SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[S]
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-7411
ALLCITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
New York 13-2530665
(State of incorporation) (I.R.S. Employer Identification Number)
335 Adams Street, Brooklyn, N.Y. 11201-3731
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 718-422-4000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained,to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No
The aggregate market value of the voting stock held by nonaffiliates of the
registrant as of March 15, 1999 was $5,382,128.
The number of shares outstanding of each of the registrant's classes of common
shares, as of March 15, 1999, was 7,078,625.
DOCUMENTS INCORPORATED BY REFERENCE - None
Exhibit Index on Page 26 Total number of pages 60
<PAGE>
TABLE OF CONTENTS
Part I
Page
Item 1- Business ........ 1
Item 2- Properties ........10
Item 3- Legal Proceedings ........10
Item 4- Submission of Matters to a Vote of Security Holders ........10
Part II
Item 5- Market for the Registrant's Common Equity and Related
Stockholder Matters ....... 11
Item 6- Selected Financial Data ....... 11
Item 7- Management's Discussion and Analysis of Financial
Condition and Results of Operations ....... 13
Item 7A- Quantitative and Qualitative Disclosures about Market Risk .... 17
Item 8- Financial Statements and Supplementary Data ....... 18
Item 9- Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure ....... 18
Part III
Item 10- Directors and Executive Officers of the Registrant ....... 19
Item 11- Executive Compensation ....... 21
Item 12- Security Ownership of Certain Beneficial Owners and
Management ....... 23
Item 13- Certain Relationships and Related Transactions ....... 25
Part IV
Item 14- Exhibits, Financial Statement Schedules, and Reports on
Form 8-K ....... 26
Signatures ....... 27
-i-
<PAGE>
PART I
Item 1. Business
General
Allcity Insurance Company (the "Registrant", "Allcity" or the "Company") is a
property and casualty insurer. Empire Insurance Company ("Empire"), a property
and casualty insurer owns approximately 84.6% of the outstanding common shares
of the Company and 100% of the outstanding common shares of Centurion Insurance
Company ("Centurion"). Empire's common shares are 100% owned and controlled,
through subsidiaries, by Leucadia National Corporation ("Leucadia").
Additionally, Leucadia indirectly owns an additional 5.3% of the outstanding
common shares of the Company. The Company, Empire and Centurion are sometimes
hereinafter collectively referred to as the Group.
The Company operates in the State of New York, primarily in the New York City
metropolitan area, conducting property and casualty insurance underwriting
activities. The Company's voluntary business is produced through general
agents, local agents, and insurance brokers, who are compensated for their
services by payment of commissions on the premiums they generate. There are
seven general agents, one of which is owned by Empire, and approximately 379
local agents and insurance brokers presently acting under agreements with the
Group. These agents and brokers also represent other competing insurance
companies. Empire's wholly owned general agent is its largest producer and
generated approximately 12% of the Group's total premium volume for the year
ended December 31, 1998. Substantially all of the Group's policies are
written for a one-year period. The Group is licensed in New York to write
most lines of insurance that may be written by a property and casualty
insurer. The Group specializes in personal and commercial property and
casualty insurance business. The Group provides personal automobile and
homeowners insurance and commercial insurance coverage for vehicles
(including medallion and radio-controlled livery vehicles), workers'
compensation, multi-family residential real estate, and various other
business classes. Empire is also licensed to write insurance in Connecticut,
Massachusetts, Missouri, New Hampshire and New Jersey. Approximately 4% of the
Group's written premiums are produced from sources outside New York State. The
Group's general agents produced approximately 32% of the Company's premium
revenues for the year ended December 31, 1998.
For the years ended December 31, 1998, 1997 and 1996, net earned premiums for
the Company were $67.5 million, $80.9 million and $96.1 million, respectively.
The decline in the net earned premiums is primarily due to the continuing
reduction in the assigned risk business and reductions in certain commercial
lines. During the year ended December 31, 1998, approximately 57%, 30% and
13% of net earned premiums were derived from automobile lines, commercial lines
and miscellaneous and personal lines, respectively.
According to A.M. Best & Co. ("Best"), an insurance industry research
organization, the Group ranked 129th in total net premium writings among
property and casualty insurance companies and groups in 1997. In February 1999,
Standard & Poor's Insurance Rating Services ("S & P") rated the Group (BBB+)
(Good), based on the Group's claims-paying ability. In 1998, the Group was
rated (B+) (Very Good) by Best and was assigned an (A) (Exceptional) financial
stability rating by Demotech, Inc., an insurance rating agency service. As with
all ratings, S & P, Best and Demotech, Inc. ratings are subject to change at
any time.
The Group has acquired blocks of assigned risk business from other insurance
companies (the "service business") relating to private passenger and commercial
automobile insurance. These contractual arrangements, which are negotiated for
one or two year periods, provide for fees paid to the Group within parameters
established by the New York State Insurance Department. In addition, the Group
received a fee for providing administrative services, including claims
processing, underwriting and collection activities, for the New York Public
Automobile Pool ("NYPAP") and the Massachusetts Taxi and Limousine Pool. These
latter arrangements do not involve the assumption of any material underwriting
risk by the Group. Effective February 28, 1998, the Group ceased serving as a
servicing carrier for the NYPAP, thereby enabling the Group to concentrate its
resources on its core non-service businesses and redeploy certain resources
previously dedicated to the NYPAP.
-1-
<PAGE>
In 1998, a new president and chief executive officer was named at the Group
and, effective in 1999, the business was reorganized into three divisions:
the Small Business Division, the Personal Lines and Residual Markets Division
and the Mid-Market Division. Each of these divisions has separate management
teams responsible for all marketing, sales and underwriting decisions within
their divisions. The reorganization is designed to provide a greater degree of
accountability for underwriting results and to create a closer relationship
with agents and customers of the Group. The Small Business Division will
primarily focus on commercial package products for small businesses; the
Personal Lines and Residual Market Division will primarily concentrate on
personal automobile and homeowners insurance; and the Mid-Market Division will
focus on commercial auto, commercial package and workers' compensation
insurance for larger accounts.
On a quarterly basis, the Group reviews and adjusts its estimated loss reserves
for any changes in trends and actual loss experience. Included in the Company's
results for 1998 was approximately $12.9 million for reserve strengthening
related to losses from prior accident years. The Group will continue to evaluate
the adequacy of its loss reserves and record future adjustments to its loss
reserves as appropriate. Beginning in 1996, the Group has taken certain steps
to improve its operations, including systems enhancements and actions relating
to pricing and improved underwriting and claims handling; these efforts have
continued into 1999. In addition, the Group may initiate additional changes in
the future. The Group believes that the results of these efforts taken to date
will not be known for some time, given the nature of the property and casualty
insurance business and the inherently long period of time involved in settling
claims.
Pooling Agreement
All insurance business written by the Company is subject to a pooling agreement
with Empire under which the Company and Empire effectively operate as one
company. The pooling agreement and subsequent amendments were approved by the
New York State Insurance Department. The Company operates under the same
general management as Empire and has full use of Empire's personnel, information
technology systems and facilities. As of December 31, 1998, Empire and its
subsidiaries had 712 full and part-time employees. Currently, and for all
periods presented, all premiums, losses, loss adjustment expenses and other
underwriting expenses are shared on the basis of 70% to Empire and 30% to the
Company.
Financial Information Relating to Business Segments
For all periods presented, the Company's operations are presented in the
following business segments:
(1) Automobile lines - includes private passenger and commercial automobile
bodily injury, property damage, comprehensive and collision insurance coverages.
(2) Commercial lines - includes commercial multiple peril, workers'
compensation, other liability, glass, burglary, and inland marine insurance
coverages.
(3) Miscellaneous and personal lines - includes fire and allied lines and
homeowners insurance coverages.
-2-
<PAGE>
<TABLE>
The following table presents business segment data, net of reinsurance, for
each of the three years ended December 31, (in thousands, except loss ratio
information):
<CAPTION>
Losses
Premiums Premiums and LAE Loss
Written Earned Incurred Ratio
<C> <C> <C> <C>
<S>
1998
Automobile lines $ 31,392 $ 38,446 $ 35,668 92.8%
Commercial lines 18,281 20,490 28,726 140.2%
Miscellaneous and
personal lines 8,386 8,576 5,195 60.6%
Total $ 58,059 $ 67,512 $ 69,589 103.1%
1997
Automobile lines $ 44,484 $ 50,677 $ 54,186 106.9%
Commercial lines 22,107 23,289 23,389 100.4%
Miscellaneous and
personal lines 8,438 6,925 4,470 64.6%
Total $ 75,029 $ 80,891 82,045 101.4%
1996
Automobile lines $ 60,162 $ 63,558 $ 64,699 101.8%
Commercial lines 25,243 27,714 20,685 74.6%
Miscellaneous and
personal lines 5,606 4,801 2,966 61.8%
Total $ 91,011 $ 96,073 $ 88,350 92.0%
</TABLE>
[S]
For further information concerning Business Segments, see Notes 8 and 12 of the
Notes to Consolidated Financial Statements, included elsewhere herein.
Combined Ratios
Set forth below is certain statistical information for the Company prepared in
accordance with generally accepted accounting principles ("GAAP") and statutory
accounting principles ("SAP"), for the three years ended December 31, 1998.
The Loss Ratio is the ratio of net incurred losses and loss adjustment
expenses to net premiums earned. The Expense Ratio is the ratio of
underwriting expenses (policy acquisition costs, commissions, and a portion
of administrative, general and other expenses attributable to underwriting
operations, net of service fee income) to net premiums written, if determined
in accordance with SAP, or to net premiums earned, if determined in accordance
with GAAP. A Combined Ratio below 100% indicates an underwriting profit and
a Combined Ratio above 100% indicates an underwriting loss. The Combined Ratio
does not include the effect of investment income.
-3-
<PAGE>
<TABLE>
<CAPTION>
Years Ended December
1998 1997 1996
<C> <C> <C>
<S>
Loss Ratio: (a)
GAAP 103.1% 101.4% 92.0%
SAP 103.1% 101.4% 89.3%
Industry (SAP) (b) N/A 72.8% 78.4%
Expense Ratio:
GAAP 26.3% 17.9% 22.1%
SAP 31.3% 17.2% 18.2%
Industry (SAP) (b) N/A 28.8% 27.4%
Combined Ratio: (c)
GAAP 129.4% 119.3% 114.1%
SAP 134.4% 118.6% 107.5%
Industry (SAP) (b) N/A 101.6% 105.8%
<S>
<FN>
(a)Includes Loss and Loss Adjustment Expenses.
(b)Source: Best's Aggregates & Averages, Property/Casualty, 1998 Edition.
Industry Combined Ratios may not be fully comparable as a result of, among
other things, differences in geographical concentration and in the mix of
property and casualty insurance products.
(c)For 1998, the difference in the accounting treatment for curtailment gains
relating to defined benefit pension plans was the principal reason for the
difference between the GAAP Combined Ratio and the SAP Combined Ratio. For
1996, a change in the statutory accounting treatment for retrospectively rated
reinsurance agreements was the principal reason for the difference between the
GAAP Combined Ratio and the SAP Combined Ratio. Additionally, for all three
years, the difference relates to the accounting for certain costs, which are
treated differently under SAP and GAAP. For further information about the
Company's combined ratios see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" of this Report.
</TABLE>
[S]
Marketing and Distribution
[S]
The Group's marketing and distribution strategy emphasizes profitability rather
than volume and focuses on the production of its voluntary business through
seven general agents, one of which is an Empire subsidiary, and approximately
379 local agents and insurance brokers presently acting under agreements with
the Group.
These agents and brokers also represent competing insurance companies. Subject
to regulatory approval, the Group utilizes premium rates developed and
independently filed for all coverages with the exception of workers'
compensation, for which rates are filed by the New York Compensation Insurance
Rating Board, and assigned risk automobile business, for which rates are filed
by the New York Automobile Insurance Plan.
Reinsurance
The Company's maximum retained limits for each of the years ended December 31,
1998, 1997 and 1996, on property and casualty lines of insurance and for
workers' compensation business was $0.3 million and $0.5 million, respectively.
Additionally, the Company has entered into certain excess of loss and
catastrophe treaties to protect itself against certain losses. Its retention
of lower level losses under such treaties is $7.5 million for 1999 and 1998,
$5.0 million for 1997 and $3.0 million for 1996.
Effective January 1, 1997, Empire entered into a quota share reinsurance
agreement with its subsidiary, Centurion. Under this agreement, Empire will
assume 50% up to July 1, 1997 and 75% thereafter of the effective period
premiums and losses of Centurion and grant Centurion a ceding commission.
Under the pooling agreement, 70% of such business assumed will be retained by
Empire and 30% will be shared with the Company.
-4-
<PAGE>
Although reinsurance does not legally discharge an insurer from its primary
liability for the full amount of the policy liability, it does make the
assuming reinsurer liable to the insurer to the extent of the reinsurance ceded.
The Company's reinsurance has been placed with certain of the largest
reinsurance companies, including (with their respective Best ratings) General
Reinsurance Corporation (A++) (superior), American Re-Insurance Company (A++)
(superior), Partner Re Co., Ltd. (A+) (superior), IPC Re Ltd. (A) (excellent),
CAT Ltd. (A) (excellent) and Zurich Reinsurance (North America), Inc. (A)
(excellent). The Company believes its reinsurers to be financially capable of
meeting their respective obligations. However, to the extent that any
reinsuring company is unable to meet its obligations, the Company would be
liable for the reinsured risks.
Investments
Investment activities represent a significant part of the Company's total
income. Investments are managed by the Investment Committee of the Board of
Directors, which consults with outside investment advisors with respect to a
substantial portion of the Company's investment portfolio.
The Company has a diversified investment portfolio primarily consisting of
securities rated "investment grade" by established bond rating agencies or
issued or guaranteed by the U.S. Government or its agencies. At December 31,
1998, 1997 and 1996, the average yield of the Company's bond portfolio was
approximately 5.8%, 5.9% and 6.1%, respectively, and the average maturity of
the Company's bond portfolio was approximately 3.2 years for 1998 and 3.3 years
for 1997 and 1996.
Tax Sharing Agreement
The Company has been included in the consolidated federal income tax returns of
Leucadia since 1993. Under the terms of the tax sharing agreement between
Leucadia and the Company, the Company computes its tax provision on a separate
return basis and is either charged its share of federal income tax resulting
from its taxable income or is reimbursed for tax benefits resulting from its
losses.
Government Regulation
The Group, like all insurance companies, is subject to detailed regulation and
supervision involving the establishment of premium rates, approval of policy
forms, standards of solvency and minimum requirements of capital and surplus,
which must be maintained in the states in which they transact business. There
can be no assurance that such regulatory requirements will not become more
stringent in the future and have an adverse effect on the Group's operations.
Insurance companies are required to file detailed annual reports with the
insurance regulatory agencies in each of the states in which they do business
and are subject to periodic examination by such agencies. Increased regulation
of insurance companies at the state level and new regulation at the federal
level is possible, although the Company cannot predict the nature or extent of
any such regulation or what impact it would have on the Company's operations.
The National Association of Insurance Commissioners ("NAIC") has adopted model
laws incorporating the concept of a "risk based capital" ("RBC") requirement
for insurance companies. Generally, the RBC formula is designed to measure the
adequacy of an insurer's statutory capital in relation to the risks inherent in
its business. The RBC formula is used by the states as an early warning tool
to identify weakly capitalized companies for the purpose of initiating
regulatory action. As of December 31, 1998, the Company's RBC ratio exceeded
minimum requirements.
The NAIC also has adopted various ratios for insurance companies which, in
addition to the RBC ratio, are designed to serve as a tool to assist state
regulators in discovering potential weakly capitalized companies or companies
with unusual trends. While the Company's operations had certain "other than
normal" NAIC ratios for the year ended December 31, 1998, the Company believes
that there are no material underlying problems or weaknesses in its operations
and that it is unlikely that material adverse regulatory action will be taken.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which will replace the current Accounting Pratices and Procedures
manual as the NAIC's primary guidance on Statutory accounting. The NAIC is
now considering amendments to the Codification guidance that would also be
effective upon implementation. The NAIC has recommended an effective date of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current
-5-
<PAGE>
statutory accounting in some areas. It is known whether the New York Insurance
Department will adopt the Codification, and whether the Department will make
any changes to that guidance. The Company has not estimated the potential
effect of the Codification guidance if adopted by the Department.
The Group is a member of state insurance funds, which provide certain protection
to policyholders of insolvent insurers doing business in those states. Due to
insolvencies of certain insurers in recent years, the Group has been assessed
certain amounts which have not been material and are likely to be assessed
additional amounts by state insurance funds. The Company believes that it has
provided for all anticipated assessments and that any additional assessments
will not have a material adverse effect on the Company's financial condition or
results of operations.
Competition
The insurance industry is a highly competitive industry, in which many of the
Company's competitors have substantially greater financial resources, larger
sales forces, more widespread agency and broker relationships, and more
diversified lines of insurance coverage. Additionally, certain competitors
market their products with endorsements from affinity groups, while the
Company's products are unendorsed, which may give such other companies a
competitive advantage. Federal administrative, legislative and judicial
activity may result in changes to federal banking laws that increase the
ability of national banks to offer insurance products in direct competition
with the Company. The Company is unable to determine what effect, if any,
such changes may have on the Company's operations.
The Company believes that property and casualty insurers generally compete on
the basis of price, customer service, consumer recognition, product design,
product mix and financial stability. The industry has historically been
cyclical in nature, with periods of less intense price competition generating
significant profits, followed by periods of increased price competition
resulting in reduced profitability or loss. The current cycle of intense
price competition has continued for a longer period than in the past, suggesting
that the significant infusion of capital into the industry in recent years,
coupled with larger investment returns, has been, and may continue to be, a
depressing influence on policy rates. In addition, the Company is experiencing
increased competition from low cost insurance providers that write personal
lines business on a direct response basis through direct mail and telemarketing.
The profitability of the property and casualty insurance industry is affected by
many factors, including rate competition, severity and frequency of claims
(including catastrophe losses), interest rates, state regulation, court
decisions and judicial climate, all of which are outside of the Company's
control.
Loss and Loss Adjustment Expenses
Liabilities for unpaid losses, which are not discounted (except for certain
workers' compensation liabilities), and loss adjustment expenses ("LAE") are
determined using case-basis evaluations, statistical analyses and estimates for
salvage and subrogation recoverable and represent estimates of the ultimate
claim costs of all unpaid losses and LAE. Liabilities include a provision for
losses that have occurred but have not yet been reported. These estimates are
subject to the effect of trends in future claim severity and frequency
experience. Adjustments to such estimates are made from time to time due to
changes in such trends as well as changes in actual loss experience. These
adjustments are reflected in current earnings.
The Company relies upon standard actuarial ultimate loss projection techniques
to obtain estimates of liabilities for losses and LAE. These projections include
the extrapolation of both losses paid and incurred by business line and accident
year and implicitly consider the impact of inflation and claims settlement
patterns upon ultimate claim costs based upon historical patterns. In addition,
methods based upon average loss costs, reported claim counts and pure premiums
are reviewed in order to obtain a range of estimates for setting the reserve
levels. For further input, changes in operations in pertinent areas including
underwriting standards, product mix, claims management and legal climate are
periodically reviewed.
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<PAGE>
<TABLE>
In the following table, the liability for losses and LAE of the Company, are
reconciled for each of the three years ended December 31, 1998. Included
therein are current year data and prior year development.
<CAPTION>
RECONCILIATION OF LIABILITY FOR LOSSES AND LAE
1998 1997 1996
<C> <C> <C>
(In thousands)
<S>
SAP
liability for losses and LAE,
net of reinsurance, at beginning of
the year $ 145,260 $ 143,494 $ 142,718
Provision for losses and LAE for
claims occurring in the current year 56,698 73,741 80,216
Increase in estimated losses and
LAE for claims occurring in
prior years 12,891 8,304 8,134
69,589 82,045 88,350
Loss and LAE payments for claims
occurring during:
Current year 19,203 23,804 27,192
Prior years 55,875 56,475 60,382
75,078 80,279 87,574
SAP liability for losses and LAE,
net of reinsurance 139,771 145,260 143,494
Reinsurance recoverable 294,461 272,266 262,593
Liability for losses and LAE at the
end of year as reported in the
financial statements (GAAP) $ 434,232 $ 417,526 $ 406,087
</TABLE>
[S]
The table on the following page presents the development of balance sheet
liabilities for 1988 through 1998. The liability line at the top of the table
indicates the estimated liability, net of reinsurance, for unpaid losses and
LAE recorded at the balance sheet date for each of the indicated years. This
liability represents the estimated amount of losses and LAE for claims that
were unpaid at each annual balance sheet date, including provision for losses
estimated to have been incurred but not reported to the Company. The middle
portion of the table shows the re-estimated amount of the previously reported
liability based on experience as of the end of each succeeding year. As more
information becomes available and claims are settled, the estimated liabilities
are adjusted upward or downward with the effect of decreasing or increasing net
income at the time of adjustment.
The "cumulative redundancy (deficiency)" represents the aggregate change in the
estimates over all prior years. For example, the initial 1988 liability
estimate has developed a $3.0 million redundancy over ten years. The effect on
pretax income during the past three years of changes in estimates of the
liabilities for losses and LAE is shown in the reconciliation table above.
The lower section of the table shows the cumulative amount paid with respect to
the previously recorded liability as of the end of each succeeding year. For
example, as of December 31, 1998, the Company had paid $59.6 million of the
currently estimated $64.1 million of losses and LAE that had been incurred for
the 1988 calendar year, thus an estimated $4.5 million of losses incurred
for 1988 remain unpaid as of the current balance sheet date.
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<PAGE>
In evaluating this information it should be noted that each amount shown for
"cumulative redundancy (deficiency)" results includes the effects of all changes
in amounts for prior periods. For example, the amount of the deficiency related
to losses settled in 1991, but incurred in 1988, will be included in the
cumulative redundancy or deficiency amount for years 1988, 1989 and 1990. This
table is not intended to and does not present accident or policy year loss and
LAE development data. Conditions and trends that have affected development of
the liability in the past may not necessarily occur in the future. Accordingly,
it would not be appropriate to extrapolate future redundancies or deficiencies
based on this table.
For further discussion of the Company's loss development experience, see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" of this Report.
-8-
<PAGE>
<TABLE>
Analysis of Loss and Loss Adjustment Expenses Development
(In thousands)
<CAPTION>
Years ended December 31,
<S >
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
<C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
$67,154 $70,567 $75,420 $84,178 $96,712 $106,115 $121,923 $142,718 $143,494 $145,260 $139771
Liability
Re-
estimated
as of:
One year
later 64,411 68,347 74,844 83,987 96,516 103,181 132,189 150,852 151,798 158,152 -
Two years
later 62,135 65,227 73,538 83,341 97,208 112,176 140,620 160,686 163,378 - -
Three years
later 59,859 63,792 73,151 85,197 103,592 118,127 150,434 172,650 - - -
Four years
later 58,606 63,556 74,190 88,928 108,430 124,375 160,542 - - - -
Five years
later 59,131 63,584 76,509 92,035 112,988 132,606 - - - - -
Six years
later 59,304 64,962 78,392 95,273 118,446 - - - - - -
Seven years
later 60,504 65,467 80,040 99,467 - - - - - - -
Eight years
later 61,363 66,298 83,670 - - - - - - - -
Nine years
later 61,780 68,877 - - - - - - - - -
Ten years
later 64,134 - - - - - - - - - -
Cumulative
Redundancy/
(Deficiency) 3,020 1,690 (8,250) (15,289) (21,734) (26,491) (38,619) (29,932) (19,884) (12,892) -
Cumulative
Amount of
Liability
Paid Through:
One year
later $19,242 $19,744 $23,681 $26,852 $33,903 $ 35,048 $ 45,789 $ 60,382 $ 56,475 $ 55,875 -
Two years
later 30,362 32,840 38,067 44,989 54,615 59,701 80,911 95,190 94,062 - -
Three years
later 39,511 42,271 50,194 59,336 71,653 81,680 105,977 121,900 - - -
Four years
later 45,698 49,803 58,830 69,955 85,689 97,917 124,645 - - - -
Five years
later 50,434 54,602 65,025 77,965 95,938 109,083 - - - - -
Six years
later 53,433 58,185 69,568 83,886 102,416 - - - - - -
Seven years
later 55,598 60,953 72,683 88,139 - - - - - - -
Eight years
later 57,393 62,737 75,932 - - - - - - - -
Nine years
later 58,495 64,409 - - - - - - - - -
Ten years
later 59,591 - - - - - - - - - -
Gross Liability
- - - End of year $290,833 $341,599 $399,879 $406,087 $417,526 $434,232
Reinsuranc 184,718 219,676 257,161 262,593 272,266 294,461
Net Liability
- End of year
as shown above $106,115 $121,923 $142,718 $143,494 $145,260 $139,771
Gross Re-
Estimated
Liability
- - - Latest $397,264 $474,175 $508,601 $500,274 $483,450 -
Re-estimated
Reinsurance
- - - Latest 264,658 313,633 335,951 336,896 325,298 -
Net Re
- - -estimated
Liability
- - - Latest $132,606 $160,542 $172,650 $163,378 $158,152 -
Gross
Cumulative
(Deficiency) $(106,431)$(132,576)$(108,722) $(94,187) $(65,924) -
<S>
</TABLE>
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<PAGE>
Item 2. Properties
The Group has entered into a twenty year lease aggreement, consisting of
286,510 square feet, in an office building located at 335 Adams Street in
Brooklyn, New York, in which Leucadia has an equity interest. The Group
received certain incentives from both the City and State of New York in
connection with this lease, which will be recognized over the term of the
lease.
Empire has subleased 133,140 square feet of the office space to its parent,
Leucadia at the similar terms as in the original lease.
The Group also conducts limited operations from branch offices located in
Manhattan and Rochester, New York, Boston, Massachusetts and Bedford, New
Hampshire. The rental charged to the Company for these facilities is prorated
in accordance with the pooling agreement described in "Pooling Agreement" under
Item 1, herein.
Item 3. Legal Proceedings
The Company is party to legal proceedings that are considered to be either
ordinary, routine litigation or incidental to its business. Based on discussion
with counsel, the Company does not believe that such litigation will have a
material effect on its financial position, results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
The following matters were submitted to a vote of shareholders at the Company's
1998 Annual Meeting of Shareholders held on October 19, 1998:
a) Election Of Directors: Number of
Shares in favor
[S]
Class II Directors, term expires 2001:
[S]
Martin B. Bernstein 4,329,299
Louis V. Siracusano 4,329,299
Lucius Theus 4,329,299
Robert V. Toppi 4,329,299
[S]
Class III Directors, term expires 1999:
James E. Jordan 4,329,299
Joseph A. Orlando 4,329,299
[S]
Class I Directors continuing in office:
Ian M. Cumming
Thomas E. Mara
Joseph S. Steinberg
Daniel G. Stewart
[S]
Class III Directors continuing in office:
Francis M. Colalucci
Harry H. Wise
b) No other matter was voted upon at the meeting.
-10-
<PAGE>
<TABLE>
PART II
<S>
Item 5. Market for the Registrant's Common Equity and Related Stockholder
Matters
(a) Market Information
The Company's common stock trades on The NASDAQ National Stock Market under the
symbol "ALCI". The following table sets forth, for the calendar quarters
indicated, the high and low closing trade price per common share as reported
by the Wall Street Journal and National Association of Securities Dealers, Inc..
<CAPTION>
High Low
<C> <C>
<S>
1st Quarter 1999 $ 8 1/8 $ 7
(Through March 15, 1999)
1st Quarter 1998 7 1/2 6 3/4
2nd " " 9 1/4 7 1/3
3rd " " 8 7
4th " " 8 7
1st Quarter 1997 8 1/2 7
2nd " " 11 7
3rd " " 11 1/4 9 1/4
4th " " 9 3/4 6 1/2
</TABLE>
[S]
(b) Holders
The number of shareholders of record of common shares at December 31, 1998
was 520.
[S]
(c) Dividends
The Company has paid no dividends on its common shares since 1975. The New York
Insurance Law prohibits New York domiciled property and casualty companies from
paying dividends except out of earned surplus. Without the approval of the New
York State Insurance Department, no New York domestic property/ casualty
insurer may declare or distribute any dividend to shareholders which,
together with any dividends declared or distributed by it during the
preceding twelve months, exceeds the lesser of (1) 10% of surplus to
policyholders as shown by its last statutory annual statement, or (2) one
hundred percent of adjusted net investment income during such period. At
December 31, 1998, $7,280,000 was available for distribution of dividends.
The Company does not presently anticipate paying dividends in the near future.
[S]
<TABLE>
Item 6. Selected Financial Data
<S>
The following selected financial data have been summarized from the Company's
consolidated financial statements and are qualified in their entirety by
reference to, and should be read in conjunction with, such consolidated
financial statements and Item 7, "Management Discussion and Analysis of
Financial Condition and Results of Operations," of this report:
<S>
Year ended December 31,
1998 1997 1996 1995 1994
(In thousands, except per share amounts)
<CAPTION>
<C> <C> <C> <C> <C>
Total Revenues $ 92,070 $ 102,624 $ 120,790 $ 117,892 $ 107,286
Net Income/(Loss) (a) $ 504 $ (83) 2,634 $ 563 $ 6,901
Basic and Diluted Earnings/(Loss)
share:
Income/(Loss) (a) $ 0.07 $ (0.01) $ 0.37 $ 0.08 $ 0.97
</TABLE>
-11-
<PAGE>
<TABLE>
Item 6. Selected Financial Data, continued
<S>
a) Net income includes net securities gains (losses), net of applicable tax,
as follows (in thousands, except per share amounts):
<S>
<CAPTION>
Gains(Losses) Per Share
<C> <C>
<S>
1998 $ 3,951 $ 0.56
1997 (125) (0.02)
1996 735 0.10
1995 (133) (0.02)
1994 (437) (0.06)
</TABLE>
[S]
<TABLE>
At December 31,
1998 1997 1996 1995 1994
(In thousands, except ratio information)
<CAPTION>
<C> <C> <C> <C> <C>
<S>
Total assets $ 605,704 $ 640,249 $ 653,730 $ 660,820 $ 582,508
Invested assets 234,039 271,736 272,992 273,548 237,878
Surplus note:
Face value 7,000 7,000 7,000 7,000 7,000
Acrued Interest 8,300 7,710 7,115 6,524 5,911
Common
Shareholders'
Equity(a)
78,200 78,164 75,658 75,936 63,264
GAAP Combined
Ratio(b) 129.4% 119.3% 114.1% 115.4% 102.5%
SAP Combined
Ratio (b) 134.4% 118.6% 107.5% 107.5% 101.3%
Industry SAP
Combined
Ratio (c) N/A 101.6% 105.8% 106.4% 108.4%
Premium to
Surplus Ratio (d) 0.8X 1.1X 1.4X 1.6X 1.7X
<S>
<FN>
(a)Includes unrealized appreciation of approximately $0.5 million in 1998,
$0.9 million in 1997 and $1.2 million in 1995, and unrealized depreciation of
approximately $1.7 million in 1996 and $10.9 million in 1994, all net of tax,
on investments classified as available for sale.
<S>
(b)For 1998, the difference in the accounting treatment for curtailment gains
relating to defined benefit pension plans was the principal reason for the
difference between the GAAP Combined Ratio and the SAP Combined Ratio. For
1996 and 1995, a change in the statutory accounting treatment for
retrospectively rated reinsurance agreements was the principal reason for the
difference between the GAAP Combined Ratios and the SAP Combined Ratios.
Additionally, for 1998, 1997 and 1996, the difference relates to the accounting
for certain costs, which are treated differently under SAP and GAAP.
<S>
(c)Source: Best's Aggregates & Averages, Property/Casualty, 1998 Edition.
Industry Combined Ratios may not be fully comparable as a result of, among
other things, differences in geographical concentration and in the mix of
property and casualty insurance products.
<S>
(d)Premium to Surplus Ratio was calculated by dividing annual statutory net
premiums written by year-end statutory surplus.
</TABLE>
-12-
<PAGE>
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
[S]
The purpose of this section is to discuss and analyze the Company's financial
condition, liquidity and capital resources and results of operations. This
analysis should be read in conjunction with the financial statements and
related notes which appear in Item 14, "Exhibits, Financial Statement Schedules,
and Reports of Form 8-k" of this Report.
Liquidity and Capital Resources
In 1998 and 1997, net cash was used for operations as a result of a decrease in
premiums written and a program to reduce pending claims.
At December 31, 1998 and 1997 the yield of the Company's fixed maturities
portfolio was 5.8% and 5.9%, respectively, with an average maturity of 3.2 and
3.3 years for 1998 and 1997, respectively. Additionally, the Company maintains
a diversified investment portfolio of securities, of which at December 31, 1998,
approximately 92% of the fixed maturities portfolio was invested in issues of
the U.S. Government and its agencies with the remainder primarily invested in
investment grade corporate and industrial issues. The Company presently
anticipates reinvesting the majority of proceeds from maturities and investment
income in substantially similiar investments.
The Company maintains cash, short-term and readily marketable securities and
anticipates that the cash flow from investment income and maturities of
fixed maturities will be sufficient to satisfy its anticipated cash needs.
The Company does not presently anticipate paying dividends in the near future
and believes it has sufficient capital to meet its currently anticipated
level of operations.
[S]
Results of Operations
[S]
For the years ended December 31, 1998, 1997 and 1996, net earned premium
revenues of the Company were $67.5 million, $80.9 million and $96.1 million,
respectively. In 1998, the decline in earned premium revenues was primarily
due to a decline in the number of assigned risk automobile pool contracts
acquired due to competition and the depopulation of the assigned risk
automobile pools ($7.4 million) and a reduction in certain lines,
principally voluntary commercial automobile ($2.6 million), private passenger
automobile ($1.8 million), commercial package policies ($1.3 million) and
workers,compensation ($1.1 million), due to tighter underwriting standards,
re-underwriting and increased competition. In addition, earned premium
revenues were reduced by $0.6 million for premiums due under retrospectively
rated reinsurance contracts written for 1995 and prior accident years as the
Company re-estimated the premium due based upon its current estimate of loss
ratios for 1995 and prior accident years.
In 1997, earned premium revenues declined primarily due to a depopulation of the
assigned risk pools ($9.5 million) and a reduction in certain commercial lines,
principally voluntary commercial automobile ($3.1 million) and workers'
compensation ($2.6 million) due to competition, reunderwriting and repricing.
In addition, earned premium revenues were reduced in 1997 by $1.7 million to
record premiums due under retrospectively rated reinsurance contracts written
for 1995 and prior accident years. The Company re-estimated the premium due
based upon its then current estimate of loss ratios for 1995 and prior accident
years. Partially offsetting these reductions was an increase in certain
voluntary personal lines, principally private passenger automobile and
homeowners.
-13-
<PAGE>
<TABLE>
During the three years ended December 31, 1998, the Company earned $3.4 million,
$5.7 million and $6.6 million, respectively, in service fee income from its
service business. The decline in service fee income is principally due to the
decline in the number of assigned risk contracts acquired by the Company, pool
depopulation, and its resignation from the NYPAP.
The Company's combined ratios as determined under GAAP and SAP were as follows:
<CAPTION>
Years Ended December 31,
1998 1997 1996
<C> <C> <C>
<S>
GAAP 129.4% 119.3% 114.1%
SAP 134.4% 118.6% 107.5%
</TABLE>
[S]
The combined ratios of the Company increased in 1998, primarily due to the
reduction in premium volume at a rate greater than the reduction in net
underwriting and other costs. In addition, the reduction in servicing fees in
1998 negatively affected the expense ratios. Included in the Company's results
for 1998, 1997 and 1996 were approximately $12.9 million, $8.3 million and $8.1
million, respectively, for reserve strengthening related to losses from prior
accident years.
During 1998, the Company reviewed the adequacy of the reserves carried for its
open claims, files, focusing on workers' compensation, commercial auto and other
commercial liability lines of business. Such reviews are part of the Company's
normal ongoing practice. Particular emphasis during this review was placed on
reserves carried for the workers' compensation line of business. As part of
the review, substantially all open workers' compensation claim files were
reviewed for every accident year up to and including 1998. The Company also
conducted a comprehensive review of reserves carried for other commercial
liability lines of business, in which approximately 28% of the open claim files
were reviewed, with a primary focus on accident years 1995 to 1997. As a
result of these reviews, the Company revised its assumptions regarding average
claims costs and probable ultimate losses and, accordingly, reserves were
strengthened by $3.9 million for workers' compensation and $4.2 million for
other commercial liability lines of business. Additionally, during 1998 the
Company reorganized the commercial auto claims department. As part of this
realignment, more complex claims files were reviewed by the most experienced
claims examiners and assumptions regarding average claims severity and probable
ultimate losses were revised and reserves were strengthened by $4.2 million for
commercial automobile lines of business.
The 1997 reserve strengthening included approximately $3.3 million for
commercial package lines of business and approximately $2.1 million for
voluntary commercial automobile lines of business. During 1997, the Company
reviewed the adequacy of the reserves carried for its open claims' files, as
part of its normal ongoing practice, focusing on the commercial package,
general liability and commercial automobile lines of business. As a result
of this review and the continued unfavorable development of prior accident
years losses, particularly the 1992 through 1994 accident years, the Company
revised its assumptions regarding future increases in average claims severity
and reserves were strengthened.
The 1996 reserve strengthening included approximately $6.0 million for voluntary
commercial automobile lines of business and approximately $2.4 million for
commercial package lines of business. Beginning in 1992, the Company entered
into new market segments of the voluntary commercial business, including
specialty programs for sanitation trucks, gas stations, fuel oil deliveries and
limousines. Initially, the Company based its loss ratio estimate upon its
experience with similar lines of business, industry statistics and standard
actuarial ultimate loss projection techniques, which consider expected loss
ratios. During 1996, claims began to develop unfavorably and the Company used
such claim development to revise the assumptions that formed the basis of
actuarial studies and reserves were increased. With respect to commercial
package lines, general liability claims for business written in 1992 through
1994 also developed unfavorably. These claims showed an increased frequency
of losses as well as an increase in the time between the date the loss
occurred and when the loss was reported compared to prior experience. General
liability claims are susceptible to the emergence of losses over an extended
period of time.
-14-
<PAGE>
For the lines of business discussed above, as well as all other property and
casualty lines of business, the Company employs a variety of standard actuarial
ultimate loss projection techniques, statistical analyses and case-basis
evaluations to estimate its liability for unpaid losses. The actuarial
projections include an extrapolation of both losses paid and incurred by
business line and accident year and implicitly consider the impact of inflation
and claims settlement patterns upon ultimate claim costs based upon historical
patterns. These estimates are performed quarterly and consider any changes
in trends and actual loss experience. Any resulting change in the estimate of
the liability for unpaid losses, including those discussed above, is reflected
in current year earnings during the quarter the change in estimate is
identified.
The reserving process relies on the basic assumption that past experience is an
appropriate basis for predicting future events. The probable effects of current
developments, trends and other relevant matters are also considered. Since the
establishment of loss reserves is affected by many factors, some of which are
outside the Company's control or affected by future conditions, reserving for
property and casualty claims is a complex and uncertain process, requiring the
use of informed estimates and judgments. As additional experience and other
data become available and are reviewed, the Company's estimates and judgments
may be revised. While the effect of any such changes in estimates could be
material to future results of operations, the Company does not expect such
changes to have a material effect on its liquidity or financial condition.
In management's judgment, information currently available has been
appropriately considered in estimating the Company's loss reserves. The
Company will continue to evaluate the adequacy of its loss reserves on a
quarterly basis, incorporating any future changes in trends and actual loss
experience, and record adjustments to its loss reserves as appropriate.
Investment income has decreased by approximately $1.2 million or 7.5% in 1998 as
compared to a decrease of $0.7 million, or 4.1% in 1997, and an increase of $1.0
million or 6.5% in 1996, primarily as a result of lower invested assets due to a
decrease in premiums written and a program to reduce pending claims during
1998 and 1997, and higher invested assets resulting from positive cash flows
in 1996. During 1998, the Company had realized capital gains of $6.1 million
principally from gains recognized on the sale of fixed maturities, primarily
U.S. Treasury Notes. During 1997, the Company recorded $0.2 million in
realized capital losses in the normal course of managing its investment
strategy. In 1996, the Company realized gains of $1.1 million on the sale of
fixed maturities, primarily U.S. Treasury Notes.
The combination of other underwriting expenses incurred and the amortization of
deferred policy acquisition costs reflected an increase of approximately $1.0
million or 4.9% in 1998, a decrease of $7.8 million, or 27.8% in 1997, and an
increase of $1.7 million, or 6.6% in 1996. The increase in 1998 was largely
the result of expenses relating to the move of the Company's executive and
administrative offices to Brooklyn, New York and higher underwriting costs
relating to surveys and audits of insureds records in connection with the
Company's reunderwriting efforts offset in part by $2.0 million pension
curtailment gain. The decrease in 1997 was primarily the result of lower
operating costs, primarily relating to pension and severance benefits for
certain employees, and a decrease in the provision for servicing carriers
expenses in connection with the NYPAP, offset by higher systems costs. The
increase in 1996 was the result of higher operating costs primarily relating
to pension and severance benefits for certain employees coupled with higher
systems costs.
Impact of Inflation
The Company, as well as the property and casualty insurance industry in general,
is affected by inflation. With respect to losses, the Company's claim severity
is affected by the impact of inflation on the cost of automobile repair parts,
medical costs and lost wages. The costs of adjusting claims and other
underwriting expenses have also been affected by inflationary pressures on
salaries and employee benefits. The Company receives rate increases based in
part upon its experience as well as the industry's experience. Accordingly,
premium increases generally follow the rate of inflation.
-15-
<PAGE>
Year 2000 and Information Technology Systems
The Company, as well as most corporations in general, is affected by the
problems associated with information technology systems and their ability to
correctly capture and process date specific information in connection with
the year 2000. The year 2000 issue is the result of computer programs being
written using two digits (rather than four) to define the applicable year.
Any programs that have time-sensitive software may recognize a date using "00"
as the year 1900 rather than the year 2000, which could result in
miscalculations or system failures.
The Group continues to evaluate its information technology systems to
determine the potential impact of the year 2000. In 1996, the Group began to
evaluate its information technology systems and their ability to support future
business needs. The Group engaged the services of outside consultants who
recommended various solutions that included a new policy management system.
This led to a decision to acquire new policy management and accounting systems.
These systems provide enhanced functionality and improved processing for
underwriting, claims, billing, collection, reinsurance, reporting, and
accounting and are designed to be year 2000 compliant. Throughout 1998 and
1997, the Group sought the assistance of outside consultants who made further
recommendations to ensure compliance, which included upgrades and improvements
to desktop computers and local applications. These recommendations would
also result in improved productivity, increased reliability, and expanded
functionality.
The Groups decision in 1996 for system replacement requires the new policy
management system to be functional by October 1998 since renewals for certain
annual policies expiring on or after January 1, 2000 will begin renewing
approximately 90 days prior to the policy's effective date. The new policy
management system was successfully migrated into production during 1998 for
all new and renewal business. Insurance companies need to maintain historical
information concerning premiums, claims, and other related policy information
for many years. Currently, the historical database for information maintained
by the Group prior to the migration of the new policy system remains on a
non-compliant year 2000 "legacy" database. The Group expects to migrate this
data to its new policy system during the third quarter of 1999. The Group had
also decided in 1996 to replace its accounting system which was installed
during the first quarter 1999. The Group believes the policy management and
accounting systems will support the year 2000 processing capabilities.
Although a significant portion of the Group's current systems are year 2000
compliant, the Group formed a year 2000 readiness team to further increase the
Group's state of readiness. The team, which meets regularly, is developing
a contingency plan to address any actual failures that may occur thereby
minimizing any outages in operational functions. The Group expects to
complete this plan before the end of the second quarter of 1999. The team is
also charged with the responsibility of monitoring all material elements of
compliance including assessment, hardware, software and application
environments; testing; and correction implementation.
The Group has made inquiries of third parties with whom it has material
relationships as to the year 2000 compliance of such third parties. Many of
such parties have reported plans to be fully compliant by the end of 1999 and
most have reported substantial progress at the end of 1998. However, at this
time the Company cannot predict the effect of the year 2000 issue on its
material third parties or the impact any deficiency in the year 2000 readiness
of such parties could have on the Group.
Through December 1998, expenses incurred by the Group in connection with the
year 2000 issue (excluding expenses related to the Group's acquisition of new
systems, which was not motivated by the year 2000 concerns) did not exceed
$100,000. Based upon current information, the Group does not expect that the
year 2000 issue will have a material effect on its consolidated financial
position or consolidated results of operations.
-16-
<PAGE>
Cautionary Statement for Forward-Looking Information
Statements included in this Report may contain forward-looking statements. Such
forward-looking statements are made pursuant to the safe-harbor provisions of
the Private Securities Litigation Reform Act of 1995. Such statements may
relate, but are not limited, to projections of revenues, income or loss,
capital expenditures, fluctuations in insurance reserves, plans for growth and
future operations (including year 2000 compatibility), competition and
regulation as well as assumptions relating to the foregoing. Forward-looking
statements are inherently subject to risks and uncertainties, many of which
cannot be predicted or quantified. When used in this Report, the words
"estimates", "expects", "anticipates", "believes", "plans", "intends" and
variations of such words and similar expressions are intended to identify
forward-looking statements that involve risks and uncertainties. Future
events and actual results could differ materially from those set forth in,
contemplated by or underlying the forward-looking statements. The factors
that could cause actual results to differ materially from those suggested by
any such statements include, but are not limited to, those discussed or
identified from time to time in the Company's public filings, including
general economic and market conditions, changes in domestic laws, regulations
and taxes, changes in competition and pricing environments, regional or
general changes in asset valuation, the occurrence of significant natural
disasters, the inability to reinsure certain risks economically, the adequacy
of loss reserves, prevailing interest rate levels, weather related conditions
that may affect the Company's operations, the difficulty in identifying
hardware and software that may not be year 2000 compliant, the lack of success
of third parties to adequately address the year 2000 issue, vendor delays and
technical difficulties affecting the Company's ability to upgrade or replace
its hardware and/or software for year 2000 compliance, and changes in the
composition of the Company's assets and liabilities through acquisitions or
divestitures. Undue reliance should not be placed on these forward-looking
statements, which are applicable only as of the date hereof. The Company
undertakes no obligation to revise or update these forward-looking statements to
reflect events or circumstances that arise after the date of this Report or to
reflect the occurrence of unanticipated events.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
The following includes "forward-looking statements" that involve risk and
uncertainties. Actual results could differ materially from those projected
in the forward-looking statements.
The Company's market risk arises principally from interest rate risk related to
its investment portfolio. The Company does not enter into material derivative
financial instrument transactions.
The Company's investment portfolio is primarily classified as available for
sale, and consequently, is recorded on the balance sheet at fair value with
unrealized gains and losses reflected in shareholders' equity. Included in
the Company's investment portfolio are fixed income securities, which comprised
approximately 78% of the Company's total investment portfolio at December 31,
1998. These fixed income securities are primarily rated "investment grade" or
are U.S. governmental agency issued or guaranteed obligations, although limited
investments in "non-rated" or rated less than investment grade securities have
been made from time to time. The estimated weighted average remaining life of
these fixed income securities was approximately 3.2 years at December 31,1998.
The Company's fixed income securities, like all fixed income instruments, are
subject to investment rate risk and will fall in value if market interest rates
increase. Expected maturities will differ from contractual maturities because
the borrowers may have the right to call or prepay obligations with or without
call or prepayment penalties. The Company manages the investment portfolio to
preserve principal, maintain a high level of quality, comply with applicable
insurance industry laws and regulations and achieve an acceptable rate of
return. In addition, the Company considers the duration of its insurance
reserves in comparison with that of its investments.
-17-
<PAGE>
<TABLE>
<S>
Expected Maturity Date
1999 2000 2001 2002 2003 Thereafter Total Fair Value
<CAPTION>
<C> <C> <C> <C> <C> <C> <C> <C>
Rate
Sensitive
Assets:
Available
for Sale
Fixed
Income
Securities:
U.S.
Government $26,052 $36,966 - $81,028 - $42,997 $187,043 $187,043
Weighted
Average
Interest
Rate 5.38% 6.03% - 6.38% - 5.97% - -
Other Fixed
Maturities:
Rated
Investment
Grade $ 806 $ 604 $860 - $1,664 $ 6,148 $ 10,082 $ 10,082
Weighted
Average
Interest
Rate 7.75% 6.50% 7.88% - 7.14% 7.19% - -
Rated
Less
Than
Investment
Grade/Not
Rate $ 806 $ 802 $746 $814 $1,622 - $4,790 $4,790
Weighted
Average
Interest
Rate 6.63% 6.25% 5.88% 6.75% 6.81% - - - -
Held to
Maturity Fixed
Income
Securities:
U.S.
Government - - - $502 - - $502 $502
Weighted
Average
Interest
Rate - - - 6.37% - - - -
</TABLE>
[S]
Item 8. Financial Statements and Supplementary Data
See page F1.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
NONE
-18-
<PAGE>
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to the Company's Charter and By-Laws, the Board of Directors of the
Company consists of 13 members divided into three classes: Class I, Class II
and Class III. Class I consists of five directors and Class II and III each
consist of four directors. Joel Berlin resigned from the Boards of the Group
in January 1999 and was replaced by Ms. Carmen M. Rivera in March 1999.
Ms. Carmen M. Rivera will serve until the 1999 Annual Meeting of Shareholders.
One class of directors is elected in each year for a three-year term. All of
the directors of the Company are also directors of Empire and Centurion.
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
[S]
Robert V. Toppi, 61, Principal Occupation - President and Chief
Director, President Executive Officer of the Company, Empire and
and Chief Executive Centurion since August 1998. Previously, Resident
Officer Vice President of the Greater New York district
with Aetna Casualty and Surety Company.
Class II Director since August 1998;
current term expires 2001.
Martin B. Bernstein, 65, Principal Occupation - President and Director
Director of Ponderosa Fibres of America, Inc.(A pulp
manufacturer for paper producers).
Class II Director since February 1988;
current term expires 2001.
Ian M. Cumming, 58, Principal Occupation - Presently and since June
Director 1978, Chairman of the Board and a Director of
Leucadia. Director of Skywest, Inc. (a Utah-based
regional air carrier) since June 1986.
Director of MK Gold Company (an international gold
mining company) since June 1995.
Class I Director since February 1988;
current term expires 2000.
James E. Jordan, 55, Principal Occupation - Financial Consultant,
Director The Jordan Company. Previously, President
of the William Penn Co. from 1986 until 1997.
Class III Director since 1997;
current term expires 1999.
Thomas E. Mara, 53, Principal Occupation - Presently and
Director since May 1980, Executive Vice President of Leucadia
and Treasurer of Leucadia since January 1993.
Class I Director since October 1994;
current term expires 2000.
Louis V. Siracusano, 52, Principal Occupation - Attorney with
Director McKenna, Fehringer, Siracusano & Chianese
(a law firm) for over seven years.
Class II Director since 1985;
current term expires 2001.
Joseph A. Orlando, 43, Principal Occupation - Chief Financial Officer
Director of Leucadia since 1996 and Vice President of
Leucadia since 1994.
Class III Director since 1998;
current term expires 1999.
-19-
<PAGE>
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
[S]
Joseph S. Steinberg, 55, Principal Occupation - President of Leucadia since
Director, Chairman of the January 1979 and Director of Leucadia since
Board December 1978. Director of MK Gold Company since
June 1995. Director since June 1988 of Jordan
Industries, Inc., a holding company principally
engaged in manufacturing. Director of HomeFed
Corporation, a California real estate developer,
since August 1998.
Class I Director since February 1988;
current term expires 2000.
Daniel G. Stewart, 80, Principal Occupation - Independent consulting
Director actuary. Previously, Senior Vice President of
Mutual Benefit Life Insurance Company from 1985
to November 1991.
Class I Director since 1980;
current term expires 2000.
Lucius Theus, 76, Principal Occupation - President, The U.S.
Director Associates (consultants in civic affairs, human
resources and business management) since 1989.
Principal and Director of the Wellness Group, Inc.
(a provider of health promotion programs) since
1989 Corporate Director, Civic Affairs of Allied
Corporation (a diversified industrial company)
since 1979.
Class II Director since 1980;
current term expires 2001.
Carmen M. Rivera, 52, Principal Occupation - Senior Vice President of
Director & Senior Small Business Division at Empire since November,
Vice President 1998. Previously, Select Manager in the N.Y.C.
office at the Travelers Property Casualty
Corporation.
Class I Director since March 1999;
current term expires 1999.
Harry H. Wise, 60, Principal Occupation - President and Director,
Director H.W. Associates, Inc. (an investment advisory firm).
President and Director, Madison Equity Capital Corp.
(a sponsor of private investment partnerships).
Class III Director since 1988;
current term expires 1999.
Francis M. Colalucci, 54, Principal Occupation - Executive Vice President,
Director, Executive Vice Chief Financial Officer and Treasurer of the
President, Chief Financial Company and Empire since March 1, 1999.
Officer & Treasurer Senior Vice President, Chief Financial Officer and
Treasurer since January 1996. Previously, Vice
President & Corporate Treasurer of Continental
Corporation (an insurance holding Company) from
1991 to January 1996.
Class III Director since October 1996;
Current term expires in 1999.
R. Scott Conant, 48, Principal Occupation - Senior Vice President,
Senior Vice President, Claims for the Company and Empire since September
Claims 1997. Previously, Senior Vice President of Home
State Holdings, Inc (an insurance holding company)
from August 1996 to September 1997. Previously,
Manager & Consultant for KPMG Peat Marwick, from
February 1995 to August 1996.
-20-
<PAGE>
<TABLE>
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth certain compensation information for Robert V.
Toppi, currently the Chief Executive Officer of the Company, Richard G. Petitt
and Andrew W. Attivissimo who were prior Chief Executive Officers of the
Company, the only executive officers whose compensation paid, or accrued for,
under the pooling arrangement exceeded $100,000 for the years ended December 31,
1998, 1997 and 1996.
<CAPTION>
Summary Compensation Table
Long Term
Annual Compensation Compensation
Name and Principal LTIP All Other
Position Salary Bonus Payouts Compensation
Year $ $ $ $
<C> <C> <C> <C>
<S>
Robert V. Toppi 1998 (a) (a) (a) (a)
President & C.E.O
Richard G. Petitt 1997 105,969 90,000 - 6,767 (b)
Chairman,
President& C.E.O. 1996 86,674 150,000 - 7,494 (c)
Andrew W. Attivissimo
President & C.O.O. 1996 87,791 30,000 69,631(b) 89,397(d)
<S>
<FN>
(a) Mr. Toppi receives no compensation from the Company. He is compensated
directly by Leucadia.
(b) Includes Salary Cap Restoration Plan ($2,303), Pension Plan ($3,264), and
Company match of 401(k) Plan ($1,200).
(c) Includes Salary Cap Restoration Plan ($2,100), Pension Plan ($4,455) and
Company match of 401(k) plan ($939).
(d) Contributions made to a trust pursuant to the Empire Long Term Incentive
Plan.
</TABLE>
The Company does not directly remunerate directors. The directors of the
Company and Empire who are not employees of Empire and the Company were paid
an annual retainer of $5,000. In addition, eligible directors receive $1,500
for each joint board meeting attended. For attendance at a meeting of a
committee of the joint board, such directors receive $1,500 per meeting. In
addition, each Chairperson of a committee is entitled to $500 per annum. All
fees paid to such directors are shared in accordance with the pooling agreement.
In 1998, Mr. Richard G. Petitt retired as Director, Chairman of the
Board, President and Chief Executive Officer of the Company and the Group.
He was succeeded by Mr. Toppi who is President and C.E.O. and a director.
Mr. Steinberg succeeded Mr. Petitt as chairman of the board.
In February 1996, Mr. Patrell retired as Chairman of the Board of Directors
and Chief Executive Officer of the Company and Empire; he was a Director of
the Company and the Group before resigning on January 1, 1998. Upon his
retirement, Leucadia agreed to pay to Mr. Patrell the amount of $1,000,000 of
which $333,333 was paid by Empire. Pursuant to the pooling agreement, the
Company contributed 30% of the compensation paid by Empire to Mr. Patrell.
Mr. Patrell agreed not to compete against Leucadia or its affiliated entities
for a two year period.
Mr. Attivissimo was employed pursuant to an Employment Agreement, which
terminated on December 31, 1996. The Employment Agreement was to continue
from year to year thereafter unless the period of employment was terminated
at the end of a calendar year by either Mr. Attivissimo or Empire on at least
six months written notice. In May 1996, Mr. Attivissimo retired from his
positions as an officer and director of the Company and the Group. Pursuant
to the terms of his Employment Agreement, Mr. Attivissimo continued to be paid
his normal salary at the rate of $240,000 per annum through December 31, 1997.
In addition, Mr. Attivissimo received $1,901,000 in a lump sum supplemental
retirement benefit, $482,375 under Empire's
-21-
<PAGE>
<TABLE>
Long Term Incentive Plan and title to an automobile having a book value of
approximately $13,000. Pursuant to the pooling agreement, the Company is
obligated to pay 30% of the compensation and cost of benefits paid to
Mr. Attivissimo.
Pension Plan
Pensions for officers and employees of the Company were provided under a
non contributory defined benefit pension plan "prior plan". Any employee
was eligible for membership in the plan on January 1st or July 1st of any
plan year after which they had completed one full year of service, consisting
of a minimum of 1,000 credited hours with Empire, provided they had attained
the age of 21 years by or before such date. Members of the prior plan
received a basic pension if they worked until their normal retirement date,
which was the last day of the month in which they attained 65 years of age
with 5 years of, credited service. Any member in the active employ of Empire
may have elected early retirement between 55 and 65. A member electing early
retirement must have had at least 10 years of service. A monthly average of
total compensation received over the highest 5 consecutive plan or calendar
years before retirement was taken to compute benefits as follows:
1.30% of the first $833 per month of average pay, plus
1.75% of average pay over $833 per month.
The sum of these two credits was multiplied by the years of credited service.
The basic benefit amounts listed in the table below were not subject to any
deduction for Social Security benefits or other offset amounts. The maximum
benefit payable under the pension plan was $96,400 per year. Benefits accrued
under the plan were frozen as of December 31, 1998. The prior plan was merged
with the Leucadia plan effective January 1, 1999.
As a result of the curtailment of the pension benefits in 1998, the Group
recognized a gain of $6,548,000. In accordance with the pooling aggreement,
the Company's share of the curtailment gain is 30%.
The amounts set forth in the following table show estimated annual benefits
upon retirement to which the Company contributes 30% of such cost through
the pooling agreement.
<S>
<CAPTION>
Highest
Five Year Average
Compensation at Years of Service
Retirement 10 15 20 2 30 35
<C> <C> <C> <C> <C> <C>
$ 10,000 $ 1,300 $ 1,950 $ 2,600 $ 3,250 $ 3,900 $ 4,550
25,000 3,925 5,888 7,850 9,813 11,775 13,738
50,000 8,300 12,450 16,600 20,750 24,900 29,050
75,000 12,675 19,013 25,350 31,688 38,025 44,363
100,000 17,050 25,575 34,100 42,625 51,150 59,675
160,000 27,500 41,300 55,100 69,000 82,600 96,400
</TABLE>
[S]
Effective January 1, 1999, Empire adopted a non-contributory defined benefit
contribution plan. The contributions, ranging from 2% - 16% of employees'
current pension plan compensation, are based on the age and service of the
employee with Empire. These contributions will accumulate for participants
on a tax-deferred basis. Participants will have choices to direct the
investment of their contributions to their accounts.
Salary Cap Restoration Plan
In 1994, Empire established a Salary Cap Restoration Plan ("SCRP") for certain
corporate officers. Under the SCRP, Empire provided these officers with an
additional benefit, to be paid in a lump-sum upon retirement, equal to the
difference between the actuarially determined lump-sum benefits, as computed
under the Prior Pension Plan, of the officer's highest five year average
compensation (not to exceed $320,000, adjusted for the cost-of-living) at
retirement and the current maximum compensation limit of $160,000. The SCRP
was an unfunded plan. Along with the defined benefit plan, the benefits under
SCRP were curtailed as of December 31, 1998.
-22-
<PAGE>
Employees' Savings Plan
Empire sponsors an Employees' Savings Plan (the "Savings Plan"), under which
each eligible employee may defer a portion of their annual compensation, subject
to limitations. Empire contributes a matching amount, subject to certain limits.
In 1996, Empire matched 65% of each participant's deferred contribution up to a
maximum matching contribution of $813. A participant may also contribute, from
his after-tax dollars, an amount, not to exceed 10% of his annual compensation.
Effective July 1996, the Savings Plan was amended to allow Empire matching
contributions equal to 50% of an employee's contributions up to a maximum of
2.5% of the employee's salary. Empire's contributions to the Savings Plan were
$420,000, $438,000, and $524,000 in 1998, 1997 and 1996, respectively. Under the
pooling agreement, the Company is obligated to provide 30% of Empire's
contributions to the Savings Plan.
Supplemental Retirement Plan
Under Empire's Supplemental Retirement Plan ("SERP"), eligible employees who
work until their normal retirement date, which, is the last day of the month
in which such employees attain 65 years of age, are entitled to receive monthly
benefits equal to (a) the difference between (i) one twelfth of a stipulated
percentage (the "stipulated percentage") of such participant's final average
compensation (the "base amount") and (ii) the aggregate amount of the monthly
pension and benefit entitlement such participant would receive under Prior
Plan, Savings Plan and other employee pension benefit plans if such benefits
were paid in the form of an annuity for the life of the participant and fifty
percent of the participant's monthly Social Security benefit, multiplied,
unless otherwise specified in the SERP, by (b) a fraction, not exceeding one
(the "reduction factor"), the numerator of which is the number of the
participant's years of service and the denominator of which is five. Final
average compensation is the average annual compensation paid during any five
consecutive calendar years during which the participant's compensation was
highest. The SERP provides that the minimum benefit payable is equal to the
base amount multiplied by the reduction factor. Participants remaining in the
employ of the Company after the normal retirement date continue to accrue
benefits under the SERP. Early retirement, between age 55 and 65 under the
SERP, is permitted provided the participant electing early retirement has at
least ten years of service. Amounts payable under the SERP are paid from the
Trust to Fund Benefits under Certain Unfunded Deferred Compensation Plans of
the Company, established effective November 1, 1987 (the "Trust Fund"). The
Trust Fund is subject to the claims of certain creditors of the Company if the
Company becomes insolvent. The Board of Directors had designated one key
employee, Andrew W. Attivissimo; to receive benefits under the SERP based on
a maximum stipulated percentage of 60% and a minimum stipulated percentage of
30%. In 1996, Mr. Attivissimo received a lump sum payment under the SERP of
$1,901,000.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The table on the following page sets forth information as of March 15, 1999 as
to the Common Shares of the Company owned of record and beneficially by each
person who owns of record, or is known by the Company to own beneficially,
more than 5% of such Common Shares.
-23-
<PAGE>
<TABLE>
<CAPTION>
Name and Amount and
Address of Nature of
Beneficial Beneficial Percent of
Owner Ownership Class
<C> <C>
Empire Insurance Company 5,987,401 Common 84.6%
335 Adams Street Shares owned of
Brooklyn, N.Y. 11201 record
Baldwin Enterprises, Inc. 373,607 Common 5.3%
529 East South Temple Shares owned of
Salt Lake City, Utah 84102 record
</TABLE>
[S]
As discussed in Item 1, "Business", Leucadia (and certain of its wholly-owned
subsidiaries) may be deemed a parent of Empire and therefore of the Company as
a result of its indirect ownership of 100% of the outstanding common stock of
Empire.
Security Ownership of Management
The following table sets forth information concerning beneficial ownership of
the Company's common stock and the equity securities of Leucadia by all
directors and by directors and officers of the Company as a group as of
December 31, 1998 with respect to the Company's Common Shares and as of
April 9, 1998 with respect to Leucadia's and Empire's securities.
-24-
<PAGE>
Each holder shown exercises sole voting and sole investment power of the shares
shown opposite his or her name.
Name of Beneficial Amount and Nature of Percent of
Owner Beneficial Ownership Class
Martin B. Bernstein - -
Francis M. Colalucci - -
R. Scott Conant - -
Ian M. Cumming (1) - -
James E. Jordan - -
Thomas E. Mara - -
Joseph A. Orlando - -
Carmen M. Rivera - -
Louis V. Siracusano - -
Joseph S. Steinberg (1) - -
Daniel G. Stewart - -
Lucius Theus - -
Robert V. Toppi - -
Harry H. Wise - -
Directors and executive
Officers as a group - -
(22 persons) (2)
[S]
(1) Although neither Ian M. Cumming nor Joseph S. Steinberg directly owns any
shares of common stock of the Company, by virtue of their respective interest
of approximately 15.5% and 14.2% in Leucadia, each may be deemed to be the
beneficial owner of a proportionate number of the shares of Common Stock of
the Company beneficially owned by Leucadia through its 100% ownership of
Empire.
[S]
(2) Aside from the beneficial ownership described in note 1 to this table, five
directors and one officer beneficially own common shares of Leucadia, which in
the aggregate, represent less than 1% of Leucadia's common stock.
[S]
Item 13. Certain Relationships and Related Transactions
[S]
See Item 1 of this report and Notes 1, 3, 8, 9, 10 and 11 of Notes to
Consolidated Financial Statements for information relating to transactions and
relationships between the Company and its affiliates.
-25-
<PAGE>
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedule
1. The following Financial Statements of Allcity Insurance Company are included
in item 8:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1998 and 1997.
Consolidated Statements of Operations for the years ended December 31, 1998,
1997 and 1996.
Consolidated Statements of Changes in Shareholders' Equity for the years
ended December 31, 1998, 1997 and 1996.
Consolidated Statements of Cash Flows for the years ended December 31,1998,
1997 and 1996.
Notes to Consolidated Financial Statements.
2. The information for Schedules I, IV and V required to be filed pursuant to
Regulation S-X, Article 7 is contained in the Notes to Consolidated
Financial Statements and, therefore, these schedules have been omitted.
The information required by Schedules III and IV of Article 7 is combined
in Schedule VI - Supplemental Insurance Information Concerning Property/
Casualty Insurance Operations. All other required schedules are not
applicable.
Schedule IV - Supplemental Insurance Information Concerning Property/
Casualty Insurance Operations for the years ended December 31, 1998,
1997 and 1996.
3. The exhibits required by Item 601 of Regulation S-K have been filed
herewith, see attached Exhibit Index.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1998, there were no reports on
Form 8-K filed for the Company.
(c) Exhibits Required by Item 601 of Regulation S-K.
See attached Exhibit Index.
(d) Financial Statements Required by Regulation S-X.
See Item 14(a).
-26-
<PAGE>
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
ALLCITY INSURANCE COMPANY
March 30, 1999 By:/s/ Francis M. Colalucci
Francis M. Colalucci
Director, Executive Vice President,
C.F.O. & Treasurer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
reporthas been signed below by the following persons on behalf of the registrant
and in the capacities indicated and on the date set forth above.
/s/ Robert V. Toppi /s/ Francis M. Colalucci
Robert V. Toppi Francis M. Colalucci
Director, President & C.E.O. Director, Executive Vice President,
C.F.O. & Treasurer
/s/ Joseph S. Steinberg /s/ Martin B. Bernstein
Joseph S. Steinberg Martin B. Bernstein
Director, Chairman of the Board Director
/s/ Louis V. Siracusano /s/ Harry H. Wise
Louis V. Siracusano Harry H. Wise
Director Director
/s/ Daniel G. Stewart /s/ Thomas E. Mara
Daniel G. Stewart Thomas E. Mara
Director Director
/s/ Ian M. Cumming /s/ James E. Jordan
Ian M. Cumming James E. Jordan
Director Director
/s/ Lucius Theus /s/ Carmen M. Rivera
Lucius Theus Carmen M. Rivera
Director Director, Senior Vice President
/s/ Joseph A. Orlando
Joseph A. Orlando
Director
-27-
<PAGE>
EXHIBIT INDEX
The following designated exhibits, as indicated below, are either filed
herewith (if indicated by an asterisk) or have heretofore been filed with the
Securities and Exchange Commission under the Securities Act of 1933 or the
Securities Exchange Act of 1934 and are incorporated herein by reference to
such filings. Reference is made to Item 8 of this Form 10-K for a listing of
certain financial information and statements incorporated by reference herein.
[S]
Exhibit Number Description of Document
[S]
3 Corporate charter, as amended, and by-laws, as
amended, of the Company (Incorporated by reference
to Exhibit 3 of the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
10(a) Pooling Agreement, as amended through March 31,
1992 between Empire and the Company (Incorporated by
reference to Exhibit 10(a)-20 of the Company's Form
8 Amendment No. 1 of its annual Report for the year
ended December 31, 1981).
10(c) Centurion Agreement, made effective as of
August 21, 1987 by and between Empire and the
Company, and Centurion. (Incorporated by reference
to Exhibit 10(e) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1987).
10(d) Empire Mutual Executive Deferred Compensation Plan
dated November 17, 1987. (Incorporated by reference
to Exhibit 10(f) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1987).
10(e) Empire Mutual Insurance Company Supplemental
Retirement Plan dated November 17, 1987.
(Incorporated by reference to Exhibit 10(g) of the
Company's Annual Report on Form 10-K for the year
ended December 31, 1987).
-28-
<PAGE>
Exhibit Number Description of Document
10(f) Tax Allocation Agreement dated February 28, 1989 among
the Company, PHLCORP, Empire, Centurion, Empire Livery
Services, Inc., Executroll Services Corporation, and
Empall Agency Incorporated. (Incorporated by reference
to Exhibit 10(m) of the Company's Annual Report on Form
10-K for the year ended December 31, 1988).
10(g) Employment Agreement made as of January 1, 1993 Empire
and Andrew W. Attivissimo. (Incorporated by reference
to Exhibit 10(g) of the 10-K for the year ended
December 31, 1992).
10(h) Empire Insurance Company Salary Cap Restoration Plan dated
May 26, 1994. (Incorporated by reference to Exhibit 10(i)
of the Company's Annual Report on Form 10-K for the
December 31, 1994).
10(i) Quota Share Reinsurance Agreement between Empire Insurance
Company and Centurion Insurance Company (Incorporated by
reference to Exhibit 10(i) of the company's Annual Report
on Form 10-K for the year ended December 31, 1997).
10(j) Lease agreement dated June 27, 1996 between Empire
Insurance Company and Brooklyn Renaissance Plaza L.L.C.,
as Landlord, BRPII L.L.C as sub-landlord (Incorporated by
reference to Exhibit 10(a) of the company's quarterly
report on Form 10-Q for the quarter ended March 31, 1997).
27* Financial Data Schedule
-29-
<PAGE>
ITEM 8. Financial Statements and Financial Statement Schedule
Page
The following financial information is submitted herein:
Report of Independent Accountants F2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F3
Consolidated Statements of Operations for the years
ended December 31, 1998, 1997 and 1996 F4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1998, 1997 and 1996 F5
Consolidated Statements of Cash Flows for the years ende
December 31, 1998, 1997 and 1996 F6
Notes to Consolidated Financial Statements. F7-F28
Financial Statement Schedule:
Schedule VI- Supplemental Insurance Information
Concerning Property/Casualty Insurance Operations for the
years ended December 31, 1998, 1997 and 1996 F29
-F1-
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
[S]
February 18, 1999
[S]
To the Board of Directors and
Shareholders of Allcity Insurance Company:
[S]
In our opinion, the consolidated financial statements listed in the index
appearing under item 14(a) (1) (2) of this Form 10-K, present fairly, in all
all material respects, the financial position of Allcity Insurance Company and
Subsidiary as of December 31, 1998 and 1997, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1998, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule listed in the index
appearing under item 14(a) (1) (2) of this Form 10-K, present fairly in all
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements and financial statements schedule based on our audits. We conducted
our audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatements. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
[S]
[S]
PRICEWATERHOUSECOOPERS LLP
[S]
New York, New York
-F2-
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEETS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
<CAPTION>
December 31,
ASSET 1998 1997
<C> <C>
<S>
Investments:
Fixed maturities
Available for sale (amortized cost of
$181,214 in 1998 and $268,091 in 1997) $181,729 $269,055
Held to maturity (fair value
of $502 in 1998 and $497 in 1997) 502 485
Equity securities available for sale 176 447
Short-term 20,186 1,749
Other Invested Assets 31,446 -
TOTAL INVESTMENTS 234,039 271,736
<S>
Cash 390 2,863
Agents' balances, less allowance for
doubtful accounts ($1,817 in 1998 and
$1,561 in 1997) 10,015 13,109
Accrued investment income 3,662 2,942
Reinsurance balances receivable 295,994 273,280
Prepaid reinsurance premiums 37,691 55,074
Deferred policy acquisition costs 5,365 7,079
Deferred tax benefit 11,101 11,462
Due from affiliates 3,010 -
Other assets 4,437 2,704
TOTAL ASSETS $605,704 $640,249
<S>
LIABILITIES
Unpaid losses $382,109 $361,341
Unpaid loss adjustment expenses 52,123 56,185
Unearned premiums 63,972 90,807
Drafts payable 3,912 4,983
Due to affiliates - 14,427
Unearned service fee income 2,240 4,539
Reserve for servicing carrier claim expenses 1,730 3,701
Reinsurance balances payable 885 4,825
Other liabilities 5,233 6,567
Surplus note 15,300 14,710
TOTAL LIABILITIES 527,504 562,085
<S>
SHAREHOLDERS' EQUITY
Common stock, $1 par value: 7,368,420
shares authorized; 7,078,625 shares issued
and outstanding in 1998 and 1997 7,079 7,079
Additional paid-in capital 9,331 9,331
Accumulated other comprehensive income net of
deferred taxes of $242 and $494 in 1998 and
1997, respectively 449 917
Retained earnings 61,341 60,837
TOTAL SHAREHOLDERS' EQUITY 78,200 78,164
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $605,704 $640,249
<S>
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
-F3-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF OPERATIONS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share
and per share amounts)
<CAPTION>
Year Ended December 31,
1998 1997 1996
<C> <C> <C>
<S>
REVENUES
Premiums earned $67,512 $80,891 $96,073
Net investment income 14,523 15,694 16,358
Service fee income 3,389 5,696 6,608
Net securities gains and(losses) 6,079 (192) 1,130
Other income 567 535 621
92,070 102,624 120,790
LOSSES AND EXPENSES
Losses 62,282 68,901 76,387
Loss adjustment expenses 7,307 13,144 11,963
Other underwriting expenses, less
deferrals of $11,697 in 1998, $14,616
in 1997 and $15,333 in 1996 7,705 4,886 11,681
Amortization of deferred policy
acquisition costs 13,411 15,245 16,204
Interest on surplus note 591 595 591
91,296 102,771 116,826
INCOME/(LOSS) BEFORE FEDERAL INCOME TAX 774 (147) 3,964
FEDERAL INCOME TAXES
Current (benefit)/expense (343) (227) 2,501
Deferred expense/(benefit) 613 163 (1,171)
270 (64) 1,330
NET INCOME/(LOSS) $ 504 $ (83) $ 2,634
Per share data, based on 7,078,625
Average shares outstanding in 1998,
1997 and 1996
BASIC and DILUTED EARNINGS/(LOSS)PER SHARE $ 0.07 $ (0.01) $ 0.37
<S>
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
-F4-
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
<CAPTION>
SHAREHOLDERS' EQUITY
Total
Additional Share-
Common Stock Paid-In Comprehensive Retained holders'
Shares Amount Capital Income Earnings
<C> <C> <C> <C> <C> <C>
Equity
Balance
at
January
1,1996 $7,079 $7,079 $9,331 $1,240 $58,286 $75,936
<S>
Comprehensive Income:
<S>
Net income
for the year 2,634 2,634
<S>
Net change
in unrealized
(loss) on
investments
(net of
deferred
benefit
of $1,567) (2,912) (2,912)
<S>
Comprehensive
Income/(loss) (278)
Balance at
December
31, 1996 7,079 7,079 9,331 (1,672) 60,920 75,658
<S>
Net loss
for the
year (83) (83)
<S>
Net change
in unrealized
gain on
investments
(net of
deferred
taxes of
$1,394) 2,589 2,589
<S>
Comprehensive
Income 2,506
<S>
Balance as
of December
31, 1997 7,079 7,079 9,331 917 60,837 78,164
<S>
Comprehensive Income:
<S>
Net income
for the year 504 504
<S>
Unrealized
holding gain
arising during
the period
(net of deferred
tax of $767) 1,425 1,425
<S>
Less reclassification
of net securities
gains included in
net income (net
of deferred tax
of $1,019) (1,893) (1,893)
<S>
Comprehensive Income 36
<S>
Balance as
of December
31, 1998 $7,079 $7,079 $9,331 $ 449 $61,341 $78,200
<S>
</TABLE>
-F5-
[S]
<PAGE>
<TABLE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
<CAPTION>
Year Ended December 31,
1998 1997 1996
<C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income/(loss) $ 504 $ (83) $ 2,634
Adjustments to reconcile net income/(loss)
to net cash(used for)/provided by operating
activities:
Provision for deferred tax benefits 613 163 (1,171)
Amortization of deferred policy
acquisition costs 13,411 15,245 16,204
Provision for doubtful accounts 256 198 270
Net securities(gains) and losses (6,079) 192 (1,130)
Policy acquisition costs incurred
and deferred (11,697) (14,616) (15,333)
Net change in:
Agents' balances 2,838 4,507 3,071
Reinsurance balances receivable (22,714) (9,121) (6,544)
Prepaid reinsurance premiums 17,383 14,987 9,224
Unpaid losses and loss adjustment expenses 16,706 11,439 6,208
Unearned premiums (26,835) (20,850) (14,285)
Drafts payable (1,071) (729) 868
Due to and (from) affiliates (17,437) 195 (3,633)
Unearned service fees (2,299) (922) 352
Reserve for service carrier claims expenses (1,971) (4,342) 1,133
Reinsurance balances payable (3,940) (62) 1,411
Other (2,526) (413) 2,907
NET CASH (USED FOR)/PROVIDED BY
OPERATING ACTIVITIES (44,858) (4,212) 2,186
NET CASH FLOWS FROM INVESTING ACTIVITIES
Available for Sale:
Acquisition of fixed maturities (246,375) (147,423) (172,010)
Acquisition of other invested assets (31,446) - -
Proceeds from sale of fixed maturities 323,177 120,272 140,862
Proceeds from maturities of fixed
maturities 15,466 13,301 36,767
Net change in short-term investments (18,437) 18,693 (8,845)
NET CASH PROVIDED BY/(USED FOR) INVESTING
ACTIVITIES 42,385 4,843 (3,226)
NET(DECREASE)/INCREASE IN CASH (2,473) 631 (1,040)
Cash at beginning of year 2,863 2,232 3,272
Cash at the end of year $ 390 $ 2,863 $ 2,232
Cash paid for federal income taxes $ 2,242 $ 1,428 $ 3,686
<S>
<FN>
See Notes to Consolidated Financial Statements.
</TABLE>
-F6-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
[S]
NOTE 1-ORGANIZATION
[S]
Allcity Insurance Company ("Allcity" or the "Company") is a property and
casualty insurer and includes the results of its subsidiary, Empall Agency,
Inc. ("Empall"). Empire Insurance Company ("Empire"), a property and casualty
insurer owns approximately 84.6% of the outstanding common shares of the Company
and 100% of the outstanding common shares of Centurion Insurance Company
("Centurion"). Empire's common shares are 100% owned and controlled, through
subsidiaries, by Leucadia National Corporation ("Leucadia"). Additionally,
Leucadia indirectly owns an additional 5.3% of the outstanding common shares
of the Company. The Company, Empire and Centurion are sometimes hereinafter
collectively referred to as the Group.
The property and casualty insurance business written by Empire and Allcity is
subject to a pooling agreement under which premiums, losses, loss adjustment
expenses and other underwriting expenses are shared on the basis of 70% to
Empire and 30% to Allcity. The pooling percentages have been changed from time
to time and may be changed in the future subject to New York State Insurance
Department approval. Allcity has no employees of its own. Empire provides
administrative services and 30% of the related expenses are allocated to
Allcity.
The Company's three business segments and principal lines of business are (1)
automobile (private passenger and commercial), (2) commercial (commercial
multi-peril, workers' compensation and other liability) and (3) miscellaneous
and personal (fire, allied and homeowners) insurance coverage. Based on the
Company's 1998 net earned premiums, approximately 57%, 30% and 13% of such
premiums were for the automobile, commercial and miscellaneous and personal
lines of business, respectively. The Company markets its products primarily
to individuals, retail establishments, restaurants, livery and taxicab owners,
and several types of service contractors. A portion of the Company's and
Empire's automobile business, both private passenger and commercial, is assigned
risk business acquired through contractual arrangements with other insurance
companies, some of which are competitors. These contractual arrangements, which
are negotiated for one or two year periods, provide for fees paid to the Group
within parameters established by the New York State Insurance Department. In
addition, the Group received a fee for providing administrative services,
including claims processing, underwriting and collection activities, for the
New York Public Automobile Pool ("NYPAP") and the Massachusetts Taxi and
Limousine Pool. These latter arrangements do not involve the assumption of
any material underwriting risk by the Group. Effective February 28, 1998,
the Group ceased serving as a servicing carrier for the NYPAP, thereby
enabling the Group to concentrate its resources on its core non-service
businesses and redeploy certain resources previously dedicated to the NYPAP.
Under the pooling arrangement, the Company assumes 30% of the fees and costs
of these arrangements.
[S]
-F7-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 1--ORGANIZATION-CONTINUED
The Company and Empire are licensed to transact insurance in the State of New
York with Empire being additionally licensed in Connecticut, Massachusetts,
Missouri, New Hampshire and New Jersey. Based on 1998 direct premiums written,
approximately 4% of the property and casualty business written by the Company
and Empire was from sources outside New York State.
The Company and Empire distribute their products through seven general agents,
one of which is an Empire subsidiary, and independent agents and brokers.
Empire's wholly-owned general agent is its largest producer and generated
approximately 12% of its total earned premium volume for the year ended
December 31, 1998.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Empall. The preparation of financial statements
in conformity with generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported amounts of assets
and liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments: Fixed maturities are designated as either (i) "held to maturity"
and carried at amortized cost, (ii) "trading" and carried at estimated market
value, which is based on quoted market prices, with differences between cost
and estimated fair value reflected in results of operations or (iii) "available
for sale" and carried at estimated fair value with differences between cost and
estimated fair value being reflected as accumulated other comprehensive income,
net of deferred income tax effects. Equity securities are designated as
available for sale and carried at estimated fair values with differences
between cost and estimated fair value reflected as accumulated other
comprehensive income, net of deferred income tax. Other invested assets are
designated as trading securities. Short-term investments are carried at cost
which approximate fair value.
At December 31, 1998 and 1997, investments in fixed maturities on deposit with
the New York State Insurance Department, which the Company has the intent and
ability to hold to maturity, are classified as "Investments held to maturity".
All other investments in fixed maturities and equity securities at those dates
are classified as "Investments available for sale" and stated at estimated fair
market value. Net unrealized appreciation (depreciation) on investments
available for sale (net of deferred tax/(benefit)) is included as accumulated
other comprehensive income.
Investment income is reported when earned.
Net securities gains or losses on the sale of investments are determined on a
specific identification basis and are included in revenues. Investments with
an impairment in value considered to be other than temporary are written down
to estimated net realizable value.
-F8-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 2--ACCOUNTING POLICIES-CONTINUED
Unearned Premiums: Unearned premiums have been calculated predominantly using
he daily pro rata method for the business processed on the Point system for new
and renewed business recorded in 1998. All other premiums have been calculated
using the monthly pro rata method.
Unpaid Losses and Loss Adjustment Expenses: Liabilities for unpaid losses, which
are not discounted (except for certain workers' compensation liabilities), and
loss adjustment expenses ("LAE") are determined using case-basis evaluations,
statistical analyses and estimates for salvage and subrogation recoverable and
represent estimates of the ultimate claim costs of all unpaid losses and LAE.
Liabilities include a provision for losses that have occurred but have not yet
been reported. These estimates are subject to the effect of trends in future
claim severity and frequency experience. Adjustments to such estimates are made
from time to time due to changes in such trends as well as changes in actual
loss experience. These adjustments are reflected in current earnings.
Reinsurance: Unpaid losses, unpaid loss adjustment expenses and unearned
premiums are stated gross of reinsurance ceded. Premiums written and earned,
losses and LAE paid and incurred, and other underwriting expenses are stated
net of reinsurance ceded.
Pension Cost: Empire funds actuarially determined pension costs as currently
accrued; 30% of such pension costs are allocated to Allcity.
Policy Acquisition Costs: Policy acquisition costs such as commissions, premium
taxes and certain other underwriting expenses are deferred and amortized ratably
over the terms of the related policies. Deferred policy acquisition costs are
limited to their net realizable value after consideration of investment income
on the related premium. If recoverability of such costs from future premiums and
related investment income is not anticipated, the amounts not considered
recoverable are charged to operations.
Participating Policies: Participating business on workers' compensation lines
constitutes approximately 4.9% of the Company's policies in force and net
premiums written. Amounts transferred to the participating policyholders'
funds are determined by means of specific identification based upon premium
volume and loss experience. The amount of dividends to be paid to
participating policyholders is approved quarterly by the Board of Directors. The
amount of policyholders' dividends recorded on participating policies was
$78,000, $315,000 and $946,000, in 1998, 1997 and 1996, respectively. Unpaid
dividends to participating policyholders are included as a liability in the
consolidated balance sheets.
Servicing Arrangements: Service fee income from assigned risk business acquired
through contractual arrangements with other insurance companies is recognized
as revenue and earned over the life of the covered policies on a monthly
pro-rata method.
[S]
-F9-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 2--ACCOUNTING POLICIES-CONTINUED
Service fee income for the administrative services, including underwriting,
policy issuance, premium collection and claims services, provided to the
NYPAP is recorded as a reduction to other underwriting and loss adjustment
expenses and is earned over the life of the policies issued. The premiums
and losses processed by the Company on behalf of the NYPAP, which are not
reflected in the consolidated financial statements for the years ended
December 31, are as follows (in thousands):
<CAPTION>
1998 1997 1996
<C> <C> <C>
<S>
Premiums Earned $ 4,091 $ 29,076 $ 59,158
Losses Incurred 23,543 50,745 76,939
Unpaid Losses 70,469 98,150 119,223
</TABLE>
[S]
The premiums, losses and expenses of the business for which the Company provides
administrative services are reflected on the financial statements of those
insurance companies, including the Company, in New York State which are
required to participate in the NYPAP. In its role as a servicing carrier, the
Company is liable only for the loss adjustment expenses which are reflected as
a reserve for servicing carrier claim expense and are determined using case
basis evaluations and statistical analyses.
Federal Income Taxes: The Company uses the liability method in providing for
income taxes. Under the liability method, deferred income taxes are provided
at the enacted tax rates for differences between the financial statements
carrying amounts and tax bases of assets and liabilities and for carryforwards.
A valuation allowance is provided if deferred tax assets are not considered more
likely than not to be realized.
Earnings Per Share: Earnings per share ("EPS") are based on the weighted average
number of common shares outstanding. There were no outstanding common stock
equivalents during 1998, 1997 and 1996 and therefore, basic and diluted EPS
are the same.
New Pronouncements: As of January 1, 1998 the Company adopted Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income. This
statement establishes standards for the reporting and disclosure of
comprehensive income and its components (revenues, expenses, gains and
losses) in the consolidated financial statements. SFAS No. 130 requires that
all items required to be recognized under accounting standards as components
of comprehensive income be reported in a financial statement that is displayed
with the same prominence as other financial statements. The purpose of
reporting comprehensive income is to report the change in equity of a
business enterprise for the period from transactions and other events and
circumstances from nonowner sources. It includes all changes in equity during
a period except those resulting from investments by owners and distributions to
owners. These items include unrealized appreciation (depreciation) of
investments, which is currently reported as other accumulated comprehensive
income in the balance sheet.
-F10-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 2--ACCOUNTING POLICIES-CONTINUED
As of January 1, 1998 the Company adopted Statement of Financial Accounting
Standards No. 131, "Disclosures about Segments of an Enterprise and Related
Information" ("SFAS No. 131"). This statement requires that companies report
certain information about their operating segments in the financial statements
including information about the products and services from which revenues are
derived, the geographic areas of operations, and information about major
customers. In connection with the adoption of SFAS No. 131, the Company has
identified three reportable segments:1) automobile lines; 2) commercial lines;
and 3) miscellaneous and personal lines. The operating segments were
determined based on the way management allocates resources and assesses
performance.
Statement of Financial Accounting Standards No. 132, "Employers' Disclosures
about Pensions and Other Postretirement Benefits" ("SFAS No. 132") was issued
in February, 1998 and requires the following additional disclosures for
employers' pensions and other retiree benefits:
(1) A reconciliation of beginning and ending balances of the benefit obligation.
(2) A reconciliation of the fair value of the plan assets.
(3) The effect of a one percentage point decrease in the assumed health care
cost trend rates on
a)the aggregate of the service and interest cost components of
net periodic post retirement health care benefit cost and
b)the accumulated post retirement benefit obligation for health care
benefits.
SFAS No. 132 does not have any effect on the financial position or results of
operations of the Company.
In January, 1998, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued Statement of Position 97-3,
"Accounting by Insurance and Other Enterprises for Insurance-Related
Assessments" ("SOP 97-3"), which is effective for fiscal years beginning
after December 15, 1998, and provides guidance for determining when an
insurance company should recognize a liability for guaranty-fund and other
insurance related assessments and how to measure that liability. The
financial position and operating results of the Company is not expected to be
materially affected by this statement.
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS No. 133") was issued in June 1998 and
requires that all derivative financial instruments be recognized as either
assets or liabilities in the statement of financial position. SFAS No. 133
will be effective for fiscal years beginning after June 15, 1999, with initial
application as of the beginning of the first quarter of the fiscal year. The
Company is currently evaluating the impact to its financial statements.
-F11-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 2--ACCOUNTING POLICIES-CONTINUED
Presentation: Certain prior year amounts have been reclassified to conform with
the 1998 presentation.
NOTE 3--SURPLUS NOTE
The Company issued a surplus note to Empire in 1980. The surplus note provides,
among other things, for interest to be accrued on the principal of the note
based on a bank's prime rate at the end of the calendar quarter. Neither the
principal amount of the surplus note nor the accrued interest may be paid, in
whole or in part, without the consent of the Superintendent of Insurance of the
State of New York ("Superintendent") and must be repaid, in whole or in part,
when so ordered by the Superintendent.
NOTE 4-INVESTMENTS
Investment income by source is summarized as follows:
<CAPTION>
<S>
Year Ended December 31,
1998 1997 1996
(In thousands)
<C> <C> <C>
<S>
Investment income:
Fixed maturities $12,702 $15,627 $15,955
Other invested Assets 1,445 - -
Short-term investments 715 385 742
14,862 16,012 16,697
Less: Investment expenses 339 318 339
NET INVESTMENT INCOME $14,523 $15,694 $16,358
</TABLE>
[S]
<TABLE>
Investments at December 31, 1998 are summarized as follows:
<CAPTION>
Esti-
Gross Unrealized mated
Amortized Appre- Depre- Fair
Cost ciation ciation Value
<C> <C> <C> <C>
(In thousands)
<S>
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government agencies $145,061 $ 365 $ 284 $145,142
Mortgage-backed
securities 21,302 413 - 21,715
Foreign governments 909 26 - 935
All other corporate bond 13,942 206 211 13,937
Total Fixed Maturities 181,214 1,010 495 181,729
Equity securities - 176 - 176
TOTAL INVESTMENTS
AVAILABLE FOR SALE 181,214 1,186 495 181,905
Held to maturity:
U.S. Treasury securities 502 - - 502
TOTAL INVESTMENTS
HELD TO MATURITY 502 - - 502
Short-term 20,186 - - 20,186
Other invested assets 31,446 - - 31,446
TOTAL INVESTMENTS $233,348 $1,186 $495 $234,039
</TABLE>
-F12-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 4--INVESTMENTS CONTINUED
Investments at December 31, 1997 are summarized as follows:
<CAPTION>
Gross Unrealized Estimated
Amortized Appre- Depre- Fair
Cost ciation ciation Value
<C> <C> <C> <C>
(In thousands)
<S>
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government agencies $218,088 $1,327 $ 596 $218,819
Mortgage-backed
securities 29,437 298 113 29,622
Foreign governments 15,143 121 77 15,187
All other corporate bonds 5,423 7 3 5,427
Total Fixed Maturities 268,091 1,753 789 269,055
Equity securities - 447 - 447
TOTAL INVESTMENTS
AVAILABLE FOR SALE 268,091 2,200 789 269,502
Held to maturity:
U.S. Treasury securities 485 12 - 497
TOTAL INVESTMENTS
HELD TO MATURITY 485 12 - 497
Short-term 1,749 - - 1,749
TOTAL INVESTMENTS $270,325 $2,212 $ 789 $271,748
</TABLE>
[S]
<TABLE>
The amortized cost and estimated fair values of fixed maturities (including
short term securities) at December 31, 1998 are shown as follows
(in thousands):
<S>
<CAPTION>
<S>
Amortized Fair
Cost Value
<C> <C>
<S>
Investments available for sale:
Due in one year or less $ 27,620 $ 27,663
Due after one year through five years 121,586 121,562
Due after five years through ten years 30,892 30,975
Sub total 180,098 180,200
Mortgage-backed securities 21,302 21,715
Sub total 201,400 201,915
Investments held to maturity:
Due after one year through five years 502 502
TOTAL $201,902 $202,417
</TABLE>
[S]
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties.
The Company sold certain fixed maturities during 1998, 1997 and 1996 and
realized gross gains of $6,227,000, $216,000 and $1,354,000, respectively.
Realized gross losses of $91,000, $298,000 and $224,000 were realized on
these sales in 1998, 1997 and 1996, respectively, before income taxes. In
1997, the Company realized a gross gain of $129,000 before taxes, from the
conversion of a portion of stock received from a trade organization
membership, Insurance Services Offices, into a stock company.
-F13-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 4--INVESTMENTS CONTINUED
The changes in unrealized appreciation/(depreciation) on investments available
for sale in fixed maturities were $(720,000) and $3,983,000 for the years ended
December 31, 1998 and 1997, respectively, before income taxes.
As of December 31, 1998 and 1997, a security with an amortized cost of
approximately $502,000 and 485,000, respectively, was on deposit with the New
York State Insurance Department.
During 1998 and 1997, the Company sold call options on certain U.S. Treasury
Notes and recognized investment losses of $57,000 and $239,000, respectively.
NOTE 5--STATUTORY INFORMATION
The following is a reconciliation of net (loss)/income and surplus as reported
on a statutory basis to net income /(loss) and shareholders' equity as
determined in conformity with generally accepted accounting principles ("GAAP
Basis") (in thousands):
<CAPTION>
<S>
Years Ended December 31,
1998 1997 1996
<C> <C> <C>
<S>
Statutory net (loss)/income $ (50) $ 505 $7,233
Add (deduct):
Change in deferred policy acquisition
costs (1,714) (628) (871)
Change in allowances for doubtful
accounts (256) (198) (270)
Policyholders' dividends 90 60 (450)
Retrospectively rated reinsurance contracts - - (3,365)
Pension plan curtailment gain 1,964 - -
Capitalized systems development costs 1,440 600
Other postretirement benefits 210 276 (176)
Deferred tax (expense)/benefit (613) (163) 1,171
Interest on surplus note (591) (595) (591)
Other 24 60 (47)
GAAP Basis $ 504 $ (83) $2,634
</TABLE>
-F14-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 5--STATUTORY INFORMATION -CONTINUED
<CAPTION>
DECEMBER 31,
1998 1997
<C> <C>
(In thousands)
<S>
Statutory Shareholders' Equity and Surplus $72,701 $70,088
Add (deduct):
Deferred policy acquisition costs 5,365 7,079
Nonadmitted assets, less allowance
for doubtful accounts 1,919 1,984
Capitalized systems development costs 2,040 600
Provision for unauthorized reinsurance 205 108
Policyholders' dividends (300) (390)
Excess of statutory reserves over
statement reserves - 1,143
Deferred tax benefit 11,101 11,462
Other postretirement benefits (257) (467)
Net unrealized appreciation
on investments 515 964
Surplus note (15,300) (14,710)
Other 211 303
GAAP Basis $ 78,200 $78,164
</TABLE>
[S]
The Company has paid no dividends on its common shares since 1975. The New York
Insurance Law prohibits New York domiciled property and casualty companies from
paying dividends except out of earned surplus. Without the approval of the New
York State Insurance Department, no New York domestic property/casualty insurer
may declare or distribute any dividend to shareholders which, together with any
dividends declared or distributed by it during the preceeding twelve months,
exceeds the lessor of (1) 10% of surplus to policyholders as shown by its
last statutory annual statement or (2) one hundred percent of adjusted net
investment income during such period. At December 31, 1998 $7,280,000 was
available for distribution of dividends. The Company does not presently
anticipate paying dividends in the near future.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance, which will replace the current Accounting Pratices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The NAIC is
now considering amendments to the Codification guidance that would also be
effective upon implementation. The NAIC has recommended an effective date of
January 1, 2001. The Codification provides guidance for areas where statutory
accounting has been silent and changes current statutory accounting in some
areas. It is known whether the New York Insurance Department will adopt the
Codification, and whether the Department will make any changes to that guidance.
The Company has not estimated the potential effect of the Codification guidance
if adopted by the Department.
-F15-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 6--AGENTS' BALANCES
Activity affecting the allowance for uncollectible agents' balances for the
years ended December 31, 1996, 1997 and 1998 is summarized as follows
(in thousands):
<CAPTION>
<S>
<C>
Balance at January 1,1996 $1,093
Provision 2,089
Charge-offs, net of recoveries (1,819)
Balance at December 31,1996 1,363
Provision 1,470
Charge-offs, net of recoveries (1,272)
Balance at December 31,1997 1,561
Provision 1,362
Charge-offs, net of recoveries (1,106)
Balance at December 31,1998 $1,817
</TABLE>
[S]
NOTE 7-UNPAID LOSSES AND LAE
[S]
The Company has relied upon standard actuarial ultimate loss projection
techniques to obtain estimates of liabilities for losses and LAE. These
projections include the extrapolation of both losses paid and incurred by
business line and accident year and implicitly consider the impact of inflation
and claims settlement patterns upon ultimate claim costs based upon historical
patterns. In addition, methods based upon average loss costs, reported claim
counts and pure premiums are reviewed in order to obtain a range of estimates
for setting the reserve levels. For further input, changes in operations in
pertinent areas including underwriting standards, product mix, claims
management and legal climate are periodically reviewed.
-F16-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 7--UNPAID LOSSES AND LAE - CONTINUED
In the following table, the liability for losses and LAE are reconciled for the
three years ended December 31, 1998, 1997 and 1996. Included therein are current
year data and prior year development.
<CAPTION>
RECONCILIATION OF LIABILITY FOR LOSSES AND LAE
1998 1997 1996
<C> <C> <C>
(In thousands)
<S>
SAP liability for losses and LAE,
net, of reinsurance,
beginning of year $145,260 $143,494 $142,718
Provision for losses and LAE for
claims occurring in the current year 56,698 73,741 80,216
Increase in estimated losses and LAE
for claims occurring in prior years 12,891 8,304 8,134
69,589 82,045 88,350
Loss and LAE payments for claims
occurring during:
The current year 19,203 23,804 27,192
Prior years 55,875 56,475 60,382
75,078 80,279 87,574
SAP liability for losses and LAE,
net of reinsurance 139,771 145,260 143,494
Reinsurance recoverable 294,461 272,266 262,593
Liability for losses and LAE
at end of year as reported in
financial statements (GAAP) $434,232 $417,526 $406,087
</TABLE>
[S]
Based upon actuarial studies conducted during 1998, 1997 and 1996 the Company
strengthened reserves for losses from prior accident years by approximately
$12.9 million in 1998 primarily related to commercial liability, commercial
auto and workers' compensation lines, by approximately $8.3 million in
1997, primarily related to commercial package and voluntary commercial
automobile lines of business and by approximately $8.1 million in 1996,
primarily related to commercial package and voluntary commercial automobile
lines of business.
[S]
The Company has purchased annuities with various life insurance companies for
number of settled claims. The claimants have been designated as payees;
however, the Company has a contingent liability of approximately $3.4 million
which represents the aggregate amount of settlements with the claimants, in
the event of the failure of the various life insurance companies to perform.
-F17-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 8--REINSURANCE
The Company has obtained reinsurance coverage to reduce its risk of and exposure
to large insurance claims and catastrophes. The Company retained $0.5 million
on workers' compensation and $0.3 million for property and casualty lines for
all three years. The Company also uses reinsurance to protect itself against
certain catastrophic losses. Its retention of lower level losses under such
treaties is $7.5 million for 1999 and 1998, $5.0 million for 1997 and $3.0
million for 1996. Due to the geographic concentration of its business, the
Company believes hurricanes, windstorms and civil disturbances are its most
significant exposure to catastrophic losses. Computer modeling programs
provided by independent consultants are used to estimate exposure to such
losses. The Company believes it presently has sufficient catastrophe
reinsurance protection.
Although reinsurance does not legally discharge an insurer from its primary
liability for the full amount of the policy liability, it does make the
assuming reinsurer liable to the insurer to the extent of the reinsurance
ceded. The majority of the Company's reinsurance has been placed with certain
of the largest reinsurance companies, including (with their A. M. Best ratings)
General Reinsurance Corporation (A++) (superior), American Re-Insurance Company
(A++) (superior), Partner Re Co., Ltd. (A+)(superior), IPC Re Ltd. (A)
(excellent), CAT Ltd. (A)(excellent) and Zurich Reinsurance (North America),
Inc. (A)(excellent). The Company believes its reinsurers to be financially
capable of meeting their respective obligations. However, to the extent that
any reinsuring company is unable to meet its obligations, the Company would
be liable for the reinsured risks. The Company has established reserves,
which the Company believes are adequate, for any non-recoverable reinsurance.
Effective January 1, 1997, Empire entered into a quota share reinsurance
agreement with its subsidiary, Centurion. Under this agreement,
Empire will assume 50% up to July 1, 1997 and 75% thereafter of the effective
period premiums and losses of Centurion and grant Centurion a ceding
commission. Under the pooling agreement, 70% of such business assumed will be
retained by Empire and 30% will be shared with the Company.
Assets and insurance reserves at December 31, 1998 and 1997 (including
$333.7 million and $328.4 million, respectively, which represent
reinsured amounts principally arising from the intercompany pooling
agreement with Empire) are as follows (in thousands):
<S>
<CAPTION>
<S>
Ceded to
Empire Others Total
<C> <C> <C>
<S>
As of December 31, 1998
Prepaid reinsurance premiums $ 37,477 $ 214 $ 37,691
Reinsurance balances receivable on:
Paid losses - 1,534 1,534
Unpaid losses 217,958 39,633 257,591
Unpaid loss adjustment expenses 32,235 4,634 36,869
</TABLE>
-F18-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STAEMENTS -- CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 8 - REINSURANCE -- CONTINUED
<CAPTION>
<S>
Ceded to
Empire Others Total
<C> <C> <C>
As of December 31, 1997
Prepaid reinsurance premiums $ 54,476 $ 598 $ 55,074
Reinsurance balances receivable on:
Paid losses - 1,014 1,014
Unpaid losses 204,023 32,758 236,781
Unpaid loss adjustment expenses 31,671 3,814 35,485
</TABLE>
[S]
<TABLE>
An analysis of reinsurance premiums, losses, LAE and commissions for the years
ended December 31, 1998, 1997 and 1996 are summarized as follows
(in thousands):
<S>
<CAPTION>
Direct Assumed Ceded Net
Empire Others Empire Others
1998
<C> <C> <C> <C> <C> <C>
Premiums earned $142,065 $ 67,512 $100 $135,419 $ 6,746 $67,512
Losses incurred 173,235 62,282 409 155,446 18,198 62,282
LAE incurred 17,202 7,307 74 15,963 1,313 7,307
Commissions incurred 15,886 8,438 10 14,795 1,101 8,438
Premiums written 117,449 58,059 48 111,135 6,362 58,059
Losses paid 146,208 62,323 655 135,539 11,324 62,323
LAE paid 15,576 12,755 74 15,157 493 12,755
Unearned premiums(a) 53,720 26,281 33 53,539 214 26,281
Unpaid losses(a) 349,699 124,518 1,303 311,369 39,633 124,518
Unpaid LAE(a) 50,685 15,253 - 46,051 4,634 15,253
1997
Premiums earned $191,175 $ 80,891 $ 142 $178,488 $12,829 $80,891
Losses incurred 170,395 68,901 195 155,122 15,468 68,901
LAE incurred 16,345 13,144 62 15,489 918 13,144
Commissions incurred 22,121 10,666 4 20,271 1,854 10,666
Premiums written 169,911 75,029 81 157,359 12,633 75,029
Losses paid 161,192 68,512 634 150,628 11,198 68,512
LAE paid 13,368 11,767 62 13,090 340 11,767
Unearned premiums(a) 78,336 35,733 85 77,823 598 35,733
Unpaid losses(a) 322,671 124,559 1,548 291,461 32,758 124,559
Unpaid LAE(a) 49,058 20,700 - 45,244 3,814 20,700
1996
Premiums earned $235,467 $ 96,073 $277 $222,909 $12,835 $96,073
Losses incurred 182,132 76,387 209 170,630 11,711 76,387
LAE incurred 13,827 11,963 72 11,679 2,220 11,963
Commissions incurred 25,556 10,987 8 23,259 2,305 10,987
Premiums written 222,467 91,011 200 210,068 12,599 91,011
Losses paid 177,454 75,938 728 170,948 7,234 75,938
LAE paid 12,843 11,636 72 12,321 593 11,636
<S>
</TABLE>
(a) Amounts as reflected in the consolidated balance sheet can be derived
[S]
-F19-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 8--REINSURANCE-CONTINUED
by adding together amounts for direct and assumed and subtracting from this sum
30% of the amount ceded to Empire. The Company remains primarily liable for
amounts ceded to reinsurers for unpaid losses, LAE and unearned premiums to
the extent that the assuming reinsuring companies are unable to meet their
obligations.
An analysis of the effect of reinsurance on premiums by business segment for the
years ended December 31, 1998, 1997 and 1996 are summarized as follows
(in thousands):
<CAPTION>
Percentage
Assumed Ceded of Amount
Direct from to Net Assumed
Amount Empire(a) Empire(b) Amount to Net
<C> <C> <C> <C> <C>
<S>
1998
Premiums written:
Automobile lines $ 49,028 $31,439 $ 49,076 $31,391 100.2%
Commercial lines 56,979 18,282 56,979 18,282 100.0%
Miscellaneous and
personal lines 11,442 8,386 11,442 8,386 100.0%
Total $117,449 $58,107 $117,497 $58,059
1997
Premiums written:
Automobile lines $ 85,701 $44,565 $85,782 $44,484 100.2%
Commercial lines 73,455 22,107 73,455 22,107 100.0%
Miscellaneous and
personal lines 10,755 8,438 10,755 8,438 100.0%
Total $169,911 $75,110 $169,992 $75,029
1996
Premiums written:
Automobile lines $131,542 $60,362 $131,742 $60,162 100.3%
Commercial lines 80,758 25,243 80,758 25,243 100.0%
Miscellaneous and
personal lines 10,167 5,606 10,167 5,606 100.0%
Total $222,467 $91,211 $222,667 $91,011
<S>
<FN>
(a)Includes $48, $81 and $200 assumed from non-affiliates in 1998, 1997
and 1996, respectively, before the effects of the pooling agreement
described in Note 1.
(b)Includes $6,362, $12,633 and, $12,599 ceded to non affiliates
in 1998, 1997 and 1996, respectively, before the effects of the
pooling agreement described in Note 1.
<S>
</TABLE>
[S]
NOTE 9--FEDERAL INCOME TAXES
The Company has been included in the consolidated federal income tax returns o
Leucadia since 1993. Under the terms of the tax sharing agreement, members
compute their tax provision on a separate return basis and are either charged
their share of federal income tax resulting from their taxable income or are
reimbursed for the tax benefits resulting from losses. As of December 31, 1998
and 1997, the Company's liability to affiliates for income taxes was $5,533,00
and $8,125,000, respectively.
-F20-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 9--FEDERAL INCOME TAXES -- CONTINUED
The principal components of the deferred tax asset at December 31, 1998 and 1997
were as follows (in thousands):
<S>
<CAPTION>
1998 1997
<C> <C>
<S>
Unpaid loss and loss adjustment
expense reserves $7,365 $7,576
Unearned premiums 1,840 2,501
Employee benefits and compensation 791 1,221
Interest accrued on surplus note 2,905 2,698
Allowance for doubtful accounts 636 547
Deferred policy acquisition costs (1,878) (2,478)
Unrealized appreciation on investments (242) (494)
Investment in Ramius LLP 459 -
Capitalized system development costs (714) (210)
Other, net (61) 101
Total $11,101 $11,462
</TABLE>
[S]
The Company believes that it is more likely than not that the deferred tax asset
at December 31, 1998 will be fully realized based on the availability of taxable
income.
For the years 1998, 1997 and 1996, the difference between the "expected"
statutory federal income tax applicable to continuing operations and the
actual income tax expense are as follows:
<TABLE>
<CAPTION>
1998 1997 1996
<C> <C> <C>
<S>
Expected federal income tax $ 271 $ (51) $1,388
Other (1) (13) (58)
Actual federal income tax $ 270 $ (64) $1,330
</TABLE>
[S]
NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS
[S]
Empire had a trusteed non-contributory defined benefit pension plan covering
substantially all employees. The benefits were based on years of credited
service and the employees' highest compensation during any five consecutive
plan or calendar years before retirement. Empire's policy was to fund pension
costs on a current basis using an aggregate method.
-F21-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS -- CONTINUED
The following tables set forth certain information relating to Empire's
non-contributory defined benefit pension plan (in thousands):
<CAPTION>
<S>
December 31,
1998 1997
<C> <C>
<S>
Reconciliation of the benefit obligation
Projected Benefit Obligation at beginning of year $27,765 $26,927
Service Cost 1,794 1,628
Interest Cost 1,906 1,985
Actuarial loss 323 1,733
Benefits paid (2,521) (4,508)
Curtailment gain (7,231) -
Projected Benefit Obligation at end of yea $22,036 $27,765
Reconciliation of the fair value of plan assets
Fair value of plan assets at beginning of year $25,152 $25,700
Actual return on plan assets 1,637 2,838
Employer contributions 925 1,122
Benefits paid (2,521) (4,508)
Fair value of plan assets at end of year $25,193 $25,152
Funded Status
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $21,188 in 1998 and $19,355 in 1997 $22,036 $20,763
Projected benefit obligation for services
rendered to date (22,036) (27,765)
Plan assets at fair value (primarily bonds and
stocks) 25,193 25,152
PROJECTED BENEFIT OBLIGATION
LESS THAN(IN EXCESS OF)PLAN ASSETS 3,157 (2,613)
Unrecognized prior service cost 82 98
Unrecognized net gain from past experience
different from that assumed and effects of
Changes in assumptions (340) (103)
Unrecognized net obligation at transition date 258 386
PREPAID PENSION/(ACCRUED) $ 3,157 $(2,232)
</TABLE>
-F22-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS --CONTINUED
<CAPTION>
<S>
Components of net pension cost:
Years Ended December 31,
1998 1997 1996
<C> <C> <C>
<S>
Service cost-benefits earned during the period $1,794 $1,628 $1,862
Interest cost on projected benefit obligation 1,906 1,985 2,098
Actual return on plan assets (1,637) (2,838) (2,120)
Deferred (loss) gain on plan assets (124) 1,039 556
Net amortization and deferral 145 145 298
NET PERIODIC PENSION COST $2,084 $1,959 $2,694
Discount rate 6.75% 7.0% 7.5%
Rate of Increase in future compensation N/A 5.0% 5.0%
Long-term rate of return on plan assets 7.50% 7.0% 7.0%
</TABLE>
[S]
Benefits accrued under the plan were frozen as of December 31, 1998. The
prior plan was merged with the Leucadia plan effective January 1, 1999.
As a result of the curtailment of the pension benefits in 1998, the Group
recognized a gain of $6,548,000. In accordance with the pooling agreement,
the Company's share of prepaid pension/accrued and net periodic pension
cost is 30% of the amounts reflected above.
Effective January 1, 1999, Empire adopted a defined contribution plan. The
contributions, ranging from 2% - 16% of employee's current pension eligible
compensation, are based on age and service life of the employees of Empire.
These contributions will accumulate for participants on a tax deferred basis.
Participants will have choices to direct the investment of the contribution
to their accounts.
Empire provides certain health care and life insurance benefits for retired
employees. During 1996, Empire amended the eligibility requirement to only
those employees who had at least ten years of service and were at least 50
years of age as of October 1, 1996. Prior to this amendment, substantially
all of Empire's employees were eligible for such benefits if they reached
normal or early retirement age while still working for Empire. As a result
of this amendment, the accumulated postretirement benefit obligation was
reduced by approximately $7,602,000, which is being amortized over three years.
Those benefits are provided through an insurance company whose premiums are
based on the cost of benefits paid during the year.
-F23-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS --CONTINUED
The following table sets forth certain information relating to Empire's unfunded
substantive plan for postretirement benefits (in thousands):
<CAPTION>
1998 1997
<C> <C>
Reconciliation of the benefit obligation
Accumulated postretirement obligation
at beginning of year $4,729 $4,574
Service cost 29 23
Interest cost 370 330
Actuarial loss 770 31
Benefits paid (324) (229)
Accumulated postretirement obligation at
end of year $5,574 $4,729
Funded Status
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $(4,022) $(3,538)
Fully eligible active plan participants (1,074) (544)
Other active plan participants (478) (647)
(5,574) (4,729)
Unrecognized net gain from past
experience different from that assumed
and effects of changes in assumptions (1,634) (4,938)
ACCRUED POSTRETIREMENT BENEFITS COST $(7,208) $ (9,667)
</TABLE>
[S]
<TABLE>
<CAPTION>
Components of net postretirement benefits
1998 1997 1996
<C> <C> <C>
<S>
Service cost--benefits earned during the period $ 29 $ 23 $ 309
Interest cost on projected benefit obligation 370 330 970
Amortization of curtailment gain (2,533) (3,168) -
Net amortization and deferral - (19) -
PERIODIC POSTRETIREMENT BENEFITS (INCOME)
COST $(2,134) $(2,834) $1,279
</TABLE>
-F24-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS -- CONTINUED
In accordance with the pooling agreement, the Company's share of accrued
postretirement benefit cost and net periodic postretirement benefit (income)
cost is 30% of the amounts reflected above and is included in other
liabilities. In determining the accumulated postretirement benefit
obligation at December 31, 1998 and 1997, Empire utilized discount rates of
6.75% and 7.0%, respectively. The assumed health care cost trend rates used
in measuring the accumulated postretirement benefit obligation were 8% for
1998 declining to an ultimate rate of 6% by 2000. If the health care cost
trend rates were increased by 1%, the accumulated postretirement benefit
obligation as of December 31, 1998 would have increased y approximately
$350,000, before the effects of the pooling agreement. If the health care
cost trend rates were decreased by 1%, the accumulated postretirement benefit
obligation as of December 31, 1998 would have decreased by approximately
$297,000 before the effect of the pooling agreement. The effect of a 1%
increase and decrease in the estimated aggregate of service and interest
cost for 1998, 1997 and 1996 would be immaterial.
In 1987, Empire established a Supplemental Retirement Plan ("SERP") for certain
senior officers. Under the SERP, Empire makes contributions to a trust account
for the benefit of eligible senior officers. Eligible officers will receive
benefits determined in accordance with the formulas and other provisions of
the SERP agreement based on prior salary. As a result of the retirement of a
former president, Empire expensed $1,073,000 during 1996. Pursuant to the
pooling agreement the Company is obligated to contribute 30% of the payments
made under the SERP.
In 1994, Empire established a Salary Cap Restoration Plan ("SCRP") for certain
corporate officers. Under the SCRP, Empire will provide these officers with
an additional benefit, to be paid in a lump-sum upon retirement, equal to the
difference between the actuarially determined lump-sum benefits, as computed
under the Pension Plan, of the officer's highest five year average compensation
(not to exceed $320,000) at retirement and the current maximum compensation
limit of $160,000. The SCRP is an unfunded plan. In 1998, 1997, and 1996
Empire expensed $74,000, $17,000 and $90,000, respectively. Along with the
defined benefit plan, the benefits under SCRP were curtailed as of December 31,
1998. Under the pooling arrangement, the Company is obligated to pay 30% of
the cost of the SCRP.
-F25-
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS -- CONTINUED
Empire sponsors an Employees' Savings Plan (the "Savings Plan"), under which
each eligible employee may defer a portion of their annual compensation,
subject to limitations. Empire contributes a matching amount, subject to
certain limits. In 1996, Empire matched 65% of each participant's deferral
contribution up to a maximum matching contribution of $813. A participant may
also contribute, from after-tax dollars, an amount, not to exceed 10% of annual
compensation. Effective July 1996, the Savings Plan was amended to allow Empire
matching contributions equal to 50% of an employee's contributions up to a
maximum of 2.5% of the employee's salary. Empire's contributions to the
Savings Plan were $420,000, $438,000 and $524,000 in 1998, 1997 and 1996,
respectively. Under the pooling arrangement, the Company is obligated to
provide 30% of Empire's contributions under the Savings Plan.
NOTE 11--LEASES
The Group has entered into a twenty year lease agreement, consisting of 286,510
square feet, in an office building located at 335 Adams Street in Brooklyn, New
York, in which Leucadia has an equity interest. The Group received certain
incentives from both the City and State of New York in connection with this
lease, which will be recognized over the term of the lease.
Empire has subleased 133,140 square feet of the office space to its parent,
Leucadia at the similar terms as in the original lease.
Empire has guaranteed the payment of lease rent by its wholly-owned subsidiary
Gould Dente Agency ("Gould"). Gould relocated its offices to the new office
building with Empire. In accordance with the guarantee, in 1998, $2.0 million
of a $2.3 million liability for lease abandonment costs established by Empire in
1997 was reversed upon release by the landlord from its obligation. Under the
pooling agreement, the Company is obligated for 30% of this transaction.
-F26-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 11--LEASES--CONTINUED
Future minimum rentals, which exclude escalation amounts, on non-cancelable
leases in the aggregate for each of the next five years and thereafter are as
follows (in thousands):
<CAPTION>
Lease Sublease Net
<C> <C> <C>
1999 $ 4,906 $ 2,280 $ 2,626
2000 4,906 2,280 2,626
2001 4,906 2,280 2,626
2002 4,906 2,280 2,626
2003 5,029 2,337 2,692
Thereafter 97,035 45,092 51,943
Total $121,688 $56,549 $65,139
</TABLE>
[S]
Rental expense for the Group for the years 1998, 1997 and 1996 was $3.3 million,
$3.3 million and $3.2 million, respectively. The Company is obligated to pay 30%
of these rental charges in accordance with the pooling agreement.
NOTE 12--BUSINESS SEGMENTS
<TABLE>
Allcity operates in three business segments--automobile lines, commercial lines
and miscellaneous and personal lines. Results by business segment for each
year ended December 31, 1998, 1997 and 1996 are summarized as follows
(in thousands):
<S>
<CAPTION>
<S>
Premiums Underwriting
1998 Earned Gain(Loss)
<C> <C>
<S>
Automobile lines $38,446 $ (5,922)
Commercial lines 20,490 (14,536)
Miscellaneous and personal lines 8,576 654
TOTAL FROM UNDERWRITING $67,512 (19,804)
Net investment income, net securities gains
other income and interest on surplus note 20,578
INCOME BEFORE FEDERAL INCOME TAXES $ 774
1997
Automobile lines $50,677 $(8,015)
Commercial lines 23,289 (7,842)
Miscellaneous and personal lines 6,925 268
TOTAL FROM UNDERWRITING $80,891 (15,589)
Net investment income, net securities losses,
other income and interest on surplus note 15,442
(LOSS) BEFORE FEDERAL INCOME TAXES $ (147)
1996
Automobile lines $63,558 $(10,822)
Commercial lines 27,714 (2,998)
Miscellaneous and personal lines 4,801 266
TOTAL FROM UNDERWRITING $96,073 (13,554)
Net investment income, net securities gains,
other income and interest on surplus note 17,518
INCOME BEFORE FEDERAL INCOME TAXES $ 3,964
</TABLE>
-F27-
<PAGE>
<TABLE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 12--BUSINESS SEGMENTS-CONTINUED
Direct investment portfolios are not maintained for each segment and,
accordingly, allocation of assets to each segment is not performed.
Seven general agents, one of which is an Empire subsidiary, produced
approximately 32%, 28%, and 23% of Allcity's premiums for the years ended
December 31, 1998, 1997 and 1996, respectively. All of Allcity's business is
conducted in the State of New York.
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's only material financial instruments are investments for which
the fair values are disclosed in Note 4, and the surplus note and short-term
investments, for which the carrying amount approximates fair value.
NOTE 14 -- LITIGATION
The Company is party to legal proceedings that are considered to be either
ordinary, routine litigation or incidental to its business. Based on
discussion with Counsel, the Company does not believe that such litigation
will have a material effect on its financial position, results of operations or
cash flows.
NOTE 15 -- RELATED PARTIES
See Notes 1, 3, 8, 9, 10 and 11 regarding Allcity's relationships with
the Group and Leucadia.
NOTE 16--SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following is a summary of unaudited quarterly results of operations
for 1998, 1997 and 1996 (in thousands, except per share amounts):
<CAPTION>
1998
1st 2nd 3rd 4th
<C> <C> <C> <C>
Total Revenues $24,168 $22,029 $21,998 $ 23,875
Net Income/(Loss) 110 (851) (10) 1,255
Basic and Diluted
Earnings/(Loss) Per Share 0.02 (0.12) (0.01) 0.18
1997
1st 2nd 3rd 4th
Total Revenues $28,108 $26,560 25,826 $ 22,130
Net Income/(Loss) 856 (162) 49 (826)
Basic and Diluted
Earnings/(Loss) Per Share 0.12 (0.02) 0.01 (0.12)
1996
1st 2nd 3rd 4th
Total Revenues $30,884 $30,714 $30,600 $ 28,592
Net Income 556 497 780 801
Basic and Diluted
Earnings Per Share 0.08 0.07 0.11 0.11
<S>
</TABLE>
-F28-
<PAGE>
<TABLE>
ALLCITY INSURANCE COMPANY
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION
CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS
(Thousands of dollars)
<CAPTION>
<S>
COL. A COL. B COL. C COL. D* COL. E COL. F COL. G COL. H
<C> <C> <C> <C> <C> <C> <C> <C>
Reserves Claims and Claim
for Unpaid Adjustment Expenses
Deferred Claims Discount Incurred related to
Policy and Claim if any Net (1) (2)
Acquisition Adjustment Deducted in Unearned Earned Investment Current Prior
Segment Costs Expenses Column C(a) Premiums Premiums Income (b) Year Years
Year Ended 12/31/98:
Automobile
lines $2,222 $180,716 - $27,700 $38,446 $7,613 $37,703 $(2,035)
Commercial
lines 2,143 240,732 307 28,110 20,490 6,087 14,108 14,618
Miscellaneous
and personal
lines 1,000 12,784 - 8,162 8,576 823 4,887 308
$5,365 $434,232 $307 $63,972 $67,512 $14,523 $56,698 $12,891
<S>
Year Ended 12/31/97:
Automobile
lines $3,339 $205,353 - $46,780 $50,677 $ 8,881 $53,995 $ 191
Commercial
lines 2,577 203,383 123 35,827 23,289 6,072 15,907 7,482
Miscellaneous
and personal
lines 1,163 8,790 - 8,200 6,925 741 3,839 631
$7,079 $417,526 $ 123 $90,807 $80,891 $15,694 $73,741 $ 8,304
<S>
Year Ended 12/31/96:
Automobile
lines $4,318 $206,706 - $66,050 $63,558 $ 9,561 $58,256 $ 6,443
Commercial
lines 2,654 194,000 104 39,090 27,714 6,370 19,251 1,434
Miscellaneous
and personal
lines 735 5,381 - 6,517 4,801 427 2,709 257
$7,707 $406,087 $ 104 $111,657 $96,073 $16,358 $80,216 $ 8,134
<S>
<FN>
<S>
(a) Liabilities for losses for certain long - term disability payments under
wokers' compensation insurance are discounted at a maximum of 6%. The
liabilities discounted are deemed insignificant and do not have a material
effect on reported income.
<S>
(b) Allocations of Net Investment Income and Other Operating Expenses are
based on a number of assumptions and estimates and results would change if
different methods were applied. Other Operating Expenses are reflected net of
service fee income.
<S>
*Information required by Schedule III - Supplementary Insurance Information has
been incorporated within this schedule.
</TABLE>
[S]
-F29-
<PAGE>
<TABLE>
ALLCITY INSURANCE COMPANY
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION - CONTINUED
CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS
(Thousands of dollars)
<CAPTION>
<S>
COL. A COL. I COL. J COL. K COL. L*
<C> <C> <C> <C>
Amortization Paid
of Deferred Claims
Policy Other and Claim
Acquisition Operating Premiums Adjustment
Segment Costs Expenses (b) Written Expenses
<S>
Year Ended 12/31/98:
Automobile lines $ 6,635 $ 2,064 $31,391 $50,767
Commercial lines 4,624 1,678 18,282 21,396
Miscellaneous and
personal lines 2,152 574 8,386 2,915
$13,411 $ 4,316 $58,059 $75,078
<S>
Year Ended 12/31/97:
Automobile lines $ 8,371 $(3,864) $44,484 $54,649
Commercial lines 5,118 2,619 22,107 22,580
Miscellaneous and
personal lines 1,756 435 8,438 3,050
$15,245 $ (810) $75,029 $80,279
<S>
Year Ended 12/31/96:
Automobile lines $ 9,854 $ (180) $60,162 $62,446
Commercial lines 5,293 4,742 25,243 22,483
Miscellaneous and
personal lines 1,057 511 5,606 2,645
$16,204 $5,073 $91,011 $87,574
<S>
<FN>
<S>
(a) Liabilities for losses for certain long - term disability payments under
wokers' compensation insurance are discounted at a maximum of 6%. The
liabilities discounted are deemed insignificant and do not have a material
effect on reported income.
<S>
(b) Allocations of Net Investment Income and Other Operating Expenses are
based on a number of assumptions and estimates and results would change if
different methods were applied. Other Operating Expenses are reflected net of
service fee income.
<S>
*Information required by Schedule III - Supplementary Insurance Information has
been incorporated within this schedule.
</TABLE>
[S]
-F29 Continued-
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<DEBT-HELD-FOR-SALE> 201,915
<DEBT-CARRYING-VALUE> 502
<DEBT-MARKET-VALUE> 502
<EQUITIES> 176
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 234,039
<CASH> 390
<RECOVER-REINSURE> 295,994
<DEFERRED-ACQUISITION> 5,365
<TOTAL-ASSETS> 605,704
<POLICY-LOSSES> 434,242
<UNEARNED-PREMIUMS> 63,972
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 0
0
0
<COMMON> 7,079
<OTHER-SE> 71,121
<TOTAL-LIABILITY-AND-EQUITY> 605,704
67,512
<INVESTMENT-INCOME> 14,523
<INVESTMENT-GAINS> 6,079
<OTHER-INCOME> 3,956
<BENEFITS> 62,282
<UNDERWRITING-AMORTIZATION> 13,411
<UNDERWRITING-OTHER> 7,705
<INCOME-PRETAX> 774
<INCOME-TAX> 270
<INCOME-CONTINUING> 504
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 504
<EPS-PRIMARY> 0.07
<EPS-DILUTED> 0.07
<RESERVE-OPEN> 417,526
<PROVISION-CURRENT> 56,698
<PROVISION-PRIOR> 12,891
<PAYMENTS-CURRENT> 19,203
<PAYMENTS-PRIOR> 55,875
<RESERVE-CLOSE> 434,232
<CUMULATIVE-DEFICIENCY> 12,891
</TABLE>
