranty in the Stock Acquisition
Agreement by the Company or the breach of any covenant by the Company. The
Company will not be liable for any such indemnification unless the aggregate
amount of all Damages exceeds $100,000 and then only to the extent of any such
excess, except for indemnification against certain Damages with respect to
certain Taxes and related matters for which the Company shall indemnify and hold
harmless Lyndon and its affiliates (including the Target Corporations) from
liability from the first dollar or any such Damages to the full amount thereof
(except as reflected on the Combined Audited December 31, 1997 Balance Sheet).
See "-- Tax Matters." The Company's and ANIC's liability to indemnify Lyndon and
Lyndon Property under the Agreements is limited to a maximum amount of $8
million, except that there is no limitation on indemnification for (i) Taxes,
(ii) breaches of certain representations and warranties relating to the
capitalization of the Target Corporations and the Company's ownership of all of
the Target Shares, free and clear of all Liens, and (iii) actual fraud by the
Company or ANIC.
Lyndon has agreed to indemnify and hold harmless the Company from and
against any and all Damages incurred by the Company resulting from, relating to
or arising out of the inaccuracy of any representation or warranty in the Stock
Acquisition Agreement by Lyndon or the breach of any covenant contained therein
by Lyndon. In addition, Lyndon has agreed to indemnify and hold harmless, and
cause the Target Corporations to indemnify and hold harmless, the Company and
its affiliates with respect to certain Taxes and related matters. See "-- Tax
Matters." The liability of Lyndon to indemnify the Company under the Agreements
is limited to a maximum amount of $8 million.
TAX MATTERS
Lyndon has agreed to: (i) timely make an election under Section 338(g)
of the Code (and any comparable election under state or local tax law) with
respect to each of the Target Corporations; (ii) join with the Company in timely
making an election under Section 338(h)(10) of the Code (and any comparable
election under state or local tax law); and (iii) cooperate with the Company in
the completion and timely filing of such elections. Not later than three months
following the Closing Date, Lyndon shall prepare and deliver to the Company a
Price Allocation Schedule allocating the modified ADSP (as such term is defined
in Treasury Regulations Section 1.338(h)(10)-1) among the assets of the Target
Corporations in accordance with Treasury Regulations promulgated under Section
338(h)(10)-1.
Any objection by the Company to the Price Allocation Schedule prepared
by Lyndon shall be raised within 60 business days after receipt by the Company
of the Price Allocation Schedule. If Lyndon and the Company are unable to
resolve any differences within 60 days thereafter, such dispute shall be
resolved by Ernst & Young LLP and KPMG Peat Marwick LLP. If such accounting
firms are unable to resolve any differences within 30 days thereafter, such
dispute shall be resolved by another national accounting firm selected by Ernst
& Young LLP and KPMG Peat Marwick LLP which has not performed any services for
or received any revenues from either of such parties or their respective
affiliates within the prior two years. Lyndon and the Company shall each pay
one-half of the costs, fees and expenses of said accounting firm.
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<PAGE> 23
The Company has agreed to timely prepare and file with the appropriate
authorities all tax returns of the Target Corporations that are required to be
filed for the tax periods ending prior to the Closing Date, and the Company has
agreed to pay all taxes due with respect to such tax returns. Lyndon has agreed
to timely prepare and file all other tax returns of the Target Corporations that
are required to be filed, and Lyndon will pay all taxes due with respect to such
tax returns. All transfers, documentary, sales, use, registration and other such
Taxes and related fees incurred in connection with the Stock Acquisition
Agreement and the transactions contemplated thereby shall be paid by the
Company. The Company and Lyndon will cooperate in timely making all filings,
returns, reports and forms as may be required to comply with the provisions of
applicable tax laws.
The parties have agreed that for all financial purposes the Closing
shall be deemed to occur on December 31, 1997, notwithstanding the actual
Closing Date. See "-- Closing; Termination." Accordingly, any profit or loss
incurred by the Target Corporations on or prior to December 31, 1997 shall
remain for the account of the Company and any profit or loss incurred by the
Target Corporations after such date shall be for the account of Lyndon. The
parties have agreed to reimburse each other for the amount of any Taxes actually
paid by the other party solely as a function of the timing difference of the
deemed Closing Date of December 31, 1997 and the actual Closing Date for tax
purposes.
The Company has agreed to indemnify and hold harmless from liability
Lyndon and its affiliates for all Damages (except as reflected on the Combined
Audited December 31, 1997 Balance Sheet) incurred in connection with: (i) Taxes
of the Target Corporations for the Pre-Closing Tax Period; (ii) Taxes of the
Company or any other corporation which is or has been affiliated with the
Company; (iii) Taxes resulting from the Section 338(g) and 338(h)(10) elections
contemplated by Section 12.1 of the Stock Acquisition Agreement; (iv) Taxes with
respect to any pre-closing period resulting from the Target Corporations'
ceasing to be included in the consolidated Federal income tax return filed by
the Company; (v) Taxes imposed on the Target Corporations on or prior to the
Closing Date; and (vi) reasonable legal fees and expenses for any item
attributable to any of the foregoing items. Notwithstanding the foregoing, the
Company shall not be obligated to indemnify and hold harmless Lyndon and its
affiliates from Taxes attributable to any action taken after the Closing by
Lyndon or its affiliates (a "Lyndon Tax Act") or attributable to a breach by
Lyndon of its obligations under the Stock Acquisition Agreement.
Lyndon has agreed to indemnify and hold harmless, and to cause the
Target Corporations to indemnify and hold harmless, the Company and its
affiliates from: (a) all liability for taxes of the Target Corporations for the
period after the Closing Date; (b) all liability for taxes attributable to a
Lyndon Tax Act or to a breach by Lyndon of its obligations under the Stock
Acquisition Agreement; and (c) all liability for reasonable legal fees and
expenses attributable to any of the foregoing items.
AMENDMENT; WAIVER
The Stock Acquisition Agreement may be amended at any time by written
agreement of the parties and the conditions to the consummation of the
contemplated transactions may be waived at any time by the party for whose
benefit they were created.
EXPENSES; LIQUIDATED DAMAGES
The Stock Acquisition Agreement provides that each of the parties shall
pay its own expenses incident to the preparation and execution of the Stock
Acquisition Agreement and the consummation of the transactions contemplated
thereby. However, if the Closing does not occur as a result of an intentional
material breach of a covenant of the Company which prevents satisfaction of a
Closing condition, then the Company shall pay Lyndon the sum of $650,000 as
liquidated damages.
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<PAGE> 24
ASSET PURCHASE AGREEMENT
The descriptions in this Proxy Statement of the terms of the Asset
Purchase Agreement are summaries only and are qualified in their entirety by
reference to the Asset Purchase Agreement which is attached as Annex II to this
Proxy Statement and is incorporated herein by reference. Terms which are not
otherwise defined in this summary have the meanings set forth in the Asset
Purchase Agreement.
PURCHASE PRICE AND ACQUIRED ASSETS
Pursuant to the terms and conditions of the Asset Purchase Agreement,
ANIC will sell to Lyndon Property, for an aggregate purchase price of $10.3
million payable in cash on the Closing Date, certain of the assets of ANIC which
comprise all of its vehicle extended service contract (or "warranty") book of
business (the "Acquired Assets"). The Acquired Assets will include: (i) all of
ANIC's rights to and interest in the expirations and renewals on all insurance
policies in force as of the Closing Date issued and insured by ANIC covering
extended service contract warranties (subject to all of the related obligations)
(the "Acquired Policies"); (ii) all expiration files, customer account records
and underwriting, claims and processing manuals related to the Acquired
Policies; (iii) all rights (subject to the related obligations), under the
contracts and commitments related to the Acquired Assets; (iv) all rights to and
interest in (subject to the related obligations with respect to) certain
computer hardware and any software used in ANIC's operation of its warranty book
of business; (v) certain furniture, fixtures and equipment; and (vi) copies of
all policy forms, rate filings related to such policy forms, and all other
regulatory filings related to the Acquired Policies.
REINSURANCE AGREEMENTS AND LIABILITIES ASSUMED
Pursuant to the Asset Purchase Agreement, Lyndon Property and ANIC will
enter into two reinsurance agreements pursuant to which ANIC will cede to Lyndon
Property and Lyndon Property will assume and reinsure the Acquired Policies and
all insurance policies issued after the Closing Date by Lyndon Property in the
name of ANIC or on ANIC's forms. Except to the extent set forth in the
Reinsurance Agreements, Lyndon Property will not be liable for any debt,
obligations or liability of ANIC relating to the Acquired Assets.
CLOSING
The Closing for the transactions contemplated by the Asset Purchase
Agreement will take place effective as of December 31, 1997, as long as the Ohio
Department of Insurance has approved the transactions contemplated by the Asset
Purchase Agreement. The Closing shall occur concurrently with, and shall be
conditional upon, the Closing of the transactions contemplated by the Stock
Acquisition Agreement.
REPRESENTATIONS AND WARRANTIES
The Asset Purchase Agreement includes representations of the Company
and ANIC as to: (i) the organization and good standing of ANIC and its
qualifications to do business as a foreign corporation; (ii) the authorization,
execution and delivery of the Asset Purchase Agreement by the Company and ANIC;
(iii) the absence of any consents, orders, licenses, approvals, authorizations,
exemptions, registrations, declarations or filings with any governmental
authority or person which are required to be obtained or made in connection with
the performance by the Company or ANIC of the Asset Purchase Agreement, except
for the approval of the Ohio Department of Insurance; (iv) ANIC's title to the
Acquired Assets; (v) the non-contravention of the consummation of the
transactions contemplated by the agreement with the articles of incorporation,
regulations, material contracts and agreements of ANIC and with any applicable
laws, judgments, orders or decrees; (vi) the absence of any violations by ANIC
of any applicable law, rule or regulation which could materially and adversely
affect the Acquired Assets; (vii) the obtainment by ANIC and continuing validity
of all Permits that are material or necessary with respect to ANIC's operations
of any of the Acquired Assets; (viii) material litigation involving or affecting
the Acquired Assets; (ix) the employees of ANIC engaged in the operation of
ANIC's warranty book of business and their compensation
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<PAGE> 25
and employment arrangements; (x) the absence of any brokers having been retained
by the Company or ANIC in connection with the transaction; (xi) the sufficiency
of the Acquired Assets, together with the assets owned by the Target
Corporations, for the conduct of ANIC's warranty book of business by Lyndon
Property and the conduct of the Target Corporations' respective business; and
(xii) the absence of any reason for the Company and ANIC to believe that the
Acquired Policies will be terminated before their stated expiration dates,
except in the ordinary course, or will not be renewed.
The representations and warranties by Lyndon Property to the Company
and ANIC include, among other things, representations of Lyndon Property as to:
(a) its organization and good standing; (b) the authorization, execution and
delivery of the Asset Purchase Agreement by Lyndon Property and the validity and
enforceability thereof against Lyndon Property; and (c) the noncontravention of
the execution, delivery and performance of the Asset Purchase Agreement by
Lyndon Property with its certificate of incorporation, by-laws and agreements.
ADDITIONAL AGREEMENTS OF THE COMPANY, ANIC AND LYNDON PROPERTY
During the period from the date of the Asset Purchase Agreement until
the Closing Date, ANIC has agreed to carry on its warranty insurance business in
the usual, regular and ordinary course, and the Company has agreed to cause ANIC
to maintain in force its current stop loss reinsurance program, at Lyndon
Property's expense, after the Closing Date. In addition, ANIC has agreed to
complete prior to May 1, 1998 the following work related to its Cost Guard
Service Contract System: (i) the resolution of all "Year 2000" issues; (ii)
system clean up; (iii) construction of a redesigned rate system module and a
laser check system module; and (iv) an on-line claims update.
ANIC has granted Lyndon Property the right and authority to utilize
ANIC's forms and to place insurance policies in the name of ANIC in each of the
states in which ANIC is currently licensed to do business for a maximum of
eighteen months following the Closing Date ("New Business"). All such New
Business written by Lyndon Property utilizing ANIC's forms or issued in ANIC's
name shall be automatically reinsured by Lyndon Property under the Reinsurance
Agreements, and Lyndon Property shall indemnify ANIC and hold ANIC harmless from
and against all liability arising under such New Business. See "--- Reinsurance
Agreements and Liabilities Assumed."
After the Closing, ANIC has agreed to provide Lyndon Property with
reasonable assistance in litigating claims arising under any Acquired Policies,
subject to the payment by Lyndon Property to ANIC of reasonable compensation for
any depositions or testimony given by ANIC personnel.
In the event that the Internal Revenue Service ("IRS") takes the
position that the Acquired Assets constitute a "trade or business" within the
meaning of Code Section 1060 and requires Lyndon Property and the Company to
prepare and file a Form 8594 with the IRS, Lyndon and the Company have agreed to
cooperate in determining the allocation of the Purchase Price among the Acquired
Assets.
COVENANT NOT TO COMPETE
The Company and ANIC have agreed that, during the three year period
following the Closing Date, they each will not, without the prior written
consent of Lyndon Property, directly or indirectly, sell, underwrite, place or
write warranty insurance policies or solicit, accept or place for itself and/or
any other entity, any warranty insurance business from existing customers of
ANIC.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES
In general, the representations and warranties contained in the Asset
Purchase Agreement shall survive the Closing for a period of two years. However,
each party shall be permitted to make claims against the other party based on
fraud or willful misrepresentation at any time within one year after the party
learns of such fraud or willful misrepresentation. In addition, claims for
indemnification under the agreement shall survive the second anniversary
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<PAGE> 26
of the Closing Date if prior to such date the party seeking indemnification in
good faith gives notice to the other party of the specific inaccuracy or breach
giving rise to such claim for indemnification.
INDEMNIFICATION
The Company and ANIC each have agreed to indemnify, defend and hold
harmless Lyndon Property, its officers, directors, employees and agents from and
against all losses, fines, civil penalties, judgments, claims, damages,
liabilities or expenses (including reasonable attorneys' fees) of every kind in
excess of $100,000 in the aggregate (including any such damages incurred by
Lyndon under the Stock Acquisition Agreement) imposed upon, incurred or paid by
Lyndon Property by reason of the breach by the Company and ANIC of any
representation and warranty made by the Company and ANIC in the Asset Purchase
Agreement or, except as otherwise provided in the Reinsurance Agreements, any
losses under the Acquired Policies. The liability of the Company and ANIC to
indemnify Lyndon under the Asset Purchase Agreement is subject to the same $8
million limitation set forth in the Stock Acquisition Agreement. See "STOCK
ACQUISITION AGREEMENT -- Indemnification."
Lyndon Property has agreed to indemnify, defend and hold harmless the
Company and ANIC from and against all losses, fines, civil penalties, judgments,
claims, damages, liabilities or expenses (including reasonable attorneys' fees)
of every kind imposed upon, incurred or paid by the Company and ANIC by reason
of (i) the breach by Lyndon Property of any representation and warranty made by
it in the Asset Purchase Agreement or (ii) any claims made against ANIC relating
to the Acquired Policies or the New Business other than for losses under the
Acquired Policies (except as otherwise provided in the Reinsurance Agreements)
or arising out of or relating in any way to the conduct of the warranty book of
business being acquired by Lyndon Property on and after the Closing Date. The
liability of Lyndon Property to indemnify the Company under the Agreements is
limited to a maximum amount of $8 million.
Claims for indemnification under the Asset Purchase Agreement must be
asserted prior to the second anniversary of the Closing Date, except for claims
by Lyndon Property related to the breach by the Company and ANIC of their
representations and warranties concerning ANIC's title to the Acquired Assets.
See "-- Survival of Representations and Warranties."
AMENDMENT; WAIVER
The Asset Purchase Agreement may be amended at any time by written
agreement of the parties and the conditions to the consummation of the
contemplated transactions may be waived at any time by the party for whose
benefit they were created.
EXPENSES
The Asset Purchase Agreement provides that each of the parties shall
pay its own expenses incident to the preparation and execution of the Asset
Purchase Agreement and the consummation of the transactions contemplated
thereby.
REGULATORY APPROVALS REQUIRED
The Transaction is subject to the approval of the Ohio and Missouri
Departments of Insurance and to the expiration of or termination of the
applicable waiting period under the HSR Act. Certain aspects of the Transaction
will require notifications to, and filings with, certain authorities in certain
states in jurisdictions where ALIC currently operates.
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<PAGE> 27
OHIO DEPARTMENT OF INSURANCE
As an Ohio chartered life insurance company, ALIC is subject to the
provisions of the Ohio Revised Code. Section 3901.321 of the Ohio Revised Code
provides that a person may acquire control of an Ohio insurance company only if
the acquisition of control is submitted to and receives advance approval from
the Ohio Superintendent of Insurance (the "Ohio Superintendent"). Section
3901.321(F)(1) provides that the Ohio Superintendent may disapprove any such
acquisition of control, after a public hearing, for any of the following
reasons: (i) after the change of control, the insurer would not be able to
satisfy the requirements for the issuance of a license to write the line or
lines of insurance for which it is presently licensed; (ii) the effect thereof
would be substantially to lessen competition in insurance in Ohio or tend to
create a monopoly therein; (iii) the financial condition of any acquiring party
is such as might jeopardize the financial stability of the insurer, or prejudice
the interests of its policyholders; (iv) the plans or proposals of the acquiring
party to make changes in the insurer's business or corporate structure or
management are unfair and unreasonable to policyholders of the insurer and not
in the public interest; (v) the competence, experience and integrity of those
persons who would control the operation of the insurer are such that it would
not be in the interest of policyholders of the insurer and of the public to
permit the acquisition of control; or (vi) the acquisition is likely to be
hazardous or prejudicial to the insurance-buying public.
Lyndon has submitted an application to the Ohio Superintendent seeking
approval of the Transaction. The application is pending before the Ohio
Superintendent and the Company expects to receive soon a formal order approving
the transaction.
MISSOURI DEPARTMENT OF INSURANCE
As a Missouri chartered insurance company, Lyndon is subject to the
provisions of the Revised Statutes of the State of Missouri. Section 375.355 of
the Missouri Revised Statutes provides that a Missouri chartered insurance
company may acquire control of another insurance company only if the acquisition
of control is submitted to and receives advance approval from the Missouri
Director of Insurance (the "Missouri Director") after notice thereof to the
stockholders of the acquiring insurance company and a public hearing thereon.
Section 375.355 provides that the Missouri Director may disapprove any such
acquisition of control for any of the following reasons: (i) the interests of
the policyholders of the company are not protected; (ii) a reasonable objection
exists as to the acquisition; or (iii) the acquisition will tend to
substantially lessen competition or create a monopoly.
Lyndon has submitted an application to the Missouri Director seeking
approval of the Transaction. The application is pending before the Missouri
Director and a hearing was held on December 4, 1997. The Company has no reason
to believe that the Missouri Director will not approve the Transaction.
HSR ACT AND ANTITRUST
Under the HSR Act and the rules promulgated thereunder by the Federal
Trade Commission (the "FTC"), the Transaction may not be consummated until
notifications have been given and certain information has been furnished to the
FTC and the Antitrust Division of the Department of Justice (the "DOJ") and the
applicable waiting period has expired or been terminated. The Company and
Frontier filed notification and report forms under the HSR Act with the FTC and
the DOJ on October 31, 1997. The waiting period was terminated early by the FTC
and the DOJ effective as of November 18, 1997. At any time before or after
consummation of the Transaction, the FTC or the DOJ could take such action under
the antitrust laws as it deems necessary or desirable in the public interest,
including seeking to enjoin the consummation of the Transaction. At any time
before or after the Closing Date, and notwithstanding that the waiting period
under the HSR Act has expired, any state could take such action under the
antitrust laws as it deems necessary or desirable in the public interest. Such
action could include seeking to enjoin the consummation of the Transaction.
Private parties may also seek to take legal action under the antitrust laws
under certain circumstances.
-21-
<PAGE> 28
Based on information available to it, the Company believes that the
Transaction can be effected in compliance with Federal and state antitrust laws.
However, there can be no assurance that a challenge to the consummation of the
Transaction on antitrust grounds will not be made or that, if such a challenge
were made, the Company would prevail or would not be required to accept certain
adverse conditions in order to consummate the Transaction. The expiration or
termination of the HSR Act waiting period is a condition to the closing of the
Transaction. See "STOCK ACQUISITION AGREEMENT -- Conditions to Consummation of
the Transactions."
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
INTRODUCTION
The following unaudited pro forma consolidated financial statements are
based on the Company's Consolidated Financial Statements. The unaudited pro
forma consolidated balance sheet is based on the September 30, 1997 unaudited
consolidated balance sheet of the Company , which is included elsewhere in this
Proxy Statement, and assumes that the Transaction was consummated on September
30, 1997. The unaudited pro forma consolidated statement of income for the nine
months ended September 30, 1997 is based on the unaudited consolidated statement
of income for the nine months ended September 30, 1997, which is included
elsewhere in this Proxy Statement, and assumes that the Transaction was
consummated on January 1, 1996. The unaudited pro forma consolidated statement
of income for the year ended December 31, 1996 is based on the consolidated
statement of income for the year ended December 31, 1996 , which is included
elsewhere in this Proxy Statement, and assumes that the Transaction was
consummated on January 1, 1996. The unaudited pro forma consolidated financial
statements and related notes should be read in conjunction with the Company's
Consolidated Financial Statements and the notes thereto included elsewhere in
this Proxy Statement.
The unaudited pro forma consolidated financial statements of the
Company do not purport to represent what the consolidated financial position or
results of operations of the Company would have been if the Transaction had in
fact been consummated on such dates or at the beginning of such periods or to
project the financial position or results of operations for any future date or
period. The pro forma adjustments are based upon available information and upon
certain assumptions that the Company's management believes are reasonable under
the circumstances.
The Company has not provided pro forma income statements for 1994 and
1995 giving effect to the Transaction because the Company's management believes
that the companies and business being sold essentially represent the Company's
material lines of business and related operating results during those periods,
except for the charge to operations of $4.034 million in 1994 for the operating
losses related to and the write-off of the Company's investment in Randjill
Group Ltd, which was deconsolidated as of April 1, 1994 and adverse experience
related to discontinued property/casualty product lines of $3.025 million and
$2.45 million in 1994 and 1995, respectively. The remaining lines of business in
1994 and 1995 were discontinued and were either not material to the Company's
operations or were reinsured by the Company to third parties.
The companies being sold pursuant to the Stock Acquisition Agreement
will be presented as discontinued operations in the Company's consolidated
financial statements as of December 31, 1997. See "The Transaction -- Accounting
Treatment." The financial results for these companies have not previously been
presented as discontinued operations. For the reasons described above, the
Company's management believes the following pro forma financial information,
when read in conjunction with the Company's historical financial statements
included herein, provides the same information in all material respects that
would otherwise be included in pro forma statements of income for this
discontinued business.
The business being sold pursuant to the Asset Purchase Agreement is a
part of the Property/Casualty segment (See Note J to the 1996 consolidated
financial statements included herein) and, as such, will not be treated as
discontinued operations in the Company's consolidated financial statements as of
December 31, 1997.
-22-
<PAGE> 29
In addition, the Company's management believes the following pro forma
financial information, when read in conjunction with the historical financial
statements included herein, provides the Stockholders with the most relevant
impact of the Transaction. The presentation of separate disaggregated financial
statements of the companies and business being sold would provide no substantive
additional information that is not already presented in the accompanying pro
forma financial statements, the historical financial statements and Note J to
the 1996 consolidated financial statements included herein.
-23-
<PAGE> 30
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ASSETS REF.
AS REPORTED ADJUSTMENTS NO. PRO FORMA
----------- ----------- --- ---------
(Thousands of dollars)
<S> <C> <C> <C> <C>
INVESTMENTS:
INVESTMENTS AVAILABLE FOR SALE
FIXED MATURITIES $ 49,796 $ 29,247 1. $ 20,549
EQUITY SECURITIES 6,126 6,126 1. --
SHORT TERM INVESTMENTS 19,958 11,641 1. 8,317
OTHER INVESTED ASSETS 306 306 1. --
--------- --------- -------
76,186 47,320 28,866
CASH 1,113 (16,323) 2. 17,436
RECEIVABLES:
PREMIUMS IN PROCESS OF TRANSMITTAL 10,355 1,941 1. 8,414
AMOUNTS DUE FROM REINSURERS, LESS ALLOWANCE 28,362 17,508 1. 10,854
RECOVERABLE FEDERAL INCOME TAXES 129 129 5. --
--------- --------- -------
38,846 19,578 19,266
ACCRUED INVESTMENT INCOME 644 398 1. 246
PREPAID REINSURANCE PREMIUMS 19,448 12,076 1. 7,372
REINSURANCE PREMIUM DEPOSITS 26,710 26,710 1. --
DEFERRED POLICY ACQUISITION COSTS 30,362 27,784 1. 2,578
FURNITURE, FIXTURES, & EQUIPMENT-NET 662 406 1. 256
LEASEHOLD IMPROVEMENTS 138 84 1. 54
OTHER ASSETS:
COST IN EXCESS OF EQUITY 657 657 3. --
FUNDS HELD UNDER REINSURANCE TREATIES 6,036 6,036 1. --
OTHER 729 461 1. 268
--------- --------- -------
7,422 7,154 268
--------- --------- -------
$ 201,531 $ 125,187 $76,344
========= ========= =======
</TABLE>
-24-
<PAGE> 31
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
REF.
AS REPORTED ADJUSTMENTS NO. PRO FORMA
(Thousands of dollars)
<S> <C> <C> <C> <C>
LIABILITIES & COMMON STOCKHOLDERS' EQUITY
POLICY RESERVES AND LIABILITIES:
UNEARNED PREMIUM RESERVES $ 83,980 $ 70,616 1. $ 13,364
INSURANCE CLAIMS 26,884 14,117 1. 12,767
OTHER 5 5 1. ---
---------- ---------- --------
110,869 84,738 26,131
OTHER LIABILITIES:
FUNDS HELD UNDER REINSURANCE AGREEMENTS 2,940 2,475 1. 465
DEFERRED REINSURANCE COMMISSIONS 14,537 13,046 1. 1,491
AMOUNTS DUE REINSURERS 12,625 5,359 1. 7,266
NOTES PAYABLE 15,000 15,000 4. ---
COMMISSIONS PAYABLE 5,550 5,550 1. ---
ACCOUNTS PAYABLE & OTHER LIABILITIES 2,655 1,445 1. 1,210
FEDERAL INCOME TAXES:
CURRENT --- (5,255) 5. 5,255
DEFERRED 4,089 4,089 5. ---
---------- ---------- --------
57,396 41,709 15,687
---------- ---------- --------
168,265 126,447 41,818
---------- ---------- --------
COMMON STOCKHOLDERS' EQUITY:
COMMON STOCK 941 --- 941
ADDITIONAL PAID-IN CAPITAL 32,520 --- 32,520
TREASURY STOCK (6,599) --- (6,599)
RETAINED EARNINGS 6,435 (1,154) 6. 7,589
NET UNREALIZED DEPRECIATION ON
INVESTMENT SECURITIES
(31) (106) 1. 75
---------- ---------- --------
33,266 (1,260) 34,526
---------- ---------- --------
$ 201,531 $ 125,187 $ 76,344
========== ========== ========
</TABLE>
-25-
<PAGE> 32
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
REF.
AS REPORTED ADJUSTMENTS NO. PRO FORMA
----------- ----------- --- ---------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
REVENUE
GROSS PREMIUMS WRITTEN $ 49,574 $ 27,787 7. $ 21,787
LESS REINSURANCE CEDED 16,255 4,898 7. 11,357
--------- ---------- ---------
NET PREMIUMS WRITTEN 33,319 22,889 10,4230
DECREASE (INCREASE) IN UNEARNED PREMIUM
RESERVES 1,700 4,261 7. (2,561)
--------- ---------- ---------
PREMIUMS EARNED 35,019 27,150 7,869
NET INVESTMENT INCOME:
INTEREST AND DIVIDENDS 3,405 2,655 7. 750
REALIZED GAINS 81 (34) 7. 115
SERVICE FEES ON EXTENDED SERVICE CONTRACTS 2,339 2,339 7. ---
OTHER INCOME 231 44 7. 187
--------- ---------- ---------
41,075 32,154 8,921
--------- ---------- ---------
BENEFITS AND EXPENSES:
POLICY BENEFITS 18,360 13,018 7. 5,342
COMMISSIONS AND SELLING EXPENSES 16,438 12,758 7. 3,680
REINSURANCE EXPENSE RECOVERY (4,043) (2,625) 7. (1,418)
GENERAL AND ADMINISTRATIVE 6,050 3,236 7. 2,814
TAXES, LICENSES AND FEES 1,570 697 7. 873
INTEREST 1,069 1,069 8. ---
DECREASE (INCREASE) IN DEFERRED POLICY
ACQUISITION COSTS 584 2,013 7. (1,429)
--------- ---------- ---------
40,028 30,166 9,862
--------- ---------- ---------
OPERATING INCOME (LOSS)
BEFORE FEDERAL INCOME TAXES 1,047 1,988 (941)
FEDERAL INCOME TAXES:
CURRENT 604 604 9. ---
DEFERRED (589) (589) 9. ---
--------- ---------- ---------
15 15 ---
--------- ---------- ---------
OPERATING INCOME (LOSS) $ 1,032 $ 1,973 $ (941)
========== ========== =========
OPERATING INCOME PER COMMON SHARE $ 0.12 $ (0.11)
========== =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 8,604,017 8,604,017
========== =========
</TABLE>
-26-
<PAGE> 33
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED STATEMENT OF OPERATIONS
DECEMBER 31, 1996
<TABLE>
<CAPTION>
REF.
AS REPORTED ADJUSTMENTS NO. PRO FORMA
----------- ----------- --- ---------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
REVENUE
GROSS PREMIUMS WRITTEN $ 58,412 $ 41,159 7. $ 17,253
LESS REINSURANCE CEDED 12,860 4,748 7. 8,112
---------- ---------- ----------
NET PREMIUMS WRITTEN 45,552 36,411 9,141
DECREASE (INCREASE) IN UNEARNED PREMIUM
RESERVES 405 3,708 7. (3,303)
---------- ---------- ----------
PREMIUMS EARNED 45,957 40,119 5,838
NET INVESTMENT INCOME:
INTEREST AND DIVIDENDS 4,416 3,448 7. 968
REALIZED GAINS 484 221 7. 263
SERVICE FEES ON EXTENDED SERVICE CONTRACTS 2,450 2,450 7. ---
OTHER INCOME 4,513 62 7. 4,451
---------- ---------- ----------
57,820 46,300 11,520
---------- ---------- ----------
BENEFITS AND EXPENSES:
POLICY BENEFITS 24,338 18,940 7. 5,398
COMMISSIONS AND SELLING EXPENSES 22,145 19,584 7. 2,561
REINSURANCE EXPENSE RECOVERY (2,670) (1,298) 7. (1,372)
GENERAL AND ADMINISTRATIVE 7,486 4,673 7. 2,813
TAXES, LICENSES AND FEES 1,880 967 7. 913
INTEREST 1,969 1,563 8. 406
DECREASE (INCREASE) IN DEFERRED POLICY
ACQUISITION COSTS 893 1,725 7. (832)
---------- ---------- ----------
56,041 46,154 9,887
---------- ---------- ----------
OPERATING INCOME BEFORE
FEDERAL INCOME TAXES 1,779 146 1,633
FEDERAL INCOME TAXES:
CURRENT 152 152 9. ---
DEFERRED (346) (346) 9. ---
---------- ---------- ----------
(194) (194) ---
---------- ---------- ----------
OPERATING INCOME $ 1,973 $ 340 $ 1,633
======= =========== =========
OPERATING INCOME PER COMMON SHARE $ 0.34 $ 0.28
======= =========
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 5,904,398 5,904,398
========= =========
</TABLE>
-27-
<PAGE> 34
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
PRO FORMA UNAUDITED CONSOLIDATED FINANCIAL DATA
NOTE--PRO FORMA ADJUSTMENTS AND ADDITIONAL INFORMATION
BALANCE SHEET ADJUSTMENTS: September 30, 1997
1. Reflects elimination of balance sheet amounts related to ALIC, ANSC,
DIL and Costguard business being sold. In addition, accounts payable
and other liabilities include accruals for expenses related to the sale
transaction.
2. Reflects proceeds to be received from the sale ($40.5 million) less
repayment of ACCEL's outstanding notes payable and related interest,
settlement of intercompany amounts, and the elimination of balance
sheet amounts related to ALIC, ANSC, DIL and Costguard business being
sold.
3. Reflects elimination of ACCEL's cost in excess of equity for ALIC.
4. Reflects pay-off of notes payable which is required as a condition of
the sale.
5. Reflects adjustment necessary at the statutory tax rate for the pro
forma adjustments considering the net operating loss position of ACCEL
after giving effect to the sale and for the elimination of deferred tax
assets of ACCEL resulting from the sale.
6. Reflects proceeds to be received from the sale ($40.5 million) less the
combined equity of the sold subsidiaries being $31.6 million, cost in
excess of equity of $.7 million, related income taxes of $5.3 million,
elimination of deferred tax assets of $1.1 million. and other pro forma
adjustments directly related to the sale of the subsidiaries of $.6
million
INCOME STATEMENT ADJUSTMENTS: December 31, 1996 and September 30, 1997
7. Reflects elimination of income statement amounts related to the
subsidiaries and Costguard business being sold.
8. Reflects elimination of interest expense related to notes payable which
are required to be paid off as a condition of the sale.
9. Reflects adjustment necessary at the statutory tax rate for the pro
forma adjustments considering the net operating loss position of ACCEL
after giving effect to the sale and for the elimination of deferred tax
assets of ACCEL resulting from the sale.
COMMENTS: Although accounting rules related to Pro Forma Financials do not allow
for the inclusion of anticipated investment income, ACCEL estimates that
investment income of $654,000 and $522,000 would have been earned for the twelve
months ended December 31, 1996 and the nine months ended September 30, 1997,
respectively, had this transaction taken place on January 1, 1996. The estimated
investment income calculation assumes ACCEL has approximately $10.1 million
available for investment (with an estimated yield of 6.5%) after reflecting the
sale and related transactions.
-28-
<PAGE> 35
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
BENEFICIAL OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
The following table sets forth certain information as of October 31,
1997 (except as otherwise noted) with respect to stockholders known to the
Company to be the beneficial owners of more than five percent (5%) of the
Company's Common Stock:
<TABLE>
<CAPTION>
NAME AND ADDRESS OF AMOUNT AND NATURE OF PERCENT
BENEFICIAL OWNER BENEFICIAL OWNERSHIP OF CLASS
---------------- -------------------- --------
<S> <C> <C>
David T. Chase 3,672,148(1) 42.7%
D.T. Chase Enterprises, Inc.
One Commercial Plaza
Hartford, Connecticut 06103
Arnold L. Chase 1,167,824(2) 13.6%
D.T. Chase Enterprises, Inc.
One Commercial Plaza
Hartford, Connecticut 06103
The Darland Trust 1,167,824(3) 13.6%
P.O. Box 472
St. Peter's House, Le Bordage
Guernsey GYI6AY
Channel Islands
Rhoda L. Chase 2,000,000(4) 23.3%
c/o Chase Enterprises, Inc.
One Commercial Plaza
Hartford, Connecticut 06103
Insurance Holdings Limited Partnership 670,000(5) 7.8%
One Commercial Plaza
Hartford, Connecticut 06103
Spitzer Profit Sharing and Savings Plan 712,250(6) 8.3%
150 East Bridge Street
Elyria, Ohio 44035
</TABLE>
- ----------
(1) Includes 6,500 shares of Common Stock subject to immediately
exercisable options. According to a Schedule 13D filed with the
Commission, Mr. David T. Chase shares the power to dispose or to direct
the disposition of 3,665,648 shares of Common Stock (the "Chase Family
Shares") but does not have the sole or shared power to vote or direct
the vote of any Chase Family Shares. Mr. Chase shares the power to
dispose or direct the disposition of (i) 1,330,000 Chase Family Shares
beneficially owned by Rhoda L. Chase, his wife, (ii) 1,167,824 Chase
Family Shares beneficially owned by Arnold L. Chase, his son, and (iii)
1,167,824 Chase Family Shares beneficially owned by The Darland Trust
(the "Trust"), a trust whose beneficiaries are Cheryl A. Chase, his
daughter and her children.
-29-
<PAGE> 36
(2) According to a Schedule 13D filed with the Commission, Mr. Arnold L.
Chase shares the power to dispose or to direct the disposition of
1,167,824 Chase Family Shares with Mr. David T. Chase and has sole
power to vote or direct the vote of such shares. Such shares are also
included in the above table in Mr. David T. Chase's Chase Family
Shares.
(3) According to a Schedule 13D filed with the Commission, the Trust shares
the power to dispose or to direct the disposition of 1,167,824 Chase
Family Shares with Mr. David T. Chase and has sole power to vote or
direct the vote of such shares. Such shares are also included in the
above table in Mr. David T. Chase's Chase Family Shares
(4) According to a Schedule 13D filed with the Commission, Rhoda L. Chase
has sole power to vote or to direct the vote of all such shares except
to the extent that she may be deemed to have temporarily transferred
beneficial ownership to Insurance Holdings Limited Partnership (the
"Partnership") of 670,000 shares of Common Stock (the "Borrowed
Shares," and, together with the Chase Family Shares, the "Chase
Shares"). In the aggregate, the Chase Shares total 4,342,148 shares of
Common Stock or approximately 50.4% of the outstanding shares of Common
Stock. The general partner of the Partnership is Chase Insurance
Corporation ("CIC"). David T. Chase is the President and a Director of
CIC, Arnold L. Chase is an Executive Vice President and a Director of
CIC and Cheryl A. Chase is an Executive Vice President and a Director
of CIC. Mrs. Chase shares the power to dispose or to direct the
disposition of 1,330,000 Chase Family Shares with Mr. David T. Chase
and has sole power to dispose or direct the disposition of the Borrowed
Shares except to the extent that Mrs. Chase may be deemed to have
temporarily transferred to the Partnership the sole power to dispose of
the Borrowed Shares. The 1,330,000 Chase Family Shares are also
included in the above table in Mr. David T. Chase's Chase Family
Shares. David T. Chase disclaims beneficial ownership of the Borrowed
Shares.
(5) The Partnership may be deemed to beneficially own 670,000 Borrowed
Shares which it has borrowed from Rhoda L. Chase pursuant to a loan
agreement. The Borrowed Shares are included in Rhoda L. Chase's
holdings in the above table but are not included in David T. Chase's
holdings in the above table.
(6) Spitzer Profit Sharing and Savings Plan under agreement dated December
31, 1973, is an Employee Benefit Plan, Pension Fund subject to the
provisions of the Employee Retirement Income Security Act of 1974.
-30-
<PAGE> 37
BENEFICIAL OWNERSHIP OF MANAGEMENT
The following table sets forth certain information as of October 31,
1997, with respect to the beneficial ownership by each director, each named
executive and by all of the directors and executive officers a group of the
Common Stock of the Company. Unless otherwise noted, the nature of beneficial
ownership consists of sole voting and dispositive power.
<TABLE>
<CAPTION>
AMOUNT OF PERCENT
NAME OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
- ------------------------ ----------------------- --------
<S> <C> <C>
Robert Betagole 115,491(2) 1.3%
David T. Chase 3,672,148(3) 42.7%
Douglas J. Coats 55,190 *
Raymond H. Deck 241,287 2.8%
Richard Desich 34,350 *
Thomas H. Friedberg 265,158 3.1%
Kermit G. Hicks 63,314(4) *
Stephen M. Qua 38,358 *
John P. Redding --- ---
All Directors and Executive Officers 4,572,429(5) 52.5%
as a group (15 persons)
</TABLE>
- ---------------
(1) On October 31, 1997, there were 8,603,742 shares of the Company's
Common Stock issued and outstanding. Except as noted, includes shares
owned by spouse, minor children or certain other family members, or
held as custodian or trustee for the benefit of spouse or children, or
owned by corporations of which such person is an of fleer or principal
stockholder, over which shares such directors have sole or shared
voting or investment power. With respect to the non-employee Directors,
includes an aggregate of 27,500 shares held by the non-employee
Directors as a group, which are subject to immediately exercisable
options.
(2) Includes 20,092 shares as to which Mr. Betagole disclaims beneficial
ownership.
(3) See the table under the caption "-- Beneficial Ownership of Certain
Beneficial Owners" and the footnotes thereto which explanations also
apply here.
(4) Includes 9,696 shares as to which Mr. Hicks claims beneficial ownership
on an indirect basis.
(5) This amount includes 107,500 shares which are subject to immediately
exercisable options and approximately 53,700 shares owned by officers
in their Acceleration Retirement Savings and Stock Ownership Plan
accounts as of June 30, 1997.
* Less than 1% of outstanding Common Stock.
-31-
<PAGE> 38
INDEPENDENT AUDITORS
Representatives of KPMG Peat Marwick LLP are expected to be present at
the Special Meeting and will have an opportunity to make a statement if they
desire to do so and are also expected to be available to respond to appropriate
stockholder questions.
STOCKHOLDER PROPOSALS
Stockholders wishing to submit proposals for the Company's 1998 Proxy
Statement may do so prior to December 22, 1997 by letter addressed to the
Company in care of the Secretary.
ADDITIONAL INFORMATION REGARDING THE COMPANY
The information set forth below is included in this Proxy Statement
pursuant to Item 14(b)(3)(1) of Schedule 14A of the Exchange Act. Such
information is derived substantially from the Company's Annual Report on Form
10-K for the year ended December 31, 1996 and the Company's Quarterly Report on
Form 10-Q for the quarter ended September 30, 1997, except that certain
additional information necessary to update the prior information and certain
cross references to other parts of this Proxy Statement which discuss the
Transaction have been added.
BUSINESS
GENERAL DEVELOPMENT OF BUSINESS
The Company is an insurance holding company incorporated in Delaware in
June 1978 as the successor to an Ohio corporation, formerly Acceleration
Corporation, organized in 1969. Unless the context requires otherwise, the
"Company" includes the Company and its subsidiaries. The Company is engaged in
the underwriting and sale of credit life and credit accident and health
insurance, extended service contracts and specialty casualty products. Beginning
in the first quarter of 1996, the Company began to offer commercial auto
coverages for long haul truckers and certain public transportation vehicles
("charter buses") through a general agent ("GA").
In the second quarter, the Company began to offer commercial
multi-peril policies to auto dealers, but elected in the third quarter to exit
this line of business. The credit insurance and extended service contract
products continue to be offered to consumers, principally through automobile
dealers, financial institutions and other business entities. In 1990, the
Company began offering farmowners' multi-peril and ancillary inland marine
coverages through a network of selected agents. These coverages were
discontinued in early 1995. See "-- Narrative Description of Business" for
further information. For a discussion of the business of the Company which will
remain following the consummation of the Transaction, see "THE TRANSACTION --
Operations of the Company After the Transaction."
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Through 1996, the Company operated predominately in two industry segments: life
and health and property and casualty insurance. See "Note J" in the Notes to
Consolidated Financial Statements.
NARRATIVE DESCRIPTION OF BUSINESS
GENERAL
The Company's life and health insurance segment primarily consists of individual
and group credit life and group credit accident and health insurance, which is
sold through automobile dealers and financial institutions. The Company's
property and casualty segment consists of extended service contracts, sold
primarily through automobile
-32-
<PAGE> 39
dealers, coverages for long haul trucking and charter buses sold through a GA
and the discontinued commercial multi-peril, farmowners' multi-peril, ancillary
inland marine and realtors errors and omissions coverages ("REO").
Credit insurance and extended service contracts, which represent a
significant portion of the Company's business, are affected by automobile sales.
These premiums accounted for approximately 72.8% of the Company's gross premiums
written in 1996.
Premiums for the long haul trucking and charter bus line comprised
23.6% of the Company's gross premiums written in 1996.
The Company's principal subsidiary engaged in the life and health
insurance business is Acceleration Life Insurance Company ("ALIC"), which holds
licenses to conduct business in 40 states and the District of Columbia. Credit
life and credit accident and health insurance are the primary insurance products
written by ALIC. The Company's property and casualty business is conducted
through Acceleration National Insurance Company ("ANIC"). ANIC holds licenses to
conduct business in 47 states and the District of Columbia. Acceleration
National Service Corporation ("ANSC") administers the Company's extended service
contracts. The majority of the Company's direct premiums written in 1996 was
derived from sales in Ohio (37.9%), Virginia (12.7%), Georgia (9.0%), West
Virginia (4.7%), Indiana (6.4%) and Florida (4.5%). During 1995 and early 1996,
both ALIC and ANIC were subject to a re-application rule in the state of
Michigan. The re-applications were denied. Therefore, as of March 1996, ALIC and
ANIC were no longer licensed in Michigan, and accordingly discontinued writings
in said state. The decision by the state of Michigan was based on ALIC's and
ANIC's experiences in several discontinued lines of business. The results from
these lines of business are now several years old. Therefore, the companies,
based on their positive 1996 results, intend to re-apply to the state of
Michigan in 1998.
CREDIT INSURANCE
The Company sells credit insurance primarily in connection with
consumer credit transactions, of which the most significant to the Company are
automobile purchases. Credit life insurance provides funds, in the event of the
insured's death, for payment of a specified loan or loans which are obligations
of the insured. Similarly, credit accident and health insurance provides for
payments on such loans during the term of the insured's disability. In most
cases, the entire premium is paid at the time the insurance is issued and such
insurance is designed to cover the risk of loss for the scheduled term of the
indebtedness. Most credit insurance is written on a decreasing term basis. The
policy benefit is initially the amount of the unpaid indebtedness and decreases
in amounts corresponding to the repayment schedule. The primary beneficiary
under credit insurance is the lender.
Substantially all of the Company's credit insurance is group insurance.
Group credit insurance policies are issued to master policyholders (typically
automobile dealers or financial institutions). The master policy of insurance
authorizes the master policyholder to issue certificates representing insurance
sold to its customers. Premiums collected from customers are remitted to the
Company net of commissions. The Company uses good health statements as part of
its underwriting measures, which inquire about the proposed insured's health at
the time the insurance is to be issued. Although medical examinations are not
required, the good health statement is intended to reduce the acceptance of
certain risks. The Company also uses additional health related questions on its
applications related to specific medical conditions. Because such conditions, if
experienced within the twelve months prior to the loan date, could be expected
to result in claims during the term of the loan, the applications are denied. In
addition to other sales and marketing services, the Company conducts related
training programs for finance and insurance managers, master policyholders and
their salespeople, independent agents and sales representatives employed by the
Company.
The Company reinsures substantial percentages of its credit accident
and health premiums on a written basis. This reinsurance provides statutory
surplus relief, thereby increasing the Company's capacity to write credit
insurance. An effect of this reinsurance is, however, to reduce the profit that
the Company might otherwise realize on its credit insurance business. The
applicable agreement contains an experience adjustment computation which
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<PAGE> 40
results in the ultimate cost of this reinsurance being a stated percentage
related to the surplus relief provided. Under such arrangements, a security fund
is usually maintained by the Company approximating the amount of ceded unearned
premiums less commissions retained, plus ceded insurance claims.
The Company has also entered into agreements to cede credit life and
credit accident and health insurance to reinsurance companies owned by certain
automobile dealers, financial institutions and agents. Under these arrangements
said entities and persons participate in the profits or losses of the insurance
sold through them, and the Company retains nominal percentages of the related
risk. These agreements generally provide that the Company receive a ceding fee
and be reimbursed for commissions and claims.
Approximately 58%, 76% and 73% of the Company's gross premiums written
during 1996, 1995 and 1994, respectively, were derived from its credit insurance
business. The credit insurance business decreased 19.4% in 1996 compared to
1995, decreased 3.6% in 1995 compared to 1994, and increased 4% in 1994 compared
to 1993. The decrease in 1996 relates to the termination of a joint marketing
agreement discussed below, the loss of two significant accounts and the
Company's withdrawal from the state of Michigan. The decrease in 1995 was
primarily due to the loss of a significant account. Automobile purchases
continue to be the most significant consumer credit transaction for which credit
insurance is sold by the Company. Automobile purchases have been and will
continue to be affected, directly and indirectly, by auto prices, interest
rates, the availability of consumer credit and general economic conditions.
The primary states in which the Company's credit insurance is sold are
Ohio, Virginia, Indiana and West Virginia. The Company markets its credit
insurance through both independent agents and its own direct sales
representatives. In 1987 the Company entered into a joint marketing arrangement
with Consumers Financial Corporation ("CFC") and transferred all of its
Pennsylvania credit insurance accounts to CFC's subsidiary, Consumers Life
Insurance Company. This business had previously been marketed by the Company's
employees. The joint venture also provided for marketing automobile extended
service contracts in Pennsylvania. The Company and CFC combined their efforts to
market these products to the automobile dealer accounts which both parties had
serviced in the past and to sign-up additional accounts.
By a Termination Agreement effective July 31, 1996, the Company and CFC
mutually terminated the joint venture between the parties. Under the agreement,
the Company was to receive a proportionate share of the proceeds received by CFC
from the sale of the business. By later amendment to the Termination Agreement,
the Company is to receive a payment of $500,000 at the completion of a
transaction to sell CFC to an unrelated organization. The special meeting of CFC
stockholders called to consider the transaction is set for March 25, 1997. If
the transaction is approved by CFC stockholders, the transaction will close soon
thereafter. A gain from the amended Termination Agreement has not been
recognized in the 1996 consolidated financial statements.
COMMERCIAL AUTOMOBILE LIABILITY
In 1996, the Company began offering coverage to operators of long haul
trucks and charter buses. This program is marketed by an unaffiliated GA
(Transportation Insurance Specialists) with extensive experience in this product
line. Commercial Auto has become one of the Company's primary product lines with
first year direct premiums written of $13,800,000 (see "Note E" in the Notes to
Consolidated Financial Statements).
NEW PROPERTY AND CASUALTY PRODUCTS
The Company has commenced new marketing initiatives in 1997 for
products including a package policy for crane operators consisting of general
liability, inland marine and commercial auto coverages; and an oil and gas
liability program. The target for the crane program is qualified operators who
lease cranes for specific projects. An independent administrator, The Crane
Institute, is being used to conduct loss control and underwriting survey work in
this specialized field. The Company expects slow controlled growth in this
product line with extensive underwriting reviews.
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<PAGE> 41
The oil and gas product is designed to be marketed to small or
mid-sized accounts. The program will insure the leasehold operators and
contractors. Limits provided will be $1 million per each occurrence subject to
an annual aggregate of $2 million. The GA has had extensive experience in this
field.
EXTENDED SERVICE CONTRACTS
Extended service contracts are sold under the name "CostGuard" and
cover the cost of labor and certain parts for the repair of automobiles and
watercraft. The Company's product covers towing, rental car reimbursement and
other benefits during the entire contract term and enables a purchaser to obtain
from the selling dealer a service contract covering the cost (in excess of a
deductible amount where applicable) of repairs to covered parts subsequent to
the expiration of the applicable manufacturer's warranty. Extended service
contracts are primarily marketed through the same group of automobile dealers
who market the Company's credit insurance. The extended service contract program
is marketed on a net cost basis to the automobile dealer who is free to
establish the retail price for the contract. The net cost paid by the dealer
includes the premiums for a contractual liability policy provided the dealer by
ANIC, and administrative and marketing fees. In 1996, this program accounted for
approximately 32.7% of ANIC's gross premiums written.
OTHER INSURANCE PRODUCTS
In early 1990, the Company introduced its farmowners' multi-peril and
ancillary inland marine coverage products. Premiums written for these products
were $0, $97,000 and $8,460,000 in 1996, 1995 and 1994, respectively. The
Company elected to discontinue offering these lines and entered into an
agreement whereby the Company ceded 100% of the in-force business at December
31, 1994. Accordingly, any new business written after January 1, 1995 was
reinsured with an unaffiliated carrier. As of June 30, 1995, the Company ceased
writing this business.
INVESTMENT IN RANDJILL GROUP LTD. ("RGL") AND GALAXY INSURANCE
COMPANY ("GALAXY")
In 1986 the Company acquired a 20% interest in RGL, a company related
through common ownership by a shareholder and director of the Company, and in
1991 acquired the remaining 80% interest. The total amount invested in RGL was
approximately $10.3 million. Due to significant losses incurred, and the
insolvency of RGL's operating subsidiary, Galaxy, a New York domiciled property
and casualty insurance company, the Company wrote off its investment in RGL
during the second quarter of 1994. For further information regarding RGL and
Galaxy see "Note K" in the Notes to Consolidated Financial Statements.
EMPLOYEES
As of December 31, 1996, the Company employed 97 full-time equivalent
employees compared to 78 as of December 31, 1995.
REINSURANCE WITH UNAFFILIATED INSURANCE COMPANIES
Reinsurance enables insurance companies to provide greater
diversification of risks and at the same time minimize risk exposure. The
reinsurer reimburses the Company for any claims on the reinsured portion of the
risk. Although reinsurance does not discharge the Company from primary liability
to the insured for the full amount of the insurance coverage, the industry and
regulatory practice is to exclude the reinsured portion of the risk from the
consolidated statements of operations.
The Company has an arrangement in place which covers a substantial
portion of its credit insurance business with an unaffiliated insurance company.
The effect of this agreement is that the Company ultimately retains a
substantial part of the insurance risk, the underwriting income or loss and the
investment income on net funds, with
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<PAGE> 42
the reinsurers receiving a stated percentage of the surplus relief provided. See
"Note F" in the Notes to Consolidated Financial Statements.
In 1993, the Company entered into reinsurance agreements with
unaffiliated reinsurers related to its discontinued health products. The effect
of such reinsurance arrangements was to transfer 100% of the related risk to the
reinsurers. Premiums ceded associated with these agreements and included in the
accompanying consolidated statements of operations amounted to $496,000,
$633,000 and $980,000 in 1996, 1995 and 1994, respectively.
REINSURANCE WITH PRODUCER-OWNED REINSURANCE COMPANIES
Certain automobile dealers, financial institutions and insurance
agencies, which generate credit insurance premiums and are master policyholders
of the Company, have formed Producer-owned Reinsurance Companies owned either
wholly or in part, directly or indirectly, by such master policyholders to
reinsure credit life and disability business generated by them. These
arrangements are structured to provide Producer-owned Reinsurance Companies with
underwriting income and a portion of investment income on the premiums ceded in
connection with such reinsurance. In these transactions the Company's revenue is
limited to a ceding fee and a portion of the investment income.
As of December 31, 1996, $10,040,000 of credit life and disability
unearned premium reserves were ceded by the Company to Producer-owned
Reinsurance Companies. However, most of these Producer-owned Reinsurance
Companies are required to deposit cash and marketable securities in a custodial
account with an independent financial institution. The minimum balance in each
account is generally required to be equal to the policy and claim reserves ceded
to the Producer-owned Reinsurance Companies. In the event a Producer-owned
Reinsurance Company fails to fulfill its obligation, the Company may withdraw
funds from the Producer-owned Reinsurance Company's account as reimbursement for
premium refunds and claim disbursements. On all insurance written by the Company
and reinsured with Producer-owned Reinsurance Companies, the Company remains
liable in the event of the insolvency of the reinsurers. As of December 31,
1996, the Company had ceded approximately $234,907,000 of credit life insurance
in-force to Producer-owned Reinsurance Companies. See "Note F" in the Notes to
Consolidated Financial Statements.
COMPETITION
The Company's business is extremely competitive as to both price and
service. In the credit insurance business, the Company's competitors include
other insurance companies, many of which are larger than the Company and have
greater resources. A significant competitive factor is the commission which may
be paid to licensed agents affiliated with master policyholders. The Company,
however, continues to compete by offering what it believes to be realistic
commissions and providing a high level of service including training, consulting
and related services to its master policyholders.
In the Costguard business, the Company competes with much larger and
established national and regional insurance companies and with automobile
manufacturers which provide service contracts to their dealers. The automobile
manufacturers have significantly greater resources than the Company and have
relationships with automobile dealers which extend beyond providing service
contracts. The principal competitive factors include price, profit potential,
type and quality of the products offered and the quality of service. Many of the
same master policyholders which sell the Company's credit insurance also market
its extended service contracts, and the termination of the relationship in one
segment could affect the Company's relationship in the other segment.
In the Commercial Auto business the Company also competes with larger
insurance companies and with companies whose industry ratings are at higher
levels than ANIC. The principal factors that enable the Company to compete are
the relationship with the general agent and the level of service provided to
accounts.
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<PAGE> 43
REGULATION
The Company is subject to regulation in the states in which it conducts
business. The extent of such regulation varies from state to state; but in
general, all states have statutory restrictions and a supervisory agency which
has broad discretionary administrative powers. Such regulation is designed
primarily to protect policyholders and relates to the licensing of insurers and
their agents, the approval of policy forms, the methods of computing reserves,
the form and content of financial reports and the type and concentration of
permitted investments. Ohio and other jurisdictions in which the Company
conducts business have enacted legislation providing for specific regulation of
the relationship between licensed insurers and affiliated members of a holding
company group. Such legislation generally (1) establishes requirements and
procedures relative to the approval or disapproval of mergers and other
acquisitions of control, (2) prescribes the filing of registration statements by
insurers which are members of the holding company group, (3) subjects the
holding company to reporting requirements, (4) establishes standards for
transactions between insurers and their holding companies and between members of
a holding company group and (5) controls the payment of extraordinary dividends.
The dividends which the Company may receive from both its life and property and
casualty insurance subsidiaries are subject to regulatory requirements as to
minimum capital and surplus. In addition to regulatory considerations,
management considers the overall financial strength of each operating entity
before dividends are paid to the Company. Additionally, the amount of dividends
the Company's primary life insurance subsidiary can pay is subject to certain
tax considerations.
In 1993, the National Association of Insurance Commissioners ("NAIC")
adopted the life and health and property and casualty Risk-Based Capital ("RBC")
formulas. These model acts require every insurer to calculate its total adjusted
capital and RBC requirement, and provides for an insurance commissioner to
intervene if the insurer experiences financial difficulty. These model acts
became law in Ohio, the Company's insurance subsidiaries' state of domicile, in
March 1996. The formula includes components for asset risk, liability risk,
interest rate exposure, and other factors. Each of the Company's insurance
subsidiaries exceed all required RBC levels as of December 31, 1996.
The tax considerations related to the life insurance subsidiary
restrict the amount of dividends that can be paid without incurring a tax. As of
December 31, 1996, the Company's life insurance subsidiary could pay an
aggregate of $4,700,000 from shareholders' surplus without incurring a tax. As
of December 31, 1996, ALIC could pay a dividend of $1,543,315 to ACCEL in 1997
without approval of the Department of Insurance of the State of Ohio ("Ohio
Department"). ANIC would require Ohio Department approval to pay any dividend to
ACCEL during 1997.
For information regarding certain federal income tax limitations on
dividends, see "Note G" in the Notes to Consolidated Financial Statements.
FINANCIAL INFORMATION ABOUT FOREIGN AND DOMESTIC OPERATIONS
AND EXPORT SALES
In 1982 the Company incorporated Dublin International Limited
("Dublin"), an exempted Island of Nevis domiciled company. Dublin is a component
in the Company's relationship with Producer-owned reinsurance companies (see
"Note F" in the Notes to Consolidated Financial Statements).
In 1986 Acceleration Insurance Company, Ltd. ("AICL"), a wholly-owned
subsidiary organized by ACCEL and domiciled in the United Kingdom, received
approval from regulatory authorities to commence operations. From mid-1986
through 1992, AICL offered specialty casualty products in the United Kingdom.
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 will exist only for as long as it
takes to recover any taxes that may be refunded to it.
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<PAGE> 44
The assets and results of operations of these subsidiaries for the year
ended December 31, 1996 are not significant to the Company's consolidated
financial statements. See "Note M" in the Notes to Consolidated Financial
Statements.
PROPERTIES
Since July 1981 the Company's executive offices have been located at
475 Metro Place North, Dublin, Ohio. The four-story office building had been
owned by ALIC and consisted 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 remains in the building and occupies approximately 16,000
square feet of home office space under a five-year lease at an annual rental of
approximately $264,000. In late 1995 the Company began renting approximately
6,000 square feet of office space in Stafford, Texas, to house its executive
offices. The annual rental on the five-year lease approximates $70,000.
LEGAL PROCEEDINGS
From time to time the Company is a party to litigation and arbitration
proceedings in the ordinary course of its business, none of which is expected to
have a material adverse effect on the Company.
MARKET FOR ACCEL'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
ACCEL's common stock is traded over-the-counter national market issues,
under the NASDAQ symbol ACLE.
The following table sets forth the quarterly range of over-the-counter
prices for ACCEL's stock during the last two years. These prices have been
adjusted for common stock dividends and do not include retail mark-up,
mark-down, or commissions and do not always necessarily represent actual
transactions.
<TABLE>
<CAPTION>
1996 High Low 1995 High Low
---- ---- --- ---- ---- ---
<S> <C> <C> <C> <C> <C>
4th Quarter $3.750 $2.37 4th Quarter $3.875 $2 .375
3rd Quarter 3.250 2.37 3rd Quarter 4.875 2.750
2nd Quarter 3.750 2.50 2nd Quarter 3.125 2.000
1st Quarter 3.875 2.37 1st Quarter 2.875 1.750
<CAPTION>
1997 High Low
---- ---- ---
<S> <C> <C>
3rd Quarter $4.250 $3.000
2nd Quarter $3.125 $2.750
1st Quarter $3.250 $2.750
</TABLE>
The approximate number of holders of record of ACCEL's common stock
($.10 par value) as of January 31,1997, was 657 holders.
Dividends paid on common stock:
1996 - -0- per share
1995 - -0- per share
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<PAGE> 45
Restrictions on present or future ability to pay dividends:
The Senior Notes issued December 29, 1995 (See "Note D" in the Notes to
Consolidated Financial Statements) contain certain covenants which restrict the
payment of dividends to not more than 50% of the cumulative consolidated net
income for the period from January 1, 1996 to and including the date of making
the dividend payment.
Since June 1992, ACCEL's Board of Directors have suspended payment of
cash dividends on the common stock until the Company returns to a level of
profitability which will sustain such payments.
FINANCIAL STATEMENTS
AUDITED ANNUAL FINANCIAL STATEMENTS
Included elsewhere in this Proxy Statement are the Company's audited
consolidated financial statements as of December 31, 1996 and 1995 and for the
three years ended December 31, 1996, and the notes thereto, and the related
independent auditors' report, as the same were included in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
UNAUDITED INTERIM FINANCIAL STATEMENTS
Included elsewhere in this Proxy Statement are the unaudited interim
consolidated financial statements of the Company, and the notes thereto, as the
same were included in the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1997.
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<PAGE> 46
SELECTED FINANCIAL DATA
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
<TABLE>
<CAPTION>
1996** 1995** 1994** 1993** 1992
---------------------------------------------------------------------
(Thousands of dollars, except per share data & ratios)
<S> <C> <C> <C> <C> <C>
Gross premiums written $ 58,412 $ 55,443 $ 60,504 $ 95,766 $ 122,101
Premiums ceded (12,860) (12,147) (12,495) (30,261) (45,116)
Net premiums written 45,552 43,296 48,009 65,505 76,985
Premiums earned 45,957 40,853 47,600 61,649 80,426
Net investment income:
Interest and dividends 4,416 6,488 6,678 8,397 11,831
Realized gains 484 455 808 1,336 701
Total revenue 57,820 50,475 57,519 74,810 96,043
Policy benefits 24,338 20,118 24,997 38,431 71,472
Income (loss) before taxes
and other items 1,779 (1,101) (4,905) (5,626) (25,075)
Cumulative effective of change in
accounting for income taxes -- -- -- -- (3,067)
Extraordinary item 131 -- -- -- --
Net income (loss) 2,104 (1,460) (5,238) (5,281) (22,124)
Per common share*:
Cumulative effect of change in
accounting for income taxes -- -- -- -- (.69)
Net income (loss) .36 (.33) (1.18) (1.19) (4.98)
Cash dividends -- -- -- -- .07
At end of year:
Invested assets 74,841 63,297 98,189 126,590 139,244
Total assets 189,308 183,507 179,948 236,181 204,209
Policy reserves
and liabilities 107,083 104,852 106,936 146,257 90,616
Notes payable 15,000 22,531 18,462 18,847 22,000
Redeemable preferred stock -- -- -- -- 73
Common stockholders' equity 31,641 20,560 15,366 28,583 32,361
Return on average common
stockholders' equity 8.06% (8.13)% (23.84)% (17.32)% (52.59)%
Book value per common share $ 3.68 $ 4.62 $ 3.46 $ 6.43 $ 7.28
</TABLE>
* Net income (loss) per common share is computed using the weighted
average number of common shares outstanding during the year after
giving effect to the preferred stock dividend requirement. The
inclusion of common stock equivalents (options) would not be dilutive.
** The 1996, 1995, 1994 and 1993 data reflects the adoption of the
Financial Accounting Standard Board's ("FASB") Statement No. 113,
"Accounting and Reporting for Reinsurance of Short-Duration and Long-
Duration Contracts."
SUPPLEMENTARY FINANCIAL INFORMATION
Not applicable.
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<PAGE> 47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATING RESULTS FOR THE THREE YEARS ENDED DECEMBER 31, 1996
OPERATING RESULTS
The Company's income before income taxes and extraordinary item for
1996 was $1,779,000. This income was primarily the result of the recognition of
$4,291,085 of other income related to a legal settlement (see Discontinued
Realtors' Errors and Omissions Program under Certain Events). In 1996,
particularly in the first half, the Company continued to experience adverse loss
development on discontinued lines of business. Adverse development on
discontinued Farmowners and related lines amounted to $800,000. The Company's
new Property and Casualty products, in particular Commercial Auto, had a
positive underwriting result in 1996. The premium earned on this line has been
continuing to grow.
The loss before income taxes for 1995 was $1,101,000. This loss was
primarily driven by three factors; the foremost factor was adverse loss
development on discontinued property and casualty products. The adverse
development aggregated $2,400,000 which included a $1,200,000 year end reserve
increase on the discontinued REO product. The adverse development was partially
offset by a $500,000 favorable development on the discontinued medical business.
The second factor was the incurrence of legal fees related to the REO program
litigation during 1995, including the Company's legal action against the
entities involved in the REO program. These actions caused the incurrence of
legal fees of $550,000 in 1995. Lastly, during 1995 the Company incurred
approximately $350,000 in severance expenses related to departed employees.
The loss before income taxes for 1994 was $4,905,000. A significant
portion of the 1994 loss was related to the write off of Galaxy ($3,829,000) and
Galaxy's first quarter loss ($205,000), for a total Galaxy loss of $4,034,000.
In addition, several discontinued property and casualty lines continued to show
adverse loss development in 1994, partially offset by positive results from the
credit and extended service contract product lines.
The Company made concerted efforts in the last three years to reduce
general and administrative expenses. General and administrative expenses have
decreased by 4.2% in 1996 compared to 1995 and by 16.3% in 1995 compared to
1994. These expense control initiatives have allowed the Company to concentrate
on its traditional profit producing lines of business (credit insurance and
extended service contracts) and to begin programs in selected Property &
Casualty lines in which the current management team has experience.
Table I on page 44 indicates changes in several key operating ratios
for the Company. The ratios in the table are consistent with the Company's
premium volume and product mix.
REVENUE
Gross premium writings for 1996 were $58.4 million compared to $55.4
million for 1995. The increase in 1996 was primarily the result of increases in
premium levels related to the new lines of business. See Table II on page 45.
Gross premium writings for 1995 were $55.4 million compared to $60.5
million for 1994. The decrease in 1995 was primarily the result of decreases in
premium levels related to discontinued lines of business. See Table II on page
45.
The Company has also experienced decreases in net investment income,
excluding realized gains, since 1993. The decrease in 1994 was primarily
attributable to a decrease in invested assets due to the run off of discontinued
lines of business. The 1995 decrease was caused by the level of prevailing
interest rates. Proceeds from the
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<PAGE> 48
Company's maturing investments were not able to be reinvested at rates
comparable to those on the maturing securities. The major portion of the
decrease in 1996 is attributable to a reinsurance treaty with an unaffiliated
party. Under the terms of this treaty, investment income credits related to
funds held are categorized as reinsurance expense recovery as opposed to
investment income.
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 F" in the Notes to 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's long haul trucking and
charter bus business generally is written for a term of one year with the
casualty claim related liabilities extending beyond that period. The Company,
therefore, maintains liquidity in its investment portfolio to correspond with
the liabilities outstanding on its lines of business. At December 31, 1996, the
estimated duration of the Company's fixed income investment portfolio was 3.0
years while the estimated liability duration was approximately 3.5 years.
Currently, an interest rate change of 1% would impact the fair value of the
fixed maturity portfolio and stockholders' equity by a decline of approximately
$2 million if interest rates rose and an increase of approximately $2 million if
interest rates declined.
The Company's "available for sale" fixed maturity securities at
December 31, 1996 include $16.5 million of mortgage-backed securities; $16.0
million of collateralized mortgage obligation securities and $8.2 million of
asset- backed collateralized securities. The mortgage and asset-backed
securities 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 December 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 portfolios 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 Ohio Department. Based on this regulation, ALIC could pay a dividend of
$1,543,315 without Ohio Department approval to ACCEL in 1997 and ANIC would
require Ohio Department approval to pay any dividend to ACCEL during 1997.
The Company's cash flow projections for 1996 assumed that certain
events would take place in order to have sufficient cash to meet its debt
service and other requirements. One of these events included the liquidation of
AICL, which was concluded in the first quarter of 1996. The Company will monitor
its current and future debt service requirements to coincide with cash flow
availability. The Company has used a portion of the proceeds from a Rights
Offering and the payment from a judgment entered in its favor in a legal
proceeding (see Rights Offering and Discontinued Realtor's Errors and Omissions
Program under Certain Events) to repay $4,296,000 in advances received in 1992
and 1993 from ACCEL's subsidiaries. These outstanding advances were eliminated
in consolidation.
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<PAGE> 49
On July 25, 1996, the Company commenced an offering of non-transferable
rights to stockholders of record as of June 18, 1996 (see Rights Offering under
Certain Events). The Rights Offering concluded on August 28, 1996 and generated
$3,261,780 in cash proceeds. A supplemental offering to employees, agents and
customers concluded on September 30, 1996 and generated $141,862 in cash
proceeds of which $113,355 had been received by the Company as of December 31,
1996. The cash proceeds from these offerings have been used to repay
intercompany advances ($2,647,000), for the redemption of Subordinated Notes
which were not tendered in the Rights Offering ($600,000) (see "Note D" in the
Notes to Consolidated Financial Statements), and for general corporate purposes.
Also, under the provisions of the Rights Offering, the Company
permitted Chase Insurance Holdings Corporation ("CIHC") and its affiliates to
tender the principal amount of their Subordinated Notes (See "Note D" in the
Notes to Consolidated Financial Statements) for cancellation as consideration
(in lieu of cash) for the purchase of shares of common stock pursuant to the
Rights Offering. On August 23, 1996, CIHC and its affiliates tendered $5,619,046
principal amount of their Subordinated Notes plus an additional $83,759 of
accrued interest thereon under the terms of the Rights Offering. At the
conclusion of the offering, CIHC and its affiliate had reduced their holding of
Subordinated Notes to $0.
In a separate transaction, ACCEL retired $731,533 principal amount of
Subordinated Notes held by an unrelated third party for consideration of
$600,000. ACCEL recognized an extraordinary gain on this transaction of
$131,533. No federal income tax was recognized related to this gain due to the
current consolidated tax position of the Company. The result of the two
aforementioned transactions was to retire all outstanding Subordinated Notes.
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 an existing
credit agreement (see "Note D" in the Notes to Consolidated Financial
Statements) and to liquidate an intercompany loan between ACCEL and an insurance
company 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. The Senior Notes are payable to the same unaffiliated company
which is a party to the reinsurance agreement dated January 1, 1996. This
agreement is structured such, that as future profits emerge on this block of
business, these profits are held by the reinsurance company, and ultimately
applied to pay interest on and to redeem the Senior Notes. Profits in excess of
the amount required to retire the Senior Notes are to be returned to ALIC. As of
December 31, 1996, $1,500,000 of the profits on this block of business were
released to ALIC in the form of the aforementioned Senior Notes issued by ACCEL.
This release resulted in a balance of $15,000,000 of Senior Notes outstanding as
of December 31, 1996.
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 to allow for the release of shares
to participants' accounts at an average price which more closely approximated
recent market values on the Company's common stock. The decrease in the loan in
1995 was reflected through a decrease in additional paid-in capital in the
accompanying consolidated balance sheets. The unpaid balance of the loan
($32,000 at December 31, 1996) has been reflected as a reduction in common
stockholders' equity in the accompanying consolidated balance sheets.
During 1996, 1995 and 1994, the Company incurred ESOP contribution
expenses of $187,000, $198,000 and $178,000, respectively.
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<PAGE> 50
The Company currently has three material lines of business that are in
run-off status: the REO line, the farmowner's multi-peril and ancillary inland
marine products and the auto dealers' commercial multi-peril line. Also, for
information regarding Galaxy, see "Note K" in the Notes to Consolidated
Financial Statements.
The estimates for policy reserves are continually under review and
adjusted as necessary 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 management believes that the current
level of policy reserves will be adequate to cover anticipated claim
liabilities. Accordingly, the ultimate amounts required for settlement of policy
benefits may vary significantly from the amounts included in the accompanying
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 became effective in 1996, and has
determined this FASB statement will not impact the Company. The Company has also
reviewed FASB Statement No. 123, "Accounting for Stock-Based Compensation"
("FASB 123") which became effective in 1996. The Company has elected to disclose
the impact of FASB 123 in the Notes to the Consolidated Financial Statements and
not adopt the statement for financial statement reporting as permitted by FASB
123. The Company has also reviewed FASB Statement No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
which becomes effective in 1997, and does not expect this FASB statement to have
a material impact on 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
RIGHTS OFFERING: On July 25, 1996, the Company commenced a
Rights Offering to stockholders of record as of June 18, 1996. The
non-transferable subscription rights entitled stockholders of record to receive
one right for each share of stock held and each right entitled the holder
thereof to purchase one and one-half shares of the common stock of the Company
at a subscription price of $2.25 per share. The rights expired on August 28,
1996. No commission or compensation was paid in connection with the Rights
Offering. As part of the Rights Offering, the Company permitted the outstanding
Subordinated Notes held by CIHC and its affiliates to be tendered for
cancellation as consideration (in lieu of cash) for the purchase of shares of
common stock pursuant to the Rights Offering.
A total of 3,984,260 shares were subscribed for under the Rights
Offering. Total consideration of $8,964,585 consisted of $5,702,805 in
Subordinated Notes and $3,261,780 in cash.
Subsequent to the Rights Offering, the Company commenced a Supplemental
Offering to employees, agents and customers which concluded on September 30,
1996. Shares were offered under this Supplemental Offering at $2.25 per share. A
total of 63,050 shares were subscribed for under this offering. No soliciting
fees or other compensation were paid in connection with such offering. The net
cash proceeds from these offerings have been used to repay intercompany advances
($2,647,000), for the redemption of Subordinated Notes which were not tendered
in the Rights Offering ($600,000) and for general corporate purposes.
WRITE OFF OF INVESTMENT IN RGL AND GALAXY: During December
1986, ACCEL invested $1,370,000 (a 20% interest) in RGL. Galaxy, a wholly owned
subsidiary of RGL, was writing commercial property insurance, property and
casualty, and assumed treaty reinsurance.
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<PAGE> 51
During the second quarter of 1991, the Company purchased 11,000
additional common shares of RGL at a cost of $992,000. The additional investment
increased the Company's ownership to 31% at June 30, 1991. In July 1991, the
Company purchased the remaining 69% of RGL for cash and Subordinated Notes (see
"Note D" in the Notes to Consolidated Financial Statements) of $2.1 million and
$5.8 million, respectively. The purchase price included goodwill of $1.2
million, of which the outstanding balance was written off in 1993.
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, 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 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.
CLAIMS ASSERTED BY LIQUIDATION BUREAU UNDER CERTIFICATES OF
SURETYSHIP: On October 7, 1994, the Liquidation Bureau of the New York
Department (the "Liquidation Bureau") took control of Galaxy pursuant to an
order of liquidation of the New York Supreme Court. Prior to the liquidation of
Galaxy, ANIC had issued certain certificates of suretyship ("Certificates") with
respect to certain Galaxy insurance policies each of which provided that ANIC
would assume the responsibilities of Galaxy under the specified policy if Galaxy
became insolvent or financially unable to meet its obligations on the underlying
policy, but only if certain conditions were met. In particular, the Certificates
provided that ANIC's assumption of liability was contingent upon the insured's
executing and delivering all agreements, assignments or evidences of subrogation
satisfactory to ANIC respecting payments made or liabilities assumed.
During 1996, the Liquidation Bureau, acting on behalf of the New York
Property/Casualty Insurance Security Funds (the "Guaranty Fund"), informally
advised the Company that on behalf of the Guaranty Fund it intended to seek
indemnification or reimbursement from ANIC for claims paid by the Guaranty Fund
to Galaxy insureds on policies which may have been covered by the Certificates.
The Liquidation Bureau has provided some information in response to the
Company's request for accounting data and other information with respect to the
Liquidation Bureau's analysis of the Guaranty Fund's right to indemnification;
however, the Company has not been able to evaluate or quantify the magnitude of
the potential claim, if any, for indemnification or reimbursement because the
Liquidation Bureau has never made a formal or informal claim or stated an
estimate of the potential amount thereof. The Company has taken the position
that the Guaranty Fund has no right to seek indemnification unless Galaxy
insureds who hold properly issued Certificates have executed assignments and
evidences of subrogation. Even if any Galaxy insureds properly made such a claim
directly to ANIC, the Company has been advised by its legal counsel that if ANIC
paid any such claim, it would have the right, under assignment and subrogation
agreements with its insureds, to assert all rights that the insureds could have
asserted to recover the loss amounts from any other source, including the
Guaranty Fund. In early 1997, the Liquidation Bureau requested of Company'
counsel the basis for the position taken by the Company. A written analysis
supporting Company's position was subsequently issued to the Liquidation Bureau.
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<PAGE> 52
The Company intends to vigorously defend any claims for indemnification
or reimbursement made by the Liquidation Bureau, on behalf of the Guaranty Fund,
with respect to the Certificates. Although the Company is not in a position to
estimate the magnitude of the potential claims for indemnification or
reimbursement, it does not believe that the ultimate resolution of such claims
will have a material adverse effect on the financial condition or results of
operations of the Company.
DISCONTINUED REALTORS' ERRORS AND OMISSIONS PROGRAM: As a
result of the losses sustained in the REO program, and in particular, conduct
discovered by the Company after it assumed responsibility for claims processing
and handling, the Company filed suit in November 1991 against the non-affiliated
marketing organization and broker involved in the program.
The lawsuit sought to recover funds improperly withdrawn from the
account established for the payment of claims under the program; for damages due
to business expenses improperly charged against such funds; and for improper
administration of the program. ACCEL and ANIC entered into an arrangement
whereby ANIC's rights under the lawsuit were transferred to ACCEL 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.
In late 1995, ACCEL was awarded $5,300,000 in damages related to this
litigation. Pursuant to settlements reached with all of the parties, ACCEL
received a total of $4,291,085 in 1996. With the approval of the Ohio
Department, the proceeds from the settlement were shared equally between ACCEL
and ANIC. The Company requested the sharing agreement due to the continuing
losses in the REO program realized by ANIC since 1991. The Company has recorded
the recovery as "Other income" in the accompanying consolidated statement of
operations for the year ended December 31, 1996.
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<PAGE> 53
TABLE I
Several key operating ratios of the Company are as follows:
<TABLE>
<CAPTION>
Consolidated Results
(Thousands of dollars, except ratios)
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Gross premiums written $ 58,412 $ 55,443 $ 60,504
======== ======== ========
Net premiums earned $ 45,957 $ 40,853 $ 47,600
======== ======== ========
RATIOS:
Policy benefits to net premiums earned 53.0% 49.2% 52.5%
Commissions and selling expenses and
general and administrative expenses
to gross premiums written 50.7% 57.0% 52.3%
Commissions and selling expenses,
reinsurance expense recovery
and change in deferred policy
acquisition costs to net premiums
earned 44.3% 49.3% 43.6%
Taxes, licenses and fees to gross
premiums written
3.2% 3.1% 3.1%
</TABLE>
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<PAGE> 54
TABLE II
Changes in Gross Premiums Written
Year Ended December 31
(Thousands of dollars, except ratios)
<TABLE>
<CAPTION>
1996 1995
vs. % vs. %
Gross Premiums Written 1996 1995 1994 1995 Change 1994 Change
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Continuing lines of business:
Credit $ 34,126 $ 42,338 $ 43,905 $ (8,212) (19.4)% $(1,567) (3.6)%
Extended service contracts 8,375 7,777 8,221 598 7.7% (444) (5.4)%
Commercial auto 13,793 -- -- 13,793 N/A -- --
Other property/casualty lines 118 58 42 60 103.4% 16 38.1%
-------- -------- -------- -------- ----- ------ ----
Total continuing lines 56,412 50,173 52,168 6,239 12.4% (1,995) (3.8)%
-------- -------- -------- -------- ----- ------ ----
Discontinued lines of business:
Medical and miscellaneous
life and health 642 776 1,751 (134) (17.3)% (975) (55.7)%
Vendor's single interest (59) (798) (5,451) 739 92.6% 4,653 (85.4)%
Agriculture, REO and other
property & casualty 362 5,292 10,091 (4,930) (93.2)% (4,799) (47.6)%
Commercial multi-peril 1,055 -- -- 1,055 N/A -- --
Galaxy Insurance Company -- -- 1,945 -- -- (1,945) (100.0)%
-------- -------- -------- -------- ----- ------ ----
Total discontinued lines 2,000 5,270 8,336 (3,270) (62.0)% (3,066) (36.8)%
-------- -------- -------- -------- ----- ------ ----
Gross premiums written $ 58,412 $ 55,443 $ 60,504 $ 2,969 5.4% $(5,061) (8.4)%
======== ======== ======== ======== === ======= ====
</TABLE>
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<PAGE> 55
OPERATING RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996
OPERATING RESULTS
The income before federal income taxes and extraordinary item for the
nine months ended September 30, 1997 was $1,047,000 compared to $426,000 for the
same period in 1996. The income before federal income taxes and extraordinary
item for the three months ended September 30, 1997 was $404,000 compared to
$374,000 for the same period in 1996. The Company's three primary product lines,
credit, extended service contracts and commercial auto, all produced positive
underwriting margins in the nine months of 1997. Loss ratios for these products
were at or below targeted levels.
The Company's new property and casualty programs continued their
growth, producing $21,468,000 of annualized premium in the nine months of 1997
compared to $14,300,000 in the nine months of 1996. These programs, primarily
commercial auto, have now matured to the point where they are generating a
significant contribution to the Company's financial results.
The Company's general and administrative expenses have increased by
$741,000 or 13.95% in 1997 compared to 1996. These expenses are being incurred
in order to prepare the Company to add additional product lines and to enhance
current offerings.
REVENUE
Premium writings for the nine months of 1997 were $49.6 million
compared to $49.2 million for the nine months of 1996. Premiums written
increased by $1,072,000 for the extended service contract program and by
$7,168,000 for the new property and casualty programs. These increases were
offset by a decrease in credit premium written of $7,368,000. The decrease in
credit premium is attributable to the termination of a joint marketing agreement
covering credit business written in the commonwealth of Pennsylvania in July
1996 and the Company's withdrawal from the state of Michigan in March 1996.
LIQUIDITY AND CAPITAL RESOURCES
The Company's cash flows from operations have generally 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. The Company's liability on extended service
contracts typically extends for either one-year or five-year periods. The
Company's long haul trucking and charter bus business generally is written for a
term of one year with the casualty claim related liabilities extending beyond
that period. The Company, therefore, maintains liquidity in its investment
portfolio to correspond with the liabilities outstanding on its lines of
business. At September 30, 1997, the estimated duration of the Company's fixed
income investment portfolio was 2.8 years while the estimated liability duration
was approximately 3.5 years. Currently, an interest rate change of 1% would
impact the fair value of the fixed maturity portfolio and stockholders' equity
by a decline of approximately $1.9 million if interest rates rose and an
increase of approximately $1.9 million if interest rates declined.
The Company's "available for sale" fixed maturity portfolio at
September 30, 1997 and 1996 includes mortgage-backed securities, collateralized
mortgage obligation securities and asset-backed collateralized securities. The
mortgage and asset backed securities 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.
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<PAGE> 56
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 September 30, 1997,
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 portfolios 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 Ohio Department. Based on this regulation, ALIC could pay a dividend of
$1,543,315 without Ohio Department approval to ACCEL in 1997 and ANIC would
require Ohio Department approval to pay any dividend to ACCEL during 1997. On
May 8, 1997, ALIC paid a cash dividend to ACCEL in the amount of $1,500,000. On
September 30, 1997, ALIC, with the approval of the Ohio Department, paid a
dividend of $1,678,125 to ACCEL which consisted of an extraordinary portion of
$1,634,810 and an ordinary portion of $43,315 to ACCEL.
The Company will monitor its current and future debt service
requirements to coincide with cash flow availability. In 1996, the Company used
a portion of the proceeds from a Rights Offering and the payment from a judgment
entered in its favor in a legal proceeding (see Rights Offering and Discontinued
Realtor's Errors and Omissions Program under Certain Events for Operating
Results for Three Years Ended December 31, 1996) to repay $4,296,000 in advances
received in 1992 and 1993 from ACCEL's subsidiaries. These outstanding advances
were eliminated in consolidation.
On July 25, 1996, the Company commenced an offering of non-transferable
rights to stockholders of record as of June 18, 1996 (see Rights Offering under
Certain Events for Operating Results for Three Years Ended December 31, 1996).
The Rights Offering concluded on August 28, 1996 and generated $3,261,780 in
cash proceeds. A supplemental offering to employees, agents and customers
concluded on September 30, 1996 and generated $141,862 in cash proceeds of which
$113,355 had been received by the Company as of December 31, 1996.
The cash proceeds from these offerings have been used to repay
intercompany advances ($2,647,000), for the redemption of Subordinated Notes
which were not tendered in the Rights Offering ($600,000) (see "Note B" in the
Notes to Unaudited Consolidated Financial Statements), and for general corporate
purposes.
Also, under the provisions of the Rights Offering, the Company
permitted Chase Insurance Holdings Corporation ("CIHC") and its affiliates to
tender the principal amount of their Subordinated Notes (See "Note B" in the
Notes to Unaudited Consolidated Financial Statements) for cancellation as
consideration (in lieu of cash) for the purchase of shares of common stock
pursuant to the Rights Offering. On August 23, 1996, CIHC and its affiliates
tendered $5,619,046 principal amount of their Subordinated Notes plus an
additional $83,759 of accrued interest thereon under the terms of the Rights
Offering. At the conclusion of the offering, CIHC and its affiliate had reduced
their holding of Subordinated Notes to $0.
In a separate transaction, ACCEL retired $731,533 principal amount of
Subordinated Notes held by an unrelated third party for consideration of
$600,000. ACCEL recognized an extraordinary gain on this transaction of $131,533
during the third quarter of 1996. No federal income tax was recognized related
to this gain due to the current consolidated tax position of the Company. The
result of the two aforementioned transactions was to retire all outstanding
Subordinated Notes.
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<PAGE> 57
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 an existing
credit agreement (see "Note B" in the Notes to Unaudited Consolidated Financial
Statements) and to liquidate an intercompany loan between ACCEL and an insurance
company 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. The Senior Notes are payable to the same unaffiliated company
which is a party to the reinsurance agreement dated January 1, 1996. This
agreement is structured such, that as future profits emerge on this block of
business, these profits are held by the reinsurance company, and ultimately
applied to pay interest on and to redeem the Senior Notes. This is accomplished
by the following transactions. The reinsurance company distributes profits to
ALIC as periodically agreed to by the reinsurance company and ALIC. ALIC then,
subject to Ohio Department approval, dividends funds to ACCEL. ACCEL then uses
these funds to redeem a portion of the senior notes and the interest thereon.
Profits in excess of the amount required to retire the Senior Notes are to be
returned to ALIC from the reinsurer. As of December 31, 1996, $1,500,000 of the
profits on this block of business were released to ALIC in the form of the
aforementioned Senior Notes issued by ACCEL. This release resulted in a balance
of $15,000,000 of Senior Notes outstanding as of September 30, 1997 and December
31, 1996.
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 bore interest at 10%.
The unpaid balance of the loan has been reflected as a reduction in
common stockholders' equity in the accompanying unaudited consolidated balance
sheets. During the first quarter of 1997, ACCEL made the final payment and
retired this loan.
The Company currently has three material lines of business that are in
run-off status: the REO line, the farmowner's multiperil and ancillary inland
marine products and the auto dealers' commercial multi-peril line.
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 management believes that the current
level of policy reserves will be adequate to cover anticipated claim
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.
In June 1996, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 125 - Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 125).
SFAS 125 provides accounting and reporting standards for transfers and servicing
of financial assets and extinguishments of liabilities. The accounting and
disclosure requirements of SFAS 125 are effective for transfers and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996 and is to be applied prospectively. Earlier or retroactive application was
not permitted. ACCEL adopted SFAS 125 in 1997 and the impact on the unaudited
consolidated financial statements was not material.
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 - Earnings per Share (SFAS 128). SFAS 128 establishes
standards for computing and presenting earnings per share (EPS). The accounting
and disclosure requirements of SFAS 128 are effective for financial statements
issued for periods ending after December 15, 1997, including interim periods and
earlier adoption is not permitted. SFAS 128 also requires
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<PAGE> 58
restatement of all prior-period EPS data presented. ACCEL will adopt SFAS 128 in
December 1997 and the impact on the unaudited consolidated financial statements
is not expected to be material.
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
SALE OF AUTO AFTERMARKET PRODUCT GROUP: On August 13, 1997,
ACCEL announced it had reached an agreement in principle pursuant to which ACCEL
would sell its auto aftermarket product group along with the stock of its
Acceleration Life Insurance Company (ALIC) subsidiary and two other subsidiaries
to Frontier Insurance Group, Inc. On October 27, 1997, ACCEL announced it had
signed definitive agreements to sell its auto after-market product group along
with the stock of Acceleration Life Insurance Company, Dublin International
Limited and Acceleration National Service Corporation to Frontier Insurance
Group, Inc. for $40.5 million in cash. The transaction is expected to close on
or about December 31, 1997 and is subject to stockholder approval and the
receipt of applicable regulatory approvals. See "THE TRANSACTION."
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Not Applicable.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not Applicable.
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<PAGE> 59
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AUDITED ANNUAL CONSOLIDATED FINANCIAL STATEMENTS
Independent Auditor's Report.............................................. F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995............. F-3
Consolidated Statements of Operations for the Year Ended
December 31, 1996, 1995 and 1994................................. F-5
Consolidated Statements of Common Stockholders' Equity for
the Three Years Ended December 31, 1996.......................... F-6
Consolidated Statements of Cash Flows for the Year Ended
December 31, 1996, 1995 and 1994................................. F-7
Notes to Consolidated Financial Statements................................ F-9
Schedule I - Summary of Investments - Other than
Investments in Related Parties................................... F-27
UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Balance Sheets as of September 30, 1997
and December 31, 1996............................................ F-28
Unaudited Consolidated Statements of Operations for the Three
Months Ended September 30, 1997 and 1996 and the Nine
Months Ended September 30, 1997 and 1996......................... F-30
Unaudited Consolidated Statements of Common Stockholders' Equity
for the Nine Months Ended September 30, 1997 and the
Year Ended December 31, 1996..................................... F-31
Unaudited Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1997 and 1996......................... F-32
Notes to Unaudited Consolidated Financial Statements...................... F-33
F-1
<PAGE> 60
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
ACCEL International Corporation:
We have audited the consolidated financial statements of ACCEL
International Corporation and subsidiaries (the Company) as listed in the
accompanying index. In connection with our audits of the consolidated financial
statements, we also have audited the financial statement schedule listed in the
accompanying index. These consolidated financial statements and the financial
statement schedule are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements and the financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
ACCEL International Corporation and subsidiaries as of December 31, 1996 and
1995, and the consolidated results of their operations and their cash flows for
each of the years in the three-year period ended December 31, 1996, in
conformity with generally accepted accounting principles. Also in our opinion,
the related financial statement schedule when considered in relation to the
basic consolidated financial statements taken as a whole, presents fairly, in
all material respects, the information set forth therein.
KPMG Peat Marwick LLP
Columbus, Ohio
March 14, 1997
F-2
<PAGE> 61
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
1996 1995
ASSETS (Thousands of dollars)
<S> <C> <C>
Investments--Notes B and F:
Investments available for sale, at fair value:
Fixed maturities (cost: 1996--$58,889,000;
1995--$53,427,000) $ 58,281 $ 53,204
Equity securities (cost: 1996--$5,514,000;
1995--$5,433,000) 5,511 5,451
Short-term investments
(cost: 1996--$10,670,000; 1995--$4,278,000) 10,703 4,278
Other invested assets at cost
(fair value: 1996--$346,000; 1995--$364,000) 346 364
---------- ----------
74,841 63,297
Cash 3,331 5,039
Receivables:
Premiums in process of transmittal--Note E, less
allowance (1996--$223,000; 1995--$154,000) 7,286 1,779
Amounts due from reinsurers--Note F,
less allowance (1996 and 1995--$125,000) 11,138 9,119
Recoverable federal income taxes--Note G 1,019 70
---------- ----------
19,443 10,968
Accrued investment income 652 557
Prepaid reinsurance premiums--Note F 15,036 14,895
Reinsurance premium deposits--Note F 42,615 51,634
Deferred policy acquisition costs 30,946 31,839
Equipment--at cost, less accumulated
depreciation (1996--$162,000; 1995--$564,000) 231 187
Leasehold improvements, less accumulated amortization
(1996--$26,000) 152 --
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 716 822
Funds held under reinsurance agreements-Note F 406 829
Other 939 273
---------- ----------
2,061 1,924
---------- ----------
$ 189,308 $ 183,507
========== ==========
</TABLE>
F-3
<PAGE> 62
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
December 31,
1996 1995
(Thousands of dollars)
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
<S> <C> <C>
Policy Reserves and Liabilities:
Unearned premium reserves--Note F $ 81,820 $ 82,080
Insurance claims--Notes F and H 25,256 22,761
Other 7 11
---------- ---------
107,083 104,852
Other Liabilities:
Funds held under reinsurance agreements--Note F 2,920 3,072
Deferred reinsurance commissions--Note F 13,902 15,663
Amounts due reinsurers--Note F 6,133 4,442
Notes payable--Notes D and F 15,000 22,531
Commissions payable 5,163 5,010
Accounts payable and other liabilities 2,788 2,353
Deferred federal income taxes--Note G 4,678 5,024
---------- ---------
50,584 58,095
---------- ---------
157,667 162,947
---------- ---------
Commitments and Contingencies--Notes F and N
Redeemable Preferred Stock:
Authorized shares--1,000,000;
no issued or outstanding shares -- --
Common stockholders' equity--Notes C, D, G, I and P:
Common stock, $.10 par value
Authorized shares (1996--15,000,000;
1995--10,000,000)
Issued shares (1996--9,401,162;
1995--5,243,852) 940 524
Additional paid-in capital 32,507 23,702
Retained earnings 5,403 3,299
Less 797,420 treasury shares at cost (6,599) (6,599)
ESOP loan--Note L (32) (161)
Net unrealized depreciation on investment
securities--Note B (578) (205)
---------- ---------
Net common stockholders' equity 31,641 20,560
---------- ---------
$ 189,308 $ 183,507
========== ==========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE> 63
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
---- ---- ----
(Thousands of dollars, except per share data)
REVENUE:
<S> <C> <C> <C>
Gross premiums written--Notes E and F $ 58,412 $ 55,443 $ 60,504
Less reinsurance ceded--Note F 12,860 12,147 12,495
---------- ----------- -----------
Net premiums written 45,552 43,296 48,009
Decrease (increase) in unearned premium reserves 405 (2,443) (409)
---------- ----------- -----------
Premiums earned--Note F 45,957 40,853 47,600
Net investment income--Note B:
Interest and dividends 4,416 6,488 6,678
Realized gains 484 455 808
Service fees on extended service
contracts 2,450 2,137 2,063
Other income--Note 5 4,513 542 370
---------- ----------- -----------
57,820 50,475 57,519
BENEFITS AND EXPENSES:
Policy benefits--Notes F and H 24,338 20,118 24,997
Commissions and selling expenses 22,145 23,780 22,296
Reinsurance expense recovery--Note F (2,670) (2,880) (3,611)
General and administrative 7,486 7,817 9,336
Taxes, licenses and fees 1,880 1,743 1,903
Interest--Note D 1,969 1,748 1,589
Decrease (increase) in deferred policy
acquisition costs 893 (750) 2,085
Write off of subsidiary--Note K -- -- 3,829
---------- ----------- -----------
56,041 51,576 62,424
---------- ----------- -----------
INCOME (LOSS) BEFORE FEDERAL INCOME
TAXES AND EXTRAORDINARY ITEM 1,779 (1,101) (4,905)
Federal income taxes--Note G:
Current expense 152 273 219
Deferred expense (benefit) (346) 86 114
---------- ----------- -----------
(194) 359 333
---------- ----------- -----------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM 1,973 (1,460) (5,238)
Extraordinary item--gain on
extinguishment of debt--Note D 131 -- --
---------- ----------- -----------
NET INCOME (LOSS) $ 2,104 $ (1,460) $ (5,238)
Per Common Share:
Net income (loss) before extraordinary item $ 0.34 $ (0.33) $ (1.18)
Extraordinary item .02 -- --
---------- ----------- -----------
Net income (loss) $ 0.36 $ (0.33) $ (1.18)
=========== =========== ===========
Weighted average number of common
shares outstanding 5,904,398 4,446,432 4,446,432
=========== =========== ===========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE> 64
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Three Years Ended December 31, 1996
(Thousands of dollars)
<TABLE>
<CAPTION>
Net unrealized
appreciation Foreign
Additional Common (depreciation) currency
Common paid-in Retained stock held in on investment translation
stock capital earnings treasury ESOP loan securities adjustments Net
<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
investment 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 and write down
of ESOP loan--Note L -- (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 -- -- -- -- 129 -- -- 129
Change in net unrealized
depreciation on
investment securities -- -- -- -- -- (373) -- (373)
Issuance of 110,000 shares of
Common Stock under
Common Stock Option Plan
(Note I) 11 223 -- -- -- -- -- 234
Issuance of 4,047,310 shares of
Common Stock in conjunction
with the Rights Offering and
the Supplemental Offering 405 8,582 -- -- -- -- -- 8,987
Net income -- -- 2,104 -- -- -- -- 2,104
---- -------- ------- ------- ----- ------- ----- --------
Balances at December 31, 1996 $940 $ 32,507 $ 5,403 $(6,599) $ (32) $ (578) -- $ 31,641
==== ======= ======= ======= ===== ======= ===== ========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE> 65
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- -------- --------
(Thousands of dollars)
OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income (loss) before extraordinary item $ 1,973 $ (1,460) $ (5,238)
Adjustments to reconcile net income (loss) to net
cash used in operating activities:
Change in premiums receivable (5,576) 1,789 3,266
Change in accrued investment income (95) 250 191
Change in prepaid reinsurance
premiums (141) 3,812 9,208
Change in funds held under reinsurance
agreements 271 (292) (1,196)
Change in unearned premium reserves (260) (1,682) (7,449)
Change in insurance claim reserves 2,495 (398) (12,435)
Change in amounts due reinsurers
and amounts due from
reinsurers (1,828) (3,310) 7,298
Change in other assets, other liabilities (1,463) 1,683 (860)
and accrued income taxes
Interest paid in kind 403 569 515
Accrual of discount on bonds (234) (461) (128)
Amortization of premium on bonds 101 172 116
Amortization of deferred policy
acquisition costs 20,290 20,743 24,414
Policy acquisition costs deferred (19,397) (21,493) (22,329)
Reinsurance commissions earned (33,645) (13,329) (12,763)
Reinsurance commissions received 31,884 11,162 11,708
Provision for depreciation and
amortization 286 412 528
Write off of subsidiary -- -- 3,829
Net realized gains on investments (484) (455) (808)
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES
BEFORE EXTRAORDINARY ITEM (5,420) (2,288) (2,133)
Extraordinary gain 131 -- --
-------- -------- --------
NET CASH USED IN OPERATING ACTIVITIES (5,289) (2,288) (2,133)
-------- -------- --------
</TABLE>
(Continued)
F-7
<PAGE> 66
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOW--(CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
INVESTING ACTIVITIES:
Sale of investments available for sale 16,219 49,159 38,103
Purchase of investments available for sale (27,665) (7,067) (35,574)
Sale of property occupied by the Company 3,298 -- --
Other, net (337) (122) (59)
-------- -------- --------
NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES (8,485) 41,970 2,470
-------- -------- --------
FINANCING ACTIVITIES:
Payment on ESOP loan 129 102 93
Repayment of notes payable (600) (13,000) --
Issuance of notes payable -- 16,500 --
Debentures redeemed -- -- (900)
Issuance of Common Stock under Stock Option Plan 234 -- --
Issuance of Common Stock under Rights Offering 3,284 -- --
Change in reinsurance premium deposit 9,019 (39,289) (1,251)
-------- -------- --------
NET CASH PROVIDED (USED IN) FINANCING ACTIVITIES 12,066 (35,687 (2,058)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH (1,708) 3,995 (1,721)
Cash at beginning of year 5,039 1,044 2,765
-------- -------- --------
CASH AT END OF YEAR $ 3,331 $ 5,039 $ 1,044
======== ======== ========
Supplemental schedule of non-cash financing activities:
Cancellation of Subordinated Notes as consideration
for the purchase of Common Stock--Note D $ 5,703 -- --
======== ======== ========
Transfer of note payable to subsidiary--Note D $ 1,500 -- --
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
F-8
<PAGE> 67
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1996, 1995 AND 1994
NOTE A--SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION: The accompanying 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 which, as to the insurance company
subsidiaries, differ in some respects from statutory accounting practices
prescribed or permitted by state insurance departments. The significant
accounting policies followed by the Company that materially affect financial
reporting are summarized below.
PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements
include the accounts of ACCEL and its wholly-owned subsidiaries, except for
Randjill Group Ltd. ("RGL") (see Note K). All significant intercompany accounts
and transactions have been eliminated in the 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, commercial auto and other specialty casualty
products. 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 specialty casualty products are
offered through general agents. 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, new legal theories or insurance company
insolvencies through guaranty fund assessments may create costs for the
insurer beyond those currently recorded in the 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.
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 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 consolidated financial statements,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosures of contingent
assets and liabilities as of the date of the consolidated financial statements
and revenues and expenses for the reporting period. Actual results could differ
significantly from those estimates.
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.
F-9
<PAGE> 68
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
INVESTMENTS: The Company classifies 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 fair value which approximates
cost.
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 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, 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 recognized by
writing the investment down to its fair value.
FAIR VALUES OF FINANCIAL INSTRUMENTS: The fair value of a financial instrument
is the amount at which the financial instrument could be exchanged in a current
transaction between willing parties. In cases where quoted market prices are not
available, fair value is based on estimates using present value or other
valuation techniques.
These techniques are significantly affected by the assumptions used, including
the discount rate and estimates of future cash flows. Although fair value
estimates are calculated using assumptions that management believes are
appropriate, changes in assumptions could cause these estimates to vary
materially. In that regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in the immediate settlement of the instruments. The disclosure
requirements related to financial instruments exclude certain assets and
liabilities. Accordingly, the aggregate fair value amounts presented do not
represent the underlying value of the Company.
The tax ramifications of the related unrealized gains and losses may have a
significant effect on fair value estimates and have not been considered in the
estimates.
The carrying amounts reported in the consolidated balance sheets for cash,
short-term investments, accrued investment income, premiums in process of
transmittal, and amounts due from reinsurers approximate their fair value.
Fair value for fixed maturity, equity and asset and mortgage backed securities
are based on quoted market prices, where available. If quoted market prices are
not available, fair values are based on quoted market prices of comparable
instruments at amortized value (see Note B).
The fair value of notes payable is estimated using discounted cash flow
analyses, based on ACCEL's current incremental borrowing rates for similar types
of borrowing arrangements (see Note G).
DEFERRED POLICY ACQUISITION COSTS: The costs (principally commissions and
certain expenses of policy issuance) of acquiring or renewing insurance
business, all of which vary with and are directly related to the production of
business, have been deferred. These deferred policy acquisition costs are
amortized in a manner related to the recognition of premiums earned.
Substantially all such deferred costs are amortized within a four-year period.
Anticipated investment income is considered in determining recoverability of
deferred costs.
F-10
<PAGE> 69
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
EQUIPMENT AND DEPRECIATION: Equipment is carried at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over an
estimated useful asset life of five years.
LEASEHOLD IMPROVEMENTS: Leasehold improvements are carried at cost less
accumulated amortization. Amortization is provided using the straight-line
method over the term of the five year lease.
PROPERTY OCCUPIED BY COMPANY: Home office property is carried at cost less
accumulated depreciation. Depreciation is provided using the straight-line
method over an estimated life of thirty-five years.
GOODWILL AMORTIZATION: Cost in excess of fair value of net assets of
subsidiaries at dates of acquisition is being amortized primarily over a
thirty-five year period. It is the Company's policy to account for goodwill at
the lower of amortized cost or fair value. On an ongoing basis, management
reviews the valuation and amortization of its goodwill.
PREMIUM INCOME RECOGNITION AND UNEARNED PREMIUM RESERVES: Unearned premium
reserves on credit life and credit accident and health insurance are calculated
primarily under the "Rule of 78's Method", which results in premium income being
recognized in decreasing proportions over the terms of the policies, which
approximates the pattern of policy benefits incurred.
Unearned premium reserves on the extended service contracts are based on the
historical emergence pattern of claims. The Company's primary liability on new
car contracts exists subsequent to the expiration of manufacturers' warranties.
This method results in premium being recognized in direct proportion to the
emergence of benefits on these contracts.
Unearned premium reserves on property and casualty products are calculated on
the pro rata method.
INSURANCE CLAIMS: The liabilities for insurance claims are determined using
statistical analyses and represent estimates of the ultimate net cost of all
reported and unreported claims that are unpaid at year end. Considerable
variability is inherent in such estimates and actual results will likely differ
from those estimates.
FEDERAL INCOME TAXES: ACCEL and its subsidiaries file a consolidated federal
income tax return. The provision for income taxes is based on income for
financial reporting purposes, after permanent differences. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under this
method, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the deferred tax
assets to the amounts expected to be realized.
REINSURANCE: Reinsurance premiums ceded and reinsurance recoveries on policy
benefits incurred are deducted from the respective income and expense accounts.
Assets and liabilities related to reinsurance ceded are reported on a gross
basis. Amounts related to reinsurance contracts, where it is not reasonably
possible for the reinsurer to realize a significant loss, are recorded based on
the deposit accounting method.
DEFERRED REINSURANCE COMMISSIONS: Commissions and ceding fees received in
connection with premiums ceded are deferred and amortized in a manner related to
the recognition of premiums earned. Substantially all such commissions and
ceding fees are amortized within a four-year period. Earned ceding fees,
commissions and experience refunds are reported as reinsurance expense
recoveries in the consolidated statements of operations.
F-11
<PAGE> 70
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
STOCK OPTION PLANS: Prior to January 1, 1996, the Company accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted the Financial
Accounting Standards Board's (FASB) Statement No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, FASB No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in FASB No. 123 had been
applied. The Company has elected to continue to apply the provisions of APB
Opinion No. 25 and provide the pro forma disclosure provisions of FASB No. 123
(see Note I).
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 and 1994 consolidated financial
statements have been reclassified to conform with the 1996 presentation.
NOTE B--INVESTMENTS
At December 31, 1996 and 1995, investments in cash and securities with a
carrying value of $10,056,000 and $9,108,000, respectively, were on deposit with
state insurance departments to satisfy regulatory requirements. Cash and
securities with a carrying value of $22,502,000 and $19,879,000 at December 31,
1996 and 1995, respectively, were on deposit as security funds in connection
with reinsurance treaties.
The change in net unrealized gains (losses) on fixed maturity and equity
securities is summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Securities available for sale:
Fixed maturities $ (385) $ 6,417 $(8,054)
Equity securities (21) 50 (114)
Short-term investments 33 -- --
------- ------- -------
$ (373) $ 6,467 $(8,168)
======= ======= =======
Realized gains (losses) on investments are summarized as follows:
Securities available for sale:
Fixed maturities
Gross realized gains $ 158 $ 607 $ 194
Gross realized losses (150) (284) (35)
Equity securities:
Gross realized gains 307 106 148
Gross realized losses -- -- --
Other invested asset gains 169 26 501
------- ------- -------
$ 484 $ 455 $ 808
======= ======= =======
</TABLE>
F-12
<PAGE> 71
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
NOTE B--INVESTMENTS--(CONTINUED)
The major sources of investment income are summarized as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Fixed maturities $ 3,865 $ 5,669 $ 6,307
Equity securities 288 181 113
Short-term investments 440 927 333
Other 55 431 469
------- -------- --------
4,648 7,208 7,222
Investment expenses (232) (720) (544)
------- -------- --------
Net investment income $ 4,416 $ 6,488 $ 6,678
======= ======= =======
</TABLE>
The amortized cost and estimated fair value of fixed maturity securities by
category, all of which were available for sale, are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized unrealized unrealized Fair
cost gains losses value
------- ------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C> <C>
December 31, 1996
- -----------------
U.S. Treasury and U.S. government
agency securities $13,120 $ 99 $ (26) $13,193
State and political subdivision
securities 940 20 -- 960
Mortgage-backed securities 16,590 48 (638) 16,000
Collateralized mortgage obligations 15,972 101 (135) 15,938
Asset-backed securities 8,181 73 (160) 8,094
U.S. corporate securities 3,541 51 (38) 3,554
Redeemable preferred stocks 545 -- (3) 542
------- ------- ------- -------
Total $58,889 $ 392 $(1,000) $58,281
======= ======= ======= =======
December 31, 1995
- -----------------
U.S. Treasury and U.S. government $ 9,310 $ 274 $ -- $ 9,584
agency securities
State and political subdivision
securities 1,255 35 -- 1,290
Mortgage-backed securities 15,887 66 (104) 15,849
Collateralized mortgage obligations 11,587 53 (604) 11,036
Asset-backed securities 13,740 203 (206) 13,737
U.S. corporate securities 1,000 26 -- 1,026
Redeemable preferred stocks 648 34 -- 682
------- ------- ------- -------
Total $53,427 $ 691 $ (914) $53,204
======= ======= ======= =======
</TABLE>
The amortized cost and estimated fair value of fixed maturity securities, all of
which were available for sale, at December 31, 1996, by contractual maturity,
are summarized as follows:
<TABLE>
<CAPTION>
Amortized Fair
cost value
------- -------
(Thousands of dollars)
Maturity
- --------
<S> <C> <C>
Due in one year or less $ 4,972 $ 4,989
Due after one year through five years 7,446 7,522
Due after five years through ten years 4,288 4,308
Due after ten years 1,440 1,430
Mortgage-backed securities 16,590 16,000
Collateralized mortgage obligations 15,972 15,937
Asset-backed securities 8,181 8,095
------- -------
Total $58,889 $58,281
======= =======
</TABLE>
F-13
<PAGE> 72
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE B--INVESTMENTS--(CONTINUED)
The expected maturities in the foregoing table will differ from contractual
maturities because borrowers may have the right to call or prepay obligations
with or without penalty. Mortgage-backed securities owned have an expected
weighted average maturity of over 10 years.
Proceeds from the sale of securities available-for-sale during 1996, 1995 and
1994 were $2,973,000, $18,456,000 and $3,467,000, respectively. Gross gains of
$408,000 ($444,000 in 1995 and $211,000 in 1994) and gross losses of $-0-
($25.000 in 1995 and $31,000 in 1994) were realized on those sales.
One asset-backed security held by the Company was written down by $150,000 and
$200,000 in 1996 and 1995, respectively. These write downs are included in
realized gains in the accompanying consolidated statements of operations.
NOTE C--STOCKHOLDERS' EQUITY AND TRANSFER LIMITATIONS
Generally, the net assets of the consolidated insurance subsidiaries available
for transfer to ACCEL are limited to the amounts that the insurance
subsidiaries' net assets, as determined in accordance with statutory accounting
practices, exceed minimum statutory capital and surplus requirements; however,
payments of such amounts as dividends from each insurance subsidiary are
currently subject to regulation by Ohio law. Based on this law, Acceleration
Life Insurance Company ("ALIC") could pay a dividend of $1,543,315 to ACCEL in
1997 without approval of the Department of Insurance of the State of Ohio ("Ohio
Department"). Acceleration National Insurance Company ("ANIC") would require
Ohio Department approval to pay any dividend to ACCEL during 1997.
The statutory basis capital and surplus and net income (loss) of the insurance
subsidiaries included in the Company's consolidated financial statements, as
reported to insurance regulatory authorities, are summarized as follows:
<TABLE>
<CAPTION>
Life/ Property/
Health Casualty
------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Statutory capital and surplus
at December 31:
1996 $15,122 $13,017
1995 13,010 10,037
Statutory net income (loss) for
year ended December 31:
1996 $1,543 $ 884
1995 (713) (2,574)
1994 1,165 (1,537)
</TABLE>
NOTE D-NOTES PAYABLE
In 1991, ACCEL issued $5,848,000 of subordinated notes (the "Subordinated
Notes"). The Subordinated Notes had 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 $403,000 and
$569,000 for the 1996 and 1995 interest payments, respectively.
Of the Subordinated Notes described above, a significant portion were held by
Chase Insurance Holdings Corporation ("CIHC"), a company related through common
ownership by a stockholder and director of the Company.
F-14
<PAGE> 73
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE D--NOTES PAYABLE--(CONTINUED)
On July 25, 1996, the Company commenced an offering of non-transferable rights
(the "Rights Offering") to stockholders of record as of June 18, 1996. Under the
provisions of the Rights Offering, the Company permitted CIHC and its affiliate
to tender the principal amount of their Subordinated Notes for cancellation as
consideration (in lieu of cash) for the purchase of shares of common stock
pursuant to the Rights Offering. On August 23, 1996, CIHC and its affiliate
tendered $5,619,046 principal amount of their Subordinated Notes plus an
additional $83,759 of accrued interest thereon under the terms of the Rights
Offering. At the conclusion of the offering, CIHC and its affiliate had reduced
their holding of Subordinated Notes to $0.
In a separate transaction, the Company retired $731,533 principal amount of
Subordinated Notes held by an unrelated third party for consideration of
$600,000. The Company recognized an extraordinary gain on this transaction of
$131,533. No federal income tax was recognized related to this gain due to the
current consolidated tax position of the Company.
The result of the two aforementioned transactions was to retire all outstanding
Subordinated Notes.
At December 31, 1994, the effective interest rate and outstanding loan balance
under a credit agreement (the "Credit Agreement") were 8.75% and $13,000,000,
respectively. 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. The
loan was to be payable in full on June 30, 1997.
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, ALIC entered into a
reinsurance agreement with an unaffiliated company to reinsure the majority of
the in-force credit business. The Senior Notes are payable to the same
unaffiliated company which is a party to the reinsurance agreement dated January
1, 1996. This agreement is structured such, that as future profits emerge on
this block of business, these profits are held by the reinsurance company, and
ultimately applied to pay interest on and to redeem the Senior Notes. Profits in
excess of the amount required to retire the Senior Notes are to be returned to
ALIC. As of December 31, 1996, $1,500,000 of the profits on this block of
business were released to ALIC in the form of the aforementioned Senior Notes.
This release resulted in a balance of $15,000,000 of Senior Notes outstanding as
of December 31, 1996. The fair value of these Senior Notes as of December 31,
1996 was $8,100,000.
During 1996, 1995 and 1994, ACCEL paid interest on notes of $403,000, $1,125,000
and $974,000, respectively.
NOTE E--BUSINESS CONCENTRATION
With first year premium written of $13,800,000 and gross earned premium of
$8,400,000, Commercial Auto has become a primary product line for the Company.
This program is marketed by a general agent located in Melbourne, Florida
Transportation Insurance Specialists (TIS). At year end 1996, the premium
receivable, net of commission, due from TIS was $5,200,000.
NOTE F--REINSURANCE
The Company's reinsurance program includes an agreement covering certain of its
direct credit business, the reinsurance of other direct business ceded on a
quota share basis and direct business ceded to producer-owned reinsurance
companies.
The ceding of insurance through reinsurance agreements does not discharge the
primary liability of the original underwriter to the insured, but it is the
practice of insurers to treat risks that have been reinsured with other
companies, to the extent of the reinsurance, as though they were not risks for
which the original insurer is liable. Should the reinsurer not be able to meet
its obligations, those obligations are the ultimate responsibility of the
Company. Therefore, in financial statement presentation, premiums and policy
benefits are presented net of that portion of risks reinsured with other
companies.
F-15
<PAGE> 74
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE F--REINSURANCE--(CONTINUED)
DIRECT BUSINESS CEDED--CREDIT BUSINESS QUOTA SHARE: The Company has an agreement
in place which covers a substantial portion of its credit insurance business.
The agreement contains an experience adjustment computation that results in the
ultimate cost of this agreement being a stated percentage related to the
business covered by the agreement. The Company ultimately retains a substantial
part of the insurance risk, the underwriting income or loss and the investment
income on net funds.
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 consolidated
financial statements have been prepared on this basis.
The effect of this agreement is to increase statutory capital and surplus of
ALIC, a wholly owned subsidiary of ACCEL, by $14,416,000 and $14,512,000 as of
December 31, 1996 and 1995, respectively.
On January 1, 1996 the Company terminated its quota share reinsurance agreement
and elected to recapture the liabilities subject to the treaty. The liabilities
recaptured thereunder were then available for cession under the treaty described
below. The unearned premium reserves and claim liabilities recaptured were
$29,753,000 and $8,424,000, respectively.
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
(see Note D). 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 approximated $48,616,000 and $9,919,000,
respectively, as of January 1, 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 consolidated balance sheets as of December 31, 1996 and 1995.
DIRECT BUSINESS CEDED--OTHER QUOTA SHARE: The Company reinsures a portion of its
group life and health care insurance with several unaffiliated companies. The
effect of this reinsurance is to transfer the risk, the underwriting income or
loss, and the investment income related to the premiums ceded. In 1993, the
Company entered into reinsurance agreements with unaffiliated reinsurers related
to certain additional product lines. The effect of such reinsurance arrangements
is to transfer 100% of the related risk to the reinsurers. Premiums ceded
associated with these agreements and included in the accompanying consolidated
statements of operations amounted to $496,000, $633,000 and $980,000 in 1996,
1995 and 1994, respectively.
DIRECT BUSINESS CEDED--TO PRODUCER-OWNED REINSURANCE COMPANIES: The Company has
agreements to cede certain credit life and credit accident and health insurance
to reinsurance companies owned by certain automobile dealers, financial
institutions or agents. Under these arrangements, the assuming entities
participate in the profits or losses of the insurance produced by them, and the
Company may retain a nominal percentage of the applicable business. These
treaties generally provide that the Company receives a ceding fee and is
reimbursed for certain commissions and claims.
Written premiums included in the accompanying consolidated statements of
operations that have been ceded, or which are subject to cession under all such
agreements, amounted to $5,669,000, $7,429,000 and $10,284,000 in 1996, 1995 and
1994, respectively.
F-16
<PAGE> 75
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE F--REINSURANCE--(CONTINUED)
OTHER REINSURANCE: Credit life and credit accident and health premiums assumed
by the Company relating to business written in Pennsylvania by an unaffiliated
carrier, amounted to $3,633,000, $6,308,000 and $7,640,000 in 1996, 1995 and
1994, respectively. Unearned premium reserves and the liability for insurance
claims at December 31, 1996 include $8,279,000 and $3,352,000, respectively
($10,904,000 and $3,243,000 at December 31, 1995, respectively), for risks
assumed under this agreement.
On July 31, 1996 this agreement was terminated. The obligations relating to the
in-force business shall remain in effect until such business expires.
As of December 31, 1992, the Company entered into a reinsurance agreement with
unaffiliated reinsurers whereby the Company cedes 100% of the premiums written
in connection with vendor's single interest insurance. In mid 1994, a
substantial part of the remaining in-force business was assumed by an
unaffiliated reinsurer, and resulted in a return of premiums. The VSI product
was forced-placed when the borrower could not demonstrate coverage for the
automobile that was securing the loan with the lending institution. Premiums
ceded under this agreement were $(63,000), $(858,000) and $(6,024,000) for 1996,
1995 and 1994, respectively. Policy benefit expense in 1996, 1995 and 1994,
respectively, has been reduced by $83,000, $104,000 and $1,407,000 in
conjunction with these agreements.
The Company also entered into reinsurance agreements with several unaffiliated
reinsurers related to certain property and casualty lines of business written by
the Company. Unearned premium reserves and the liability for insurance claims
associated with these agreements at December 31, 1996 are $5,572,000 and
$5,820,000, respectively ($2,645,000 and $2,240,000 at December 31, 1995,
respectively).
The following data summarizes certain aspects of the Company's reinsurance
activity for 1996, 1995 and 1994.
Premiums written and earned in 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- -----
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Direct $ 54,779 $ 52,417 $ 49,135 $ 50,265 $ 52,864 $ 59,789
Assumed 3,633 6,259 6,308 6,864 7,640 7,004
Ceded (12,860) (12,719) (12,147) (16,276) (12,495) (19,193)
-------- -------- -------- -------- -------- --------
Net premiums $ 45,552 $ 45,957 $ 43,296 $ 40,853 $ 48,009 $ 47,600
======== ======== ======== ======== ======== ========
</TABLE>
Policy benefits incurred in 1996, 1995 and 1994 are summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Direct $ 27,602 $ 24,900 $ 31,567
Assumed 4,100 3,973 3,754
Ceded (7,364) (8,755) (10,324)
-------- -------- --------
Net policy benefits $ 24,338 $ 20,118 $ 24,997
======== ======== ========
</TABLE>
NOTE G--FEDERAL INCOME TAXES
The Company files a consolidated income tax return with its subsidiaries,
including its life insurance subsidiary. For tax purposes, certain amounts have
been accumulated by the life insurance subsidiary in a memorandum tax account
designated as "policyholders' surplus" that will be taxed only when distributed
to shareholders. Policyholders' surplus on a tax basis was $4,489,000 at
December 31, 1996. Management considers the likelihood of distributions from
this account to be remote; therefore, no federal income tax has been provided
for such distributions in the accompanying consolidated financial statements.
F-17
<PAGE> 76
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE G--FEDERAL INCOME TAXES--(CONTINUED)
As of December 31, 1996, approximately $4,700,000 could be distributed to
shareholders before a distribution would be designated as from the
policyholders' surplus account.
In 1996, 1995 and 1994, the Company paid $1,100,000, $410,000 and $140,000,
respectively, in federal income taxes.
Total income tax expense (benefit) differed from the amount computed by applying
the statutory federal income tax rate to income (loss) before taxes as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
------- ------- -------
(Thousands of dollars)
<S> <C> <C> <C>
Income tax (benefit at statutory rate $ 605 $ (374) $(1,668)
Amortization of goodwill 36 36 36
Dividends-received deduction (64) (54) (38)
Special deductions of life insurance
subsidiaries (273) -- (297)
Tax-exempt interest (14) (18) (21)
Valuation allowance (372) 761 (599)
Write off of subsidiary -- -- 1,302
Other, net (112) 8 1,618
------- ------- -------
Federal income tax expense (benefit) $ (194) $ 359 $ 333
======= ======= =======
</TABLE>
The tax effects of temporary differences that give rise to significant
components of the net deferred tax liability at December 31, 1996 and 1995 are
summarized as follows:
<TABLE>
<CAPTION>
December 31,
1996 1995
-------- -------
(Thousands of dollars)
<S> <C> <C>
Deferred Tax Liabilities: $ 10,400 $ 10,656
2,223 2,621
-------- -------
Other 12,633 13,277
-------- -------
Deferred Tax Assets: 4,819 5,420
Deferred reinsurance commissions 994 1,766
Net operating loss carryforward 1,457 1,328
Insurance reserves 204 119
Unrealized losses on investments 1,900 1,757
Service contracts 277 -
Amount due reinsurers 228 95
-------- --------
Other 9,879 10,485
Total deferred tax assets (1,924) (2,232)
-------- -------
Net deferred tax assets $ 4,678 $ 5,024
Valuation allowance 7,955 8,253
-------- -------
Net deferred tax assets $ 4,678 $ 5,024
======== ========
Net deferred tax liability
</TABLE>
The Company has determined the valuation allowance related to the deferred tax
assets based on its analysis of future deductible amounts. This analysis
included a schedule of the deductibility of non-life items against life company
taxable income pursuant to Section 801 of the Internal Revenue Code and a
determination of the realization of losses generated by available for sale
securities.
The Company recorded a valuation allowance of $3,638,000 and $2,484,000 as of
December 31, 1994 and January 1, 1994, respectively.
The Company has $2,923,000 of net operating losses that are available to reduce
future income taxes and will expire in 2010.
F-18
<PAGE> 77
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE H--LIABILITY FOR INSURANCE CLAIMS
The following table provides a reconciliation of beginning and ending
liability balances for the Company's insurance claims for 1996, 1995 and 1994.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Liability for insurance claims $ 22,761 $ 23,159 $ 49,919
at beginning of year
Less reinsurance recoverables (5,864) (5,423) (11,801)
-------- -------- --------
Net balances at beginning of year 16,897 17,736 38,118
Policy benefits incurred:
Policy benefits incurred for
events of the current year 23,895 19,602 24,914
Policy benefits incurred for
events of prior years 443 516 83
-------- -------- --------
Total policy benefits incurred 24,338 20,118 24,997
-------- -------- --------
Galaxy unpaid losses and LAE at
date of write off (see Note K) -- -- 14,325
Payments:
Policy benefits for insured
events of the current year 13,307 10,860 20,556
Policy benefits for insured
events in prior years 8,896 10,097 10,498
-------- -------- --------
Total payments 22,203 20,957 31,054
-------- -------- --------
Net balances at end of year 17,759 16,897 17,736
Plus reinsurance recoverables 7,497 5,864 5,423
-------- -------- --------
Liability for insurance claims
at end of year $ 25,256 $ 22,761 $ 23,159
======== ======== ========
</TABLE>
The table above reflects decreases in the liability for insurance claims
resulting from discontinued lines of business and the write off of Galaxy
Insurance Company ("Galaxy"), a wholly owned subsidiary of RGL (see Note K).
Increases in policy benefits incurred for events of prior years relate to
management's reevaluation of discontinued lines of business.
In establishing the liability for insurance claims, management considers facts
currently known and the current state of the law and coverage litigation.
Liabilities are recognized for known claims (including the cost of related
litigation) when sufficient information has been developed to indicate the
involvement of a specific insurance policy, and management can reasonably
estimate its liability. In addition, liabilities have been established to cover
additional exposures on both known and unasserted claims. Estimates of the
liabilities are reviewed and updated continually.
F-19
<PAGE> 78
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I--COMMON STOCKS AND COMMON STOCK OPTIONS
In 1992, the Board of Directors voted to suspend payment of cash dividends on
the common stock until the Company returns to a level of profitability that will
sustain the payment of cash dividends.
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. At December 31, 1996,
the unpaid balance on this loan was $32,000.
During November 1989, ACCEL's Board of Directors also approved a stock buy back
program to repurchase up to 1,000,000 common shares in the open market. ACCEL
has purchased 229,185 shares at a cost of $1,722,000 under this program. The buy
back program was funded from internally generated funds. No shares have been
purchased since 1992.
During 1982, ACCEL adopted a stock option plan (the "82 Plan") under which
shares of common stock were made available to eligible officers and key
personnel. Under the terms of the 82 Plan, the option price had to be at least
100% of the fair value at the date of grant, and, accordingly, there were no
charges to income resulting from grants. Options were granted at prices ranging
from $2.769 to $11.750 per share from April 1982 through April 1992. The options
become exercisable after one year of continuous employment in installments of
50% at the end of the first and the second year from the date of grant and
expired ten years from the date of grant. A total of 300,000 (349,672 after
giving effect to all subsequent stock dividends) shares had been reserved for
options under the 82 Plan.
Of the total options granted under the 82 Plan at December 31, 1996, only 18,524
remain exercisable. No additional shares may be granted under the 82 Plan.
During 1987, ACCEL adopted the 1987 Incentive Stock Option Plan (the "87 Plan").
The 87 Plan provided for incentive stock options with respect to a maximum of
300,000 (347,287 after giving effect to all subsequent stock dividends) shares
of common stock of ACCEL prior to the expiration of the 87 Plan in April 1997.
During June of 1991, ACCEL's Board of Directors and shareholders approved the
First Restatement of the 1987 Stock Incentive Plan (the "Restated Plan"). The
Restated Plan replaced the 87 Plan except as to options granted and outstanding
under the 87 Plan. The Restated Plan reserved an additional 450,000 shares for
key employees and 50,000 shares for non-employee directors. Options could be
granted prior to expiration of the Restated Plan covering shares subject to
lapsed or terminated options. Of the total options outstanding under the
Restated Plan, 235,254 were exercisable at December 31, 1996. At December 31,
1996, no shares were reserved for future grants.
During May 1995, two new Key Employees were granted stock options under ACCEL's
Restated 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. Options for 150,000 shares were granted at an option price per
share of $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
have been forfeited if employment with ACCEL had been voluntarily terminated
prior to May 23, 1996. The options lapse five years from the effective date of
grant.
At the end of their first year of service the status of these two key employees
was evaluated by the Compensation Committee and based on the value of their
services, began receiving compensation effective June 1, 1996. As part of their
compensation both were granted stock options pursuant to the 1996 Stock
Incentive Plan (the "96 Plan"). Options for 165,000 shares were granted at an
option price per share of $2.50, the fair value of ACCEL's common stock on the
date of grant. The terms are identical to the aforementioned options granted in
May 1995.
In June 1996, ACCEL stockholders approved the adoption of the 96 Plan. The 96
Plan provides for stock options, stock appreciation rights, restricted stock,
phantom stock and performance awards. No award may be granted after June 11,
2006, the expiration date of the 96 Plan. The total number of shares of common
stock available under the 96 Plan is 1,000,000 shares and up to 100,000 shares
may be issued pursuant to the exercise of outside directors' stock options.
F-20
<PAGE> 79
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE I--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)
Options granted to employees or independent agents of the Company under the 96
Plan will be priced at not less than 100% of the fair value of the common stock
on the date of grant and will become exercisable as to 25% of the shares subject
to the option upon completion of each full year of employment until fully
vested. Grants of options to outside directors under the 96 Plan will also be
priced at 100% of fair value on the date of grant but, in the absence of any
provisions in an option to the contrary, the options will become exercisable as
to 50% of the shares subject to the option upon completion of each full year
until vested. In substantially all other respects, the 96 Plan contains
provisions similar to the previous plans.
On August 28, 1996, the Board of Directors of the Company approved a resolution
to offer to all key employees holding options outstanding that were priced in
excess of the current market value the opportunity to receive "re-priced"
options. Such key employees were permitted to surrender, cancel and terminate
any or all outstanding options (whether vested or not) and receive options for
an equal number of shares under the 96 Plan at the then current price of $2.50
per share. The re-priced or "replacement" options would be newly granted options
and become exercisable in accordance with the vesting provisions of the 96 Plan.
A total of 161,371 shares were surrendered by key employees as part of the
re-pricing opportunity and 4,500 shares were not surrendered. Including the
shares surrendered as a part of the re-pricing opportunity, options were granted
for a total of 420,371 shares to key employees and outside directors under the
96 Plan.
The following table summarizes activity under the respective plans.
<TABLE>
<CAPTION>
The 1996 Plan
- -------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Options granted 420,371 -- --
Average option price per share 2,514 -- --
Options lapsed -- -- --
Options exercised -- -- --
Average exercise price -- -- --
The Restated Plan-Employees
- ---------------------------
1996 1995 1994
------- ------- -------
Options granted -- 231,500 89,000
Average option price per share -- $ 2.125 $ 4.500
Options lapsed 45,526 25,000 118,759
Options exercised 110,000 -- --
Average exercised price 2,125 -- --
The Restated Plan-Non Employee Directors
- ----------------------------------------
1996 1995 1994
------- ------- -------
Options granted -- 9,000 8,000
Average option price per share -- $ 2.236 $ 4.500
Options lapsed -- -- --
Options exercised -- -- --
Average exercised price -- -- --
</TABLE>
F-21
<PAGE> 80
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE I-- COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)
At December 31, 1996 and 1995, there were 579,629 and 0 additional shares
available for grant under the 1996 Plan and the Restated Plan, respectively. The
per share weighted-average fair value of stock options granted during 1996 and
1995 was $1.20 and $0.79 on the date of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions: 1996
expected dividend yield 0%, risk-free interest rates ranging from 6.85% to 7.09%
(based on the date of the grant), and expected lives of 5 to 10 years (based on
the terms of the grant); 1995 - expected dividend yield 0%, risk-free interest
rate 7.00%, and expected lives of 5 to 10 years (based on the terms of the
grant).
The Company applies APB Opinion No. 25 in accounting for these plans and,
accordingly, no compensation cost has been recognized for its stock options in
the consolidated financial statements. Had the Company determined compensation
cost based on the fair value at the grant date for its stock options under FASB
No. 123, the Company's net income would have been reduced to the pro forma
amounts indicated below:
<TABLE>
<CAPTION>
1996 1995
--------- ---------
<S> <C> <C> <C>
Net income (loss) As reported $ 2,104 $ (1,460)
Pro forma 1,980 (1,580)
Net income (loss) per As reported $ .36 $ (.33)
common share Pro forma .34 (.36)
</TABLE>
Pro forma net income reflects only options granted in 1996 and 1995. Therefore,
the full impact of calculating compensation cost for stock options under FASB
No. 123 is not reflected in the proforma net income amounts presented above
because compensation cost is reflected over the options' vesting periods from
one to four years and compensation cost for options granted prior to January 1,
1995 is not considered.
NOTE J--SEGMENT INFORMATION
The Company operates primarily in the life/health and property/casualty
insurance industries. There are no intersegment sales.
The allocations of certain general expenses and investment income within
segments are based on a number of assumptions, and the reported operating
results would change if different methods were applied. Depreciation and capital
expenditures are not considered material.
Information relating to revenue, income (loss) before income taxes and
extraordinary item, and identifiable assets by segment are summarized as follows
(see Note K regarding 1994 Property/Casualty amounts):
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- -------- --------
(Thousands of dollars)
Revenue:
<S> <C> <C> <C>
Life/Health $ 36,382 $ 38,878 $ 37,097
Property/Casualty (Note S) 19,289 11,454 20,185
Other (Note S) 2,149 143 237
-------- -------- --------
Total $ 57,820 $ 50,475 $ 57,519
======== ======== ========
Income (loss) before income taxes and extraordinary item:
Life/Health $ 628 $ 3,055 $ 3,123
Property/Casualty 1,345 (2,236) (6,333)
Other (194) (1,920) (1,695)
-------- -------- --------
Total $ 1,779 $ (1,101) $ (4,905)
======== ======== ========
</TABLE>
F-22
<PAGE> 81
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE J-SEGMENT INFORMATION--(CONTINUED)
<TABLE>
<CAPTION>
Year Ended December 31,
1996 1995 1994
-------- -------- --------
(Thousands of dollars)
<S> <C> <C> <C>
Identifiable assets:
Life/Health $138,723 $144,164 $139,262
Property/Casualty 49,840 38,997 40,428
Other 745 366 258
-------- -------- --------
Total $189,308 $183,507 $179,948
======== ======== ========
</TABLE>
NOTE K--WRITE OFF OF INVESTMENT IN RANDJILL GROUP LTD. AND GALAXY INSURANCE
COMPANY
During December 1986, ACCEL invested $1,370,000 (a 20% interest) in RGL. Galaxy,
a wholly owned subsidiary of RGL, wrote 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) of $2.1 million and $5.8 million, respectively.
The purchase price included goodwill of $1.2 million of which the outstanding
balance was written off in 1993.
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, 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. As a result
of this action, the consolidated results of operations for 1994 include a charge
to operations of $3.8 million, representing the Company's net investment in
Galaxy as of April 1, 1994, in addition to operating losses of $205,000 incurred
during the first quarter. The Company wrote its investment in RGL to zero and
Reconsolidated 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 (the "Liquidation Bureau") took control of Galaxy on October 11,
1994.
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 (see Note N).
NOTE L--RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN
The Acceleration Retirement Savings Plan became effective in 1985. During 1989,
ACCEL's Board of Directors approved changes to this plan to include an ESOP and
concurrently changed the plan name to the "Acceleration Retirement Savings and
Stock Ownership Plan" ("Plan"). For 1996, 1995 and 1994 the Board authorized
contributions to the Plan at a level that would fund a 100% match of the first
6% of each participating employees' tax deferred contributions. The Company
incurred a contribution expense for 1996, 1995 and 1994 of $187,000, $198,000
and $178,000, respectively.
The Plan allows all employees who meet certain eligibility requirements and
choose to participate to defer a percentage of their salary and contribute to
the Plan on a tax deferred basis. The employee contributions to the Plan are
used to fund the savings element of the Plan. The Company contributions become
part of the Plan and are used to purchase shares of ACCEL's common stock in the
open market.
F-23
<PAGE> 82
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE L--RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN--(CONTINUED)
In 1990, the Plan entered into an agreement with ALIC to borrow up to $1,000,000
for the purchase of ACCEL's common stock. The Plan purchased 136,887 shares
(adjusted for the 1990 5% common stock dividend) under this loan agreement with
ALIC at a cost of $1,000,000. In addition to the shares purchased under the loan
agreement, the Plan has purchased 90,088 common shares at a cost of $603,000.
The loan, which bears interest at 10%, is being repaid from Company
contributions to the Plan.
At December 31, 1995, the loan had an unpaid balance of $525,000. The market
value of the underlying shares was $161,000. The Company revalued this loan to
market value as of December 31, 1995. This allowed 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 in 1995
has been reflected through a decrease in additional paid-in capital in the
accompanying consolidated balance sheets. The unpaid balance of the loan
($32,000 and $161,000 at December 31, 1996 and 1995, respectively), has been
reflected as a reduction in common stockholders' equity in the accompanying
consolidated balance sheets.
NOTE M--FOREIGN CURRENCY TRANSLATION AND OPERATING RESULTS
The financial statements of Acceleration Insurance Company, Ltd. ("AICL") were
translated into U. S. dollars using the British pound as the functional
currency. The balance sheets of AICL were translated into U. S. dollars using
exchange rates, as of the date of the consolidated financial statements.
The operating results of AICL were translated into U. S. dollars using the
average exchange rates in effect during the respective period. The consolidated
results of operations included $137,000 and $82,000 of pre-tax loss from AICL
for the years ended December 31, 1995 and 1994, respectively.
Included in foreign currency translation adjustments were 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 will exist only for as long as it
takes to recover any taxes that may be refunded to it.
NOTE N--COMMITMENTS AND CONTINGENCIES
Due to the nature of its operations, the Company is at all times subject to
pending and threatened legal actions that arise in the normal course of its
activities. In management's opinion, based on the advice of outside counsel, the
accompanying consolidated financial statements would not be materially affected
by the ultimate outcome of any legal proceedings or contingent liabilities.
On October 7, 1994, the Liquidation Bureau took control of Galaxy pursuant to an
order of liquidation of the New York Supreme Court. Prior to the liquidation of
Galaxy, ANIC had issued certain certificates of suretyship ("Certificates") with
respect to certain Galaxy insurance policies each of which provided that ANIC
would assume the responsibilities of Galaxy under the specified policy if Galaxy
became insolvent or financially unable to meet its obligations on the underlying
policy, but only if certain conditions were met. In particular, the Certificates
provided that ANIC's assumption of liability was contingent upon the insured's
executing and delivering all agreements, assignments or evidences of subrogation
satisfactory to ANIC respecting payments made or liabilities assumed.
F-24
<PAGE> 83
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE N--COMMITMENTS AND CONTINGENCIES--(CONTINUED)
In May 1996, the Liquidation Bureau, acting on behalf of the New York
Property/Casualty Insurance Security Funds (the "Guaranty Fund"), during a
meeting with Company representatives informally advised the Company that on
behalf of the Guaranty Fund it intended to seek indemnification or reimbursement
from ANIC for claims paid by the Guaranty Fund to Galaxy insureds on policies
which may have been covered by the Certificates. The Liquidation Bureau has
provided some information in response to the Company's request for accounting
data and other information with respect to the Liquidation Bureau's analysis of
the Guaranty Fund's right to indemnification; however, the Company is not yet
able to quantify the magnitude of the potential claim, if any, for
indemnification or reimbursement. The Company has taken the position that the
Guaranty Fund has no right to seek indemnification unless Galaxy insureds who
hold properly issued Certificates have executed assignments and evidences of
subrogation. Even if any Galaxy insured properly made such a claim directly to
ANIC, the Company has been advised by counsel that if ANIC paid any such claim,
it would have the right, under assignment and subrogation agreements with its
insureds, to assert all rights that the insureds could have asserted to recover
the loss amounts from any other source, including the Guaranty Fund.
The Company intends to fully investigate each claim which the Liquidation
Bureau, acting on behalf of the Guaranty Fund, formally asserts is entitled to
the benefits of a Certificate to determine whether such Certificate was properly
endorsed by ANIC and issued with proper authority and if so, whether proper
agreements, assignments and evidences of subrogation have been executed. The
Company intends to vigorously defend any claims for indemnification or
reimbursement made by the Liquidation Bureau, on behalf of the Guaranty Fund,
with respect to the Certificates. Although the Company is not in a position to
estimate the magnitude of the potential claims for indemnification or
reimbursement, it does not believe that the ultimate resolution of such claims
will have a material adverse effect on the financial condition or results of
operations of the Company.
The Company currently leases office space under two operating leases which
expire in 2000 and 2001. These leases are accounted for as operating leases.
Minimum rental commitments in effect at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
Year Payable Annual Minimum Rentals
------------ ----------------------
<S> <C> <C>
1997 $ 336,000
1998 338,000
1999 340,000
2000 322,000
2001 147,000
----------
Total $1,483,000
==========
</TABLE>
The amount of rent charged to operations was $208,000, $16,800 and $28,700 in
1996, 1995 and 1994, respectively.
NOTE O--RELATED PARTY TRANSACTIONS
During 1995, the Company sold its investment in First International Bancorp, an
affiliate of CIHC, to entities associated with CIHC. The sales price was
$1,250,000; no gain or loss was realized on the disposition.
As more fully described in Note D, during 1996 the Company retired all of the
outstanding Subordinated Notes held by CIHC.
NOTE P--RISK BASED CAPITAL
In 1993, the National Association of Insurance Commissioners ("NAIC") adopted
the life and health and property and casualty Risk-Based Capital (RBC) formulas.
These model acts require every insurer to calculate its total adjusted capital
and RBC requirement, and provides for an insurance commissioner to intervene if
the insurer experiences financial difficulty. These model acts became law in
Ohio, the Company's insurance subsidiaries' state of domicile, in March 1996.
The formula includes components for asset risk, liability risk, interest rate
exposure. and other factors. Each of the Company's insurance subsidiaries exceed
all required RBC levels as of December 31, 1996.
F-25
<PAGE> 84
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE Q--QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED)
Quarterly consolidated results of operations for 1996 and 1995 are summarized as
follows:
<TABLE>
<CAPTION>
First Second Third Fourth
Quarter Quarter Quarter Quarter
-------- -------- -------- --------
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
1996
----
Premiums written $ 16,697 $ 17,169 $ 15,288 $ 9,258
Premiums earned 10,065 11,498 13,176 11,218
Policy benefits 5,091 5,594 7,429 6,224
Net income 46 46 160 1,852
Net income per common share .01 .01 .03 .22
1995
----
Premiums written $ 13,247 $ 15,125 $ 15,297 $ 11,774
Premiums earned 9,787 9,833 10,321 10,912
Policy benefits 4,138 3,973 4,820 7,187
Net income (loss) 268 399 165 (2,292)
Net income (loss) per common share .06 .09 .04 (.52)
</TABLE>
The 1996 net income per common share amounts, in the aggregate, do not equal the
amount on the 1996 consolidated statement of operations due to the Rights
Offering (see Note D).
The first, second and third quarters of 1996 have been restated to be consistent
with the year end presentation relating to certain reinsurance treaties. These
treaties, which had been accounted for as reinsurance have been presented using
deposit accounting in the year end results. The restatement of these quarterly
amounts did not change net income or net income per common share as previously
reported.
NOTE R--PROPERTIES
Since July 1981 the Company's executive offices have been located at 475 Metro
Place North, Dublin, Ohio. The four-story office building had been owned by
ALIC, and consisted 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 $264,000.
NOTE S--LITIGATION PROCEEDS
In 1996, ACCEL received a total of $4,291,085 in proceeds from a legal action
brought by the Company against a non-affiliated marketing organization. With the
approval of the Ohio Department the proceeds from the settlement were shared
equally between ACCEL and ANIC. These proceeds have been categorized as other
income in the accompanying 1996 consolidated statement of operations.
F-26
<PAGE> 85
SCHEDULE I - SUMMARY OF INVESTMENTS -
OTHER THAN INVESTMENTS IN RELATED PARTIES
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
DECEMBER 31, 1996
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Column A Column B Column C Column D
- --------------------------------------------------------------------------------
Amount at
Which Shown
in the
Fair Balance
Type of Investment Cost* Value Sheet
- --------------------------------------------------------------------------------
(Thousands of dollars)
<S> <C> <C> <C>
Available for sale securities:
Fixed maturities:
United States Government and govern-
ment agencies and authorities $13,120 $13,193 $13,193
States, municipalities and political
subdivisions 940 960 960
Mortgage and asset-backed securities 40,743 40,032 40,032
All other corporate bonds 3,541 3,554 3,554
Redeemable preferred stocks 545 542 542
------- ------- -------
Total 58,889 58,281 58,281
Equity securities:
Common stocks:
Industrial & Miscellaneous 5,514 5,511 5,511
Other long-term investments 346 346 346
Short-term investments 10,670 10,703 10,703
------- ------- -------
Total investments $75,419 $74,841 $74,841
======= ======= =======
</TABLE>
* Original cost of equity securities, adjusted for any permanent write
down, and, as to fixed maturities, original cost reduced by repayments
and adjusted for amortization of premiums or accrual of discounts.
See accompanying independent auditors' report.
F-27
<PAGE> 86
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
<S> <C> <C>
ASSETS (Thousands of dollars)
Investments:
Investments available for sale, at fair value:
Fixed maturities (cost: 1997--$49,862,000;
1996--$58,889,000) $ 49,796 $ 58,281
Equity securities (cost: 1997--$6,124,000;
1996--$5,514,000) 6,126 5,511
Short-term investments
(cost: 1997--$19,925,000; 1996--$10,670,000) 19,958 10,703
Other invested assets, at cost
(fair value: 1997--$306,000; 1996--$346,000) 306 346
---------- ----------
76,186 74,841
Cash 1,113 3,331
Receivables:
Premiums in process of transmittal--less
allowance (1997--$258,000; 1996--$223,000) 10,355 7,286
Amounts due from reinsurers,
less allowance (1997 and 1996--$125,000) 28,362 11,138
Recoverable federal income taxes 129 1,019
---------- ----------
38,846 19,443
Accrued investment income 644 652
Prepaid reinsurance premiums 19,448 15,036
Reinsurance premium deposits 26,710 42,615
Deferred policy acquisition costs 30,362 30,946
Equipment--at cost, less accumulated
depreciation (1997--$200,000; 1996--$162,000) 662 231
Leasehold improvements, less accumulated amortization
(1997--$40,000; 1996--$26,000) 138 152
Other assets:
Cost in excess of fair value of net assets of
subsidiaries at dates of acquisition ($4,448,000)
less accumulated amortization 657 716
Funds held under reinsurance agreements 6,036 406
Other 729 939
---------- ----------
7,422 2,061
---------- ----------
$ 201,531 $ 189,308
========== ==========
</TABLE>
(Continued)
F-28
<PAGE> 87
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
<TABLE>
<CAPTION>
September 30, December 31,
1997 1996
---- ----
(Thousands of dollars)
<S> <C> <C>
LIABILITIES AND COMMON STOCKHOLDERS' EQUITY
Policy reserves and liabilities:
Unearned premium reserves $ 83,980 $ 81,820
Insurance claims 26,884 25,256
Other 5 7
---------- ---------
110,869 107,083
Other liabilities:
Funds held under reinsurance agreements 2,940 2,920
Deferred reinsurance commissions 14,537 13,902
Amounts due reinsurers 12,625 6,133
Notes payable 15,000 15,000
Commissions payable 5,550 5,163
Accounts payable and other liabilities 2,655 2,788
Federal income taxes:
Current -- --
Deferred 4,089 4,678
---------- ---------
57,396 50,584
---------- ---------
168,265 157,667
---------- ---------
Commitments and Contingencies -- Note D
Redeemable preferred stock:
Authorized shares--1,000,000;
no issued or outstanding shares -- --
Common stockholders' equity:
Common stock, $.10 par value
Authorized shares (1997 and 1996--15,000,000)
Issued shares (1997--9,406,162; 1996--9,401,162) 941 940
Additional paid-in capital 32,520 32,507
Retained earnings 6,435 5,403
Less 797,420 treasury shares at cost (6,599) (6,599)
ESOP loan -- (32)
Net unrealized depreciation on investment
securities (31) (578)
---------- ---------
33,266 31,641
---------- ---------
$ 201,531 $ 189,308
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
F-29
<PAGE> 88
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
1997 1996 1997 1996
---- ---- ---- ----
(Thousands of dollars, except per share data)
<S> <C> <C> <C> <C>
REVENUE:
Gross premiums written $17,029 $ 15,288 $ 49,574 $ 49,152
Less reinsurance ceded 6,117 3,185 16,255 12,439
------- --------- --------- ---------
Net premiums written 10,912 12,103 33,319 36,713
Decrease (increase) in unearned
premium reserves 949 1,074 1,700 (1,974)
------- --------- --------- ---------
Premiums earned 11,861 13,177 35,019 34,739
Net investment income:
Interest and dividends 1,074 1,218 3,405 3,277
Realized gains (losses) 16 (48) 81 227
Service fees on extended service
contracts 822 662 2,339 1,885
Other income 81 1,439 231 1,711
------- --------- --------- ---------
13,854 16,448 41,075 41,839
------- --------- --------- ---------
BENEFITS AND EXPENSES:
Policy benefits 6,118 7,429 18,360 18,114
Commissions and selling expenses 5,240 5,556 16,438 17,611
Reinsurance expense recovery (1,160) (344) (4,043) (1,963)
General and administrative 2,236 1,950 6,050 5,309
Taxes, licenses and fees 480 689 1,570 1,560
Interest 356 489 1,069 1,577
Decrease (increase) in deferred policy
acquisition costs 180 305 584 (795)
------- --------- --------- ---------
13,450 16,074 40,028 41,413
------- --------- --------- ---------
INCOME BEFORE FEDERAL INCOME
TAXES AND EXTRAORDINARY ITEM 404 374 1,047 426
Federal income taxes:
Current expense 118 582 604 1,095
Deferred benefit (143) (237) (589) (790)
------- --------- --------- ---------
(25) 345 15 305
------- --------- --------- ---------
INCOME BEFORE EXTRAORDINARY
ITEM $ 429 29 1,032 121
Extraordinary item--gain on
extinguishment of debt--Note D -- 131 -- 131
------- --------- --------- ---------
NET INCOME $ 429 $ 160 $ 1,032 $ 252
========= ========= ========= =========
Per Common Share:
Net income $ 0.05 $ 0.03 $ 0.12 $ 0.05
========= ========= ========= =========
Weighted average number of common
shares outstanding 8,604,557 6,029,561 8,604,017 4,998,048
========= ========= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
F-30
<PAGE> 89
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Net
unrealized
Additional Common depreciation
Common paid-in Retained stock held in ESOP on investment
stock capital earnings treasury Loan securities Net
------- --------- --------- ---------- ----- ------------ ----
(Thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Balances at December 31, 1995 $ 524 $ 23,702 $ 3,299 $ (6,599) $ (161) $ (205) $ 20,560
Payments on ESOP loan -- -- -- -- 129 -- 129
Change in net unrealized
depreciation on
investment securities -- -- -- -- -- (373) (373)
Issuance of 110,000 shares of
Common Stock under
Common Stock Option Plan 11 223 -- -- -- -- 234
Issuance of 4,047,310 shares of
Common Stock in conjunction
with the Rights Offering and
the Supplemental Offering 405 8,582 -- -- -- -- 8,987
Net income -- -- 2,104 -- -- -- 2,104
--------- -------- -------- --------- ------- --------- ---------
Balances at December 31, 1996 940 32,507 5,403 (6,599) (32) (578) 31,641
Payments on ESOP loan -- -- -- -- 32 -- 32
Change in net unrealized
depreciation on
investment securities -- -- -- -- -- 547 547
Issuance of 5,000 shares of
Common Stock under
Common Stock Option Plan 1 13 14
Net income -- -- 1,032 -- -- -- 1,032
--------- -------- -------- --------- ------- --------- ---------
Balances at September 30, 1997 $ 941 $ 32,520 $ 6,435 $ (6,599) $ -- $ (31) $ 33,266
========= ======== ======== ========= ======= ========= =========
</TABLE>
See notes to unaudited consolidated financial statements.
F-31
<PAGE> 90
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended September 30,
1997 1996
---- ----
(Thousands of Dollars)
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 1,032 $ 121
Adjustments to reconcile net income to net
cash used in operating activities:
Change in premiums receivable (3,104) (8,667)
Change in accrued investment income 8 (22)
Change in prepaid reinsurance premiums (4,412) (2,157)
Change in funds held under reinsurance
agreements (5,610) (3,066)
Change in unearned premium reserves 2,160 5,365
Change in insurance claim reserves 1,628 1,052
Change in amounts due reinsurers
and amounts due from reinsurers (10,732) (21,088)
Change in other assets, other liabilities
and accrued income taxes 928 206
Interest paid in kind -- 403
Accrual of discount on bonds (175) (179)
Amortization of premium on bonds 80 77
Amortization of deferred policy acquisition
costs 15,190 15,537
Policy acquisition costs deferred (14,606) (16,330)
Reinsurance commissions earned (10,973) (16,846)
Reinsurance commissions received 11,608 19,688
Provision for depreciation and amortization 198 225
Net realized gains on investments (81) (227)
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES
EXCLUDING EXTRAORDINARY ITEM (16,861) (25,908)
Extraordinary Item -- 131
---------- ----------
NET CASH USED IN OPERATING ACTIVITIES (16,861) (25,777)
INVESTING ACTIVITIES:
Sale of investments available for sale 23,605 9,566
Purchase of investments available for sale (24,357) (21,739)
Sale of property occupied by the Company - 3,298
Other, net (556) (350)
---------- ----------
NET CASH USED IN INVESTING ACTIVITIES (1,308) (9,225)
FINANCING ACTIVITIES:
Payment on ESOP loan 32 112
Repayment of notes payable -- (731)
Issuance of Common Stock under Stock Option Plan 14 257
Issuance of Common Stock under Rights Offering -- 3,263
Change in reinsurance premium deposits 15,905 26,452
---------- ----------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,951 29,353
---------- ----------
NET DECREASE IN CASH (2,218) (5,649)
Cash at beginning of year 3,331 5,039
---------- ----------
CASH (OVERDRAFT) AT END OF PERIOD $ 1,113 $ (610)
========== ==========
Supplemental schedule of non-cash financing activities:
cancellation of Subordinated Notes as consideration for
the purchase of Common Stock--Note B -- 5,703
========== ==========
</TABLE>
See notes to unaudited consolidated financial statements.
F-32
<PAGE> 91
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1997
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 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 in the Company's Annual
Report on Form 10-K for the year ended December 31, 1996.
PRINCIPLES OF CONSOLIDATION: The accompanying unaudited consolidated financial
statements include the accounts of ACCEL and its wholly-owned subsidiaries. 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, commercial auto and other specialty casualty
products. 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 specialty casualty products are
offered through general agents. 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.
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 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 fair value which approximates
cost.
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.
F-33
<PAGE> 92
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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, 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 recognized by
writing the investment down to its fair value.
DEFERRED POLICY ACQUISITION COSTS: The costs (principally commissions and
certain expenses of policy issuance) of acquiring or renewing insurance
business, all of which vary with and are directly related to the production of
business, have been deferred. These deferred policy acquisition costs are
amortized in a manner related to the recognition of premiums earned.
Substantially all such deferred costs are amortized within a four-year period.
Anticipated investment income is considered in determining recoverability of
deferred costs.
EQUIPMENT AND DEPRECIATION: Equipment is carried at cost less accumulated
depreciation. Depreciation is provided using the straight-line method over an
estimated useful asset life of five years.
LEASEHOLD IMPROVEMENTS: Leasehold improvements are carried at cost less
accumulated amortization. Amortization is provided using the straight-line
method over the term of the five year lease.
GOODWILL AMORTIZATION: Cost in excess of fair value of net assets of
subsidiaries at dates of acquisition is being amortized primarily over a
thirty-five year period. It is the Company's policy to account for goodwill at
the lower of amortized cost or fair value. On an ongoing basis, management
reviews the valuation and amortization of its goodwill.
PREMIUM INCOME RECOGNITION AND UNEARNED PREMIUM RESERVES: Unearned premium
reserves on credit life and credit accident and health insurance are calculated
primarily under the "Rule of 78's Method", which results in premium income being
recognized in decreasing proportions over the terms of the policies, which
approximates the pattern of policy benefits incurred.
Unearned premium reserves on the extended service contracts are based on the
historical emergence pattern of claims. The Company's primary liability on new
car contracts exists subsequent to the expiration of manufacturers' warranties.
This method results in premium being recognized in direct proportion to the
emergence of benefits on these contracts.
Unearned premium reserves on all other property and casualty products are
calculated on the pro rata method.
INSURANCE CLAIMS: The liabilities for insurance claims are determined using
statistical analyses and represent estimates of the ultimate net cost of all
reported and unreported claims that are unpaid at year end. Considerable
variability is inherent in such estimates and actual results will likely differ
from those estimates.
FEDERAL INCOME TAXES: ACCEL and its subsidiaries file a consolidated federal
income tax return. The provision for income taxes is based on income for
financial reporting purposes, after permanent differences. Deferred tax assets
and liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases and operating loss and tax credit
carryforwards. Deferred tax assets and liabilities are measured using enacted
tax rates expected to apply to taxable income in the years in which those
temporary differences are expected to be recovered or settled. Under this
method, the effect on deferred tax assets and liabilities of a change in tax
rates is recognized in income in the period that includes the enactment date.
Valuation allowances are established when necessary to reduce the deferred tax
assets to the amounts expected to be realized.
REINSURANCE: Reinsurance premiums ceded and reinsurance recoveries on policy
benefits incurred are deducted from the respective income and expense accounts.
Assets and liabilities related to reinsurance ceded are reported on a gross
basis. Amounts related to reinsurance contracts, where it is not reasonably
possible for the reinsurer to realize a significant loss, are recorded based on
the deposit accounting method.
F-34
<PAGE> 93
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE SIGNIFICANT POLICIES--(CONTINUED)
DEFERRED REINSURANCE COMMISSIONS: Commissions and ceding fees received in
connection with premiums ceded are deferred and amortized in a manner related to
the recognition of premiums earned. Substantially all such commissions and
ceding fees are amortized within a four-year period. Earned ceding fees,
commissions and experience refunds are reported as reinsurance expense
recoveries in the unaudited consolidated statements of operations.
STOCK OPTION PLANS: Prior to January 1, 1996, the Company accounted for its
stock option plans in accordance with the provisions of Accounting Principles
Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and
related interpretations. As such, compensation expense would be recorded on the
date of grant only if the current market price of the underlying stock exceeded
the exercise price. On January 1, 1996, the Company adopted the Financial
Accounting Standards Board's (FASB) Statement No. 123, Accounting for
Stock-Based Compensation, which permits entities to recognize as expense over
the vesting period the fair value of all stock-based awards on the date of
grant. Alternatively, FASB No. 123 also allows entities to continue to apply the
provisions of APB Opinion No. 25 and provide pro forma net income and pro forma
earnings per share disclosures for employee stock option grants made in 1995 and
future years as if the fair-value-based method defined in FASB No. 123 had been
applied.
EARNINGS PER COMMON SHARE: Net income per common share is 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 1996 unaudited consolidated financial
statements have been reclassified to conform with the 1997 presentation.
NOTE B--NOTES PAYABLE
In 1991, ACCEL issued $5,848,000 of subordinated notes (the "Subordinated
Notes"). The Subordinated Notes had a nine year term with no principal payable
until maturity, and bore 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 $403,000 for
the nine months ended September 30, 1996.
Of the Subordinated Notes described above, a significant portion were held by
Chase Insurance Holdings Corporation ("CIHC"), a company related through common
ownership by a stockholder and director of the Company.
On July 25, 1996, the Company commenced an offering of non-transferable rights
(the "Rights Offering") to stockholders of record as of June 18, 1996. Under the
provisions of the Rights Offering, the Company permitted CIHC and its affiliate
to tender the principal amount of their Subordinated Notes for cancellation as
consideration (in lieu of cash) for the purchase of shares of common stock
pursuant to the Rights Offering. On August 23, 1996, CIHC and its affiliate
tendered $5,619,046 principal amount of their Subordinated Notes plus an
additional $83,759 of accrued interest thereon under the terms of the Rights
Offering. At the conclusion of the offering, CIHC and its affiliate had reduced
their holding of Subordinated Notes to $0.
In a separate transaction, the Company retired $731,533 principal amount of
Subordinated Notes held by an unrelated third party for consideration of
$600,000. The Company recognized an extraordinary gain on this transaction of
$131,533 during the third quarter of 1996. No federal income tax was recognized
related to this gain due to the consolidated tax position of the Company.
The result of the two aforementioned transactions was to retire all outstanding
Subordinated Notes.
F-35
<PAGE> 94
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE B--NOTES PAYABLE (CONTINUED)
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 an existing credit
agreement and to liquidate an intercompany loan between ACCEL and an insurance
subsidiary. In addition, as of January 1, 1996, Acceleration Life Insurance
Company ("ALIC") entered into a reinsurance agreement with an unaffiliated
company to reinsure the majority of the in-force credit business. The Senior
Notes are payable to the same unaffiliated company which is a party to the
reinsurance agreement dated January 1, 1996. This agreement is structured such,
that as future profits emerge on this block of business, these profits are held
by the reinsurance company, and ultimately applied to pay interest on and to
redeem the Senior Notes. This is accomplished by the following transactions. The
reinsurance company distributes profits to ALIC as periodically agreed to by the
reinsurance company and ALIC. ALIC then, subject to the Department of Insurance
of the State of Ohio (Ohio Department) approval, dividends funds to ACCEL. ACCEL
then uses these funds to redeem a portion of the senior notes and the interest
thereon. Profits in excess of the amount required to retire the Senior Notes are
to be returned to ALIC from the reinsurer. As of December 31, 1996, $1,500,000
of the profits on this block of business were released to ALIC in the form of
the aforementioned Senior Notes. These Senior Notes were retired on September
30, 1997. These transactions resulted in a balance of $15,000,000 of Senior
Notes outstanding as of September 30, 1997 and December 31, 1996.
NOTE C--REINSURANCE
On January 1, 1996 the Company terminated its then existing quota share
reinsurance agreement and elected to recapture the liabilities subject to the
treaty. The liabilities recaptured thereunder were then available for cession
under the treaty described below. The unearned premium reserves and claim
liabilities recaptured were $29,753,000 and $8,424,000, respectively.
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 B)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
(see Note B). 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 approximated $48,616,000 and $9,919,000,
respectively, as of January 1, 1996.
The Company also has an agreement in place which covers a substantial portion of
its credit insurance business produced in 1996 and 1997. 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 Company ultimately retains a substantial part of the insurance
risk, the underwriting income or loss and the investment income on net funds.
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.
F-36
<PAGE> 95
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE C--REINSURANCE (CONTINUED)
The following data summarizes certain aspects of the Company's reinsurance
activity for the periods presented.
Premiums written and earned in 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
WRITTEN EARNED
-----------------------------------------------------------------------------------------------------------
Period Ended September 30
-------------------------
Nine Months Ended Three Months Ended Nine Months Ended Three Months Ended
================= ================== ================== ==================
1997 1996 1997 1996 1997 1996 1997 1996
---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Direct $49,070 $ 45,214 $ 15,978 $ 13,930 $43,950 $38,922 $ 15,880 $ 13,775
Assumed 504 3,938 1,051 1,358 3,467 4,864 1,241 2,132
Ceded 16,255 12,439 6,117 3,185 12,398 9,047 5,260 2,730
------- -------- -------- -------- ------- ------- -------- --------
Net $33,319 $ 36,713 $10,912 $ 12,103 $35,019 $34,739 $ 11,861 $ 13,177
======= ======== ======= ======== ======= ======= ======== ========
</TABLE>
Policy benefits incurred in 1997 and 1996 are summarized as follows:
<TABLE>
<CAPTION>
Nine Months Ended September 30 Three Months Ended September 30
------------------------------ -------------------------------
1997 1996 1997 1996
---- ---- ---- ----
(Thousands of dollars)
<S> <C> <C> <C> <C>
Direct $23,031 $15,125 $ 9,058 $ 6,321
Assumed 2,350 2,993 805 1,124
Ceded 7,021 4 3,745 16
------- ------- ------- -------
Net policy benefits $18,360 $18,114 $ 6,118 $ 7,429
======= ======= ======= =======
</TABLE>
NOTE D--COMMITMENTS AND CONTINGENCIES
In May 1996, the Liquidation Bureau of the New York Department ("Liquidation
Bureau"), acting on behalf of the New York Property/Casualty Insurance Security
Funds (the "Guaranty Fund"), during a meeting with Company representatives
informally advised the Company that on behalf of the Guaranty Fund it intended
to seek indemnification or reimbursement from Acceleration National Insurance
Company ("ANIC") for claims paid by the Guaranty Fund to Galaxy Insurance
Company ("Galaxy", a subsidiary of the Company), insureds on policies which may
have been covered by certificates of suretyship ("Certificates") which ANIC had
issued with respect to certain Galaxy insurance policies. The Liquidation Bureau
has provided some information in response to the Company's request for
accounting data and other information with respect to the Liquidation Bureau's
analysis of the Guaranty Fund's right to indemnification; however, the Company
is not yet able to quantify the magnitude of the potential claim, if any, for
indemnification or reimbursement. The Company has taken the position that the
Guaranty Fund has no right to seek indemnification unless Galaxy insureds who
hold properly issued Certificates have executed assignments and evidences of
subrogation in accordance with the terms of the Certificates. Even if any Galaxy
insured properly made such a claim directly to ANIC, the Company has been
advised by counsel that if ANIC paid any such claim, it would have the right,
under assignment and subrogation agreements with its insureds, to assert all
rights that the insureds could have asserted to recover the loss amounts from
any other source, including the Guaranty Fund.
The Company intends to fully investigate each claim which the Liquidation
Bureau, acting on behalf of the Guaranty Fund, formally asserts is entitled to
the benefits of a Certificate to determine whether such Certificate was properly
endorsed by ANIC and issued with proper authority and if so, whether proper
agreements, assignments and evidences of subrogation have been executed. The
Company intends to vigorously defend any claims for indemnification or
reimbursement made by the Liquidation Bureau, on behalf of the Guaranty Fund,
with respect to the Certificates. Although the Company is not in a position to
estimate the magnitude of the potential claims for indemnification or
reimbursement, it does not believe that the ultimate resolution of such claims
will have a material adverse effect on the financial condition or results of
operations of the Company. In early 1997, the Liquidation Bureau requested of
the Company's counsel the basis for the position taken by the Company. A written
analysis supporting the Company's position was subsequently issued to the
Liquidation Bureau.
F-37
<PAGE> 96
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED)
NOTE E--SALE OF AUTO AFTER-MARKET PRODUCT GROUP
On August 13, 1997, ACCEL announced it had reached an agreement in principle
pursuant to which ACCEL would sell its auto aftermarket product group along with
the stock of its Acceleration Life Insurance Company (ALIC) subsidiary and two
other subsidiaries to Frontier Insurance Group, Inc. On October 27, 1997, ACCEL
announced it had signed definitive agreements to sell its auto after-market
product group along with the stock of Acceleration Life Insurance Company,
Dublin International Limited and Acceleration National Service Corporation to
Frontier Insurance Group, Inc. for $40.5 million in cash. The transaction is
expected to close on or about December 31, 1997 and is subject to stockholder
approval and the receipt of applicable regulatory approvals.
F-38
