UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934 forthe fiscal year ended December 31, 1996 (No Fee Required)
- or -
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 (No Fee Required)
COMMISSION FILE NUMBER 1-9460
LAWRENCE INSURANCE GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3370656
(State or other jurisdiction (I.R.S. Employer Identification No.)
of incorporation or organization)
430 State Street, Schenectady, New York 12305
(Address of principal executive offices)
Registrant's telephone number, including area code: (518) 372-0500
______________________________
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Stock, $.01 par value None, common stock delisted March 14,1997
Securities registered pursuant to Section 12(g) of the Act: NONE
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
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will 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. [ ]
The aggregate market value on February 28, 1997 of voting stock held by
non-affiliates of the registrant was $361,000. February 28 was the day of
the last trade before delisting by the American Stock Exchange. As of March 20,
1997, 14,121,482 shares of the registrant's Common Stock, $.01 par value,
were outstanding.
<PAGE>
TABLE OF CONTENTS
Item 1 Business 3
Item 2 Properties 14
Item 3 Legal Proceedings 14
Item 4 Submission of Matters to a Vote of Security Holders 14
Item 5 Market for Registrant's Common Stock
an Related Stockholder Matters 14
Item 6 Selected Consolidated Financial Data 15
Item 7 Management"s Discussion an Analysis of Financial
Condition and Results of Operations 17
Item 8 Financial Statements and Supplemental Data 20
Item 9 Changes and Disagreements with Accountants on
Accounting and Financial Disclosures 20
Item 10 Directors and Executive Officers 21
Item 11 Executive Compensation 22
Item 12 Security Ownership of Certain Beneficial
Owners and Management 23
Item 13 Certain Relationships and Related Transactions 24
Item 14 Exhibits, Financial Statement Schedules,
and Reports on Form 8K 24
Signatures 26
Index to Consolidated Financial Statements and
Financial Statement Schedules 27
Consolidated Financial Statements 29
Financial Statement Schedules 50
<PAGE>
PART I
ITEM 1. BUSINESS
General
There have been several events in 1996 and early 1997 that have had a
significant impact on the Company with some of the ramifications remaining
unknown at this time. The Company recorded a net loss of $13,731,000 for
the year. This compares with a loss before extraordinary gain of $642,000 for
1995 and a net loss of $7,091,000 in 1994. The losses in 1994 were
essentially attributable to the operations of United Community Insurance Com-
pany (UCIC). Lawrence Group, Inc.(LGI), the Company's 93% owner and eleven of
its subsidiaries filed for bankruptcy under Chapter 11 on February 28, 1997.
Senate Insurance Company (Senate) is heavily dependent upon several of the
subsidiaries for marketing, underwriting and claims handling of its products.
While Chapter 11 gives the filer protection from creditors as it attempts to
reorganize there is no guarantee that the reorganization will be successful
or if it is what impact that may have on the Company.
Based upon the results of the Texas Department of Insurance (TDI)'s regul-
ar examination of United Republic Insurance Company (URIC), URIC was placed
under confidential supervision on June 22, 1994. This order was based upon dis-
agreements with valuations of several assets, chief among them Alpha Trust, in
financial statements filed by URIC with the TDI and upon net operating losses
reported during the first quarter of 1994. On August 25, 1995 this Order was
lifted. In exchange the Company agreed to certain minimum financial targets.
URIC met the interim goals but had not met the December 31, 1995 policyholder
surplus target of $8.0 million. As a consequence, the TDI can place URIC into
conservatorship without the consent of the Company. Based upon the filing of
Chapter 11 by LGI and eleven subsidiaries on February 28, 1997 the TDI did
place URIC under conservation. Under Texas insurance regulations an insurance
company can remain in conservatorship 180 days before other action must be
taken. Subsequent to the filing of URIC's 1996 Statutory financial statement
which reflected policyholder surplus of $3.5 million, the Company received
reports from its actuary that the loss and LAE reserves related to pooling
with UCIC could be between $7 million and $10 million higher than reported on
URIC's statutory statement. This information has been received by the TDI.
Based on minimum capital requirements and insolvency provisions of the Texas
insurance law, the TDI has indicated that unless these reserves can be com-
muted or modified at an amount significantly less than presently stated the
alternative would be to place URIC in liquidation.
On September 19, 1996, as a result of the purchase of real estate by
Senate Insurance Company (Senate), a wholly owned subsidiary of URIC, from a
former owner and director, the State of Arizona Department of Insurance (ADI)
placed Senate and Senate National Insurance Company (SNLIC), a wholly owned
subsidiary if Senate, under supervision. A hearing was to be held by November
19, 1996, in order to ascertain that the transaction was fair and that the
obligations of LGI could be met without utilizing the assets of these compan-
ies. The hearing has been postponed at the request of the ADI.
UCIC, which the New York State Supreme Court of Schenectady County with the
consent of the Company, ordered liquidated as of November 10, 1995, was a
wholly owned subsidiary of the Company. UCIC was incorporated in 1967 and
acquired by Albert W. Lawrence on December 30, 1981. UCIC was transferred by
Mr. Lawrence to a subsidiary of Lawrence Group in 1982 and was transferred to
the Company in 1986. UCIC wrote commercial and personal lines of Property and
Casualty (P&C) insurance until mid-February 1994, when it ceased writing new or
renewal business. Amounts included in the pages that follow do not include
UCIC after 1993.
URIC is owned approximately 79% by the Company, and the remainder is owned
by UCIC. URIC was incorporated in 1986 and was acquired by the Company on
October 24, 1989. URIC assumed reinsurance and was also licensed to write
business directly in some states. URIC voluntarily ceased writing business in
1994. Under the conditions of its confidential supervision and subsequent re-
lease, the approval of the TDI to accept any new or renewal business is
required.
Global Insurance Company (Global) is a wholly owned subsidiary of URIC.
Global was incorporated in 1969 and acquired by the Company effective January
1, 1992. Global wrote substandard automobile and excess and surplus lines of
P&C insurance. Global voluntarily ceased writing new or renewal business in
November 1993 although it continued to receive assignments from Georgia's
automobile assigned risk pool. Global resumed writing during the fourth
quarter of 1996.
Senate is a wholly owned subsidiary of URIC. Senate was incorporated in
1967, acquired by Albert W. Lawrence in 1978, transferred to a subsidiary of
Lawrence Group in 1981 and transferred to the Company in 1986. Senate writes
accident and health (A&H) insurance.
Senate National Life Insurance Company (SNLIC), is a wholly owned subsid-
iary of Senate. SNLIC was incorporated in 1970 and acquired by Senate on Jan-
uary 13, 1983. SNLIC is licensed to write life insurance and assumes A&H and
credit life insurance.
Senate Syndicate, Inc. (Syndicate) was formed in 1985 and was a syndicate
on the New York Insurance Exchange (Exchange) until its withdrawal in 1989.
It is dormant.
The Company was formed in 1986 by Lawrence Group under the laws of
Delaware to function as an insurance holding company. Unless the context
otherwise requires, URIC, Global, Senate, SNLIC and Syndicate each are
sometimes referred to herein as the Company except for 1993 wherein the term
Company also includes the accounts of UCIC.
The Company's executive offices are located at 430 State Street,
Schenectady, New York 12305 and its telephone number is (518) 372-0500.
Relationship with Lawrence Group, Inc.
LGI owns and operates subsidiaries principally engaged in insurance agency
and brokerage operations, in addition to its ownership interest in the Company.
LGI, headquartered in Schenectady, New York, was established on December 30,
1983, as a holding company for the various insurance related enterprises
controlled by Albert W. Lawrence. On February 28, 1997, LGI along with
eleven subsidiaries filed for Chapter 11 under federal bankruptcy laws.
At this time, it is unclear what the ultimate impact of this filing and the
actions to be taken by LGI and its subsidiaries will be on LIG. Since Senate
depends on several of LGI's subsidiaries for marketing, underwriting and claims
handling it has been the component of LIG that has been most adversely
affected to date.
LGI owns approximately 93% of the common stock of the Company. Albert W.
Lawrence, Chairman of the Board of the Company, is the owner of 100% of the
common stock of LGI.
Products
The Company's current product mix consists primarily of A&H insurance with
Global beginning to write non-standard automobile policies in Georgia.. A & H
insurance comprises principally medical stop-loss insurance for self-insured
medical plans, short-term disability coverage and group dental programs and
student accident insurance. The Company's A&H coverage are marketed by A.W.
Lawrence & Co., Inc. (AWL), a subsidiary of Lawrence Agency Corp.(LAC), which
is a subsidiary of LGI. SNLIC is licensed to write life insurance and assumes
credit A&H and credit life insurance. Due to the lengthy inactivity of URIC
in the market place it is uncertain what products, organization and
relationships could be reestablished if it could resume business.
The following table sets forth the Company's gross premiums written and
earned by product line for the periods indicated:
Year Ended December 31,
1996 1995 1994 1993 1992
-----------------------------------------------
(Dollars in thousands)
Gross premiums written:
Property/casualty $ 380 $ 137 $ 283 $111,838 $132,273
Reinsurance assumed 353 1,281 (12,171) 7,815 29,183
Accident/Health/Life 4,038 5,237 8,974 11,513 11,673
----- ----- ------- ------- -------
Totals $4,771 $ 6,655 $ (2,914)$131,166 $173,129
===== ===== ===== ======= =======
Gross premiums earned:
Property/casualty $161 $ 222 $ 658 $119,615 $136,633
Reinsurance assumed 365 2,091 451 14,480 26,349
Accident/Health/Life 4,126 5,222 8,857 11,547 11,686
------ ------- ------- ------- -------
Totals $4,652 $ 7,535 $ 9,966 $145,642 $174,668
===== ===== ===== ======= =======
Gross premiums written or premiums assumed generally represent the annual
cost of insurance at the time of inception. Premiums earned represent a pro
rata portion of the business written or assumed in the current calendar year
plus amounts carried over from the prior year that are taken into revenue in
the current period. The decline in premiums written and earned during 1996 and
1995 compared with 1994, was related primarily to halt of new and renewal
business by URIC and Global and the loss of business by Senate which was
adversely impacted by the liquidation of UCIC.
The costs of reinsurance are deducted from gross premiums to arrive at net
premiums written or earned. The Company, like the industry in general, util-
izes reinsurance to minimize the concentration of exposure to losses in any one
geographic area, type of coverage or any one insured or group of insureds.
The following table shows the net premiums written and earned together with
other key operating results, followed by a discussion of the individual
products.
Key operating results on a combined basis and for each product are
summarized below:
Year Ended December 31,
1996 1995 1994
---- ---- ----
(Dollars in thousands)
All products combined:
Net premiums written $3,490 $ 5,135 $(7,770)
Net premiums earned 3,571 5,533 $ 5,221
Percentage of Company's
total earned premium 100.0% 100.0% 100.0%
Loss and LAE ratio 231.0% 97.6% 77.0%
Expense ratio 42.8 65.7% 65.6%
Combined ratio 273.8% 163.3% 142.6%
Property/casualty:
Net premiums written $ 89 $ 137 $ 273
Net premiums earned 88 222 641
Percentage of Company's
total earned premium 2.5% 4.0% 12.3%
Loss and LAE ratio 15.3% 140.1% 130.9%
Expense ratio 309.6% 151.3% 69.0%
Combined ratio 324.9% 291.4% 199.9%
Year Ended December 31,
1996 1995 1994
---- ---- ----
(Dollars in thousands)
Reinsurance assumed:
Net premiums written $330 $1,063 $(13,802)
Net premiums earned 342 1,490 (974)
Percentage of Company's
total earned premium 9.6% 26.9% (18.7)%
Loss and LAE ratio - % 208.6% - %
Expense ratio 107.1 % 89.9% - %
Combined ratio - % 298.5% - %
Accident/health/life:
Net premiums written $ 3,071 $3,935 $ 5,759
Net premiums earned 3,141 3,821 $ 5,554
Percentage of Company's
total earned premium 87.9% 69.1% 106.4%
Loss and LAE ratio 64.5% 51.9% 37.9%
Expense ratio 53.2% 51.0% 44.3%
Combined ratio 117.7% 102.9% 82.2%
All Products Combined: For 1996 net premiums written totaled $3,490,000
of which 88% were A&H premiums. Net premiums earned were $3,571,000. For
1995, net premiums written were $5,135,000 and net premiums earned for 1994
totaled $5,221,000. The loss and LAE ratio was 231.0%, 97.6% and 77.0% for
1996,1995 and 1994, respectively. In 1996 and 1995 the Company was impacted by
adverse development related to URIC's pooling agreement with UCIC. The
operating expense ratio for 1996, 1995 and 1994 have been high as changes in
operating expenses have not kept pace with reductions in premiums.
Property/Casualty: Property and casualty results essentially reflected the
runoff of prior years' business as new business consisted only of personal
automobile business in Global. The Company wrote very little products
liability, professional malpractice and business containing environmental
impact coverage. Consequently, the overall exposure to occupational diseases or
similar longtime emerging disabilities is considered by Management to be
minimal.
Reinsurance Assumed: Assumed reinsurance was underwritten for P&C coverage
which emphasize exposures in the automobile and general liability lines of
business where claims develop over a shorter period of time than do claims
arising in such lines of business as medical malpractice and product liability.
Reinsurance assumed business for 1996,1995 and 1994 reflected the runoff of
prior years business as new business was halted in 1994. Negative written
premiums for 1994 were due largely to the termination of the pooling agreement
between URIC and UCIC on January 1, 1994.
Accident/Health: Earned premiums from A&H insurance lines decreased by 18%
in 1996, and 31% in 1995. The Company's premium volume in A&H has been largely
from medical stop loss policies. The growth in this business has slowed as
many of the customers who purchased these policies in the past are self
insuring at higher retentions. In addition, the Company was impacted by the
publicity related to the financial difficulties of UCIC. The Company's A&H
loss and LAE ratio increased to 64.5% in 1996 and 51.9% for 1995 from 37.9%
in 1994. The expense ratio increased to 53.2% in 1996 and 51.0% in 1995 from
44.3% for 1994.
Further discussion of operating results is provided in ITEM 7 -
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
Markets
The Company's markets for A&H insurance traditionally included school
districts, municipalities, retail stores and other selected risks. Public
school districts represents the Company's largest single market for its
A&H coverage. A&H insurance is generally marketed by affiliates of LAC with a
lesser percentage of such coverage marketed by agents not otherwise affiliated
with Lawrence Group or the Company. A portion of this coverage is marketed
to members of sponsoring organizations.
Claims
URIC's reinsurance assumed claims are monitored by a consultant, when
necessary. Individual claims originate from ceding companies and are sent by
the reinsurance intermediaries to URIC. Claims are monitored and appropriate
controls are established for each ceding company.
Global's reinsurance assumed claims are administered by its Finance
Department as the individual claims are sent by the ceding companies to Global.
On the current business written through a managing general agent an outside
consulting firm is utilized to review the agent's claims operation.
Claims on policies insured by Senate are handled by a related third party
administrator. Senate is provided with weekly reports on claims activity.
Reserves
Insurance companies are required to maintain reserves for losses and LAE
for all lines of business. These reserves are intended to provide for the
ultimate settlement and administration of claims for all losses incurred and
unpaid, including those incurred but not yet reported (IBNR).
Property/Casualty and Accident/Health:
Reserves for losses and LAE represent estimates of reported losses and LAE
and estimates of IBNR based upon past and current experience and is net of
salvage and subrogation to be received and is increased for reinsurance
assumed. In developing reserve estimates, Global and Senate give consider-
ation to the impact of changes in demographics and/or line of business mix.
The IBNR reserve is calculated by applying actuarial derived loss development
factors to results recorded to date.
Reinsurance Assumed:
Reserves for losses on reinsurance assumed business are generally
maintained by URIC at the amounts reported by the ceding companies.
The following table provides a reconciliation of the Company's beginning
and ending property and casualty (P&C) loss and LAE liability balances for
1996, 1995 and 1994.
Year Ended December 31,
(Dollars in thousands) 1996 1995 1994
-------- -------- --------
Reserves for losses and
LAE at January 1, $28,709 $45,560 $ 75,402
Less reinsurance receivable 4,600 7,072 9,679
------ ------- -------
Total 24,109 38,488 65,720
Provision for losses and
LAE for claims occurring
in the current year 29 368 4,614
Increase (decrease) in estimated
losses and LAE for claims
occurring in prior years 6,195 3,051 (2,699)
----- ----- ------
Total incurred losses & LAE 6,224 3,419 1,915
Losses and LAE payments ----- ----- -------
for claims occurring during:
Current year 22 141 2,758
Prior years 8,658 17,657 26,389
------ ------ -------
Total losses and LAE payments 8,680 17,798 29,147
------ ------ -------
Net reserves for losses
and LAE at December 31, 21,653 24,109 38,488
Reinsurance receivables 3,490 4,600 7,072
------ ------ -------
Gross reserves $25,143 $28,709 $ 45,560
===== ===== =====
The above table for 1996, 1995 and 1994 and the accompanying loss and LAE
reserve summary, exclude UCIC and Senate and SNLIC. Net reserves for Senate
and SNLIC were $897,000, $1,102,000 and $1,180,000 at December 31, 1996 ,
1995 and 1994, respectively.
Loss and LAE totaled $6,224,000 for 1996. The adverse development was
related primarily to the pooling agreement with UCIC. Loss and LAE incurred for
1995 totaled $3,419,000 reflecting the unfavorable impact of the adverse
development of the URIC's pooling agreement with UCIC partially offset by the
favorable impact of commuting several reinsurance treaties. Loss and LAE for
1994 totaled $1,915,000 and included approximately $1,600,000 related to the
Northridge California earthquake. Reserves related to prior years were reduced
by $3,699,000 reflecting more favorable results in the reinsurance assumed
business. The favorable loss experience on the reinsurance assumed business
was related primarily to contracts that have retrospective rating provisions.
This resulted in a commensurate reduction in earned premiums.
The following table presents the development of the Company's GAAP balance
sheet reserves for 1986 through 1996, excluding UCIC. The line "Reserves for
Losses and LAE" reflects the reserves at the balance sheet date for each of the
indicated years and represents the estimated amount of losses and LAE arising
in all prior years that are unpaid at the balance sheet date. The "Reserves
Re-estimated" lines of the table reflect the re-estimated amount of the
previously recorded reserves based on experience as of the end of each succeed-
ing year. The estimate changes as more information becomes known about the
frequency and severity of claims for individual years. The "Cumulative
Redundancy (Deficiency)" represents the aggregate change in the estimates over
all prior years. The "Cumulative Paid" lines of the table reflect the
<PAGE>
cumulative amounts paid as of successive years with respect to the aforement-
ioned reserve liability.
December 31,
Year 1986 1987 1988 1989 1990 1991
Dollars in thousands
----------------------------------------------------------------
Reserves for losses & LAE 1,873 506 742 15,053 30,342 44,399
Reserves - re-estimated:
One year later 678 175 120 15,051 29,898 63,249
Two years later 537 109 120 17,782 43,688 69,794
Three years later 505 109 120 25,016 45,953 62,418
Four years later 505 109 120 24,722 36,419 61,264
Five years later 505 109 120 19,547 36,100 60,647
Six years later 505 109 120 19,875 35,520
Seven years later 505 109 120 19,472
Eight years later 505 109 120
Nine years later 505 109
Ten years later 505
Cumulative Redundancy
(Deficiency) 1,368 397 622 (4,419) (5,178)(16,248)
Cumulative paid as of:
One year later 570 94 120 4,902 10,587 32,658
Two years later 514 109 120 8,351 26,284 41,747
Three years later 505 109 120 15,086 29,823 46,934
Four years later 505 109 120 15,264 27,491 54,220
Five years later 505 109 120 14,642 32,301 56,370
Six years later 505 109 120 17,804 33,224
Seven years later 505 109 120 18,098
Eight years later 505 109 120
Nine years later 505 109
Ten years later 505
<PAGE>
December 31,
Year 1992 1993 1994 1995 1996
Dollars in thousands
-------------------------------------------------------------------
Reserves for losses & LAE 60,845 76,099 45,560 28,709 25,143
Reserves - re-estimated:
One year later 78,590 65,338 49,230 35,113
Two years later 69,444 68,383 55,549
Three years later 70,707 74,129
Four years later 73,528
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
Cumulative Redundancy
(Deficiency) (12,683) 1,970 (9,989) (6,404)
Cumulative paid as of:
One year later 24,586 23,297 20,745 10,888
Two years later 40,771 42,158 31,490
Three years later 54,708 51,791
Four years later 60,491
Five years later
Six years later
Seven years later
Eight years later
Nine years later
Ten years later
The Company does not discount its loss and LAE reserves to present value,
except as required for tax purposes under the Tax Reform Act of 1986.
Reinsurance Ceded
URIC, Global and Senate utilize reinsurance principally to reduce their
net liability on individual risks and to protect against catastrophic losses.
Reinsurance generally is written under contracts in which the coverage is
either on a proportional basis (quota share), where the reinsurer shares
proportionately in premiums and losses, or on an excess of loss basis, where
only losses above a fixed point are reinsured.
URIC utilized reinsurance to limit its exposure to catastrophic exposures
that it assumed. Global used a combination of excess of loss reinsurance
arrangements and quota share treaties to limit its liability on any one
loss to $100,000. Senate also utilizes reinsurance to limit its maximum
exposure to $250,000 on business written by it.
The ceding of reinsurance does not legally discharge the original insurer
from its primary liability to the policyholder, and the ceding company is
required to pay the loss even if the assuming company fails to meet its
obligations under the reinsurance agreement. The practice of insurers,
however, subject to certain statutory limitations and as permitted by
regulatory authorities, is to account for reinsured risks to the extent of the
reinsurance ceded as though they were not risks for which the original
insurer is liable. Under SFAS No. 113, for balance sheet presentations,
companies are required to show reserves before reinsurance ceded.
UCIC and URIC had a pooling agreement in effect during 1992 and 1993.
Under the terms of the agreement, the premiums and losses incurred during
1992 and 1993 were to be combined between the carriers and then split:
65% going to UCIC and 35% to URIC. The agreement was terminated effective
January 1, 1994; however, each company is responsible for its share of all
premium, losses and LAE incurred prior to that date. At December 31, 1996,
URIC had a net liability to UCIC of approximately $11.9 million under a quota
share treaty and the pooling agreement.
Ceded premiums earned under reinsurance treaties were approximately
$1,082,000, $2,002,000 and $4,745,000 for 1996, 1995 and 1994, respectively.
The decrease in 1996 and 1995 was due primarily to the lower premiums written.
Investment Policy
Insurance company investments must comply with the insurance law of the
insurer's domiciliary state. These laws prescribe the kind, quality and
concentration of investments which may be made by insurance companies. In
general, these laws permit investments within specified limits and subject to
certain qualifications in federal, state and municipal obligations, corporate
bonds, preferred stocks, common stocks, real estate mortgages, real estate
and money market instruments. The TDI had taken issue with URIC's investment in
Alpha Trust. This investment, which totaled $14,000,000 was made in January
1994. On September 19, 1996, the ADI placed Senate and SNLIC under
supervision as a result of an investment in real estate that had been purchased
from a former officer and director. Refer to Regulation for additional comment.
The investment policy and investments of each of the Company's subsidiaries
are determined by its Investment Committee, consisting of certain Directors,
and all transactions are ratified by the Board of Directors.
As of December 31, 1996, the Company has classified its fixed investments
as Fixed Maturities Available for Sale. Securities to be held for indefinite
periods of time and not intended to be held to maturity are classified as
available for sale.
The table set forth below reflects average investments and income earned
thereon for the Company for each of the years in the three-year period ended
December 31, 1996:
Year Ended December 31,
Dollars in thousands) 1996 1995 1994
---- ---- ----
Average investments $16,091 $23,370 $48,338
Net investment income 1,648 3,101 3,313
Average yield excluding income
from Alpha Trust 5.8% 6.8% 4.3%
Net investment income for 1996, 1995 and 1994 includes interest income from
Alpha Trust whose principal is not included in average investments. Net
investment income included $712,000, $1,513,000 and $1,226,000 from Alpha Trust
for 1996, 1995 and 1994, respectively. The decrease in yield for 1996 was
attributable to the loss of income due to the default of Alpha Trust and a
reserve against rental income for non-payment. The increase in average yield
for 1995 compared with 1994 was attributable primarily to the general
improvement in interest rates.
The following table summarizes the combined cash, cash equivalents and
investments of the Company as of December 31, 1996:
(Dollars in thousands) Amounts % of Total
Cash and cash equivalents $ 943 5.5%
Short-term investments 2,862 16.6
Common stocks 942 5.4
Fixed maturities available for sale 9,682 56.0
Real estate 2,581 14.9
Mortgage loans on real estate 154 .9
Other invested assets 120 .7
------ -----
Total $ 17,284 100.0%
====== =====
The table set forth below indicates the carrying amount of the fixed
maturities portion of the investment portfolio by year of maturity as of
December 31, 1996:
Period from December 31, 1996 Percent of
to Maturity Amounts Portfolio
- ------------------------------ --------- ----------
(Dollars in thousands)
One year or less $ 3,343 34.5%
More than one year to five years 2,158 22.3
More than ten years 10 1.1
----- ----
Sub-total 5,608 57.9
Mortgage backed securities 4,074 42.1
------ -----
Total $ 9,682 100.0%
===== ====
All securities in the Company's fixed investment portfolio as of December
31, 1996 are rated A or better by Standard & Poor's Corporation or Moody's
Investor Services.
Operations, Personnel and Management Agreements
At December 31, 1996, URIC, Senate and Global had 3, 5 and 2 employees,
respectively.
Senate and AWL are parties to a management agreement (Senate Management
Agreement) pursuant to which AWL provides management services to Senate.
During 1996, 1995 and 1994, Senate expended $76,000, $74,000 and $60,000,
respectively, pursuant to the Senate Management Agreement. Senate also obtains
a majority of its medical stop-loss insurance and group business through
subsidiaries of LAC. During 1996, 1995, and 1994, Senate incurred commission
expenses of $525,000, $605,000 and $963,000, respectively, on this business.
LAC pays a portion of these commissions to external brokers and subagents. As
a result of the Chapter 11 filing, it is not certain under what conditions
these relationships will continue.
Competition
The P&C and A&H industry is highly competitive and competitors have taken
advantage of Senate's relationship with UCIC and LAC. In addition, A. M. Best
has downgraded Senate's rating to "under supervision". The Company's ability to
retain customers under these circumstances is a significant challenge.
Regulation
The Company and its subsidiaries are subject to regulation in each state
in which they conduct business, including licensing and supervision by state
insurance departments. Current statutes and regulations govern such matters
as the nature of and limitations on investments, the payment of dividends and
capital and surplus requirements. In addition, in most states, approval of
premium rates and policy forms is required. The Company and its subsidiaries
are, and will continue to be subject to these regulations.
The Company and its subsidiaries also are subject to regulation under the
holding company statutes of Texas, Georgia and Arizona. These holding company
statutes generally require insurers that are subsidiaries of holding companies
to register and file reports containing information concerning their capital
structure, ownership, management, financial condition and general business
operations and to provide such information regarding the holding company as
well. Such regulations also generally require prior regulatory agency notice or
approval of intercompany transactions within the holding company structure.
The regulatory agencies of each state have statutory authorization to enforce
their laws and regulations through various administrative orders and
enforcement proceedings.
The insurance laws of Arizona, Georgia and Texas provide that no person,
as defined by the law may acquire control of an insurance company domiciled in
that state, unless it has given notice to the insurance company and obtained
prior written approval from the Commissioner of Insurance for such acquisition
of control. Any purchaser of 10% or more of the Company in Georgia and Texas
and 25% or more in Arizona would be presumed to have acquired control of the
company, unless such presumption is rebutted.
The NAIC, which is not itself a regulatory authority but makes recommend-
ations to and takes other actions affecting state regulatory authorities,
adopted a Risk-Based Capital (RBC) standard in the fourth quarter of 1993 for
use by state insurance regulators. RBC is intended to be a "tool" for
regulators to assess the capital adequacy of property and casualty insurers and
to take action when capital under the standard is judged to be inadequate.
This standard has four action levels based upon the relationship of actual
capital to RBC. The mildest action occurs at a level of 2.5:1. Based upon the
RBC standards developed by the NAIC, all consolidated subsidiaries capital
except URIC exceeded the authorized control level RBC by a substantial margin.
URIC's ratio was .9:1. URIC is currently under more stringent requirements
than those imposed by the RBC standards.
Insurance regulations of the states in which the Insurance companies are
domiciled limit the level of dividends that can be paid without the approval
of the respective departments. Dividends can only be paid out of earned
surplus and are generally based on a component of net income or similar measure
or 10% of statutory surplus. Based upon 1996 results only SNLIC could pay a
dividend. Its maximum dividend payable to Senate in 1997 is $20,000.
The NYID completed an examination of UCIC for the years 1989 through 1993
in 1994 and found UCIC to be insolvent, its capital impaired and a shortfall
of $37,624,941 in its required surplus to policyholders at December 31, 1993.
As a result of that examination UCIC was placed in rehabilitation on July 7,
1994 and following continued discussions and negotiations between the Company
and the NYID, UCIC with the consent of the Company was placed into liquidation
by court order on November 10, 1995. As part of the order, the Company, its
directors, officers and employees were relieved of any liability for the
deficit of UCIC except for obligations incurred in the ordinary course of
business or due to fraudulent acts. URIC was also given the right of first
refusal to purchase the shares of its stock owned by UCIC.
The Texas Department of Insurance (TDI) conducted its regular examination
of URIC as of March 31, 1993. TDI issued their audit report on May 25, 1994.
On June 22, 1994, the TDI issued a confidential order creating a state of
supervision and appointing a supervisor of the operations of URIC. The order
was based upon disagreements with valuations of several assets, chief among
them Alpha Trust, in financial statements filed by URIC with the TDI and upon
net operating losses reported during the first quarter of 1994. On August 25,
1995 URIC was released from this order conditioned upon it achieving certain
minimum policyholders' surplus and other goals. If URIC did not achieve these
goals the TDI could place URIC into conservatorship. Under conservatorship,
the TDI would assume all control and decision making authority during the
period of conservatorship. As of December 31, 1995, URIC had not achieved all
of these goals. On February 28, 1997 as a result of the bankruptcy filing by
LIG's parent and other affiliates the TDI placed URIC under conservatorship.
Under Texas insurance regulations an insurance company can remain in
conservatorship 180 days before other action must be taken. Subsequent to the
filing of URIC's 1996 Statutory financial statement which reflected policy-
holder surplus of $3.5 million, the Company received reports from its actuary
that the loss and LAE reserves related to pooling with UCIC could be between
$6 million and $8 million higher than reported on URIC's statutory statement.
This information has been received by the TDI. Based on minimum capital
requirements and insolvency provisions of the Texas insurance law, the TDI has
indicated that unless these reserves can be commuted or otherwise modified at
an amount significantly less than presently stated the alternative would be
to place URIC in liquidation.
On September 19,1996 the ADI issued a Notice of Determination and Order of
Supervision for Senate and SNLIC. This Order arose over Senate's purchase of
real estate from a former officer and director and the subsequent loan of these
proceeds to LGI. The Order could be abated upon demonstrating that the
purchase was fair and reasonable and complies with applicable Arizona statutes
and that Senate's controlling persons can meet their financial obligations
without utilizing the assets of Senate or SNLIC except for dividends. If the
Company should be unable to satisfy these items the ADI could place either or
both companies under conservatorship. A hearing had been scheduled for
November 18, 1996 but has been postponed at the request of the ADI.
Global, Senate and SNLIC underwent their regular examinations as of
December 31, 1993, by the respective insurance departments. The reports showed
no material findings.
The National Association of Insurance Commissioners (NAIC) annually
calculates eleven financial ratios to assist state insurance regulators in
monitoring the financial condition of P&C insurance companies. Many of these
ratios are intended to express operating activity over a one or two year period
as a factor of policyholders' statutory surplus. A "usual range" of results
for each ratio is used as a benchmark. Departure from the usual range on
four or more of the ratios could lead to inquiries from individual state
insurance commissioners as to certain aspects of a company's business. Global
fell outside the normal range on two ratios. Both were related to the winding
down of Global's operations. URIC fell outside the normal range on four
ratios. These ratios were outside the normal range as a result of the default
of the Alpha Trust notes and adverse loss development. Senate fell outside the
range on seven ratios as a result of the increase in non-admitted assets
related to the bankruptcy filing by LGI and certain of its subsidiaries and
decreases in premiums written and income.
As a result of the financial difficulties, Best has downgraded URIC's and
Senate's ratings to reflect the fact that they are under conservation or
supervision.
Tax Legislation
During 1996, the IRS did not issue any new regulations which would have
any material impact on the Company's tax position.
ITEM 2. PROPERTIES
The Company occupies leased office space in Texas and Georgia. It occupies
owned facilities at its corporate headquarters located in Schenectady, New York.
ITEM 3. LEGAL PROCEEDINGS
In addition to the proceedings with the NYID, TDI and ADI discussed under
Regulation, the Company is a defendant in other legal proceedings which
Management believes will not have a material impact on the Company's financial
statements. Management is defending these cases. As a result of an unpaid
judgement against LIG and two codefendants, LIG's bank accounts have been
frozen. The Company has filed suit against its former accountant and actuary
seeking to recover damages for breach of contract and inaccurate certifications
of the Company's 1992 and prior loss and loss adjustment expense reserves. The
Company is seeking $250 million. The litigation is in its early stages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of 1996, there were no matters submitted to a
vote of security holders.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market Information
The Company's common stock was traded on the American Stock Exchange under
the symbol of LWR. Trading of the Company's common stock was suspended by the
American Stock Exchange (AMEX) from May 16, 1994 to August 29, 1995 due to the
lack of current financial information. On August 30, 1995 trading was resumed,
however, at that time the Company did not meet the minimum financial require-
ments of the Exchange and delisting procedures could have been resumed in the
future. Effective March 14, 1997 the Company consented to a delisting by
AMEX as it did not meet the minimum financial requirements. Trading had been
halted on March 4, 1997. It is expected that an over the counter market will
develop for its shares.
The high and low sales prices for each quarterly period are summarized in
the following schedule:
1996 1995
Quarter Ended High Low High Low
- -------------- ---- --- ---- ---
March 31 3/4 7/8 N/A N/A
June 30 3/4 1 1/8 N/A N/A
September 30 5/8 1 1 3/16 7/8
December 31 3/8 3/4 15/16 7/8
As of April 8, 1997, there were approximately 1,500 holders of the
Company's common stock and 14,121,482 common shares were issued and outstanding.
The Company has not declared or paid any dividends in 1996 or 1995.
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
The following GAAP basis tables should be read in conjunction with the
consolidated financial statements of the Company and the notes thereto.
Year Ended December 31,
($ in thousands) 1996 1995 1994 1993 1992
Operating Data: ----- ----- ----- ----- -----
Revenues:
Net premiums earned $3,571 $5,533 $5,221 $121,015 $131,799
Net investment income 1,648 3,101 3,313 7,165 12,188
Realized gains (losses)
on investments (12,673) (743) (598) (5,471) 5,888
----- ----- ----- ------- -------
Total revenues (7,454) 7,891 7,936 122,709 149,875
Operating expenses:
Losses and loss
adjustment expenses 8,249 5,402 4,019 148,437 107,583
Losses-government pools - - - 897 2,864
Policy acquisition expenses 8 1,863 2,068 35,378 24,799
Other operating expenses 1,519 1,769 1,360 14,771 14,706
------ ------ ------ -------- -------
Total operating expenses 9,776 9,034 7,447 199,483 149,952
------ ------ ----- ------- -------
Operating income (loss) (17,230) (1,143) 489 (76,774) (77)
Equity in loss of non-
consolidated subsidiary - - (7,309) - -
Equity in earnings
(loss) of investee - - (103) 632 413
------ ------ ------ -------- ------
Income (loss) before income
taxes, minority interest and
extraordinary items (17,230)(1,143) (6,923) (76,142) 336
Income tax expense(benefit) (133) (282) 168 962 (919)
---- ----- ------- ------- -----
Income (loss) before minority
interest and other items (17,097) (861) (7,091) (77,104) 1,255
Minority interest (3,366) 219 - - -
Extraordinary gain - 38,387 - - -
Change in accounting principle - - - - (233)
------ ------ ------ -------- -----
Net income (loss) $(13,731) $37,745 $(7,091) $(77,104) $ 1,022
===== ===== ===== ===== =====
ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA
Year Ended December 31,
1996 1995 1994 1993 1992
(Amounts in thousands, except per share data)
Balance Sheet Data:
Total investments $16,341 $16,935 $27,994 $121,036 $181,818
Total assets 29,701 46,502 67,041 257,315 305,018
Reserves for losses
and loss adjustment
expenses (1) 26,441 30,974 47,165 200,845 160,857
Total stockholders'
equity (deficiency) (2,800) 145 (56,252) (19,251) 58,908
Per Share Data:
Net income(loss) before
extraordinary items $ (.97) $ (.05) $ (.50) $ (5.46) $ .09
Net income (loss) (.97) 2.67 (.50) (5.46) .07
Dividends - - - .27 .46
Total stockholders'
equity (deficiency) $ (.20) $ .01 $ (3.98) $ (1.36) $ 4.17
Average shares
outstanding 14,121 14,121 14,121 14,121 14,121
Certain GAAP
Financial Ratios:
Loss and LAE ratio 231.0% 97.6% 77.0% 122.7% 81.6%
Losses - government
pools ratio - - - .7 2.2
Acquisition expense
ratio .2 33.7 39.6 29.2 18.8
Dividend ratio - - - .2 .2
Underwriting expense
ratio 42.6 32.0 26.0 12.0 11.0
Combined ratio 273.8% 163.3% 142.6% 164.8% 113.8%
(1) Reserves for loss and loss adjustment expenses have been restated for the
year ended December 31, 1992 to reflect the gross reporting provisions of
Statement of Financial Accounting Standard No. 113 "Accounting and Reporting
for Reinsurance of Short-Duration and Long-Duration Contracts".
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview
There have been several events in 1996 and early 1997 that have had a
significant impact on the Company with some of the ramifications remaining
unknown at this time. The Company recorded a net loss of $13,731,000 for the
year. This compares with a loss before extraordinary gain of $642,000 for 1995
and a net loss of $7,091,000 in 1994. The losses in 1994 were essentially
attributable to the operations of United Community Insurance Company (UCIC).
Lawrence Group, Inc.(LGI) and eleven of its subsidiaries filed for bankruptcy
under Chapter 11 on February 28, 1997. Senate Insurance Company (Senate) is
heavily dependent upon several of the subsidiaries for marketing, underwriting
and claims handling of its products. While Chapter 11 gives the filer protect-
ion from creditors as it attempts to reorganize there is no guarantee that the
reorganization will be successful or if it is what impact that may have on the
Company.
All significant intercompany transactions have been eliminated in
consolidation. Amounts in 1994 include UCIC financial results only through the
date of the Order of Rehabilitation (July 7, 1994) and on an unconsolidated
basis (ie. results of operations are reflected as "Equity in loss of non-
consoldated subsidiary" and the Company's investment as "Deficit of non-
consolidated subsidiary"). As a result of the formal order of liquidation
entered on November 10, 1995 the Company reversed these amounts resulting in
the extraordinary gain.
URIC had been under a confidential order of supervision by the Texas
Department of Insurance (TDI) since June, 1994, until its release on August
25, 1995. As a condition to the release of the order the Company agreed to
achieving certain financial goals. The financial goals included increasing
statutory surplus to $8 million at December 31, 1995. The statutory surplus as
filed with the TDI at December 31, 1995 was $6.6 million and $3.6 million at
December 31, 1996. These amounts did not include the effect of the loss and
LAE adjustments of approximately $4.0 million and $7.8 million at December 31,
1995 and 1996, respectively, included in the accompanying financial statements.
The TDI could have placed URIC under conservatorship at any time based upon the
1995 policyholder surplus. Under conservation, the TDI assumes all control and
decision making authority during the rehabilitation period. On February 28,
1997, as a result of the bankruptcy filing by LIG's parent and eleven of its
subsidiaries the TDI did place URIC into conservatorship. Under Texas insurance
regulations an insurance company can remain in conservatorship 180 days before
other action must be taken. Subsequent to the filing of URIC's 1996 Statutory
financial statement which reflected policyholder surplus of $3.6 million, the
Company received a report from its actuary that indicated that the reserves
related to pooling with UCIC could be between $7 and $10 million higher than
reported on URIC's statutory statement. This information has been received by
the TDI. Based on minimum capital requirements and insolvency provisions of the
Texas insurance law, the TDI has indicated that unless these reserves can be
commuted at an amount significantly less than presently stated, the alternative
would be to place URIC in liquidation.
On September 19, 1996, as a result of the purchase of real estate by
Senate Insurance Company (Senate) from Barbara Lawrence, a former owner and
director, the State of Arizona Department of Insurance (ADI) placed Senate and
Senate National Insurance Company (SNLIC) under supervision. A hearing was to
be held by November 19, 1996, in order to ascertain that the transaction was
fair and that the obligations of LGI could be met without utilizing the assets
of these companies. The hearing has been postponed at the request of the ADI.
Global Insurance Company (Global) resumed writing business on a modest
scale beginning in the fourth quarter of 1996.
Results of Operations
For 1996, the Company recorded a net loss of $13,731,000. For 1996,
realized losses on investments totaled $12,673,000 and underwriting losses
totaled $6,205,000. These were partially offset by investment income and the
minority interest share of the losses. For 1995, the Company recorded net
income of $37,745,000 including the extraordinary gain related to UCIC of
$38,387,000. Net loss from ongoing operations was $642,000. The Company's
results for 1996 and 1995 continued to be adversely impacted by adverse
development related to URIC's pooling agreement with UCIC, partially offset by
Company's ability to commute several reinsurance agreements at favorable terms.
For 1994, the Company lost $7,091,000 as LIG recorded a loss related to UCIC of
$7,307,000 for the first six months of 1994. In addition to the loss related
to UCIC's own operations since UCIC owns 21.4% of URIC, LIG does not
consolidate the full amount of income or loss earned by URIC. For 1994, this
amounted to $2,000 in URIC earnings not consolidated by LIG. Excluding UCIC
for 1994, the Company would have earned $216,000.
Net Premiums Earned: Net premiums earned represent the pro rata portion of
the business written in the calendar year plus amounts carried over from the
prior year that are taken into revenue in the current period reduced by
applicable reinsurance.
Net premiums earned for 1996 totaled $3,571,000 compared with $5,533,000
for 1995 and $5,221,000 for 1994. The decrease in 1996 was due primarily to the
continued decline in the accident and health (A&H) business. The increase from
1994 to 1995 was attributable primarily to favorable adjustments to URIC assum-
ed premiums partially offset by the decrease in Senate's stop loss business.
Net Investment Income: Net investment income was $1,648,000 for 1996,
$3,101,000 for 1995 and $3,313,000 for 1994. The decrease for 1996 compared to
1995 was due to the loss of interest from the Alpha Trust due to default and
a valuation reserve established for rent due from an affiliate as a result of
its bankruptcy filing and the lower level of invested assets of the Company.
The decrease for 1995 compared with 1994 was due to the lower level of invested
assets as yields were higher.
Realized Gains (Losses) on Investments: Realized losses for 1996 totaled
$12,673,000 and consisted of gains of $739,000 on the sale of Mechanical
Technology, Inc. (MTI) common stock to LGI offset by the charge off to
operations of the unpaid balance of the Alpha Trust ($13,093,000) and by
valuation allowances established against amounts due from affiliates as a
result of the Chapter 11 bankruptcy filing of LGI and certain subsidiaries.
Since Receivable from Alpha Trust was carried as a contra equity account in
stockholders' equity the impact on total stockholders' equity of this charge
off was $0. The Realized losses for 1995 totaled $946,000 and were related to
the loss on the disposition of notes of Aquatic Development Corporation and
losses on fixed investments. Realized gains totaled $203,000. Realized losses
totaled $598,000 for the year 1994 with approximately $503,000 due to the write
down of an equity investment in Aquatic Development Corporation.
Losses and Loss Adjustment Expenses: Loss and LAE totaled $8,249,000 for
1996 compared with $5,402,000 for 1995 and $4,019,000 for 1994. The increase in
1996 compared with 1995 was attributable primarily to higher adverse develop-
ment of losses related to the pooling agreement with UCIC . The increase for
1995 vs 1994 was attributable to the adverse impact of URIC's pooling agreement
with UCIC partially offset by favorable results related to the commutation of
several reinsurance agreements and the reduced business volume at Senate. In
addition, for 1994 the Company incurred losses of approximately $1,600,000
related to the Northridge, California earthquake for which it had no
counterpart in 1995.
Reinsurance assumed loss and LAE expenses have been adversely impacted by
the pooling agreement with UCIC. Earned premium in 1994 was negative as a
result of a moratorium on new business and adjustments to retrospectively rated
treaties as some of these treaties showed favorable loss experience in 1994.
The favorability was offset by losses incurred of approximately $1,600,000
related to the Northridge California earthquake.
The accident and health business, which constitutes the current majority of
the Company's business, continues to enjoy good results although the trend has
been unfavorable. The loss and LAE ratio was 64%, 52% and 38% for 1996, 1995
and 1994, respectively as some customers who had been experiencing excellent
loss ratios have in a number of instances selfinsured or kept higher
retentions. Senate has also been impacted by the publicity surrounding UCIC and
LGI and its subsidiaries.
Loss and LAE are based on the ability to collect from reinsurers amounts
due under reinsurance contracts. URIC's reinsurance is allocated to numerous
companies. Senate reinsured through Lloyd's of London on a combined quota
share/excess of loss basis. Senate claims with insureds are settled quickly
and reimbursed by Lloyd's of London promptly. This minimizes any significant
credit risk associated with longer tail business where premiums are remitted to
reinsurers long before claims are paid and reimbursed. Global has quota share
reinsurance spread among a number of companies. Management believes the
credit risk to be minimal.
Policy Acquisition Costs: Commissions and other acquisition expenses were
approximately $8,000 in 1996, $1,863,000 in 1995 and $2,068,000 in 1994. The
changes in policy acquisition costs for these years are attributable to the
change in the volume of business, changes in the mix of business from premium
with a lower commission rate to premium with a higher commission rate and
changes in reinsurance ceding commission income. The Company offsets
reinsurance ceding commission income against commissions and other acquisition
costs to arrive at the Company's net expense. The Company's net expense is
impacted by changes in reinsurance ceding commission, in addition to changes
in direct commissions associated with the Company's direct and assumed premium.
Policy acquisition expenses decreased in 1996 primarily as a result of
adjustments to incentive rated reinsurance contracts of URIC and lower premium
volume at Senate. Policy acquisition expenses for 1995 decreased by $205,000
compared with 1994 primarily as a result of lower premium volume at Senate.
Other Operating Expenses: The Company's other operating expenses were
approximately $1,519,000, $1,769,000 and $1,360,000 for the years ended Decemb-
er 31, 1996, 1995 and 1994, respectively. Other operating expenses for 1996 and
1995 reflected increased costs of litigation relative to URIC and the TDI as
well as costs associated with complying with other regulatory agencies as well
as additional costs associated with positioning the Company to be able to move
forward in 1996 compared with 1994.
Equity in Earnings of Investee: During 1992, the Company acquired 49% of
the outstanding common stock of MTI. The Company's pro rata share of MTI's
undistributed earnings since the date of acquisition has been included in the
Company's operating results in the amount of $(103,000) for 1994. Based upon
events subsequent to December 31, 1993, the investment was written down as of
December 31, 1993 to reflect an impairment.
Income Taxes: For 1996, the Company recorded an income tax benefit of
$133,000 reflecting primarily a truing up of prior years income tax receivables
and payables. For 1995, the Company recorded a tax benefit of $282,000
representing an amount recoverable against prior expense by URIC partially
offset by a provision for state income taxes of Senate. For 1994, the
Company recorded a tax expense of approximately $168,000 which consisted of
state income taxes due. The statutory Federal rate was 34% for 1996, 1995 and
1994.
Liquidity and Capital Resources
Insurance premiums generally are collected prior to the disbursement of
claims and related expenses resulting in a favorable cash flow from operations
for the insurance subsidiaries. Funds are then used to purchase investments
ranging in maturity from short-term to long-term, reflecting the varying
duration of insurance liabilities for losses, as well as the investment
market conditions.
During 1994 the Company implemented SFAS No. 115 - "Accounting for Certain
Investment in Debt and Equity Securities." This requires that fixed investments
be classified into categories for financial statement presentation: Fixed
Maturities Held to Maturity and Fixed Maturities Available for Sale. Fixed
Maturities Held to Maturity are carried at amortized cost. Securities to be
held for indefinite periods of time and not intended to be held to maturity are
classified as available for sale. Securities available for sale include
securities that Management intends to use as part of its asset/liability
management strategy and that may be sold in response to changes in interest
rates, prepayment risk and other similar economic factors, as well as to fund
catastrophic losses and other unexpected cash needs. Fixed Maturities
Available for Sale are carried at fair value after 1993. After 1994 the
Company considered all fixed investments to be available for sale.
Operating activities used cash and cash equivalents of approximately
$6,349,000, $8,233,000 and $18,221,000 in 1996, 1995 and 1994, respectively.
The decrease in operating cash flow for the three years reflects the reduction
in premiums written and the change in income from underwriting operations and
the reduction in investment income. In addition, in January, 1994, UCIC and
URIC loaned $13,000,000 and $14,000,000, respectively, to Alpha Trust. These
loans consisted of term notes with differing maturities and repayment schedules
with the initial principal repayment commencing April 1, 1996 and ending on
January 1, 2001. Interest is at the prime rate plus 2%. Interest is payable
quarterly beginning April 1, 1994. Alpha Trust loaned $27,000,000 to Lawrence
Group, which owns approximately 93% of the Company. This represented a use of
cash by URIC of $14,000,000. Principal and interest payments due after July 1,
1996 are in default and LGI has filed for bankruptcy under Chapter 11. On
April 4, 1996, Senate purchased real estate from Barbara Lawrence (a former
owner and director). This utilized $2,600,000 of cash and short term invest-
ments. This property was also subject to a blanket mortgage (approximately
$2.9 million at December 31, 1996) of the previous owner being held by a
financial institution The previous owner filed for protection under the
federal bankruptcy laws and it is uncertain as to what impact this may have on
LIG.
A significant portion of the parent company's internal sources of funds
historically consisted of dividends from its subsidiaries. Since the insurance
subsidiaries are subject to regulatory restrictions on the amount of dividends
that may be paid, their earnings are not necessarily available to the Company
on a current basis. The restrictions are generally based on specific levels of
statutory surplus and investment income, as determined under statutory
insurance accounting practices. Based upon their restrictions as of December
31, 1996, the insurance subsidiaries will not be able to pay any dividends to
the Company during 1997 without prior approval of regulatory authorities.
Dividend payments from the Company's subsidiaries have been suspended since the
fourth quarter of 1993 due to statutory limitations. Dividends from the
Company to its shareholders have also been suspended pending future dividends
from the subsidiaries.
In the absence of dividends from its subsidiaries the Company has had to
rely on tax refunds and other miscellaneous sources of cash to fund its own
activities. While these requirements are not expected to be substantial it
is uncertain to what degree they can be met in the future. Senate, Global and
SNLIC are deemed to have ample cash and invested assets to meet their
foreseeable cash requirements. However, it is uncertain that URIC can meet
it long term cash requirements if the loss and LAE reserves related to pooling
are not commuted or otherwise modified substantially.
Economy
Periods of economic recession and inflation can have varying effects on
members of the insurance industry. Due to the current nature of the Company's
operations it is not anticipated that fluctuations in the economy would have a
significant impact on the Company. The underwriting policy of each subsidiary is
geared to obtaining an adequate return for the risk it is underwriting. For
example, policies exclude environmental and pollution coverages, due to their
uncertainty.
New Accounting Pronouncements
There were no new accounting pronouncements that would upon implementation
have a significant impact on the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
The consolidated financial statements required in response to this Item
are submitted as part of ITEM 14 (a) of this report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURES
For the year ended December 31, 1996, the Company engaged the firm of
Weaver and Tidwell L.L.P, Fort Worth, Texas as it Accountant. Coopers &
Lybrand L.L.P. had been the Accountant for the preceding three years. There
were no disagreements with the current or prior accountants during the time of
their engagement.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
The Directors and Executive Officers of the Company at December 31, 1996
were as follows:
Name Age Position
Albert W. Lawrence 68 Chairman of the Board
Albert F. Kilts 51 Chief Executive Officer,
President, Director
Floyd N. Adams 54 Treasurer
Randall F. Ezick 48 Secretary, Director
Nevin D. Harkness (1) 75 Director
Milos R. Knorr (1) 78 Director
William J. Mather 59 Director
Janet H. Lawrence 38 Director
(1) Member of the Audit Committee. All members of the Audit Committee serve
only as Directors and have no management responsibilities with respect to the
Company.
All Directors hold office until the next annual meeting of stockholders
and until their successors are duly elected and qualified. Officers are
elected annually by the Board of Directors and serve at the discretion of the
Board of Directors.
Mr. Lawrence has been a Director since June 30, 1986. Messrs. Harkness
and Knorr became Directors on October 19, 1986. Mr. Mather became a Director on
October 7, 1987. Mr. Kilts became a Director on December 8, 1994. Ms.
Lawrence became a director on June 20,1996.
Albert W. Lawrence is the founder of Lawrence Group and its subsidiaries.
He is the Chairman of the Board and Chief Executive Officer of Lawrence Group
and has held various offices in the subsidiaries of Lawrence Group since
prior to 1990.
Albert F. Kilts has been President and Chief Executive Officer since May
1996 and had been Vice President and Treasurer of Lawrence Insurance Group,
Inc. since December 1994 and Chief Operating Officer of LIG since May 1994.
From October 1993 to July 1994 he also held several positions within UCIC.
He previously served as Corporate Auditor for Lawrence Management Group, Inc.
from August, 1991 through September, 1993. From 1975 until joining the
Lawrence Group in August, 1991, Mr. Kilts was affiliated with Key Corp where he
most recently served as Senior Vice President of Banking Administration at the
parent company.
Nevin D. Harkness had been a Director of UCIC since October 1983. During
1993, Mr. Harkness retired from the position of Chief Executive Officer and
President of The Olympic Regional Development Authority, Lake Placid, New York.
Mr. Harkness has been involved in the field of athletics as administrator and
coach since prior to 1989.
Milos R. Knorr is active as an independent consultant and advisor in
insurance, reinsurance and related fields, and acts as an arbitrator. He also
serves as a Director of several companies. Prior to 1982, he held various
senior executive positions with the INA Group (now CIGNA), including head of
European Reinsurance Operations, President of INA Insurance Company of Canada
and Senior Vice President of INA Reinsurance Company.
William J. Mather is President of Global, Senate, SNLIC and held various
offices in various subsidiaries of Lawrence Group. He is currently the Chief
Marketing Officer of Lawrence Group and was President of the LAC since prior
to 1989 until February 1997. Mr Mather has resigned his positions as a
director and officer of LIG and its subsidiaries effective March 21, 1997.
Janet H. Lawrence has been President of Lawrence Healthcare Administrative
Services (LHAS), which is a subsidiary of LAC since 1995. She previously
served as Vice President of Litigation Management and Vice President of Product
Development of UCIC. Prior to that she had been employed within LGI in
positions of increasing responsibility since 1981.
Randall J. Ezick has been Secretary of Lawrence Insurance Group, Inc. since
April 1996. He has been General Counsel for Lawrence Group, Inc. since August
1995. Prior to that time he was stockholder in the law firm of Roemer and
Featherstonaugh P.C. since 1989. During that time he was actively involved in
providing legal services to Lawrence Group,Inc. And its subsidiaries. He is a
member of the New York State and Albany county Bar Associations and the
Defense Research Institute. Mr. Ezick resigned as a director and officer of
the Company effective April 18,1997.
Under the securities laws of the United States, the Company's Directors,
its Executive Officers, and any persons holding more than ten percent of the
Company's common stock are required to report their ownership of the Company's
common stock and any changes in that ownership to the SEC. The Company is
required to report in this Form 10-K any failure to file during 1996.
ITEM 11. EXECUTIVE COMPENSATION
The following table sets forth all compensation that the Company and its
subsidiaries paid or accrued for the year ended December 31, 1996 for Herbert F.
Brantlinger and his successor, Albert F. Kilts as President and Chief Executive
Officer of LIG. The Company did not have any other Executive Officer whose
compensation exceeded $100,000 during 1996.
All other
Year Salary Bonus Compensation
---- -------- ------- -----------
F. Herbert Brantlinger 1996 $ 75,912 $ - $ -
1995 118,922 - -
1994 96,827 - -
Albert F. Kilts 1996 116,346 - -
The Company does not have any long-term compensation plans based upon the
issuance of restricted stock awards, stock options and/or stock appreciation
rights (SARs).
Mr. Brantlinger resigned his positions effective April 19, 1996.
Compensation Committee Interlocks and Insider Participation
There were no compensation interlocks. Mr. Kilts received an increase when
he became President and CEO.
Retirement Plans
URIC, Global and Senate are participating employers in a profit sharing
plan under Section 401(k) of the Internal Revenue Code, maintained by
Lawrence Group (401(k) Plan). The 401(k) Plan covers all employees of URIC,
Global and Senate who have completed one year of service and have attained age
twenty and one-half. Each year, URIC, Global and Senate contribute to the 401(k)
Plan such amounts as the Boards of Directors, in their discretion, may
determine. In addition, participants may elect to reduce their salary and to
have such amounts contributed by the Company to the 401(k) Plan. The
participants' accounts are fully vested at all times. The 401(k) Plan was
adopted effective as of January 1, 1986. Cost were $0 in 1996, 1995 and 1994
for executive officers.
Directors' Fees
Directors of the Company are paid $600 for each regular meeting of the
Board of Directors which they attend.
Five Year Performance Graph
Comparison of Five-Year Cumulative Returns Among the Company,
American Stock Exchange Composite ("AMEX") and the Insurance
Industry Listed Companies:
Year ended December 31,
----------------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
LIG 100 83 35 25 16 7
AMEX Stock Market(US) 100 105 124 116 149 159
NYSE,AMEX,NASDAQ listed
insurance carriers 100 128 139 130 188 226
The Stock Performance Graph, as presented above, reflects the cumulative
return on the common stocks of the Company, AMEX and the Insurance Industry,
respectively, assuming an original investment in each of $100 on December 31,
1991 (the "base") and reinvestment of quarterly dividends. Cumulative returns
for each fiscal year subsequent to 1991 are measured as a change from this base.
Since 1991, the Company's return declined substantially, reflecting an
earnings decline in 1992 and significant losses for 1993 and 1994. Trading in
the Company's stock was suspended on May 13, 1994. The suspension was lifted
on August 30, 1995. Trading has been in a narrow range since the suspension was
lifted. On March 3, 1997 trading in the Company's stock was halted by AMEX and
the Company delisted as of March 14, 1997.
.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the holdings of Common Stock by each of the
Company's Directors and by all Officers and Directors as a group as of December
31, 1996. Except as otherwise indicated, to the Company's knowledge all
shares are beneficially owned, and investment and voting power is held by the
persons named as owners.
Percent of
Name of Beneficial Owner Beneficial Ownership Outstanding Shares
Albert W. Lawrence (1) 13,157,769 93.2 %
Nevin D. Harkness 300 *
Milos R. Knorr 3,000 *
William J. Mather (2) 27,664 *
Albert F. Kilts - *
Randall J. Ezick - *
Janet H. Lawrence 196 *
All Officers and Directors
as a group (1)(2) 13,190,130 93.4%
*Less than 1%
(1) Includes 13,144,395 shares held by Lawrence Group. In addition, there are
8,374 shares in the account of Mr. Lawrence in the 401(k) Plan.
(2) Includes 26,839 shares in the account of Mr. Mather in the 401(k) Plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
URIC, Global and Senate with the approval of the requisite state insurance
departments sold their shares of MTI stock to LGI for $739,000 in 1996. The
carrying value of the stock had previously been written down to $0 in 1994.
Since August 1996, Global has subleased office space located in Atlanta,
Georgia to LAC. Annual rent is $30,000.
The Company's subsidiaries held various notes receivable and other
receivables from various Lawrence Group affiliates at December 31, 1996. Based
upon the bankruptcy filing the Company has established a valuation allowance
totaling $545,000 reducing the balance to $0. Interest income earned with
respect to these receivables totaled $9,000, $11,000 and $40,000 for the years
ended December 31, 1996, 1995 and 1994, respectively.
Senate obtains a significant portion of its business from LAC to which it
pays commissions. These commission expenses totaled $525,000, $605,000 and
$963,000 in 1996, 1995 and 1994, respectively. LAC pays a portion of these
to external brokers and subagents. Senate also pays AWL for management
services associated with Senate business. These payments were $76,000, $74,000
and $60,000 for 1996, 1995 and 1994, respectively.
URIC loaned $14,000,000 to Alpha Trust which in turn invested in notes
issued by Lawrence Group, which owns approximately 93% of the Company during
1994. Principal payments totaling $908,000 were made during 1996. The loan
is currently in default and LGI filed for protection under Chapter 11 of the
Federal Bankruptcy Law. Based on the above, the remaining balance was written
off in 1996. There was no impact on stockholder's equity.
At December 31, 1996 URIC carried a $120,000 note receivable from a
corporation owned by Albert Lawrence, the ultimate parent of LIG. Interest
earned in 1996 totaled $16,000.
At December 31, 1996, URIC carried a note payable due to LGI of $300,000.
Interest is at 8%. LIG had received advances of $210,000 from affiliates which
were outstanding at December 31, 1996.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) 1. Financial Statements
The 1996 financial statements listed on the accompanying Index to Financial
Statements and Financial Statement Schedules Covered by Report of Independent
Accountants are filed as part of this report.
2. Schedules
The 1996 schedules listed on the accompanying Index to Financial Statements
and Financial Statement Schedules Covered by Report of Independent Accountants
are filed as part of this report.
3. Exhibits
The exhibits listed on the accompanying Index to Exhibits are filed as part
of this report.
(b) Reports on Form 8-K
On December 18, 1996, the Company reported that the Board of Directors had
approved Weaver and Tidwell L.L.P. as its accountants for 1996. The Board
decided not to retain Coopers & Lybrand L.L.P. who had been its accountants
for the preceding three years. For the two preceding years and the interim
1996 period there had been no disagreements with the previous accountants nor
did their reports contain any adverse opinions or disclaimers.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.
LAWRENCE INSURANCE GROUP, INC.
(Registrant)
Dated: April 9, 1997 By: /s/ ALBERT F. KILTS
------------------------------
Albert F. Kilts
President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the date indicated.
Name Title Date
/s/ ALBERT W. LAWRENCE Chairman of the Board April 9, 1997
Albert W. Lawrence
ALBERT F. KILTS President and Director April 9, 1997
Albert F. Kilts (Principal Executive Officer)
/s/ FLOYD N. ADAMS Treasurer April 9, 1997
Floyd N. Adams ( Principal Accounting
and Financial Officer)
/s/ RANDALL J. EZICK Secretary and Director April 9, 1997
Randall J. Ezick
/s/ NEVIN D. HARKNESS Director April 9, 1997
Nevin D. Harkness
/s/ MILOS R. KNORR Director April 9, 1997
Milos R. Knorr
/s/ JANET H. LAWRENCE Director April 9, 1997
Janet H. Lawrence
<PAGE>
LAWRENCE INSURANCE GROUP, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
ITEM 14 (a)
Form 10-K
Page
Reports of Independent Auditor 28
Consolidated Balance Sheets as of December 31, 1996 and 1995 29
Consolidated Statements of Operations for the Years Ended
December 31, 1996, 1995 and 1994 31
Consolidated Statements of Stockholders' Equity (Deficiency)
for the Years Ended December 31, 1996, 1995 and 1994 32
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1996, 1995 and 1994 33
Notes to Consolidated Financial Statements 35
Schedules:
I - Summary of Investments Other than Investments
in Related Parties at December 31, 1996 51
II - Condensed Financial Information of Registrant
at December 31, 1996 and 1995 and for the Years
Ended December 31, 1996, 1995 and 1994 52
III - Supplementary Insurance Information for the
Years Ended December 31, 1996, 1995 and 1994 55
IV - Reinsurance for the Years Ended December 31,
1996, 1995 and 1994 58
V - Valuation and Qualifying Accounts for the
Years Ended December 31, 1996, 1995 and 1994 59
VI - Supplementary Information Concerning Property
and Casualty Insurance Operations for the
Years Ended December 31, 1996, 1995 and 1994 60
INDEPENDENT AUDITOR'S REPORT
We have audited the consolidated financial statements and the financial
statement schedules of Lawrence Insurance Group, Inc. and subsidiaries (the
Company) as of and for the year ended December 31, 1996 as listed in Item
14(a) of this Form 10-K. These financial statements and financial statement
schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
financial statement schedules based on our audit. The 1995 and 1994 financial
statements were audited by other auditors whose report dated April 8, 1996 on
those statements included an explanatory paragraph that described the
regulatory actions against the Company discussed in Note 1 to the financial
statements.
We conducted our audits in accordance with generally accepted audited
standards. Those standards require that we plan and perform the audit to ob-
tain reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audit provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Lawrence
Insurance Group, Inc. and subsidiaries as of December 31, 1996, and the
consolidated results of their operations and their cash flows for the year
then ended in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedules referred to above
when considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
The accompanying consolidated financial statements and financial state-
ment schedules have been prepared assuming that the Company will continue as
a going concern. As discussed in Note 1, a subsidiary, United Republic Insur-
ance Company (URIC), was under confidential supervision by the Texas Depart-
ment of Insurance (TDI) under an order issued in June 1994. On August 25,
1995, the Commissioner of Insurance of the TDI issued a Release From Confid-
ential Supervision Order and an Article 1.32 Order of Consent for URIC. The
effect of these orders was to release URIC from confidential supervision
contingent upon increasing its statutory policyholder surplus to $8 million and
other administrative requirements. In addition, an Appointment of Conservator
by Consent was signed by URIC and could be executed by TDI should URIC fail to
abide by the above mentioned financial and other administrative requirements.
URIC has failed to meet several of these requirements, including the policy-
holder surplus requirements. URIC could have been placed in to conservatorship
by the TDI at any time. On February 28,1997, as a result of the filing of
bankruptcy by the Company's parent and various other related entities, the TDI
placed URIC into conservatorship. Additionally, subsequent to the filing of
URIC's 1996 statutory financial statement which reflected policyholder surplus
of $3.5 million, the Company received reports from its actuary which resulted
in an increase to URIC's loss and loss adjustment expense reserves of
approximately $8 million. Based upon minimum capital requirements and
insolvency provisions of the Texas insurance law, the TDI has indicated that
unless these reserves can be commuted or otherwise modified at an amount
significantly less than presently stated, the alternative would be to place
URIC into liquidation. As discussed further in Note 1, Senate Insurance Comp-
any (Senate), a subsidiary of URIC, and Senate National Life Insurance Company
(SNLIC), a subsidiary of Senate, were placed under supervision of the Arizona
Department of Insurance on September 19,1996, as a result of Senate's purchase
of real estate from a former owner and director of the company. They remain
under supervision. The above actions raise substantial doubt about the
Company's ability to continue as a going concern. Management's plans in regard
to these matters are described in Note 1. The consolidated financial
statements and financial statement schedules do not include any adjustments
that might result from the outcome of these uncertainties.
/s/ Weaver and Tidwell L.L.P.
Fort Worth, Texas
April 9, 1997
LAWRENCE INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
(SEE NOTES 1 & 2)
($ in thousands) December 31,
-------------------
1996 1995
------- -------
Investments:
Fixed maturities available for sale, at
fair value (Amortized Cost: 1996 - $9,915,
1995 - $3,875) 9,682 3,921
Equity securities, at fair value
(Cost: 1996 and 1995 - $997) 942 941
Short-term investments, at cost which
approximates fair value 2,862 11,898
Real estate at cost less depreciation (1996-$19) 2,581 -
Mortgage loans on real estate, at
aggregate outstanding principal balance 154 171
Other invested assets, at cost which
approximates fair value 120 4
------- ------
Total investments 16,341 16,935
Cash and cash equivalents 943 5,688
Accrued investment income 159 475
Accounts receivable (Net of allowance for
doubtful accounts of $0 in 1996 and 1995) 5,279 10,777
Reinsurance recoverable 1,695 5,690
Reinsurance receivable 3,891 5,764
Prepaid reinsurance premiums 243 44
Deferred policy acquisition costs 64 68
Property and equipment, net 11 23
Income taxes recoverable 5 69
Other assets 1,070 969
-------- -------
Total assets $29,701 $ 46,502
====== ======
See accompanying notes to consolidated financial statements.
LAWRENCE INSURANCE GROUP, INC.
CONSOLIDATED BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIENCY)
(SEE NOTES 1 & 2)
($ in thousands) December 31,
_ ___________
1996 1995
------- --------
Liabilities:
Reserves for losses and loss adjustment
expenses $26,441 $ 30,974
Unearned premiums 719 505
Reinsurance balances payable 3,401 11,526
Accrued expenses and other liabilities 882 955
Payable to affiliate, net 597 441
Income taxes payable 2 113
Excess of fair value of acquired subsidiaries
over purchase price 459 1,414
------ -------
Total liabilities 32,501 45,928
------- -------
Contingencies and commitments (Notes 7 & 8) - -
Minority interest - 429
---- ----
Stockholders' equity (deficiency):
Preferred stock, $.01 par value; 2,000,000
shares authorized; no shares outstanding - -
Common stock, $.01 par value; 20,000,000
shares authorized; 14,121,482 shares
issued and outstanding 141 141
Additional paid-in-capital 39,739 39,739
Net unrealized losses on investments
(Net of deferred income tax of $0
in 1996 and 1995) (226) (8)
Receivable from Alpha Trust (Note 3) - (11,004)
Accumulated deficit (42,454) (28,723)
------- --------
Total stockholders' equity (deficiency) (2,800) 145
------ -----
Total liabilities and stockholders' equity (deficiency)$29,701 $46,502
===== =====
See accompanying notes to consolidated financial statements.
LAWRENCE INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(SEE NOTES 1 & 2 )
(Amounts in thousands except Year Ended December 31,
per share data) --------------------------
1996 1995 1994
-------- -------- --------
Revenues:
Net premiums earned $3,571 $5,533 $5,221
Net investment income 1,648 3,101 3,313
Realized (losses) on investments (12,673) (743) (598)
------- ----- -------
Total revenues (7,454) 7,891 7,936
Operating expenses:
Loss and loss adjustment expenses 8,249 5,402 4,019
Policy acquisition expenses 8 1,863 2,068
Other operating expenses 1,519 1,76 1,360
------ ------ -------
Total operating expenses 9,776 9,034 7,447
------ ------ -------
Operating income (loss) (17,230) (1,143) 489
Equity in loss of non-consolidated
subsidiary - - (7,309)
Equity in (loss) of investee - - (103)
------ ------ -------
Loss before income taxes, minority
interest and extraordinary gain (17,230) (1,143) (6,923)
Income tax expense (benefit) (133) (282) 168
------ ------ -------
Net income (loss) before minority
interest and extraordinary gain (17,097) (861) (7,091)
Minority interest (3,366) 219 -
------ ------ -------
Net loss before extraordinary gain (13,731) (642 (7,091)
Extraordinary gain (net of $0 tax) - 38,387 -
------ -------- -------
Net income (loss) $(13,731) $37,745 $ (7,091)
===== ===== =====
Per share data:
Income (loss) before
extraordinary gain $ (.97) $ (.05) $ (.50)
Extraordinary gain - 2.72 -
------- ------- --------
Net income (loss) $ (.97) $ 2.67 $ (.50)
=== === ===
Average shares outstanding 14,121 14,121 14,121
See accompanying notes to consolidated financial statements
LAWRENCE INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
($ in thousands) Net unreal-
ized gains
Add'l (losses) on
Preferred Common Paid-in investments
Stock Stock Capital net of tax
-------- ------ -------- ----------
Balance at January 1, 1994 - 141 39,739 246
Change in net unrealized gains (2,910)
------ ------ ------- -------
Balance at December 31, 1994 - 141 39,739 (2,664)
Change in net unrealized losses 2,656
------ ------ ------- -------
Balance at December 31, 1995 - 141 39,739 (8)
Change in net unrealized losses (218)
------ ------ -------- -------
Balance at December 31, 1996 $ - $ 141 $ 39,739 $ (226)
=== === ===== ===
Receivable Retained Stockholders'
from earnings equity
Alpha Trust (deficit) (deficiency)
----------- ---------- -----------
Balance at January 1, 1994 - (59,377) (19,251)
Change in net unrealized gains (2,910)
Net loss (7,091) (7,091)
Receivable from Alpha Trust (27,000) (27,000)
------- ------- -------
Balance at December 31, 1994 (27,000) (66,468) (56,252)
Change in net unrealized losses 2,656
Net income 37,745 37,745
Liquidation of subsidiary 15,996 15,996
------ ------- --------
Balance at December 31, 1995 (11,004) (28,723) 145
Change in net unrealized loss (218)
Net loss (13,731) (13,731)
Received from Alpha Trust 713 713
Writeoff of Alpha Trust 10,291 10,291
------- --------- -------
Balance at December 31, 1996 $ - $ (42,454) $(2,800)
===== ===== ====
See accompanying notes to consolidated financial statements.
LAWRENCE INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
($ in thousands) Year Ended December 31,
-----------------------
1996 1995 1994
------- ------- --------
Operating activities:
Net income (loss) $(13,731) $37,745 $(7,091)
Adjustments to reconcile net income
(loss) to net cash and cash
equivalents used in
operating activities:
Realized losses on investments 12,673 743 598
Equity in loss of
non-consolidated subsidiary - 7,309
Equity in (earnings) loss of investee - - 103
Minority interest in subsidiary (3,366) (219) -
Extraordinary gain - (38,387) -
Depreciation and amortization (904) (1,061) (1,047)
Accrued investment income 315 194 (426)
Accounts receivable 5,498 1,690 3,959
Reinsurance recoverable 3,995 8,018 (3,289)
Reinsurance receivable 1,873 1,557 3,382
Prepaid reinsurance premiums (199) 424 (111)
Deferred policy acquisition costs 4 220 2,220
Income taxes recoverable (46) 81 2,503
Other assets (101) 454 3,876
Reserves for losses and loss
adjustment expenses (4,533) (16,191) (30,654)
Unearned premiums 215 (880) (12,880)
Reinsurance balances payable (8,125) (1,790) 14,287
Accrued expenses and other
liabilities 83 (831) (960)
------ ------ ------
Net cash and cash equivalents
used by operating activities (6,349) (8,233) (18,221)
------ ------ -------
See accompanying notes to consolidated financial statements.
<PAGE>
LAWRENCE INSURANCE GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS (Continued)
($ in thousands) Year Ended December 31,
-----------------------
1996 1995 1994
------- ------- -------
Investing activities:
Proceeds on sales of:
Fixed maturities held to maturity $ - $ 3,179 $ -
Fixed maturities available for sale 2,037 5,090 7,760
Other 739 682 -
Proceeds on redemptions of:
Fixed maturities held to maturity - 3,850 -
Fixed maturities available for sale 984 286 2,192
Other 464 520 -
Payments for purchases of:
Fixed maturities available for sale (9,077) (2,111) (12,997)
Real estate (2,600) - -
Other (885) - (2,260)
(Increase)decease short-term investments 9,035 (375) 23,144
------ ------ ------
Net cash & cash equivalents provided
by investing activities 697 11,121 17,839
------ ------ ------
Financing activities:
Receivable from Alpha Trust 907 - (14,000)
Notes payable to affiliate - 300 -
----- ------ --------
Net cash and cash equivalents (used)
provided by financing activities 907 300 (14,000)
----- ------ -------
Increase (decrease) in cash and cash
equivalents (4,745) 3,188 (14,382)
Cash and cash equivalents -
beginning of year 5,688 2,500 16,882
------ ------ -------
Cash and cash equivalents-end of year $ 943 $5,688 $ 2,500
==== ==== ====
Supplemental disclosure of cash flow information:
Cash paid (received) for income taxes (50) $ 24 $(3,324)
Non cash financing - elimination of Alpha
Trust receivable due to liquidation of subsidiary - $15,996 -
See accompanying notes to consolidated financial statements.
<PAGE>
LAWRENCE INSURANCE GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - GENERAL
Lawrence Insurance Group, Inc. (the Company or LIG) was incorporated in
Delaware on June 30, 1986, as an insurance holding company, which is presently
93% owned by Lawrence Group, Inc. (Lawrence Group).
Subsidiaries of the Company include United Republic Insurance Company
(URIC), Global Insurance Company (Global), Senate Insurance Company (Senate),
Senate National Life Insurance Company (SNLIC), and Senate Syndicate, Inc.
(Syndicate). Senate and Global are wholly owned subsidiaries of URIC. SNLIC
is a wholly owned subsidiary of Senate. United Community Insurance Company
(UCIC) is no longer considered a subsidiary of the Company as a result of the
Order of Rehabilitation issued on July 7, 1994 which transferred management
and control to the New York Insurance Department (NYID) and the subsequent
Order of Liquidation entered on November 10, 1995 by the New York Supreme
Court, Schenectady County. URIC and Global, which are property and casualty
insurance companies, had been in run-off since early 1994. Global resumed
writing business during the fourth quarter 1996. Senate is an accident and
health insurer doing business almost exclusively in New York. SNLIC and
Syndicate are inactive.
(a) BASIS OF PRESENTATION
The consolidated financial statements include the accounts of LIG and all
wholly owned subsidiaries (collectively, the Company). All significant
intercompany transactions have been eliminated in consolidation. Amounts
include the financial results of UCIC through the date of the Order of
Rehabilitation on an unconsolidated basis, that is results of operations are
reflected as "Equity in loss of non-consolidated subsidiary" and the Company's
investment as "Deficit of non-consolidated subsidiary". The Company continued
to reflect this liability until UCIC was entered into liquidation on November
10, 1995. See Note 2.
The accompanying financial statements have been prepared assuming the
Company will continue as a going concern. The Company incurred substantial
losses in 1993 and 1994 and 1996 and even though UCIC's stockholder's
deficiency has been eliminated, the Company's subsidiaries continue to be
adversely impacted by UCIC's demise.
URIC had been under a confidential order of supervision by the Texas
Department of Insurance (TDI) since June, 1994, until its release on August 25,
1995. As a condition to the release of the order the Company agreed to
achieving certain financial goals. The financial goals included increasing
statutory surplus to $8 million at December 31, 1995. The statutory surplus
as filed with the TDI at December 31, 1995 was $6.6 million and $3.6 million
at December 31, 1996. These amounts did not include the effect of the loss and
LAE adjustments of approximately $7 million and $4 million at December 31,
1996 and 1995, respectively, described under (e) of Note 1. The TDI could
have placed URIC under conservatorship at any time. Under conservation, the
TDI assumes all control and decision making authority during the rehabilitation
period. On February 28, 1997, as a result of the bankruptcy filing by LIG's
parent and eleven of its subsidiaries the TDI did place URIC into
conservatorship. Under Texas insurance regulations an insurance company can
remain in conservatorship 180 days before other action must be taken.
Subsequent to the filing of URIC's 1996 Statutory financial statement which
reflected policyholder surplus of $3.5 million, the Company received reports
from its actuary that the loss and LAE reserves related to pooling with UCIC
could be between $6 million and $8 million higher than reported on URIC's
statutory statement. This information has been received by the TDI. Based
on minimum capital requirements and insolvency provisions of the Texas
insurance law, the TDI has indicated that unless these reserves can be commuted
or otherwise modified at an amount significantly less than presently stated the
alternative would be to place URIC in liquidation.
Senate and SNLIC were placed under supervision of the State of Arizona
Department of Insurance (ADI) on September 19, 1996 as a result of Senate's
purchase of real estate from Barbara Lawrence (a former director and owner of
the Company) and concern over whether the ultimate parent (LGI) obligations
could be met without utilizing the assets of Senate and SNLIC. They remain
under supervision.
In addition, liquidity for the parent company has deteriorated significant-
ly and is expected to remain in that condition as its principal source of cash
was dividends from its subsidiaries.
Company management continues to work with the respective insurance
departments on these and other issues and during the fourth quarter of 1996
Global was permitted to resume writing business. In addition, the Company
has also filed suit against its former outside accountant and actuary seeking
to recover damages for breach of contract and inaccurate certifications of the
Company's 1992 and prior loss and loss adjustment expense (LAE) reserves. The
amount being sought is $250 million. The litigation is in its early stages.
The accompanying consolidated financial statements are presented in
accordance with generally accepted accounting principles, which differ in
certain respects from those followed by subsidiaries of the Company in their
reports to regulatory authorities. See Note 8. 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 dates of the financial statements and the reported amounts
of revenues and expenses during the reporting periods. Actual results could
differ from those estimates.
Certain amounts in the accompanying 1995 and 1994 consolidated financial
statements have been reclassified to conform with the 1996 presentation. These
reclassifications have no effect on consolidated net income (loss) or
stockholders' equity (deficit).
(b) INVESTMENTS
Fixed maturities, which consist of bonds and notes, are presented as Fixed
Maturities Available for Sale. Securities to be held for indefinite periods of
time and not intended to be held to maturity are classified as available for
sale and carried at fair value. Unrealized gain or losses on securities
carried at fair value are recorded directly in stockholders' equity, net of
applicable deferred income tax. The estimated fair value of financial
instruments has been determined using available information and appropriate
value methodologies. The estimated fair value of financial instruments are not
necessarily indicative of the amounts the company might pay or receive in
actual market transactions. Potential taxes and other transaction costs have
not been considered in estimating fair value.
Equity Securities, which consist of common stock are carried at fair value.
Negotiable certificates of deposit are carried at cost which approximates fair
value. Mortgage Loans on Real Estate are recorded at their aggregate
outstanding principal balance; and Short-Term Investments are stated at cost
which approximates market. Short-Term Investments consist primarily of
commercial paper, repurchase agreements with banks and other financial
institutions and treasury bills. Collateral loans are carried at cost which
approximates fair value. Real estate is carried at depreciated cost which
approximates fair value. Other Invested Assets, are carried at fair value.
See Note 3.
Realized gains and losses on disposition of investments are reported in
the Statement of Operations based upon the average cost method. Unrealized
gains and losses on securities carried at fair value are recorded directly in
stockholders' equity, net of applicable deferred income taxes. Provision for
impairments of investments that are considered other than temporary is
included in realized capital loss. See Note 3.
(c) CASH AND CASH EQUIVALENTS
The Company considers cash to be funds held in checking and money market
accounts. Non-negotiable certificates of deposit with original maturity less
than thirty days are considered to be cash equivalents.
(d) DEFERRED POLICY ACQUISITION COSTS
The costs of acquiring new business, principally commissions and premium
taxes are deferred and amortized as the related premiums are earned. The method
used in computing deferred acquisition costs limits the amounts of such
deferred costs to their net realizable value based upon the related unearned
premiums and investment income less anticipated losses and loss adjustment
expenses. The amortization of deferred acquisition costs results in a charge
against current operations as follows:
($ in thousands) 1996 1995 1994
----- ------- -------
Direct commission expense $ (43) $ 1,803 $1,962
Premium taxes 51 60 106
----- ------ ------
$ 8 $ 1,863 $ 2,068
=== ==== ====
On the accompanying Consolidated Statements of Operations, commissions
and premium taxes are presented as Policy Acquisition Expenses.
(e) RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
Reserves for losses and loss adjustment expenses (LAE) represent estimates
of reported losses and estimates of incurred but not reported (IBNR) losses
based on past and current experience. Such liability is net of salvage and
subrogation to be received, and is increased for reinsurance assumed. To the
extent claims settlement underlying the recent losses and LAE may differ
perhaps significantly from those underlying the historical losses and LAE, this
adds uncertainty to the estimated reserves for loss and LAE. Accordingly, the
ultimate settlement of losses and LAE may vary perhaps significantly from the
amounts included in the accompanying financial statements.
As discussed in Note 4, URIC has a reinsurance pooling arrangement with
UCIC. UCIC has provided the Company with estimates of URIC's share of its
reserve for loss and LAE under the pooling agreement of approximately $12.5
million as of December 31,1996 and $12 million as of December 31, 1995. URIC
had included approximately $5.5 and $8 million of these amounts in its
statutory financial statements for the years ended December 31,1996 and 1995,
respectively. The Company's independent actuary certified URIC's 1995 loss
and LAE reserves of which this was a part. For 1996, URIC's actuary could not
form an estimate of the impact of this pooling agreement on URIC's reserves at
the time the statement was filed. The Company has included approximately $12.5
million and $12 million of these amounts in the accompanying balance sheets as
of December 31, 1996 and 1995, respectively. The recording of the UCIC esti-
mates for loss and LAE had the effect of decreasing the Company's net income
and stockholders' equity by approximately $3.2 million for 1995 and $3.7
million for 1996. The following table provides a reconciliation of the
Company's beginning and ending loss and LAE liability balances for 1996, 1995
and 1994:
Year Ended December 31,
-------------------------
($ in thousands) 1996 1995 1994
------ ------- -------
Reserves for losses and LAE
at January 1, $30,974 $ 47,165 $ 78,518
Less reinsurance receivable 5,764 7,320 10,701
------ ------ ------
Net balance at January 1 25,931 39,845 67,817
Provision for losses & LAE for claims
occurring in the current year 2,328 2,926 7,332
Increase (decrease) in estimated
losses and LAE for claims
occurring in prior years 5,921 2,476 (3,313)
------ ------ -------
Total incurred losses and LAE 8,249 5,402 4,019
------ ------ -------
Losses and LAE payments for claims
occurring during:
Year Ended December 31,
-------------------------
($ in thousands) 1996 1995 1994
------ ------- -------
Current year 1,591 1,772 4,555
Prior years 9,318 18,265 27,436
------- ------- --------
Total losses and LAE payments 10,909 20,037 31,991
------- ------- -------
Net reserves for losses and LAE
at December 31, 22,550 25,210 39,845
Reinsurance receivables 3,891 5,764 7,320
-------- ------ -------
Gross reserves $ 26,441 $30,974 $47,165
==== ===== =====
(f) PREMIUM REVENUE
Premium revenue, which is net of reinsurance ceded, is recognized as earned
on a pro rata basis over the terms of the policies and includes audit premiums
and estimates for retrospectively rated premiums. Accident/health unearned
premiums are calculated on a monthly basis. Unearned premiums on the remaining
lines of business are calculated on a monthly pro rata basis.
(g) AMORTIZATION OF EXCESS OF FAIR VALUES OF ACQUIRED SUBSIDIARIES OVER
PURCHASE PRICES
The excess of the fair value of the net assets of URIC and Global over the
respective purchase prices at the dates of acquisition is being amortized on
the straight-line basis over a period of seven years. Amortization in the
amount of $954,000 for 1996 and $1,094,000 for 1995 and 1994 is reflected in
the accompanying Consolidated Statements of Operations as a reduction of Other
Operating Expenses.
(h) INCOME TAXES
The Company and its subsidiaries are included in the consolidated Federal
income tax return of Lawrence Group. The current income tax provision has been
computed as if each company filed a separate return. See Note 6.
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred
tax assets and liabilities of a change in tax rates is recognized in income
in the period that includes the enactment date.
(I) EARNINGS PER SHARE
Net income (loss) per share is calculated by dividing net income (loss) by
the weighted average number of shares outstanding during the period.
NOTE 2 - NON-CONSOLIDATED SUBSIDIARY
As a result of the order of rehabilitation and assumption of management and
control of UCIC on July 7, 1994 by the NYID, the Company has included the
results of UCIC for 1994 on a deconsolidated basis up to the point of the
court order. On November 10, 1995 UCIC, with the Company's consent, was
ordered liquidated and as a consequence the Company has no further legal or
financial interest in UCIC except for any contractual arrangements that arose
in the ordinary course of business and any tax consequences that may result
from UCIC's continued inclusion in the consolidated federal income tax return.
The following table presents condensed financial information for UCIC
through July 7, 1994. Amounts exclude the effect of eliminating UCIC's 21.4%
ownership of URIC which is included in the "Deficit of non-consolidated
subsidiary" and "Equity in loss of non-consolidated subsidiary" on the balance
sheet and statement of operations, respectively for 1994 and as "Minority
interest" for 1996 and 1995.
($ in thousands) As of and for the period:
(Unaudited) January 1 to July 7,1994
----------------------------
Cash and invested assets $ 50,872
Amounts due from reinsurers 48,990
Premiums receivable 1,808
Deferred policy acquisition expenses 3,424
Other assets 5,626
------
Total assets $ 110,720
=======
Reserves for loss and LAE expenses $132,201
Unearned premiums 18,249
Amounts due to reinsurers 17,221
Other liabilities 670
-------
Total liabilities 168,341
Stockholder's deficiency (57,621)
-------
Total liabilities and stockholders' deficiency $ 110,720
======
Revenues $ 43,959
Operating loss (3,531)
Net loss (7,307)
In the fourth quarter of 1995 the Company recorded the following to
eliminate the stockholder's deficiency carried for UCIC and record minority
interest:
Extraordinary gain $ 38,387
Minority interest 429
Stockholders's equity-
Receivable from Alpha Trust 15,996
Unrealized loss on investments 1,953
Deficit of non-consolidated subsidiary (56,765)
In January 1994, UCIC loaned $13,000,000 to the Alpha Trust, a business
trust, which in turn invested in notes issued by Lawrence Group, which owns 93%
of LIG. This loan and unrealized losses on investments for the period January
1, 1994 to July 7, 1994, is included in the Company's statement of
stockholders' equity for the year ended December 31, 1994.
NOTE 3 - INVESTMENTS
Net investment income for the Company was as follows:
($ in thousands) Year Ended December 31,
-----------------------
1996 1995 1994
------ ------ ------
Investment income:
Fixed maturities held to maturity $ - $ 237 $ 531
Fixed maturities available for sale 492 433 538
Equity securities 52 55 46
Short-term investments 382 778 786
Collateral loans 712 1,514 1,258
Mortgage loans on real estate 14 15 19
Other 40 119 166
----- ----- -----
Total investment income 1,692 3,151 3,344
Less: Investment expenses 44 50 31
----- ----- ------
Net investment income $1,648 $3,101 $ 3,313
==== ==== ====
Realized gains (losses) on investments of the Company were:
($ in thousands) Year Ended December 31,
--------------------------
1996 1995 1994
----- ----- -----
Fixed maturities held to maturity $ - $ 203 $ -
Fixed maturities available for sale (7) (249) (95)
Equity securities 739 - (503)
Collateral loans - (683) -
Other invested assets (313) (14) -
Receivable from Alpha Trust (13,092) - -
------ ----- -----
Net realized losses
on investments $(12,673) $ (743) $ (598)
====== ==== =====
Proceeds from the sale of fixed maturities held to maturity with an
amortized cost of $2,976,000 were $3,179,000 in 1995. Gross gains were
$203,000. There were no losses. These securities were sold to meet cash
requirements. Based upon the circumstances leading to the sale of held to
maturity securities in 1995, all remaining investments which were classified
as held to maturity were transferred to available for sale. The amortized cost
of the investments were $795,000 with unrealized gains of $14,000 at the date
transferred. There were no sales of securities held to maturity in prior years.
Proceeds from sales of fixed maturities available for sale during 1996,
1995 and 1994 were $2,037,000, $5,090,000 and $7,760,000, respectively. Gross
gains of $0, $37,000 and $0, for 1996, 1995 and 1994, respectively, were
realized on those proceeds. Gross losses of $7,000, $286,000 and $95,000 for
1996, 1995 and 1994, respectively were realized.
Based upon the default in 1996 and subsequent bankruptcy filing of LGI and
eleven of its subsidiaries, the Company charged off to operations the unpaid
balance of the Receivable from Alpha Trust that was carried as a contra account
in Stockholders' Equity. There was no impact on overall stockholders' equity
as a result of this action.
The amortized cost and estimated fair values of the Company's investments
which are all classified as available for sale at December 31, 1996 are as
follows:
($ in thousands) ------ Gross ------ Esti-
Amort- Unrealized mated
ized ---------- Fair
Cost Gains Losses Value
------ ------ ------ ------
Fixed maturities
US Treasury securities and
obligations of US government
corporations and agencies $5,018 $ 17 $ 1 $ 5,034
Obligations of states and
political subdivisions 567 7 - 574
Mortgage-backed securities 4,330 - 256 4,074
------ ---- ----- ------
Total fixed maturities 9,915 24 257 9,682
Equity securities 997 - 55 942
Short term investments 2,862 - - 2,862
Real estate 2,581 - - 2,581
All other 274 - - 274
------ ---- ---- ------
Investments available for sale $16,629 $ 24 $ 312 $16,341
====== === === ======
The amortized cost and estimated fair values of the Company's investments
as of December 31, 1995 are as follows:
($ in thousands) ------- Gross ------ Esti-
Amort- Unrealized mated
ized ---------- Fair
Cost Gains Losses Value
------ ------ ------ ------
Available for sale:
Fixed maturities
US Treasury securities and
obligations of US government
corporations and agencies $ 2,336 $ 22 $ - $ 2,358
Obligations of states and
political subdivisions 590 13 - 603
Mortgage-backed securities 949 11 - 960
------ ---- ---- ------
Total fixed maturities
available for sale 3,875 46 - 3,921
Equity securities 997 - 56 941
Short term investments 11,898 - - 11,898
All other 175 - - 175
------ ---- ---- ------
Total investments available
for sale $16,945 $ 46 $ 56 $16,935
===== == == =====
The amortized cost and estimated market value of fixed maturities at
December 31, 1996 and 1995 , by contractual maturity, are shown below.
Expected maturities will differ from contractual maturities because borrowers
may have the right to call or prepay obligations with or without call or
prepayment penalties. Mortgage-backed securities are stated separately as such
securities produce a principal return on a monthly basis. Fixed maturities
available for sale are carried at fair value.
December 31, 1996
($ in thousands) Fixed maturities
Available for sale
------------------
Amortized Estimated
Cost Fair value
------- --------
Due in one year or less $ 3,335 $ 3,343
Due after one year through five years 2,145 2,158
Due after ten years 105 107
------ ------
Subtotal 5,585 5,608
Mortgage-backed securities 4,330 4,074
---- -----
Total $9,915 $9,682
===== =====
December 31, 1995
($ in thousands) Fixed maturities
Available for sale
------------------
Amortized Estimated
Cost Fair value
------- --------
Due in one year or less $ 2,286 $ 2,301
Due after one year through five years 150 155
Due after five years through ten years 385 396
Due after ten years 105 109
------ ------
Subtotal 2,926 2,961
Mortgage-backed securities 949 960
----- -----
Total $3,875 $3,921
==== ====
At December 31, 1996 and 1995, bonds and short-term investments with a
carrying amount of $3,704,000 and $4,695,000, respectively, were on deposit
with various regulatory authorities.
At December 31, 1996, the Company wrote down $545,000 in amounts due from
affiliates as a result of the bankruptcy filing by LGI and certain of its
subsidiaries.
NOTE 4 - REINSURANCE
Reinsurance is ceded under both pro rata and excess of loss arrangements.
The Company utilizes reinsurance principally to reduce the net liability of its
subsidiaries on individual risks and to protect against catastrophic losses.
In addition to a quota share treaty with UCIC, URIC and UCIC also had a
pooling agreement in effect during 1992 and 1993. The agreement was terminated
effective January 1, 1994; however, each company is responsible for its share
of all premium, losses and LAE incurred prior to that date. At December 31,
1996, URIC had a net liability to UCIC under these reinsurance agreements of
approximately $10.6 million.
Senate reinsures a portion of its exposure on a quota share/excess of loss
basis and Global reinsures the business that it began writing during the fourth
quarter utilizing quota share reinsurance.
Premiums written, premiums earned and losses and loss adjustment expenses
information by direct, assumed and ceded for the years ended December 31 is as
follows:
($ in thousands) 1996 1995 1994
------ ------ --------
Premiums written:
Direct business $4,417 $ 5,374 $ 9,257
Reinsurance assumed 353 1,281 (12,172)
Reinsurance ceded (1,280) (1,520) (4,855)
----- ------ -------
Premiums written $3,490 $ 5,135 $ 7,770
==== ==== ====
Premiums Earned:
Direct business $4,288 $ 5,444 $ 9,515
Reinsurance assumed 365 2,091 451
Reinsurance ceded (1,082) (2,002) (4,745)
----- ----- ------
Premiums earned $3,571 $ 5,533 $ 5,221
===== ==== ====
Losses and LAE
Direct business $2,854 $ 4,292 $ 3,646
Reinsurance assumed 6,211 3,510 4,054
Reinsurance ceded (816) (2,400) (3,681)
----- ----- ------
Losses and LAE $8,249 $ 5,402 $ 4,019
==== ==== ====
Contingent liabilities exist with respect to reinsurance ceded, which would
become liabilities of the Company in the event the assuming reinsurers were
unable to meet their obligations under reinsurance agreements. The Company
evaluates the financial condition of its reinsurers to minimize its exposure
to losses and an allowance for uncollectible reinsurance is provided when
collection is in doubt.
NOTE 5 - INCOME TAXES
The Company's current taxable income is included in the consolidated
Federal tax return of Lawrence Group. The consolidated tax or benefit is
allocated proportionately between the subsidiaries of Lawrence Group pursuant
to a tax allocation agreement (Tax Agreement) based on the contribution of each
company in the consolidated Federal tax return as if each company calculated
its tax on a separate return basis. The Tax Agreement provides that if the
Company's tax liability as calculated on a separate return basis exceeds the
Company's portion of the consolidated tax liability, the Company is to pay
the excess of the separate return liability over its allocated portion of the
consolidated tax liability to Lawrence Group. If the Company should have a
claim for refund of Federal income taxes, Lawrence Group will pay to the
Company an amount equal to the refund that would have been received from the
Internal Revenue Service if a separate return would have been filed. In 1994,
approximately $2,900,000 of income tax recoveries was paid by Lawrence Group
to the Company.
At December 31, 1996, the Company had a net recoverable for income taxes
of $5,000 for state income taxes.
Income tax expense (benefit) attributable to income from operations consists
of:
($ in thousands) 1996 1995 1994
------ ------ ------
Current U.S. Federal $ (108) $ (307) $ -
Current State (25) 25 168
----- ----- -----
Total current (133) (282) 168
---- ----- -----
Total income taxes (benefit) $ (133) $ (282) $ 168
=== === ===
Income tax expense (benefit) attributable to pretax operating income
(excluding equity in loss of non-consolidated subsidiary) differed from the
expected amounts computed by applying the U.S. Federal income tax rate of 34%
as a result of the following:
Year Ended December 31,
-----------------------
($ in thousands) 1996 1995 1994
------ ----- --------
Computed expected Federal tax
expense (benefit) $(5,858) $ (389) $ 131
State income taxes, net of Federal
income tax benefit (17) 17 109
Change in valuation allowance 6,198 702 105
Amortization of negative goodwill (324) (372) (372)
Tax exempt investment income (9) (17) (44)
Amortization of bonds - - (11)
Other, net (123) (223) 250
----- ---- ------
Total income tax expense (benefit) $ (133) $ (282) $ 168
=== === ===
The tax effects of the Company's temporary differences that give rise to
significant portions of the deferred tax assets and liabilities at December 31,
1996 and 1995 (excluding those associated with its non-consolidated
subsidiary) are presented below:
($ in thousands) 1996 1995
------ ------
Deferred tax assets:
Reserves for losses, due to discounting
for Federal tax purposes $ 1,291 $ 1,563
Tax loss carryforwards 12,477 5,394
Valuation allowances on investments 131 924
Other 152 87
----- -----
Total gross deferred tax assets 14,051 7,968
----- -----
Deferred tax liabilities:
Deferred policy acquisition costs,
principally due to deferral for
financial reporting purposes (26) (27)
Loss deferred on intercompany sale (23) -
Equity in undistributed (losses) of investee - (137)
----- -----
Total gross deferred tax liabilities (49) (164)
($ in thousands) 1996 1995
------ ------
Net deferred tax asset before
valuation allowance 14,002 7,804
Less valuation allowance (14,002 (7,804)
----- -----
Net deferred tax asset $ - $ -
===== =====
A valuation allowance is provided when it is more likely than not that
some portion of the deferred tax asset will not be realized. The Company's
valuation allowance for deferred tax assets was $14,002,000 at December 31,
1996. The Company's conclusion is that more likely than not, it will not
realize the benefit of all of its deductible temporary differences and net
operating loss carryovers and as a result has maintained a full valuation
allowance against its net deferred tax assets.
The Company has approximately $85 million in net operating loss carry
forwards at December 31, 1996, of which approximately $46 million attributable
to the non-consolidated subsidiary, UCIC, may be limited in their availability
to offset future taxable income of the Company. The net operating loss
carryforwards begin to expire in 2008.
NOTE 6 - RELATED PARTY TRANSACTIONS
URIC, Global and Senate with the approval of the requisite state insurance
departments sold their shares of MTI stock to LGI for $739,000 in 1996. The
carrying value of the stock had previously been written down to $0 in 1994.
Since August 1996, Global has subleased office space located in Atlanta,
Georgia to LAC. Annual rent is $30,000.
The Company's subsidiaries held various notes receivable and other
receivables from various Lawrence Group affiliates at December 31, 1996. Based
upon the bankruptcy filing the Company has established a valuation allowance
totaling $545,000. Interest income earned with respect to these receivables
totaled $9,000, $11,000 and $40,000 for the years ended December 31, 1996, 1995
and 1994, respectively. The Company also had a note receivable at December 31,
1996 due from a corporation owned by Mr. Lawrence in the amount of $120,000.
Interest earned was 16,000.
Senate obtains a significant portion of its business from LAC to which it
pays commissions. These commission expenses totaled $525,000, $605,000 and
$963,000 in 1996, 1995 and 1994, respectively. LAC pays a portion of these
to external brokers and subagents. Senate also pays AWL for management
services associated with Senate business. These payments were $76,000, $74,000
and $60,000 for 1996, 1995 and 1994, respectively.
URIC loaned $14,000,000 to Alpha Trust which in turn invested in notes
issued by Lawrence Group, which owns approximately 93% of the Company during
1994. Principal payments totaling $908,000 were made during 1996. The loan is
currently in default and LGI filed for protection under Chapter 11 of the
Federal Bankruptcy Law. Based on the above, the remaining balance was written
off in 1996. There was no impact on stockholder's equity.
At December 31, 1996, URIC carried a note payable due to LGI of $300,000.
Interest is at 8%. LIG had received advances of $210,000 from affiliates which
were outstanding at the end of 1996.
NOTE 7 - STATE EXAMINATIONS, DIVIDEND RESTRICTIONS, INSURANCE DEPARTMENT
REGULATIONS AND RELATED LEGAL PROCEEDINGS
The Texas Department of Insurance (TDI) conducted its regular examination
of URIC as of March 31, 1993. TDI issued their audit report on May 25, 1994.
On June 22, 1994, the TDI issued a confidential order creating a state of
supervision and appointing a supervisor of the operations of URIC. The order
was based upon disagreements with valuations of several assets, chief among
them Alpha Trust, in financial statements filed by URIC with the TDI and upon
net operating losses reported during the first quarter of 1994. On August 25,
1995 URIC was released from this order conditioned upon it achieving certain
minimum policyholders' surplus and other goals. If URIC did not achieve these
goals the TDI could place URIC into conservatorship. Under conservatorship the
TDI would assume all control and decision making authority during the period of
conservatorship. As of December 31, 1995, URIC had not achieved all of these
goals. On February 28, 1997 as a result of the bankruptcy filing by LIG's
parent and other affiliates the TDI placed URIC under Conservatorship. Under
Texas insurance regulations an insurance company can remain in conservatorship
180 days before other action must be taken. Subsequent to the filing of URIC's
1996 Statutory financial statement which reflected policyholder surplus of $3.5
million, the Company received reports from its actuary that the loss and LAE
reserves related to pooling with UCIC could be between $6 million and $8
million higher than reported on URIC's statutory statement. This information
has been received by the TDI. Based on minimum capital requirements and
insolvency provisions of the Texas insurance law, the TDI has indicated that
unless these reserves can be commuted or otherwise modified at an amount
significantly less than presently stated the alternative would be to place
URIC in liquidation.
On September 19,1996 the State of Arizona Department of Insurance (ADI)
issued a Notice of Determination and Order of Supervision for Senate and SNLIC.
This Order arose over Senate's purchase of real estate from a former officer
and director and the subsequent loan of these proceeds to LGI. The Order could
be abated upon demonstrating that the purchase was fair and reasonable and
complies with applicable Arizona statutes and that Senate's controlling
persons can meet their financial obligations without utilizing the assets of
Senate or SNLIC except for dividends. If the Company should be unable to
satisfy these items the ADI could place either or both companies under
conservatorship. A hearing had been scheduled for November 18, 1996 but has
been postponed at the request of the ADI.
The NYID completed an examination of UCIC for the years 1989 through 1993
in 1994 and found UCIC to be insolvent, its capital impaired and a shortfall of
$37,624,941 in its required surplus to policyholders at December 31, 1993.
As a result of that examination UCIC was placed in rehabilitation on July 7,
1994 and following continued discussions and negotiations between the Company
and the NYID, UCIC with the consent of the Company was placed into liquidation
by court order on November 10, 1995. As part of the order, the Company, its
directors, officers and employees were relieved of any liability for the
deficit of UCIC except for obligations incurred in the ordinary course of
business or due to fraudulent acts. URIC was also given the right of first
refusal to purchase the shares of its stock owned by UCIC.
Global, Senate and SNLIC underwent their regular examinations as of
December 31, 1993, by the respective insurance departments. The reports showed
no material findings.
The NAIC, which is not itself a regulatory authority but makes recommend-
ations to and takes other actions affecting state regulatory authorities,
adopted a Risk-Based Capital (RBC) standard in the fourth quarter of 1993 for
use by state insurance regulators. RBC is intended to be a "tool" for
regulators to assess the capital adequacy of property and casualty insurers and
to take action when capital under the standard is judged to be inadequate.
This standard has four action levels based upon the relationship of actual
capital to RBC. The mildest action occurs at a level of 2.5:1. Based upon the
RBC standards developed by the NAIC, all consolidated subsidiaries capital
except URIC exceeded the authorized control level RBC by a substantial margin.
URIC's ratio was .9:1. URIC is currently under more stringent requirements
than those imposed by the RBC standards.
Insurance regulations of the states in which the Insurance companies are
domiciled limit the level of dividends that can be paid without the approval of
the respective departments. Dividends can only be paid out of earned surplus
and are generally based a the component of net income or similar measure or
10% of statutory surplus. Based upon 1996 results only SNLIC could pay a
dividend. Its maximum dividend payable to SIC in 1997 is $20,000.
Net income (loss) and policyholders' surplus of UCIC, URIC, Global, Senate
and SNLIC as filed with insurance regulatory authorities, are as follows:
STATUTORY NET INCOME (LOSS)
($ in thousands) (Unaudited) Year ended December 31,
------------------------
1996 1995 1994
------ ------ ------
United Republic Insurance Company $ (1,929) $ 631 $ 75
Global Insurance Company (993) (290) (1,488)
Senate Insurance Company (244) 134 731
Senate National Life Insurance Company 13 10 (11)
POLICYHOLDERS' SURPLUS
($ in thousands) (Unaudited) December 31
--------------------
1996 1995
------ ------
United Republic Insurance Company (1) $ 3,552 $ 6,611
Global Insurance Company 3,540 3,429
Senate Insurance Company 1,705 4,705
Senate National Life Insurance Company 616 654
(1) Does not include 7,818,000 and $4,000,000 in loss and LAE expense
for 1996 and 1995, respectively. See Note 1
Statutory accounting differs from GAAP primarily as follows:
(1) the costs related to acquiring business are charged to income in the year
incurred and thus are not amortized over the periods benefitted, whereas the
related premiums are taken into income on a pro rata basis over the periods
covered by the policies; (2) adjustments reflecting the equity in earnings
of affiliated companies are carried to the surplus account as net unrealized
capital gains or losses rather than income; (3) adjustments reflecting the
revaluation of stocks and bonds are carried to the surplus account as
unrealized investment gains or losses, without provision for federal income
taxes, or income tax reductions; (4) assets must be included in the statutory
statements of admitted assets, liabilities, and surplus at "admitted asset
value" and "non-admitted assets" are excluded through a charge against surplus;
(5) deferred federal income taxes are not provided for temporary differences
between book and tax income; (6) certain income and expense items are charged
or credited to surplus; (7) majority owned subsidiaries are not consolidated;
(8) no provision is made for the effect of Financial Accounting Standards Board
Statement No. 115, whereby equity securities that have readily determinable
fair values and all investments in debt securities are classified into three
categories: held to maturity; trading; and available for sale; and would be
reported in the financial statements at amortized cost; fair value, with
unrealized gains and losses included in earnings; fair value, with unrealized
gains and losses excluded from earnings and reported as a separate component of
surplus, respectively; and (9) insurance liabilities (reserves for policy
and contract claims and loss and LAE and unearned premium) are presented net of
reinsurance ceded.
NOTE 8 - CONTINGENCIES AND COMMITMENTS
The Company leases office space and equipment under various terms. The
Company has no material leases with terms in excess of one year. Rent expense
under leases for office space was approximately $67,000, 62,000 and $56,000
for 1996, 1995 and 1994. Amounts due for future lease payments with terms
beyond one year are $50,000, $50,000 and$29,000 for 1997, 1998 and 1999,
respectively.
The Company is a defendant in other legal proceedings which Management
believes will not have a material impact on the Company's financial statements.
Management is defending these cases. As a result of a unpaid judgment against
LIG and two other co-defendants, LIG's bank accounts have been frozen.
The Company had outstanding letters of credit in favor of insureds of
approximately $1,048,000 and $1,300,000 at December 31, 1996 and 1995,
respectively. These letters of credit were collateralized by investments of
approximately $1,250,000 and $2,150,000 at December 31, 1996 and 1995,
respectively.
The real estate that the Company purchased from a former owner and
director of LIG is currently subject to a blanket mortgage of the former owner
totaling approximately $2.9 million. The former owner has filed for protection
under the federal bankruptcy laws and it is possible that the Company could be
adversely impacted as a result of proceedings that may be initiated by the
lending institution to collect amounts due them.
NOTE 9 - QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
The quarterly unaudited financial information for the periods since LIG
resumed trading on the AMEX are as follows:
(Amounts in thousands except Quarter ended
per share data) ----------------------------------
March 31,June 30, Sept. 30,Dec. 31
1996 1996 1996 1996
----- ------ ------ -------
Revenues:
Net premiums earned $1,156 $ 751 $ 982 $ 682
Net investment income 631 582 341 94
Realized gains(losses) on investments 733 (74) - (13,332)
------ ------ ----- -----
Total revenues 2,520 1,259 1,323 (12,556)
Operating expenses 1,526 965 1,076 6,209
------ ------ ------- -------
Operating income(loss) 994 294 247 (18,765)
Income tax expense (benefit) (14) (1) 20 (138)
----- ----- ----- ------
Net income (loss) before minority
interest 1,008 295 227 (18,627)
Minority interest 159 41 3 (3,569)
------ ----- ----- ------
Net income (loss) $ 849 $ 254 $ 224$ (15,058)
=== === === =====
Per share data:
Net income (loss) $ .06 $ .02 $ .02 (1.07)
Number of shares outstanding 14,121 14,121 14,121 14,121
(Amounts in thousands except Quarter ended
per share data) ------------------------
December 31 September 30,
1995 1995
-------- --------
Revenues:
Net premiums earned $2,652 $1,342
Net investment income 718 807
Realized (losses) on investments (175) (568)
------ ------
Total revenues 3,195 1,581
Operating expenses 4,900 1,398
----- -----
Operating income (1,705) 183
(Amounts in thousands except Quarter ended
per share data) ------------------------
December 31 September 30,
1995 1995
-------- -------
Equity in loss of non-consolidated
subsidiary 83 (83)
---- -----
Income (loss) before income taxes,
minority interest and
extraordinary gain (1,622) 100
Income tax expense (benefit) 98 (364)
----- -----
Net income (loss) before minority
interest and extraordinary gain (1,720) 464
Minority interest (219) -
------ -----
Net Income before extraordinary gain (1,501) 464
Extraordinary gain 38,387 -
------- ----
Net income (loss) $36,886 $ 464
===== ====
Per share data:
Income (loss) before extraordinary
gain $ (.11) $ .03
Extraordinary gain 2.72 -
----- ----
Net income (loss) $ 2.61 $ .03
==== ===
Average shares outstanding 14,121 14,121
<PAGE>
LAWRENCE INSURANCE GROUP, INC.
INDEX TO FINANCIAL STATEMENT SCHEDULES
Page
I - Summary of Investments Other than Investments
in Related Parties at December 31, 1996 51
II - Condensed Financial Information of Registrant
at December 31, 1996 and 1995 and for the Years
Ended December 31, 1996, 1995 and 1994 52
III - Supplementary Insurance Information for the
Years Ended December 31, 1996, 1995 and 1994 55
IV - Reinsurance for the Years Ended December 31,
1996, 1995 and 1994 58
V - Valuation and Qualifying Accounts for the
Years Ended December 31, 1996, 1995 and 1994 59
VI - Supplementary Information Concerning Property
and Casualty Insurance Operations for the
Years Ended December 31, 1996, 1995 and 1994 60
Schedule I
LAWRENCE INSURANCE GROUP, INC.
SUMMARY OF INVESTMENTS
DECEMBER 31, 1996
($ in thousands)
Amount at
Which Shown
Estimated on the
Fair balance
Cost Value sheet
------ -------- ----------
Fixed maturities available for sale:
United States government and
government agencies and
political subdivisions $ 5,018 $ 5,034 $5,034
States, municipalities and
political subdivisions 567 574 574
Mortgage backed securities 4,330 4,074 4,074
------ ------ ------
Total fixed maturities
available for sale 9,915 9,682 9,682
------ ------ ------
Common Stock 997 942 942
Short-term investments 2,862 2,862 2,862
Mortgage loans on real estate 154 154 154
Real Estate 2,581 2,581 2,581
------ ------ ------
Total investments $16,509 $ 16,221 $ 16,221
===== ===== =====
Schedule II
LAWRENCE INSURANCE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
BALANCE SHEETS
($ in thousands) December 31,
--------------
1996 1995
------ ------
ASSETS
Investment in subsidiaries $ - $ 649
Other invested assets, at fair value - 4
Cash 30 2
Other assets - 68
---- -----
Total assets $ 30 $ 723
==== ===
LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIENCY)
Liabilities:
Liability of subsidiary $ 2,383 $ -
Accrued expenses and other liabilities 447 578
---- ----
Total liabilities 2,830 578
Stockholders' equity:
Preferred stock, $.01 par value; 2,000,000
shares authorized; no shares outstanding - -
Common stock, $.01 par value; 20,000,000
shares authorized; 14,121,482 shares
issued and outstanding 141 141
Additional paid-in capital 39,739 39,739
Net unrealized gains (losses) on
investments (Net of deferred income
taxes of $0 in 1996 and 1995) (226) (8)
Receivable from Alpha Trust - (11,004)
Accumulated deficit (42,454) (28,723)
-------- --------
Total stockholders' equity(deficiency) (2,800) 145
------ ------
Total liabilities and stockholders'
equity (deficiency) $ 30 $ 723
==== ===
Schedule II
Continued
LAWRENCE INSURANCE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF OPERATIONS
($ in thousands) Year Ended December 31,
------------------------
1996 1995 1994
------ ------ ------
Net investment income $ - $ 1 $ (7)
Equity in net income (loss) of
subsidiaries (13,816) (424) (6,625)
Other operating expenses (81) 232 688
Income tax( benefit) (4) (13) (229)
Extraordinary gain - 38,387 -
------ -------- ------
Net income (loss) $(13,731) $ 37,745 $ (7,091)
==== ===== ====
Schedule II
Continued
LAWRENCE INSURANCE GROUP, INC.
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
STATEMENTS OF CASH FLOWS
($ in thousands) Year Ended December 31,
-----------------------
1996 1995 1994
------ ------ ------
Operating activities:
Net income (loss) $(13,731) $37,745 $ (7,091)
Adjustments to reconcile net
income to net cash provided
(used) by operating activities:
Equity in net (income) loss of
subsidiaries 13,816 424 6,625
Extraordinary gain - (38,387) -
Other assets 73 191 (153)
Accrued expenses and liabilities
and all other (130) 6 444
------ ----- ------
Net cash generated (used)
by operating activities 28 (21) (175)
------ ------ ------
Investing activities:
Repayment of long-term investments:
Mortgage loans on real estate - - 22
Other invested assets - 20 21
------ ------ ------
Net cash provided by investing
activities - 20 43
------ ------ ------
Increase (decrease) in cash 28 (1) (132)
Cash-beginning of year 2 3 135
---- ---- ----
Cash-end of year $ 30 $ 2 $ 3
=== == ==
Supplemental disclosure of
cash flow information:
Cash paid (received) during
year for income taxes $ (75) $ (13) $ 70
LAWRENCE INSURANCE GROUP INC.
SUPPLEMENTARY INSURANCE INFORMATION
YEAR ENDED DECEMBER 31, 1996
($ in thousands) Schedule III
Column A Column B Column C Column D
- --------------- ----------- ------------ ----------
1996 Future Policy
Deferred Benefits,
Policy Losses,
Acquisition Claims & Unearned
Segment Costs Loss expense Premium
- --------------- ----------- ----------- ----------
Property/casualty $ 6 $ 603 $ 252
Reinsurance assumed - 24,539 -
Accident & Health 58 1,299 467
--------- --------- -------
Total $ 64 $ 26,441 $ 719
========= ======== ========
Column E Column F Column G Column H
- --------------- ----------- ------------ ----------
Benefits, Claims,
Other policy Net Losses and
Claims and Premium Investment Settlement
Benefits payable Revenue Income(1) Expenses
- -------------- ----------- ----------- ----------
$ - $ 88 $ 220 $ 13
- 342 1,221 6,211
- 3,141 207 2,025
---------- --------- --------- --------
- $ 3,571 $ 1,648 $ 8,249
========= ======= ======= ========
Column I Column J Column K
- --------------- ----------- ------------
Amortization of
Deferred policy Other
Acquisition Operating Premiums
Costs Expenses(1) Written
-------------- ----------- --------
$ 26 $ 246 $ 89
(634) 215 330
616 1,058 3,071
------- --------- ---------
$ 8 $ 1,519 $ 3,490
====== ====== =====
($ in thousands) Schedule III (continued)
Column A Column B Column C Column D
- --------------- ----------- ------------ ----------
1995 Future Policy
Deferred Benefits,
Policy Losses,
Acquisition Claims & Unearned
Segment Costs Loss expense Premium
- --------------- ----------- ----------- ----------
Property/casualty $ 7 $ 849 $ 34
Reinsurance assumed 3 27,860 12
Accident & Health 58 2,265 459
--------- --------- -------
Total $ 68 $ 30,974 $ 505
========= ========= ========
Column E Column F Column G Column H
--------------- ----------- ------------ ----------
Benefits, Claims,
Other policy Net Losses and
Claims and Premium Investment Settlement
Benefits payable Revenue Income(1) Expenses
- -------------- ----------- ----------- ----------
$ - $ 222 $ 278 $ 311
- 1,490 2,463 3,108
- 3,821 360 1,983
---------- --------- --------- --------
- $ 5,533 $ 3,101 $ 5,402
========= ======= ======= ========
Column I Column J Column K
- --------------- ----------- ------------
Amortization of
Deferred policy Other
Acquisition Operating Premiums
Costs Expenses(1) Written
-------------- ----------- --------
$ 51 $ 285 $ 137
926 413 1,063
886 1,071 3,935
------- --------- ---------
$ 1,863 $ 1,769 $ 5,135
====== ====== =====
($ in thousands) Schedule III (cont)
Column A Column B Column C Column D
- --------------- ----------- ------------ ----------
1994 Future policy
Deferred Benefits,
Policy Losses,
Acquisition Claims & Unearned
Segment Costs Loss expense Premium
- --------------- ----------- ----------- ----------
Property/casualty $ 24 $ 2,369 $ 119
Reinsurance assumed 231 43,191 822
Accident & Health 34 1,605 443
--------- --------- --------
Total $ 289 $ 47,165 $ 1,384
==== ===== ====
Column E Column F Column G Column H
- --------------- ----------- ------------ ----------
Benefits, claims,
Other policy Net Losses and
Claims and Premium Investment Settlement
Benefits payable Revenue Income(1) Expenses
- -------------- ----------- ----------- ------------
$ - $ 641 $ 378 $ 839
- (973) 2,678 1,076
- 5,553 257 2,104
----------- --------- --------- --------
$ - $ 5,221 $ 3,313 $4,019
====== ===== ==== ====
Column I Column J Column K
- --------------- ----------- ------------
Amortization of
Deferred policy Other
Acquisition Operating Premiums
Costs Expenses(1) Written
-------------- ----------- -----------
$ (27) $ 297 $ 273
565 60 (13,802)
1,530 1,003 5,759
----------- -------- ---------
$ 2,068 $ 1,360 $ (7,770)
==== ===== ======
(1) The allocation among segments is based upon the actual income
or expense of each underlying subsidiary of the parent. Each
subsidiary generally represents only one segment.
LAWRENCE INSURANCE GROUP, INC.
REINSURANCE Schedule IV
($ in thousands)
Ceded Assumed
Gross To From Net Assumed
Amount Others Others Amount To Net
------ ------ ------ ------ ------
For year ended
December 31, 1996
Premiums earned:
Property/casualty $ 161 $ 73 $ - $ 88 -%
Accident/health 4,125 984 - 3,141 -%
Reinsurance assumed - 23 365 342 106.7%
----- ----- ----- ----
Total $4,286 $1,080 $ 365 $3,571
===== ===== ===== =====
For year ended
December 31, 1995
Premiums earned:
Property/casualty $ 222 $ - $ - $ 222 -%
Accident/health 5,222 1,401 - 3,821 -%
Reinsurance assumed - 601 2,091 1,490 140.3%
----- ----- ----- -----
Total $5,444 $2,002 $2,091 $5,533
===== ==== ==== ====
For year ended
December 31, 1994
Premiums earned:
Property/casualt $ 658 $ 17 $ - $ 641 -%
Accident/health 8,857 3,303 - 5,554 -%
Reinsurance assumed - 1,425 451 (974) -%
----- ----- ----- -----
Total $9,515 $4,745 $ 451 $5,221
===== ==== === ====
LAWRENCE INSURANCE GROUP, INC. Schedule V
VALUATION ACCOUNTS
($ in thousands) Additions
-------------
Charged to
Balance -------------- Balance
Jan 1, Cost & Other Deduct- Dec 31,
of year expenses Accounts ions of year
------ ------ ------ ------ ------
December 31, 1996
Receivables from
affiliates $ - $ 313 $ 232 $ - $ 545
Deferred Income
Taxes - 7,804 - 6,198 - 14,002
Reinsurance
Recoverable 148 - (148) -
Income tax recoverable
recoverable - - 108 - 108
------ ---- ---- ----- -----
Total (1) $ 7,952 $ 313 $ 6,538 $ (148) $ 14,655
===== === ==== === =====
December 31, 1995
Equity securities $ 502 $ - $ - $ (502) $ -
Deferred Income
Taxes - 7,102 - 702 - 7,804
Reinsurance
Recoverable - 148 - - 148
----- ---- ---- ----- -----
Total (1) $ 7,604 $ 148 $ 702 $ (502) $ 7,952
===== === === === ====
December 31, 1994
Equity in common
stock of investee $ 2,651 $ - $ - $ (2,651) $ -
Equity securities - 502 - - 502
Deferred Income
Taxes - 6,997 - 105 - 7,102
------ ---- ---- ------ ------
Total (1) $ 9,648 $ 502 $ 105 $ (2,651) $ 7,604
===== ==== ==== ===== ====
(1) Excludes UCIC.
LAWRENCE INSURANCE GROUP INC.
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY AND CASUALTY
INSURANCE
OPERATIONS
DECEMBER 31, 1996
($ in thousands) SCHEDULE VI
Column A Column B Column C Column D
- --------------- ----------- ------------ ----------
1996 Future policy
Deferred Benefits
Policy Losses,claims Discount
Acquisition and loss Deducted in
Company Costs Expenses Column C
- --------------- ----------- ----------- ----------
United Republic
Insurance Company $ - $ 24,539 $ -
Global Insurance Co. 6 603 -
--------- --------- --------
Total $ 6 $ 25,142 $ -
====== ====== =====
Column E Column F Column G Column H
- --------------- ----------- ------------ ----------
Net Settlement &
Unearned Premium Investment Claim expense
Premiums Revenue Income Current Yr
- -------------- ----------- ----------- ----------
$ - $ 342 $ 1,221 $ -
252 88 220 29
- ------------ --------- --------- --------
$ 252 $ 430 $ 1,441 $ 29
==== ====== ===== =====
Column H Column I Column J Column K
- --------------- ----------- ------------ ---------
Claim and Amortization Paid claims,
Settlement deferred policy and claim
Expense Acquisition Adjustment Premium
Prior Yrs Costs Expenses Written
----------- ----------- ----------- ---------
$ 6,211 $ (634) $ 8,521 $ 330
(16) 26 159 89
---------- --------- --------- ---------
$ 6,195 $ (608) $ 8,680 $ 419
===== ===== ====== =====
($ in thousands) SCHEDULE VI (continued)
Column A Column B Column C Column D
- --------------- ----------- ------------ ----------
1995 Future policy
Deferred Benefits
Policy Losses,claims Discount
Acquisition and loss Deducted in
Company Costs Expenses Column C
- --------------- ----------- ----------- ----------
United Republic
Insurance Company $ 3 $ 27,860 $ -
Global Insurance
Company 7 849 -
--------- --------- --------
Total $ 10 $ 28,709 $ -
====== ====== =====
Column E Column F Column G Column H
- --------------- ----------- ------------ ----------
Claim and
Net Settlement
Unearned Premium Investment Expense
Premiums Revenue Income Current Yr
- -------------- ----------- ----------- ----------
$ 12 $ 1,490 $ 2,462 $ 288
33 22 278 80
- ------------ --------- --------- --------
$ 45 $ 1,712 $ 2,740 $ 368
==== ====== ===== =====
Column H Column I Column J Column K
- --------------- ----------- ------------ ---------
Claim and Amortization Paid claims,
Settlement deferred policy and claim
Expense Acquisition Adjustment Premium
Prior Yrs Costs Expenses Written
----------- ----------- ----------- ---------
$ 2,820 $ 926 $ 15,897 $ 1,063
231 51 1,901 137
---------- --------- --------- ---------
$ 3,051 $ 977 $ 17,798 $ 1,200
===== ===== ====== =====
($ in thousands) SCHEDULE VI(cont)
Column A Column B Column C Column D
- --------------- ----------- ------------ ----------
1994 Future policy
Deferred Benefits
Policy Losses,claims Discount
Acquisition and loss Deducted in
Company Costs Expenses Column C
- --------------- ----------- ----------- ----------
United Republic
Insurance Company $ 231 $ 43,191 $ -
Global Insurance
Company 24 2,369 -
--------- --------- --------
Total $ 255 $ 45,560 $ -
==== ===== ===
Column E Column F Column G Column H
- --------------- ----------- ------------ ----------
Claim and
Net Settlement
Unearned Premium Investment Expense
Premiums Revenue Income Current Yr
- -------------- ----------- ----------- ----------
$ 822 $ (896) $ 2,684 $ 4,106
119 565 378 508
- ------------ --------- --------- --------
$ 941 $ (331) $ 3,062 $ 4,614
==== ==== ==== ====
Column H Column I Column J Column K
- --------------- ----------- ------------ ---------
Claim and Amortization Paid claims,
Settlement Deferred Policy and claim
Expense Acquisition Adjustment Premium
Prior Yrs Costs Expenses Written
----------- ----------- ----------- ---------
$ (3,030) $ 565 $ 24,315 $ (13,726)
331 (28) 4,832 197
- ----------- --------- --------- ---------
$ (2,699) $ 537 $ 29,147 $ (13,529)
===== ==== ===== ======
LAWRENCE INSURANCE GROUP INC
INDEX TO EXHIBITS
ITEM 601
Exhibit
Number Description Reference
1 Certification of Incorporation (1)
2-1 Bylaws (2)
4-1 Specimen Certificate of Common Stock (3)
10-1 Management Agreement between Senate Insurance
Company and A.W.Lawrence and Company Inc. (2)
21-1 Subsidiaries of Registrant EX-21
27-1 Financial Data Schedule EX-27
28-1 Information from reports furnished to
State insurance Regulatory Authorities EX-28
(1) Previously filed on December 10,1986 in Amendment No. 3 to Form
S-1 Registration Statement (Registration No. 33-9898)
(2) Previously filed on October 31, 1986 in Form S-1 Registration
Statement (Registration No. 33-9898)
(3) Previously filed on December 29, 1986 in Amendment No. 5 to
Form S-1 Registration Statement (Registration No. 33-9898)
LAWRENCE INSURANCE GROUP INC
EXHIBIT 21
SUBSIDIARIES OF REGISTRANT
YEAR ENDED DECEMBER 31, 1996
Percent
Owned
_____
Lawrence Insurance Group Inc. Del.
United Republic Insurance Company Tx. 78.6%
Global Insurance Company Ga. 100.0%
Senate Insurance Company Az. 100.0%
Senate National Life Insurance Company Az. 100.0%
Senate Syndicate Inc. NY. 100.0%
EX 21-1
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from Lawrence
Insurance Group Inc.'s consolidated financial statements as of and for the
years ended December 31, 1996, 1995 and 1994 and is qualified in its
entirety by reference to such statements.
</LEGEND>
<CIK> 0000805266
<NAME> LAWRENCE INSURANCE GROUP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-END> DEC-31-1996
<DEBT-HELD-FOR-SALE> 9,682
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 942
<MORTGAGE> 154
<REAL-ESTATE> 2,581
<TOTAL-INVEST> 16,341
<CASH> 943
<RECOVER-REINSURE> 1,695
<DEFERRED-ACQUISITION> 64
<TOTAL-ASSETS> 29,701
<POLICY-LOSSES> 26,441
<UNEARNED-PREMIUMS> 719
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 300
0
0
<COMMON> 141
<OTHER-SE> (2,941)
<TOTAL-LIABILITY-AND-EQUITY> 29,701
3,571
<INVESTMENT-INCOME> 1,648
<INVESTMENT-GAINS> (12,673)
<OTHER-INCOME> 0
<BENEFITS> 8,249
<UNDERWRITING-AMORTIZATION> 8
<UNDERWRITING-OTHER> 1,519
<INCOME-PRETAX> (17,230)
<INCOME-TAX> (133)
<INCOME-CONTINUING> (17,097)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (13,731)
<EPS-PRIMARY> (.97)
<EPS-DILUTED> (.97)
<RESERVE-OPEN> 25,931
<PROVISION-CURRENT> 2,328
<PROVISION-PRIOR> 5,921
<PAYMENTS-CURRENT> 1,591
<PAYMENTS-PRIOR> 9,318
<RESERVE-CLOSE> 22,550
<CUMULATIVE-DEFICIENCY> 5,921
</TABLE>
