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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-7411
ALLCITY INSURANCE COMPANY
(Exact name of registrant as specified in its
charter)
New York 13-2530665
(State of incorporation) (I.R.S. Employer Identification Number)
122 Fifth Avenue, New York, N.Y. 10011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-387-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on Title of each class
which registered
None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [x]
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes X No ____
The aggregate market value of the voting stock held by nonaffiliates of
the registrant as of March 17, 1998 was $5,282,330.
The number of shares outstanding of each of the registrant's classes of
common shares, as of March 17, 1998, was 7,078,625.
DOCUMENTS INCORPORATED BY REFERENCE - 2
Exhibit Index on Page 26.
Total number of pages 55.
TABLE OF CONTENTS
Part I
Page
Item 1- Business.................................................. 1
Item 2- Properties................................................ 9
Item 3- Legal Proceedings......................................... 9
Item 4- Submission of Matters to a Vote of Security Holders....... 9
Part II
Item 5- Market for the Registrant's Common Equity and Related
Stockholder Matters..................................... 10
Item 6- Selected Financial Data................................... 10
Item 7- Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Item 8- Financial Statements and Supplementary Data............... 16
Item 9- Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure..................... 16
Part III
Item 10- Directors and Executive Officers of the Registrant........ 17
Item 11- Executive Compensation.................................... 19
Item 12- Security Ownership of Certain Beneficial Owners and
Management.............................................. 22
Item 13- Certain Relationships and Related Transactions............ 23
Part IV
Item 14- Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................ 24
Signatures ......................................................... 25
-i-
PART I
Item 1. Business
General
Allcity Insurance Company (the "Registrant", "Allcity" or the "Company")
is a property and casualty insurer. Empire Insurance Company ("Empire"),
a property and casualty insurer, owns approximately 84.6% of the
outstanding common shares of the Company and 100% of the outstanding
common shares of Centurion Insurance Company ("Centurion"). Empire's
common shares are 100% owned and controlled, through subsidiaries, by
Leucadia National Corporation ("Leucadia"). Additionally, Leucadia
indirectly owns an additional 5.2% of the outstanding common shares of the
Company. The Company, Empire and Centurion are sometimes hereinafter
collectively referred to as the Group.
The Company operates in the State of New York, primarily in the New York
City metropolitan area, conducting property and casualty insurance
underwriting activities. The Company's voluntary business is
produced through general agents, local agents, and insurance brokers, who
are compensated for their services by payment of commissions on the
premiums they generate. There are five general agents, one of which is
owned by Empire, and approximately 400 local agents and insurance brokers
presently acting under agreements with the Group. These agents and
brokers also represent other competing insurance companies. Empire's
wholly owned general agent is its largest producer and generated
approximately 11% of the Group's total premium volume for the year ended
December 31, 1997. Substantially all of the Group's policies are written
for a one-year period. The Group is licensed in New York to write most
lines of insurance that may be written by a property and casualty insurer.
The Group specializes in personal and commercial property and casualty
insurance business. The Group provides personal automobile and
homeowners insurance and commercial insurance coverage for vehicles
(including medallion and radio-controlled livery vehicles), workers'
compensation, multi-family residential real estate, and various other
business classes. The Group is also licensed to write insurance in
Connecticut, Massachusetts, Missouri, New Hampshire and New Jersey.
Approximately 4% of the Group's written premiums are produced from sources
outside New York State.
According to A.M. Best & Co. ("Best"), an insurance industry research
organization, the Group ranked 109th in total net premium writings among
property and casualty insurance companies and groups in 1996. In January
1998, the Group was rated (A-) (Good) by Standard & Poor's Insurance
Rating Services, based on the Group's claims-paying ability. In 1997, the
Group was rated (B++) (Very Good) by Best and was assigned an (A)
(Exceptional) financial stability rating by Demotech, Inc., an insurance
rating agency service. Approximately 59% of the Company's net premiums
written in 1997 were for automobile insurance coverage, while 41% of such
premiums were for commercial (other than automobile) and miscellaneous
and personal coverage. The Group's general agents produced approximately
28% of the Company's premium revenues for the year ended December 31,
1997.
The Group has acquired blocks of assigned risk business from other
insurance companies (the "service business") relating to private passenger
and commercial automobile insurance. These contractual arrangements,
which are negotiated for one or two year periods, provide for fees paid to
the Group within parameters established by the New York State Insurance
Department. In addition, the Group receives a fee for providing
administrative services, including claims processing, underwriting and
collection activities, for the New York Public Automobile Pool ("NYPAP")
and the Massachusetts Taxi and Limousine Pool. These latter arrangements
do not involve the assumption of any material underwriting risk by the
Group.
On a quarterly basis, the Group reviews and adjusts its estimated loss
reserves for any changes in trends and actual loss experience. Included
in the Company's results for 1997 was approximately $8.3 million for
reserve strengthening related to losses from prior accident years. The
Group will continue to evaluate the adequacy of its loss reserves and
record future adjustments to its loss reserves as appropriate. The
Group has taken certain steps to improve its operations, including
systems enhancements and actions relating to pricing and improved
underwriting and claims handling, and may initiate additional changes in
the future. The Group believes that the results of efforts taken to
date
-1-
may not be known for some time, given the nature of the property and
casualty business and the inherently long period of time involved in
settling claims.
Pooling Agreement
All insurance business written by the Company is subject to a pooling
agreement with Empire under which the Company and Empire effectively
operate as one company. The Company operates under the same general
management as Empire and has full use of Empire's personnel, information
technology systems and facilities. As of December 31, 1997, Empire and
its subsidiaries had 748 full and part-time employees. Currently, and for
all periods presented, all premiums, losses, loss adjustment expenses and
other underwriting expenses are shared in the proportion 70% to Empire and
30% to the Company. The pooling agreement and subsequent amendments were
approved by the New York State Insurance Department.
Financial Information Relating to Business Segments
The Company operates in the following business segments:
(1) Automobile lines - includes private passenger and commercial
automobile bodily injury, property damage, comprehensive and collision
insurance coverages.
(2) Commercial lines - includes commercial multiple peril, workers'
compensation, other liability, glass, burglary, and inland marine
insurance coverages.
(3) Miscellaneous and personal lines - includes fire and allied lines
and homeowners insurance coverages.
The following table presents business segment data, net of reinsurance,
for each of the three years ended December 31, 1997 (in thousands, except
loss ratio information):
Premiums Premiums Losses Loss
Written Earned Incurred Ratio (a)
1997
Automobile lines $44,484 $50,677 $45,175 89.1%
Commercial lines 22,107 23,289 19,844 85.2%
Miscellaneous and
personal lines 8,438 6,925 3,882 56.1%
Total $75,029 $80,891 $68,901 85.2%
1996
Automobile lines $60,162 $63,558 $56,562 89.0%
Commercial lines 25,243 27,714 17,128 61.8%
Miscellaneous and
personal lines 5,606 4,801 2,697 56.2%
Total $91,011 $96,073 $76,387 79.5%
1995
Automobile lines $62,485 $61,261 $55,652 90.8%
Commercial lines 28,821 29,535 20,799 70.4%
Miscellaneous and
personal lines 4,029 3,455 1,224 35.4%
Total $95,335 $94,251 $77,675 82.4%
(a) Computed on a Statutory Accounting Principles ("SAP") basis and
excluding loss adjustment expenses.
For further information concerning Business Segments, see Notes 8 and 12
of the Notes to Consolidated Financial Statements, included elsewhere
herein.
-2-
Combined Ratios
Set forth below is certain statistical information for the Company
prepared in accordance with generally accepted accounting principles
("GAAP") and SAP, for the three years ended December 31, 1997. The Loss
Ratio is the ratio of incurred losses and loss adjustment expenses to net
premiums earned. The Expense Ratio is the ratio of underwriting expenses
(policy acquisition costs, commissions, and a portion of administrative,
general and other expenses attributable to underwriting operations, net of
service fee income) to net premiums written, if determined in accordance
with SAP, or to net premiums earned, if determined in accordance with
GAAP. A Combined Ratio below 100% indicates an underwriting profit and a
Combined Ratio above 100% indicates an underwriting loss. The Combined
Ratio does not include the effect of investment income.
Years Ended December
1997 1996 1995
Loss Ratio: (a)
GAAP 101.4% 92.0% 95.8%
SAP 101.4% 89.3% 91.2%
Industry (SAP) (b) N/A 78.4% 78.9%
Expense Ratio:
GAAP 17.9% 22.1% 19.6%
SAP 17.2% 18.2% 16.3%
Industry (SAP)(b) N/A 27.4% 27.5%
Combined Ratio: (c)
GAAP 119.3% 114.1% 115.4%
SAP 118.6% 107.5% 107.5%
Industry (SAP) (b) N/A 105.8% 106.4%
(a) Includes Loss and Loss Adjustment Expenses.
(b) Source: Best's Aggregates & Averages, Property/Casualty, 1997
Edition. A comparison of industry combined ratios may not be meaningful
as a result of, among other things, differences in geographical
concentration and in the mix of property and casualty insurance products.
(c) For 1996 and 1995, a change in the statutory accounting treatment for
retrospectively rated reinsurance agreements was the principal reason
for the difference between the GAAP Combined Ratio and the SAP Combined
Ratio. Additionally, the difference relates to the accounting for
certain costs which are treated differently under SAP and GAAP.
For further information about the Company's combined ratios see Item 7,
"Management's Discussion and Analysis of Financial Condition and Results
of Operations" of this Report.
Marketing and Distribution
The Group's marketing and distribution strategy emphasizes profitability
rather than volume and focuses on the production of its voluntary business
through five general agents, one of which is an Empire subsidiary, and
approximately 400 local agents and insurance brokers who are compensated
for their services by payment of commissions on the premiums they produce.
These agents and brokers also represent competing insurance companies.
Subject to regulatory approval, the Group utilizes premium rates developed
and independently filed for all coverages with the exception of workers'
compensation, for which rates are filed by the New York Compensation
Insurance Rating Board, and assigned risk automobile business, for which
rates are filed by the New York Automobile Insurance Plan.
-3-
Reinsurance
The Company's retention on property and casualty lines of insurance was
$0.3 million in 1997 and 1996 and $0.2 million in 1995. For workers'
compensation business the retention was $0.5 million for all three years.
Additionally, the Company carries reinsurance to protect itself against
certain catastrophic losses. Its retention of lower level losses under
such treaties is $7.5 million for 1998 and was $5.0 million for 1997 and
$3.0 million for 1996 and 1995.
Effective January 1, 1997, Empire entered into a quota share reinsurance
agreement with its subsidiary, Centurion. Under this agreement, Empire
will assume 50% up to July 1, 1997 and 75% thereafter of the effective
period premiums and losses of Centurion and grant Centurion a ceding
commission. Under the pooling agreement, 70% of such business assumed
will be retained by Empire and 30% will be shared with the Company.
Although reinsurance does not legally discharge an insurer from its
primary liability for the full amount of the policy liability, it does
make the assuming reinsurer liable to the insurer to the extent of the
reinsurance ceded. The majority of the Company's reinsurance has been
placed with certain of the largest reinsurance companies, including (with
their Best ratings) General Reinsurance Corporation (A++) (superior),
American Re-Insurance Company (A+) (superior), Partner Re Co., Ltd.
(A+)(superior), IPC Re Ltd. (A) (excellent), CAT Ltd. (A)(excellent) and
Zurich Reinsurance (North America), Inc. (A) (excellent). The Company
believes its reinsurers to be financially capable of meeting their
respective obligations. However, to the extent that any reinsuring
company is unable to meet its obligations, the Company would be liable for
the reinsured risks. The Company has established reserves, which the
Company believes are adequate, for any non-recoverable reinsurance.
Investments
Investment activities represent a significant part of the Company's total
income. Investments are managed by the Investment Committee of the Board
of Directors, which consults with outside investment advisors with respect
to a substantial portion of the Company's investment portfolio.
The Company has a diversified investment portfolio substantially
consisting of securities rated "investment grade" by established bond
rating agencies or issued or guaranteed by the U.S. Government or its
agencies. At December 31, 1997 and 1996, the average yield of the
Company's bond portfolio was approximately 5.9% and 6.1%, respectively,
and the average maturity of the Company's bond portfolio was approximately
3.3 years for each year.
Tax Sharing Agreement
The Company has been included in the consolidated federal income tax
returns of Leucadia since 1993. Under the terms of the tax sharing
agreement between Leucadia and the Company, the Company computes its tax
provision on a separate return basis and is either charged its share of
federal income tax resulting from its taxable income or is reimbursed for
tax benefits resulting from its losses.
Government Regulation
The Group, like all insurance companies, is subject to regulation
involving the establishment of premium rates, standards of solvency and
minimum requirements of capital and surplus which must be maintained in
the states in which they transact business. There can be no assurance
that such regulatory requirements will not become more stringent in the
future and have an adverse effect on the Group's operations. Insurance
companies are required to file detailed annual reports with the insurance
regulatory agencies in each of the states in which they do business and
are subject to periodic examination by such agencies. The New York State
Insurance Department is currently finalizing their examination of the
Company's statutory financial statements for the years 1994, 1995 and
1996.
-4-
In the opinion of management, the results of this exam are not
expected to have a material impact on the financial position or results of
operations of the Company.
The National Association of Insurance Commissioners ("NAIC") has adopted
model laws incorporating the concept of a "risk based capital" ("RBC")
standard for insurance companies. Generally, the RBC formula is designed
to assess the adequacy of an insurer's statutory capital in relation to
the risks inherent in its business. The RBC formula is used by the states
as a tool to identify weakly capitalized companies for the purpose of
initiating regulatory action when capital under the standard is judged to
be inadequate. As of December 31, 1997, the Company's RBC ratio
substantially exceeded minimum requirements.
The NAIC also has adopted various ratios for insurance companies which, in
addition to the RBC ratio, are designed to serve as a tool to assist state
regulators in discovering potential weakly capitalized companies or
companies with unusual trends. The Company had one "other than normal"
NAIC ratio for the year ended December 31, 1997. The Company believes
that there are no material underlying problems or weaknesses in its
insurance operations and that it is unlikely that material adverse
regulatory action will be taken.
The Group is a member of state insurance funds, which provide certain
protection to policyholders of insolvent insurers doing business in those
states. Due to insolvencies of certain insurers in recent years, the
Group has been assessed certain amounts which have not been material and
are likely to be assessed additional amounts by state insurance funds. The
Company believes that it has provided for all anticipated assessments and
that any additional assessments will not have a material adverse effect on
the Company's financial condition or results of operations.
Competition
The insurance industry is a highly competitive industry, in which many of
the Company's competitors have substantially greater financial resources,
larger sales forces, more widespread agency and broker relationships, and
more diversified lines of insurance coverage. Additionally, certain
competitors market their products with endorsements from affinity groups,
while the Company's products are unendorsed, which may give such other
companies a competitive advantage. Federal, administrative, legislative
and judicial activity may result in changes to federal banking laws that
will enable national banks to act as agents in order to offer certain
insurance products in direct competition with the Company. The Company is
unable to determine what effect, if any, such changes may have on the
Company's operations.
The Company believes that property and casualty insurers generally compete
on the basis of price, customer service, consumer recognition and
financial stability. The industry has historically been cyclical in
nature, with periods of less intense price competition generating
significant profits, followed by periods of increased price competition
resulting in reduced profitability or loss. The current cycle of intense
price competition has continued for a longer period than in the past,
suggesting that the significant infusion of capital into the industry in
recent years, coupled with larger investment returns, has been, and may
continue to be, a depressing influence on policy rates. In addition, the
Company is experiencing increased competition from low cost insurance
providers that write personal lines business on a direct response basis
through direct mail and telemarketing. The profitability of the property
and casualty insurance industry is affected by many factors, including
rate competition, severity and frequency of claims (including catastrophe
losses), interest rates, state regulation, court decisions and judicial
climate, all of which are outside of the Company's control.
Loss and Loss Adjustment Expenses
Liabilities for unpaid losses, which are not discounted (except for
certain workers' compensation liabilities), and loss adjustment expenses
("LAE") are determined using case-basis evaluations, statistical analyses
and estimates for salvage and subrogation recoverable and represent
estimates of the ultimate claim costs of all unpaid losses and LAE.
Liabilities include a provision for losses that have occurred but have not
yet been reported. These estimates are subject to the effect of trends in
future claim severity and
-5-
frequency experience. Adjustments to such
estimates are made from time to time due to changes in such trends as well
as changes in actual loss experience. These adjustments are reflected in
current earnings.
The Company relies upon standard actuarial ultimate loss projection
techniques to obtain estimates of liabilities for losses and LAE. These
projections include the extrapolation of both losses paid and incurred by
business line and accident year and implicitly consider the impact of
inflation and claims settlement patterns upon ultimate claim costs based
upon historical patterns. In addition, methods based upon average loss
costs, reported claim counts and pure premiums are reviewed in order to
obtain a range of estimates for setting the reserve levels. For further
input, changes in operations in pertinent areas including underwriting
standards, product mix, claims management and legal climate are
periodically reviewed.
In the following table, the liability for losses and LAE of the Company,
are reconciled for each of the three years ended December 31, 1997.
Included therein are current year data and prior year development.
RECONCILIATION OF LIABILITY FOR LOSSES AND LAE
1997 1996 1995
(In thousands)
Liability for losses and LAE,
net of reinsurance, at beginning of the year $143,494 $142,718 $121,923
Provision for losses and LAE for
claims occurring in the current year 73,741 80,216 80,061
Increase in estimated losses and LAE
for claims occurring in prior years 8,304 8,134 10,266
82,045 88,350 90,327
Loss and LAE payments for claims
occurring during:
Current year 23,804 27,192 23,743
Prior years 56,475 60,382 45,789
80,279 87,574 69,532
Liability for losses and LAE, net 145,260 143,494 142,718
Reinsurance balances receivable 272,266 262,593 257,161
Liability for losses and LAE at the end
of year as reported in the financial
statements $417,526 $406,087 $399,879
The Company's liability for losses and LAE as of December 31, 1997 was
$145.3 million determined in accordance with SAP and $417.5 million
determined in accordance with GAAP. The difference relates to liabilities
assumed by reinsurers, which are not deducted from GAAP liabilities.
-6-
The table on the following page presents the development of balance sheet
liabilities for 1987 through 1997. The liability line at the top of the
table indicates the estimated liability, net of reinsurance, for unpaid
losses and LAE recorded at the balance sheet date for each of the
indicated years. This liability represents the estimated amount of losses
and LAE for claims that were unpaid at each annual balance sheet date,
including provision for losses estimated to have been incurred but not
reported to the Company. The middle portion of the table shows the re-
estimated amount of the previously reported liability based on experience
as of the end of each succeeding year. As more information becomes
available and claims are settled, the estimated liabilities are adjusted
upward or downward with the effect of decreasing or increasing net income
at the time of adjustment.
The "cumulative redundancy (deficiency)" represents the aggregate change
in the estimates over all prior years. For example, the initial 1987
liability estimate has developed a $5.1 million redundancy over ten years.
The effect on pretax income during the past three years of changes in
estimates of the liabilities for losses and LAE is shown in the
reconciliation table above.
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each
succeeding year. For example, as of December 31, 1997, the Company had
paid $54.6 million of the currently estimated $56.9 million of losses and
LAE that had been incurred, but not paid, through the end of 1997; thus an
estimated $2.3 million of losses incurred through 1987 remain unpaid as of
the current balance sheet date.
In evaluating this information it should be noted that each amount shown
for "cumulative redundancy (deficiency)" results includes the effects of
all changes in amounts for prior periods. For example, the amount of the
deficiency related to losses settled in 1990, but incurred in 1987, will
be included in the cumulative redundancy amount for years, 1987, 1988 and
1989. This table does not present accident or policy year development
data. Conditions and trends that have affected development of the
liability in the past may not necessarily occur in the future.
Accordingly, it would not be appropriate to extrapolate future
redundancies or deficiencies based on this table.
For further discussion of the Company's loss development experience, see
Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations" of this Report.
-7-
Analysis of Loss and Loss Adjustment Expenses Development
(In Thousands)
Years ended December 31,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
Liability for Unpaid
Losses and Loss
Adjustment Expenses $ 62,013 $ 67,154 $ 70,567 $ 75,420 $ 84,178 $ 96,712 $106,115 $121,923 $142,718 $143,494 $145,260
Liability Re-estimated
as of:
One year later 59,515 64,411 68,347 74,844 83,987 96,516 103,181 132,189 150,852 151,798 -
Two years later 58,357 62,135 65,227 73,538 83,341 97,208 112,176 140,620 160,686
Three years later 56,650 59,859 63,792 73,151 85,197 103,592 118,127 150,434
Four years later 55,367 58,606 63,556 74,190 88,928 108,430 124,375
Five years later 54,595 59,131 63,584 76,509 92,035 112,988
Six years later 54,904 59,304 64,962 78,392 95,273
Seven years later 54,924 60,504 65,467 80,040
Eight years later 55,682 61,363 66,298
Nine years later 56,382 61,780
Ten years later 56,895
Cumulative Redundancy
/(Deficiency) $ 5,118 $ 5,374 $ 4,269 $ (4,620) $(11,095) $(16,276) $(18,260) $(28,511) $(17,968) $ (8,304) $ -
Cumulative Amount of
Liability Paid
Through:
One year later $ 18,133 $ 19,242 $ 19,744 $ 23,681 $ 26,852 $ 33,903 $ 35,048 $ 45,789 $ 60,382 $ 56,475
Two years later 29,287 30,362 32,840 38,067 44,989 54,615 59,701 80,911 95,190
Three years later 36,927 39,511 42,271 50,194 59,336 71,653 81,680 105,977
Four years later 42,872 45,698 49,803 58,830 69,955 85,689 97,917
Five years later 46,734 50,434 54,602 65,025 77,965 95,938
Six years later 49,262 53,433 58,185 69,568 83,886
Seven years later 51,067 55,598 60,953 72,683
Eight years later 52,538 57,393 62,737
Nine years later 53,813 58,495
Ten years later 54,634
GROSS LIABILITY -
END of YEAR $290,833 $341,599 $399,879 $406,087 $417,526
REINSURANCE 184,718 219,676 257,161 262,593 272,266
NET LIABILITY -
END of YEAR
AS SHOWN ABOVE $106,115 $121,923 $142,718 $143,494 $145,260
GROSS RE-ESTIMATED
LIABILITY - LATEST $360,625 $430,635 $455,578 $440,385
RE-ESTIMATED REIN-
SURANCE - LATEST 236,250 280,201 294,892 288,587
NET RE-ESTIMATED
LIABILITY - LATEST $124,375 $150,434 $160,686 $151,798
GROSS CUMULATIVE
(DEFICIENCY) $(69,792) $(89,036) $(55,699) $(34,298)
-8-
Item 2. Properties
The Group's executive and administrative offices are located on six floors
of a ten-story office building at 122 Fifth Avenue, New York, New York
10011 and some additional space in the surrounding area under leases, each
of which expire on September 30, 1998.
The Group has entered into a twenty-year lease agreement in an office
building in Brooklyn, New York, in which Leucadia has an equity interest,
and will relocate its executive and administrative offices in September
1998. The Group received certain incentives from both the City and State
of New York in connection with this lease, which will be recognized over
the term of the lease.
The Group also conducts limited operations from branch offices located in
Manhattan, and Rochester, New York, Boston, Massachusetts and Bedford, New
Hampshire. The rental charged to the Company for these facilities is
prorated in accordance with the pooling agreement described in "Pooling
Agreement" under Item 1, herein.
Item 3. Legal Proceedings
The Company is party to legal proceedings that are considered to be either
ordinary, routine litigation or incidental to its business. Based on
discussion with counsel, the Company does not believe that such litigation
will have a material effect on its financial position, results of
operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
The information to be included under the captioned "Submission of Matters
to a Vote of Security Holders" is included in the Company's Form 10-Q for
the quarterly period ended September 30, 1997.
-9-
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
(a) Market Information
The Company's common stock trades on The Nasdaq National Stock Market
under the symbol "ALCI". The following table sets forth, for the calendar
quarters indicated, the high and low closing trade price per common share
as reported by the Wall Street Journal and National Association of
Securities Dealers, Inc.
High Low
1st Quarter 1998 $ 7 3/8 $ 7
(Through March 17, 1998)
1st Quarter 1997 8 1/2 7
2nd " " 11 7
3rd " " 11 1/4 9 1/4
4th " " 9 3/4 6 1/2
1st Quarter 1996 9 3/8 8
2nd " " 9 1/4 7 1/2
3rd " " 8 1/4 6 1/4
4th " " 8 1/2 7
(b) Holders
The number of shareholders of record of common shares at December 31, 1997
was 551.
(c) Dividends
The Company has paid no dividends on its common shares since 1975. The New
York Insurance Law prohibits New York domiciled property and casualty
companies from paying dividends except out of earned surplus. Without the
approval of the New York State Insurance Department, dividends are
limited to the lowest of 1) 10% of surplus as computed on a SAP basis, or 2)
adjusted net investment income during the 12 month period prior to
declaration. At December 31, 1997, $7,009,000 was available for
distribution of dividends. The Company does not presently anticipate
paying dividends in the near future.
Item 6. Selected Financial Data
Years ended December 31,
(In thousands, except per share amounts)
1997 1996 1995 1994 1993(b)
Total Revenues $102,624 $120,790 $117,892 $107,286 $ 94,632
(Loss)/Income before
cumulative effects of
changes in accounting
principles (a) $ (83) $ 2,634 $ 563 $ 6,901 $ 7,222
Cumulative effects of changes
in accounting principles - - - - 6,171
Net (Loss)/Income (a) $ (83) $ 2,634 $ 563 $ 6,901 $ 13,393
Basic (Loss)/Earnings Per
Share:
(Loss)/Income before cumu-
lative effects of changes
in accounting principles (a) $ (0.01) $ 0.37 $ 0.08 $ 0.97 $ 1.02
Cumulative effects of changes
in accounting principles - - - - .88
Basic (Loss)/Earnings per
Share (a) $ (0.01) $ 0.37 $ 0.08 $ 0.97 $ 1.90
-10-
Item 6. Selected Financial Data, continued
a) Net income includes net securities (losses) gains, net of applicable
tax, as follows:
(Losses) Per
Gains Share
1997 $(125,000) $ (0.02)
1996 735,000 0.10
1995 (133,000) (0.02)
1994 (437,000) (0.06)
1993 918,000 0.13
b) The cumulative effects of changes in accounting principle related to
changes in accounting for income taxes, post-retirement benefits and
retrospectively rated reinsurance contracts.
At December 31,
1997 1996 1995 1994 1993
(In thousands, except ratio information)
Total assets $640,249 $653,730 $660,820 $582,508 $513,558
Invested assets 271,736 272,992 273,548 237,878 219,608
Surplus note:
Face value 7,000 7,000 7,000 7,000 7,000
Interest 7,710 7,115 6,524 5,911 5,395
Common Shareholders'
Equity(a) 78,164 75,658 75,936 63,264 69,813
GAAP Combined Ratio(c) 119.3% 114.1% 115.4% 102.5% 103.5%
SAP Combined Ratio (c) 118.6% 107.5% 107.5% 101.3% 101.6%
Industry SAP Combined
Ratio N/A 105.8% 106.4% 108.4% 106.9%
Premium to Surplus
Ratio (b) 1.1X 1.4X 1.6X 1.7X 1.5X
(a) Includes unrealized depreciation of approximately $1.7 million in
1996 and $10.9 million in 1994, and unrealized appreciation of
approximately $0.9 million in 1997, $1.2 million in 1995 and $2.6
million in 1993, all net of tax, on investments classified as available
for sale.
(b) Premium to Surplus Ratio was calculated by dividing annual statutory
net premiums written by year-end statutory surplus.
(c) For 1996 and 1995, a change in the statutory accounting treatment for
retrospectively rated reinsurance agreements was the principal reason
for the difference between the GAAP Combined Ratio and the SAP Combined
Ratio. Additionally, the differences relate to the accounting for
certain costs which are treated differently under SAP and GAAP.
-11-
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations
The purpose of this section is to discuss and analyze the Company's
financial condition, liquidity and capital resources and results of
operations. This analysis should be read in conjunction with the
financial statements and related notes which appear elsewhere in this
Report.
Liquidity and Capital Resources
In 1997, the Company posted a small loss and net cash was used for
operations as a result of a decrease in premiums written and a program to
reduce pending claims and settle claims more quickly than in the past.
During the two year period ended December 31, 1996, the Company operated
profitably and net cash was provided from operations.
At December 31, 1997 and 1996 the yield of the Company's fixed maturities
portfolio was 5.9% and 6.1%, respectively, with an average maturity of 3.3
years for each year. Additionally, at December 31, 1997, approximately
92% of the fixed maturities portfolio was invested in issues of the U.S.
Government and its agencies with the remainder invested in investment
grade corporate and industrial issues. The Company presently
anticipates reinvesting the majority of proceeds from maturities
and investment income in substantially similar investments.
The Company believes its immediate cash needs will not require the sale of
long term fixed maturities, although it may sell certain of these
securities from time to time.
The Company maintains cash, short-term and readily marketable securities
and anticipates that the cash flow from investment income and maturities
of long term fixed maturities will be sufficient to satisfy its
anticipated cash needs. The Company does not presently anticipate paying
dividends in the near future and believes it has sufficient capital to
meet its currently anticipated level of operations.
Results of Operations
Net earned premium revenues of the Company decreased by approximately
$15.2 million, or 15.8%, in 1997 and increased by approximately $1.8
million and $5.2 million in 1996 and 1995 respectively (1.9% and 5.8% in 1996
and 1995, respectively). In 1997, the decline in earned premium revenues
was primarily due to the depopulation of the assigned risk pools ($9.5
million) and a reduction in certain commercial lines, principally
voluntary commercial automobile ($3.1 million) and workers' compensation
($2.6 million) due to competition, reunderwriting and repricing. In
addition, earned premium revenues were reduced in 1997 by $1.7 million to
record premiums due under retrospectively rated reinsurance contracts
written for 1995 and prior accident years. The Company re-estimated the
premium due based upon its current estimate of loss ratios for 1995 and
prior accident years. Partially offsetting these reductions was an
increase in certain voluntary personal lines, principally private
passenger automobile and homeowners.
In 1996, although higher premium rates were charged on certain lines of
business than in 1995 including amounts related to increased minimum
automobile liability coverage required by New York State, such rate
increases were largely offset by a decrease in the number of policies in
force. This decrease primarily resulted from the depopulation of the
assigned risk pools and reduced volume in other lines of business that
were not profitable, primarily certain specialty programs within voluntary
commercial automobile lines. In addition, in 1996 the Company
experienced increased competition, primarily in workers' compensation and
commercial package policies, which reduced volume.
-12-
During the three years ended December 31, 1997, the Company received
servicing fees for providing administrative and claims services for the
NYPAP. During 1997, the premium volume that the Group managed under this
program significantly declined primarily due to the ongoing depopulation
of the NYPAP, which is expected to continue, and increased competition.
During 1997, the Group's agreement with NYPAP contributed approximately
$900,000 to the Company in pre-tax income, net of servicing expenses.
Effective February 28, 1998, the Group ceased serving as a servicing
carrier for the NYPAP, thereby enabling the Group to concentrate its
resources on its core non-service businesses and redeploy certain
resources previously dedicated to the NYPAP. Accordingly, the Group will
not provide such services in 1998, except for the run-off of the remaining
NYPAP claims, which will occur over approximately a two-year period. The
Group believes it has provided sufficient reserves for future claims
servicing costs related to such run-off business.
The Company's combined ratios as determined under GAAP and SAP were as
follows:
Years Ended December 31,
1997 1996 1995
GAAP 119.3% 114.1% 115.4%
SAP 118.6% 107.5% 107.5%
The combined ratios of the Company increased in 1997, primarily reflecting
an increase in the 1997 accident year loss ratios, principally for the
private passenger automobile and commercial assigned risk lines of
business, based upon increased claim frequency and continued unfavorable
development of prior accident year losses. This increase was partially
offset by a decrease in expenses primarily due to a reduction in the
reserve for prior years' servicing carrier expenses and reduced expenses
reflecting reduced premium volume in 1997. Included in the Company's
results for 1997, 1996 and 1995 were approximately $8.3 million in 1997,
$8.1 million in 1996 and $10.3 million in 1995 for reserve strengthening
related to losses from prior accident years. In 1997 and 1996, the
reserve strengthening primarily related to voluntary commercial automobile
and commercial package lines of business, while in 1995, the reserve
strengthening primarily related to automobile and workers' compensation
lines of business.
The 1997 reserve strengthening included approximately $3.3 million for
commercial package lines of business and approximately $2.1 million for
voluntary commercial automobile lines of business. During 1997, the
Company reviewed the adequacy of the reserves carried for its open
claims' files, as part of its normal ongoing practice, focusing on the
commercial package, general liability and commercial automobile lines of
business. As a result of this review and the continued unfavorable
development of prior accident years losses, particularly the 1992 through
1994 accident years, the Company has revised its assumptions regarding
future increases in average claims severity and reserves were
strengthened.
The 1996 reserve strengthening included approximately $6.0 million for
voluntary commercial automobile lines of business and approximately $2.4
million for commercial package lines of business. Beginning in 1992, the
Company entered into new market segments of the voluntary commercial
business, including specialty programs for sanitation trucks, gas
stations, fuel oil deliveries and limousines. Initially, the Company
based its loss ratio estimate upon its experience with similar lines of
business, industry statistics and standard actuarial ultimate loss
projection techniques, which consider expected loss ratios. During 1996,
claims began to develop unfavorably and the Company used such claim
development to revise the assumptions that formed the basis of actuarial
studies and reserves were increased. With respect to commercial package
lines, general liability claims for business written in 1992 through 1994
also developed unfavorably. These claims showed an increased frequency of
losses as well as an increase in the time between the date the loss
occurred and when the loss was reported compared to prior experience.
General liability claims are susceptible to the emergence of losses over
an extended period of time.
-13-
The 1995 reserve strengthening included approximately $6.9 million for
private passenger automobile lines of business and $3.0 million for
workers' compensation lines of business. In early 1994, the private
passenger automobile business increased significantly as a result of the
acquisition of a large block of assigned risk business. The acquisition
of this block of business nearly doubled the volume previously written by
the Company. Early in 1995, losses began to develop in this line of
business that indicated a higher ultimate loss ratio than the Company had
experienced on similar blocks of assigned risk business from earlier
periods, which experience formed the basis of the Company's original loss
estimate. The Company believes the increased losses in this line resulted
primarily from its inability to effectively process a much larger volume
of claims from its significantly increased customer base. Consequently,
claims investigation and file documentation were not conducted timely
which led to higher claim costs. With respect to workers' compensation
lines, the Company's policies provide insurance coverage to the employer
if employees are able to successfully assert liability for employer
negligence in providing a safe working environment. During 1995, a
relatively small number of such claims with large dollar values emerged
that had not been previously anticipated. The emergence of these claims,
and the fact that the workers' compensation line of business is
susceptible to the emergence of losses over an extended period, resulted
in a revision of the Company's estimate of ultimate losses and reserves
were increased.
For the lines of business discussed above, as well as all other property
and casualty lines of business, the Company employs a variety of standard
actuarial loss projection techniques, statistical analyses and case base
evaluations to estimate its liability for unpaid losses. The actuarial
projections include an extrapolation of both losses paid and incurred by
business line and accident year and implicitly consider the impact of
inflation and claims settlement patterns upon ultimate claim costs based
upon historical patterns. These estimates are performed quarterly and
consider any changes in trends and actual loss experience. Any resulting
change in the estimate of the liability for unpaid losses, including those
discussed above, is reflected in current year earnings during the quarter
the change in estimate is identified.
The reserving process relies on the basic assumption that past experience
is an appropriate basis for predicting future events. The probable
effects of current developments, trends and other relevant matters are
also considered. Since the establishment of loss reserves is affected by
many factors, some of which are outside the Company's control or affected
by future conditions, reserving for property and casualty claims is a
complex and uncertain process, requiring the use of informed estimates and
judgements. As additional experience and other data become available and
are reviewed, the Company's estimates and judgements may be revised.
While the effect of any such changes in estimates could be material to
future results of operations, the Company does not expect such changes to
have a material effect on its liquidity or financial condition.
In management's judgement, information currently available has been
appropriately considered in estimating the Company's loss reserves. The
Company will continue to evaluate the adequacy of its loss reserves on a
quarterly basis, incorporating any future changes in trends and actual
loss experience, and record adjustments to its loss reserves as
appropriate.
Investment income has decreased by approximately $0.7 million, or 4.1% in
1997, as compared to an increase of $1.0 million or 6.5% in 1996
and $2.2 million or 16.5% in 1995, primarily as a result of a decrease
in premiums written and a program to reduce pending claims and settle
claims more quickly during 1997, and higher invested assets resulting
from positive cash flows in 1996 and 1995. During 1997, the Company also
recorded $0.2 million in realized capital losses in
the normal course of managing its investment strategy. In 1996, the
Company realized gains of $1.1 million on the sale of fixed maturities,
primarily U.S. Treasury Notes. During 1995, the Company realized losses
of $0.2 million on the sale of certain investments in order to shorten the
average duration of its investment portfolio.
-14-
The combination of other underwriting expenses incurred and the
amortization of deferred policy acquisition costs reflected a decrease of
approximately $7.8 million, or 27.8% in 1997, and increases of $1.7
million, or 6.6% in 1996. The decrease in 1997 was primarily the result
of lower operating costs, primarily relating to pension and severance
benefits for certain employees, and a decrease in the provision for
servicing carriers expenses in connection with the NYPAP, offset by higher
systems costs. The increase in 1996 was the result of higher operating
costs primarily relating to pension and severance benefits for certain
employees coupled with higher systems costs.
Impact of Inflation
The Company, as well as the property and casualty insurance industry in
general, is affected by inflation. With respect to losses, the Company's
claim severity is affected by the impact of inflation on the cost of
automobile repair parts, medical costs and lost wages. The costs of
adjusting claims and other underwriting expenses have also been adversely
affected by inflationary pressures on salaries and employee benefits. The
Company receives rate increases based in part upon its experience as well
as the industry's experience. Accordingly, premium increases generally
follow the rate of inflation.
Year 2000 and Information Technology Systems
The Company has evaluated its information technology systems to determine
the potential impact of the year 2000. The year 2000 issue is the result
of computer programs being written using two digits (rather than four) to
define the applicable year. Any programs that have time-sensitive
software may recognize a date using "00" as the year 1900 rather than the
year 2000, which could result in miscalculations or system failures. In
1996, the Group began to evaluate its information technology systems and
their ability to support future business needs. This led to a decision to
acquire new policy management and accounting systems. These systems
provide enhanced functionality and improved processing for underwriting,
claims, billing, collection, reinsurance, reporting and accounting and are
designed to be year 2000 compliant. The Group anticipates that these new
systems will be fully implemented in 1999. The Company does not expect
that the year 2000 issue will have a material effect on its consolidated
financial position or consolidated results of operations. However, the
year 2000 issue may affect other entities with which the Company transacts
business, and the Company cannot predict the effect of the year 2000 issue
on such entities.
Cautionary Statement for Forward-Looking Information
Statements included in this Report may contain forward-looking statements.
Such forward-looking statements are made pursuant to the safe-harbor
provisions of the Private Securities Litigation Reform Act of 1995. Such
statements may relate, but are not limited, to projections of revenues,
income or loss, capital expenditures, fluctutations in insurance reserves,
plans for growth and future operations, competition and regulation as well
as assumptions relating to the foregoing. Forward-looking statements are
inherently subject to risks and uncertainties, many of which cannot be
predicted or quantified. When used in this Report, the words "estimates",
"expects", "anticipates", "believes", "plans", "intends" and variations of
such words and similar expressions are intended to identify forward-
looking statements that involve risks and uncertainties. Future events
and actual results could differ materially from those set forth in,
contemplated by or underlying the forward-looking statements. The factors
that could cause actual results to differ materially from those suggested
by any such statements include, but are not limited to, those discussed or
identified from time to time in the Company's public filings, including
general economic and market conditions, changes in domestic laws,
regulations and taxes, changes in competition and pricing environments,
regional or general changes in asset valuation, the occurence of
significant natural disasters, the inability to reinsure certain risks
economically, the adequacy of loss reserves, prevailing interest rate
levels and changes in the composition of the Company's assets and
liabilities through acquisitions or divestitures. Undue reliance should
not be placed on these forward-looking statements, which are applicable
only as of the date hereof. The Company undertakes no obligation to
revise or update these forward-looking statements to reflect events or
circumstances that arise after the date of this Report or to reflect the
occurrence of unanticipated events.
-15-
Securities Exchange Commission Financial Reporting Release No. 48
Financial Reporting Release No. 48 ("Accounting Policies for Derivative
Financial Instruments and Derivative Commodity Instruments") issued on
February 4, 1997 by the Securities Exchange Commission requires certain
domestic and foreign issuers to disclose the accounting policies for
derivative instruments and derivative commodity instruments and disclosure
of quantitative and qualitative information about market risk inherent in
these instruments. The Company's market capitalization is under the
reporting threshold for 1997 and accordingly no disclosure is included
herein. The Company will be required to disclose such information
beginning with 1998 financial activity.
Item 8. Financial Statements and Supplementary Data
See page F1.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
NONE
-16-
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to the Company's Charter and By-Laws, the Board of Directors of
the Company consists of 14 members divided into three classes: Class I,
Class II and Class III. Classes I and III consist of five directors each
and Class II consists of four directors. Currently, Class III consists
of four directors due to the resignation of Oliver Patrell on January 1, 1998.
One class of directors is elected in each year for a three-year term.
All of the directors of the Company are also directors of Empire and
Centurion.
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
Richard G. Petitt, 49, Principal Occupation - Chairman
Director, Chairman of of the Board, and Chief Executive
the Board, President and Officer of the Company and Empire
Chief Executive Officer since March 1996 and Executive
Officer and President since May
1996. Previously, Chairman of the
Board and Chief Executive Officer
of Colonial Penn Life Insurance
Co. ("CPL") from March 1992 to
September 1997. President and
Chief Operating Officer of CPL
from August 1991 to
April 1996. Since September 1983,
has served in various executive
capacities at Leucadia and its
subsidiaries including Vice
President of Leucadia and
President of Sperry &
Hutchinson Co., Inc. ("S&H").
Director since March 1996;
current term expires 1999.
Martin B. Bernstein, 64, Principal Occupation - President
Director and Director of Ponderosa Fibres
of America, Inc. (A pulp
manufacturer for paper producers).
Director since February 1988;
current term expires 1998.
Ian M. Cumming, 57, Principal Occupation - Presently
Director and since June 1978, Chairman
of the Board and a Director of
Leucadia. Director of Skywest,
Inc. (a Utah-based regional air
carrier) since June 1986.
Director of MK Gold Company
(an international gold mining
company) since June 1995.
Director since February 1988;
current term expires 2000.
James E. Jordan, 54 Principal Occupation - Financial
Director Consultant, The Jordan Company.
Previously, President of the
William Penn Co. from 1986 until
1997.
Director since 1997; current term
expires 2000.
Thomas E. Mara, 52, Principal Occupation - Presently
Director and since May 1980, Executive Vice
President of Leucadia and Treasurer
of Leucadia since January 1993.
Director since October 1994;
current term expires 2000.
Louis V. Siracusano, 51, Principal Occupation - Attorney with
Director McKenna, Fehringer, Siracusano
& Chianese (a law firm) for over six
years.
Director since 1985; current term
expires 1998.
-17-
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
Joseph S. Steinberg, 54, Principal Occupation - President of
Director Leucadia since January 1979 and
Director of Leucadia since December
1978. Director of MK Gold Company
since June 1995. Director since June
1988 of Jordan Industries, Inc., a
holding company principally
engaged in manufacturing.
Director since February 1988; current
term expires 2000.
Daniel G. Stewart, 79, Principal Occupation - Independent
Director consulting actuary. Previously,
Senior Vice President of Mutual
Benefit Life Insurance Company
from 1985 to November 1991.
Director since 1980; current term
expires 2000.
Lucius Theus, 75, Principal Occupation - President,
Director The U.S. Associates (consultants
in civic affairs, human resources
and business management) since 1989.
Principal and Director of the Wellness
Group, Inc. (a provider of
health promotion programs) since 1989.
Corporate Director, Civic Affairs of
Allied Corporation (a diversified
industrial company) since 1979.
Director since 1980; current term
expires 1998.
Helen W. Vogel, 80, Principal Occupation - Teacher
Director of political science at the White
Plains, New York, Senior Center
for over six years.
Director since 1980; current term
expires 1998.
Harry H. Wise, 59, Principal Occupation - President and
Director Director, H.W. Associates, Inc. (an
investment advisory firm). President
and Director, Madison Equity Capital
Corp. (a sponsor of private
investment partnerships).
Director since 1988; current term
expires 1999.
Joel M. Berlin, 54, Principal Occupation - Senior Vice
Director, Senior Vice President of marketing of the Company
President Marketing and Empire since May 1996. Previously,
Chairman of the Board and Chief
Executive Officer of S&H (an incentive
marketing firm) from April 1993 to May
1996. President and Chief Operating
Officer of S&H from March 1992 to May
1996.
Director since 1996; current term
expires 2000.
-18-
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
Francis M. Colalucci, 53, Principal Occupation - Senior Vice
Director, Senior Vice President, President, Chief Financial Officer and
Chief Financial Officer & Treasurer of the Company and Empire since
Treasurer January 1996. Previously, Vice President
& Corporate Treasurer of Continental
Corporation (an insurance holding Company)
from 1991 to January 1996.
Director since October 1996; Current term
expires in 1999.
Linda A. Philipps, 53, Principal Occupation - Senior Vice
Senior Vice President, President and Chief Information Officer
Chief Information Officer of the Company and Empire since June 1996.
Previously, Chief Information Officer of
Banta Printing Corp (a commercial
printing firm), from March 1996 to June
1996 and Director of Business Development
of Menasha Paper Corp. (a manufacturer of
paper and plastic products) from March
1994 to March 1996. From August 1988
to February 1994 acted in various
operational capacities for Leucadia.
R. Scott Conant, 47, Principal Occupation - Senior Vice President,
Senior Vice President, of Claims for the Company and Empire since
Claims September 1997. Previously, Senior Vice
President of Home State Holdings, Inc (an
insurance holding company) from August
1996 to September 1997. Previously,
Manager & Consultant for KPMG Peat
Marwick, from February 1995 to August 1996.
Item 11. Executive Compensation
Summary Compensation Table
The following table sets forth certain compensation information for
Richard G. Petitt, the Chief Executive Officer of the Company, and Andrew
W. Attivissimo, who was Chief Executive Officer of the Company in 1995,
the only executive officers whose compensation paid, or accrued for, under
the pooling arrangement exceeded $100,000 for the years ended December 31,
1997, 1996 and 1995.
Summary Compensation Table
Long Term
Annual Compensation Compensation
Name and Principal LTIP All Other
Position Year Salary Bonus Payouts Compensation
Richard G. Petitt 1997 $105,969 $ 90,000 $ - $ 6,767 (a)
Chairman, President
& C.E.O. 1996 86,674 150,000 - 7,494 (b)
Andrew W. Attivissimo 1997 - - - -
President & C.O.O. 1996 87,791 30,000 69,631 (c) 89,397 (d)
1995 78,906 42,300 30,497 (c) 72,876 (e)
(a) Includes Salary Cap Restoration Plan ($2,303), Pension Plan ($3,264), and
Company match of 401(k) Plan ($1,200).
(b) Includes Salary Cap Restoration Plan ($2,100), Pension Plan ($4,455) and
Company match of 401(k) plan ($939).
(c) Contributions made to a trust pursuant to the Empire Long Term Incentive
Plan.
(d) Includes Supplemental Retirement Plan ($86,698), Pension Plan ($1,856),
income from Empire Long Term Incentive Plan units ($599) and Company
match of 401(K) plan ($244).
(e) Includes Supplemental Retirement Plan ($58,090), Pension Plan ($5,325),
income from Empire Long Term Incentive
Plan units ($9,217) and Company match of 401(k) plan ($244).
-19-
The Company does not directly remunerate directors. The directors of the
Company and Empire who are not employees of Empire and the Company were
paid an annual fee of $5,000. In addition, eligible directors receive
$1,500 for each joint board meeting attended. For attendance at a meeting
of a committee of the joint board, such directors receive $1,500 per
meeting. In addition, each Chairperson of a Committee is entitled to $500
per annum. All fees paid to such directors are shared in accordance with
the pooling agreement.
In February 1996, Mr. Patrell retired as Chairman of the Board of
Directors and Chief Executive Officer of the Company and Empire; he was a
Director of Empire and the Company before resigning on January 1, 1998.
Upon his retirement, Leucadia agreed to pay to Mr. Patrell the amount of
$1,000,000 of which $333,333 was paid by Empire. Pursuant to the pooling
agreement, the Company contributed 30% of the compensation paid by Empire
to Mr. Patrell. Mr. Patrell agreed not to compete against Leucadia or its
affiliated entities for a two year period.
Mr. Attivissimo was employed pursuant to an Employment Agreement which
terminated on December 31, 1996. The Employment Agreement was to continue
from year to year thereafter unless the period of employment was
terminated at the end of a calendar year by either Mr. Attivissimo or
Empire on at least six months written notice. In May 1996, Mr.
Attivissimo retired from his positions as an officer and director of the
Company and Empire. Pursuant to the terms of his Employment Agreement,
Mr. Attivissimo continued to be paid his normal salary at the rate of
$240,000 per annum through December 31, 1997. In addition, Mr.
Attivissimo received $1,901,000 in a lump sum supplemental retirement
benefit, $482,375 under Empire's Long Term Incentive Plan and title to an
automobile having a book value of approximately $13,000. Pursuant to the
pooling agreement, the Company is obligated to pay 30% of the compensation
and cost of benefits paid to Mr. Attivissimo.
Pension Plan
Pensions for officers and employees of the Company are provided under a
trusteed non-contributory pension plan. Any employee is eligible for
membership in the Plan on January 1st or July 1st of any plan year after
which he has completed one full year of service, consisting of a minimum
of 1,000 credited hours with Empire, provided they have attained the age
of 21 years by or before such date.
Members of the Plan receive a basic pension if they work until their
normal retirement date which is the last day of the month in which they
attain 65 years of age with 5 years of credited service. Any member in
the active employ of Empire may elect early retirement between 55 and 65.
A member electing early retirement must have at least 10 years of service.
A monthly average of total compensation received over the highest 5
consecutive plan or calendar years before retirement is taken to compute
benefits as follows:
1.30% of the first $833 per month of average pay, plus
1.75% of average pay over $833 per month.
The sum of these two credits is multiplied by the years of credited
service. The basic benefit amounts listed in the table below are not
subject to any deduction for Social Security benefits or other offset
amounts. The maximum benefit payable under the pension plan is $96,400
per year.
The amounts set forth in the following table show estimated annual
benefits upon retirement to which the Company contributes 30% of such cost
through the pooling agreement.
-20-
Highest
Five Year Average
Compensation at Years of Service
Retirement 10 15 20 25 30 35
$ 10,000 $ 1,300 $ 1,950 $ 2,600 $ 3,250 $ 3,900 $ 4,550
25,000 3,925 5,888 7,850 9,813 11,775 13,738
50,000 8,300 12,450 16,600 20,750 24,900 29,050
75,000 12,675 19,013 25,350 31,688 38,025 44,363
100,000 17,050 25,575 34,100 42,625 51,150 59,675
160,000 27,500 41,300 55,100 69,000 82,600 96,400
Salary Cap Restoration Plan
In 1994, Empire established a Salary Cap Restoration Plan ("SCRP") for
certain corporate officers. Under the SCRP, Empire will provide these
officers with an additional benefit, to be paid in a lump-sum upon
retirement, equal to the difference between the actuarially determined
lump-sum benefits, as computed under the Pension Plan, of the officer's
highest five year average compensation (not to exceed $320,000, adjusted
for the cost-of-living) at retirement and the current maximum
compensation limit of $160,000. The SCRP is an unfunded plan. Under the
pooling agreement, the Company is obligated to pay 30% of the cost of the
SCRP.
Employees' Savings Plan
Empire sponsors an Employees' Savings Plan (the "Savings Plan"), under
which each eligible employee may defer a portion of their annual
compensation, subject to limitations. Empire contributes a matching
amount, subject to certain limits. In 1995, Empire matched 65% of each
participant's deferral contribution up to a maximum matching contribution
of $813. A participant may also contribute, from his after-tax dollars,
an amount, not to exceed 10% of his annual compensation. Effective July
1996, the Savings Plan was amended to allow Empire matching contributions
equal to 50% of an employee's contributions up to a maximum of 2.5% of the
employee's salary. Empire's contributions to the Savings Plan were
$438,000, $524,000 and $435,000 in 1997, 1996 and 1995, respectively.
Under the pooling agreement, the Company is obligated to provide 30% of
Empire's contributions under the Savings Plan.
Supplemental Retirement Plan
Under Empire's Supplemental Retirement Plan, eligible employees who work
until their normal retirement date, which, is the last day of the
month in which such employees attains 65 years of age, are entitled to
receive monthly benefits equal to (a) the difference between (i) one
twelfth of a stipulated percentage (the "stipulated percentage") of such
participant's final average compensation (the "base amount") and (ii) the
aggregate amount of the monthly pension and benefit entitlement such
participant would receive under Empire's Pension Plan, Savings Plan and
other employee pension benefit plans if such benefits were paid in the
form of an annuity for the life of the participant and fifty percent of
the participant's monthly Social Security benefit, multiplied, unless
otherwise specified in the plan, by (b) a fraction, not exceeding one (the
"reduction factor"), the numerator of which is the number of the
participant's years of service and the denominator of which is five.
Final average compensation is the average annual compensation paid during
any five consecutive calendar years during which the participant's
compensation was highest. The plan provides that the minimum benefit
payable is equal to the base amount multiplied by the reduction factor.
Participants remaining in the employ of the Company after the normal
retirement date continue to accrue benefits under the plan. Early
retirement, between age 55 and 65 under this plan, is permitted provided
the participant electing early retirement has at least ten years of
service. Amounts payable under the plan are payable out of the assets of
the Trust to Fund Benefits under Certain Unfunded Deferred Compensation
Plans of the Company, established effective November 1, 1987 (the "Trust
Fund"). The Trust Fund is subject to the claims of certain creditors of
the Company if the Company becomes insolvent. The Board of Directors had
designated one key employee, Andrew W. Attivissimo, to receive benefits
under the plan based on a maximum stipulated percentage of 60%
-21-
and a minimum stipulated percentage of 30%. In 1996,
Mr. Attivissimo received a lump sum payment under the plan of $1,901,000.
Long Term Incentive Plan
Prior to 1996, Empire sponsored a Long Term Incentive Plan which, based
upon the attainment of certain performance goals, awarded officers with
units of participation in a compensation pool. The plan was terminated in
1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The table on the following page sets forth information as of March 17,
1998 as to the Common Shares of the Company owned of record and
beneficially by each person who owns of record, or is known by the
Company to own beneficially, more than 5% of such Common Shares.
Name and Amount and
Address of Nature of
Beneficial Beneficial Percent of
Owner Ownership Class
Empire Insurance Company 5,987,401 Common 84.6%
122 Fifth Avenue Shares owned of
New York, N.Y. 10011 record
Baldwin Enterprises, Inc. 368,607 Common 5.2%
529 East South Temple Shares owned of
Salt Lake City, Utah 84102 record
As discussed in Item 1, "Business", Leucadia (and certain of its wholly-
owned subsidiaries) may be
deemed a parent of Empire and therefore of the Company as a result of its
indirect ownership of 100% of the outstanding common stock of Empire.
Security Ownership of Management
The following table sets forth information concerning beneficial ownership
of the Company's common stock and the equity securities of Leucadia by all
directors and by directors and officers of the Company as a group as of
December 31, 1997 with respect to the Company's Common Shares and as of
March 17, 1998 with respect to Leucadia's and Empire's securities.
-22-
Each holder shown exercises sole voting and sole investment power of the
shares shown opposite his or her name.
Name of Beneficial Amount and Nature of Percent of
Owner Beneficial Ownership Class
Joel M. Berlin - -
Martin B. Bernstein - -
Francis M. Colalucci - -
R. Scott Conant - -
Ian M. Cumming (1) - -
James E. Jordan - -
Thomas E. Mara - -
Oliver L. Patrell - -
Richard G. Petitt - *
Linda Philipps - *
Louis V. Siracusano - -
Joseph S. Steinberg (1) - -
Daniel G. Stewart - -
Lucius Theus - -
Helen W. Vogel - *
Harry H. Wise - *
Directors and executive
Officers as a group
(16 persons) (2) - *
*Less than 1% of Common Stock
(1) Although neither Ian M. Cumming nor Joseph S. Steinberg directly owns
any shares of Common Stock of the Company, by virtue of their respective
interest of approximately 15.5% and 14.3% in Leucadia, each may be
deemed to be the beneficial owner of a proportionate number of the shares
of Common Stock of the Company beneficially owned by Leucadia through its
100% ownership of Empire.
(2) Aside from the beneficial ownership described in note 1 to this table,
seven directors and one officer beneficially own common shares of
Leucadia, which in the aggregate, represent less than 1% of Leucadia's
common stock.
Item 13. Certain Relationships and Related Transactions
See Item 1 of this report and Notes 1, 3, 8, 9, 10 and 11 of Notes to
Consolidated Financial Statements for information relating to transactions
and relationships between the Company and its affiliates.
-23-
PART IV
Item 14. Exhibits, Financial Statement Schedule, and Reports on Form 8-K
(a) Financial Statements and Schedule
1. The following Financial Statements of Allcity Insurance Company are
included in item 8:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1997 and 1996.
Consolidated Statements of Operations for the years ended December 31,
1997, 1996 and 1995.
Consolidated Statements of Changes in Shareholders' Equity Accounts for
the years ended
December 31, 1997, 1996 and 1995.
Consolidated Statements of Cash Flows for the years ended December
31,1997, 1996 and 1995.
Notes to Consolidated Financial Statements.
Schedule VI - Supplemental Insurance Information Concerning
Property/Casualty Insurance Operations
for the years ended December 31, 1997, 1996 and 1995.
2. The information for Schedules I, IV and V required to be filed pursuant
to Regulation S-X, Article 7 is
contained in the Notes to Consolidated Financial Statements and,
therefore, these schedules have been omitted. The information required
by Schedules III and IV of Article 7 is combined in Schedule VI -
Supplemental Insurance Information Concerning Property/Casualty
Insurance Operations. All other required schedules are not applicable.
3. The exhibits required by Item 601 of Regulation S-K have been filed
herewith, see attached Exhibit
Index.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1997, there were no reports on
Form 8-K filed for the Company.
(c) Exhibits Required by Item 601 of Regulation S-K.
See attached Exhibit Index.
(d) Financial Statements Required by Regulation S-X.
See Item 14(a).
-24-
Signatures
Pursuant to the requirements of Section 13 or 15 (d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
ALLCITY INSURANCE COMPANY
March 30, 1998 By: FRANCIS M. COLALUCCI
Francis M. Colalucci
Director, Senior Vice President
C.F.O. & Treasurer
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 indicated and on the date set forth
above.
RICHARD G. PETITT FRANCIS M. COLALUCCI _
Richard G. Petitt Francis M. Colalucci
Director, Chairman, President & C.E.O. Director, Senior Vice President
C.F.O. & Treasurer
JOSEPH S. STEINBERG MARTIN B. BERNSTEIN
Joseph S. Steinberg Martin B. Bernstein
Director Director
LOUIS V. SIRACUSANO HARRY H. WISE
Louis V. Siracusano Harry H. Wise
Director Director
DANIEL G. STEWART JOEL M. BERLIN
Daniel G. Stewart Joel M. Berlin
Director Director, Senior Vice President
IAN M. CUMMING JAMES E. JORDAN
Ian M. Cumming James E. Jordan
Director Director
LUCIUS THEUS HELEN H. VOGEL
Lucius Theus Helen H. Vogel
Director Director
THOMAS E. MARA
Thomas E. Mara
Director
-25-
EXHIBIT INDEX
The following designated exhibits, as indicated below, are either
filed herewith (if indicated by an asterisk) or have heretofore been filed
with the Securities and Exchange Commission under the Securities Act of
1933 or the Securities Exchange Act of 1934 and are incorporated herein by
reference to such filings. Reference is made to Item 8 of this Form 10-K
for a listing of certain financial information and statements incorporated
by reference herein.
Exhibit Number Description of Document
3 Corporate charter, as amended, and by-laws, as
amended, of the Company (Incorporated by reference
to Exhibit 3 of the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
10(a) Pooling Agreement, as amended through March 31,
1992 between Empire and the Company (Incorporated by
reference to Exhibit 10(a)-20 of the Company's
Form 8 Amendment No. 1 of its annual Report for the
year ended December 31, 1981).
10(b) Lease Agreement, dated November 15, 1982, between
Empire and 122 Fifth Associates (Incorporated by
reference to exhibit 10(d) of the Company's Annual
Report on Form 10-K or the year ended December 31,
1982).
10(c) Centurion Agreement, made effective as of
August 21, 1987 by and between Empire and the
Company, and Centurion. (Incorporated by reference
to Exhibit 10(e) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1987).
10(d) Empire Mutual Executive Deferred Compensation Plan
dated November 17, 1987. (Incorporated by reference
to Exhibit 10(f) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1987).
10(e) Empire Mutual Insurance Company Supplemental
Retirement Plan dated November 17, 1987.
(Incorporated by reference to Exhibit 10(g) of the
Company's Annual Report on Form 10-K for the year
ended December 31, 1987).
10(f) Tax Allocation Agreement dated February 28, 1989 among
the Company, PHLCORP, Empire, Centurion, Empire Livery
Services, Inc., Executroll Services Corporation and
Empall Agency Incorporated (Incorporated by reference
to Exhibit 10(m) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1988).
-26-
Exhibit Number Description of Document
10(g) Employment Agreement made as of January 1, 1993
Empire and Andrew W. Attivissimo. (Incorporated by
reference to Exhibit 10(g) of the 10-K for the year
ended December 31, 1992).
10(h) Empire Insurance Company Salary Cap
Restoration Plan dated May 26, 1994. (Incorporated by
reference to Exhibit 10(i) of the Company's Annual
Report on Form 10-K for the December 31, 1994).
10(i) Quota Share Reinsurance Agreement between Empire
Insurance Company and Centurion Insurance Company
(Incorporated by reference to Exhibit 10(i) of the
company's Annual Report on Form 10-K for the year ended
December 31, 1997).
10(j) Lease agreement dated June 27, 1996 between Empire
Insurance Company and Brooklyn Renaissance Plaza
L.L.C., as Landlord, BRPII L.L.C as sub-landlord
(Incorporated by reference to Exhibit 10(a) of the
company's quarterly report on Form 10-Q for the quarter
ended March 31, 1997).
EX-10* Quota Share Agreement (Refer to 10(i) above)
EX-27* Financial Data Schedule
-27-
ITEM 8. Financial Statements and Financial Statement Schedule
Page
The following financial information is submitted herein:
Report of Independent Accountants F2
Consolidated Balance Sheets - December 31, 1997 and 1996 F3
Consolidated Statements of Operations for the years
ended December 31, 1997, 1996 and 1995 F4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1997, 1996 and 1995 F5
Consolidated Statements of Cash Flows for the years ended
December 31, 1997, 1996 and 1995 F6
Notes to Consolidated Financial Statements F7 - F25
Financial Statement Schedule:
Schedule VI- Supplemental Insurance Information
Concerning Property/Casualty Insurance Operations for the
Years ended December 31, 1997, 1996 and 1995 F26
-F1-
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders' of Allcity Insurance Company:
We have audited the consolidated financial statements and the financial
statement schedule of Allcity Insurance Company and Subsidiary listed
in Item 8 of this Form 10-K. These financial statements and financial
statement schedule are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
and financial statement schedule based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position
of Allcity Insurance Company and Subsidiary as of December 31, 1997 and
1996, and the consolidated results of their operations and their cash
flows for each of the three years in the period ended December 31,
1997, in conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedule referred to
above, when considered in relation to the basic financial statements
taken as a whole, present fairly, in all material respects, the
information required to be included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 9, 1998
-F2-
CONSOLIDATED BALANCE SHEETS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share and per share amounts)
December 31,
1997 1996
ASSETS
Investments:
Fixed maturities
Available for sale (amortized cost of
$268,091 in 1997 and $254,645 in 1996) $269,055 $252,073
Held to maturity (fair value
of $497 in 1997 and $485 in 1996) 485 477
Equity securities available for sale 447 -
Short-term 1,749 20,442
TOTAL INVESTMENTS 271,736 272,992
Cash 2,863 2,232
Agents' balances, less allowance for
doubtful accounts ($1,561 in 1997 and
$1,363 in 1996) 13,109 17,814
Accrued investment income 2,942 2,822
Reinsurance balances receivable 273,280 264,159
Prepaid reinsurance premiums 55,074 70,061
Deferred policy acquisition costs 7,079 7,707
Deferred tax 11,462 13,019
Other assets 2,704 2,924
TOTAL ASSETS $640,249 $653,730
LIABILITIES
Unpaid losses $361,341 $353,536
Unpaid loss adjustment expenses 56,185 52,551
Unearned premiums 90,807 111,657
Drafts payable 4,983 5,712
Due to affiliates 14,427 14,232
Unearned service fee income 4,539 5,461
Reserve for servicing carrier claim
expenses 3,701 8,043
Reinsurance balances payable 4,825 4,887
Other liabilities 6,567 7,878
Surplus note 14,710 14,115
TOTAL LIABILITIES 562,085 578,072
SHAREHOLDERS' EQUITY
Common stock, $1 par value: 7,368,420
shares authorized; 7,078,625 shares issued
and outstanding in 1997 and 1996 7,079 7,079
Additional paid-in capital 9,331 9,331
Net unrealized appreciation(depreciation)
on investments (net of deferred taxes
of $494 and ($900) in 1997 and
1996, respectively) 917 (1,672)
Retained earnings 60,837 60,920
TOTAL SHAREHOLDERS' EQUITY 78,164 75,658
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $640,249 $653,730
See Notes to Consolidated Financial Statements.
-F3-
CONSOLIDATED STATEMENTS OF OPERATIONS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands, except share
and per share amounts)
Year Ended December 31,
1997 1996 1995
REVENUES
Premiums earned $ 80,891 $ 96,073 $ 94,251
Net investment income 15,694 16,358 15,358
Service Fee Income 5,696 6,608 7,683
Net securities (losses) and gains (192) 1,130 (205)
Other income 535 621 805
102,624 120,790 117,892
LOSSES AND EXPENSES
Losses 68,901 76,387 77,675
Loss adjustment expenses 13,144 11,963 12,652
Other underwriting expenses, less
deferrals of $14,616 in
1997, $15,333 in 1996 and
$18,359 in 1995 4,886 11,681 7,810
Amortization of deferred policy
acquisition costs 15,245 16,204 18,349
Interest on surplus note 595 591 613
102,771 116,826 117,099
(LOSS)/INCOME BEFORE FEDERAL INCOME TAX (147) 3,964 793
FEDERAL INCOME TAXES
Current (benefit)/expense (227) 2,501 3,050
Deferred expense/(benefit) 163 (1,171) (2,820)
(64) 1,330 230
NET (LOSS)/INCOME $ (83) $ 2,634 $ 563
Per share data, based on 7,078,625
average shares outstanding in 1997,
1996 and 1995
BASIC (LOSS)/EARNINGS PER SHARE $ (0.01) $ 0.37 $ 0.08
See Notes to Consolidated Financial Statements.
-F4-
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
SHAREHOLDERS' EQUITY
Net Unrealized
(Depreciation) Total
Additional Appreciation Share-
Common Stock Paid-In On Retained holders
Shares Amount Capital Investments Earnings Equity
Balance at January 1, 1995 7,079 $ 7,079 $ 9,331 $(10,869) $ 57,723 $ 63,264
Net income for the year 563 563
Change in unrealized appreciation
on investments (net of deferred
taxes of $1,073) 12,109 12,109
Balance at December 31, 1995 7,079 7,079 9,331 1,240 58,286 75,936
Net income for the year 2,634 2,634
Change in unrealized depreciation
on investments (net of deferred
benefit of $1,567) (2,912) (2,912)
Balance as of December 31, 1996 7,079 7,079 9,331 (1,672) 60,920 75,658
Net Loss for the year (83) (83)
Change in unrealized appreciation
on investments (net of deferred
taxes of $1,394) 2,589 2,589
Balance as of December 31, 1997 7,079 $ 7,079 $ 9,331 $ 917 $ 60,837 $ 78,164
-F5-
CONSOLIDATED STATEMENTS OF CASH FLOWS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
(In thousands)
Year Ended December 31,
1997 1996 1995
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss)/income $ (83) $ 2,634 $ 563
Adjustments to reconcile net (loss)/income
to net cash used for/provided by operating
activities:
Provision for deferred tax benefits 163 (1,171) (2,820)
Amortization of deferred policy
acquisition costs 15,245 16,204 18,349
Provision for doubtful accounts 198 270 141
Net securities losses and (gains) 192 (1,130) 205
Policy acquisition costs incurred
and deferred (14,616) (15,333) (18,359)
Net change in:
Agents' balances 4,507 3,071 (1,977)
Reinsurance balances receivable (9,121) (6,544) (37,761)
Prepaid reinsurance premiums 14,987 9,224 (1,671)
Unpaid losses and loss adjustment expense 11,439 6,208 58,280
Unearned premiums (20,850) (14,285) 2,756
Drafts payable (729) 868 1,408
Due to affiliates 195 (3,633) (2,557)
Unearned service fees (922) 352 853
Reserve for service carrier claims expenses (4,342) 1,133 1,660
Reinsurance balances payable (62) 1,411 3,255
Other (413) 2,907 (169)
NET CASH (USED FOR)/PROVIDED BY OPERATING
ACTIVITIES (4,212) 2,186 22,156
NET CASH FLOWS FROM INVESTING ACTIVITIES
Available for Sale:
Acquisition of fixed maturities (147,423) (172,010) (107,352)
Proceeds from sale of fixed maturities 120,272 140,862 48,405
Proceeds from maturities of fixed maturities 13,301 36,767 21,731
Net change in short-term investments 18,693 (8,845) 14,389
NET CASH PROVIDED BY/(USED FOR) INVESTING
ACTIVITIES 4,843 (3,226) (22,827)
NET INCREASE/(DECREASE)IN CASH 631 (1,040) (671)
Cash at beginning of year 2,232 3,272 3,943
Cash at the end of year $ 2,863 $ 2,232 $ 3,272
Cash paid for federal income taxes $ 1,428 $ 3,686 $ 3,714
See Notes to Consolidated Financial Statements.
-F6-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 1-ORGANIZATION
Allcity Insurance Company ("Allcity" or the "Company") is
a property and casualty insurer and includes the results of its subsidiary,
Empall Agency, Inc. ("Empall"). Empire Insurance Company ("Empire"), a
property and casualty insurer owns approximately 84.6% of the outstanding
common shares of the Company and 100% of the outstanding common shares of
Centurion Insurance Company ("Centurion"). Empire's common shares are 100%
owned and controlled, through subsidiaries, by Leucadia National Corporation
("Leucadia"). Additionally, Leucadia indirectly owns an additional 5.2% of
the outstanding common shares of the Company. The Company, Empire and
Centurion are sometimes hereinafter collectively referred to as the Group.
The property and casualty insurance business written by Empire and Allcity is
subject to a pooling agreement under which premiums, losses, loss adjustment
expenses and other underwriting expenses are shared on the basis of 70% to
Empire and 30% to Allcity. The pooling percentages have been changed from
time to time and may be changed in the future subject to New York State
Insurance Department approval. Allcity has no employees of its own.
Administrative services are provided by Empire and 30% of the related expenses
are allocated to Allcity.
The Company's three business segments and principal lines of business are
(1) automobile (private passenger and commercial), (2) commercial (commercial
multi-peril, workers' compensation and other liability) and (3) miscellaneous
and personal(fire, allied and homeowners) insurance coverages. Based on the
Company's 1997 net premiums written, approximately 59%, 30% and 11% of such
premiums were for the automobile, commercial and miscellaneous and personal
lines of business, respectively. The Company markets its products primarily to
individuals, retail establishments, restaurants, livery and taxicab owners,
and several types of service contractors. A substantial portion of the
Company's and Empire's automobile business, both private passenger
and commercial, is assigned risk business acquired through contractual
arrangements with other insurance companies, some of which are competitors.
These contractual arrangements, which are negotiated for one or two
year periods, provide for fees paid to the Group within parameters established
by the New York State Insurance Department. In addition, the Group receives
a fee for providing administrative services, including claims processing,
underwriting and collection activities, for the New York Public Automobile
Pool ("NYPAP"), the Massachusetts Taxi and Limousine Pool, and the New
Hampshire Commercial Automobile Insurance Procedure. These latter arrangements
do not involve the assumption of any material underwriting risk by the Group.
Effective February 28, 1998, the Group ceased serving as a servicing carrier
for the NYPAP, thereby enabling the Group to concentrate its resources on
its core non-service businesses and redeploy certain resources previously
dedicated to the NYPAP. Under the pooling arrangement, the Company assumes
30% of the fees and costs of these arrangements.
The Company and Empire are licensed to transact insurance in the State of New
York with Empire being additionally licensed in Connecticut, Massachusetts,
Missouri, New Hampshire and New Jersey. Based on 1997 direct premiums written,
approximately 96% of the property and casualty business written by the Company
and Empire was in the State of New York.
-F7-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 1--ORGANIZATIONCONTINUED
The Company and Empire distribute their products through five general agents,
one of which is an Empire subsidiary, and independent agents and brokers.
The Empire Group's wholly owned general agent is the largest producer and
generated approximately 11% of its total premium volume for the year ended
December 31, 1997.
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary, Empall. The preparation of financial statements
in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates.
NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Investments: Fixed maturities are designated as either (i) "held to maturity"
and carried at amortized cost, (ii) "trading" and carried at estimated market
value, which is based on quoted market prices, with differences
between cost and estimated fair value reflected in results of operations
or (iii) "available for sale" and carried at estimated fair value with
differences between cost and estimated fair value being reflected as a
separate component of Shareholders' Equity, net of deferred income tax
effects. Equity securities are designated as available for sale and
carried at estimated fair values with differences between cost and estimated
fair value reflected as a separate component of Shareholders' Equity, net
of deferred taxes. Short-term investments are carried at cost.
At December 31, 1997 and 1996, investments in fixed maturities on deposit
with the New York State Insurance Department, which the Company has the intent
and ability to hold to maturity, are classified as "Investments held to
maturity". All other investments in fixed maturities and equity securities
at those dates are classified as "Investments available for sale" and stated
at estimated fair market value. Net unrealized appreciation (depreciation)
on investments available for sale (net of deferred tax/(benefit)) is
included as a separate component of Shareholders' Equity.
Net securities gains or losses on the sale of investments are
determined on a specific identification basis and are included in
revenues. Investments with an impairment in value considered to be
other than temporary are written down to estimated net realizable
value.
Unearned Premiums: Unearned premiums have been calculated primarily
using the monthly pro rata method.
Unpaid Losses and Loss Adjustment Expenses: Liabilities for unpaid losses,
which are not discounted (except for certain workers' compensation
liabilities), and loss adjustment expenses ("LAE") are determined using
-F8-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 2--ACCOUNTING POLICIES-CONTINUED
case-basis evaluations, statistical analyses and estimates for salvage and
subrogation recoverable and represent estimates of the ultimate claim costs
of all unpaid losses and LAE. Liabilities include a provision for losses that
have occurred but have not yet been reported. These estimates are subject to
the effect of trends in future claim severity and frequency experience.
Adjustments to such estimates are made from time to time due to changes in
such trends as well as changes in actual loss experience. These adjustments
are reflected in current earnings.
Reinsurance: Unpaid losses, unpaid loss adjustment expenses and unearned
premiums are stated gross of reinsurance ceded. Premiums written and earned,
losses and LAE incurred, and other underwriting expenses are stated net of
reinsurance ceded.
Pension Cost: Empire funds actuarially determined pension costs as currently
accrued; 30% of such pension costs are allocated to Allcity.
Policy Acquisition Costs: Policy acquisition costs such as commissions,
premium taxes and certain other underwriting expenses are deferred and
amortized ratably over the terms of the related policies. Deferred policy
acquisition costs are limited to their net realizable value after
consideration of investment income on the related premium.
Participating Policies: Participating business on workers' compensation
lines constitutes approximately 4.7% of the Company's policies in force
and net premiums written. Amounts transferred to the participating
policyholders' funds are determined by means of specific identification
based upon premium volume and loss experience. The amount of dividends to
be paid to participating policyholders is approved quarterly by the Board
of Directors. The amount of policyholders' dividends declared on
participating policies was $315,000, $946,000, and $523,000 in 1997, 1996
and 1995, respectively. Unpaid dividends to participating policyholders
are included as a liability in the consolidated balance sheets.
Servicing Arrangements: Service fee income from assigned risk business
acquired through contractual arrangements with other insurance companies is
recognized as revenue and earned over the life of the covered policies on a
monthly pro-rata method.
Service fee income for the administrative services, including underwriting,
policy issuance, premium collection and claims services, provided to the NYPAP
is recorded as a reduction to other underwriting and loss adjustment expenses
and is earned over the life of the policies issued. The premiums and losses
processed by the Company on behalf of the NYPAP, which are not reflected in
the consolidated financial statements for the years ended December 31, are as
follows (in thousands):
1997 1996 1995
Premiums Earned $ 29,076 $ 59,158 $ 60,458
Losses Incurred 50,745 76,939 100,595
Unpaid Losses 98,150 119,223 117,736
-F9-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 2--ACCOUNTING POLICIES-CONTINUED
The premiums, losses and expenses of the business for which the Company
provides administrative services are reflected on the financial statements
of those insurance companies, including the Company, in New York State which
are required to participate in the NYPAP. In its role as a servicing carrier,
the Company is liable only for the loss adjustment expenses which are
reflected as a reserve for servicing carrier claim expense and are determined
using case basis evaluations and statistical analyses.
Federal Income Taxes: The Company uses the liability method in providing for
income taxes. Under the liability method, deferred income taxes are provided
at the enacted tax rates for differences between the financial statements
carrying amounts and tax bases of assets and liabilities and for carryforwards.
A valuation allowance is provided if deferred tax assets are not considered
more likely than not to be realized.
Earnings Per Share: Earnings per share ("EPS") are based on the weighted
average number of common shares outstanding. There were no outstanding common
stock equivalents during 1997, 1996 and 1995 and therefore, basic and diluted
EPS are the same.
New Pronouncements: In June 1997, the Financial Accounting Standards Board
(the "FASB") issued SFAS No. 130, Reporting Comprehensive Income. This
statement establishes standards for the reporting and display of comprehensive
income and its components in the consolidated financial statements. The
purpose of reporting comprehensive income is to report the change in equity
of a business enterprise for the period from transactions and other events
and circumstances from nonowner sources. It includes all changes in equity
during a period except those resulting from investments by owners and
distributions to owners. These items include unrealized appreciation
(depreciation) of investments, which is currently reported as separate
components of equity in the balance sheet. The statement is effective in
1998 and will change the presentation of information in the financial
statements and is not expected to have any effect on the financial position
or results of operations of the Company.
Also in June 1997, the FASB issued SFAS No. 131, Disclosure about Segments of
an Enterprise and Related Information. This statement requires that companies
report certain information about their operating segments in the financial
statements including information about the products and services from which
revenues are derived, the geographic areas of operations, and information
about major customers. Operating segments are determined by the way
management decides how to allocate resources and how it assesses performance.
Descriptive information about the method used to identify the reportable
operating segments must also be disclosed. The statement also requires a
reconciliation of revenues, net income, assets and other amounts disclosed
for the segments to the corresponding amounts in the consolidated financial
statements. The statement is effective in 1998 and is not expected to change
the Company's current segmentation of its business. The financial position
and operating results of the Company are not expected to be affected by
this statement.
-F10-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 2--ACCOUNTING POLICIES-CONTINUED
Presentation: Certain prior year amounts have been reclassified
to conform with the 1997 presentation.
NOTE 3--SURPLUS NOTE
The Company issued a surplus note to Empire in 1980. The surplus note
provides, among other things, for interest to be accrued on the principal
of the note based on a bank's prime rate at the end of the calendar
quarter. Neither the principal amount of the surplus note nor the accrued
interest may be paid, in whole or in part, without the consent of the
Superintendent of Insurance of the State of New York ("Superintendent")
and must be repaid, in whole or in part, when so ordered by the
Superintendent.
NOTE 4-INVESTMENTS
Investment income by source is summarized as follows:
Year Ended December 31,
1997 1996 1995
(In thousands) Investment income:
Fixed maturities $ 15,627 $ 15,955 $ 13,606
Short-term investments 385 742 2,126
16,012 16,697 15,732
Less: Investment expenses 318 339 374
NET INVESTMENT INCOME $ 15,694 $ 16,358 $ 15,358
Investments at December 31, 1997 are summarized as follows:
Gross Unrealized Esti-
Amortized Apprec- Deprec- mated Carrying
Cost iation iation Fair Value Amount
(In Thousands)
Available for Sale:
U.S. Treasury securities
and obligations of U.S.
government agencies $218,088 $ 1,327 $ 596 $218,819 $218,819
Mortgage-backed
securities 29,437 298 113 29,622 29,622
Foreign governments 15,143 121 77 15,187 15,187
All other corporate bond 5,423 7 3 5,427 5,427
Total 268,091 1,753 789 269,055 269,055
Equity securities - 447 - 447 447
TOTAL INVESTMENTS
AVAILABLE FOR SALE 268,091 2,200 789 269,502 269,502
Held to maturity:
U.S. Treasury securities 485 12 - 497 485
TOTAL INVESTMENTS
HELD TO MATURITY 485 12 - 497 485
Short-term 1,749 - - 1,749 1,749
TOTAL INVESTMENTS $270,325 $ 2,212 $ 789 $271,748 $271,736
-F11-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 4--INVESTMENTS CONTINUED
Investments at December 31, 1996 are summarized as follows:
Gross Unrealized Esti-
Amortized Apprec- Deprec- mated Carrying
Cost iation iation Fair Value Amount
(In Thousands)
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government agencies $195,470 $ 377 $ 2,720 $193,127 $193,127
Mortgage-backed
securities 50,619 130 377 50,372 50,372
Foreign governments 75 - 8 67 67
All other corporate bonds 8,481 41 15 8,507 8,507
TOTAL INVESTMENTS
AVAILABLE FOR SALE 254,645 548 3,120 252,073 252,073
Held to maturity:
U.S. Treasury securities 477 8 - 485 477
TOTAL INVESTMENTS
HELD TO MATURITY 477 8 - 485 477
Short-term 20,442 - - 20,442 20,442
TOTAL INVESTMENTS $275,564 $ 556 $ 3,120 $273,000 $272,992
The amortized cost and estimated fair values of fixed maturities at
December 31, 1997 are shown as follows (in thousands):
Amortized Fair
Cost Value
Investments available for sale:
Due in one year or less $ 32,219 $ 32,192
Due after one year through five years 186,510 187,102
Due after five years through ten years 19,925 20,139
Sub total 238,654 239,433
Mortgage-backed securities 29,437 29,622
Sub total 268,091 269,055
Investments held to maturity:
Due after one year through five years 485 497
TOTAL $268,576 $269,552
Expected maturities will differ from contractual maturities because
borrowers may have the right to call or prepay obligations with or
without call or prepayment penalties.
The Company sold certain fixed maturities during 1997, 1996 and 1995
realized gross gains of $216,000, $1,354,000 and, $343,000,
respectively. Realized gross losses of $298,000, $224,000 and $548,000 were
realized on these sales in 1997, 1996 and 1995, respectively, before
income taxes. In 1997, the Company realized a gross gain of $129,000
before taxes, from the conversion of a portion of stock received from a
trade organization membership, Insurance Services Offices, into a stock
company.
-F12-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 4--INVESTMENTS CONTINUED
The changes in unrealized appreciation/(depreciation) on investments
available for sale in fixed maturities were $3,983,000 and $(4,479,000)
for the years ended December 31, 1997 and 1996, respectively, before
income taxes.
As of December 31, 1997 and 1996, a security with an amortized cost of
approximately $485,000 was on deposit with the New York State Insurance
Department.
During 1997 and 1996, the Company sold call options on certain U.S.
Treasury Notes and recognized an investment loss of $239,000
in 1997 and income of $230,000 in 1996. Options on U.S. Treasury Notes
with notional values of $0 and $20,000,000 were in force at December 31,
1997 and 1996, respectively.
NOTE 5--STATUTORY INFORMATION
The following is a reconciliation of net income/(loss) and surplus as
reported on a statutory basis to net income and shareholders' equity as
determined in conformity with generally accepted accounting principles
("GAAP Basis") (in thousands):
Years Ended December 31,
1997 1996 1995
Statutory basis - Net Income $ 505 $ 7,233 $ 3,311
Add (deduct):
Change in deferred policy acquisition
costs (628) (871) 9
Change in allowances for doubtful
accounts (198) (270) (141)
Change in policyholders' dividend reserve 60 (450) -
Retrospectively rated reinsurance
contracts - (3,365) (4,742)
System development cost capitalized 600 - -
Other postretirement benefits 276 (176) (49)
Deferred tax provision (benefit) (163) 1,171 2,820
Interest on surplus note (595) (591) (613)
Other 60 (47) (32)
GAAP Basis $ (83) $ 2,634 $ 563
-F13-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 5--STATUTORY INFORMATION -CONTINUED
DECEMBER 31,
1997 1996
(In Thousands)
Statutory Shareholders' Equity and Surplus $ 70,088 $ 69,566
Add (deduct):
Deferred policy acquisition costs 7,079 7,707
Nonadmitted assets, less allowance
for doubtful accounts 1,984 2,352
System development cost capitalized 600 -
Provision for unauthorized reinsurance 108 114
Policyholders' dividend reserve (390) (450)
Excess of statutory reserves over
statement reserves 1,143 291
Deferred tax benefit 11,462 13,019
Other postretirement benefits (467) (744)
Net unrealized appreciation
(depreciation)on investments 964 (2,572)
Surplus note (14,710) (14,115)
Other 303 490
GAAP Basis $ 78,164 $ 75,658
The Company has paid no dividends on its common shares since 1975. The New
York Insurance Law prohibits New York domiciled property and casualty
companies from paying dividends except out of earned surplus. Without the
approval of the New York State Insurance Department, dividends are
limited to the lowest of 1) 10% of surplus as computed on a SAP basis, or
2) adjusted net investment income during the 12 month period prior to
declaration. At December 31, 1997, $7,009,000 was available for
distribution of dividends. The Company does not presently anticipate
paying dividends in the near future.
The New York State Insurance Department is currently finalizing their
examination of the Company's statutory financial statements for the years
1994, 1995 and 1996. In the opinion of management, the results of this exam
are not expected to have a material impact on the financial position or
results of operations of the Company.
NOTE 6--AGENTS' BALANCES
Activity affecting the allowance for uncollectible agents' balances for
the years ended December 31, 1995, 1996 and 1997 is summarized as follows
(in thousands):
Balance at January 1, 1995 $ 952
Provision 1,577
Charge-offs, net of recoveries (1,436)
Balance at December 31, 1995 1,093
Provision 2,089
Charge-offs, net of recoveries (1,819)
Balance at December 31, 1996 1,363
Provision 1,470
Charge-offs, net of recoveries (1,272)
Balance at December 31, 1997 $ 1,561
-F14-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 7-UNPAID LOSSES AND LAE
The Company has relied upon standard actuarial ultimate loss projection
techniques to obtain estimates of liabilities for losses and LAE. These
projections include the extrapolation of both losses paid and incurred by
business line and accident year and implicitly consider the impact of
inflation and claims settlement patterns upon ultimate claim costs based
upon historical patterns. In addition, methods based upon average loss
costs, reported claim counts and pure premiums are reviewed in
order to obtain a range of estimates for setting the reserve levels.
For further input, changes in operations in pertinent areas including
underwriting standards, product mix, claims management and legal climate
are periodically reviewed.
In the following table, the liability for losses and LAE are reconciled
for each of the three years ended December 31, 1997. Included therein
are current year data and prior year development.
RECONCILIATION OF LIABILITY FOR LOSSES AND LAE
1997 1996 1995
(In thousands)
Liability for losses and LAE, net,
at beginning of year $143,494 $142,718 $121,923
Provision for losses and LAE for claims
occurring in the current year 73,741 80,216 80,061
Increase in estimated losses and LAE
for claims occurring in prior years 8,304 8,134 10,266
82,045 88,350 90,327
Loss and LAE payments for claims
occurring during:
The current year 23,804 27,192 23,743
Prior years 56,475 60,382 45,789
80,279 87,574 69,532
Liability for losses and LAE, net 145,260 143,494 142,718
Reinsurance balances receivable 272,266 262,593 257,161
Liability for losses and LAE
at end of year as reported in
financial statements $417,526 $406,087 $399,879
Based upon actuarial studies conducted during 1997 and 1996 the Company
strengthened reserves for losses from prior accident years by approximately
$8.3 million in 1997 and by approximately $8.1 million in 1996, primarily
related to commercial package and voluntary commercial automobile lines
of business.
-F15-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 7-UNPAID LOSSES AND LAE - CONTINUED
The Company has purchased annuities with various life insurance
companies for a number of settled claims. The claimants have been
designated as payees, however, the Company has a contingent liability
of approximately $3.1 million which represents the aggregate amount of
settlements with the claimants, in the event of the failure of the
various life insurance companies to perform.
NOTE 8--REINSURANCE
The Company has obtained reinsurance coverage to reduce its risk of and
exposure to large insurance claims and catastrophes. The maximum single
risk retained by the Company was $0.5 million on workers' compensation, for
all three years, and for other property and casualty lines $0.3 million in
1997 and 1996 and $0.2 million in 1995, respectively. The Company also uses
reinsurance to protect itself against certain catastrophic losses. Its
retention of lower level losses under such treaties was $5.0
million for 1997 and $3.0 million for 1996 and 1995. Due to the
geographic concentration of its business, the Company believes
hurricanes, windstorms and civil disturbances are its most significant
exposure to catastrophic losses. Computer modeling programs provided by
independent consultants are used to estimate exposure to such losses.
The Company believes it presently has sufficient catastrophe reinsurance
protection.
Although reinsurance does not legally discharge an insurer from its primary
liability for the full amount of the policy liability, it does make the
assuming reinsurer liable to the insurer to the extent of the reinsurance
ceded. The majority of the Company's reinsurance has been placed with certain
of the largest reinsurance companies, including (with their A. M. Best
ratings) General Reinsurance Corporation (A++) (superior), American
Re-Insurance Company (A+) (superior), Partner Re Co., Ltd. (A+)(superior),
IPC Re Ltd. (A) (excellent), CAT Ltd. (A)(excellent) and Zurich Reinsurance
(North America), Inc. (A)(excellent). The Company believes its reinsurers
to be financially capable of meeting their respective obligations. However,
to the extent that any reinsuring company is unable to meet its obligations,
the Company would be liable for the reinsured risks. The Company has
established reserves, which the Company believe are adequate, for any
non-recoverable reinsurance.
Effective January 1, 1997, Empire entered into a quota share reinsurance
agreement with its subsidiary, Centurion. Under this agreement, Empire will
assume 50% up to July 1 and 75% thereafter of the effective period premiums
and losses of Centurion and grant Centurion a ceding commission. Under the
pooling agreement, 70% of such business assumed will be retained by Empire
and 30% will be shared with the Company.
-F16-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 8--REINSURANCE-CONTINUED
Assets and insurance reserves at December 31, 1997 and 1996 (including
$328.4 million and $334.2 million, respectively, which represent
reinsured amounts principally arising from the intercompany pooling
agreement with Empire are as follows (in thousands):
Ceded to
Empire Others Total
As of December 31, 1997
Prepaid reinsurance premiums $ 54,476 $ 598 $ 55,074
Reinsurance balances receivable on:
Paid losses - 1,014 1,014
Unpaid losses 204,023 32,758 236,781
Unpaid loss adjustment expenses 31,671 3,814 35,485
Ceded to
Empire Others Total
As of December 31, 1996
Prepaid reinsurance premiums $ 69,266 $ 795 $ 70,061
Reinsurance balances receivable on:
Paid losses - 1,567 1,567
Unpaid losses 200,877 28,489 229,366
Unpaid loss adjustment expenses 29,991 3,235 33,226
An analysis of reinsurance premiums, losses, LAE and commissions for
the years ended December 31, 1997, 1996 and 1995 are summarized as
follows (in thousands):
Direct Assumed Ceded Net
Empire Others Empire Others
1997
Premiums earned $191,175 $ 80,891 $ 142 $178,488 $ 12,829 $ 80,891
Losses incurred 170,395 68,902 195 155,122 15,469 68,901
LAE incurred 16,345 13,144 62 15,489 918 13,144
Commissions incurred 22,121 10,666 4 20,271 1,854 10,666
Premiums written 169,911 75,029 81 157,359 12,633 75,029
Losses paid 161,192 68,512 634 150,628 11,198 68,512
Unearned premiums(a) 78,336 35,733 85 77,823 598 35,733
Unpaid losses(a) 322,671 124,559 1,548 291,461 32,758 124,559
Unpaid LAE(a) 49,058 20,700 - 45,244 3,814 20,700
1996
Premiums earned $235,467 $ 96,073 $ 277 $222,909 $ 12,835 $ 96,073
Losses incurred 182,132 76,387 209 170,630 11,711 76,387
LAE incurred 13,827 11,963 72 11,679 2,220 11,963
Commissions incurred 25,556 10,987 8 23,259 2,305 10,987
Premiums written 222,467 91,011 200 210,068 12,599 91,011
Losses paid 177,454 75,938 728 170,948 7,234 75,938
Unearned premiums(a) 99,600 41,596 146 98,952 794 41,596
Unpaid losses(a) 313,469 124,170 1,987 286,967 28,489 124,170
Unpaid LAE(a) 46,080 19,324 - 42,845 3,235 19,324
-F17-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 8--REINSURANCE-CONTINUED
1995
Premiums earned $233,695 $ 94,251 $ 569 $219,649 $ 14,615 $ 94,251
Losses incurred 188,198 77,671 555 179,410 9,339 77,675
LAE incurred 17,731 12,652 76 19,128 (1,321) 12,652
Commissions incurred 29,792 12,223 32 27,076 2,748 12,223
Premiums written 236,170 95,335 483 222,046 14,607 95,335
Losses paid 141,279 59,680 811 133,849 8,241 59,680
(a) Amounts as reflected in the consolidated balance sheet can be derived by
adding together amounts for direct and assumed and subtracting from this sum
30% of the amount ceded to Empire. The Company remains primarily liable for
amounts ceded to reinsurers for unpaid losses, LAE and unearned premiums to
the extent that the assuming reinsuring companies are unable to meet their
obligations.
An analysis of the effect of reinsurance on premiums by business segment for
the years ended December 31, 1997, 1996 and 1995 are summarized as follows
(in thousands):
Percentage
Assumed Ceded of Amount
Direct from to Net Assumed
Amount Empire (a) Empire (b) Amount to Net
1997
Premiums written:
Automobile lines $ 85,701 $ 44,565 $ 85,782 $ 44,484 100.2%
Commercial lines 73,455 22,107 73,455 22,107 100.0%
Miscellaneous and
personal lines 10,755 8,438 10,755 8,438 100.0%
Total $169,911 $ 75,110 $169,992 $ 75,029
1996
Premiums written:
Automobile lines $131,542 $ 60,362 $131,742 $ 60,162 100.3%
Commercial lines 80,758 25,243 80,758 25,243 100.0%
Miscellaneous and
personal lines 10,167 5,606 10,167 5,606 100.0%
Total $222,467 $ 91,211 $222,667 $ 91,011
1995
Premiums written:
Automobile lines $133,427 $ 62,968 $133,910 $ 62,485 100.8%
Commercial lines 93,659 28,821 93,659 28,821 100.0%
Miscellaneous and
personal lines 9,084 4,029 9,084 4,029 100.0%
Total $236,170 $ 95,818 $236,653 $ 95,335
(a)Includes $81, $200 and $483 assumed from non-affiliates in
1997, 1996 and 1995, respectively, before the effects of the pooling
agreement described in Note 1.
(b)Includes $12,633, $12,599 and, $14,607 ceded to non affiliates
in 1997, 1996 and 1995, respectively, before the effects
of the pooling agreement described in Note 1.
-F18-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 9--FEDERAL INCOME TAXES
The Company has been included in the consolidated federal income tax
returns of Leucadia since 1993. Under the terms of the tax sharing
agreement, members compute their tax provision on a separate return
basis and are either charged their share of federal income tax resulting
from their taxable income or are reimbursed for the tax
benefits resulting from losses. As of December 31, 1997 and 1996, the
Company's liability to affiliates for income taxes was $8,125,000 and
$9,780,000, respectively.
The principal components of the deferred tax asset at December 31, 1997
and 1996 were as follows (in thousands):
1997 1996
Unpaid loss and loss adjustment
expense reserves $ 7,576 $ 7,644
Unearned premiums 2,501 2,912
Employee benefits and compensation 1,221 1,580
Interest accrued on surplus note 2,698 2,490
Allowance for doubtful accounts 547 477
Deferred policy acquisition costs (2,478) (2,697)
Unrealized (appreciation) depreciation
on investments (494) 900
Other, net (109) (287)
Total $ 11,462 $ 13,019
The Company believes that it is more likely than not that the deferred
tax asset at December 31, 1997 will be fully realized based on the
availability of taxable income.
For the years 1997, 1996 and 1995, the difference between the "expected"
statutory federal income tax applicable to continuing operations and the
actual income tax expense are as follows:
1997 1996 1995
Expected federal income tax $ (51) $ 1,388 $ 278
Other (13) (58) (48)
Actual federal income tax $ (64) $ 1,330 $ 230
NOTE 10--PENSION PLAN, POSTRETIREMENT BENEFITS AND STOCK OPTIONS
Empire has a trusteed non-contributory pension plan covering substantially
all employees. Current benefits are based on years of credited service and
the employee's highest compensation during any five consecutive plan or
calendar years before retirement. Empire's policy is to fund pension costs
on a current basis using an aggregate method.
-F19-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10--PENSION PLAN, POSTRETIREMENT BENEFITS AND STOCK OPTIONS--CONTINUED
The following table sets forth certain information relating to Empire's
pension plan (in thousands):
December 31,
1997 1996
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $19,955 in 1997 and $19,355 in 1996 $ 20,763 $ 20,043
Projected benefit obligation for services
rendered to date (27,765) (26,927)
Plan assets at fair value (primarily bonds and stocks) 25,152 25,700
PROJECTED BENEFIT OBLIGATION
IN EXCESS OF PLAN ASSETS (2,613) (1,227)
Unrecognized prior service cost 98 115
Unrecognized net (gain) from past experience
different from that assumed and effects of
changes in assumptions (103) (797)
Unrecognized net obligation at transition date 386 515
ACCRUED PENSION COST $ (2,232) $ (1,394)
Net pension cost includes the following components (in thousands):
Years Ended December 31,
1997 1996 1995
Service cost-benefits earned during the period $ 1,628 $ 1,862 $ 1,887
Interest cost on projected benefit obligation 1,985 2,098 1,792
Actual return on plan assets (2,838) (2,120) (3,745)
Deferred gain on plan assets 1,039 556 2,535
Net amortization and deferral 145 298 196
NET PERIODIC PENSION COST $ 1,959 $ 2,694 $ 2,665
In accordance with the pooling agreement, the Company's share of accrued
pension cost and net periodic pension cost is 30% of the amounts reflected
above. In determining the actuarial present value of the projected benefit
obligation, the Company utilized discount rates of 7.0% for 1997 and 7.5%
for 1996 and a rate of increase in future compensation of 4% in 1997 and 5%
in 1996, respectively. The expected long-term rate of return on plan assets
was 7.0% during 1997 and 1996.
Empire provides certain health care and life insurance benefits for retired
employees. During 1996, Empire amended the eligibility requirement to only
those employees who had at least ten years of service
-F20-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10--PENSION PLAN, POSTRETIREMENT BENEFITS AND STOCK OPTIONS--CONTINUED
and were at least 50 years of age as of October 1, 1996. Prior to this
amendment, substantially all of Empire's employees were eligible for such
benefits if they reached normal or early retirement age while still
working for Empire. As a result of this amendment, the accumulated
postretirement benefit obligation was reduced by approximately $7,602,000
which is being amortized over three years. Those benefits are provided
through an insurance company whose premiums are based on the cost of
benefits paid during the year.
The following table sets forth certain information relating to Empire's
unfunded substantive plan for postretirement benefits (in thousands):
1997 1996
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $ (3,538) $ (5,325)
Fully eligible active plan participants (544) (1,742)
Other active plan participants (647) (450)
(4,729) (7,517)
Unrecognized net (gain) from past
experience different from that assumed
and effects of changes in assumptions (4,938) (5,213)
ACCRUED POSTRETIREMENT BENEFITS COST $ (9,667) $(12,730)
For the years ended December 31, 1997, 1996 and 1995, net postretirement
benefits cost included the following components (in thousands):
1997 1996 1995
Service cost--benefits earned during the period $ 23 $ 309 $ 234
Interest cost on projected benefit obligation 330 970 866
Amortization of curtailment gain (3,168) - -
Net amortization and deferral (19) - -
PERIODIC POSTRETIREMENT BENEFITS (INCOME)
COST $ (2,834) $ 1,279 $ 1,100
In accordance with the pooling agreement, the Company's share of
accrued postretirement benefit cost and net periodic postretirement
benefit (income) cost is 30% of the amounts reflected above and is
included in other liabilities. In determining the accumulated postretirement
benefit obligation at December 31, 1997 and 1996, Empire
utilized discount rates of 7.0% and 7.5%, respectively.
The assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were 9% for 1997 declining to an
ultimate rate of 6% by 2000. If the health care cost trend rates were
increased by 1%, the accumulated postretirement benefit obligation
-F21-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10--PENSION PLAN, POSTRETIREMENT BENEFITS AND STOCK OPTIONS--CONTINUED
as of December 31, 1997 and 1996 would have increased by approximately
$155,000 and $338,000, respectively, before the effects of the pooling
agreement. The effect of a 1% change in the estimated aggregate of
service and interest cost for 1997, 1996 and 1995 would be immaterial.
In 1987, Empire established a Supplemental Retirement Plan ("SERP") for
certain senior officers. Under the SERP, Empire makes contributions to
a trust account for the benefit of eligible senior officers. Eligible
officers will receive benefits determined in accordance with the formulas
and other provisions of the SERP agreement based on prior salary. Empire
expensed $1,073,000 during 1996 and had income of $697,000 in 1995 due to
a reduction in accruals. Pursuant to the pooling agreement the Company is
obligated to contribute 30% of the payments made under the SERP.
In 1994, Empire established a Salary Cap Restoration Plan ("SCRP") for
certain corporate officers. Under the SCRP, Empire will provide these
officers with an additional benefit, to be paid in a lump-sum upon
retirement, equal to the difference between the actuarially determined
lump-sum benefits, as computed under the Pension Plan, of the officer's
highest five year average compensation (not to exceed $320,000) at
retirement and the current maximum compensation limit of $160,000. The SCRP
is an unfunded plan. During 1995, Empire had income of $274,000 due to an
accrual reduction and, during 1997 and 1996, expensed $17,000 and $90,000,
respectively. Under the pooling arrangement, the Company is obligated to
pay 30% of the cost of the SCRP.
Empire sponsors an Employees' Savings Plan (the "Savings Plan"),
under which each eligible employee may defer a portion of their annual
compensation, subject to limitations. Empire contributes a matching amount,
subject to certain limits. In 1995, Empire matched 65% of each participant's
deferral contribution up to a maximum matching contribution of $650. A
participant may also contribute, from after-tax dollars, an amount, not to
exceed 10% of annual compensation. Effective July 1996, the Savings Plan
was amended to allow Empire matching contributions equal to 50% of an
employee's contributions up to a maximum of 2.5% of the employee's
salary. Empire's contributions to the Savings Plan were $438,000, $524,000
and $435,000 in 1997, 1996 and 1995, respectively. Under the pooling
arrangement, the Company is obligated to provide 30% of Empire's
contributions under the Savings Plan.
- -F22-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 10--PENSION PLAN, POSTRETIREMENT BENEFITS AND STOCK OPTIONS--CONTINUED
In 1985, Allcity adopted the Allcity Insurance Company 1985 Incentive Stock
Option Plan ("SOP") for officers and key employees. Under this plan,
368,420 shares were reserved for future options that may be granted to
acquire common shares at the market price at date of grant. On October 1,
1986 options were granted to acquire a total of 312,250 common shares at
an exercise price of $1.50 per common share. The plan expired in 1995.
Prior to 1996, Empire sponsored a Long Term Incentive Plan which, based
upon the attainment of certain performance goals, awarded officers with
units of participation in a compensation pool. The plan was terminated
in 1996.
NOTE 11--LEASES
The Group's executive and administrative offices are located on six floors of
a ten-story office building at 122 Fifth Avenue, New York, New York 10011 and
some additional space in the surrounding area, under leases each of which
expire on September 30, 1998.
The Group has entered into a twenty year lease agreement, in an office
building in Brooklyn, New York, in which Leucadia has an equity interest,
and will relocate its executive and administrative offices in September 1998.
The Group received certain incentives from both the City and State of New
York in connection with this lease which will be recognized over the term
of the lease.
Empire has guaranteed the payment of lease rent by its wholly owned
subsidiary Gould Dente Agency ("Gould"). Gould will also relocate its
offices to the new office buildings with Empire. In accordance with the
guarantee, in 1997 Empire has established a $2.3 million liability for
lease abandonment costs. Under the pooling agreement, the Company is
obligated to pay 30% of this cost.
Future minimum rentals, which exclude escalation amounts, on non-cancelable
leases in the aggregate for each of the next five years and thereafter
are as follows (in thousands):
1998 $ 2,361
1999 4,906
2000 4,906
2001 4,906
2002 4,906
Thereafter 102,064
Total $124,049
Rental expense for the Group for the years 1997, 1996 and 1995 was $3.3
million, $3.2 million and $2.8 million, respectively. The Company is
obligated to pay 30% of these rental charges in accordance with the
pooling agreement.
-F23-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 12--BUSINESS SEGMENTS
Allcity operates in three business segments--automobile lines, commercial
lines and miscellaneous and personal lines. Results by business segment
for each of the three years ended December 31, 1997 are summarized as
follows (in thousands):
Premiums Underwriting
Earned Gain (Loss)
1997
Automobile lines $ 50,677 $ (8,015)
Commercial lines 23,289 (7,842)
Miscellaneous and personal lines 6,925 268
TOTAL FROM UNDERWRITING $ 80,891 (15,589)
Net investment income, net securities losses,
other income and interest on surplus note 15,442
(LOSS) BEFORE FEDERAL INCOME TAXES $ (147)
1996
Automobile lines $ 63,558 $ (10,822)
Commercial lines 27,714 (2,998)
Miscellaneous and personal lines 4,801 266
TOTAL FROM UNDERWRITING $ 96,073 (13,554)
Net investment income, net securities gains,
other income and interest on surplus note 17,518
INCOME BEFORE FEDERAL INCOME TAXES $ 3,964
1995
Automobile lines $ 61,261 $ (9,965)
Commercial lines 29,535 (5,147)
Miscellaneous and personal lines 3,455 560
TOTAL FROM UNDERWRITING $ 94,251 (14,552)
Net investment income, net securities losses,
other income and interest on surplus note 15,345
INCOME BEFORE FEDERAL INCOME TAXES $ 793
Direct investment portfolios are not maintained for each segment and,
accordingly, allocation of assets to each segment is not performed.
Five general agents, one of which is an Empire subsidiary, produced
approximately 28%, 23%, and 21% of Allcity's premiums for the
years ended December 31, 1997, 1996 and 1995, respectively. All of
Allcity's business is conducted in the State of New York.
-F24-
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY AND SUBSIDIARY
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's only material financial instruments are investments for
which the fair values are disclosed in Note 4, and the surplus note
and short-term investments, for which the carrying amount approximates
fair value.
NOTE 14 -- LITIGATION
The Company is party to legal proceedings that are considered to be
either ordinary, routine litigation or incidental to its business.
Based on discussion with Counsel, the Company does not believe that
such litigation will have a material effect on its financial
position, results of operations or cash flows.
NOTE 15 -- RELATED PARTIES
See Notes 1, 3, 8, 9, 10 and 11 regarding Allcity's relationships with
the Group and Leucadia.
NOTE 16--SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following is a summary of unaudited quarterly results of operations
for 1997, 1996 and 1995 (in thousands, except per share amounts):
1997
1st 2nd 3rd 4th
Total revenues $ 28,108 $ 26,560 $ 25,826 $ 22,130
Net income /(loss) 856 (162) 49 (826)
Basic Earnings/(Loss) per share 0.12 (0.02) 0.01 (0.12)
1996
1st 2nd 3rd 4th
Total revenues $ 30,884 $ 30,714 $ 30,600 $ 28,592
Net income 556 497 780 801
Basic Earnings per share 0.08 0.07 0.11 0.11
1995
1st 2nd 3rd 4th
Total revenues $ 28,273 $ 30,091 $ 29,852 $ 29,676
Net income/(loss) 698 590 299 (1,024)
Basic Earnings/(Loss) per share 0.10 0.08 0.04 (0.14)
-F25-
ALLCITY INSURANCE COMPANY
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION
CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS
(THOUSANDS OF DOLLARS)
COL. A COL. B COL. C COL. D COL. E COL. F COL. G COL. H COL. I COL. J COL. K COL. L
Reserves Amortiz-
for Unpaid Claims and Claim tion of Paid
Deferred Claims Discount Net Adjustment Expenses Deferred Other Claims
Policy and Claim if any Invest- Incurred Related to Policy Operat- and Claim
Acquisi- Adjust- Deducted ment (1) (2) Acquisi- ing Exp- Adjust-
tion ment Exp- in Col. Unearned Earned Income Current Prior tion enses Premiums ment Exp-
Segment Costs enses C (a) Premiums Premiums (b) Year Years Costs (b) Written enses
Year Ended 12/31/97:
Automobile Lines $ 3,339 $ 205,353 $ 0 $ 46,780 $ 50,677 $ 8,881 $ 53,995 $ 191 $ 8,371 $ (3,864)$ 44,484 $ 54,649
Commercial Lines 2,577 203,383 123 35,827 23,289 6,072 15,907 7,482 5,118 2,619 22,107 22,580
Miscellaneous and
Personal Lines 1,163 8,790 0 8,200 6,925 741 3,839 631 1,756 435 8,438 3,050
$ 7,079 $ 417,526 $ 123 $ 90,807 $ 80,891 $ 15,694 $ 73,741 $ 8,304 $ 15,245 $ (810)$ 75,029 $ 80,279
Year Ended 12/31/96:
Automobile Lines $ 4,318 $ 206,706 $ 0 $ 66,050 $ 63,558 $ 9,561 $ 58,256 $ 6,443 $ 9,854 $ (180)$ 60,162 $ 62,446
Commercial Lines 2,654 194,000 104 39,090 27,714 6,370 19,251 1,434 5,293 4,742 25,243 22,483
Miscellaneous and
Personal Lines 735 5,381 0 6,517 4,801 427 2,709 257 1,057 511 5,606 2,645
$ 7,707 $ 406,087 $ 104 $111,657 $ 96,073 $ 16,358 $ 80,216 $ 8,134 $ 16,204 $ 5,073 $ 91,011 $ 87,574
Year Ended 12/31/95:
Automobile Lines $ 5,057 $ 199,550 $ 0 $ 74,194 $ 61,261 $ 8,875 $ 56,931 $ 13,656 $ 11,016 $ (3,045)$ 62,485 $ 57,891
Commercial Lines 3,042 195,098 75 46,402 29,535 6,137 21,399 (3,183) 6,530 2,589 28,821 10,174
Miscellaneous and
Personal Lines 479 5,231 0 5,346 3,455 346 1,731 (207) 803 583 4,029 1,467
$ 8,578 $ 399,879 $ 75 $125,942 $ 94,251 $ 15,358 $ 80,061 $ 10,266 $ 18,349 $ 127 $ 95,335 $ 69,532
(a) Liabilities for losses for certain long-term disability payments under
workers' compensation insurance are discounted at a maximum 6%.
The liabilities discounted are deemed insignificant and do not have a
material effect on reported income.
(b) Allocations of Net Investment Income and Other Operating Expenses are
based on a number of assumptions and estimates and results would
change if different methods were applied. Other Operating Expenses
are reflected net of service fee income.
* Information required by Schedule III - Supplementary Insurance Information
has been incorporated within this schedule.
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