UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark one)
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 (FEE REQUIRED)
For the fiscal year ended December 31, 1995.
OR
- --- TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (NO FEE REQUIRED)
for the transition period from _________________ to _________________
Commission file number 0-15373
U.S. CAPITAL GROUP INC.
(Exact name registrant as specified in its charter)
Delaware 13-3357749
(State of other jurisdiction of Incorporation) (I.R.S. Employer
Identification No.)
c/o U.S. Capital Insurance Company
Two Manhattanville Rd., Purchase, N.Y. 10577- 2118
Tel: (914) 694-4757
Securities registered pursuant to Section 12(g) of the Act:
Title of Class Name of Exchange on Which Registered
Common Stock, $.10 par value OTC Bulletin Board
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 not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K, or any amendment to
this Form 10-K. __
The aggregate market value on March 27, 1995 of the voting stock held by
non-affiliates of the registrant was approximately $181,000.
There were 560,546 shares outstanding of the Registrant's Common Stock,
$.10 par value as of March 25, 1995.
DOCUMENTS INCORPORATED BY REFERENCE
(to the extent set forth in the part indicated)
Portions of Registrant's Proxy Statement for the Annual Meeting of
Shareholders scheduled to be held on May 22, 1996 are incorporated by reference
in Parts I and III. Definitive copies of said Proxy Statement will be filed with
the Securities and Exchange Commission within the period required by the
Instructions to Form 10-K.
U.S. CAPITAL GROUP INC.
Table of Contents
PAGE
ITEM NUMBER
- ---- ------
PART I
1. Business....................................................... 2
2. Properties..................................................... 14
3. Legal Proceedings.............................................. 14
4. Submission of Matters to a Vote of Security Holders............ 15
PART II
5. Market for the Registrant's Common Stock and Related
Stockholder Matters............................................ 16
6. Selected Financial Data........................................ 17
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations...................................... 18
8. Financial Statements and Supplementary Data.................... 23
9. Changes in Accountants and Disagreements with Accountants on
Accounting and Financial Disclosure............................ 23
PART III
10. Directors and Executive Officers............................... 24
11. Executive Compensation......................................... 24
12. Security Ownership of Certain Beneficial Owners and Management. 24
13. Certain Relationships and Related Transactions................. 24
PART IV
14. Exhibits, Financial Statement Schedules, and Reports on
Form 8-K........................................................ 25
Signatures...................................................... 27
PART I
Item 1. Business--
Recent Developments.
- --------------------
In December 1995, U.S. Capital Group Inc. ("USCG") relocated its
principal subsidiary, U.S. Capital Insurance Company, to Two Manhattanville
Road, Purchase, New York 10577-2118.
On November 9, 1995 USCG and its subsidiaries entered into a settlement
agreement with Republic Insurance Company ("Republic") in order to settle the
various disputes between the parties ("the Settlement"). These disputes and
certain unfavorable arbitration awards were referenced in USCG's 10K for the
fiscal year ended December 31, 1994 at Note I to the financial statements. The
Settlement provides for a restructuring of the complex business relationship
between the parties. This matter is further discussed below at "Item 3. Legal
Proceedings" at page 14 and at "Note I" to the "Notes to the Consolidated
Financial Statements."
History.
- -------
USCG and its subsidiaries (collectively the "Company") is comprised of
property and casualty insurance and reinsurance companies, reinsurance
underwriting services companies, and a computer software company, operating in
the United States, Bermuda, and Europe.
In 1987, the Pan Atlantic companies became subsidiaries of U.S. Capital
Group, Inc. which then sold common shares of the Company in a public offering.
In 1988 and 1989, management implemented a series of changes in the Company's
underwriting operations and redirected the focus of the Company's resources. The
changes included the commencement of the Company's private passenger automobile
and commercial lines insurance operations in New York; a diminished role for
reinsurance underwriting, and in 1989, the sale of the Company's subsidiaries in
Ireland and the cessation of underwriting in the U.K. market.
General Description of Business.
- --------------------------------
The Company's principle subsidiary, U.S. Capital Insurance Company
("USCIC"), is predominately a private passenger automobile insurer. In 1995,
USCIC commenced underwriting some commercial automobile, and a minimal amount of
commercial liability and property insurance. USCIC mainly writes in the states
of New York, California, and Louisiana.
Private Passenger Automobile--
USCIC writes private passenger automobile liability and physical damage
insurance in the states of New York and California. In New York, USCIC offers
private passenger automobile policies to the preferred driver for both liability
and physical damage coverage, and also for liability coverage alone.
The program in California targets the sub-standard driver, who
typically will have up to 4 points on their motor vehicle report. USCIC is also
required, under Proposition 103, to offer competitive insurance on the "good
driver." Physical damage only policies are also available.
USCIC is subject to receiving assignments from the New York and
California assigned risk pools, which are based upon USCIC's percentage of total
automobile writings in the particular state.
Commercial Automobile Liability--
USCIC's underwrites commercial automobile liability and physical damage
policies in New York, Louisiana, and California. Coverage is provided generally
to small to medium sized trucking firms, delivery trucks for both wholesalers
and retailers, and service vehicles for contractors with a traveling radius of
no more than 500 miles. No long haul trucking is accepted.
Commercial Multiple Peril--
USCIC's commercial multiple peril program offers coverage to small to
medium sized residential, service and retail businesses in the state of New
York.
Other Liability--
USCIC underwrites general liability exposures associated with trucking
terminals in conjunction with its commercial automobile program to cover the
incidental public liability exposure in the states of California, Louisiana and
New York.
For some years, USCIC has offered asbestos abatement liability policies
to small contractors specializing in asbestos abatement in New York,
Pennsylvania, Virginia, Florida and Delaware. The policies cover premise and job
site liability, products and completed operations, as well as personal and
advertising injury, fire damage, and medical expenses. However, this program is
winding down as the need for asbestos abatement and the related coverage
recedes.
A USCIC program in California offers general liability coverage to
small artisan contracting firms, usually with three or four employees, which
perform mostly maintenance work.
USCIC underwrites a professional liability policy for lawyers and real
estate agents. Coverage is offered to law firms with ten or fewer lawyers, in
Michigan, Illinois, Wisconsin, and Ohio. The real estate errors and omissions
liability policy provides coverage for claims arising out of a wrongful act in
rendering professional services. The policy is written for firms with less than
20 licensees, located in Florida, Illinois, Michigan and Wisconsin.
Surety--
In March, 1994, USCIC discontinued offering surety bonds to small
contractors, and has no plans to re-enter this line of business.
The following tables present the gross premiums written and the net
premiums written with respect to the principal risks insured by USCIC for the
years indicated:
Gross Premiums Written
(dollars in millions)
Year Ended December 31,
---1995--- ---1994--- ---1993---
Amt. % Amt. % Amt. %
----- ---- ----- ---- ----- ----
Private Passenger Automobile........ $42.0 64% $18.1 71% $29.5 81%
Commercial Automobile............... 20.8 31 5.8 23 2.8 8
Commercial Multiple Peril........... .4 1 .2 1 -- --
Other Liability..................... 1.9 3 1.0 4 1.7 5
Surety.............................. -- -- .3 1 1.7 5
Miscellaneous Lines................. .4 1 -- -- .3 1
----- ---- ----- ---- ----- ----
$65.5 100% $25.4 100% $36.0 100%
===== ==== ===== ==== ===== ====
Net Premiums Written
(dollars in millions)
Year Ended December 31,
---1995--- ---1994--- ---1993---
Amt. % Amt. % Amt. %
----- ---- ----- ---- ----- ----
Private Passenger Automobile........ $26.0 54% $18.1 74% $29.5 86%
Commercial Automobile............... 19.5 41 5.1 21 2.5 7
Commercial Multiple Peril........... .3 1 .1 1 -- --
Other Liability..................... 1.5 3 .8 3 1.1 3
Surety.............................. (.1) -- .3 1 1.3 4
Miscellaneous Lines................. .5 1 -- -- -- --
----- ---- ----- ---- ----- ----
$47.7 100% $24.4 100% $34.4 100%
===== ==== ===== ==== ===== ====
Rating.
- -------
USCIC currently has a "B+" ("Very Good") rating as determined by A.M.
Best Rating Service, Property/Casualty 1995 Edition ("Best's"), which is Best's
third highest rating. Best's 1996 ratings have not been published, however
management is anticipating USCIC's rating to be down graded as a result of the
decrease in surplus reflected in the December 31, 1995 statutory statement. The
Best's rating is based upon factors of concern to policyholders and should not
be considered an indication of the degree or lack of risk involved in an equity
investment in an insurance group.
Competition.
- ------------
The insurance business is highly competitive, and USCIC competes with
numerous major insurance companies. These include local independent companies
and subsidiaries or affiliates of established worldwide insurance companies.
Competition in the types of property and casualty business in which USCIC
engages is based upon many factors. These factors include perceived overall
financial strength, absolute size, premiums charged, limits capacity, Best's
ratings, services offered, underwriting expertise and quality of claims
management. The number of jurisdictions in which an insurance company is
licensed to do business is also a factor.
Regulation.
- -----------
USCIC is subject to regulation under the insurance statutes, including
holding company statues, of jurisdictions in which it conducts business,
including New York where USCIC is domiciled. Such statutes and regulations are
designed to protect insurance companies and policyholders rather than
stockholders. Among other areas of focus, insurance statutes and regulations
applicable to USCIC serve to limit the amount of dividends that can be paid
without prior regulatory notification and approval, impose restrictions on the
amount and type of investments USCIC may hold, prescribe solvency standards that
must be met and maintained, require filing of annual or other reports with
respect to USCIC's financial condition and other matters, and provide for
certain periodic examinations of its operations and financial condition.
Recently, the insurance and reinsurance regulatory framework has been
subject to increased scrutiny by the National Association of Insurance
Commissioners (the "NAIC"), state legislatures and insurance regulators, and the
United States Congress. State legislatures have considered or enacted
legislation that alters and, in many cases, increases state authority to
regulate insurance companies and holding company systems. The NAIC and state
insurance regulators have been re-examining existing laws and regulations, with
an emphasis on insurance company solvency and investment issues.
In an ongoing effort to improve solvency regulation, the NAIC and
individual states have enacted certain laws and changes regarding financial
statements. Recently, the NAIC adopted a model risk-based capital act intended
to provide a tool for regulators to evaluate the capital of insurers and
reinsurers with respect to the risks assumed by them and to determine whether
there is a perceived need for possible corrective action. The nature of any
corrective action depends upon the extent of the calculated risk-based capital
deficiency. Although the risk-based capital requirements have not been adopted
by any state, in a related action the NAIC adopted a proposal that requires
insurers to report the results of their risk-based capital calculations as part
of 1994 and subsequent statutory annual statements that are filed with state
regulatory authorities.
USCIC's risk-based capital level, as calculated in accordance with the
NAIC model act and included in its 1995 statutory annual statement, was within
the average range of domestic insurance companies, thereby requiring no
regulatory action.
USCG is an insurance holding company. Under the holding company
structure, USCG is dependent upon the ability of its principal operating
subsidiary, USCIC, for transfer of funds in the form of tax reimbursements and
cash dividends. Such transactions, including the payment of cash dividends by
USCIC, are subject to restrictions imposed by New York Insurance Law. Generally,
USCIC may pay cash dividends only out of its statutory earned surplus. However,
the maximum amount of cash dividends that may be paid in any twelve month period
without prior approval of the New York Insurance Department is the lesser of net
investment income, or 10% of defined statutory surplus, as such terms are
defined in the New York Insurance Law. USCIC did not pay out any
dividends in 1995, 1994, or 1993.
Underwriting.
- -------------
Underwriting opportunities are presented to USCIC through brokers and
producers for commercial risks, directly and through the independent producer
system for personal lines such as automobile. Such opportunities are evaluated
on the basis of a number of underwriting factors, including the past experience
of the program and the level of exposure for a line of business. As part of the
underwriting process, the Company's underwriters analyze the historical data,
anticipate future loss levels, and estimate other costs which may not be evident
in the historical experience. Programs under way are closely monitored as they
progress. If projected profit levels are not reached, then a change in terms is
proposed, or the Company may cease its involvement. USCIC performs on-site
underwriting and claims reviews and audits of a producer or broker where deemed
necessary to determine the quality of a producer's underwriting operation.
Marketing.
- ----------
USCIC uses several means of marketing, depending upon the line of
business. The New York preferred private passenger automobile coverage is
marketed principally directly to the public through radio advertising, print
inserts, and direct mail. In California the policies are marketed through
independent producers.
USCIC's Commercial Automobile, Other Liability and Commercial Multiple
Peril Programs are marketed through selected independent producers and brokers
who are specialists in these lines of business.
Claims.
- -------
USCIC's claims philosophy stresses the prompt and equitable
investigation, evaluation, and resolution of claims. This is accomplished
through proactive technical and administrative supervision, training, and
interactive consultation with underwriting personnel, which stress timely and
accurate verification of coverage, determination of liability, and estimation of
damages. This routinely involves coordination with independent appraisers,
adjusters, investigators and attorneys.
Reserves.
- ---------
USCIC establishes loss reserves for the maximum probable cost of all
losses when notice of a claim is first received. Reserves are subject to
adjustment as additional information is made available. The loss reserves
include reserves for reported losses, incurred but not reported losses ("IBNR"),
and loss adjusting expense ("LAE"). Reserves for IBNR losses generally are
established on the basis of actuarial analysis of statistical information used
to project ultimate losses. USCIC utilizes the services of an independent
actuary to review the adequacy of USCIC's loss reserves.
Loss reserves are only estimates at a point in time of what the
insurance company expects to pay on losses, based upon facts and circumstances
then known. The ultimate liability may exceed or be less than such estimates.
Estimates are not precise insofar as, among other things, they are based upon
predictions of future events and estimates of future trends in claim severity
and frequency, and other variable factors, which include inflation, escalation
of repair costs and medical expenses, the size of jury awards, and the content
of judicial decisions. During the loss settlement period, which, in some cases,
may last several years, additional facts regarding individual claims may become
known. Accordingly, it can become necessary to refine and adjust the estimates
of liability on a claim either upward or downward. Since USCIC writes lines of
business that are relatively short tailed as compared with some other lines of
business within the insurance industry, this potential adjustment is minimized.
Even then, ultimate liability may exceed or be less than the revised estimates.
The risk that adjustments to reserves will be required is greater during the
formative period for relatively new programs in which USCIC currently operates.
This is because the statistical basis for estimating reserves for such programs
is inherently less reliable than the statistical basis for reserve estimations
of a program with a longer loss history. USCIC regularly adjusts its reserves as
necessary. Any upward adjustment in reserves will have an adverse effect on the
Company's earnings and shareholders' equity.
The table below provides a reconciliation of beginning and ending GAAP
("Generally Accepted Accounting Principles") loss and loss adjustment expense
reserves, including IBNR, for the period 1993 through 1995. In 1993, the Company
adopted SFAS No. 113, "Accounting for Reinsurance of Short-Duration and Long
Duration Contracts." In accordance with this SFAS, the Company's reinsurance
receivables, prepaid reinsurance receivables, and prepaid reinsurance premiums
are reported as assets and are no longer netted against unearned premiums and
the liability for losses and loss adjustment expenses. The Company did not, nor
was it required to, restate prior years. USCG does not discount reserves.
(Year Ended December 31)
1995 1994 1993
---- ---- ----
(Dollars in thousands)
Net Unpaid Losses and LAE at beginning of period.. $ 85,967 $ 93,036 $ 91,258
Add--
Provision for Losses and LAE for claims occurring
in the current year.............................. 23,942 14,772 22,532
Increase in estimated Losses and LAE for claims
occurring in prior years......................... 6,143 324 4,058
-------- -------- --------
Total............................................ 116,052 108,132 117,848
-------- -------- --------
Less--
Losses and LAE payments for claims occurring during:
The current year................................. 13,056 8,768 14,223
Prior years...................................... 34,172 13,397 10,589
-------- -------- --------
Total............................................ 47,228 22,165 24,812
-------- -------- --------
Net Unpaid Losses and LAE at end of period........ 68,824 85,967 93,036
Reinsurance recoverable........................... 38,451 36,810 41,587
-------- -------- --------
Gross Unpaid Losses and LAE at end of period...... $107,275 $122,777 $134,623
======== ======== ========
The Company believes, based upon currently available information, that
USCG's reserves for Losses and LAE are adequate to cover ultimate net cost of
Losses and LAE on reported and unreported claims. However, there can be no
assurance that such estimates will prove to be adequate. To the extent that such
estimates are not adequate, increases in reserves for losses arising from
occurrences in prior years will be required, thereby adversely affecting the
Company's future reported earnings and shareholders' equity.
The table on the following page presents the development of USCG's
domestic GAAP reserves from 1986 through 1995 for its United States insurance
subsidiaries. Foreign insurance and reinsurance subsidiaries are not included
since the statutory reporting requirements in their countries of domicile do not
provide for reserve development analysis comparable to that required under
statutory reporting in the United States.
The top line of the table shows the reserves at the balance sheet date
for each of the indicated years, and represents the estimated amounts of Losses
and LAE for claims arising in the current and all prior years that are unpaid at
the balance sheet date, including IBNR. The upper portion of the table shows the
re-estimated amount of the previously recorded reserve, based upon experience as
of the end of each succeeding year. The estimate may change as more information
becomes known about the frequency and severity of claims from individual years.
The cumulative redundancy or deficiency represents the aggregate change in the
estimates over all prior years. The lower portion of the table shows the
cumulative amounts paid, as of successive years, with respect to that reserve
liability.
In evaluating the information in the table on the following page, it
should be noted that each amount includes the effects of all changes in amounts
of prior periods. For example, if a Loss paid in 1988 in the amount of $150,000
was first reserved in 1986 at $100,000, the $50,000 deficiency (Loss minus
original estimate) would be included in the cumulative deficiency in each of the
years 1986-1987 shown in the table. This table does not represent accident or
policy year development data. Conditions and trends that have affected
development of reserves in the past may not necessarily occur in the future.
Accordingly, it may not be appropriate to extrapolate future deficiencies, based
upon this table.
U.S. CAPITAL GROUP AND SUBSIDIARIES
DEVELOPMENT OF DOMESTIC GAAP RESERVES
Year Ended December 31, 1995
<TABLE>
<CAPTION>
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liability for Unpaid
Loss and LAE 17,768 18,401 19,048 24,592 25,610 21,301 21,742 23,909 15,874 22,124
Liability Re-estimated
as of:
1 Year Later 18,048 16,338 18,808 18,946 19,485 28,038 31,338 24,516 26,600
2 Years Later 21,154 18,358 18,254 19,900 27,458 30,644 31,569 31,583
3 Years Later 21,828 17,813 17,518 25,127 27,048 31,515 31,720
4 Years Later 20,827 19,167 18,787 24,473 27,662 33,201
5 Years Later 23,484 17,765 15,803 25,326 27,981
6 Years Later 20,643 17,913 15,904 25,068
7 Years Later 20,744 17,969 16,023
8 Years Later 20,768 18,140
9 Years Later 20,839
Cumulative Redundancy
(Deficiency) (3,071) 261 3,025 (476) (2,371) (11,900) (9,978) (7,674) (10,726)
====== === ----- ----- ------- --------- ------- ------- --------
Cumulative Amount of
Liability Paid through:
1 Year Later 4,303 4,081 2,522 4,733 5,798 12,603 10,052 8,461 4,685
2 Years Later 7,671 5,215 3,511 9,109 14,081 15,666 12,279 13,365
3 Years Later 8,201 8,726 7,316 19,019 14,580 17,371 14,121
4 Years Later 9,918 11,530 12,773 21,475 15,017 19,578
5 Years Later 12,189 15,728 11,100 22,434 15,800
6 Years Later 14,592 16,072 11,194 22,459
7 Years Later 14,614 16,361 11,355
8 Years Later 14,527 16,343
9 Years Later 14,505
</TABLE>
Reinsurance of Primary Business.
Insurance companies enter into reinsurance arrangements primarily to
increase premium capacity, and to reduce and spread the risk of loss on
insurance written. USCIC has reinsurance on its commercial liability lines of
business and on its New York private passenger automobile liability and physical
damage business. USCIC's reinsurance agreements are all written on a treaty
basis.
USCIC cedes its risk to reinsurers both through reinsurance brokers and
directly. The ceding of risks underwritten by USCIC does not legally discharge
USCIC from liability for any part of the risk reinsured, and USCIC will be
required to absorb the full amount of the loss associated with the reinsured
risk if the reinsurance company is unable to or fails to meet its reinsurance
obligations for any reason. A Security Committee comprised of executive officers
of USCIC is responsible for evaluating the financial condition of reinsurance
companies prior to the commencement of underwriting activities, and at least
annually thereafter. The security review process is administered in part by
adhering to financial guidelines formulated to assess the reinsurers' ability to
satisfy future claims obligations. All reinsurers are subject to ongoing
evaluation to ensure that there have been no significant changes in their
financial condition.
In the case of reinsurance companies that either do not satisfy USCIC's
financial guidelines or are in liquidation or rehabilitation proceedings, a
reserve for actual and potential non-recovery is established, which includes a
provision for paid and unpaid claims and claims expense, inclusive of IBNR
claims. The reserve for non-recoveries is continually reviewed and updated to
reflect current activity and developments.
While reinsurance may vary by contract and by line of business, the
following summarizes USCIC's maximum net retentions on any one claim:
Gross Line Net Retention
---------- -------------
General Casualty Treaty $1,000,000 First $250,000
Commercial Property $4,000,000 Pro Rata $250,000
Other Liability $2,000,000 Pro Rata $250,000
Commercial Automobile $1,100,000 Maximum $250,000
The reinsurance on the New York Private Passenger Automobile book of
business is a quota share of the business written after July 1, 1995 with 100%
of the unearned premium reserve at July 1, 1995 being ceded to the reinsurer.
The maximum reinsurance recoverable under this treaty is 130% of net ceded
premiums written, inclusive of allocated loss adjusting expense, but not to
exceed $21,500,000.
Investments.
Strategy and guidelines for the management of the investment portfolios
of the Group and its subsidiaries are set by the Investment Committee. The
Committee supervises the implementation of the guidelines by management and its
outside investment advisors. The established guidelines and procedures are
designed both to ensure compliance with applicable regulatory requirements and
to provide flexibility to accommodate changes in market conditions. Regulatory
compliance prescribes the type, quality and concentration of securities that are
held in the portfolios of the licensed insurance subsidiaries.
For the years ended December 31, 1995, 1994 and 1993, a substantial
portion of USCG's investments were fixed income securities rated as "investment
grade" by Moody's Investors Services. The following table provides certain
information regarding types of investments and investment income. In 1993, the
Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." In complying with the Statement, the Company has classified
its 1995 1994 and 1993 investments into a category labeled "securities available
for sale", which are adjusted to reflect market value.
1995 1994 1993
---- ---- ----
(Dollars in thousand ,except percentages)
Total investments at end of period.......... $84,656 $90,783 $ 108,999
======= ======= =========
Investment income........................... $ 6,067 $ 6,714 $ 7,477
Realized investment gains................... 960 264 4,527
------- ------- --------
Total investment income and realized gains.. $ 7,027 $ 6,978 $ 12,004
======= ======= =========
Average annual yield on investments......... 6.92% 7.68% 6.86%
======= ======= =========
The table below sets forth at December 31, a summary of investments of USCG.
(Dollars in thousands, except percentages)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
TYPE OF INVESTMENTS:
$ % $ % $ %
------- ---- ------- ---- -------- ----
<S> <C> <C> <C> <C> <C> <C>
U.S. Treasury & other
government issues............ $18,075 22% $17,735 20% $ 24,798 23%
Foreign governments............ 2,933 3% 2,000 2% 3,976 4%
Corporate Securities........... 27,024 32% 30,411 33% 35,558 33%
Mortgage-backed Securities.. 22,338 26% 16,322 18% 22,602 20%
Equity securities.............. -- -- 631 1% 5,017 5%
Short-term..................... 14,287 17% 23,684 26% 17,047 15%
------- ---- ------- ---- -------- ----
Total....................... $84,657 100% $90,783 100% $108,999 100%
======= ==== ======= ==== ======== ====
</TABLE>
(Dollars in thousands except percentages)
<TABLE>
<CAPTION>
1995 1994 1993
---- ---- -----
MATURITIES ANALYSIS:
$ % $ % $ %
------- ---- ------- ---- --------- -----
<S> <C> <C> <C> <C> <C> <C>
One year or less............... $15,313 18% $29,728 33% $ 18,439 18%
Over one year through
three years................. 7,509 9% 11,222 13% 11,285 11%
Over three years through
ten years................... 31,887 38% 22,708 25% 25,870 25%
Over ten years................. 29,949 35% 26,494 29% 48,394 46%
------- ---- ------- ---- -------- ----
Total.................... $84,657 100% $90,152 100% $103,988 100%
======= ==== ======= ==== ======== ====
</TABLE>
Employees.
USCG employed 127 individuals at the end of 1995 at the Company's
offices in Purchase and Medford, New York, and a staff of 7 individuals in
Galway, Ireland. None of USCG's employees are represented by a labor union and
USCG believes that its employee relations are good.
Segmentation.
Financial information relating to the types of business and services
provided by the Company is included in "Note N" to the "Notes to the
Consolidated Financial Statements".
Executive Officers of the Registrant.
The executive officers of the registrant are its directors who are
employees of the registrant or its subsidiaries, with respect to whom
information is incorporated herein by reference to the Notice of Annual Meeting
of Stockholders and Proxy Statement for the May 22, 1996 Annual Meeting of
Stockholders (the "1996 Proxy Statement").
Item 2. Properties--
In 1995 the business activities of USCG and its subsidiaries was
conducted through leased office space located in White Plains, Purchase, and
Medford, New York; Trumbull, Connecticut; and Galway, Ireland. No difficulty is
anticipated in negotiating renewals on leases expiring or in finding other
satisfactory space if warranted. Insurance company management is currently
maintained at the company's Purchase, New York office.
Item 3. Legal Proceedings--
On November 9, 1995 USCG and its subsidiaries entered into a
settlement agreement with Republic Insurance Company ("Republic") in order to
settle the various disputes between the parties ("the Settlement"). These
disputes and certain unfavorable arbitration awards were referenced in USCG's
10K for the fiscal year ended December 31, 1994 at "Note I" to the "Notes to the
Consolidated Financial Statements."
The Settlement provides for a restructuring of the complex business
relationship between the parties: the transfer to Republic of the control and
administration of reinsurance policies bound in Republic's name by certain
subsidiaries of USCG; the payment of a liability, carried by USCG of $5,400,000,
over ten years without interest, the payment being secured by a pledge of all
the shares of USCG's principal subsidiary, U.S. Capital Insurance Company, with
the option to discharge this obligation at any time by payment of the net
present value of the amount outstanding: the commutation and release of the
reinsurance obligations of various insurance company subsidiaries of USCG to
Republic, some of which are immediate and others of which are to be determined
at a future date; the commutation and immediate release of all Republic's
reinsurance obligations to USCG's subsidiaries; the payment by Republic and
other entities as parties to the settlement of up to $3,340,698 to a USCG
subsidiary; and the transfer to Republic of USCG's equity interest in GoldStreet
Syndicate Corporation in the amount of $4,297,026. The Settlement provides
further for a number of continuing obligations on behalf of USCG, the
performance of which determine the extent and exact timing of the release from
the arbitration awards referenced above as well as from certain other
contractual and reinsurance obligations. See " "Note I" to the "Notes to the
Consolidated Financial Statements."
The Company or its subsidiaries are parties to various other lawsuits
generally arising in the normal course of the Company's insurance, reinsurance
and management businesses. The Company does not believe that the eventual
outcome of any such litigation will have a materially adverse effect on the
financial condition or business of the Company or its subsidiaries. The
Company's subsidiaries are regularly engaged in the investigation and defense of
claims arising out of its insurance and reinsurance business.
Item 4. Submission of Matters to a Vote of Security Holders--
Not Applicable.
PART II
Item 5. Market for the Registrant's Common Stock and Related Shareholder
Matters--Market Information
The common stock ($.10 par value) of USCG is traded through the OTC
Bulletin Board under the symbol "USCG". As of March 27, 1996, there were 40
shareholders of record, which include 26 shareholders of record of USCG, and 14
shareholders of record of the predecessor Pan Atlantic Inc. who have not yet
exchanged their shares for USCG certificates. Pursuant to a July 1993 stock
split, one share of USCG was declared exchangeable for each four shares of Pan
Atlantic Inc.. The Company had in excess of 250 beneficial shareholders. For the
periods presented below, the high and low prices of the Common Stock were as
follows:
1995 1994
----------------- ----------------
HIGH LOW HIGH LOW
------ ------ ------ ------
First Quarter $3.00 $3.00 $8.38 $6.75
Second Quarter No Trades $7.63 $6.50
Third Quarter $4.12 $4.00 $7.25 $5.00
Fourth Quarter $3.50 $.75 $4.88 $2.00
Item 6. Selected Financial Data
<TABLE>
<CAPTION>
Year Ended December 31,
(in thousands except percentage and per share data)
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA--
Net premiums written $48,462 $25,119 $34,308 $28,452 $19,699
====== ====== ====== ====== ======
Earned premiums 37,533 21,554 35,445 27,446 20,998
Reinsurance service fees (99) 614 837 1,295 775
Other income 1,651 969 698 705 574
Investment income 6,067 6,714 7,477 6,946 8,157
Realized investment gains 960 264 4,527 4,181 1,098
Loss and loss adjustment expenses 30,086 15,096 26,590 23,382 17,439
Operating costs and expenses 25,530 15,337 22,230 21,991 19,432
Income (loss) before income taxes minority interests (9,504) (318) 164 (4,800) (5,269)
Minority interest (6) 506 196 293 412
------- ------- ------- ------- --------
Net Income (Loss) ($9,510) $ 188 $ 360 ($ 4,507) ($ 4,857)
======= ======= ======= ======== ========
PER SHARE DATA--
Net Income (Loss) ($16.97) $ .33 $ .63 ($ 7.92) ($ 8.54)
======= ======= ======= ======== ========
Number of shares of Common
Stock outstanding 560,546 560,546 568,896 568,896 568,896
BALANCE SHEET DATA--
Investments and cash $ 84,657 $ 90,831 $109,011 $ 93,578 $ 94,514
Total assets $155,831 $193,259 $210,875 $155,625 $165,261
Reserves for unpaid losses
and loss adjustment expenses $107,275 $122,777 $134,623 $ 91,258 $ 92,156
Bank note payable -- -- -- -- $ 1,077
Total stockholders' equity $ 6,016 $ 8,068 $ 18,200 $ 14,409 $ 16,702
CERTAIN GAAP FINANCIAL RATIOS--
Combined Ratio 117.5% 123.3% 131.0% 155.1% 152.7%
Net Premiums Written to
Surplus Ratio .88:1 .58:1 .67:1 .57:1 .37:1
</TABLE>
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations--
Overview
- --------
USCG is a holding company which, through its subsidiaries, engages in
primary insurance underwriting, reinsurance underwriting, and a range of
services to other insurance and reinsurance companies. Primary insurance
underwriting is being generated by U.S. Capital Insurance Company ("USCIC"),
which accounted for 98% of the USCG's earned premiums in 1995 and 90% of total
revenues in 1995. The other Companies in USCG whose books of business are
currently in run off are Pan Atlantic Investors Ltd. ("PAIL"), Pan Atlantic
Insurance Company ("PAICO"), and Pan Atlantic Reinsurance Company, Ltd
("PARCO").
Consolidated net loss in 1995 amounted to $9.5 million or $16.97 per
share, as compared to net income of $.2 million or $.33 per share in 1994 and
net income of $.4 million or $.63 per share in 1993. Included in the $9.5
million net loss at year end 1995 is an approximately $13.4 million loss
attributable to the recognition of the Settlement agreement. See "Note I" to the
"Notes to the Consolidated Financial Statements".
Primary Insurance Underwriting
- ------------------------------
Written Premium
USCIC has been predominately a New York private passenger automobile
insurer. In 1995, USCIC's underwriting activities included commercial
automobile, general liability, professional liability and property liability.
USCIC mainly writes in the states of New York, California and Louisiana. Gross
premiums written in 1995 were $65.5 million, as compared to $25.4 million in
1994 and $36.0 million in 1993. Net premium writings for those years were $47.7
million, $24.4 million and $34.4 million, respectively. The decrease in the
premium volume in 1994 resulted primarily from the cancellation of an assumed
auto program in Louisiana which, although profitable, had become too large for a
principally direct writing company.
USCIC's plan in 1995 was to replace the canceled Louisiana program with
commercial business and with private passenger automobile insurance from
independent producers. This change of business source is responsible for the
volatility in USCIC's earned premium income, which increased in 1995 to $37.1
million after a decrease from $35.5 million in 1993 to $20.8 million in 1994.
In 1995 earned premium increased to $37.1 million as premiums for
non-standard automobile business in California increased by approximately $7.9
million. Additionally, the Company's non-standard private passenger automobile
business in the state of Texas produced earned premiums of $3.1 million, as
compared to $0.4 million in 1994.
When gross premium volume in 1995 exceeded expectations, management
reacted in the third and fourth quarter of 1995 by curtailing its business
sources. This included ending the flow of business from all except one New York
producer of private passenger automobile policies; curtailing USCIC's short term
automobile rental program in New York; and ending the non-standard automobile
program in Louisiana and Texas, and the small auto dealers and garage keepers
program in California.
Underwriting Results
USCIC combined loss and expense ratio for 1995 was 110.8% as compared
to 103.3% in 1994 and 114.7% in 1993. Statutory underwriting loss from
operations was $7.6 million in 1995, $2.1 million in 1994 and $4.9 million in
1993. The 1995 underwriting loss from operations was due principally to adverse
development on two programs in run-off since 1993 and 1994, and the Company's
strengthening of its Incurred-But-Not-Reported ("IBNR") reserves by $7.1 million
on a gross basis and $5.9 million on a net basis.
Overall combined ratio was 7.5% over 1994, but was improved by 3.9%
over 1993. The 16.5% increase in the loss ratio between 1995 and 1994 was offset
by a 7.9% decrease in the underwriting expense ratio. The loss adjusting expense
ratio decreased by approximately 1%.
The loss and loss adjustment expenses incurred on a statutory basis
as a percentage of earned premiums were 88.5% in 1995, 73.1% in 1994, and 86.7%
in 1993. This significant increase in the loss and loss adjustment expense
incurred ratio between 1995 and 1994 is a direct result of the adverse
development on canceled programs of approximately $3.2 million and an increase
in IBNR of approximately $5.9 million.
Underwriting expenses increased $4.1 million in 1995, of which assigned
risk expense accounted for $1.1 million. The balance of the increase is due to
expenses incurred on the increased premium volume written by the Company in
1995, such as commissions and premium taxes.
Investment Income
- -----------------
USCG's investment portfolio generated net dividends and interest
income of $6.1 million in 1995, compared to $6.7 million in 1994 and $7.5
million in 1993. The decrease is due primarily to lower interest rates in 1995
and the sale of securities valued at $9.2 million on an amortized cost basis, to
meet operational needs in 1995. These figures do not include realized capital
gains of $1.0 million in 1995, $0.3 million in 1994, and $4.5 million in 1993.
At December 31, 1995, USCG's invested assets were distributed as
follows: cash equivalents - 26%; Treasury issues - 24%; mortgaged backed issues
- - 34%; foreign issues - 3%; corporate issues - 29%; and equities - 1%. The
weighted average maturity of the portfolio was approximately 7.0 years; with a
weighted average current yield of approximately 6.6%, as compared to 7.7% in
1994, and 7.5% in 1993.
In 1993, USCG adopted SFAS Statement 115, "Accounting for Certain
Investments in Debt and Equity Securities." In complying with the statement,
USCG has classified its fixed maturity investments and its equity securities
into a category entitled "securities available for sale." Such securities are
adjusted to reflect market value. Unrealized investment gains and losses on
securities available for sale are credited or charged directly to shareholders'
equity, net of applicable tax provisions or credits. The net unrealized gain on
securities available for sale was $1.7 million in 1995, as compared to an
unrealized loss of $5.6 million in 1994, and an unrealized gain of $4.0 million
in 1993. USCG does not purchase fixed maturity investments with a view to
resale. Accordingly, the "available for sale" classification does not denote a
trading account.
Liquidity and Capital Resources--
- -------------------------------
USCG is a holding company, receiving cash principally through sales of
equities, borrowings, and dividends from its subsidiaries, some of which are
subject to dividend restrictions described in "Note L" to the "Consolidated
Financial Statements". The ability of insurance and reinsurance companies to
underwrite insurance and reinsurance is based upon maintaining liquidity and
capital resources sufficient to pay claims and expenses as they become due. The
primary sources of liquidity for USCG subsidiaries are funds generated from
insurance and reinsurance premiums, investment income, commission and fee
income, and proceeds from sales and maturities of portfolio investments. The
principal expenditures are for payment of losses and loss adjustment expenses,
operating expenses, and commissions.
At December 31, 1995, USCG's total assets of $155.8 million were
distributed as follows: 54.7% - cash and investments; 34.5% - receivables;
and other assets - 10.8%. All of the subsidiaries
maintain liquid operating positions and follow investment guidelines that are
intended to provide for an acceptable return on investment while preserving
capital and maintaining sufficient liquidity to meet their obligations. USCIC,
the principal insurance underwriter, maintains a sufficient margin of capital
and surplus to ensure its unimpaired ability to write insurance and assume
reinsurance.
Cash flow generated from (absorbed by) operations for 1995, 1994 and
1993 was $(16.7) million, $(8.9), and $7.2 million, respectively. Cash from
all Company operations has been adequate to meet obligations and, at this
time, is believed by management to be adequate for the foreseeable future.
See "Item 3. Legal Proceedings" and "Note I" to the Consolidated Financial
Statements".
Federal Income Taxes--
- --------------------
The Company incurred net losses in 1995 which will carry forward as net
operating losses to be utilized against future net income. As a result of an
audit for federal income tax years through June 30, 1990, USCG received refunds
of $262,000 and $594,000 in 1995 and 1996, respectively, for net operating loss
carry backs to the tax year ended June 30, 1987.
Equity in GoldStreet--
- --------------------
As of September 30, 1995, the company's minority interest in GoldStreet
Syndicate Corporation was transferred to Republic. The results of GoldStreet's
operations for the nine months ended September 30, 1995 are included in the
Company's statement of operations, using the equity method of accounting. For
the nine months ended September 30, 1995 and the years ended December 31, 1994,
and 1993, the Company's equity in GoldStreet's net income was $(6,000),
$506,000, and $196,000, respectively.
Regulation--
- ----------
In its ongoing effort to improve solvency regulation, the National
Association of Insurance Commissioners ("NAIC") and individual states have
enacted certain laws and financial statement changes. The most recent activity
was aimed at greater disclosure of an insurer's reliance upon reinsurance and
changes in its reinsurance programs, and tighter rules on accounting for certain
overdue reinsurance.
The NAIC adopted a model risk-based capital act intended to
provide a tool for regulators to evaluate the capital of insurers and reinsurers
with respect to the risks assumed by them, and to determine whether there is a
perceived need for corrective action. The nature of the corrective action
depends upon the extent of the calculated risk-based capital deficiency.
Although the risk-based capital requirements have not been adopted by any state,
in a related action the NAIC adopted a proposal that requires insurers to report
the results of their risk-based capital calculations as part of 1994 and
subsequent statutory annual statements filed with the state regulatory
authorities.
USCIC and PAIL's risk-based capital level, as calculated in accordance
with the NAIC model act and included in their 1995 statutory annual statements,
were within the average range of domestic insurance companies, and thus do not
indicate any need of corrective action.
Impact of Inflation--
- -------------------
Property and casualty insurance premiums are established before the
total losses and loss adjustment expenses, or the extent to which inflation may
affect such expenses, are known. Consequently, USCG attempts, in establishing
its premiums, to anticipate the potential impact of inflation. However, for
competitive and regulatory reasons, USCG may be limited in raising its premium
levels commensurate with anticipated inflation. In such an event USCG, rather
than its insureds, would absorb inflation costs. Inflation also affects the rate
of investment return on the investment portfolio, with a corresponding effect on
the investment income.
Recent Accounting Pronouncements--
- --------------------------------
The Company adopted SFAS No. 112, "Employers Accounting for Post
Employment Benefits". This Statement requires employers to recognize an
obligation for all benefits provided to former and inactive employees after
employment but before retirement. Examples of these benefits include, but are
not limited to, severance pay, continuation of health care benefits, and leaves
of absence benefits. The adoption of this statement in 1994 did not have a
material impact upon the financial statements of the Company.
The FASB has issued Statement No. 114, "Accounting by Creditors for
Impairment of a Loan". This statement requires that an impaired loan be measured
on the basis of the present value of expected future cash flows, using the loans
effective interest rate and Statement No. 118, "Accounting by Creditors for
Impairment of a Loan - Income Recognition and Disclosures", which amends
Statement No. 114 methods of recognizing interest income on impaired loans. Both
of these Statements are effective for fiscal years beginning after December 15,
1994, and did not have a material impact on the financial statements of the
Company.
The Company adopted SFAS No. 119, "Disclosure about Derivative
Financial Instruments and Fair Value of Financial Instruments". The adoption of
this Statement in 1994 had no material impact on the financial statements of the
Company, and the Company had no derivative activities to disclose.
The Company also adopted the American Institute of Certified Public
Accountants' Statement of Position 94-5, "Disclosure of Certain Matters in the
Financial Statements of Insurance Enterprises" and 94-6, "Disclosures of
Certain Significant Risks and Uncertainties."
During 1995, the FASB issued Statement No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed Of", which requires that an impairment loss be recognized when
the expected future cash flows resulting from the use of the asset is
less than the carrying amount.
In October 1995, the FASB issued SFAS No. 123, "Accounting for
Stock-Based Compensation". SFAS No. 123 allows companies to continue to account
for their stock plans in accordance with APB Opinion 25 but encourages the
adoption of a new accounting method based on the estimated fair value of
employee stock options. Companies electing not to follow the new fair value
based method are required to provide expanded footnote disclosures, including
pro forma net income and earnings per share, determined as if the company had
applied the new method. SFAS No. 123 is required to be adopted prospectively for
its stock option plans in accordance with APB Opinion 25 and provide
supplemental disclosures as required by SFAS No. 123, beginning in 1996.
ITEM 8. Financial Statements and Supplementary Data.
The Consolidated Financial Statements of USCG and its subsidiary
companies appear on pages F-1 through F-30, attached.
Unaudited quarterly financial data is included in Note O of the
Consolidated Financial Statements. Other Supplementary Data required by Item 302
of Regulation S-K is not required under the related instructions, and therefore
has been omitted.
ITEM 9. Changes in Accountants and Disagreements with Accountants on
Accounting and Financial Disclosure.
Not Applicable.
PART III
ITEM 10. Directors and Executive Officers of the Registrant--
Information as to "Directors and Executive Officers of the Registrant"
is incorporated by reference to the caption "Directors and Executive Officers"
in the definitive proxy statement involving the election of directors and other
matters (the "Proxy Statement") which USCG intends to file with the Commission
pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later
than 120 days after December 31, 1995.
ITEM 11. Executive Compensation--
Information as to "Executive Compensation" is incorporated by reference
to the caption "Summary Compensation of Directors and Executive Officers" in the
Proxy Statement.
ITEM 12. Security Ownership of Certain Beneficial Owner and Management--
Information as to "Security Ownership of Certain Beneficial Owner and
Management" is incorporated by reference to the caption "Security Ownership of
Certain Beneficial Owners and Management" in the Proxy Statement.
ITEM 13. Certain Relationships and Related Transactions--
Information as to "Certain Relationships and Related Transactions" is
incorporated by reference to the caption "Summary Compensation of Executive
Officers" and "Principal Stockholders" in the Proxy Statement.
PART IV
Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8 - K.
(a) Documents
1. Index to Financial Statements
U.S. CAPITAL GROUP INC. and SUBSIDIARIES
Reports of Independent Certified Public Accountants:
BDO Seidman, LLP................................ F-1
Price Waterhouse................................ F-3
Consolidated Balance Sheets at
December 31, 1995 and 1994....................... F-5
Consolidated Statements of Operations
for the years ended December 31, 1995,
1994 and 1993.................................... F-7
Consolidated Statements of Stockholders'
Equity for the years ended December 31, 1995,
1994 and 1993.................................... F-8
Consolidated Statements of Cash Flows
for the years ended December 31, 1995,
1994 and 1993.................................... F-9
Notes to Consolidated Financial Statements........ F-11
2. Index to Financial Statement Schedules
SCH I Summary of Investments Other Than
Investments in Related Parties at
December 31, 1995...................... S-1
SCH II Condensed Financial Information of
Registrant, for the years ended
December 31, 1995, 1994 and 1993...... S-2
SCH III Supplementary Insurance Information
for the years ended December 31,
1995, 1994 and 1993.................... S-8
SCH IV Reinsurance for the years ended
December 31, 1995, 1994 and 1993....... S-9
SCH VI Supplementary Information Concerning
Property and Casualty Insurance
Operations for the years ended
December 31, 1995, 1994 and 1993....... S-10
All other schedules of the consolidated financial statements
required by Article 7 of Regulation S-X are not required under the
related instructions or are inapplicable, and therefore have been omitted.
3. Index to Exhibits
3.1 Certificate of Amendment to the Restated
Certificate of Incorporation of the Company
and a complete copy of the Restated
Certificate of Incorporation, as amended.
3.2 By-Laws of the Company, as amended.
21 List of Subsidiaries of the Company.
29 Information from reports furnished to state
insurance regulatory authorities.
Exhibit 3.2 is incorporated by reference to Registration
Statement No. 33-10770 and Exhibit 3.1 is incorporated by reference
to Form 10-Q filed by the Company for June 30, 1989. Exhibit 21 is
filed herewith. Exhibit 29, "Information from reports furnished to state
insurance regulatory authorities," is omitted herefrom as such information
is filed directly with the Securities and Exchange Commission.
(b) Reports on Form 8-K
A report on Form 8-K was filed with the Securities and Exchange
Commission on November 14,1995. Reported on was "Item 5 Other Items" in which
USCG described the settlement of various disputes involving the Company.
Exhibit Number 21 "Other Documents Or Statements To Security Holders" was
submitted which was the USCG's press release dated November 13, 1995
announcing the settlement of the various disputes in regards to the
unfavorable arbitration awards.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
U.S. CAPITAL GROUP INC.
(Registrant)
By LIONEL J. GOETZ
/s/ Lionel J. Goetz
----------------------------------
Lionel J. Goetz
President & Chief Executive Officer
Dated: March 27, 1996
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 dates indicated.
Signature/Title/Date
LIONEL J. GOETZ SIMON C. K. TWIGDEN
/s/ Lionel J. Goetz /s/ Simon C. K. Twigden
- ------------------------- -------------------------
Lionel J. Goetz Simon C. K. Twigden
Director, Chairman and Director
President March 27, 1996
March 27, 1996
JONATHAN L. AUERBACH THOMAS S. JOHNSON
/s/ Jonathan L. Auerbach /s/ Thomas S. Johnson
- --------------------------- --------------------------
Jonathan L. Auerbach Thomas S. Johnson
Director Director
March 27, 1996 March 27, 1996
RONALD H. LABENSKI
/s/ Ronald H. Labenski
--------------------------------------
Ronald H. Labenski
Director, Vice President and Treasurer
March 27, 1996
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of
U.S. Capital Group Inc.
We have audited the accompanying consolidated balance sheets of U.S. Capital
Group Inc. (the "Company") and subsidiaries as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity
and cash flows for each of the three years in the period ended December 31,
1995. We have also audited the schedules for the each of the three years in
the period ended December 31, 1995 listed in the accompanying index. These
financial statements and schedules are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits. We did not audit the 1995 and
1994 financial statements of a foreign subsidiary, Pan Atlantic Insurance
Company, Ltd., whose statements reflect total assets of $24,070,000 and
$26,884,000 and total liabilities of $19,136,000 and $22,256,000 as of
December 31, 1995 and 1994, respectively, and total revenue of $1,502,000 and
$1,243,000 for the years then ended. Those statements were audited by another
auditor whose reports have been furnished to us, and our opinion on the 1995
and 1994 financial statements insofar as it relates to the amounts included
for such subsidiary, is based solely on the reports of the other auditor.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements and schedules are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements and
schedules. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the reports of
the other auditor for 1995 and 1994 provide a reasonable basis for our
opinions.
In our opinion, based on our audits and the reports of the other auditor for
1995 and 1994, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of U.S. Capital Group
Inc. and subsidiaries at December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995, in conformity with generally accepted accounting principles.
Also, in our opinion, based on our audits and the reports of the other auditor
for 1995 and 1994, the schedules present fairly, in all material respects, the
information set forth therein.
As discussed in Note H to the financial statements, in March 1991, the
Company's United Kingdom subsidiary, Pan Atlantic Insurance Company, Ltd.,
which represents approximately 82% of the consolidated equity, ceased writing
insurance and is discharging its liabilities. All loss reserves and recoverable
amounts from insurance companies have been established based on current
information; however, changes in these estimates are dependent on future
events. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
As discussed in Note G to the Financial Statements, Pan Atlantic Investors,
Limited, a subsidiary of the Company, was declared insolvent by the New York
Insurance Exchange, which has petitioned the Superintendent of the Insurance
Department of New York State for an order of liquidation under the insurance
law. Management is disputing this action and steps taken by the Company to
satisfy the State are also described in Note G. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note I to the
financial statements, the Company has settled an arbitration decision in
connection with a dispute with a ceding insurance company which restricts the
transactions of a trust fund. In addition, the Company sustained a loss in the
current year whereby reducing its capital. These matters raise substantial doubt
about the Company's ability to continue as a going concern. The ability of the
Company to continue as a going concern is dependent on future profitable
operations and successful completion of the terms of its settlement agreement.
Management's plans in regard to this matter are more fully described in Note I.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
BDO Seidman, LLP
Valhalla, New York
March 27, 1996
Gardner House Telephone 660 5199
Wilton Place Telecopier 660 7638
Dublin 2 I.D.E. Box No. 137
Ireland
Price Waterhouse
REPORT OF THE INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
Pan Atlantic Insurance Company Limited
We have audited the accompanying balance sheet of Pan Atlantic Insurance Company
Limited as of December 31, 1995 and the related statements of income and of cash
flows for the year, as prepared for use in the preparation of the consolidated
financial statements of US Capital Group Inc. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by the management as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements audited by us present fairly, in all
material respects and for the purpose referred to above, the financial position
of Pan Atlantic Insurance Company Limited at December 31, 1995 and the results
of its operations and its cash flows for the year in conformity with accounting
principles generally accepted in the United States of America.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The following uncertainties raise
substantial doubt about the Company's ability to continue as a going concern:
(1) As discussed in Note I, the Company was instructed by the UK Insurance
Industry Regulator in March 1991 to cease writing new and renewal
insurance contracts and the Company has since that date become a
company in run-off discharging its liabilities.
(2) The Company's loss reserves of US$16,914,000 at December 31, 1995 have
been established based on available current information. Future changes
in these estimates may arise based on updated information.
(3) As discussed in Note I, the company is dependent on the timely remittances
of amounts due from certain group companies of US$14,012,000 which are
subject to:
- the release of sufficient surplus funds upon the final evaluation
of a certain trust fund held by a group company; and
- the ability to collect certain retrocessional protections from a
third party who has assumed control and responsibility for the
collection of these balances.
The financial statements do not include any adjustments that might result from
the outcome of these uncertainties. Management's plan in regard to these
uncertainties are also described in Note I.
PRICE WATERHOUSE
DUBLIN
27 March 1996
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and number of shares)
December 31
-------------------
1995 1994
---- ----
ASSETS
Investments:
Fixed maturities, available for sale,
at market value (amortized cost: 1995 -- $68,630;
1994 -- $71,427) $ 70,370 $ 66,468
Equity securities, available for sale,
(cost: 1995--$2; 1994--$610) -- 631
Short-term investments, at cost, which
approximates market 14,287 23,684
-------- --------
Total Investments 84,657 90,783
Cash 596 48
Accrued investment income 1,349 1,325
Deferred charges -- 11,839
Premiums receivable 6,664 8,167
Reinsurance recoverable 45,096 68,500
Deferred acquisition costs 3,102 979
Investment in unconsolidated affiliate -- 4,011
Property and equipment, net 1,800 1,328
Income taxes recoverable 594 856
Prepaid reinsurance premiums 6,545 603
Other assets 5,428 4,820
-------- --------
TOTAL ASSETS $155,831 $193,259
======== ========
(The accompanying footnotes are an integral part of the consolidated financial
statements.)
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except par value and number of shares)
December 31,
------------------
1995 1994
---- ----
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Reserves for unpaid losses and loss
adjustment expenses $107,275 $122,776
Reinsurance balances payable 9,990 49,176
Funds held for reinsurers 1,455 2,399
Unearned premiums 25,916 9,045
Note payable 4,000 --
Accounts payable and accrued liabilities 1,179 1,794
-------- --------
Total Liabilities 149,815 185,191
-------- --------
Commitments and Contingent Liabilities
Stockholders' Equity:
Preferred stock, par value $1.00 per share;
authorized 250,000 shares, none issued
and outstanding -- --
Common stock, par value $.10 per share;
authorized 2,500,000 shares; issued
1,112,542 (including 551,996 shares in
1995 and 1994 held in treasury) 111 111
Additional paid-in capital 29,481 29,481
Unrealized appreciation (depreciation) on
securities 1,738 (5,639)
Foreign exchange translation adjustment 2,198 2,117
Deficit (10,953) (1,443)
------- --------
22,575 24,627
Less: Treasury stock at cost 16,559 16,559
-------- --------
Total Stockholders' Equity 6,016 8,068
-------- --------
LIABILITIES AND STOCKHOLDERS' EQUITY $155,831 $193,259
======== ========
(The accompanying footnotes are an integral part of
the consolidated financial statements.)
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share and number of shares)
Year Ended December 31,
---------------------------
1995 1994 1993
---- ---- ----
Revenues:
Earned premiums $ 37,533 $ 21,554 $ 35,445
Investment income 6,067 6,714 7,477
Realized investment gains 960 264 4,527
Underwriting fees and commissions:
From affiliated companies 150 300 300
From unaffiliated companies (249) 314 537
Other Income 1,651 969 698
-------- -------- --------
Total revenue 46,112 30,115 48,984
-------- -------- --------
Losses and expenses:
Loss and loss adjustment expenses 30,086 15,096 26,590
Policy acquisition costs 7,632 4,808 6,492
Underwriting, general and
administrative expenses 13,046 9,348 14,373
Amortization of deferred charge 4,852 1,181 1,365
-------- -------- --------
Total losses and expenses 55,616 30,433 48,820
-------- -------- --------
INCOME (LOSS) BEFORE FOLLOWING ITEM: (9,504) (318) 164
Equity in income of
unconsolidated affiliate (6) 506 196
--------- -------- --------
NET INCOME (LOSS) $ (9,510) $ 188 $ 360
======== ======== ========
INCOME (LOSS) PER SHARE $ (16.97) $ .33 $ .63
======== ======== ========
WEIGHTED AVERAGE SHARES 560,546 568,896 568,896
======== ======= ========
(The accompanying footnotes are an integral part of the consolidated financial
statements.)
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993
(in thousands)
<TABLE>
<CAPTION>
Shares of Unrealized Foreign
Common Stock Additional Appreciation Exchange Retained
---------------- Common Paid-In (Depreciation) Translation Earnings Treasury Stockbroker's
Issued Treasury Stock Capital on Securities Adjustment (Deficit) Stock Equity
------ -------- ----- ------- ------------- ---------- -------- ----- ------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1992 4,450 2,174 445 29,147 797 2,553 (1,991) (16,542) $14,409
Net Income - - - - - - 360 - 360
Change in unrealized
appreciation on securities - - - - 3,202 - - - 3,202
Foreign currency translation
adjustment - - - - - 229 - - 229
Reverse stock split (3,337) (1,630) (334) 334 - - - - -
------- ------- ----- ------- ------- ------ -------- ------- -------
Balance, December 31, 1993 1,113 544 111 29,481 3,999 2,782 (1,631) (16,542) 18,200
Net Income - - - - - - 188 - 188
Change in unrealized
depreciation on securities - - - - (9,638) - - - (9,638)
Foreign currency translation
adjustment - - - - - (666) - - (666)
Purchases of treasury stock - 8 - - - - - (17) (17)
------- ------- ----- ------- ------- ------ -------- ------- -------
Balance, December 31, 1994 1,113 552 $111 $29,481 $(5,639) $2,117 $(1,443) $(16,559) $ 8,068
------- ------- ----- ------- ------- ------ -------- -------- -------
Net Loss - - - - - - (9,510) - (9,510)
Change in unrealized depreciation
on securities - - - - 7,376 - - - 7,376
Foreign currency translation
adjustment - - - - - 82 - - 82
------- ------- ----- ------- ------- ------ -------- -------- -------
Balance, December 31, 1995 1,113 552 $111 $29,481 $ 1,738 $ 2,198 $(10,953) $(16,559) $ 6,016
------- ------- ----- ------- ------- ------ -------- -------- -------
</TABLE>
(The accompanying footnotes are an integral part of the consolidated financial
statements).
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31
--------------------------------
1995 1994 1993
------- --------- ------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income (Loss) $(9,510) $ 188 $360
Adjustments to reconcile net
loss to net cash used by
operating activities:
(Increase) in accrued
investment income (23) (27) (54)
(Increase) in reinsurance
recoverables and premiums
receivable net of payables (41,048) (3,507) (5,838)
(Increase) decrease in deferred
acquisition costs (2,125) (474) 76
Depreciation and amortization (8) 163 216
Increase (decrease) in reserves for
unpaid loss and loss adjustment expenses 11,212 (9,201) 16,372
Increase (decrease) in unearned
premium reserve 16,872 4,169 (1,137)
Decrease in accounts
payable and accrued liabilities (469) (229) (402)
Amortization of premium/discount 69 (1) (35)
Increase in deferred and
current income tax payable, net of
refundable income taxes 262 130 100
Increase in prepaid reinsurance premiums (5,942) (603) --
Increase (decrease) in other assets (941) 47 890
Equity in net income of affiliated company 4,011 (506) (196)
Realized gains (960) (264) (4,527)
Commutation proceeds-deferred charge 11,839 1,181 1,365
------ ----- -----
NET CASH FROM OPERATING ACTIVITIES (16,761) (8,934) 7,190
------ ----- -----
NET CASH FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed
maturities and equity securities 42,482 22,977 59,046
Purchase of fixed maturities and
equity securities (37,485) (6,797) (56,784)
Net increase in short-term
investments 9,422 (6,637) (9,934)
Disposal (purchases) of property and
equipment, net (27) (1,264) (66)
------ ----- -----
NET CASH FROM INVESTING ACTIVITIES 14,392 8,279 (7,738)
------ ----- -----
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in Thousands)
Year Ended December 31
--------------------------------
1995 1994 1993
------- --------- ------
NET CASH FROM FINANCING ACTIVITIES:
Increase (decrease) in funds held, net (1,082) 681 552
Purchase of treasury stock - (17) -
Increase in note payable 4,000 - -
------ ----- -----
NET CASH FROM
FINANCING ACTIVITIES 2,918 664 552
------ ----- -----
Effect of exchange rate changes on cash (1) 27 (7)
------ ----- -----
INCREASE (DECREASE) IN CASH 548 36 (3)
CASH - BEGINNING OF THE PERIOD 48 12 15
------ ----- -----
CASH - END OF THE PERIOD $ 596 $ 48 $ 12
====== ===== =====
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION:
Cash paid during the year for:
Interest $ - $ - $ -
====== ===== =====
Income taxes $ - $ - $ -
====== ===== =====
(The accompanying footnotes are an integral part of the consolidated financial
statements.)
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1995
NOTE A--ORGANIZATION AND NATURE OF BUSINESS
U.S. Capital Group Inc. (the "Company") was organized under the laws of Delaware
in 1971, as a shell corporation, which remained inactive until 1986, when it was
purchased by the company to act as the holding company for the U.S. Capital
Group Inc. The Company, through its subsidiaries, comprise a property and
casualty insurance and reinsurance underwriting and services group operating
from the United States and Europe.
The Company, through U.S. Capital Insurance Company, specializes principally in
the underwriting of insurance in the following lines of business: private
passenger automobile, commercial automobile, commercial property, specialty
reinsurance and other liability.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PRINCIPLES OF
CONSOLIDATION AND BASIS OF PRESENTATION
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries at December 31, 1995, as follows: U.S. Capital
Insurance Company (U.S.) 100%; PAG Management Inc. (U.S.) (formerly named Pan
Atlantic Group, Inc.) 100%; Pan Atlantic Investors, Ltd. (U.S.) 100%; Pan
Atlantic Insurance Company, Ltd. (United Kingdom) 100%; Insyst Inc. (U.S.) 100%;
Pan Atlantic Underwriters, Ltd. (Bermuda) 100%; AROS Reinsurance Services
Limited (United Kingdom) 100%; Atlantic Run Off Services Inc. (U.S.) 100%; Pan
Atlantic Reinsurance Company (Bermuda) 100%; U.S. Capital Premium Finance
Company (U.S.) 100%; and AI Service Bureau, Inc. (U.S.) 100%. The investment in
GoldStreet Syndicate Corporation (GoldStreet), an affiliated company (30%
owned), was carried on the equity basis of accounting until September 30, 1995,
at which time the equity interest was transferred to Republic Insurance Company
("Republic"). All significant inter-company transactions are eliminated in
consolidation.
COMMISSIONS--
Profit commissions are based on underwriting results for each account year
including the Company's estimates for incurred but not reported losses ("IBNR")
on open account years. Profit commissions previously accrued are adjusted, if
appropriate, in subsequent years as additional underwriting experience becomes
known.
INVESTMENTS--
In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and
Equity Securities", the Company has classified its investments into "Securities
Available for Sale." Securities available for sale are reported at market value.
The unrealized gains and losses of the investments in this category are credited
or charged directly to shareholders' equity, net of applicable taxes.
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PRINCIPLES OF
CONSOLIDATION AND BASIS OF PRESENTATION (Continued)
Fixed maturity investments are carried at market. Marketable equity securities,
(common stocks and preferred stocks with no mandatory redemption) are carried at
market. Short-term investments are carried at cost, which approximates market.
Net unrealized appreciation or depreciation of equity securities is a component
of stockholders' equity. Realized gains and losses are determined on a specific
identification of securities sold.
FEDERAL INCOME TAX--
The Company establishes, when required, deferred tax assets and liabilities for
the temporary differences between the financial reporting basis and the tax
basis of the Company's assets and liabilities at enacted tax rates expected to
be in effect when such amounts are realized or settled. (See Footnote F)
UNEARNED PREMIUM RESERVE--
Unearned premiums represent the portion of premiums written applicable to the
unexpired terms of contracts in force. Unearned premium reserves are calculated
by using pro rata methods or reports received from ceding companies.
Accordingly, premiums written are recorded as income when earned.
RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES--
Losses and loss adjustment expenses are charged to income as incurred. Reserves
for unpaid losses and loss adjustment expenses are based on reports received
from an accumulation of case estimates for losses reported prior to year end
plus a provision for losses and loss adjustment expenses incurred but not
reported based upon the Company's past experience and reviews of individual
policies and contracts written and expenses for investigating and adjusting
claims. Such estimated liabilities are continually reviewed and revised as
necessary. Changes in estimates, if any, are reflected in operations in the
period determined. The liability for such losses is stated after estimated
recoveries for salvage and subrogation.
DEFERRED POLICY ACQUISITION COSTS--
Deferred acquisition costs represent costs that are primarily related to and
vary with the production of business. These costs are principally commission and
brokerage, taxes and salaries for primary insurance contracts. Such costs are
deferred to the extent recoverable, after considering future investment income,
and are amortized over the period in which the related premiums are earned.
Policy acquisition costs included in the accompanying statements of operations
are presented net of ceding commissions, commission overrides and other fees.
Deferred charges arising under certain reinsurance contracts are amortized over
the periods in which the related anticipated income is earned.
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PRINCIPLES OF
CONSOLIDATION AND BASIS OF PRESENTATION (Continued)
DEPRECIATION--
Buildings are depreciated on the straight-line method over 27.5 years. Furniture
and equipment are depreciated over estimated useful lives of three to ten years,
on either the straight-line or double declining-balance methods. Leasehold
improvements are amortized over the term of the lease. Accumulated depreciation
and amortization as of December 31, 1995 and 1994 aggregated $2,450,000 and
$2,521,000, respectively. Depreciation and amortization expense for the years
ended December 31, 1995, 1994 and 1993 were $99,000, $195,000 and $334,000,
respectively.
RECEIVABLES--
The credit risk associated with the collection of premiums receivable and
reinsurance recoverable amounts is an ongoing concern to the insurance and
reinsurance industry. U.S. Capital Group Inc. and subsidiaries monitors on a
case-by-case basis the credit worthiness of companies from which significant
receivables are due. Premiums receivable are net of uncollectable balances of
approximately $1,925,000.
EARNINGS PER SHARE--
The Company's earnings per share are calculated based on weighed average of
shares outstanding for the periods presented. No effect has been given for
common stock equivalents since they are not dilutative. The company has given
retroactive effect to the reverse 1 share for 4 shares stock split effected in
July 1993. The Company accounts for common stock equivalents on the treasury
stock method
USE OF SIGNIFICANT ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS--
The preparation of financial statements in accordance with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, and disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported amounts of and disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
SIGNIFICANT ESTIMATES--
The most significant estimates in the Company's balance sheet are the
determination of prepaid policy acquisition costs, reserve for insurance
losses and loss adjustment expenses, and the recognition of the Republic
Settlement (See Note I). Management's best estimate of prepaid
policy acquisition costs is based on historical studies and assumptions made
regarding costs incurred. Management's best estimate of insurance losses and
loss adjustment expenses is based on past loss experience and consideration of
current claim trends as well as prevailing social, economic and legal
conditions. Although management's estimates are not expected to change in the
near term, the costs the Company will ultimately incur could differ from the
amounts assumed will be incurred based on the assumptions made.
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PRINCIPLES OF
CONSOLIDATION AND BASIS OF PRESENTATION (Continued)
ADVERTISING--
The Company expenses the costs of advertising as incurred. Advertising expense
was $229,000 in 1995, $490,000 in 1994 and $1,021,000 in 1993.
STOCK OPTIONS--
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation". SFAS No. 123 allows companies to continue to account for their
stock plans in accordance with APB Opinion 25 but encourages the adoption of a
new accounting method based on the estimated fair value of employee stock
options. Companies electing not to follow the new fair value based method are
required to provide expanded footnote disclosures, including pro forma net
income and earnings per share, determined as if the company had applied the new
method. SFAS No. 123 is required to be adopted prospectively for its stock
option plans in accordance with APB Opinion 25 and provide supplemental
disclosures as required by SFAS No. 123, beginning in 1996. Management intends
to continue to account for its stock-based compensation plans in accordance
with APB Opinion 25 and provide the supplemental disclosures as required by
SFAS No. 123, beginning in 1996.
NOTE C--INVESTMENTS
Fixed maturities, equity securities and short-term investments at December 31,
1995 with a carrying value of approximately $38.7 million are pledged to banks
in connection with an equivalent amount of letters of credit or trust agreements
issued to ceding companies in accordance with reinsurance agreements or for
various regulatory restrictions. Also, fixed maturities with a carrying value of
approximately $4,547,000 are on deposit with insurance regulatory authorities.
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE C--INVESTMENTS (Continued)
The components of investment income are summarized as follows:
(in thousands)
1995 1994 1993
-------- -------- --------
Fixed maturities $ 5,135 6,071 $ 6,373
Equity securities -- 173 683
Short-term investments 932 470 421
-------- -------- --------
Total Investment Income $ 6,067 $ 6,714 $ 7,477
======== ======== ========
Realized gains on sale of investments are as follows:
1995 1994 1993
-------- -------- --------
Fixed Maturities $ 1,017 $ 156 $ 2,515
Equity Securities (57) 108 2,012
-------- -------- --------
Total Realized Gains $ 960 $ 264 $ 4,527
======== ======== ========
See chart on following page for amortized cost and estimated market value of
investments held by the Company.
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE C--INVESTMENTS (Continued)
The amortized cost and estimated market value of investments held by the Company
are as follows:
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1995 Cost Gains Losses Value
- ----------------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Fixed maturities - Bonds
U.S. Treasury obligations.................. $17,381 $ 693 0 $18,074
Foreign government......................... 2,981 0 (48) 2,933
Corporate securities....................... 26,218 806 0 27,024
Mortgage-backed securities................. 22,049 289 22,338
---------- ---------- ---------- ----------
Total Bonds available for sale 68,630 1,787 (48) 70,369
---------- ---------- ---------- ----------
Equity securities:
Common stocks.............................. 1 0 (1) 0
Preferred stocks........................... 0 0 0 0
---------- ---------- ---------- ----------
Total Equities available for sale 1 0 (1) 0
---------- ---------- ---------- ----------
Short-term investments....................... 14,287 0 0 14,287
---------- ---------- ---------- ----------
Total investments $82,918 $1,787 ($49) $84,656
========== ========== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
Gross Gross
Amortized Unrealized Unrealized Market
December 31, 1994 Cost Gains Losses Value
- ----------------- ---------- ---------- ---------- ----------
(in thousands)
<S> <C> <C> <C> <C>
Fixed maturities - Bonds
U.S. Treasury obligations................... $18,517 $ 28 (810) $17,735
Foreign government.......................... 2,311 0 (311) 2,000
Corporate securities........................ 32,720 219 (2,528) 30,411
Mortgage-backed securities.................. 17,879 2 (1,559) 16,322
---------- ---------- ---------- ----------
Total Bonds available for sale 71,427 249 (5,208) 66,468
---------- ---------- ---------- ----------
Equity securities:
Common stocks............................... 204 0 (88) 116
Preferred stocks............................ 406 109 0 515
---------- ---------- ---------- ----------
Total Equities available for sale 610 109 (88) 631
---------- ---------- ---------- ----------
Short-term investments........................ 23,684 0 0 23,684
---------- ---------- ---------- ----------
Total investments $95,721 $358 ($5,296) $90,783
========== ========== ========== ==========
</TABLE>
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE C--INVESTMENTS (continued)
The amortized cost and estimated market value of debt securities at December 31,
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.
Estimated
Amortized Market
Cost Value
-------- -------
(in thousands)
Less than 1 year $ 1,350 $ 1,025
1 to 5 Years 18,438 18,792
5 to 10 Years 18,320 18,905
10 Years 8,474 9,309
-------- -------
Sub-total 46,582 48,031
Mortgage-backed securities 22,048 22,338
-------- --------
TOTAL $68,630 $70,369
======= =======
NOTE D--COMMITMENTS
Rental expense for the years ended December 31, 1995, 1994 and 1993 was
$656,000, $803,000 and $1,003,000 respectively. The aggregate future minimum
lease payments required under non-cancelable operating leases for office space
at December 31, 1995 are as follows:
1996 $ 316,915
1997 305,030
1998 279,611
------------
Total $ 901,556
============
In 1995, USCG relocated its principal subsidiary, USCIC, to Purchase, New York
under a three year lease expiring in 1998 at approximately $25,000 per month.
Subsequent to year end, the Company entered into an office lease arrangement for
its personal lines automobile lines of business operations for a term of five
years expiring May 31, 2001, at approximately $14,000 per month.
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE E--STOCK OPTIONS
In November 1986, the Company reserved 200,000 shares of its common stock,
(50,000 after the reverse 1 share for 4 shares stock split effected in July,
1993) for issuance to its directors, officers, and employees under a stock
option plan. Options granted under the stock option plan become exercisable in
two cumulative installments, with 50% of each option becoming exercisable one
year after the date of grant and 50% of each option becoming exercisable one
year thereafter. Options expire ten years after the date of grant.
On May 20, 1992, the Stock Option Committee amended the exercise price of the
options outstanding to $1.75 per share. Effective July 1993, the exercise price
per option was adjusted to $7.00 per share to reflect the reverse stock split of
1 share for 4 shares. During 1995, certain officers and certain directors
received 7,000 options pursuant to the plan at an exercise price of $8 per
share. At December 31, 1995, 17,275 shares are exercisable. No options granted
have been exercised to date.
The following table gives retroactive effect to these transactions:
Shares Outstanding
Available Options
for Grant Shares Option Price
--------- -------- ------------
Balance, January 1, 1993 38,725 11,275 $7.00
Options forfeited 1,125 (1,125)
------- ------
Balance, December 31, 1993 39,850 10,150 $7.00
Options forfeited 3,375 (3,375)
Options granted (21,000) 21,000 $8.00
------- ------
Balance, December 31, 1994 22,225 27,775 $7.00 - $8.00
Options granted (7,000) 7,000 $8.00
------- ------
Balance, December 31, 1995 15,225 34,775 $7.00 - $8.00
======= ======
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE F--INCOME TAXES
The Company files a consolidated federal corporate income tax return based on a
June 30 tax year. USCG's portion of certain income from foreign operations is
included in United States taxable income under the applicable provisions of the
Internal Revenue Code. It is management's intent that the undistributed earnings
of the foreign subsidiaries not subject to such tax will be reinvested in the
respective operations; therefore, federal, state and local taxes were not
provided on their cumulative undistributed earnings, which amounted to
approximately $16 million at December 31, 1995. Taxes paid by the Company's
foreign subsidiaries have not been material.
Deferred tax assets(liabilities) are composed of the following at:
December 31,
1995 1994
------------------------------------
NOL carry-forwards $5,900,000 $3,200,000
Policy acquisition costs related
to unearned premium (1,531,000) (330,000)
Unearned premium adjustments 1,762,000 575,000
Difference between book
and tax reserves 2,345,000 2,000,000
---------- ----------
Net deferred tax asset $8,476,000 $5,445,000
========== ==========
The domestic operations of the Company resulted in losses for 1995 which added
to loss carry-forwards. The Company has established a full valuation allowance
against the net deferred tax asset as it has incurred losses in previous years.
At December 31, 1995, the Company had a tax loss carry-forward of approximately
$17.5 million. If not used to offset future taxable income, this tax loss
carry-forward will expire through the year 2010. Franchise taxes paid, primarily
based on premiums, were approximately $427,000 for 1995, $434,000 for 1994, and
$435,000 for 1993.
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE G--INTENTION TO DRAW ON INVESTMENT DEPOSITS
Pursuant to the requirements of the Constitution and By-Laws of the New York
Insurance Exchange (the Exchange) and the Insurance Laws of the State of New
York, Pan Atlantic Investors Ltd. (PAIL), the Company's wholly owned subsidiary
and Exchange underwriting members are contingently liable for up to a maximum of
$500,000 for the unpaid contractual obligations of underwriting members found to
be insolvent.
In the opinion of management, based on the advice of legal counsel, the $500,000
deposit which was used by the Security Fund represents each underwriting
member's maximum liability with respect to the declared insolvencies as of
December 31, 1995. However, each Exchange underwriting member remains
contingently liable for an additional $500,000 in the event that the Security
Fund is required to pay the contractual obligations of any underwriting member
of the Exchange found to be insolvent in the future.
At December 31, 1991 the Exchange terminated its remaining employees and, in
management's opinion, it is not likely that the Exchange will resume operations.
Statutory statements at December 31, 1995 filed by PAIL indicate a statutory
capital and surplus of approximately $1,038,000. PAIL capital and surplus under
GAAP as at the same date was approximately $5,959,000.
PAIL has been declared insolvent by the New York Insurance Exchange. The
Exchange has petitioned the Superintendent of the Insurance Department of New
York State for an order of liquidation under the insurance law. Management
disputes this action.
NOTE H--FOREIGN OPERATIONS
Foreign (principally European) subsidiaries accounted for approximately 10%,
16%, and 9% of revenues in 1995, 1994 and 1993, respectively. Earned premiums
underwritten by the Company on behalf of subsidiaries and companies managed by
the Company aggregate, $37,533,000, $21,554,000, and $35,442,000 in 1995, 1994
and 1993, respectively, of which approximately 4%, 2% and none, related to
business assumed in foreign markets in 1995, 1994 and 1993, respectively. At
December 31, 1995 assets and liabilities of foreign subsidiaries before
inter-company eliminations aggregated $122,841,261, and $90,557,023,
respectively. Net income (loss) before income taxes of foreign subsidiaries
aggregated $622,000, ($2,115,000) and $2,400,000 in 1995, 1994 and 1993,
respectively. Under the provisions of Financial Accounting Standards Board
Statement Number 52, the adjustment resulting from translating the financial
statements of certain foreign based subsidiaries is included as a separate
component of stockholders' equity. Foreign exchange gains and losses on foreign
subsidiaries for which the functional currency is U.S. dollars are included in
the individual items of revenues and expenses. Included in 1995, 1994 and 1993
operations are approximately $695,000, $101,000 and ($4,000), respectively of
foreign currency transaction gains (losses).
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE H--FOREIGN OPERATIONS (Continued)
PAICO acted as an insurance company authorized to transact all non-life classes
of direct and reinsurance business. However, on March 12, 1991, PAICO received
notice from the Secretary of State for Trade and Industry pursuant to sections
37 and 45 of the Insurance Companies Act 1982 to refrain from effecting
(including renewing) any contract of insurance on or after March 18, 1991.
PAICO's continued solvency is contingent on its ability to collect reinsurance
balances owing from other USCG subsidiaries of US$14,384,000. Management intends
to continue PAICO's ongoing program of commutations and continues to
discharge its liabilities.
NOTE I--CONTINGENCIES
On November 9, 1995 USCG and its subsidiaries entered into a settlement
agreement with Republic Insurance Company ("Republic") in order to
settle the various disputes between the parties (the "Settlement").
The Settlement provides for a restructuring of the complex business
relationship between the parties: the transfer to Republic of the
control and administration of reinsurance policies bound in Republic's
name by certain subsidiaries of USCG; the payment of a liability,
carried by USCG of $5,400,000, over ten years without interest, the
payment being secured by a pledge of all the shares of USCG's principal
subsidiary, U.S. Capital Insurance Company, with the option to discharge
this obligation at any time by payment of the net present value of the
amount outstanding: the commutation and release of the reinsurance
obligations of various insurance company subsidiaries of USCG to
Republic, some of which are immediate and others of which are to be
determined at a future date; the commutation and immediate release of
all Republic's reinsurance obligations to USCG's subsidiaries; the
payment by Republic and other entities as parties to the settlement of
up to $3,340,698 to a USCG subsidiary; and the transfer to Republic of
USCG's equity interest in GoldStreet Syndicate Corporation in the amount
of $4,297,026. The Settlement provides further for a number of
continuing obligations on behalf of USCG, the performance of which
determine the extent and exact timing of the release from the
arbitration awards referenced in the December 31, 1994 10K of the
Company as well as from certain other contractual and reinsurance
obligations. In particular, pending the payment to Republic of the $5.4
million referred to above, the Settlement incorporates various covenants
on USCG, including a requirement to maintain the consolidated net worth
of USCG to the level of 100% of the amount owed to Republic, as well as
certain other restrictions on borrowings, capital expenditures,
dividends, premium writings, and asset sales.
During 1987 the Company assumed indirectly from certain former PAG Reinsurance
Underwriting Syndicate (the "PAG Syndicate") members the loss and loss
adjustment expense reserve obligations relating to the 1984 and prior
underwriting years, and the 1985 and 1986 business, written by the PAG Syndicate
on their behalf, for cash and other consideration. Investments
aggregating $34,000,000 are held in trusts by two of the Company's
subsidiaries to pay claims related to the policies reinsured by
Republic. Provided there are no events of default under the terms of the
Settlement, the Company and Republic have agreed to defer commutation of
the liabilities secured by the trusts until at least June 30, 1997. In
the event that the value of the assets in the trusts on the date
Republic exercises the commutation option is greater than Republic's
valuation of the trust fund obligations, Republic shall distribute the
excess trust funds to the Company's subsidiaries less any unpaid
obligations owed to Republic, as per the terms of the Settlement. The
difference between the value of assets held in the trusts and the
estimate of trust fund obligations as of December 31, 1995 is carried as
a deferred liability.
The Company or its subsidiaries are parties to various other lawsuits
generally arising in the normal course of the Company's insurance,
reinsurance and management businesses. The Company does not believe that
the eventual outcome of any such litigation will have a materially
adverse effect on the financial condition or business of the Company or
its subsidiaries. The Company's subsidiaries are regularly engaged in
the investigation and defense of claims arising out of its insurance and
reinsurance business.
In an ongoing effort to improve solvency regulation, the National
Association of Insurance Commissioners ("NAIC") and individual states
have enacted certain laws and financial statement changes. The
NAIC adopted a model risk-based capital act intended to provide a tool
for regulators to evaluate the capital of insurers and reinsurers with
respect to the risk assumed by them and determine whether there is a
perceived need for possible corrective action. The nature of the
corrective action depends upon the extent of the calculated risk-based
capital act has not yet been widely adopted, in a related action, the
NAIC adopted a proposal that requires insurers and reinsurers to report
the results of their risk-based capital calculations as part of the 1994
and subsequent statutory annual statements filed with state regulatory
authorities. Based on industry analysis provided by the NAIC, all
domestic insurance companies in the USCG fell within the average
risk-based capital level and require no regulatory action.
NOTE J--REINSURANCE
Pan Atlantic Reinsurance Company Limited ("PARCO"), U.S. Capital Insurance
Company, Pan Atlantic Investors Limited ("PAIL"), and Pan Atlantic Insurance
Company ("PAICO") cede risks to other reinsurers and remain contingently liable
to the extent that reinsuring companies are unable to meet their obligations on
these agreements.
Pursuant to the Financial Accounting Standards Board SFAS No. 113, "Accounting
and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts",
the Company's balance sheet recognizes reinsurance receivables and prepaid
reinsurance premiums as assets.
Reinsurance recoverable is presented net of a provision for uncollectible
amounts of $5,378,000 in 1995 and $6,021,000 in 1994.
The effects of Retrocession activity on premiums written and earned is set forth
below in thousands:
<TABLE>
<CAPTION>
Premiums Premiums
Written Earned
Year Ended December 31, Year Ended December 31,
---------------------------------- ---------------------------------
1995 1994 1993 1995 1994 1993
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Direct $59,748 $24,881 $20,360 $45,075 $20,628 $21,581
Assumed 7,444 1,231 15,590 5,245 1,504 16,078
Ceded (18,730) (993) (1,642) (12,787) (578) (2,214)
------- ------- ------- ------- ------- -------
Net $48,462 $25,119 $34,308 $37,533 $21,554 $35,445
======= ======= ======= ======= ======= =======
</TABLE>
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE J--REINSURANCE (Continued)
The incurred and paid activity for insurance losses and loss adjustment expenses
is as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
1995 1994 1993
---- ---- ----
(000 Omitted)
<S> <C> <C> <C>
Net Unpaid Losses and LAE at beginning of period....... $ 85,967 93,036 $ 91,258
Add--
Provision for Losses and LAE for claims occurring
in the current year.................................... 23,942 14,772 22,532
Increase in estimated Losses and LAE for claims
occurring in prior years............................... 6,143 324 4,058
-------- -------- --------
Total.................................................. 116,052 108,132 117,848
-------- -------- --------
Less--
Losses and LAE payments for claims occurring during:
The current year....................................... 13,056 8,768 14,223
Prior years............................................ 34,172 13,397 10,589
-------- -------- --------
Total.................................................. 47,228 22,165 24,812
-------- -------- --------
Net Unpaid Losses and LAE at end of period............. 68,824 85,967 93,036
Reinsurance recoverable................................ 38,451 36,810 41,587
-------- -------- --------
Gross Unpaid Losses and LAE at end of period........... $107,275 $122,777 $134,623
======== ======== ========
</TABLE>
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE K--INVESTMENT IN UNCONSOLIDATED AFFILIATE
In accordance with the Settlement agreement described in Note I, the equity
interest in GoldStreet was transferred to Republic at September 30, 1995.
The table below summarizes the balance sheets of GoldStreet at December 31, 1995
and 1994 and its Statements of Operations for each of the three years ended
December 31, 1995, 1994 and 1993:
(in thousands)
BALANCE SHEETS December 31
------------------------
ASSETS 1995 1994
---- ----
Investments $ 0 $25,042
Other assets 0 4,179
------ -------
TOTAL $ 0 $29,221
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Unpaid losses and loss adjustment expenses $ 0 $15,743
Other liabilities 0 180
------ -------
Total Liabilities 0 15,923
------ -------
Total Stockholders' Equity 0 13,298
------ -------
TOTAL $ 0 $29,221
====== =======
<TABLE>
<CAPTION>
(in thousands)
STATEMENTS OF OPERATIONS Year Ended December 31
--------------------------------------------
1995 1994 1993
--------- ----- ------
<S> <C> <C> <C>
Revenues:
Earned premiums $ -- $1,040 $ 22
Net investment income -- 1,725 2,914
-------- ------- --------
Total -- 2,765 2,936
-------- ------- --------
Expenses:
Losses and loss adjustment expense -- 1,370 (261)
Other underwriting expenses 6 349 391
--------- ------- --------
Total 6 1,719 130
--------- ------- --------
Income before federal income
taxes & extraordinary gain (6) 1,046 2,806
Federal income tax (benefit) 0 (650) 796
------- ------ ------
NET INCOME $ (6) $1,696 $2,010
========= ======= ======
</TABLE>
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE L--RESTRICTIONS OF INSURANCE SUBSIDIARIES STOCKHOLDERS' EQUITY
The payment of cash dividends by U.S. Capital, PAIL, PARCO, and PAICO is subject
to statutory restrictions imposed by each of the jurisdictions in which these
subsidiaries operate. Generally, cash dividends may be paid only out of
statutory earned surplus subject to certain other limitations. The amount which
may be paid to the holding company during 1995 without obtaining insurance
department approval is approximately $7 million. At December 31, 1995, none of
the consolidated assets could be transferred in the form of loans or advances to
the parent company without prior regulatory approval.
Set forth below is a reconciliation of net income and surplus as determined
under statutory accounting practices (SAP) to net income and stockholders'
equity as determined under generally accepted accounting principles (GAAP) for
the Company's reinsurance and insurance subsidiaries.
<TABLE>
<CAPTION>
Year Ended December 31
-------------------------------------------
1995 1994 1993
---- ---- ----
(in thousands)
<S> <C> <C> <C>
SAP net income (loss) in
reinsurance and insurance
subsidiaries $(9,919) $ 218 $ 2,466
GAAP Adjustments:
Change in deferred acquisition
costs 2,124 474 (76)
Change in deferred taxes - 176 (179)
Accrual of income on reinsurance
deposits 165 423 151
Amortization of goodwill (68) (69) (69)
Equity accounting for SAP (180) 233 175
Other, net 286 (101) (2,538)
------- -------- -------
GAAP Net Income (Loss) of
Reinsurance and Insurance
Subsidiaries (7,592) (1,354) (70)
Net Income (Loss) of Other
Subsidiaries (1,918) (1,166) 430
--------- --------- -------
NET INCOME (LOSS)-GAAP BASIS $ (9,510) $ 188 $ 360
========= ======= =======
</TABLE>
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE L--RESTRICTIONS OF INSURANCE SUBSIDIARIES STOCKHOLDERS' EQUITY
(Continued)
December 31,
----------------------
1995 1994
------- --------
SAP surplus of reinsurance and insurance
subsidiaries $31,202 $36,305
GAAP adjustments:
Deferred acquisition costs 3,103 978
Goodwill -- 68
Non-admitted assets under SAP 6,657 3,458
Reinsurance transactions recorded
as deposits under GAAP -- 2,454
Taxes (23) (266)
SAP accounting for unrealized gain -- (875)
GAAP accounting for investment in
unconsolidated affiliate -- 1,150
---------- ----------
Equity of reinsurance and
insurance subsidiaries
included in the accompanying
financial statements 40,939 43,272
Equity of other subsidiaries 16,720 16,862
Consolidating eliminations (51,643) (52,066)
STOCKHOLDERS' EQUITY GAAP BASIS $ 6,016 $ 8,068
======== =======
NOTE M--OTHER ASSETS
The components of other assets are as follows:
December 31
------------------------
1995 1994
------- ------
(in thousands)
Reinsurance transactions recorded as deposits $ -- $2,744
Investment in Miller Tabak Hirsch & Co., at cost 309 309
Other receivables 3,828 408
Receivable from managed company 68 68
Commissions receivable 1,223 1,223
Goodwill -- 68
-------- ------
TOTAL $5,428 $4,820
======= ======
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE N--BUSINESS SEGMENTS INFORMATION
The Company and its subsidiaries operate within the reinsurance and insurance
industry in three identifiable segments: (i) primary insurance (ii) reinsurance
underwriting and (iii) reinsurance services.
In the primary insurance underwriting segment, the Company provides property and
casualty insurance coverage to insureds primarily in the United States,
principally coverage of automobile liability and third-party liability with the
balance being commercial and personal property business.
In the reinsurance underwriting segment, the Company provided reinsurance to
property and casualty insurers and reinsurers operating within the United States
and Europe.
In the reinsurance services segment, the Company provides underwriting
management and reinsurance-related services to reinsurers operating as
underwriting members on the New York Insurance Exchange, and to a group of
affiliated and unaffiliated foreign and domestic reinsurers.
<TABLE>
<CAPTION>
Year Ended December 31
----------------------------
1995 1994 1993
------- ------ ------
(in thousands)
<S> <C> <C> <C>
Primary insurance underwriting:
Net premium earned $33,169 $20,031 $21,581
Investment income 2,166 2,235 1,903
Realized gains 830 382 1,982
Other income 1,089 352 --
------- ------- -------
Total primary insurance underwriting $37,254 $23,000 $25,466
======= ======= =======
Reinsurance underwriting:
Net premium earned $ 4,364 $ 1,523 $13,863
Investment income 3,401 4,434 5,139
Realized gains 125 113 2,348
Other income 238 548 813
--------- ------- -------
Total reinsurance underwriting $ 8,128 $ 6,618 $22,163
========= ======= =======
</TABLE>
US. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE N--BUSINESS SEGMENTS INFORMATION (Continued)
<TABLE>
<CAPTION>
Year Ended December 31
---------------------------
1995 1994 1993
----- ----- -----
(in thousands)
<S> <C> <C> <C>
Reinsurance services:
Service fees $ 1,830 $ 2,522 $ 2,876
Investment income 63 26 382
Realized gains - (214) -
Other income (83) 95 81
------- ------- -------
Total reinsurance services $ 1,810 $ 2,429 $ 3,339
======= ======= =======
Total all segments $47,192 $32,047 $50,968
Corporate investment income 443 3 54
Inter-segment eliminations (1,929) (1,908) (2,038)
------- ------- -------
Total $45,705 $30,142 $48,984
======= ======= =======
Income (loss) from operations before federal
income taxes and equity in income
of unconsolidated affiliate:
Primary insurance underwriting segment $(4,085) $ 990 $ 427
Reinsurance underwriting segment (3,911) 216 (678)
Reinsurance services segment (1,861) (1,475) 364
Corporate overhead, net 353 (49) 51
------- ------- -------
Total $(9,504) $ (318) $ 164
======== ======= =======
</TABLE>
PAG Management Inc. ("PAG") provided Pan Atlantic Investors, Ltd. ("PAIL") with
underwriting management services and received a management fee. PAG's operations
are included in the reinsurance services segment and PAIL's operations are
included in the reinsurance underwriting segment.
December 31
-------------------
1995 1994
---- ----
(in thousands)
Identifiable assets:
Primary insurance $ 61,687 $ 46,519
Reinsurance underwriting 139,533 149,120
Reinsurance services and corporate 4,478 74,438
Investment in unconsolidated affiliate - 4,011
Inter-segment eliminations (58,914) (80,829)
-------- --------
Total $146,784 $193,259
======== ========
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE O--UNAUDITED QUARTERLY FINANCIAL DATA
The following is a summary of unaudited quarterly results of operations and per
share data for 1995 and 1994 (in thousands except per share amounts)
<TABLE>
<CAPTION>
1995
-----------------------------------------------
1st 2nd 3rd 4th
--- --- ---- ---
<S> <C> <C> <C> <C>
Operations
Premiums and Other Income $7,901 $11,055 $13,166 $6,962
Net Investment Income 2,030 1,236 1,051 1,749
Realized Gains (Losses) 91 188 (71) 751
Net Income (Loss) 193 98 (7,856) (1,946)
Per Share Data
Net Income (Loss) $ .35 $ .18 $(14.01) $(3.47)
<CAPTION>
1994
--------------------------------------------------
<S> <C> <C> <C> <C>
Operations
Premiums and Other Income $5,343 $4,544 $5,756 $7,494
Net Investment Income 1,825 1,589 1,676 1,624
Realized Gains (223) 248 285 (46)
Net Income (Loss) 562 672 (346) (700)
Per Share Data
Net Income (Loss) $ .99 $ 1.18 $ (.61) $(1.23)
The third quarter 1995 loss reflects the Settlement agreement referred to in
Note I.
SCHEDULE I
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES
(In thousands)
December 31, 1995
-----------------------------
Column A Column B Column C Column D
- ------------------------------------------ -------- -------- --------
Amount
at
Which
Shown
in the
Balance
Type of Investment Cost Value Sheet
- ------------------------------------------ -------- ------- -------
Fixed maturities - Bonds
U.S. Treasury securities and obligations
of U.S. government agencies............ 17,381 18,074 18,074
Foreign governments...................... 2,981 2,933 2,933
Corporate Securities..................... 26,218 27,024 27,024
Mortgaged-backed securities.............. 22,049 22,338 22,338
------ ------ ------
68,630 70,369 70,369
Total Fixed Maturities
Equity securities:
Common stocks............................ 1 0 0
Nonredeemable preferred stocks........... 0 0 0
------ ------ ------
Total Equity Securities 1 0 0
------ ------ ------
Short-term investments..................... 14,287 14,287
------ ------
TOTAL INVESTMENTS $82,918 $84,656
------- -------
SCHEDULE II
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED BALANCE SHEETS
(in thousands)
December 31
-----------------------
1995 1994
------ -------
ASSETS
Bonds $ 175 $ 166
Cash 596 48
Investment in subsidiaries 6,066 18,465
Other assets 309
Income taxes recoverable 594 856
------ -------
TOTAL ASSETS $7,740 $19,535
====== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities:
Other Liabilities -- 27
Due to subsidiaries 1,724 11,440
------ -------
Total Liabilities $1,724 $11,467
------ -------
Stockholders' equity:
Preferred stock, par value $1.00 per share;
authorized 250,000 shares, none issued
Common stock, par value $.10 per share;
authorized 2,500,000 shares; issued
1,112,542 (including 551,996 shares in 1994
and 543,646 shares in 1993 in treasury) 111 111
Additional paid-in capital 29,481 29,481
Unrealized appreciation (depreciation)
on equity securities 1,738 (5,639)
Foreign exchange translation adjustment 2,198 2,117
Deficit (10,953) (1,443)
Treasury stock (16,559) (16,559)
------ -------
Total Stockholders' Equity 6,016 8,068
------ -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,740 $19,535
======== =======
SCHEDULE II
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
(in thousands)
Year Ended December 31
----------------------------------
1995 1994 1993
------- ------- -------
Revenues:
Investment Income $ 437 $ 19 $ 38
Realized gain (loss) 6 (17) 8
------- ------- -------
Total Revenue 443 2 46
------- ------- -------
Expenses:
General and administrative 90 52 91
------- ------- -------
Total 90 52 91
------- ------- -------
INCOME (LOSS) BEFORE EQUITY IN
SUBSIDIARIES 353 (50) (45)
Equity in net income (loss) of
subsidiaries (9,857) 238 405
------- ------- -------
NET INCOME (LOSS) $(9,504) $ 188 $ 360
======== ===== ======
SCHEDULE II
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31
----------------------------------
1995 1994 1993
------- ------- -------
OPERATING ACTIVITIES:
Net income (loss) $(9,504) $188 $ 360
Equity in net (income) loss of
subsidiaries 9,857 (238) (405)
Change in income taxes recoverable 262 145 84
Change in other assets (308) - 84
Change in other liabilities (27) 27 -
------- ------- -------
Net Cash Provided By Operating
Activities 280 122 123
------- ------- -------
INVESTING ACTIVITIES -
Sale (purchase) of bonds (29) 421 (607)
------- ------- -------
Net Cash Provided (Used) By
Investing Activity (29) 421 (607)
------- ------- -------
FINANCING ACTIVITIES:
Change in due from subsidiaries 297 (507) 481
------- ------- -------
Net Cash Provided (Used) By
Financing Activities 297 (507) 481
------- ------- -------
INCREASE (DECREASE) IN CASH 548 36 (3)
CASH - BEGINNING OF THE PERIOD 48 12 15
------- ------- -------
CASH - END OF THE PERIOD $ 596 $ 48 $ 12
======= ======= =======
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for:
Interest $ - $ - $ -
======= ======= =======
Income taxes $ - $ - $ -
======= ======= =======
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT
NOTE A--ORGANIZATION AND NATURE OF BUSINESS
U.S. Capital Group Inc. (the "Company") was organized under the laws of
Delaware in 1971, as a shell corporation, which remained inactive until 1986,
when it was purchased by the company to act as the holding company for the U.S.
Capital Group Inc. The Company, through its subsidiaries, comprise a property
and casualty insurance and reinsurance underwriting and services group operating
from the United States and Europe.
The Company, through U.S. Capital Insurance Company, specializes principally in
the underwriting of insurance in the following lines of business: private
passenger automobile, commercial automobile, commercial property, specialty
reinsurance and other liability.
NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying consolidated financial statements include the accounts of the
Company and its subsidiaries at December 31, 1995, as follows: U.S. Capital
Insurance Company (U.S.) 100%; PAG Management Inc. (U.S.) (formerly named Pan
Atlantic Group, Inc.) 100%; Pan Atlantic Investors, Ltd. (U.S.) 100%; Pan
Atlantic Insurance Company, Ltd. (United Kingdom) 100%; Insyst Inc. (U.S.)
100%; Pan Atlantic Underwriters, Ltd. (Bermuda) 100%; AROS Reinsurance Services
Limited (United Kingdom) 100%; Atlantic Run Off Services Inc. (U.S.) 100%; Pan
Atlantic Reinsurance Company (Bermuda) 100%; U.S. Capital Premium Finance
Company (U.S.) 100%; and AI Service Bureau, Inc. (U.S.) 100%. The investment in
GoldStreet Syndicate Corporation (GoldStreet), an affiliated company (30%
owned), was carried on the equity basis of accounting until September 30, 1995,
at which time the equity interest was transferred to Republic Insurance Company
("Republic"). All significant inter-company transactions are eliminated in
consolidation.
NOTE C--INTENTION TO DRAW ON INVESTMENT DEPOSITS
Pursuant to the requirements of the Constitution and By-Laws of the New York
Insurance Exchange (the Exchange) and the Insurance Laws of the State of New
York, Pan Atlantic Investors Ltd. (PAIL), the Company's wholly owned subsidiary
and Exchange underwriting members are contingently liable for up to a maximum of
$500,000 for the unpaid contractual obligations of underwriting members found to
be insolvent.
In the opinion of management, based on the advice of legal counsel, the $500,000
deposit which was used by the Security Fund represents each underwriting
member's maximum liability with respect to the declared insolvencies as of
December 31, 1995. However, each Exchange underwriting member remains
contingently liable for an additional $500,000 in the event that the Security
Fund is required to pay the contractual obligations of any underwriting member
of the Exchange found to be insolvent in the future.
At December 31, 1991 the Exchange terminated its remaining employees and,
in management's opinion, it is not likely that the Exchange will resume
operations.
Statutory statements at December 31, 1995 filed by PAIL indicate a statutory
capital and surplus of approximately $1,038,000. PAIL capital and surplus under
GAAP as at the same date was approximately $5,959,000.
USCG has petitioned the Superintendent of the Insurance Department of New York
State to allow PAIL to be merged into USCIC.
NOTE D--CONTINGENCIES
On November 9, 1995 USCG and its subsidiaries entered into a
settlement agreement with Republic Insurance Company ("Republic")
in order to settle the various disputes between the parties ("the
Settlement").
The Settlement provides for a restructuring of the complex
business relationship between the parties; the transfer to
Republic of the control and administration of reinsurance
policies bound in Republic's name by certain subsidiaries of
USCG; the payment of a liability, carried by USCG of $5,400,000,
over ten years without interest, the payment being secured by a
pledge of all the shares of USCG's principal subsidiary, U.S.
Capital Insurance Company, with the option to discharge this
obligation at any time by payment of the net present value of the
amount outstanding; the commutation and release of the
reinsurance obligations of various insurance company subsidiaries
of USCG to Republic, some of which are immediate and others of
which are to be determined at a future date; the commutation and
immediate release of all Republic's reinsurance obligations to
USCG's subsidiaries; the payment by Republic and other entities
as parties to the settlement of up to $3,340,698 to a USCG
subsidiary; and the transfer to Republic of USCG's equity
interest in GoldStreet Syndicate Corporation in the amount of
$4,297,026. The Settlement provides further for a number of
continuing obligations on behalf of USCG, the performance of
which determine the extent and exact timing of the release from
the arbitration awards referenced in the December 31, 1994 10K of
the Company as well as from certain other contractual and
reinsurance obligations. In particular, pending the payment to
Republic of the $5.4 million referred to above, the Settlement
incorporates various covenants on USCG, including a requirement
to maintain the consolidated net worth of USCG to the level of
100% of the amount owed to Republic, as well as certain other
restrictions on borrowings, capital expenditures, dividends,
premium writings, and asset sales.
During 1987 the Company assumed indirectly from certain former
PAG Reinsurance Underwriting Syndicate (the "PAG Syndicate")
members the loss and loss adjustment expense reserve obligations
relating to the 1984 and prior underwriting years, and the 1985
and 1986 business, written by the PAG Syndicate on their behalf,
for cash and other consideration. Investments aggregating
$34,000,000 are held in trusts by two of the Company's
subsidiaries to pay claims related to the policies reinsured by
Republic. Provided there are no events of default under the
terms of the Settlement, the Company and Republic have agreed to
defer commutation of the liabilities secured by the trusts until
at least June 30, 1997. In the event that the value of the
assets in the trusts on the date Republic exercises the
commutation option is greater than Republic's valuation of the
trust fund obligations, Republic shall distribute the excess
trust funds to the Company's subsidiaries less any unpaid
obligations owed to Republic, as per the terms of the Settlement.
The difference between the value of assets held in the trusts and
the estimate of trust fund obligations as of December 31, 1995 is
carried as a deferred liability.
The Company or its subsidiaries are parties to various other
lawsuits generally arising in the normal course of the Company's
insurance, reinsurance and management businesses. The Company
does not believe that the eventual outcome of any such litigation
will have a materially adverse effect on the financial condition
or business of the Company or its subsidiaries. The Company's
subsidiaries are regularly engaged in the investigation and
defense of claims arising out of its insurance and reinsurance
business.
In an ongoing effort to improve solvency regulation, the National
Association of Insurance Commissioners ("NAIC") and individual
states have enacted certain laws and financial statement changes.
The NAIC adopted a model risk-based capital act
intended to provide a tool for regulators to evaluate the capital
of insurers and reinsurers with respect to the risk assumed by
them and determine whether there is a perceived need for possible
corrective action. The nature of the corrective action depends
upon the extent of the calculated risk-based capital act has not
yet been widely adopted, in a related action, the NAIC adopted a
proposal that requires insurers and reinsurers to report the
results of their risk-based capital calculations as part of the
1994 and subsequent statutory annual statements filed with state
regulatory authorities. Based on industry analysis provided by
the NAIC, all domestic insurance companies in the USCG fell
within the average risk-based capital level and require no
regulatory action.
</TABLE>
<TABLE>
<CAPTION>
Schedule III
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993
SUPPLEMENTARY INSURANCE INFORMATION
(in thousands)
Unpaid Claims Claim Underwriting,
Deferred and Claim Gross Other Net and Claim Policy General and Net
Acquisition Adjustment Unearned Claims Earned Investment Adjustment Acquisition Administrative Premium
Segment Costs Expenses Premiums Payable Premiums Income Expenses Costs Expenses Written
- ---------- --------- -------- -------- ------- -------- --------- ---------- ---------- ----------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31, 1993:
Reinsurance underwriting $ -- $113,782 $ 300 $ -- $13,863 $ 5,139 $11,059 $ 2,406 $ 7,579 $13,948
Reinsurance Services -- -- -- -- - 51 -- -- 2,975 --
Primary underwriting 505 20,841 4,576 -- 21,582 1,905 15,531 3,286 6,222 20,360
Corporate expense/income -- -- -- -- - 382 -- -- 91 --
Intercompany eliminations -- -- -- -- - -- -- (1,000) (1,129) --
-------- -------- ------- ----- ------- ------- ------- ------- ------- -------
TOTAL $ 505 $134,623 $ 4,876 $ -- $35,445 $ 7,477 $26,590 $ 4,692 $15,738 $34,308
======== ======== ======= ===== ======= ======= ======= ======= ======= =======
Year ended December 31, 1994:
Reinsurance underwriting $ -- $105,179 $ 215 $ -- $ 1,523 $ 4,434 $ 501 $ 1,374 $ 4,621 $ 1,249
Reinsurance services -- -- -- -- - 26 -- -- 3,904 --
Primary underwriting 979 17,598 8,830 -- 20,031 2,235 14,595 682 6,733 23,869
Corporate expense/income -- -- -- -- - 19 -- -- 52 --
Intercompany eliminations -- -- -- -- - -- -- (1,000) (1,002) --
-------- -------- ------- ----- ------- ------- ------- ------- ------- -------
TOTAL $ 979 $122,777 $9,045 $ -- $21,554 $ 6,714 $15,096 $1,056 $14,308 $25,118
======== ======== ======= ===== ======= ======= ======= ======= ======= =======
Year ended December 31, 1995:
Reinsurance Underwriting $ -- $ 84,540 $ 2,414 $ -- $ 4,364 $ 3,401 $(2,281) $ 1,627 $12,698 $ 6,561
Reinsurance Services -- -- -- -- - 63 -- -- 4,108 --
Primary Underwriting 3,103 22,735 23,502 -- 33,169 2,166 32,367 3,568 5,404 41,901
Corporate expense/income -- -- -- -- - 437 -- -- 90 --
Intercompany eliminations -- -- -- -- - -- -- (1,000) (1,366) --
-------- -------- ------- ----- ------- ------- ------- ------- ------- -------
TOTAL $3,103 $107,275 $25,916 $ -- $37,533 $ 6,067 $30,086 $ 4,195 $20,934 $48,462
======== ======== ======= ===== ======= ======= ======= ======= ======= =======
</TABLE>
SCHEDULE 1V
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
REINSURANCE
(in thousands)
Ceded Percentage
to Assumed of Amount
Gross Other from Other Net Assumed
Description Amount Companies Companies Amount to Net
- ----------- ------- --------- ---------- ------- ----------
Year Ended
December 31, 1993
Property and liability
insurance premiums $21,582 $ 2,048 $15,911 $35,445 45%
======= ======= ======= ======= ===
Year Ended
December 31, 1994:
Property and liability
insurance premiums $20,628 $ 619 $ 1,545 $21,554 7%
======= ======= ======= ======= ===
Year Ended
December 31, 1995:
Property and liability
insurance premiums $45,075 $21,881 $14,339 $37,533 38%
======= ======= ======= ======= ====
Schedule VI
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
SUPPLEMENTARY INFORMATION CONCERNING PROPERTY--CASUALTY INSURANCE OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Reserves for
Unpaid Claims Discount
Deferred and Claims if Any Gross Net
Acquisition Adjustment Deducted in Unearned Earned
Affiliation with Registrant Costs Expense Column C Premium Premiums
- --------------------------- ----------- ------------- ----------- --------- --------
<S> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Consolidated property-casualty
entities $ 505 $134,623 $ - $ 4,876 $34,445
Unconsolidated property-casualty
entities
Proportionate share of registrant
and its subsidiaries' 50% or
less earned property-casualty
equity investees - 2,720 - - 6
------- -------- ------- ------- -------
TOTAL $ 505 $137,343 $ - $ 4,876 $34,451
======= ======== ======= ======= =======
Year ended December 31, 1994:
Consolidated property-casualty
entities $ 979 $122,777 $ - $ 9,045 $21,554
Unconsolidated property-casualty
entities
Proportionate share of registrant
and its subsidiaries' 50% or
less earned property-casualty
equity investees - 1,446 - - 310
------ -------- ------- ------- -------
TOTAL $ 979 $124,223 $ - $ 9,045 $21,864
====== ======== ======= ======= =======
Year ended December 31, 1995:
Consolidated property-casualty
entities $3,103 $107,275 $ - $25,916 $37,533
Unconsolidated property-casualty
entities
Proportionate share of registrant
and its subsidiaries' 50% or
less earned property-casualty
equity investees - - - - -
------ -------- ------- ------- -------
TOTAL $3,103 $107,275 $ - $25,916 $37,533
====== ======== ======= ======= =======
<CAPTION>
Claim and Claim
Adjustment Expenses
Incurred Relative to Paid
---------------------- Claims
Net Policy and Claim Net
Investment Current Prior Acquistion Adjusting Premiums
Affiliation with Registrant Income Year Years Costs Expenses Written
- --------------------------- ---------- --------- ------- ----------- ----------- ---------
<S> <C> <C> <C> <C> <C> <C>
Year ended December 31, 1993:
Consolidated property-casualty
entities $ 7,477 $22,532 $ 4,058 $ 4,692 $27,822 $34,308
Unconsolidated property-casualty
entities
Proportionate share of registrant
and its subsidiaries' 50% or
less earned property-casualty
equity investees 482 - (78) (5) 575 6
------- ------- ------- ------- ------- ------
TOTAL $ 7,959 $22,532 $ 3,980 $ 4,687 $28,397 $34,314
======= ======= ======= ======= ======= =======
Year ended December 31, 1994:
Consolidated property-casualty
entities $ 6,714 $14,772 $ 324 $ 1,056 $22,165 $25,118
Unconsolidated property-casualty
entities
Proportionate share of registrant
and its subsidiaries' 50% or
less earned property-casualty
equity investees 509 - 474 5 290 310
------- ------- ------- ------- ------- -------
TOTAL $ 7,223 $14,772 $ 798 $ 1,061 $22,455 $25,428
======= ======= ======= ======= ======= =======
Year ended December 31, 1995:
Consolidated property-casualty
entities $ 6,067 $23,942 $ 6,144 $ 4,195 $46,206 $48,462
Unconsolidated property-casualty
entities
Proportionate share of registrant
and its subsidiaries' 50% or
less earned property-casualty
equity investees - - - - - -
------- ------- ------- ------- ------- ------
TOTAL $ 6,067 $23,942 $ 6,144 $ 4,195 $46,206 $48,462
======= ======= ======= ======= ======= =======
</TABLE>
Name of Corporation Ownership % Jurisdiction
- ------------------- ----------- ------------
U.S. Capital Group Inc. 100% Delaware
U.S. Capital Insurance Company 100% New York
Atlantic Run Off Services Inc. 100% Connecticut
INSYST, Inc. 100% Connecticut
PAG Management Inc. 100% Delaware
Pan Atlantic Investors Ltd. 100% New York
Pan Atlantic Underwriters Ltd. 100% Bermuda
Pan Atlantic Reinsurance Company Limited(2) 73% Bermuda
Pan Atlantic Insurance Company Limited(3) 67.33% United Kingdom
AROS Reinsurance Services Limited 100% United Kingdom
(1) An additional 12.94% is owned by Pan Atlantic Investors Ltd.
(2) The remaining 27% is owned by Pan Atlantic Underwriters, Ltd.
(3) The remaining 32.67% is owned by Pan Atlantic Underwriters, Ltd.
March 15, 1995
Exhibit 21
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
The schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-END> DEC-31-1995
<DEBT-HELD-FOR-SALE> 68,630
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 70,370
<EQUITIES> 14,287
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 84,657
<CASH> 596
<RECOVER-REINSURE> 67,476
<DEFERRED-ACQUISITION> 3,102
<TOTAL-ASSETS> 155,831
<POLICY-LOSSES> 107,275
<UNEARNED-PREMIUMS> 25,916
<POLICY-OTHER> 12,624
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 4,000
111
0
<COMMON> 5,905
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 155,831
37,533
<INVESTMENT-INCOME> 6,067
<INVESTMENT-GAINS> 960
<OTHER-INCOME> 1,552
<BENEFITS> 0
<UNDERWRITING-AMORTIZATION> 4,852
<UNDERWRITING-OTHER> 50,764
<INCOME-PRETAX> (9,504)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> (6)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,510)
<EPS-PRIMARY> 16.97
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
