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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
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[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, 1993
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: 1-5721
LEUCADIA NATIONAL CORPORATION
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(Exact Name of Registrant as Specified in its Charter)
New York 13-2615557
- ------------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
315 Park Avenue South
New York, New York 10010
(212) 460-1900
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(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------------------------- -----------------------------------
Common Shares, par value $1 per share New York Stock Exchange
Pacific Stock Exchange
10-3/8% Senior Subordinated Notes due New York Stock Exchange
June 15, 2002
5-1/4% Convertible Subordinated New York Stock Exchange
Debentures due February 1, 2003
7-3/4% Senior Notes due August 15, New York Stock Exchange
2013
Securities registered pursuant to Section 12(g) of the Act:
None.
- ---------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_].
Aggregate market value of the voting stock of the registrant held by non-
affiliates of the registrant at March 16, 1994 (computed by reference to
the last reported closing sale price of the Common Stock on the New York
Stock Exchange on such date): $621,552,120.
On March 16, 1994, the registrant had outstanding 27,948,823 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with
the 1994 annual meeting of shareholders of the registrant are incorporated
by reference into Part III of this Report.
PART I
Item 1. Business.
------ --------
THE COMPANY
GENERAL
The Company is a financial services company principally engaged,
through its subsidiaries, in personal and commercial lines of property
and casualty insurance, life and health insurance primarily marketed
directly to older individuals, banking and lending, incentive services
and manufacturing. The Company concentrates on profitability and
maximizing cash flow in order to build long-term shareholder value,
rather than emphasizing volume or market share. Shareholders' equity
has grown from a deficit of approximately $7,657,000 at December 31,
1978 (prior to the acquisition of control of and significant ownership
interest in the Company by both the Company's Chairman and President),
to a positive shareholders' equity of approximately $907,856,000 at
December 31, 1993, equal to a book value per common share of negative
$.22 at December 31, 1978 and $32.54 at December 31, 1993,
respectively. Income before income taxes and the cumulative effects
of accounting changes for 1993 was $176,868,000, the highest in the
history of the Company.
The Company's principal operations are its insurance businesses,
where it is a specialty markets provider of property and casualty and
life insurance products to niche markets. The Company's principal
personal lines insurance products are automobile insurance, homeowners
insurance, graded benefit life insurance marketed primarily to the age
50-and-over population and variable annuity products. The Company's
principal commercial lines are property and casualty products provided
for multi-family residential real estate, retail establishments, and
taxicabs in the New York metropolitan area. For the year ended
December 31, 1993, the Company's insurance segments contributed
approximately 80% of total revenue and, at December 31, 1993,
constituted approximately 81% of consolidated assets.
The Company's insurance subsidiaries have a diversified
investment portfolio of securities, substantially all of which are
issued or guaranteed by the U.S. Treasury or by U.S. governmental
agencies or are rated "investment grade" by Moody's Investors Service
Inc. ("Moody's") and/or Standard & Poor's Corporation ("S&P").
Investments in mortgage loans, real estate and non-investment grade
securities represented in the aggregate less than 1% of the insurance
subsidiaries' aggregate portfolio at December 31, 1993.
The Company's banking and lending operations primarily consist of
making instalment loans funded by customer banking deposits
("Deposits") insured by the Federal Deposit Insurance Company (the
"FDIC"). The Company has established a niche market for automobile
loans to individuals with poor credit histories. Based on its
experience with such loans, the Company concluded that excellent
opportunities exist for a successful expansion of this business.
Accordingly, during 1993 the Company increased, on a controlled basis,
its investment in such loans. The Company intends to expand this
business in 1994. The Company's incentive services operations consist
primarily of trading stamp operations. The Company's manufacturing
operations primarily manufacture products for the "do-it-yourself"
home improvement market and for industrial and agricultural markets.
At December 31, 1993, the Company had aggregate minimum tax loss
carryforwards of approximately $197,000,000. The amount and
availability of tax loss carryforwards are subject to certain
qualifications, limitations and uncertainties, including, with respect
to its consolidated subsidiary, Phlcorp, Inc. ("Phlcorp"), tax sharing
payments pursuant to a tax settlement agreement with the Internal
Revenue Service and the Department of Justice.
The Company also has investments, including non-controlling
equity interests representing more than 5% of the outstanding capital
stock of several public companies. Additionally, the Company
continuously
evaluates the retention and disposition of its existing operations and
investigates possible acquisitions of new businesses in order to
maximize its ultimate economic value to shareholders.
As used herein, the term "Company" refers to Leucadia National
Corporation, a New York corporation organized in 1968, and its
subsidiaries, except as the context otherwise may require.
3
Financial Information About Industry Segments
---------------------------------------------
Certain information concerning the Company's operations is
presented in the following table.
Year Ended December 31,
-------------------------------
1993 1992 1991(a)
---- ---- ----
(In millions)
Revenues:
--------
Property and Casualty Insurance $ 842.1 $ 849.0 $ 476.0
Life Insurance 286.3 395.5 257.6
Banking and Lending 38.2 56.4 43.9
Incentive Services 46.0 96.9 98.3
Manufacturing 173.8 168.8 161.8
Corporate and Other (b) 21.7 6.4 49.1
-------- -------- --------
$1,408.1 $1,573.0 $1,086.7
======== ======== ========
Income (loss) before income taxes:
---------------------------------
Property and Casualty Insurance $ 135.5 $ 108.4 $ 65.3
Life Insurance 54.5 63.7 27.1
Banking and Lending 12.6 17.4 (0.7)
Incentive Services 29.2 14.1 7.8
Manufacturing (2.2) (6.6) (0.8)
Corporate and Other (b) (52.7) (53.4) (3.7)
-------- -------- --------
$ 176.9 $ 143.6 $ 95.0 (a)
======== ======== ========
Identifiable assets employed:
----------------------------
Property and Casualty Insurance $2,169.6 $1,843.3 $1,910.7
Life Insurance 1,610.5 1,857.0 2,030.9
Banking and Lending 262.6 268.9 279.7
Incentive Services 42.9 41.2 72.3
Manufacturing 101.0 105.8 103.0
Corporate and Other (b)(c) 502.7 214.4 193.5
-------- -------- --------
$4,689.3 $4,330.6 $4,590.1
======== ======== ========
At December 31, 1993, the Company and its consolidated subsidiaries had
4,372 full-time employees.
_______________________
(a) Includes Colonial Penn Group, Inc. ("CPG") from date of acquisition
(August 16, 1991). On a pro forma (unaudited) basis giving effect to
the acquisition of CPG only, income before income taxes for 1991 would
have been approximately $141,613,000.
(b) Includes Jordan Associated Companies (described below), gains (losses)
from certain investments and amounts related to a subsidiary, Cambrian &
General ("Cambrian"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(c) Principally consists of cash, investments, receivables and, at December
31, 1993, the deferred income tax asset of $114,001,000.
3
INSURANCE OPERATIONS
GENERAL
The Company engages in the personal property and casualty and the
life and health insurance businesses on a nationwide basis and
specializes in the commercial property and casualty insurance business
in the New York metropolitan area. The Company's principal insurance
subsidiaries consist of the CP Group, Charter National Life Insurance
Company ("Charter") and the Empire Group. The CP Group consists of
Colonial Penn Life Insurance Company ("CPL"), Colonial Penn Franklin
Insurance Company ("Franklin"), Colonial Penn Heritage Insurance
Company ("Heritage"), Colonial Penn Insurance Company ("CPI") and
Intramerica Life Insurance Company ("Intramerica"). The Empire Group
consists of Empire Insurance Company ("Empire"), Empire's subsidiary,
Allcity Insurance Company ("Allcity") and Colonial Penn Madison
Insurance Company ("Madison"). In conducting its insurance
operations, the Company focuses primarily on profitability and
persistency rather than volume.
A.M. Best Company ("Best"), an independent rating agency, has
rated CPL, Charter, and Empire "A" (excellent), Intramerica "A-"
(excellent) and CPI, Franklin and Heritage "NA-5" (indicating a
previously rated company which has experienced a significant change in
ownership, management or book of business, as a result of which its
operating experience may be interrupted). Demotech, Inc., an
independent rating agency, has rated CPI, Franklin and Heritage "A"
(exceptional). Ratings may be revised or withdrawn at any time.
Restructuring of CP Group
The Company's insurance operations were significantly increased
as a result of the Company's acquisition of CPG on August 16, 1991.
The Company acquired CPG for an aggregate cash purchase price of
approximately $128,000,000, including costs. For the year ended
December 31, 1992 and for the period from August 16, 1991 to December
31, 1991, CPG contributed approximately $131,757,000 and $59,995,000,
respectively, to the Company's consolidated pre-tax income, including
gains on sales of securities (approximately $23,543,000 and
$16,323,000, respectively) and exclusive of financing costs. Due to
changes in the Company's insurance operations it is not practicable to
provide meaningful comparable information for CPG for 1993. At the
acquisition date, after giving effect to a cash contribution by the
seller prior to the closing of approximately $49,827,000, CPG had
unaudited shareholder's equity, determined in accordance with
generally accepted accounting principles ("GAAP"), of approximately
$391,000,000 (or approximately $263,000,000 in excess of the purchase
price) and the CP Group had combined unaudited statutory capital and
surplus for regulatory purposes determined in accordance with
statutory accounting principles ("SAP") of approximately $225,100,000.
This acquisition was accounted for as a purchase and the consolidated
financial statements included in this Report include the operations of
CPG since August 16, 1991.
Historically, the CP Group marketed most of its insurance
products directly to individuals without the use of commissioned
agents through "direct response marketing" methods. Direct response
marketing includes any form of marketing in which a company and a
customer deal directly with each other rather than through an
insurance agent. Direct response marketing methods include print
advertising, radio and television advertising, direct mail,
telemarketing and customer referral programs. Typical direct response
marketing campaigns utilize a variety of these methods in a planned
sequence. The costs of certain of these marketing efforts were
substantial and the Company believes were not justified by the CP
Group's previous operating results. As a result, during the Company's
restructuring of the CP Group, the CP Group substantially refined and
reduced its marketing efforts. The Company believes that smaller and
more focused direct response marketing campaigns have resulted in
lower unit costs, resulting in more profitable operations, albeit with
an initial substantial
4
reduction in new business. The Company believes that as a result of
its restructuring efforts, which are complete, together with the
Company's operating experience, the Colonial Penn P&C Group (as
defined below) has become a low cost provider of automobile and
homeowners insurance to its niche markets, enabling it to charge
competitive rates, which should aid the Colonial Penn P&C Group in
obtaining new business and retaining existing business. Furthermore,
as a result of the Colonial Penn life insurance companies' favorable
experience in obtaining new business, the Company has increased its
direct response marketing of graded benefit life products, generating
significant new premiums at acceptable acquisition costs.
The Company believes that its restructuring efforts described
above have increased the CP Group's profitability without impairing
service to existing policyholders.
PROPERTY AND CASUALTY INSURANCE
The Company's principal property and casualty insurance
operations are conducted through CPI, Franklin and Heritage
(collectively, the "Colonial Penn P&C Group") and through the Empire
Group. The Colonial Penn P&C Group, which maintains its headquarters
in Valley Forge, Pennsylvania, is licensed in all 50 states, the
District of Columbia, Puerto Rico and the U.S. Virgin Islands and
writes insurance throughout most of the United States. The Colonial
Penn P&C Group has regional offices in Devon, Pennsylvania, Tampa,
Florida and Phoenix, Arizona. The Empire Group is licensed in twenty-
three states and operates primarily in the New York metropolitan area.
During the year ended December 31, 1993, approximately 80%, 13%
and 7% of net earned premiums of the Company's property and casualty
insurance operations were derived from personal and commercial
automobile lines of insurance, commercial lines of insurance (other
than automobile insurance) and personal lines of insurance (other than
automobile insurance), respectively. Total property and casualty
insurance net earned premiums for the year ended December 31, 1993
aggregated approximately $712,000,000, of which approximately
$452,600,000 was attributable to the Colonial Penn P&C Group.
Set forth below is certain statistical information for the
Company's property and casualty operations for each of the three years
in the period ended December 31, 1993 prepared in accordance with GAAP
and SAP. The Combined Ratio is the sum of the Loss Ratio and the
Expense Ratio. A Combined Ratio below 100% indicates an underwriting
profit and a Combined Ratio above 100% indicates an underwriting loss.
The Loss Ratio is the ratio of losses and loss adjustment expenses
incurred to net premiums earned. Incurred losses include a provision
for claims which have occurred but have not yet been reported. The
Expense Ratio is the ratio of underwriting expenses (policy
acquisition costs, including commissions, and a portion of
administrative, general and other expenses attributable to
underwriting operations) to net premiums written, if determined in
accordance with SAP, or to net premiums earned, if determined in
accordance with GAAP. Certain accident and health insurance business,
which is included in the statutory results of operations of the
property and casualty insurance segment and is reflected in the SAP
Combined Ratio, is reported in the life insurance segment for
financial reporting purposes and therefore is not included in the GAAP
Combined Ratios reflected herein. The Combined Ratio does not reflect
the effect of investment income on the results of operations.
5
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1992 1991(A)
---- ---- -------
Loss Ratio:
GAAP . . . . . . . . . . . . . . . . . . . . . . . 76.9% 82.3% 82.9%
SAP . . . . . . . . . . . . . . . . . . . . . . . 76.1% 85.3% 82.0%
Industry (SAP) (b) . . . . . . . . . . . . . . . . N/A 88.1% 81.1%
Expense Ratio:
GAAP . . . . . . . . . . . . . . . . . . . . . . . 20.0% 19.4% 19.2%
SAP . . . . . . . . . . . . . . . . . . . . . . . 17.6% 17.5% 21.3%
Industry (SAP) (b) . . . . . . . . . . . . . . . . N/A 27.6% 27.7%
Combined Ratio (c):
GAAP . . . . . . . . . . . . . . . . . . . . . . . 96.9% 101.7% 102.1%
SAP . . . . . . . . . . . . . . . . . . . . . . . 93.7% 102.8% 103.3%
Industry (SAP) (b) . . . . . . . . . . . . . . . . N/A 115.7% 108.8%
_______________
(a) Includes Colonial Penn P&C Group from date of acquisition.
(b) Source: Best's Insurance Management Reports, Property/Casualty, March 25, 1993. A comparison to
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 1993, the difference in the treatment of certain costs for GAAP and SAP purposes was a principle
reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1992, the
results of the accident and health insurance business, which (as described above) are reflected in
the SAP Combined Ratio but are not reflected in the GAAP Combined Ratio, had a non-recurring income
item which reduced the SAP Combined Ratio. In addition, in 1992 certain income credits were
recognized only for GAAP purposes.
The Company believes, based on published reports, that the Colonial
Penn P&C Group's SAP Expense Ratio for 1992, the last year for which
annual industry data is available, is among the lowest in the
industry.
The Colonial Penn P&C Group
The Colonial Penn P&C Group's primary business is providing
private passenger automobile and homeowners insurance coverage to the
age 50-and-over population. The Colonial Penn P&C Group's goal is to
be one of the lowest cost providers to this market.
Substantially all of the policies are written for a one-year
period. However, in many states CPI and Franklin offer a "guaranteed
lifetime protection" provision in its automobile policies whereby,
subject to certain exceptions, policyholders who are age 50 and older
are guaranteed that CPI and Franklin will renew their policies at
rates then in effect for the insured's appropriate classification.
6
Net earned premiums for the Colonial Penn P&C Group for the year
ended December 31, 1993 were concentrated in the states listed below:
Percentage of Net
State Earned Premiums
----- -----------------
Automobile (1): California (2) 19%
----------
Florida 17
New York 13
Connecticut 7
Arizona 7
All others 37
---
Total 100%
===
Homeowners: Florida 23%
----------
California (2) 17
New York 10
Arizona 6
Pennsylvania 6
All others 38
---
Total 100%
===
______________
(1) Does not include net earned premiums with respect to involuntary
automobile insurance, i.e., mandatory assumed risks, which generally
relate to the amount of writings in the applicable state.
(2) For a discussion of legislation relating to California property and
casualty operations, see "Insurance Operations-General-Government
Regulation."
Prior to 1988, CPI wrote as primary insurer or as a reinsurer
certain commercial property and casualty insurance business known as
"Special Risks." The Special Risks business consisted of a variety of
diverse commercial lines including, among other things, general
corporate liability policies issued to public and corporate entities,
residual value insurance on leased automobiles, collision insurance to
car leasing and rental businesses and professional and directors and
officers liability insurance. CPI had realized significant losses in
the Special Risks business prior to the acquisition date and had
provided for significant additional losses from time to time, both as
to policy benefits and non-recoverable reinsurance receivables. The
nature of most of this insurance involves exposures which can be
expected to develop over a relatively long period of time before a
definitive determination of ultimate losses and loss adjustment
expenses can be established. As a result, losses with respect to this
block are particularly difficult to predict accurately. Based in part
upon a recently completed independent actuarial review, the Company
believes that the policy reserves for the Special Risks block
reflected in the consolidated balance sheet at December 31, 1993
(approximately $74,900,000, before reinsurance) are adequate. In
evaluating and administering the Special Risks portfolio, the Company
has used its experience gained from the management of certain of the
WMAC Companies (as defined below), which also involves managing the
run-off of a closed block of commercial property and casualty
insurance business. The Company intends to manage the run-off of the
Special Risks block and does not intend to offer this aspect of
commercial lines insurance either as an insurer or reinsurer. The
WMAC Companies are certain legal subsidiaries of Phlcorp which are or
have been under the control of the Wisconsin Insurance Commissioner
due to the rehabilitation and liquidation proceedings (which were
initiated prior to the Company's acquisition of Phlcorp) of certain of
Phlcorp's non-consolidated subsidiaries (the "WMAC Companies").
7
The Empire Group
The Empire Group provides personal insurance coverage to
automobile owners and homeowners and commercial insurance primarily
for residential real estate, restaurants, retail establishments,
taxicabs (both medallion and radio-controlled) and several types of
service contractors.
For the years ended December 31, 1993, 1992 and 1991, net earned
premiums and commissions for the Empire Group aggregated approximately
$259,400,000, $243,100,000 and $210,700,000, respectively.
Substantially all of the Empire Group policies are written in New York
for a one-year period; however, some policies are issued for three
years with provision for re-rating the policy for premium purposes at
each policy anniversary date. The Empire Group is licensed in New
York to write all lines of insurance that may be written by a property
and casualty insurer except residual value, credit, unemployment,
animal and marine protection and indemnity insurance and ocean marine
insurance.
The Empire Group has acquired blocks of private passenger
automobile and commercial automobile assigned risk business from
insurance companies required or volunteering to terminate such
coverage. These contractual arrangements provide for fees to the
Empire Group within parameters established by the New York Insurance
Department. In addition, the Empire Group acts for a fee as a
"servicing carrier," providing administrative services, including
claims processing, underwriting and collection activities, for the New
York Public Automobile Pool. This latter arrangement does not involve
the assumption of any material underwriting risk by the Empire Group.
As is true with the Company's other insurance subsidiaries, the
Empire Group's marketing strategy emphasizes profitability rather than
volume. The business of the Empire Group 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 426 local agents and insurance brokers
presently acting under agreements with the Empire Group. These agents
and brokers also represent other competing insurance companies.
Losses and Loss Adjustment Expenses
Liabilities for unpaid losses, which are not discounted (except
for certain workers' compensation liabilities), and loss adjustment
expenses ("LAE") are determined using case-basis evaluations,
statistical analyses and estimates for salvage and subrogation
recoverable and represent estimates of the ultimate claim costs of all
unpaid losses and LAE through December 31 of each year. 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 to represent changes in loss experience (and are
reflected in current earnings).
In the following table, the liability for losses and LAE of the
Company's property and casualty insurance subsidiaries are reconciled
for each of the three years ended December 31, 1993. Included therein
are current year data and prior year development.
8
RECONCILIATION OF LIABILITY FOR LOSSES AND
LOSS ADJUSTMENT EXPENSES
1993 1992 1991
---- ---- ----
(In thousands)
Net liability for losses
and LAE at
beginning of year $ 904,326 $938,384 $251,401
---------- -------- --------
Amounts related to the
Colonial Penn P&C Group
at date of acquisition - - 689,458
---------- -------- --------
Provision for losses and
LAE for claims occurring
in the current year 624,048 619,691 320,511
Decrease in estimated
losses and LAE for
claims occurring in
prior years (84,382) (41,912) (1,909)
---------- -------- --------
Total incurred losses
and LAE 539,666 577,779 318,602
---------- -------- --------
Losses and LAE payments for
claims occurring during:
Current year 236,369 239,055 131,247
Prior years 318,541 372,782 189,830
---------- -------- --------
554,910 611,837 321,077
---------- -------- --------
889,082 904,326 938,384
Reserve deducted above for
insurance not considered
collectible 41,065 34,273 41,998
---------- -------- --------
930,147 938,599 980,382
Reinsurance recoverable (a) 121,721 - -
---------- -------- --------
Liability for losses and LAE
at end of year as reported
in financial statements $1,051,868 $938,599 $980,382
========== ======== ========
_____________
(a) For 1992 and 1991, liability for losses and LAE is shown net of
reinsurance recovable.
The Company's property and casualty insurance subsidiaries rely
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 consistent range of estimates for setting the reserve
levels. For further input, loss reserve committees periodically
9
mix, claims management and legal climate. Such input sometimes leads
to modifications of the statistical projections.
The Company's property and casualty insurance subsidiaries'
liability for losses and LAE as of December 31, 1993 was $910,657,000
determined in accordance with SAP and $1,051,868,000 determined in
accordance with GAAP. The reconciling differences principally relate
to liabilities assumed by reinsurers, which are not deducted from GAAP
liabilities (approximately $163,000,000) reduced by approximately
$15,000,000, net, included in accounts other than property and
casualty loss reserves for GAAP and approximately $6,000,000 for
salvage and subrogation.
The tables below present the development of balance sheet
liabilities for 1983 through 1993 and include periods prior to
acquisition for each of the Empire Group and the Colonial Penn P&C
Group. The adjusted liability line of the table indicates the
estimated liability 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 provisions for losses
estimated to have been incurred but not reported to the Company's
property and casualty companies. The middle section of the table
shows the re-estimated amount of the previously recorded liability
based on experience as of the end of each succeeding year. The
estimate is increased or decreased as more information becomes known
about the frequency and severity of claims. 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. Thus, for
the year 1985, the Empire Group table indicates that an estimated
$8,887,000 of losses remain unpaid as of December 31, 1993 (the
difference between the currently estimated $155,727,000 of re-
estimated liability for that year and the $146,840,000 paid through
December 31, 1993).
The effect on 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 "cumulative redundancy (deficiency)" represents the aggregate
change in the estimates over all prior years. For example, the
initial 1983 liability estimate indicated on the Empire Group table
($153,342,000) has been re-estimated during the course of the
succeeding ten years, resulting in a re-estimated liability at
December 31, 1993 of $131,556,000, or a redundancy of $21,786,000. If
the re-estimation of liability exceeded the liability initially
established, a cumulative deficiency would be indicated.
As noted in the Colonial Penn P&C Group table below, the loss and
LAE development of the Colonial Penn P&C Group from 1985 through 1989
resulted in cumulative deficiencies, indicating that the established
reserves for policy claims and LAE were less than subsequently
determined to be necessary. The Colonial Penn P&C Group provided
additional reserves related to prior years' claims of approximately
$107,100,000 in 1990 and $35,100,000 in 1989. Prior to its
acquisition by the Company, and in part as a result of the unfavorable
loss development, the Colonial Penn P&C Group reviewed its loss ratio
and experience on a state-by-state basis, and initiated procedures to
improve underwriting standards, increase rates (subject to necessary
regulatory approvals) and withdraw from certain states with
unfavorable experience, where permissible, on financially acceptable
terms. The Company used the knowledge and experience gained from
managing Empire and certain of the WMAC Companies to review the
adequacy of the Colonial Penn P&C Group reserves and concluded that
the existing reserves were adequate.
The Company believes that the Empire Group's conservatism in
establishing reserves and CP Group's conservatism and improved claims
management procedures since acquisition have contributed significantly
to the creation of the redundancies included in the tables below.
10
In evaluating this information, it should be noted that each
amount shown for "cumulative redundancy (deficiency)" includes the
effects of all changes in amounts for prior periods. For example, the
amount of the redundancy (deficiency) related to losses settled in
1987, but incurred in 1983, will be included in the cumulative
redundancy (deficiency) amount for 1983, 1984, 1985 and 1986. This
table is not intended to and does not present accident or policy year
loss and LAE development data. Conditions and trends that have
affected development of the liability in the past may not necessarily
occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on these tables.
Because of substantial differences in the development of reserves
of the Colonial Penn P&C Group and the Empire Group, loss and LAE
development data of the Colonial Penn P&C Group and the Empire Group
are each presented separately.
11
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE EMPIRE GROUP)
Year Ended December 31,
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
Adjusted Liability for
Unpaid Losses and
Loss Adjustment
Expenses $153,342 $156,434 $165,713 $182,133 $206,709 $222,814 $235,223 $251,401 $280,679 $322,615 $353,937
Liability
Re-estimated as of:
One Year Later $137,663 $142,474 $160,728 $180,975 $198,384 $213,671 $227,832 $249,492 $280,020 $322,037 $ -
Two Years Later 132,899 144,504 162,962 175,305 194,530 206,088 217,432 245,141 277,866
Three Years Later 134,144 143,635 156,870 170,152 188,843 198,500 212,649 243,849
Four Years Later 132,019 139,113 157,001 168,574 184,564 194,324 211,859
Five Years Later 128,440 139,441 155,413 165,717 181,990 196,070
Six Years Later 129,010 139,584 154,045 164,487 183,015
Seven Years Later 130,173 139,435 154,151 166,266
Eight Years Later 130,236 139,741 155,727
Nine Years Later 130,295 141,054
Ten Years Later 131,556
Cumulative Redundancy $ 21,786 $ 15,380 $ 9,986 $ 15,867 $ 23,694 $ 26,744 $ 23,364 $ 7,552 $ 2,813 $ 578 $ -
======== ======== ======= ======== ======== ======== ======== ======== ======== ======= ========
Cumulative Amount
of Liability
Paid Through:
One Year Later $ 43,859 $ 44,056 $ 51,795 $ 54,359 $ 60,446 $ 64,140 $ 65,822 $ 78,954 $ 89,559 $113,309 $ -
Two Years Later 68,999 74,265 83,249 88,770 97,627 101,206 109,479 126,908 150,043
Three Years Later 89,415 95,527 106,348 114,322 123,092 131,705 140,916 167,330
Four Years Later 103,773 110,368 123,275 130,433 142,910 152,330 166,023
Five Years Later 112,319 120,479 132,618 141,346 155,786 168,117
Six Years Later 117,591 126,094 139,276 149,079 164,213
Seven Years Later 120,781 130,015 143,926 153,681
Eight Years Later 123,286 132,600 146,840
Nine Years Later 125,126 134,881
Ten Years Later 126,980
Gross liability -
end of year $394,709
Reinsurance 40,772
--------
Net liability - $353,937
end of year as ========
shown above
12
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE COLONIAL PENN P&C GROUP)
Year Ended December 31,
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
Adjusted Liability
for Unpaid Losses
and Loss
Adjustment
Expenses $229,700 $215,200 $217,000 $324,700 $386,200 $ 410,500 $ 448,800 $626,300 $657,700 $581,711 $535,145
Liability
Re-estimated
as of:
One Year Later $197,900 $193,200 $236,500 $352,600 $389,900 $ 445,600 $ 555,900 $659,800 $616,400 $497,911 $ -
Two Years Later 190,700 198,800 245,900 340,600 409,000 506,800 588,600 619,600 574,000
Three Years Later 193,700 203,500 241,600 338,700 443,700 535,600 563,800 614,000
Four Years Later 197,000 200,000 248,100 359,400 467,300 522,800 565,800
Five Years Later 194,500 197,100 231,200 384,000 459,400 526,700
Six Years Later 193,900 193,500 257,600 375,700 464,700
Seven Years Later 195,000 199,200 250,800 381,300
Eight Years Later 195,700 201,100 255,900
Nine Years Later 197,300 202,900
Ten Years Later 198,000
Cumulative
Redundancy
(Deficiency) $ 31,700 $ 12,300 $(38,900) $(56,600) $(78,500) $(116,200) $(117,000) $ 12,300 $ 83,700 $ 83,800 $ -
======== ======== ======== ======== ======== ========= ========= ======== ======== ======== ========
Cumulative Amount
of Liability
Paid Through:
One Year Later $103,500 $105,500 $126,200 $177,100 $207,700 $ 243,300 $ 258,500 $279,300 $283,200 $205,200 $ -
Two Years Later 150,600 156,600 178,500 249,800 304,000 353,300 387,500 432,500 390,100
Three Years Later 175,300 177,500 208,600 288,700 356,800 419,900 467,500 492,900
Four Years Later 184,900 187,600 227,600 313,700 393,100 462,200 496,400
Five Years Later 188,700 195,600 213,100 332,700 416,800 476,400
Six Years Later 191,800 187,000 223,000 343,600 425,500
Seven Years Later 192,500 190,800 227,800 349,200
Eight Years Later 193,100 192,700 231,100
Nine Years Later 193,800 194,400
Ten Years Later 194,900
Gross liability-
end of year $657,159
Reinsurance 122,014
--------
Net liability - $535,145
end of year as ========
shown above
13
LIFE INSURANCE
The Company's principal life insurance subsidiaries are Charter,
CPL and Intramerica. For the year ended December 31, 1993, the
Company's principal life insurance products were "Graded Benefit Life"
and variable annuity insurance products. Through its various
subsidiaries, the Company is licensed in all 50 states, the District
of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands and
generally writes its life and health products in most of the United
States. Total direct life insurance in force as of December 31, 1993
was approximately $2.7 billion.
The following table reflects premiums earned on the Company's
life and health insurance products (except investment oriented
products) and premium receipts on variable annuity and other
investment oriented products for each of the three years in the period
ended December 31, 1993. Variable annuity and other investment
oriented product premium receipts are not recorded as revenue under
GAAP but are recorded in a manner similar to a deposit, and are
included below.
Year Ended December 31,
----------------------------------------
1993 1992 1991 (1)
---- ---- ----
(In thousands)
Graded Benefit Life $109,838 $109,552 $ 36,230
Variable Annuity Products 81,484 58,207 25,804
Other Investment
Oriented Products 6,828 9,828 17,360
Agent-sold Medicare
Supplement Products (2) 47,364 62,724 23,159
Other Health Products 18,992 22,367 8,538
Other 495 1,847 626
-------- -------- --------
Total (3) $265,001 $264,525 $111,717
======== ======== ========
__________________
(1) Excludes premium receipts on life insurance products of the CP Group
prior to the acquisition date (August 16, 1991).
(2) Effective December 31, 1992, the Company ceased marketing Medicare
Supplement products through agents.
(3) Excludes premium receipts (refunds) in 1993, 1992 and 1991 (since the
acquisition date) of $(1,655,000), $28,745,000 and $57,142,000,
respectively, on reinsurance of certain ordinary life policies and group
life and health insurance contracts underwritten by other insurance
companies and assumed by the life insurance subsidiaries.
Life and Health Insurance Products
Graded Benefit Life. "Graded Benefit Life" is a guaranteed-issue
product. These modified-benefit, whole life policies are offered on
an individual basis primarily to persons age 50 to 80, principally in
face amounts of $350 to $10,000, without medical examination or
evidence of insurability. Premiums are paid as frequently as monthly.
Graded Benefit Life is marketed using direct response marketing
techniques. New policyholder leads are generated primarily from
television advertisements. Consistent with its present marketing
program, the Company intends to concentrate its marketing efforts
towards soliciting new policyholders where the cost is justified,
upgrading existing policyholders' policy packages and obtaining
referrals from existing policyholders. The Company believes that
premiums on new business written in 1994 will exceed reductions due to
death and lapses.
14
During late l993, the Company began offering certain
policyholders a rider to their existing Graded Benefit Life policy.
This "Accelerated Benefit Rider" pays a policy benefit if the
policyholder is suffering from a terminal illness. Initial results
are promising and the Company expects to offer this rider to
additional policyholders on a limited basis. The Company is exploring
the development of other new products.
Investment Oriented Products. During 1993, the principal
investment oriented product offered by the Company's life insurance
subsidiaries was a no-load variable annuity ("VA") product. The VA
product is marketed as an investment vehicle to individuals seeking to
defer, for federal income tax purposes, the annual increase in their
account balance. Premiums from this VA product either are invested at
the policyholders' election in unaffiliated mutual funds where the
policyholder bears the entire investment risk or in a fixed account
where the funds earn interest at rates determined by the Company. The
Company's VA product is currently marketed in conjunction with a
mutual fund manager. The Company is pursuing cooperative arrangements
with other money managers to distribute its VA product.
Prior to 1991, the investment oriented products sold by the
Company included, among others, single premium deferred annuity
("SPDA") and single premium whole life ("SPWL") products. During
1992, the Company concluded that the profitability of its existing
blocks of SPDA and SPWL businesses were unlikely to achieve acceptable
operating results in the future. For a discussion of the reinsurance
of certain of these products, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Medicare Supplement. Medicare Supplement products are health
insurance products primarily designed to supplement medicare benefits
for the older population on an underwritten guaranteed renewable
basis. Prior to l993, the Company's Medicare Supplement products were
marketed primarily through insurance agents. As a result of recent
federal and state legislation mandating standardization of Medicare
Supplement products (thereby enhancing an individual's ability to
compare various Medicare Supplement products), this market has become
more competitive. The Company is no longer actively marketing
Medicare Supplement products, but is offering renewals of its non-
standardized products to its policyholders. National health care
reforms are currently under consideration. It is not possible to
predict whether any reforms will be enacted, and, if enacted, what
effect such reforms might have on the Company's Medicare Supplement
products.
INSURANCE OPERATIONS - GENERAL
Investments
Investment activities represent a significant part of the
Company's insurance related revenues and profitability. Investments
are managed by the Company's investment advisors under the direction
of, and upon consultation with, the Company's several investment
committees.
The Company's insurance subsidiaries have a diversified
investment portfolio of securities substantially all of which are
rated "investment grade" by Moody's and/or S&P or issued or guaranteed
by the U.S. Treasury or by governmental agencies. The Company's
insurance subsidiaries do not generally invest in less than
"investment grade" or "non-rated" securities, real estate or
mortgages, although the Company's insurance subsidiaries may from time
to time make such investments in amounts not expected to be material.
For additional information concerning the Company's investments, see
"Notes to Consolidated Financial Statements."
15
The composition of the Company's insurance subsidiaries'
investment portfolio as of December 31, 1993 and 1992 was as follows:
PROPERTY AND CASUALTY LIFE AND HEALTH
--------------------- ---------------------
1993 1992 1993 1992
---- ---- ---- ----
(Dollars in thousands)
Bonds and notes (a):
U.S. Government and agencies . . . . . . . . . 75% 79% 75% 63%
Rated investment grade (b) . . . . . . . . . . 22 20 19 24
Non rated - other . . . . . . . . . . . . . . - - 1 1
Rated less than investment grade . . . . . . . - - - 1
Policyholder loans . . . . . . . . . . . . . . . - - 2 10
Equity securities . . . . . . . . . . . . . . . . 1 - 1 -
Other, principally accrued interest . . . . . . . 2 1 2 1
--- --- --- ---
Total . . . . . . . . . . . . . . . . . 100 % 100 % 100% 100%
=== === === ===
Estimated average yield to maturity
of bonds and notes (c) . . . . . . . . . . . . 6.2 % 7.0 % 6.2% 7.6%
Estimated average remaining life of bonds
and notes (c) . . . . . . . . . . . . . . . . . 4.5 yrs. 5.9 yrs. 5.1 yrs. 5.8 yrs.
Carrying value of investment portfolio . . . . . $1,650,085 $1,387,644 $779,739 $1,240,275
Market value of investment portfolio . . . . . . $1,651,411 $1,411,478 $780,867 $1,271,185
_________________
(a) Exclusive of investments held for sale at December 31, 1992, "U.S. Government and agencies" would
have represented 69% of the property and casualty segment's investment portfolio and 59% of the life
and health segment's investment portfolio and "Rated investment grade" would have represented 19% of
the property and casualty segment's investment portfolio and 22% of the life and health segment's
investment portfolio. Investments held for sale represented 10% of the property and casualty
investment portfolio and 6% of the life and health investment portfolio at December 31, 1992.
(b) As rated by Moody's and/or S&P.
(c) Exclusive of trading securities in 1993, which are not significant, and investments held for sale in
1992.
Reinsurance
The Company currently obtains reinsurance for certain of its life
insurance policies and property and casualty insurance policies.
Among the Company's major reinsurers (and their respective Best
ratings) are General Reinsurance Corporation (A++), Lincoln National
Life Insurance Co. (A+), Munich American Reinsurance Company (A++) and
Hartford Fire Insurance Company (A+). Reinsurance is obtained for
investment oriented products for face amounts in excess of $500,000
per life. The life insurance subsidiaries generally do not obtain
reinsurance for the Graded Benefit Life products because these
policies generally do not exceed $10,000 face amount. The Colonial
Penn P&C Group obtained reinsurance for casualty risks in excess of
$2,000,000 in 1993 ($1,000,000 in 1992). Most Colonial Penn P&C Group
automobile policies do not have policy limits in excess of $100,000
per risk and $300,000 per accident. The Empire Group's maximum limit
retained for workers' compensation was $500,000 from July 1, 1992
through December 31, 1993 and $200,000 from January 1, 1991 through
June 30, 1992 and for other property and casualty lines, the maximum
limit retained was $225,000 for 1993 and $175,000 for each of 1992 and
1991. Additionally, the Company's property and casualty insurance
subsidiaries have entered into certain excess of loss and catastrophe
treaties to protect against certain losses. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." Although reinsurance does not legally discharge an
insurer from its primary liability for the full amount of the policy
liability, it does make the assuming reinsurer liable to the insurer
to the extent of the reinsurance ceded. The Company's reinsurance
generally has been placed with certain of the largest reinsurance
companies, which the Company believes 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's
insurance subsidiaries would be liable for the reinsured risks.
Additionally, certain of CPI's Special Risks reinsurers have
experienced financial difficulty and some are in rehabilitation
proceedings. CPI has
16
established reserves, which the Company believes are adequate, for
nonrecoverable reinsurance on its Special Risks block of insurance.
In 1992, 1993 and 1994, unusually severe natural disasters
occurred, including Hurricane Andrew (1992), the Midwest floods and
California fires (1993) and the Los Angeles Earthquake (1994). These
events have resulted in unprecedented industry-wide losses. The
Company's insurance subsidiaries also suffered losses as a result of
certain of these occurrences, although reinsurance reduced the
economic loss to the Company of Hurricane Andrew. However, as a
result of the industry's losses, the Company has seen a notable
decrease in the availability of catastrophe reinsurance at reasonable
rates, particularly at low levels of deductibility. Although the
Company has completed its 1994 reinsurance program at acceptable upper
loss limits, the insurance subsidiaries in 1993 and 1994 were unable
to obtain 1992 levels of deductibility at reasonable cost.
Accordingly, the Company increased its retention of lower level
losses. The Company did not incur catastrophic losses in excess of
its retained limits in 1993 and to date in 1994. Further, in 1992 the
Company did not incur losses in excess of its maximum reinsurance.
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
for the most part unendorsed, which may give such other companies a
competitive advantage.
VA products are subject to regulation both as insurance policies
and as securities. As a result, the introduction of a VA product
involves significant regulatory and administrative efforts over a
substantial period of time. The Company expects sales of its no-load
VA product to be cyclical, generally following the securities markets.
The attractiveness of VA products as an investment vehicle is closely
linked to the tax status of such products. Typically, increases in
account values of VA products are not taxed until distributed in the
form of either surrenders or annuity payments. The taxable portion of
any such distribution is taxed as ordinary income.
The property and casualty insurance industry has historically
been cyclical in nature, with periods of less intense price competi-
tion and high underwriting standards generating significant profits,
followed by periods of increased price competition and lower under-
writing standards resulting in reduced profitability or loss. Price
competition has been significant in recent years. The cyclicality and
competitive nature of the property and casualty insurance business
historically have contributed to significant industry-wide quarter-to-
quarter and year-to-year fluctuations in underwriting results and net
income. Its profitability is affected by many factors, including rate
competition, severity and frequency of claims, interest rates, state
regulation, court decisions and judicial climate, all of which are
outside the Company's control.
Government Regulation
Insurance companies are subject to detailed regulation and
supervision in the states in which they transact business. Such
regulation pertains to matters such as approving policy forms and
various premium rates, minimum reserves and loss ratio requirements,
the type and amount of investments, minimum capital and surplus
requirements, granting and revoking licenses to transact business,
levels of operations and regulating trade practices. There can be no
assurance that such regulatory requirements will not become more
stringent in the future and have an adverse effect on the Company's
operations. The majority of the Company's property
17
and casualty insurance operations are in states requiring prior
approval by regulators before proposed rates may be implemented.
Certain states have indicated that they may change the bases (e.g.,
age, sex and geographic location) on which rates traditionally have
been established. Rates proposed for life insurance generally become
effective immediately upon filing. Insurance companies are required
to file detailed annual reports with the supervisory agencies in each
of the states in which they do business, and are subject to
examination by such agencies at any time. Due to the savings and loan
crisis and the seizure by state insurance regulators of certain large
financially unstable insurance companies, there has been some erosion
of confidence in all financial institutions, including insurance
companies. Increased regulation of insurance companies at the state
level and new regulation at the federal level is possible, although
the Company cannot predict the nature or extent of any such
regulation.
The National Association of Insurance Commissioners ("NAIC") has
adopted model laws incorporating the concept of a "risk based capital"
requirement for insurance companies, although the model law is not
intended to apply to property and casualty insurance companies until
year end 1994 financial statements are available. Generally, Risk
Based Capital ("RBC") is designed to measure the adequacy of an
insurer's statutory capital in relation to the risks inherent in its
business. The RBC formula is used by the states as an early warning
tool to identify weakly capitalized companies for the purpose of
initiating regulatory action.
The RBC formula develops a risk adjusted target level of
statutory surplus for insurers by applying certain factors to various
asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus,
the target level of statutory surplus varies not only as a result of
the insurer's size, but also on the risk profile of the insurer's
operation.
The RBC model laws provide for four incremental levels of
regulatory attention for insurers whose surplus is below the
calculated RBC target. These levels of attention range in severity
from requiring the insurer to submit a plan for corrective action to
actually placing the insurer under regulatory control.
Each of the Company's insurance subsidiaries' RBC ratio as of
December 31, 1993 substantially exceeded the 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. Generally, life insurance companies having three or more
of such ratios outside their "normal" range may be indicative of a
weakly capitalized company. Two of the Company's life insurance
subsidiaries, Charter and CPL, had three or more "other than normal"
NAIC ratios for the year ended December 31, 1993. Charter had five
"other than normal" ratios in l993, four of which resulted from
reinsurance of the SPWL block of business described under
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," while CPL had four "other than normal" ratios
in l993, three of which resulted from reinsurance transactions,
including a transaction with an affiliate. The Company believes that
there are no underlying problems or weaknesses at Charter or CPL and
that, in view of the strong capital and RBC ratios of Charter and CPL
and their strong and conservative investment portfolios, it is
unlikely that material adverse regulatory action will be taken.
On November 8, 1988, California voters passed Proposition 103, an
insurance initiative which requires a 20% rollback in insurance rates
for policies written or renewed during the twelve month period
beginning November 8, 1988 (the "rollback period") and provided that
changes in insurance premiums after November 8, 1989 must be submitted
for approval by the California Insurance Commissioner prior to
implementation. While the Proposition has the most significant impact
on automobile insurance, some of its provisions also apply to
18
other types of property and casualty insurance. In May 1989, the
California Supreme Court held that insurance companies may not be
deprived of a "fair return." In June 1991, the current California
Insurance Commissioner issued revised regulations regarding the
rollback period which established an allowable after-tax return of 10%
for the rollback period. These regulations were held unconstitutional
by the Los Angeles Superior Court in February 1993, because each
insurer was entitled to an individual hearing to determine its fair
level of profit. The California Insurance Commissioner has appealed
this decision, which remains sub judice. The Company has not yet
----------
received any order or determination requiring it to refund any
premiums collected. Based upon its operating results in the relevant
years, the Company believes the Colonial Penn P&C Group should not be
assessed for any rollback rebate and, if assessed a significant
amount, intends to vigorously oppose such determination. Voluntary
automobile net earned premiums in California represent approximately
8.9% of the Company's total property and casualty net earned premiums.
Proposition 103 does not apply to premiums earned on involuntary
coverage. It is possible that other states may attempt similar
initiatives, although the Company is unable to predict whether and to
what extent such regulation may be proposed or adopted.
In early 1990, New Jersey adopted new laws to depopulate the
deficit-ridden Automobile Joint Underwriting Association (the "JUA"),
the New Jersey insurance pool for high-risk drivers. The New Jersey
statute, among other things, abolished the JUA, established the Market
Transition Facility (the "MTF") as a temporary successor to the JUA,
established quotas for depopulation of the MTF and required all
automobile insurers to share in the losses of the MTF based on their
depopulation share of the JUA, as set by the New Jersey Department of
Insurance. The MTF deficit is currently estimated to be $917 million.
Based on that amount, the Colonial Penn P&C Group would be assessed
approximately $11,100,000. In February 1994, the Colonial Penn P&C
Group paid approximately $5,300,000 of this possible assessment into a
court mandated escrow account. The balance of this possible
assessment has been provided for in the Company's December 31, 1993
balance sheet. The New Jersey Insurance Department has adopted
regulations which would permit an insurer, with the approval of the
Insurance Department, to recover amounts paid to the MTF through
surcharges to policyholders; however, there can be no assurance that
the Colonial Penn P&C Group would be permitted to surcharge its
policyholders for all or even part of any assessment.
The Company's insurance subsidiaries are members 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 Company's
insurance subsidiaries have 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.
BANKING AND LENDING
GENERAL
The Company's banking and lending operations primarily are
conducted through its national bank subsidiary, American Investment
Bank, N.A. ("AIB"); two wholly owned industrial loan corporations (the
"ILCs"), American Investment Financial ("AIF") and Governor Financial
("GF"); and Transportation Capital Corp. ("TCC"), a small business
investment company, which is a 99% owned subsidiary of the Company.
AIB and the ILCs take money market and other non-demand deposits that
are eligible for insurance provided by the FDIC within its applicable
limitations. At December 31, 1993, AIB and the ILCs had Deposits of
$173,365,000 compared to $186,339,000 at December 31, 1992. In
January 1994, the deposits and certain
19
assets of GF were combined into AIF. AIB and AIF currently have
several deposit-taking and lending facilities and an administrative
office in the Salt Lake City area. TCC, which is not a significant
subsidiary of the Company, makes collaterialized loans to operators of
medallion taxicabs and limousines.
At December 31, 1993, the Company's consolidated banking and
lending operations had outstanding loans (net of unearned finance
charges) of $205,744,000 compared to $169,552,000 at December 31,
1992. The increase was financed primarily from proceeds of the sale
of the Company's consumer loan offices sold in 1992. See
"Management's Discussion and Analysis of Financial Conditions and
Results of Operations." At December 31, 1993, approximately 36% were
loans to individuals generally collateralized by automobiles;
approximately 26% were unsecured loans to individuals acquired from
others in connection with investments in limited partnerships;
approximately 23% were unsecured loans to executives and
professionals; approximately 9% were loans to small business concerns
collateralized principally by taxicab medallions and other personal
property; approximately 5% of the loans were instalment loans to
consumers, substantially all of which were collateralized by real or
personal property; and approximately 1% were loans generally
collateralized by non-residential real estate.
It is the Company's policy to charge to income an allowance for
losses which, based upon management's analysis of numerous factors,
including current economic trends, aging of the loan portfolio and
historical loss experience, is deemed adequate to cover reasonably
expected losses on outstanding loans. At December 31, 1993, the
allowance for loan losses for the Company's entire loan portfolio was
approximately $8,341,000 or 4.1% of the net outstanding loans,
compared to approximately $6,973,000 or 4.1% of net outstanding loans
at December 31, 1992.
The funds generated by the Deposits are primarily used to make
instalment loans, including collateralized personal automobile loans
to individuals who have difficulty in obtaining credit. These
automobile loans are made at interest rates above those charged to
individuals with good credit histories. In determining which
individuals qualify for these loans, the Company takes into account a
number of highly selective criteria with respect to the individual as
well as the collateral to attempt to minimize the number of defaults.
Additionally, the Company monitors these loans and takes prompt
possession of the collateral securing such loans in the event of a
default. For the three year period ended December 31, 1993, the
Company generated an aggregate of approximately $100,754,000 of these
loans (approximately $51,000,000 during 1993). At December 31, 1993,
the allowance for loan losses for this portfolio was approximately
$4,399,000 or 6% of net outstanding loans; actual loss experience has
been approximately 1.4% per year of average outstanding loans. The
Company is satisfied with the results of this loan portfolio and
believes that there is an opportunity for successful growth in this
niche market. The Company intends to expand its business in this
area.
COMPETITION
The Company's lending operations compete with banks, savings and
loan associations and credit unions, many of which are able to offer
financial services on very competitive terms, credit card issuers and
consumer finance companies. Additionally, substantial national
financial services networks have been formed by major brokerage firms,
insurance companies, retailers and bank holding companies. Some
competitors have substantial local market positions; others are part
of large, diversified organizations.
GOVERNMENT REGULATION
The Company's principal lending operations are subject to
detailed supervision by state authorities, as well as federal
regulation pursuant to the Federal Consumer Credit Protection Act and
regulations promulgated
20
by the Federal Trade Commission. The Company's banking operations are
subject to extensive federal and state regulation and supervision by,
among others, the Office of the Comptroller of the Currency (the
"OCC"), the FDIC and the State of Utah. AIB's primary federal
regulator is the OCC, while the primary federal regulator for the ILCs
is the FDIC. AIB and AIF have substantially similar assets. With
FDIC approval on January 31, 1994, AIF purchased a substantial portion
of the assets and assumed all of the deposit liabilities as well as a
significant amount of the remaining liabilities of GF. Following this
transaction, GF retained its ILC charter but terminated its FDIC
insurance and thus its right under Utah law to accept deposits.
The Competitive Equality Banking Act of 1987 ("CEBA") places
certain restrictions on the operations and growth of AIB and restricts
further acquisitions of banks and savings institutions by the Company.
CEBA does not restrict the growth of the ILCs as currently operated.
INCENTIVE SERVICES
GENERAL
For the year ended December 31, 1993, the Company's incentive
services business was conducted by The Sperry and Hutchinson Company,
Inc. ("S&H"). In early 1993, the Company contributed the net assets
of S&H Motivation, Inc. ("SHM") to a new joint venture formed with an
unrelated motivation services company and provided a $3,000,000 line
of credit to the joint venture in exchange for a 45% equity interest
in the joint venture. Operations of the motivation services business
historically have not been significant and are not expected to be
significant in the future.
S&H distributes Green Stamps to retailers under license
agreements that give the retailer an exclusive franchise for a
particular category of retail establishment in a particular geographic
area. Customers of participating retailers receive Green Stamps when
they purchase goods and services.
Since 1969, when annual sales for the trading stamp industry as a
whole peaked, S&H's trading stamp business has been steadily
declining. The Company believes that there is a substantial
likelihood that the declining trend in trading stamp sales will
continue. The Company has attempted, but has not succeeded in,
developing new uses for its trading stamp business.
REDEMPTION RESERVE-LIQUIDITY
When trading stamps are sold, S&H receives cash and accrues as a
liability the estimated obligation to deliver merchandise and/or cash
associated with those stamps. Demands for redemption generally occur
over a considerable period of time. The loss of customers usually
results in an acceleration of redemptions and requires the expenditure
of available funds to provide the merchandise and/or cash required for
such redemptions.
At December 31, 1993 and 1992, the liability for unredeemed
trading stamps reflected in the Company's consolidated balance sheets
was approximately $58,541,000 and $74,964,000, respectively. The most
recent statistical studies of trading stamp redemptions have indicated
that the historical pattern of redemptions has changed and that the
recorded liability for unredeemed trading stamps is in excess of the
amount that ultimately will be required to redeem trading stamps
outstanding. The amount of this excess may be different than
indicated by these studies. Accordingly, the Company is amortizing
the apparent excess over
21
a five year period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION
The Company's incentive services businesses compete primarily
with other incentive companies and other forms of promotional and
merchandising techniques other than trading stamps. Retail establish-
ments, for example, frequently utilize store coupons, special
advertising programs, games, extra services and related programs.
MANUFACTURING
The Company's manufacturing operations consist primarily of the
manufacture of bathroom vanities and related products for the "do-it-
yourself" market, through its General Marble division, and padding,
absorbent, erosion control and proprietary plastic netting products
for various industrial and agricultural uses, through its Fibers and
Plastics divisions.
In 1990, the Company acquired a factory in North Carolina and in
1991 equipped it with state-of-the-art manufacturing machinery for its
General Marble division. This facility was designed to enable the
Company to improve the quality of its products, to manufacture certain
of its products on a "ready-to-assemble" basis and to expand capacity.
General Marble's products are sold through manufacturers'
representatives primarily to home improvement centers. The
inefficiencies and start up costs associated with bringing this
facility to full production, together with pricing pressures, have
adversely affected results of operations for this segment.
The Fibers and Plastics divisions manufacture and market padding,
absorbent and erosion control products, which may be reinforced with
plastic netting, for the furniture, automotive, erosion control and
maintenance industries and thermoplastic netting used for a variety of
purposes including, among other things, construction, packaging,
agriculture, carpet backing and filtration.
The manufacturing operations are subject to a high degree of
competition, generally on the basis of price, service and quality.
Additionally, these manufacturing operations are dependent on cyclical
industries, including the construction industry, which have been
adversely effected by recent economic conditions. Through its various
manufacturing divisions, the Company holds patents on certain
improvements to the basic manufacturing processes and on applications
thereof. The Company believes that the expiration of these patents,
individually or in the aggregate, is unlikely to have a material
effect on the business of its manufacturing operations.
OTHER OPERATIONS AND INVESTMENTS
The Company also owns non-controlling equity interests
representing, at December 31, 1993, more than 5% of the outstanding
capital stock of each of the following domestic public companies:
Carmike Cinemas, Inc. ("Carmike") (approximately 9% of Class A
shares), Jones Plumbing Systems, Inc. ("Jones") (approximately 21%),
Jordan Industries, Inc. ("JII") (approximately 11%) and Olympus
Capital Corporation (approximately 18%).
22
The Company owns interests in two foreign power companies:
Compania Boliviana de Energia Electrica, S.A. - Bolivian Power Company
Limited ("Bolivian Power") and through Canadian International Power
Company Limited Liquidating Trust, The Barbados Light and Power
Company Limited. The Company's investments in the power companies
were recorded at an aggregate of approximately $5,208,000 at December
31, 1993. The shares of Bolivian Power are traded on the New York
Stock Exchange. In November 1993, the Company sold 750,000 common
shares of Bolivian Power in an underwritten public offering. The
Company currently owns approximately 719,206 common shares of Bolivian
Power, representing approximately 17% of Bolivian Power's outstanding
common shares.
In 1990, the Company received the stock of certain of the WMAC
Companies that had been under the control of the Wisconsin Insurance
Commissioner. The Company is unable to predict when Commercial Loan
Insurance Company ("CLIC") and WMAC Credit Insurance Corporation
("Credit"), two WMAC Companies which constitute substantially all of
the WMAC Companies' remaining value expected from the assets under the
control of the Wisconsin Insurance Commissioner, will be returned to
its control. The Company estimates that the fair value to the Company
of the net tangible assets yet to be received is approximately
$32,800,000 in excess of their recorded carrying value at December 31,
1993.
A subsidiary of the Company is a partner in The Jordan Company
and Jordan/Zalaznick Capital Company. These partnerships each
specialize in structuring leveraged buyouts in which the partners are
given the opportunity to become equity participants. John W. Jordan
II, a director of the Company, is the managing partner of the two
partnerships. Since 1982, the Company has invested an aggregate of
$25,870,000 in these partnerships and related companies and, through
December 31, 1993, has received approximately $62,398,000 (consisting
of cash, interest bearing notes and other receivables) relating to the
disposition of investments and management and other fees. At December
31, 1993, through these partnerships, the Company had interests in an
aggregate of 15 companies (the "Jordan Associated Companies"), which
are carried in the Company's consolidated financial statements at
$13,620,000. The Jordan Associated Companies include JII, Carmike and
Jones.
Item 2. Properties.
------ ----------
Through its various subsidiaries, the Company owns the following
significant properties: an office building in Clayton, Missouri
(approximately 66,000 sq. ft.), which is leased to unaffiliated
parties; an office building in Valley Forge, Pennsylvania (approxi-
mately 94,800 sq. ft.) located on land leased from a third party to a
subsidiary of the Company; two offices in Salt Lake City, Utah
(totaling approximately 74,000 sq. ft.); three multi-tenant office
buildings in Indianapolis, Indiana (totaling approximately 444,000 sq.
ft.) which are leased (or are available for lease) to unaffiliated
parties; and a warehouse in Fort Worth, Texas (approximately 256,000
sq. ft.) that is leased to a third party. In addition, subsidiaries
of the Company own nine facilities (totaling approximately 1,208,000
sq. ft.) primarily used for manufacturing and storage located in
Georgia, New Jersey, New York, North Carolina, Pennsylvania, Wisconsin
and Canada.
The Company's subsidiaries lease numerous manufacturing,
warehousing, office and headquarters facilities. The facilities vary
in size and have leases expiring at various times, subject in certain
instances to renewal options. See Note 15 of Notes to Consolidated
Financial Statements.
23
Item 3. Legal Proceedings.
------ -----------------
PHLCORP TENDER OFFER
Seven class action complaints were filed against the Company and
others in connection with the Company's tender offer to purchase up to
5,200,000 common shares of Phlcorp, which expired in February 1988,
and have been consolidated into one action in the United States
District Court for the Southern District of New York (the "Southern
District"), entitled In re PHLCORP Securities Tender Offer Litigation
------------------------------------------------
(Civil Action No. 88 Civ. 0306 (SS)) ("In Re Phlcorp").
-------------
The consolidated and amended class action complaint (the
"Complaint") seeks damages (in an unspecified amount), imposition of a
constructive trust and costs and disbursements of the action.
Several of the claims were dismissed in 1988 as a result of
defendants' motion to dismiss. The remaining claims allege that
defendants violated the Securities Exchange Act of 1934, as amended,
by causing Phlcorp's directors to issue a recommendation to accept the
Company's tender offer, which incorrectly represented that the
directors' recommendation was based on a determination that the
Company's offer was fair and that defendants breached their fiduciary
duties in connection with the tender offer. A class of plaintiff
minority shareholders, who owned shares of Phlcorp on January 21,
1988, has been certified.
Upon completion of discovery, with the exception of discovery of
experts, defendants filed a motion for Summary Judgment. Prior to the
time defendants' reply brief was due, the parties reached an agreement
in principle for the settlement of the action. A stipulation of
settlement was submitted to the Court for its approval on January 24,
1994. At a conference on February 2, 1994, the Court entered an order
requiring (a) plaintiffs to mail notice of the proposed settlement to
class members by February 22, 1994, (b) class members to submit any
objections to the settlement by April 15, 1994 and (c) a hearing to
determine whether the settlement should be approved to be held on
April 29, 1994. Because of the settlement agreement, defendants
withdrew their summary judgment motion, without prejudice to renew the
motion in the event that the court does not approve the settlement.
Defendants believe that the material allegations of these
complaints are without merit and, if not settled, intend to defend
these actions vigorously.
EMPIRE TRANSACTIONS
Beginning in 1988, four separate actions were commenced in the
Supreme Court, New York County relating to Empire's conversion from a
mutual to a stock company, a 1988 reverse stock split, a subsequent
odd lot cash tender offer and adoption of Empire's Section 7118 Plan
in l991. Empire, Phlcorp and ten of Empire's directors are named as
defendants in some or all of these actions.
While the Company believes the material allegations of these
actions are without merit, these actions have been settled pursuant to
Court approval. The settlement, which will become final during the
second quarter of l994, unless appealed, will have no material effect
on the Company.
PHLCORP MERGER
Three actions were filed by minority shareholders of Phlcorp in
connection with the August 17, 1992 proposal by the Company to Phlcorp
that the Company acquire all outstanding Phlcorp shares not already
owned
24
by it and its subsidiaries and the October 12, 1992 public
announcement that the Company and Phlcorp had reached an agreement in
principle with respect to the merger of Phlcorp (then a 63.1% owned
public subsidiary of the Company) with and into a wholly owned
subsidiary of the Company (the "Phlcorp Merger"). The actions name
the Company and/or Phlcorp and their directors as defendants. Two of
the actions were brought in the Supreme Court of the State of New
York, County of New York, and one was filed in the Pennsylvania Court
of Common Pleas, Philadelphia County. The Pennsylvania action has
been voluntarily discontinued.
The amended class action complaints in the New York action
contain similar allegations, inter alia, that the Company, aided and
abetted by its directors, breached its fiduciary duties purportedly
owed to Phlcorp's minority shareholders by using its position as
controlling shareholder of Phlcorp to effect the Merger on terms which
do not reflect the true value of Phlcorp Shares, by failing to
disclose material facts concerning Phlcorp's assets, businesses, and
future prospects, and by timing the October 12 Proposal to coincide
with an abnormally high stock price of Leucadia and an artificially
depressed Phlcorp stock price. In addition, one of the New York
actions asserts a derivative claim brought on behalf of Phlcorp for
corporate waste under state law.
In November and December 1992, defendants moved to dismiss the
New York actions. In early December 1992, plaintiffs' request for a
preliminary injunction barring consummation of the Phlcorp Merger, was
denied.
The parties have entered into settlement negotiations. On
February 19, 1993, the court denied defendants' motions to dismiss the
New York actions as moot in light of settlement negotiations. The
court indicated that plaintiffs would be able to re-open the cases by
way of an order to show cause if the cases are not in fact settled.
On September 5, 1993, the parties entered into a memorandum of
understanding to settle the matter subject to plaintiffs conducting
confirmatory discovery and the court's approval of the settlement.
Defendants believe that the material allegations of these
complaints are without merit and, if not settled, intend to defend
these actions vigorously.
OTHER PROCEEDINGS
In addition to the foregoing, the Company and its subsidiaries
are parties to legal proceedings that are considered to be either
ordinary, routine litigation incidental to their business or not
material to the Company's consolidated financial position.
The Company does not believe that any of the foregoing actions
will have a material adverse effect on its consolidated financial
position or consolidated results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
------ ---------------------------------------------------
Not applicable.
25
Item 10. Executive Officers of the Registrant.
------- ------------------------------------
All executive officers of the Company are elected at the
organizational meeting of the Board of Directors of the Company held
annually and serve at the pleasure of the Board of Directors. As of
March 16, 1994, the executive officers of the Company, their ages, the
positions held by them and the periods during which they have served
in such positions were as follows:
NAME AGE POSITION WITH LEUCADIA OFFICE HELD SINCE
---- --- ---------------------- -----------------
Ian M. Cumming . . . . . . . . . . 53 Chairman of the Board June 1978
Joseph S. Steinberg . . . . . . . . 50 President January 1979
Thomas E. Mara . . . . . . . . . . 48 Executive Vice President May 1980;
and Treasurer January 1993
Lawrence S. Hershfield . . . . . . 37 Executive Vice July 1993
President
Norman P. Kiken . . . . . . . . . . 51 Vice President and October 1977
Comptroller
Paul J. Borden . . . . . . . . . . 45 Vice President August 1988
Mark Hornstein . . . . . . . . . . 46 Vice President July 1983
Ruth Klindtworth . . . . . . . . . 59 Secretary and Vice President- February 1976;
Corporate Administrator January 1990
C. Bruce Miller . . . . . . . . . . 62 Vice President January 1989
Joseph A. Orlando . . . . . . . . . 38 Vice President January 1994
David K. Sherman . . . . . . . . . 28 Vice President August 1992
Mr. Cumming has served as a director and Chairman of the
Board of the Company since June 1978. In addition, he has served as a
director of Bolivian Power since March 1987, as Chairman of the Board of
Bolivian Power since September 1988 and as a director of Allcity since
February 1988. Mr. Cumming has also been a director of Skywest, Inc.,
a Utah-based regional air carrier, since June 1986.
Mr. Steinberg has served as a director of the Company since
December 1978 and as President of the Company since January 1979. In
addition, he has served as a director of Bolivian Power since March
1987, as a director of Allcity since February 1988 and as a director
of JII since June 1988.
Mr. Mara joined the Company in April 1977 and was elected Vice
President of the Company in May 1977. He has served as Executive Vice
President of the Company since May 1980 and as Treasurer of the
Company since January 1993. Mr. Mara also served as Treasurer of the
Company from April 1981 to April 1985.
Mr. Hershfield has served as Executive Vice President of the
Company since July 1993 and prior thereto served as Vice President of
the Company since April 1990. Mr. Hershfield has also served as a
director of Bolivian Power since January 1992. From 1981 to April
1990, he served in a variety of executive positions with the Company's
subsidiary, BRAE Corporation (formerly a public company), including
President, Executive Vice President and Vice President.
Mr. Kiken, a certified public accountant, was employed by Coopers
& Lybrand, certified public accountants, from 1969 until he joined the
Company in October 1977 as Vice President and Comptroller.
Mr. Borden joined the Company as Vice President in August 1988
and has served in a variety of other capacities with the Company and
its subsidiaries.
26
Mr. Hornstein joined the Company as Vice President in July 1983
and has also served as Secretary of Bolivian Power since July 1988.
Ms. Klindtworth has been employed by the Company since July 1960
and was appointed Assistant Secretary in May 1973. She has served as
Secretary of the Company since February 1976, as Vice President-
Corporate Administrator of the Company since January 1990 and prior
thereto had served as Assistant Vice President-Corporate Administrator
of the Company since February 1979.
Mr. Miller has served as Vice President of the Company since
January 1989. He has also served as Executive Vice President of a
subsidiary of the Company for more than the past five years.
Mr. Orlando, a certified public accountant, has served as Vice
President of the Company since January 1994. Mr. Orlando served in a
variety of capacities with the Company and its subsidiaries since
1987, including serving as Chairman of S & H.
Mr. Sherman has served as Vice President of the Company since
August 1992. For the five years prior, he served in a variety of
capacities with the Company and its subsidiaries.
27
PART II
Item 5. Market for Registrant's Common Equity and Related
-------------------------------------------------
Stockholder Matters.
-------------------
(a) Market Information.
------------------
The common shares of the Company (the "Common Shares") are traded
on the New York Stock Exchange and Pacific Stock Exchange under the
symbol LUK. The following table sets forth, for the calendar periods
indicated, the high and low sales price per Common Share on the
consolidated transaction reporting system, as reported by the Dow
Jones Historical Stock Quote Reporter Service. On January 8, 1993,
the Company effected a two-for-one stock split of the Common Shares in
the form of a 100% stock dividend (the "Stock Split"). The dividend
was paid to shareholders of record immediately following the close of
business on December 31, 1992. Per share amounts set forth in this
Report have been adjusted to reflect the Stock Split.
COMMON SHARE
------------
HIGH LOW
---- ---
1992
----
First Quarter . . . . . . . . . . . . . $26.69 $18.32
Second Quarter . . . . . . . . . . . . 25.94 22.00
Third Quarter . . . . . . . . . . . . . 35.25 23.75
Fourth Quarter . . . . . . . . . . . . 41.00 30.75
1993
----
First Quarter . . . . . . . . . . . . . $51.25 $38.63
Second Quarter . . . . . . . . . . . . 43.75 36.00
Third Quarter . . . . . . . . . . . . . 47.75 39.25
Fourth Quarter . . . . . . . . . . . . 44.50 38.75
1994
----
First Quarter (through March 16, 1994) $43.63 $39.25
(b) Holders.
-------
As of March 16, 1993, there were approximately 6,918 record
holders of the Common Shares.
(c) Dividends.
---------
The Company declared and paid on December 15, 1993, a dividend of
$.25 per Common Share and on December 31, 1992, a dividend of $.20 per
Common Share. Prior thereto, the Company had not paid any cash
dividends on the Common Shares since January 1, 1973. In connection
with the Phlcorp Merger, the Company agreed to consider, but has not
made any commitment to, paying annual dividends in the future. The
payment of dividends in the future is subject to the discretion of the
Board of Directors and will depend upon general business conditions,
legal and contractual restrictions on the payment of dividends and
other factors that the Board of Directors may deem to be relevant.
In connection with the declaration of dividends or the making of
distributions on, or the purchase, redemption or other acquisition of
Common Shares, the Company is required to comply with certain
restrictions contained in certain of its debt instruments.
28
Item 6. Selected Financial Data.
------ -----------------------
The following selected financial data have been summarized from
the Company's consolidated financial statements and are qualified in
their entirety by reference to, and should be read in conjunction
with, such consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," below.
YEAR ENDED DECEMBER
---------------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA: (a)
Revenues $1,408,058 $1,573,015 $1,086,748 $674,914 $659,061
Interest expense (b) 39,465 38,507 36,925 34,604 43,961
Provision for insurance losses and
policy benefits 789,752 896,673 558,127 232,986 225,999
Income from continuing operations
before income taxes and cumulative
effects of changes in accounting
principles 176,868 143,553 95,030 78,938 34,805
Income from continuing operations
before cumulative effects of changes
in accounting principles 116,259 130,607 94,830 65,010 22,567
Income (loss) from discontinued operations
less applicable income taxes - - - (17,670) 41,744
Income before cumulative effects of
changes in accounting principles 116,259 130,607 94,830 47,340 64,311
Cumulative effects of changes in
accounting principles 129,195 - - - -
Net income 245,454 130,607 94,830 47,340 64,311
Per share:
Primary earnings (loss) per common and dilutive
common equivalent share:
Continuing operations before
cumulative effects of changes in
accounting principles $3.97 $5.35 $4.00 $2.68 $ .85
Discontinued operations - - - (.73) 1.56
Cumulative effects of changes in accounting
principles 4.41 - - - -
----- ----- ----- ----- -----
Net income $8.38 $5.35 $4.00 $1.95 $2.41
===== ===== ===== ===== =====
Fully diluted earnings (loss) per common
share:
Continuing operations before
cumulative effects of changes
in accounting principles $3.89 $5.33 $3.97 $2.68 $ .84
Discontinued operations - - - (.73) 1.52
Cumulative effects of changes in accounting
principles 4.20 - - - -
----- ----- ----- ----- -----
Net income $8.09 $5.33 $3.97 $1.95 $2.36
===== ===== ===== ===== =====
29
AT DECEMBER 31,
-------------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
SELECTED BALANCE SHEET DATA: (a)
Cash and investments $2,989,384 $3,371,624 $3,627,542 $1,741,273 $1,632,340
Total assets 4,689,272 4,330,580 4,590,096 2,406,438 2,244,678
Debt, including current maturities 401,335 225,588 220,728 208,458 120,428
Customer banking deposits 173,365 186,339 194,862 176,366 126,114
Common shareholders' equity 907,856 618,161 365,495 268,567 257,735
Book value per common share $32.54 $22.12 $15.89 $11.82 $9.84
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
SELECTED INFORMATION ON PROPERTY AND CASUALTY
INSURANCE OPERATIONS (Unaudited): (a)(c)(d)
GAAP Combined Ratio 96.9% 101.7% 102.1% 105.2% 105.3%
SAP Combined Ratio 93.7% 102.8% 103.3% 100.8% 102.3%
Industry SAP Combined Ratio (e) N/A 115.7% 108.8% 109.5% 109.2%
Premium to Surplus Ratio (f) 1.6x 2.0x 2.2x 1.4x 1.9x
_________________________
(a) Data includes acquired companies from date of acquisition and has been reclassified for discontinued operations.
(b) Includes interest on customer banking deposits.
(c) Combined Ratios and the Premium to Surplus Ratios include CPG for the relevant periods since August 16, 1991.
(d) Certain accident and health insurance business, which is included in the statutory results of operations of the
property and casualty insurance segment and is reflected in the SAP Combined Ratio, is reported in the life insurance
segment for financial reporting purposes and therefore is not included in the GAAP Combined Ratios reflected herein.
The Combined Ratio does not reflect the effect of investment income on results of operations. For 1993, the
difference in the treatment of costs for GAAP and SAP purposes was a principle reason for the difference between the
GAAP Combined Ratio and the SAP Combined Ratio. For 1992, the results of the accident and health insurance business,
which (as described above) are reflected in the SAP Combined Ratio but are not reflected in the GAAP Combined Ratio,
had a non-recurring income item which reduced the SAP Combined Ratio. In addition, in 1992 certain income credits
were recognized only for GAAP purposes.
(e) Source: Best's Insurance Management Reports, Property/Casualty Supplement, March 25, 1993. A comparison to industry
average 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.
(f) Premium to Surplus Ratio was calculated by dividing statutory property and casualty insurance premiums written by
statutory capital at the end of the year.
30
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.
-------------------------
LIQUIDITY AND CAPITAL RESOURCES
The Company. During each of the three years in the period ended
-----------
December 31, 1993, the Company operated profitably and in the year
ended December 31, 1991 net cash was provided from operations. For
the years ended December 31, 1993 and 1992, in spite of increased
earnings, net cash was used for operations. The 1992 net cash used
principally resulted from a 1991 reinsurance transaction, which had
the effect of reducing CPI's premium to surplus ratio for 1991, and
the 1993 net cash used principally related to the transfer of blocks
of insurance described below.
Principally as a result of the acquisition of the minority
interest in Phlcorp (the "Phlcorp Minority Interest") on December 31,
1992 and the Company's continuing profitable operations, ratings of
the Company's debt obligations were upgraded in 1993 by Moody's, S&P
and Duff & Phelps Inc., three of the leading bond rating agencies, all
of which rated the Company's senior debt as "investment grade." The
Company believes the higher ratings have made it substantially easier
to raise additional funds, including the offerings described below, on
favorable terms. Ratings issued by bond rating agencies are subject
to change at any time.
In February 1993, the Company sold $100,000,000 principal amount
of its newly authorized 5 1/4% Convertible Subordinated Debentures due
2003 (the "Convertible Debentures") in an underwritten public
offering. The Convertible Debentures are convertible into Common
Shares at $57.50 per Common Share (an aggregate of 1,739,130 Common
Shares), subject to anti-dilution provisions. In August 1993, the
Company sold $100,000,000 principal amount of its newly authorized 7
3/4% Senior Notes due 2013 (at 99% of principal amount) in an
underwritten public offering. The net proceeds of these offerings
were added to working capital.
Principally as a result of the public offerings and increased
cash flow from affiliates, including tax sharing payments, the Company
and its non-regulated affiliates had aggregate cash and temporary
investments of approximately $204,000,000 at February 28, 1994. Such
funds are available for general corporate purposes, including
acquisitions. However, the interest rate currently earned on such
funds is less than the interest paid on the 1993 debt offerings. In
addition, at February 28, 1994 the Company had available aggregate
credit agreement facilities of $150,000,000. During 1994, the credit
agreements were renewed and now expire in 1997. No amounts were
outstanding at February 28, 1994 under these credit agreement
facilities.
Effective as of January 1, 1993, as described more fully in Note
1(a) of Notes to Consolidated Financial Statements, the Company
adopted SFAS 106 (postretirement benefits), SFAS 109 (income taxes),
SFAS 112 (postemployment benfits), SFAS 113 (reinsurance) and EITF
93-6 (retrospectively rated reinsurance agreements). Although
adoption of these statements resulted in an aggregate credit of
$129,195,000 being reported as an element of net income for 1993 and
an increase in shareholders' equity of $138,605,000, adoption of such
statements will not affect cash flows, actual income taxes paid or the
actual utilization of the Company's substantial tax loss
carryforwards. However, adoption of SFAS 109 is likely to increase
reported provisions for income taxes in most periods.
In addition, as of December 31, 1993, the Company adopted SFAS
115. SFAS 115 requires that most securities, other than those meeting
the requirements for classification as "held-to-maturity," be carried
on the consolidated balance sheet at market value, either through an
adjustment to earnings (if classified as "trading securities") or
through shareholders' equity (if classified as "available for sale").
The Company has classified substantially all of its investment
portfolio as "available for sale," which resulted in an increase of
shareholders' equity at December 31, 1993 of approximately
$49,500,000. The Company believes SFAS 115 will result in
31
substantial fluctuations in reported shareholders' equity, but is
unlikely to have a material effect on results of operations. For
additional information with respect to the changes in accounting
principles, see "Results of Operations," below and Notes to
Consolidated Financial Statements.
During 1992, the Company concluded that the profitability of its
existing SPDA and SPWL business was unlikely to achieve acceptable
operating results in the future. Accordingly, principally starting in
the fourth quarter of 1992, the Company offered certain of its
existing SPDA policyholders the opportunity to exchange their policies
for SPDA policies of an unrelated insurer and entered into a
reinsurance agreement (which closed in stages in 1992 and 1993) to
reinsure certain blocks of SPDA business with a second unrelated
insurer. In connection with the 1993 SPDA closing (which involved
reinsurance of policies with account balances of approximately
$47,187,000 on the date of closing in 1993), there was no significant
net gain or loss. The Company is maximizing the return on any
remaining SPDA policies by reducing crediting rates to the minimum
permitted. As a result, the Company believes that a substantial
portion of the remaining SPDA policyholders will terminate their
policies over a period of time.
On June 23, 1993, the Company reinsured substantially all of its
existing blocks of SPWL business with a subsidiary of John Hancock
Mutual Life Insurance Company ("John Hancock"). In connection with
the transaction, the Company realized a net pre-tax gain of
approximately $16,700,000. Such net pre-tax gain consists of net
gains on sales of investments sold in connection with the transaction
(approximately $24,100,000), which are included in the caption "Net
securities gains," reduced by a net loss of approximately $7,400,000
(principally the write-off of deferred policy acquisition costs of
approximately $26,900,000 less the premium received on the
transaction), which is included in the caption "Provision for
insurance losses and policy benefits." Further, the Company may
receive additional consideration based on the subsequent performance
of this block of business. For financial reporting purposes, the
Company will reflect the policy liabilities assumed by John Hancock
(in policy reserves), with an offsetting receivable from John Hancock
of the same amount (in reinsurance receivable, net), until the Company
is relieved of its legal obligation to the SPWL policyholders.
During the first quarter of 1994, the Company and an equal
partner agreed to acquire a 60% interest in Caja de Ahorro y Seguro
S.A. ("Caja") for a purchase price of approximately $85,000,000,
subject to final adjustment. Caja is a holding company whose
subsidiaries are engaged in property and casualty insurance, life
insurance and banking in Argentina. Caja has (unaudited) assets in
excess of approximately $500,000,000. Reliable historical operating
data for Caja is not available. The Company believes that Caja will
not constitute a "significant subsidiary."
On August 16, 1991, the Company acquired CPG. As described in
"Results of Operations," CPG has operated profitably and has been a
substantial contributor to the Company's performance. Prior to the
acquisition of CPG, particularly in 1989 and 1990, the property and
casualty insurance operations of CPG had provided significant
additional amounts for losses. At December 31, 1991, the Company
stated it believed that the reserves established for the Colonial Penn
P&C Group were adequate, including amounts applicable to the Special
Risks business. Since acquisition, the claims and settlement
experience of the acquired business has been satisfactory and the
Company continues to believe (in part based on the recent report of an
independent consulting actuary) that the reserves established for the
Colonial Penn P&C Group, including the Special Risks business and
amounts that may be assessed by California and New Jersey, are
adequate.
The Company records trading stamp revenues and provides for the
cost of redemptions at the time trading stamps are furnished to
licensees. A liability for unredeemed trading stamps is estimated
based on the cost of merchandise, cash and related redemption service
expenses required to redeem the trading stamps which
32
are expected to be presented for redemption in the future. The
Company periodically reviews the appropriateness of the estimated
redemption rates based upon recent experience, statistical evaluations
and other relevant factors. At December 31, 1993 and 1992, the
liability for unredeemed trading stamps reflected in the Company's
consolidated balance sheet was $58,541,000 and $74,964,000,
respectively. The most recent statistical studies of trading stamp
redemptions have indicated that the historical pattern of redemptions
has changed and that the recorded liability for unredeemed trading
stamps is in excess of the amount that ultimately will be required to
redeem trading stamps outstanding. The amount of this excess may be
different than indicated by these studies. Accordingly, the Company
is amortizing the aggregate apparent excess over a five year period
(starting in 1990 with respect to approximately $34,000,000 of such
apparent excess and in 1991 with respect to approximately $28,000,000
of such apparent excess). Based upon the latest studies, the
unamortized apparent excess was approximately $17,067,000 at December
31, 1993. The Company will continue to monitor current redemptions
and estimates of ultimate redemptions.
The government of El Salvador and representatives of the Company
had previously reached agreement as to the amount to be paid for the
assets of an electric utility in El Salvador in which the Company had
an interest. Pursuant to such agreement, on March 30, 1993, the
Company received cash of approximately $5,300,000 and approximately
$12,000,000 principal amount of 6% U.S. dollar denominated El Salvador
Government bonds due in instalments through 1996. The gain recognized
during 1993 was not material. As a result of receiving required
prepayments and the sale of the bonds, the Company will report a pre-
tax gain of approximately $8,458,000 in the first quarter of 1994.
In connection with the formation of JII on June 1, 1988, John W.
Jordan II, a director and significant shareholder of the Company,
acquired from the Company most of the Company's direct interest in JII
in exchange for a zero coupon note which matured in 1993. On June 1,
1993 Mr. Jordan delivered to the Company 224,175 of the Company's
Common Shares valued at $8,294,000 (the maturity value of the zero
coupon note) as payment in full of the zero coupon note. The Common
Shares were valued at $37.00 per share, the closing price of a Common
Share on the New York Stock Exchange Composite Tape on May 24, 1993,
the last full trading day prior to the authorization by the Company's
Board of Directors of the agreement.
The Company is to receive the residual interest in CLIC and
Credit from the Wisconsin Insurance Commissioner without additional
consideration. The Company estimates that the value of the net
tangible assets of such companies to the Company was approximately
$32,800,000 in excess of their carrying amount at December 31, 1993.
The underlying assets of such companies are principally invested in
high quality interest earning securities. The timing for receipt of
such assets is uncertain.
During 1993 and 1992, the property and casualty insurance
industry suffered unprecedented losses from natural disasters,
principally Hurricane Andrew in 1992 and snow storm and fire related
losses in 1993. The Company's insurance subsidiaries also suffered
certain of such losses, although as described below in "Results of
Operations," reinsurance reduced the economic loss to the Company
related to Hurricane Andrew. However, as a result of the industry's
losses, the Company has seen a notable decrease in the availability of
catastrophe reinsurance at reasonable rates, particularly at low
levels of deductibility. Although the reinsurance programs were
completed at acceptable upper loss limits (albeit at a somewhat
increased cost), the insurance subsidiaries have been unable to obtain
previous levels of deductibility at reasonable cost. Accordingly, for
1994 and 1993 the Company has increased its retention of lower level
losses to $11,000,000. In 1992, the Company did not incur losses in
excess of its maximum reinsurance. Further, the Company did not incur
catastrophic losses in excess of its retained limits in 1993 and to
date in 1994. In January 1994, Los Angeles experienced severe
earthquakes. As a result, the Company suffered losses estimated at
approximately $7,000,000 to $10,000,000. In addition, severe winter
storms in 1994 resulted in unusually high losses.
33
New Jersey's insurance laws require all automobile insurers to
share in the losses of the MTF based on their depopulation share of
the JUA, as set by the New Jersey Department of Insurance. Although
the amount of the MTF deficit has not yet been finalized, based on
certain current estimates of the MTF deficit (which are subject to
change), the Colonial Penn P&C Group would be assessed approximately
$11,100,000. While the New Jersey Insurance Department has adopted
regulations which would permit an insurer, with the approval of the
Insurance Department, to recover amounts paid to the MTF through
surcharges to policyholders, there can be no assurance that the
Colonial Penn P&C Group would be permitted to surcharge its
policyholders for all or even part of any future deficit assessment.
The Colonial Penn P&C Group has provided for its portion of the
estimated MTF losses.
The NAIC has adopted a model law incorporating the concept of a
"risk based capital" ("RBC") requirement for insurance companies,
although the model law is not intended to apply to property and
casualty insurance companies until year end 1994 financial statements
are available. Generally, RBC is designed to measure the adequacy of
an insurer's statutory capital in relation to the risks inherent in
the business. The RBC formula will be used by the states as an early
warning tool to identify weakly capitalized companies for the purpose
of initiating regulatory action. The RBC ratios of the Company's
insurance subsidiaries as of December 31, 1993 were substantially in
excess of the minimum requirements.
The Company and certain of its subsidiaries including Phlcorp and
its subsidiaries, have substantial loss carryforwards and other tax
attributes (see Note 13 of Notes to Consolidated Financial
Statements). The amount and availability of tax loss carryforwards
are subject to certain qualifications, limitations and uncertainties,
including, with respect to Phlcorp and its subsidiaries, tax sharing
payments pursuant to a tax settlement agreement with the Internal
Revenue Service and the Department of Justice. In order to reduce the
possibility that certain changes in ownership could impose limitations
on the use of these carryforwards which could reduce their value to
the Company, the Company's shareholders, at a special meeting held on
December 30, 1992, imposed certain charter restrictions which
generally restrict the ability of a person or entity from accumulating
five percent or more of the Common Shares and the ability of persons
or entities now owning at least five percent of the Common Shares from
acquiring additional Common Shares. Upon implementation of SFAS 109,
the Company recognized as an asset (net of reserves) certain of the
benefits of such loss carryforwards and other tax attributes.
However, the amount of the asset recognized only reflects the minimum
Phlcorp tax loss carryforwards and assumes that certain proposed
regulations affecting the use of Phlcorp's tax loss carryforwards are
finalized without significant change. As described in the
accompanying financial statements, significant additional amounts may
be available under certain circumstances.
The Company's fixed maturity investments are generally
"investment grade" or U.S. governmental agency issued or guaranteed
obligations, although limited investments in "non-rated" or rated less
than "investment grade" securities have been made from time to time.
The Company believes that it provides for potential losses on its
investments upon early indications that a decline in the market value
of a particular security may be other than temporary. The cost and
market/carrying value of the Company's investments in "non-rated" or
less than "investment grade" rated securities was approximately
$40,218,000 and $48,351,000 at December 31, 1993, respectively. At
December 31, 1993, less than 1% of the insurance subsidiaries fixed
maturity investment portfolio was rated by Moody's and/or S&P as less
than "investment grade" or was not rated.
The Company continuously evaluates its existing operations and
investigates possible acquisitions of new businesses and dispositions
of businesses in order to maximize its ultimate economic value to
shareholders. Accordingly, while the Company does not have any
material arrangement, commitment or understanding with respect
thereto, except as described in this Report, further acquisitions,
divestitures, investments and changes in
34
capital structure are possible. The Company also believes based on
discussions with commercial and investment bankers that it has the
ability to raise significant additional funds under acceptable
conditions for use in its existing businesses or for appropriate
investment opportunities.
Parent. Leucadia National Corporation (the "Parent") is a
------
holding company whose assets principally consist of the stock of its
several direct subsidiaries. As described below, its principal
sources of funds are derived from its available cash resources, bank
borrowings, public financings, repayment of advances, funds
distributed from its subsidiaries as tax sharing payments, management
and other fees, and borrowings and dividends from its regulated and
non-regulated subsidiaries. It has no substantial recurring cash
requirements other than payment of interest and principal on its debt,
tax payments and expenses of its corporate offices.
The Parent maintains the principal borrowings for the Company and
its non-banking subsidiaries and has provided working capital to
certain of its wholly owned subsidiaries. These borrowings have
primarily been made on an unsecured basis from banks through various
credit agreement facilities and term loans, and through public
financings. As noted above, during 1993, the Company issued an
aggregate of $200,000,000 principal amount of senior debt securities
and subordinated convertible debt securities in underwritten public
offerings. Although the Company had no specific use for such funds
(the proceeds of the offerings were principally invested on a
temporary basis), the Company believes that it was prudent to borrow
long term funds at rates that were historically attractive. As a
result of these offerings and other sources of funds, at February 28,
1994, the Company and its wholly owned non-regulated subsidiaries had
cash and temporary investments of approximately $204,000,000.
There are no restrictions on distributions from the wholly owned
non-regulated subsidiaries and therefore all cash available to these
subsidiaries (including proceeds from sales of their investments in
marketable securities) is available to the Parent. At December 31,
1993, a maximum of approximately $50,590,000 was available to the
Parent as dividends from the regulated subsidiaries without regulatory
approval. Additional amounts may be available to the Parent in the
form of loans or cash advances from such regulated subsidiaries. The
Parent (and Phlcorp) also receive tax sharing payments from their
subsidiaries included in consolidated tax returns, including certain
regulated subsidiaries. Because of the tax loss carryforwards
available to the Parent (and Phlcorp) and current interest deductions,
the amount paid by the Parent (and Phlcorp) for income taxes is
substantially less than tax sharing payments received from the
subsidiaries. In addition, the Company believes significant amounts
are available from the regulated and non-regulated entities for
services provided by the Parent. The Parent also has borrowed
short-term funds from time to time from its regulated subsidiaries (as
permitted by applicable regulations), although no amounts were
outstanding at December 31, 1993 and no amounts were borrowed to date
in 1994. Furthermore, as previously noted, the Parent has recently
renewed its credit agreements which provide for aggregate credit
agreement facilities of $150,000,000. No significant amounts were
borrowed in 1993 or to date in 1994 under such agreements.
RESULTS OF OPERATIONS
CPG is included in results of operations from its date of
acquisition, August 16, 1991. For the year ended December 31, 1992,
CPG contributed revenues of approximately $836,552,000 (including net
gains on sales of securities of approximately $23,543,000) and
contributed approximately $131,757,000 to consolidated pre-tax income
(exclusive of financing costs). For the period from August 16, 1991
to December 31, 1991, CPG contributed revenues of approximately
$359,088,000 (including net gains on sales of securities of
approximately $16,323,000) and contributed approximately $59,995,000
to consolidated pre-tax income (exclusive of financing costs). Due to
changes in the Company's insurance operations it is not practicable to
35
provide meanful comparable information for CPG for 1993. Except as
disclosed herein, the material changes in results of operations for
the year ended December 31, 1992 compared to the preceding year result
from the acquisition of CPG.
Premium receipts on investment oriented products of the life
insurance subsidiaries (which are not reflected as revenues) were
approximately $88,312,000 in 1993, $68,035,000 in 1992 and $43,164,000
in 1991. The principal investment oriented product sold during the
three year period ended December 31, 1993 was a tax-advantaged VA
product marketed directly to consumers. Increases in premium receipts
in 1993 and 1992 may in part result from Federal tax law changes
anticipated in 1992 and enacted in 1993. Substantially all other life
insurance earned premiums relate to the CPG operations.
Earned premium revenues of the life and health insurance
operations were approximately $181,800,000 for 1993 compared to
$233,700,000 for 1992. The decrease reflected the termination of
certain assumed life and health reinsurance contracts which had
revenues of approximately $28,750,000 for 1992 and minimal
profitability (except for termination gains of approximately
$6,200,000 recognized in 1992). In addition, earned premium revenues
decreased as a result of the run-off of the agent sold medicare
supplement business, which the Company ceased marketing at December
31, 1992 due to inadequate profitability.
During 1993, based on its experience since acquisition, the
Company concluded that it would be able to generate significant new
premiums for its Graded Benefit Life business at acquisition cost
levels that result in adequate profitability. Accordingly, starting
in 1993, the Company increased its marketing efforts with respect to
this product.
Earned premium revenues and commissions of the property and
casualty insurance operations of the Empire Group were approximately
$259,400,000 in 1993, $243,100,000 in 1992 and $210,700,000 in 1991.
The increases (as compared to the preceding year) are principally due
to increases in certain premium rates (4.3% in 1993 and 6.2% in
1992) and increased premium volume (2.4% in 1993 and 9.2% in 1992).
Earned premium revenues of the Colonial Penn property and
casualty insurance operations were approximately $452,600,000 in 1993
and $456,000,000 in 1992. Earned premiums in 1993 reflect an increase
in involuntary auto insurance resulting from assigned risk business.
The 1993 decline in other business was anticipated and is principally
the result of the substantial reduction in marketing costs incurred
prior to acquisition, which the Company believes were not justified by
prior operating results. As described more fully elsewhere herein,
the Colonial Penn property and casualty insurance operations are using
other means to market their products. The Company believes its
present marketing efforts have resulted in new business which to some
degree offsets the normal attrition of existing business. The Company
believes that it is likely that new business generated in 1994 will be
greater than business lost through normal attrition, although there
can be no assurance that this will be achieved.
Manufacturing revenues and cost of goods sold in 1993 and 1992
increased slightly from amounts from the preceding year.
Manufacturing gross profit was substantially unchanged in 1993 and
lower in 1992 than 1991. The decline in 1992 was due to certain
manufacturing inefficiencies and start up costs associated with the
Company's new bathroom vanity manufacturing facility,
under-utilization of facilities in part due to general unfavorable
economic conditions and pricing pressures. These inefficiencies
contributed to the manufacturing operations having a small loss in
1991 and a substantially larger loss in 1993 and 1992. Although the
new manufacturing plant decreased its inefficiencies in 1993, the
plant continues to operate at unacceptable efficiency levels. During
1993, the Company instituted actions that it believes should improve
efficiency to acceptable levels in 1994 and 1995, although there can
be no assurance as to that effect.
36
Trading stamps revenues were lower in 1993 and 1992 than the
preceding year principally due to the loss of business of certain
customers. The Company believes the historical decline in usage of
trading stamps will continue. The Company provided the liability for
unredeemed trading stamps based on the estimate that approximately 75%
of stamps issued in each of 1993, 1992 and 1991 ultimately will be
redeemed. The gross profit rate was higher in 1992 than in 1991
principally due to lower merchandise costs. In early 1993, the
Company contributed the net assets of its motivation services business
to a new joint venture formed with an unrelated motivation services
company in exchange for a 45% equity interest in the joint venture.
The joint venture is recorded on the equity basis of accounting.
Results of operations of the motivation services business have
historically not been significant and are not expected to be
significant in the future.
Finance revenues reflect the level of consumer instalment loans.
In 1992 the Company sold at a profit substantially all of its consumer
loan development offices, which had aggregate consumer instalment
loans at the time of sale of approximately $68,500,000. As expected,
the operating profit applicable to this segment increased in 1993 as
the offices sold in 1992 operated at a loss. Based on its experience
since 1988 in providing automobile collateralized loans to individuals
with poor credit histories, during 1993 the Company concluded that
there were excellent opportunities for successful expansion of this
business. Accordingly, on a controlled basis, the Company increased
its investment in such loans. Such loans approximated $73,321,000 at
December 31, 1993 and $47,890,000 at December 31, 1992. The Company
expects to further increase such loans in 1994.
Investment and other income decreased in 1993 compared to 1992.
The decrease was the result of a lower level of investments due to
disposition of the SPWL and SPDA business and lower interest rates.
Exclusive of CPG, investment and other income decreased in 1992
compared to 1991. The investment earnings of the non-CPG insurance
subsidiaries were lower in 1992 compared to the prior year in part due
to a reduction in Charter's investment portfolio to fund a substantial
portion of the CPG purchase price. The estimated average yield to
maturity of bonds and notes in the Company's investment portfolio was
lower at December 31, 1993 and 1992 than at the preceding year end.
The decreased yield resulted in part from the reinvestment of sales
proceeds at the generally prevailing lower interest rates. Further,
other income in 1991 includes approximately $9,359,000 related to the
resolution of certain pre-acquisition contingencies related to
Cambrian, a consolidated subsidiary. The $12,981,000 gain in 1993
from the sale of a portion of the investment in Bolivian Power and the
$12,128,000 gain in 1992 from sale of the consumer loan development
offices is reflected in other income.
37
Net securities gains (losses) in each of the three years ended
December 31, 1993 were as follows (in thousands):
1993 1992 1991
---- ---- ----
Net gains on fixed maturities:
Resulting in additional provision
for policyholder benefits $ 6,800 $ 2,700 $ 8,800
Resulting in increase in amortization
of deferred policy acquisition costs 24,100 11,230 -
Other 19,352 51,797 26,103
------- -------- --------
50,252 65,727 34,903
Provision for write-down of investments
in certain fixed maturity investments (2,000) (19,677) (7,783)
Provision for write-down of investments
in certain equity and other securities - (364) (757)
Net unrealized holding loss on trading
securities (685) - -
Gain on sale of investment in Molins PLC - - 18,437
Net gains on equity and other securities 4,356 6,092 5,591
------- -------- ------
$51,923 $ 51,778 $ 50,391
======= ======== ========
The proceeds from sales of investments were primarily reinvested
at the generally lower prevailing interest rates. Since these
reinvestment rates were, in certain instances, lower than had
previously been expected on certain fixed rate annuity policies issued
by the life insurance subsidiaries, in 1993 and 1991 the Company
provided approximately $6,800,000 and $8,800,000, respectively, which
is included in results of operations under the caption, "Provision for
insurance losses and policy benefits." In 1992, as a result of
realizing securities gains and reinvestment of sales proceeds at the
lower prevailing interest rates, and securities gains realized in
connection with the termination or transfer of the SPDA business, the
Company recalculated and eliminated deferred policy acquisition costs
applicable to certain of its investment oriented products (including
the SPDA policies), reviewed the expected and required return on
certain fixed income products and, as a result, provided additional
reserves of approximately $13,900,000, which is included in the
caption "Provision for insurance losses and policy benefits" in 1992
results of operations. These reinvestment risks do not apply to the
Company's currently offered variable investment oriented products.
The provision for insurance losses and policy benefits of the
life and health operations decreased in the 1993 period compared to
the 1992 period, principally due to lower earned premiums and
insurance in force, (including the SPDA and SPWL business that was
sold in late 1992 and 1993). However, the provision for insurance
losses and policy benefits of the life and health operations for 1993
includes a net loss of approximately $7,400,000 (principally the
write-off of deferred policy acquisition costs less the premium
received) applicable to the SPWL business sold to John Hancock and
additional provisions of approximately $6,800,000 applicable to
certain fixed rate policies due to realization of securities gains and
reinvestment of proceeds at the lower prevailing interest rates, as
described more fully above.
The provision for insurance losses and policy benefits of the
life and health operations exclusive of CPG increased in 1992 compared
to 1991 principally due to the growth in earned premiums and the
additional amounts provided by the life insurance subsidiaries as a
result of the realized securities gains described above. Further, the
spread between amounts credited to policyholders by the life insurance
subsidiaries and amounts earned on investments was reduced in 1992 as
compared to 1991. As a result of the termination of certain
reinsurance arrangements by the life insurance subsidiaries,
approximately $6,200,000, representing amounts
38
provided for policyholder benefits that were no longer required, is
reflected as a reduction in the provision for insurance losses and
policy benefits for 1992.
The Company's property and casualty insurance operations combined
ratios as determined under GAAP and SAP were as follows:
Year ended December 31, GAAP SAP
------ ------
1993 96.9% 93.7%
1992 101.7%102.8%
1991 102.1%103.3%
For the Colonial Penn P&C Group, the severity of personal
automobile claims was substantially more favorable in 1993 than in
1992 and the frequency of such claims was substantially more favorable
in 1992 than in the prior year. The Company believes this experience
reflects its improved underwriting procedures, emphasis on over 50
year old insureds and prior rate increases. In addition, the combined
ratio and the provision for losses applicable to the property and
casualty operations for 1993 were favorably affected due to settlement
of prior years' claims at amounts less than had been provided. The
overall loss experience of the Empire Group's property and casualty
insurance subsidiaries was less favorable in 1992 than in 1991
primarily as a result of unfavorable loss experience in automobile
lines and an approximately $3,000,000 retroactive assessment for a
workers' compensation fund. The Company believes that as a result of
the reduction in claims outstanding for the Colonial Penn P&C Group,
there will be a reduced positive effect on future results of
operations from settlement of claims at less than amounts previously
provided in spite of providing loss reserves on current operations at
very conservative levels.
The provision for insurance losses and policy benefits in 1993
and 1992 (including CPG) also includes catastrophe losses (net of
reinsurance recoveries in 1992) estimated at an aggregate of
approximately $10,900,000 in 1993 and $12,300,000 in 1992 (including
amounts related to Hurricane Andrew in 1992). In addition, in 1992,
the Company provided approximately $1,000,000 to reinstate certain
reinsurance coverage which was exhausted in connection with Hurricane
Andrew.
Interest expense principally reflects the level of external
borrowings outstanding during the period and, in each year compared to
the preceding year, the effect of lower interest rates. Interest
expense in 1992 also reflects a lower level of intercompany borrowings
from Phlcorp during 1992, which resulted in increased interest charges
of approximately $4,880,000 in 1992 compared to 1991. Additionally,
interest expense reflects the level of Deposits at AIB and the ILCs.
Generally, interest rates on Deposits are lower than on other
available funds. Interest on Deposits was approximately $9,001,000 in
1993, $11,954,000 in 1992 and $15,138,000 in 1991. The Company
estimates that in 1993, the interest expense on its borrowings which
were invested in temporary investments exceeded interest earned by
approximately $2,500,000.
Selling, general and other expenses in 1991 includes costs
applicable to development by the trading stamps subsidiary of a
database marketing program of approximately $8,237,000 (including
close down costs). In 1991 the Company discontinued development of
the program due to a lack of acceptance by food manufacturers.
Minority interest in 1992 and 1991 was principally applicable to
the Phlcorp Minority Interest. On December 31, 1992, the Company
acquired the Phlcorp Minority Interest in exchange for approximately
4,408,000 Common Shares.
39
Income before income taxes and the effects of accounting changes
was $176,868,000 in 1993, $143,553,000 in 1992 and $95,030,000 in
1991. The amount for 1993 was the highest in the history of the
Company.
The provision for income taxes for 1993 was calculated under SFAS
109 which does not reflect the benefit from utilization of tax loss
carryforwards. The provisions for income taxes for 1992 and 1991 have
been reduced for the benefit from utilization of tax loss
carryforwards. The provision for income taxes for 1993 was reduced by
approximately $8,315,000 as a result of tax law changes and a
reduction in the valuation allowance applicable to certain deferred
tax assets. The Company estimates that if the 1993 tax provision had
been calculated as it was in 1992 and 1991, such provision would have
been lower by, and net income (exclusive of amounts applicable to
changes in accounting principles) would have been higher by
approximately $42,614,000 (or $1.46 per primary earnings per share and
$1.38 per fully diluted earnings per share).
The provisions for income taxes for 1992 and 1991 principally
consist of state income taxes, the federal alternative minimum income
tax, federal income taxes applicable to the life insurance
subsidiaries which cannot utilize the Company's tax loss carryforwards
and United Kingdom income taxes applicable to Cambrian. The 1991
provision reflects credits of approximately $5,400,000, resulting from
the favorable outcome of certain prior years' United Kingdom income
tax matters. As noted above, the tax provisions for 1992 and 1991
reflect the benefit from utilization of accounting and tax loss
carryforwards, including capital loss carryforwards.
The number of shares used to calculate primary earnings per share
was 29,270,000, 24,435,000 and 23,704,000 for 1993, 1992 and 1991,
respectively. The number of shares used to calculate fully diluted
earnings per share was 30,743,000, 24,516,000 and 23,916,000 for 1993,
1992 and 1991, respectively. The increase in 1993 was principally
caused by the acquisition of the Phlcorp Minority Interest and, with
respect to fully diluted per share amounts, the effect of the assumed
conversion of the 5 1/4% Convertible Debentures. The increase in the
number of shares utilized in calculating per share amounts in 1992
compared to 1991 was principally caused by the exercise of options to
purchase common shares and the increase in the market price per common
share.
Item 8. Financial Statements and Supplementary Data.
------ -------------------------------------------
Financial Statements and supplementary data required by this
Item 8 are set forth at the pages indicated in Item 14(a) below.
Item 9. Disagreements on Accounting and Financial Disclosure.
------ ----------------------------------------------------
Not applicable.
40
PART III
Item 10. Directors and Executive Officers of the Registrant.
------- --------------------------------------------------
The information to be included under the caption "Nominees
for Election as Directors" in the Company's definitive proxy statement to
be filed with the Commission pursuant to Regulation 14A of the 1934
Act in connection with the 1994 annual meeting of shareholders of the
Company (the "Proxy Statement") is incorporated herein by reference.
In addition, reference is made to Item 10 in Part I of this Report.
Item 11. Executive Compensation.
------- ----------------------
The information to be included under the caption "Executive
Compensation" in the Proxy Statement is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
------- --------------------------------------------------------------
The information to be included under the caption "Present
Beneficial Ownership of Common Shares" in the Proxy Statement is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions.
------- ----------------------------------------------
The information to be included under the caption "Executive
Compensation - Certain Relationships and Related Transactions" in the
Proxy Statement is incorporated herein by reference.
41
PART IV
Item 14. Exhibits, Financial Statement Schedules
and Reports on Form 8-K.
----------------------------------------
(a)(1)(2) Financial Statements and Schedules.
----------------------------------
Report of Independent Certified Public
Accountants . . . . . . . . . . . . . . . F-1
Financial Statements:
Consolidated Balance Sheets at
December 31, 1993 and 1992 . . . . . . . . F-2
Consolidated Statements of Income
for the years ended December 31,
1993, 1992 and 1991 . . . . . . . . . . . F-3
Consolidated Statements of Cash
Flows for the years ended
December 31, 1993, 1992 and 1991 . . . . . F-4
Consolidated Statements of Changes
in Shareholders' Equity for the
years ended December 31, 1993, 1992
and 1991 . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . F-7
Financial Statement Schedules:
Schedule I - Summary of Investments
Other Than Investments in Affiliates . . . F-35
Schedule III - Condensed Financial
Information of Registrant . . . . . . . . F-37
Schedule V - Supplementary
Insurance Information . . . . . . . . . . F-41
Schedule VI - Schedule of
Reinsurance . . . . . . . . . . . . . . . F-42
Schedule VIII - Valuation and
Qualifying Accounts . . . . . . . . . . . F-43
Schedule IX - Short-Term Borrowings . . . . F-44
Schedule X - Schedule of Supplemental
Information for Property and
Casualty Insurance Underwriters . . . . . F-45
42
(3) Executive Compensation Plans and Arrangements.
---------------------------------------------
1982 Stock Option Plan, as amended August 28, 1991 (filed as Annex B to
the Company's Proxy Statement dated July 21, 1992).
1992 Stock Option Plan (filed as Annex C to the Company's Proxy Statement
dated July 21, 1992).
Agreement made as of March 12, 1984 by and between Leucadia, Inc. and
Ian M. Cumming (filed as Exhibit 10.14 to the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1983
(the "1983 10-K")).
Agreement made as of March 12, 1984 by and between Leucadia, Inc. and
Joseph S. Steinberg (filed as Exhibit 10.15 to the Company's
1983 10-K).
Agreement dated as of August 1, 1988 among the Company, Ian M. Cumming
and Joseph S. Steinberg (filed as Exhibit 10.6 to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31, 1991
(the "1991 10-K")).
Agreement dated as of January 10, 1992 between Ian M. Cumming, certain
other persons listed on Schedule A thereto and the Company (filed
as Exhibit 10.7 to the Company's 1991 10-K).
Agreement dated as of January 10, 1992 between Joseph S. Steinberg,
certain other persons listed on Schedule A thereto and the Company
(filed as Exhibit 10.8 to the Company's 1991 10-K).
Agreement between Leucadia, Inc. and Ian M. Cumming, dated as of
December 28, 1992 (filed as Exhibit 10.12(a) to the Company's
Annual Report on Form 10-K for the fiscal year ended December 31,
1992 (the "1992 10-K")).
Escrow and Security Agreement by and among Leucadia, Inc., Ian M. Cumming
and Weil, Gotshal & Manges, as escrow agent, dated as of December 28,
1992 (filed as Exhibit 10.12(b) to the 1992 10-K).
Agreement between Leucadia, Inc. and Joseph S. Steinberg, dated as of
December 28, 1992 (filed as Exhibit 10.13(a) to the 1992 10-K).
Escrow and Security Agreement by and among Leucadia, Inc., Joseph S.
Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as
of December 28, 1992 (filed as Exhibit 10.13(b) to the 1992 10-K).
Agreement made as of December 28, 1993 by and between the Company and
Ian M. Cumming (filed as Exhibit 10.17 to this Report).
Agreement made as of December 28, 1993 by and between the Company and
Joseph S. Steinberg (filed as Exhibit 10.18 to this Report).
Agreement between the Company and Ian M. Cumming dated as of December 28,
1993 (filed as Exhibit 10.19(a) to this Report).
Escrow and Security Agreement by and among the Company, Ian M. Cumming
and Weil, Gotshal & Manges, as escrow agent, dated as of
December 28, 1993 (filed as Exhibit 10.19(b) to this Report).
Agreement between the Company and Joseph S. Steinberg, dated as of
December 28, 1993 (filed as Exhibit 10.20(a) to this Report).
Escrow and Security Agreement by and among the Company, Joseph S.
Steinberg and Weil, Gotshal & Manges, as escrow agent, dated as of
December 28, 1993 (filed as Exhibit 10.20(b) to this Report).
43
(b) Reports on Form 8-K.
-------------------
Not applicable.
(c) Exhibits.
--------
3.1 Restated Certificate of Incorporation (filed as
Exhibit 5.1 to the Company's Current Report on Form
8-K dated July 14, 1993).*
3.2 By-laws (as amended) filed as Exhibit 4.5 to the
Company's Registration Statement No. 33-57054).*
4.1 The Company undertakes to furnish the Securities
and Exchange Commission, upon request, a copy of
all instruments with respect to long-term debt not
filed herewith.
10.1 1982 Stock Option Plan, as amended August 28, 1991
(filed as Annex B to the Company's Proxy Statement
dated July 21, 1992).*
10.2 1992 Stock Option Plan (filed as Annex C to the
Company's Proxy Statement dated July 21, 1992).*
10.3(a) Restated Articles and Agreement of General
Partnership, effective as of February 1, 1982, of
The Jordan Company (filed as Exhibit 10.3(d) to the
Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1986).*
10.3(b) Amendments dated as of December 31, 1989 and
December 1, 1990 to the Partnership Agreement
referred to in 10.3(a) above (filed as Exhibit
10.2(b) to the Company's 1991 10-K).*
10.3(c) Amendment dated as of December 17, 1992 to the
Partnership Agreement referred to in 10.3(a) above
(filed as Exhibit 10.3(c) to the 1992 10-K).*
10.3(d) Articles and Agreement of General Partnership,
effective as of April 15, 1985, of Jordan/Zalaznick
Capital Company (filed as Exhibit 10.20 to the
Company's Registration Statement No. 33-00606).*
10.4 Agreement made as of March 12, 1984 by and between
Leucadia, Inc. and Ian M. Cumming (filed as Exhibit
10.14 to the 1983 10-K).*
10.5 Agreement made as of March 12, 1984 by and between
Leucadia, Inc. and Joseph S. Steinberg (filed as
Exhibit 10.15 to the 1983 10-K).*
___________________
* Incorporated by reference.
44
10.6 Stock Purchase and Sale Agreement dated as of April
5, 1991, by and between FPL Group Capital Inc. and
the Company (filed as Exhibit B to the Company's
Current Report on Form 8-K dated August 23, 1991).*
10.7 Agreement dated as of August 1, 1988 among the
Company, Ian M. Cumming and Joseph S. Steinberg
(filed as Exhibit 10.6 to the Company's 1991 10-
K).*
10.8 Agreement dated as of January 10, 1992 between Ian
M. Cumming, certain other persons listed on
Schedule A thereto and the Company (filed as
Exhibit 10.7 to the Company's 1991 10-K).*
10.9 Agreement dated as of January 10, 1992 between
Joseph S. Steinberg, certain other persons listed
on Schedule A thereto and the Company (filed as
Exhibit 10.8 to the Company's 1991 10-K).*
10.10(a) Agreement dated April 23, 1992 between AIC
Financial Services, Inc. (an Alabama corporation),
AIC Financial Services (a Mississippi corporation)
and AIC Financial Services (a South Carolina
corporation) (collectively, "Seller") and Norwest
Financial Resources, Inc. (filed as Exhibit
10.10(a) to the 1992 10-K).*
10.10(b) Purchase Agreement between A.I.C. Financial
Services, Inc., American Investment Bank, N.A.,
American Investment Financial and Terracor II d/b/a
AIC Financial Fund, Seller, and Associates
Financial Services Company, Inc., Buyer, dated
November 5, 1992 (filed as Exhibit 10.10(b) to the
Company's Registration Statement No. 33-55120).*
10.11(a) Agreement and Plan of Merger, dated as of October
22, 1992, by and among the Company, Phlcorp
Acquisition Company and PHLCORP, Inc. (filed as
Exhibit 5.2 to the Company's Current Report on Form
8-K dated October 22, 1992).*
10.11(b) Amendment dated December 10, 1992, to the Merger
Agreement referred to in 10.11(a) above (filed as
Exhibit 5.2 to the Company's Current Report on Form
8-K dated December 14, 1992).*
10.12(a) Agreement between Leucadia, Inc. and Ian M.
Cumming, dated as of December 28, 1992 (filed as
Exhibit 10.12(a) to the 1992 10-K).*
10.12(b) Escrow and Security Agreement by and among
Leucadia, Inc., Ian M. Cumming and Weil, Gotshal &
Manges, as escrow agent, dated as of December 28,
1992 (filed as Exhibit 10.12(b) to the 1992 10-K).*
10.13(a) Agreement between Leucadia, Inc. and Joseph S.
Steinberg, dated as of December 28, 1992 (filed as
Exhibit 10.13(a) to the 1992 10-K).*
___________________
* Incorporated by reference.
45
10.13(b) Escrow and Security Agreement by and among
Leucadia, Inc., Joseph S. Steinberg and Weil,
Gotshal & Manges, as escrow agent, dated as of
December 28, 1992 (filed as Exhibit 10.13(b) to the
1992 10-K).*
10.14 Settlement Agreement between Baldwin-United
Corporation and the United States dated August 27,
1985 concerning tax issues (filed as Exhibit 10.14
to the 1992 10-K).*
10.15 Acquisition Agreement, dated as of December 18,
1992, by and between Provident Mutual Life and
Annuity Company of America and Colonial Penn
Annuity and Life Insurance Company (filed as
Exhibit 10.15 to the 1992
10-K).*
10.16 Reinsurance Agreement, dated as of December 31,
1991, by and between Colonial Penn Insurance
Company and American International Insurance
Company (filed as Exhibit 10.16 to the 1992 10-K).*
10.17 Agreement made as of December 28, 1993 by and
between the Company and Ian M. Cumming.
10.18 Agreement made as of December 28, 1993 by and
between the Company and Joseph S. Steinberg.
10.19(a) Agreement between the Company and Ian M. Cumming,
dated as of December 28, 1993.
10.19(b) Escrow and Security Agreement by and among the
Company, Ian M. Cumming and Weil, Gotshal & Manges,
as escrow agent, dated as of December 28, 1993.
10.20(a) Agreement between the Company and Joseph S.
Steinberg, dated as of December 28, 1993.
10.20(b) Escrow and Security Agreement by and among the
Company, Joseph S. Steinberg and Weil, Gotshal &
Manges, as escrow agent, dated as of December 28,
1993.
21 Subsidiaries of the registrant.
23 Consent of independent certified public accountants
with respect to the incorporation by reference into
the Company's Registration Statements on Form S-8
(File No. 2-84303), Form S-8 and S-3 (File No. 33-
6054), Form S-8 and S-3 (File No. 33-26434), Form
S-8 and S-3 (File No. 33-30277).
___________________
* Incorporated by reference.
46
28 Schedule P of the 1993 Annual Statement to
Insurance Departments of the Colonial Penn
Insurance Company and Affiliated Fire & Casualty
Insurers, the Empire Insurance Company, Principal
Insurer, and Colonial Penn Madison Insurance
Company.
47
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.
LEUCADIA NATIONAL CORPORATION
March 23, 1994 By: /s/ Norman P. Kiken
-------------------------
Norman P. Kiken
Vice President and
Comptroller
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, on the date
set forth above.
Signature Title
--------- -----
/s/ Ian M. Cumming Chairman of the Board
------------------------------
Ian M. Cumming (Principal Executive Officer)
/s/ Joseph S. Steinberg President and Director
------------------------------
Joseph S. Steinberg (Principal Executive Officer)
/s/ Norman P. Kiken Vice President and Comptroller
------------------------------
Norman P. Kiken (Principal Financial and
Accounting Officer)
/s/ Paul M. Dougan Director
------------------------------
Paul M. Dougan
/s/ Lawrence D. Glaubinger Director
------------------------------
Lawrence D. Glaubinger
/s/ James E. Jordan Director
------------------------------
James E. Jordan
/s/ John W. Jordan II Director
------------------------------
John W. Jordan II
/s/ Jesse Clyde Nichols, III Director
------------------------------
Jesse Clyde Nichols, III
48
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors of Leucadia National Corporation:
We have audited the consolidated financial statements and the
financial statement schedules of LEUCADIA NATIONAL CORPORATION
and SUBSIDIARIES listed in Item 14(a) of this Form 10-K. These
financial statements and financial statement schedules are the
responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and
financial statement schedules 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 LEUCADIA NATIONAL CORPORATION and
SUBSIDIARIES as of December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for
each of the three years in the period ended December 31, 1993, in
conformity with generally accepted accounting principles. In
addition, in our opinion, the financial statement schedules
referred to above, when considered in relation to the basic
financial statements taken as a whole, present fairly, in all
material respects, the information required to be included
therein.
As more fully discussed in Note 1 to the consolidated financial
statements, in 1993, the Company changed its method of accounting
for Income Taxes, Postretirement Benefits Other than Pensions,
Postemployment Benefits, Re-insurance of Short-Duration and Long-
Duration Contracts, Multiple-Year Retrospectively Rated
Contracts, and Certain Investments in Debt and Capital
Securities, all as set forth in various pronouncements of the
Financial Accounting Standards Board and the Emerging Issues Task
Force.
COOPERS & LYBRAND
New York, New York
March 17, 1994
F-1
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1993 and 1992
(Dollars in thousands, except par value)
1993 1992
---- ----
ASSETS
------
Investments $2,697,970 $2,701,025
Cash and short-term investments 291,414 670,599
Reinsurance receivable, net 462,671 10,553
Trade, notes and other receivables, net 390,394 326,454
Prepaids and other assets 161,441 174,844
Property, equipment and leasehold
improvements, net 99,741 103,545
Deferred policy acquisition costs
and value of insurance in force 55,410 78,895
Deferred income taxes 114,001 -
Separate and variable accounts 335,357 215,988
Investments in associated companies 80,873 48,677
---------- ----------
Total $4,689,272 $4,330,580
========== ==========
LIABILITIES
-----------
Customer banking deposits $ 173,365 $ 186,339
Trade payables and expense accruals 164,533 131,122
Other liabilities 110,396 113,244
Income taxes payable 40,378 27,790
Policy reserves 2,105,408 2,390,219
Unearned premiums 380,260 339,634
Separate and variable accounts 334,636 213,492
Liability for unredeemed trading stamps 58,541 74,964
Debt, including current maturities 401,335 225,588
---------- ---------
Total liabilities 3,768,852 3,702,392
---------- ----------
Minority interest 12,564 10,027
---------- ----------
SHAREHOLDERS' EQUITY
--------------------
Common shares, par value $1 per share, authorized
150,000,000 and 60,000,000 shares; 27,897,023 and
27,944,535 shares issued and outstanding, after
deducting 30,260,664 and 29,978,256 shares held
in treasury 27,897 27,945
Additional paid-in capital 125,013 123,656
Net unrealized gain on investments 49,912 9
Retained earnings 705,034 466,551
---------- ----------
Total shareholders' equity 907,856 618,161
---------- ----------
Total $4,689,272 $4,330,580
========== ==========
The accompanying notes are an integral part of these
consolidated financial statements.
F-2
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31, 1993, 1992 and 1991
1993 1992 1991
---- ---- ----
(In thousands, except per share amounts)
Revenues:
Insurance revenues and commissions $ 893,850 $ 932,943 $ 517,284
Manufacturing 173,638 168,687 161,420
Trading stamps 23,827 29,339 34,607
Motivation services - 63,336 58,935
Finance 33,587 39,580 37,690
Investment and other income 231,233 287,352 226,421
Net securities gains 51,923 51,778 50,391
---------- --------- ---------
1,408,058 1,573,015 1,086,748
Expenses:
Provision for insurance losses and
policy benefits 789,752 896,673 558,127
Insurance commissions 6,609 13,327 4,883
Cost of goods sold:
Manufacturing 122,815 119,742 110,228
Trading stamps 1,252 1,421 5,971
Motivation services - 46,653 42,658
Interest 39,465 38,507 36,925
Salaries 83,179 97,758 66,954
Selling, general and other expenses 185,713 191,886 150,517
Minority interest 2,405 23,495 15,455
---------- ---------- ---------
1,231,190 1,429,462 991,718
---------- ---------- ---------
Income before income taxes and
cumulative effects of changes
in accounting principles 176,868 143,553 95,030
Provision for income taxes: ---------- --------- ---------
Currently payable 25,355 12,946 200
Applied to deferred taxes 35,254 - -
---------- --------- ---------
60,609 12,946 200
---------- --------- ---------
Income before cumulative effects of
changes in accounting principles 116,259 130,607 94,830
Cumulative effects of changes in
accounting principles 129,195 - -
---------- --------- ---------
Net income $ 245,454 $ 130,607 $ 94,830
========== ========= =========
Earnings per common and dilutive common
equivalent share:
Income before cumulative effects of
changes in accounting principles $3.97 $5.35 $4.00
Cumulative effects of changes in
accounting principles 4.41 - -
----- ----- -----
Net income $8.38 $5.35 $4.00
===== ===== =====
Fully diluted earnings per common share:
Income before cumulative effects of
changes in accounting principles $3.89 $5.33 $3.97
Cumulative effects of changes in
accounting principles 4.20 - -
----- ----- -----
Net income $8.09 $5.33 $3.97
===== ===== =====
The accompanying notes are an integral part of these
consolidated financial statements.
F-3
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31, 1993, 1992 and 1991
1993 1992 1991
---- ---- ----
(Thousands of dollars)
Net cash flows from operating activities:
----------------------------------------
Net income $ 245,454 $ 130,607 $ 94,830
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Cumulative effects of changes in accounting
principles (129,195) - -
Benefit from utilization of tax loss
carryforwards applied to reduce SFAS 109
deferred tax asset 35,254 - -
Depreciation and amortization of property,
equipment and leasehold improvements 16,378 16,825 13,876
Other amortization 113,450 78,395 39,742
Provision for doubtful accounts 6,754 9,437 13,115
Net securities (gains) (51,923) (51,778) (50,391)
(Gain) on reinsurance transaction with John
Hancock (exclusive of security gains and
write-off of deferred policy acquisition
costs) (19,456) - -
(Gain) on sale of loan development offices - (12,128) -
Equity in loss of associated companies 2,064 1,891 722
(Gain) related to Bolivian Power (12,981) - -
Purchases of investments classified as trading (77,333) - -
Proceeds from sales of investments classified
as trading 38,118 - -
Net change in reinsurance receivable 52,356 - -
Net change in trade, notes and other
receivables (55,877) 2,071 (8,780)
Net change in prepaids and other assets (49,258) (27,902) (10,168)
Deferred policy acquisition costs incurred and
deferred (81,746) (77,448) (56,058)
Net change in trade payables and expense
accruals (the decrease in 1992 principally
relates to a prior reinsurance transaction) 18,295 (101,508) 61,823
Net change in other liabilities (3,954) (12,584) 5,100
Net change in income taxes 8,195 3,888 1,386
Net change in policy reserves (56,327) (8,850) 18,177
Net change in unearned premiums 35,020 31,007 (49,748)
Decrease in liability for unredeemed trading
stamps (16,423) (19,095) (16,514)
Cash related to reinsurance transaction with
John Hancock (510,698) - -
Minority interest 2,405 23,495 15,455
Other 1,701 730 1,214
----------- ----------- -----------
Net cash provided by (used for) operating
activities (489,727) (12,947) 73,781
----------- ----------- -----------
Net cash flows from investing activities:
----------------------------------------
Acquisition of property, equipment and
leasehold improvements (19,368) (27,351) (27,869)
Proceeds from disposals of property,
equipment and leasehold improvements 5,760 7,034 9,128
Cash related to acquisition of certain
companies, net - (1,711) 116,456
Collections on notes receivable and policy loans 438 341 1,157
Advances on loan receivables (132,324) (114,168) (125,658)
Principal collections on loan receivables 95,535 108,912 109,120
Proceeds from sales of instalment loan
receivables - 78,096 -
Purchases of investments (other than short-
term) (1,582,856) (2,650,517) (1,558,791)
Proceeds from maturities of investments 471,440 642,723 276,846
Proceeds from sales of investments 1,219,509 2,447,450 1,258,744
----------- ----------- -----------
Net cash provided by investing activities 58,134 490,809 59,133
----------- ------------ -----------
(continued)
The accompanying notes are an integral part of these
consolidated financial statements.
F-4
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS, continued
For the years ended December 31, 1993, 1992 and 1991
1993 1992 1991
---- ---- ----
(Thousands of dollars)
Net cash flows from financing activities:
----------------------------------------
Net change in credit agreement and other
short-term borrowings $ (5,678) $ (79,893) $ (20,574)
Net change in customer banking deposits (12,817) (8,117) 18,860
Net change in policyholder account balances (95,554) (220,888) 47,331
Issuance of long-term debt, net of issuance
costs 194,157 130,640 35,080
Reduction of long-term debt (18,237) (63,433) (10,251)
Purchase of warrants to acquire common shares - (14,700) -
Exercise of PHLCORP, Inc. warrants - - 14,782
Purchase of common shares for treasury (2,492) (2,850) (1,373)
Dividends paid (6,971) (5,589) -
---------- ---------- ----------
Net cash provided by (used for) financing
activities 52,408 (264,830) 83,855
---------- ---------- ----------
Net increase (decrease) in cash and
short-term investments (379,185) 213,032 216,769
Cash and short-term investments at January 1, 670,599 457,567 240,798
---------- ---------- ----------
Cash and short-term investments at December 31, $ 291,414 $ 670,599 $ 457,567
========== ========== ==========
Supplemental disclosures of cash flow
-------------------------------------
information:
-----------
Cash paid during the year for: $34,574 $39,745 $36,287
Interest $17,025 $10,316 $ (270)
Net income tax payments (refunds)
The accompanying notes are an integral part of these
consolidated financial statements.
F-5
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
For the years ended December 31, 1993, 1992 and 1991
Net
Common Unrealized
Shares Additional Gain (Loss)
$1 Par Paid-in On Retained
Value Capital Investments Earnings Total
------ ---------- ----------- -------- -----
(Thousands of dollars)
Balance, January 1, 1991 $22,724 $ - $ (860) $246,703 $268,567
Exercise of options to
purchase common shares 384 1,953 2,337
Net change in unrealized gain
(loss) on investments 1,134 1,134
Purchase of stock for treasury (102) (1,271) (1,373)
Net income 94,830 94,830
------- -------- ------- -------- --------
Balance, December 31, 1991 23,006 682 274 341,533 365,495
Exercise of options to
purchase common shares 641 4,879 5,520
Acquisition of PHLCORP, Inc.
minority interest 4,408 135,535 139,943
Net change in unrealized gain
(loss) on investments (265) (265)
Purchase of stock for treasury (110) (2,740) (2,850)
Purchase of warrants to acquire
common shares (14,700) (14,700)
Dividend ($.20 per Common Share) (5,589) (5,589)
Net income 130,607 130,607
------- -------- ------- -------- --------
Balance, December 31, 1992 27,945 123,656 9 466,551 618,161
Exercise of options to
purchase common shares 235 2,100 2,335
Net change in unrealized gain
(loss) on investments 49,903 49,903
Purchase of stock for treasury (283) (10,503) (10,786)
Income tax benefit related to
warrant and option transactions
(primarily recognized upon
adoption of SFAS 109) 9,760 9,760
Dividend ($.25 per Common Share) (6,971) (6,971)
Net income 245,454 245,454
------- -------- ------- -------- --------
Balance, December 31, 1993 $27,897 $125,013 $49,912 $705,034 $907,856
======= ======== ======= ======== ========
The accompanying notes are an integral part of these
consolidated financial statements.
F-6
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Significant Accounting Policies:
-------------------------------
(a) Changes in Accounting Policies: Effective as of January 1, 1993,
------------------------------
the Company adopted Statement of Financial Accounting Standards No.
109 "Accounting for Income Taxes" ("SFAS 109"), Statement of Financial
Accounting Standards No. 106 "Employers' Accounting for Postretirement
Benefits Other Than Pensions" ("SFAS 106"), Statement of Financial
Accounting Standards No. 112 "Employers' Accounting for Postemployment
Benefits" ("SFAS 112"), Statement of Financial Accounting Standards
No. 113 "Accounting and Reporting for Reinsurance of Short-Duration
and Long-Duration Contracts" ("SFAS 113") and Financial Accounting
Standards Board's Emerging Issues Task Force Consensus No. 93-6
"Accounting for Multiple-Year Retrospectively Rated Contracts by
Ceding and Assuming Enterprises" ("EITF 93-6"). As a result of
adoption of SFAS 106, SFAS 109, SFAS 112 and EITF 93-6, the cumulative
effects of such changes through January 1, 1993 were recorded as of
the date of adoption and were principally reflected in results of
operations as "Cumulative effects of changes in accounting
principles." In addition, as a result of adoption of SFAS 109,
certain acquired intangibles were reduced (for benefits of acquired
tax loss carryforwards) and shareholders' equity was directly
increased (as a result of prior stock transactions).
SFAS 106, SFAS 112 and EITF 93-6 had no material effect on income
before cumulative effects of changes in accounting principles for 1993
and are unlikely to have a material effect on future results of
operations.
Effective as of December 31, 1993, the Company adopted Statement of
Financial Accounting Standards No. 115 "Accounting for Certain
Investments in Debt and Equity Securities" ("SFAS 115"). Adoption of
SFAS 115 had no material effect on results of operations but did
increase shareholders' equity by approximately $49,500,000 at December
31, 1993 as described more fully in Note 1(e).
(b) Consolidation Policy: The consolidated financial statements
--------------------
include the accounts of the Company and all significant majority-owned
subsidiaries. The Company's subsidiary, Phlcorp, Inc. ("Phlcorp") has
several legal subsidiaries (the "WMAC Companies") which are, or were,
under the control of the Wisconsin Insurance Commissioner (the
"Commissioner"). These companies are not consolidated while under the
control of the Commissioner.
Investments in certain other entities in which the Company owns less
than 50% of the voting interest and has the ability to exercise
significant influence are accounted for on the equity method of
accounting. Amounts related to such companies have not been material.
Certain amounts for prior periods have been reclassified to be
consistent with the 1993 presentation.
(c) Stock Split: On January 8, 1993, a two-for-one stock split was
-----------
effected in the form of a 100% stock dividend. The financial
statements (and notes thereto) give retroactive effect to the stock
split for all periods presented.
(d) Statement of Cash Flows: The Company considers short-term
-----------------------
investments (generally investments with maturities of less than three
months at the time of acquisition) as cash equivalents.
As described in Note 2, on August 16, 1991, the Company acquired
Colonial Penn Group, Inc. ("Colonial Penn") for cash of approximately
$128,000,000. The acquired assets were recorded at an aggregate of
The accompanying notes are an integral part of these
consolidated financial statements.
F-7
1. Significant Accounting Policies, continued:
-------------------------------
approximately $1,950,000,000 (principally investments in securities)
and the acquired liabilities were recorded at an aggregate of
approximately $1,822,000,000 (principally policy reserves and unearned
premiums).
Also, as described in Note 2, on December 31, 1992, the Company
acquired the minority interest in Phlcorp (the "Phlcorp Minority
Interest") for approximately 4,408,000 of the Company's Common Shares
which were recorded at an aggregate of approximately $142,927,000,
including costs. Because Phlcorp was a consolidated subsidiary, the
Phlcorp Minority Interest (approximately $92,819,000) was eliminated
and the difference between the consideration issued and the minority
interest eliminated was principally allocated to investments in
associated companies (approximately $11,022,000), amounts related to
the WMAC Companies (approximately $16,847,000) and excess of purchase
price over net assets acquired (approximately $22,277,000). The
amount allocated to excess of purchase price over net assets acquired
was eliminated as a result of the adoption of SFAS 109.
On June 1, 1993, the Company received 224,175 of the Company's Common
Shares (valued at $8,294,000) in settlement of a zero coupon note due
from John W. Jordan II, a Director of the Company and a significant
shareholder. Based on the market price of the shares on the date the
transaction was approved by the Board of Directors, the value of the
shares received was equal to the maturity value of the note.
(e) Investments: Prior to December 31, 1993, investments were carried
-----------
at amortized cost with respect to fixed maturities (other than those
classified as held for sale) and policyholder loans. Investments were
carried at market with respect to marketable equity securities of the
insurance subsidiaries and options that did not meet the accounting
definition of a hedge and at the lower of cost or market (in the
aggregate) for other marketable equity securities.
Prior to adoption of SFAS 115, the Company classified a portion of the
insurance subsidiaries' investment portfolios as "held for sale."
Such investments were carried at the lower of cost or market. A
substantial portion of the proceeds from disposition of the portfolio
classified as held for sale were invested in other securities.
The Company adopted SFAS 115 on December 31, 1993. Under SFAS 115
marketable debt and equity securities are designated as i) "held to
maturity" (carried at cost), ii) "trading" (carried at market with
differences between cost and market being reflected in results of
operations) or iii) if not otherwise classified, as "available for
sale" (carried at market with differences between cost and market
being reflected as a separate component of shareholders' equity, net
of income tax effect). The adoption of SFAS 115 resulted in an
increase in reported shareholders' equity of approximately
$49,500,000. The Company does not expect that SFAS 115 will have a
material effect on future results of operations, although the Company
believes SFAS 115 is likely to result in substantial fluctuations in
reported shareholders' equity.
The fixed maturity investments of the insurance subsidiaries (other
than those classified as "trading") are made with the intention of
holding such securities to maturity and the Company has the ability to
do so.
Both prior and subsequent to adoption of SFAS 115, declines in market
value below cost which are considered other than temporary are charged
to results of operations. For determining realized gain or loss on
securities sold, cost is based on average cost.
Net unrealized gain on investments at December 31, 1993 is net of
deferred income taxes of $27,091,000.
(f) Property, Equipment and Leasehold Improvements: Property,
----------------------------------------------
equipment and leasehold improvements are stated at cost, net of
accumulated depreciation and amortization (approximately $73,640,000
and $65,150,000 at
F-8
1. Significant Accounting Policies, continued:
-------------------------------
December 31, 1993 and 1992, respectively). Depreciation and amortization
are provided principally on the straight-line method over the estimated
useful lives of the assets or, if less, the term of the lease.
(g) Income Recognition from Insurance Operations: Premiums on the
--------------------------------------------
property and casualty insurance business are recognized as revenues
over the term of the policy using the monthly pro rata basis.
The life insurance subsidiaries have had several investment oriented
insurance products (collectively the "IOP products"), principally
consisting of single premium whole life ("SPWL") products, a variable
life ("VL") product, variable annuity ("VA") products and a single
premium deferred annuity ("SPDA") product. IOP product premiums are
reflected in a manner similar to a deposit; revenues reflect only
mortality charges and other amounts assessed against the holder of the
insurance policies and annuity contracts. Other life premiums are
recognized as revenues when due. Health premiums are recognized as
revenues over the premium paying period.
Premiums for the VA and VL products are directed by the policyholder
to be invested generally in a unit trust solely for the benefit and
risk of the policyholder. Such investments are considered a "separate
account." Policyholder's accounts are charged for the cost of
insurance provided, administrative and certain other charges. The
amounts included in the balance sheet as policy reserves for the VA
and VL products represent the current value of the policyholders'
funds.
(h) Policy Acquisition Costs: Policy acquisition costs principally
------------------------
consist of direct response marketing costs, commissions, premium taxes
and other underwriting expenses (net of reinsurance allowances). If
recoverability of such costs is not anticipated, the amounts not
considered recoverable are charged to operations. During the three
years ended December 31, 1993, the Company has also written-off or
reduced deferred policy acquisition costs in connection with
dispositions of blocks of business or reinvestment of proceeds from
security sales at the lower prevailing interest rates.
Policy acquisition costs applicable to the property and casualty
insurance operations are deferred and amortized ratably over the terms
of the related policies.
Policy acquisition costs applicable to IOP products are deferred and
amortized as a level percentage of the present value of expected gross
profits over the estimated life of each policy. The Company regularly
compares its actual experience to the previously expected gross profit
and reviews revised estimates of expected future gross profits. When
significant changes occur, deferred policy acquisition costs are
recalculated and the resultant adjustment is reflected in results of
operations.
Policy acquisition costs applicable to other life insurance products
are amortized over the expected premium paying period of the policies.
(i) Reinsurance: In the normal course of business, the Company seeks
-----------
to reduce the loss that may arise from catastrophes or other events
that cause unfavorable underwriting results by reinsuring certain
levels of risk in various areas of exposure with other insurance
enterprises or reinsurers. The Company has also entered into
reinsurance transactions in connection with dispositions of blocks of
businesses. Reinsurance contracts do not necessarily relieve the
Company from its obligations to policyholders.
Prior to January 1, 1993, losses, loss adjustment expenses and
unearned premiums were stated net of reinsurance ceded, as were
premiums earned and other underwriting expenses. Under SFAS 113,
which was adopted as of January 1, 1993, the effects of certain
reinsurance transactions are no longer deducted from the related asset
or liability. As a result of adoption of SFAS 113, at December 31,
1993 certain assets (principally
F-9
1. Significant Accounting Policies, continued:
-------------------------------
reinsurance receivables) and policy reserves were each greater by
approximately $457,621,000, representing reinsured amounts that prior
to the adoption of SFAS 113 would have been deducted from the related
asset or liability. Under SFAS 113 and the prior accounting, appropriate
provisions are made for uncollectible reinsurance receivables. Although
SFAS 113 did not have a material effect on results of operations, it is
likely to affect the way certain new reinsurance transactions or
extensions or amendments of existing reinsurance contracts are reported.
(j) Policy Reserves and Unearned Premiums: Policy reserves and
-------------------------------------
unearned premiums for life, health and traditional annuity policies
are computed on a net level premium method based upon standard and
Company developed tables with provision for adverse deviation and
estimated withdrawals. Liabilities for unpaid losses and loss
adjustment expenses applicable to the property and casualty insurance
operations are determined using case basis evaluations, statistical
analyses for losses incurred but not reported and estimates for
salvage and subrogation recoverable and represent estimates of
ultimate claim costs and loss adjustment expenses.
Effective as of January 1, 1993, the Company adopted EITF 93-6 which
specifies the accounting for certain retrospectively rated reinsurance
agreements. EITF 93-6 is applicable to a small number of per risk,
excess of loss reinsurance policies entered into in the normal course
of the Empire Insurance Company and subsidiaries' (the "Empire Group")
property and casualty insurance business. As a result of the adoption
of EITF 93-6, the Company (retroactive to January 1, 1993) reduced its
policy reserves at January 1, 1993 by approximately $14,654,000 and
recorded a credit of approximately $9,672,000 (net of income taxes of
$4,982,000) which is included in the caption "Cumulative effects of
changes in accounting principles." If the accounting specified by
EITF 93-6 had been in effect in 1992 and 1991, the resulting increase
in income before cumulative effects of changes in accounting
principles for each of those years would not have been material.
(k) Trading Stamp Revenue and Liability for Unredeemed Trading Stamps:
-----------------------------------------------------------------
The Company records trading stamp revenues and provides for the cost
of redemptions at the time trading stamps are furnished to licensees.
A liability for unredeemed trading stamps is estimated based upon the
cost of merchandise, cash and related redemption service expenses
required to redeem the trading stamps which are expected to be
presented for redemption in the future. The Company periodically
reviews the appropriateness of the estimated redemption rates based
upon recent experience, statistical evaluations and other relevant
factors. The most recent statistical studies of trading stamp
redemptions have indicated that the historical pattern of redemptions
has changed and that the recorded liability for unredeemed trading
stamps is in excess of the amount that ultimately will be required to
redeem trading stamps outstanding. Although the Company believes a
significant change in redemption patterns has occurred, the amount of
the excess may be different than indicated by these studies.
Accordingly, the Company is amortizing the aggregate apparent excess
over a five year period (starting in 1990 with respect to
approximately $34,000,000 of such apparent excess and in 1991 with
respect to approximately $28,000,000 of such apparent excess). As a
result, after giving effect to related adjustments, cost of goods sold
applicable to the trading stamp operations reflects a credit of
approximately $11,900,000, $14,100,000 and $13,700,000 for the years
ended December 31, 1993, 1992 and 1991, respectively. Based on the
latest studies the unamortized apparent excess at December 31, 1993
was approximately $17,067,000. The Company provided the liability for
unredeemed trading stamps based on the estimate that approximately 75%
of stamps issued in each of the three years ended December 31, 1993
ultimately will be redeemed.
(l) Motivation Services Revenues: Motivation services revenues are
----------------------------
generally recorded when awards are redeemed or travel programs are
completed. Customer deposits for travel programs and the Company's
related costs are deferred until such programs are completed. In
early 1993, the Company contributed the net assets of the motivation
service business to a new joint venture formed with an unrelated
motivation services company in exchange for a 45% equity interest in
the joint venture. Results of operations of the motivation services
business have historically not been significant and are not expected
to be significant in the future.
F-10
1. Significant Accounting Policies, continued:
-------------------------------
(m) Pension, Postemployment and Postretirement Costs: There are
------------------------------------------------
non-contributory trusteed pension plans, which cover certain
employees, which generally provide for retirement benefits based on
salary and length of service. The plans are funded in amounts
sufficient to satisfy minimum ERISA funding requirements.
Certain subsidiaries provide health care and other benefits to certain
eligible retired employees. The plans (most of which require employee
contributions) are unfunded. Prior to January 1, 1993, the costs of
such benefits were expensed generally as incurred, although
liabilities for benefits were recorded in connection with certain
acquisitions, including that of Colonial Penn and the Phlcorp Minority
Interest. Effective as of January 1, 1993, the Company adopted SFAS
106 and SFAS 112 which require companies to accrue the cost of
providing certain postretirement and postemployment benefits during
the employees' period of service. The Company does not expect SFAS
106 and SFAS 112 to have a material effect on results of continuing
operations exclusive of cumulative effects of changes in accounting
principles.
(n) Income Taxes: The Company and its domestic subsidiaries, other
------------
than (i) Phlcorp and its subsidiaries prior to January 1, 1993 and
(ii) the life insurance subsidiaries of Colonial Penn (acquired in
1991, as described below), file a consolidated federal income tax
return. Prior to January 1, 1993, Phlcorp filed a consolidated
federal income tax return with its subsidiaries that are not life
insurance companies. The life insurance subsidiaries of Colonial Penn
file separate or consolidated federal income tax returns. In
addition, certain subsidiaries are subject to foreign income taxes.
The Company provides for income taxes using the liability method.
Effective as of January 1, 1993, the Company adopted SFAS 109. Prior
to adoption of SFAS 109, the benefit from utilization of tax loss
carryforwards and future deductions was only recognized when utilized
and under certain other limited circumstances. Under SFAS 109, the
future benefit of certain tax loss carryforwards and future deductions
is recorded as an asset (net of valuation allowance) and the provision
for income taxes for periods ending after December 31, 1992 is not
reduced for the benefit from utilization of tax loss carryforwards.
Accordingly, the provision for income taxes for periods ended in 1993
is not comparable to provisions for income taxes for periods ended in
1992 and 1991. Under the liability method, deferred income taxes are
provided at the statutorily enacted rates for differences between the
tax and accounting bases of substantially all assets and liabilities
and for carryforwards. A valuation allowance is provided (and
periodically reevaluated) if deferred tax assets are not considered
more likely than not to be realized.
(o) Translation of Foreign Currency: Foreign currency denominated
-------------------------------
investments which are not subject to hedging agreements and currency
rate swap agreements not meeting the accounting requirements for
"hedges," are converted into U.S. dollars at exchange rates in effect
at the end of the period. Resulting net exchange gains or losses were
not material.
2. Acquisitions:
------------
Through November 1991, the Company owned approximately 66% of the
outstanding common shares of Phlcorp. During 1991 outstanding
warrants to acquire approximately 8% of Phlcorp's shares were
exercised by other parties at an aggregate purchase price of
approximately $14,782,000. After giving effect to certain purchases
by the Company, the Company owned approximately 63% of Phlcorp's
outstanding common shares at December 31, 1991 and throughout most of
1992. On December 31, 1992, pursuant to a merger agreement, Phlcorp
merged with a subsidiary of the Company and became a wholly owned
subsidiary of the Company (the "Merger"). Pursuant to the terms of
the Merger, the Company issued .812 of a Common Share for each Phlcorp
share not held by the Company or its subsidiaries (an aggregate of
approximately 4,408,000 of the Company's Common Shares). The
aggregate cost of acquiring the Phlcorp Minority Interest (principally
based
F-11
2. Acquisitions, continued:
------------
on the market price of the Company's Common Shares on the day
immediately prior to entering into an agreement in principle as to the
terms of the transaction) was approximately $142,927,000.
The Company is a partner in The Jordan Company and Jordan/Zalaznick
Capital Company, private investment firms whose principal activity is
structuring leveraged buy-outs in which the partners are given the
opportunity to become equity participants. John W. Jordan II, a
director of the Company and a significant shareholder, is a Managing
Partner of both firms. Since 1982, through such partnerships, the
Company acquired interests in several companies (the "Jordan
Associated Companies"), principally engaged in various aspects of
manufacturing and distribution. The Company currently accounts for
its interests in fourteen of the Jordan Associated Companies on the
cost method of accounting and one company (which is not material to
the Company) on the equity method of accounting. The investments
acquired as a result of the partnership interests are considered
Associated Companies.
On August 16, 1991, the Company, through its wholly owned subsidiary,
Charter National Life Insurance Company ("Charter National"),
completed the acquisition of Colonial Penn for an aggregate cash
purchase price of approximately $128,000,000, including costs. The
Company also made a subsequent $40,000,000 investment in Colonial
Penn's principal property and casualty insurance subsidiary. Colonial
Penn is a holding company, principally for life and property and
casualty insurance companies specializing in direct marketing of
personal lines of insurance primarily to individuals over the age of
50. Colonial Penn's principal property and casualty insurance
subsidiary also previously wrote certain commercial property and
casualty insurance.
At the acquisition date, after giving effect to a cash contribution by
the seller prior to the closing of approximately $49,827,000, Colonial
Penn had (unaudited) shareholder's equity, determined in accordance
with generally accepted accounting principles, of approximately
$391,000,000 (approximately $263,000,000 in excess of the purchase
price). The allocation of the purchase price reflected the
elimination of deferred policy acquisition costs, value of insurance
in force and property and equipment, and additional amounts for
employee severance, postretirement benefits, relocation, lease
commitments, restructuring costs and additional reserves for
policyholders' benefits. Colonial Penn is included in results of
operations from its date of acquisition, August 16, 1991.
For the period from date of acquisition to December 31, 1991, Colonial
Penn had revenues of approximately $359,088,000 (including net
security gains of approximately $16,323,000) and contributed
approximately $59,995,000 to consolidated pre-tax income (exclusive of
financing costs). For the year ended December 31, 1992, Colonial Penn
had revenues of approximately $836,552,000 (including net security
gains of approximately $23,543,000) and contributed approximately
$131,757,000 to consolidated pre-tax income (exclusive of financing
costs). Due to changes in the Company's insurance operations, it is
not practicable to provide meaningful comparable information for the
acquired Colonial Penn operations for 1993. The following table
provides certain unaudited consolidated pro forma results of
operations data assuming the acquisition of Colonial Penn and the
Phlcorp Minority Interest had occurred on January 1, 1991. (Amounts
are in thousands, except per share amounts.)
For the Year Ended December 31,
-------------------------------
1992 1991
---- ----
Revenues $1,573,015 $1,826,875
Income before income taxes $ 163,417 $ 153,329
Income taxes $ 12,946 $ 1,200
Net income $ 150,471 $ 152,129
Per share:
Primary $5.22 $5.41
Fully diluted $5.20 $5.37
F-12
2. Acquisitions, continued:
------------
The principal pro forma adjustments related to Colonial Penn reflected
in the data above consist of elimination and/or reduction of (i)
amortization and depreciation of deferred policy acquisition costs,
value of insurance in force, goodwill and fixed assets, (ii) rent
expense applicable to excess facilities and, (iii) with respect to
1991, income taxes. Such pro forma data also provides for the cost of
financing the acquisition.
The effects of certain cost savings programs implemented by the
Company since the acquisition of Colonial Penn are reflected only to
the extent included in the consolidated historical results of
operations. The reduction in new business solicitation effort which
has been accomplished by the Company since the acquisition was
expected to, and has, resulted in a substantial reduction in new
business and premium revenues. Colonial Penn's annualized written
premiums related to new business generated were approximately
$24,563,000 for 1992 compared to $111,277,000 for 1991. However, the
effect on operating earnings of such reduction in new business
solicitation efforts cannot be reasonably estimated and is not
reflected in the pro forma data above. Accordingly, such pro forma
data should not necessarily be considered indicative of future results
of operations or the results of operations that would have resulted if
the acquisitions had actually occurred as reflected in the pro forma
data.
3. Investments in Associated Companies:
-----------------------------------
The Company owns or held part interests in the following foreign power
companies: Compania de Alumbrado Electrico de San Salvador, S.A.
("CAESS"), Compania Boliviana de Energia Electrica, S.A. - Bolivian
Power Company Limited ("Bolivian Power") and, through Canadian
International Power Company Limited Liquidating Trust, The Barbados
Light and Power Company Limited.
In March 1993, in settlement of claims related to El Salvador's 1986
seizure of CAESS's assets, the Company received cash of approximately
$5,300,000 and approximately $12,000,000 principal amount of 6% U.S.
dollar denominated El Salvador Government bonds due in instalments
through 1996. The Company, which had an investment in CAESS of
$8,188,000 at December 31, 1992, will recognize the gain on the cash
basis. Payments of principal and interest are being made in
accordance with their terms. Recognized gains in 1993 were not
significant. During 1994, the Company disposed of the bonds and will
report a pre-tax gain of $8,458,000 in first quarter 1994 results of
operations.
During 1993 the Company sold 750,000 shares of Bolivian Power common
stock in an underwritten public offering and realized a pre-tax gain
of approximately $12,981,000, which is reflected in 1993 results of
operations in the caption, "Investment and other income." At December
31, 1993, the Company owned 719,206 shares of Bolivian Power common
stock.
The Company believes that it ultimately will receive the stock of two
WMAC Companies, which are the only additional companies expected to be
returned to the Company with significant value. However, the timing
of such receipt is uncertain. The Company estimates that the fair
value to the Company of the net tangible assets yet to be received is
approximately $32,800,000 in excess of their recorded cost at December
31, 1993.
4. Insurance Operations:
--------------------
SPWL and SPDA policies generally provide the policyholder with a
declared rate of cash value increase for a specified initial period
and subsequent annual rates as determined by the Company, generally
subject to minimum rates; the policyholder is generally subject to
early termination penalties designed to recover unamortized policy
acquisition costs.
F-13
4. Insurance Operations, continued:
--------------------
Premiums received on IOP products amounted to approximately
$88,312,000, $68,035,000 and $43,164,000 for the years ended December
31, 1993, 1992 and 1991, respectively.
The changes in deferred policy acquisition costs and value of
insurance in force were as follows (in thousands):
1993 1992 1991
---- ---- ----
Balance, January 1, $ 78,895 $ 82,982 $ 76,037
--------- -------- --------
Additions 81,746 77,448 56,058
--------- -------- --------
Included in provision for insurance
losses and policy benefits:
Provided in connection with
disposition and/or transfers
of business (29,748) (9,130) -
Provided in connection with
sales of securities - (2,100) -
Other amortization (71,702) (70,305) (49,113)
--------- -------- --------
(101,450) (81,535) (49,113)
--------- -------- --------
Adoption of SFAS 109 (3,781) - -
--------- -------- --------
Balance, December 31, $ 55,410 $ 78,895 $ 82,982
========= ======== ========
During 1992, the Company concluded that the profitability of its
existing block of SPDA business was unlikely to achieve acceptable
results in the future. Accordingly, principally starting in the
fourth quarter of 1992, the Company offered certain of its existing
SPDA policyholders' the opportunity to exchange their policies for
SPDA policies of an unrelated insurer and entered into a reinsurance
agreement (which closed in stages in 1992 and 1993) to reinsure
certain blocks of SPDA business with a second unrelated insurer. As a
result, during the fourth quarter of 1992, policies with an aggregate
policyholders' account balance of approximately $196,648,000 were
either terminated by the policyholder, transferred at the
policyholder's request or transferred in a reinsurance transaction.
In the 1993 transactions, which involved reinsurance of policies with
account balances of approximately $47,187,000 on the date of closing,
there was no significant gain or loss.
The Company is maximizing the return on any remaining SPDA policies by
reducing crediting rates to the minimum permitted. As a result, the
Company believes a substantial portion of the remaining SPDA
policyholders will terminate their policies over a period of time.
On June 23, 1993, the Company reinsured substantially all of its
existing SPWL business with a subsidiary of John Hancock Mutual Life
Insurance Company ("John Hancock"). In connection with the
transaction, the Company realized a net pre-tax gain of approximately
$16,700,000 during 1993. Such net pre-tax gain consists of net gains
on sales of investments sold in connection with the transaction
(approximately $24,100,000), which are included in the caption "Net
securities gains," reduced by a net loss of approximately $7,400,000
(principally the write-off of deferred policy acquisition costs of
approximately $26,900,000 less the premium received on the
transaction) which is included in the caption "Provision for insurance
losses and policy benefits." Further, the Company may receive
additional consideration based on the subsequent performance of this
block of business.
Under SFAS 113, for financial reporting purposes, the Company will
reflect the policy liabilities assumed by John Hancock (in policy
reserves), with an offsetting receivable from John Hancock of the
same amount (in reinsurance receivable, net), until the Company is
relieved of its legal obligation to the SPWL policyholders. During
1993, the Company was legally relieved of SPWL policy liabilities
of approximately $200,096,000.
During the three years ended December 31, 1993, the Company sold, at
gains, substantial amounts of investments (including dispositions in
connection with the actual or contemplated transfer of blocks of
business) and, in certain cases, reinvested proceeds at the lower
prevailing interest rates. Since certain of these rates
F-14
4. Insurance Operations, continued:
--------------------
were lower than had previously been expected on certain fixed rate
annuity policies, the Company provided additional reserves of
approximately $6,800,000 in 1993, $2,700,000 in 1992 and $8,800,000 in
1991. In addition, because of the lower anticipated investment
earnings, the Company also recalculated deferred policy acquisition
costs and provided additional amounts for amortization of deferred
policy acquisition costs of $2,100,000 in 1992.
The amount deducted from insurance loss and policy reserves for
reinsured risks was approximately $179,391,000 at December 31, 1992.
The effect of reinsurance on premiums written and earned for the year
ended December 31, 1993 is as follows (in thousands):
Premiums Premiums
Written Earned
-------- --------
Direct $930,424 $893,797
Assumed 34,102 33,628
Ceded (33,191) (33,575)
-------- --------
Net $931,335 $893,850
======== ========
Recoveries recognized on reinsurance contracts were approximately
$22,800,000 in 1993.
Net income and statutory surplus as determined in accordance with
statutory accounting principles as reported to the domiciliary state
of the Company's insurance subsidiaries are as follows (in thousands):
Year Ended December 31,
-----------------------
1993 1992 1991
---- ---- ----
Net income (loss):
Property and casualty insurance $ 96,279 $ 51,108 $ 11,099
Life insurance $ (2,951) $ 16,187 $(24,561)
At December 31,
---------------
1993 1992 1991
---- ---- ----
Statutory surplus:
Property and casualty insurance $475,408 $378,816 $328,725
Life insurance $303,986 $234,058 $207,358
Certain insurance subsidiaries are owned by other insurance
subsidiaries. In the data above, investments in such subsidiary-owned
insurance companies are reflected in statutory surplus of both the
parent and subsidiary-owned insurance company. As a result, at
December 31, 1993 and 1992, statutory surplus of approximately
$288,800,000 and $122,000,000, respectively, related to property and
casualty operations is included in the statutory surplus of the life
insurance parent and the property and casualty insurance subsidiary,
and statutory surplus of approximately $42,200,000 and $38,000,000,
respectively, related to life operations is included in the statutory
surplus of the property and casualty insurance parent and the life
insurance subsidiary. The insurance subsidiaries are subject to
regulatory restrictions which limit the amount of cash and other
distributions available to the Company without regulatory approval.
At December 31, 1993, approximately $33,200,000 could be distributed
to the Company without regulatory approval.
F-15
4. Insurance Operations, continued:
--------------------
The Company's insurance subsidiaries are members 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 Company's insurance subsidiaries
have been assessed certain amounts and are likely to be assessed
additional amounts by the state insurance funds. The Company has
provided for all anticipated assessments and does not expect any
additional assessments to have a material effect on results of
operations.
The Colonial Penn property and casualty insurance subsidiaries are
subject to a possible rate "roll-back" refund on California insurance
premiums for certain pre-acquisition years. The amount of such
roll-back refunds are to be determined by the California Insurance
Commissioner. The Company has not been notified of the amount, if
any, of such roll-back refund. Based on its operating results in the
relevant years, the Company believes Colonial Penn should not be
assessed for any roll-back refund and, if assessed a significant
amount, intends to vigorously oppose such determination. In addition,
New Jersey's insurance laws require all automobile insurers to share
in the losses of the successor (the "MTF") to its insurance pool for
high risk drivers (the "JUA"), based on their depopulation share of
the JUA, as set by New Jersey. Although the amount of the MTF deficit
has not yet been established, based on certain current estimates
(which are subject to change) of the MTF deficit, Colonial Penn could
be assessed approximately $11,100,000, which has been accrued. For
1993, voluntary automobile net earned premiums in California and New
Jersey together represented approximately 10% of the Company's total
property and casualty net earned premiums.
5. Investments:
-----------
Certain information with respect to investments (other than short-
term) at December 31, 1993 is as follows (in thousands):
Amortized Carrying
Cost Market Amount
---------- ---------- ---------
Investments held to maturity $ 74,796 $ 77,243 $ 74,796
Investments available for sale 2,447,180 2,524,493 2,524,493
Trading securities 40,578 41,984 41,984
Policyholder loans 18,138 18,138 18,138
Other 3,162 3,164 3,156
Accrued interest income 35,403 35,403 35,403
---------- ---------- ----------
$2,619,257 $2,700,425 $2,697,970
========== ========== ==========
F-16
5. Investments, continued:
-----------
The amortized cost and estimated market value of investments
classified as held to maturity and investments classified as available
for sale at December 31, 1993 are as follows (in thousands):
Gross Gross
Unrealized Unrealized Estimated
Amortized Holding Holding Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
Held to maturity:
Bonds and notes:
United States Government
agencies and authorities $55,556 $2,470 $61 $57,965
States, municipalities
and political subdivisions 2,175 45 - 2,220
All other corporates 477 - 7 470
Other fixed maturities 16,588 - - 16,588
------- ------ --- -------
$74,796 $2,515 $68 $77,243
======= ====== === =======
Available for sale:
Bonds and notes:
United States Government
agencies and authorities $1,924,697 $43,756 $2,806 $1,965,647
States, municipalities
and political subdivisions 68,469 896 70 69,295
Foreign governments 9,726 3,914 15 13,625
Public utilities 117,927 4,769 694 122,002
All other corporates 307,420 21,057 751 327,726
Preferred stock (non-equity) 392 2 26 368
---------- ------- ------ ----------
Total fixed maturities 2,428,631 74,394 4,362 2,498,663
Equity securities 18,549 7,774 493 25,830
---------- ------- ------ ----------
$2,447,180 $82,168 $4,855 $2,524,493
========== ======= ====== ==========
The amortized cost and estimated market value of investments
classified as held to maturity and investments classified as
available for sale at December 31, 1993, by contractual maturity are
shown below. Expected maturities are likely to differ from
contractual maturities because borrowers may have the right to call or
prepay obligations with or without call or prepayment penalties.
Held to Maturity Available For Sale
---------------- -----------------------------
Estimated Estimated
Amortized Market Amortized Market
Cost Value Cost Value
--------- -------- --------- ---------
(In thousands)
Due in one year or less $30,840 $30,880 $ 209,558 $ 215,065
Due after one year
through five years 32,742 34,726 1,098,084 1,128,778
Due after five years
through ten years 4,190 4,418 364,952 379,454
Due after ten years 2,422 2,638 97,773 102,783
------- ------- ---------- ----------
70,194 72,662 1,770,367 1,826,080
Mortgage-backed securities 4,602 4,581 658,264 672,583
------- ------- ---------- ----------
$74,796 $77,243 $2,428,631 $2,498,663
======= ======= ========== ==========
F-17
5. Investments, continued:
-----------
Certain information with respect to investments (other than short-
term) at December 31, 1992 is as follows (in thousands):
Amortized Carrying
Cost Market Amount
---------- ---------- ----------
Equity securities:
Common stock $ 7,630 $ 10,827 $ 8,038
Preferred stock 2,152 2,217 2,217
---------- ---------- ----------
Total equity securities 9,782 13,044 10,255
Fixed maturities 2,327,765 2,380,952 2,327,765
Policyholder loans 119,612 119,612 119,612
Other 2,205 1,770 1,770
Accrued interest income 36,259 36,259 36,259
Investments held for sale 205,364 211,667 205,364
---------- ---------- ----------
$2,700,987 $2,763,304 $2,701,025
========== ========== ==========
The amortized cost and estimated market value of fixed maturity
investments (other than investments held for sale) at December 31,
1992 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ---------- ---------- ---------
Bonds and notes:
United States Government
agencies and authorities $1,720,936 $38,408 $3,948 $1,755,396
States, municipalities
and political subdivisions 23,709 1,468 388 24,789
Foreign governments 53,137 3,438 25 56,550
Public utilities 115,681 4,711 349 120,043
All other corporates 379,762 11,524 1,652 389,634
Preferred stock (non-equity) 3,194 - - 3,194
Other 31,346 - - 31,346
---------- ------- ------ ----------
$2,327,765 $59,549 $6,362 $2,380,952
========== ======= ====== ==========
The amortized cost and estimated market value of investments held for
sale at December 31, 1992 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Market
Cost Gains Losses Value
--------- ----------- ---------- ---------
Bonds and notes:
United States Government
agencies and authorities $181,435 $4,937 $642 $185,730
Public utilities 11,484 550 - 12,034
All other corporates 12,445 1,461 3 13,903
-------- ------ ---- --------
$205,364 $6,948 $645 $211,667
======== ====== ==== ========
Gross unrealized gains and losses on the Company's marketable equity
securities were $3,366,000 and $104,000, respectively, at December 31,
1992.
At December 31, 1993 and 1992 securities with book values aggregating
approximately $55,145,000 and $39,469,000, respectively, were on
deposit with various regulatory authorities.
F-18
5. Investments, continued:
-----------
At December 31, 1993, the Company had common stock equity interests of
5% or more in the following domestic publicly owned non-consolidated
companies, some of which are Associated Companies: Carmike Cinemas,
Inc. (approximately 9% of Class A shares), Jones Plumbing Systems,
Inc. (approximately 21%) and Olympus Capital Corporation
(approximately 18%).
6. Receivables, Net:
----------------
A summary of trade, notes and other receivables, net at December 31,
1993 and 1992 is as follows (in thousands):
1993 1992
---- ----
Instalment loan receivables net of unearned
finance charges of $5,858 and $3,281 (a) $187,694 $149,128
Loans to small business concerns, including
accrued interest 18,050 20,424
Agents' balances and premiums receivable 154,201 107,270
Amount due on sale of securities 2,513 523
Trade receivables 26,258 35,830
Zero Coupon Note receivable from
John W. Jordan II, net of discount (b) - 7,874
El Salvador Government bonds receivable,
net of deferred gain 1 -
Premium tax receivable 399 3,910
Other 14,804 13,562
-------- --------
403,920 338,521
Allowance for doubtful accounts (including
$8,341 and $6,973 applicable to loan
receivables of banking and lending
subsidiaries) (13,526) (12,067)
-------- --------
$390,394 $326,454
======== ========
[FN]
(a) Contractual maturities of instalment loan receivables at December
31, 1993 were as follows (in thousands): 1994 - $102,524; 1995 -
$39,598; 1996 - $21,674; 1997 - $13,942 and 1998 and thereafter -
$9,956. Experience shows that a substantial portion of such notes
will be repaid or renewed prior to contractual maturity. Accordingly,
the foregoing is not to be regarded as a forecast of future cash
collections.
(b) On June 1, 1993, Mr. Jordan delivered to the Company 224,175 of
the Company's Common Shares valued at $8,294,000 (the maturity value
of the zero coupon note, after reflecting certain prepayments) as
payment in full of the zero coupon note. The Common Shares were
valued at $37.00 per share, the closing price of a Common Share on the
New York Stock Exchange Composite Tape on the last full trading day
prior to the authorization by the Company's Board of Directors of the
agreement. Interest and other income recognized in connection with
the note was $420,000 for 1993, $929,000 for 1992 and $819,000 for
1991.
During 1992, the Company sold substantially all of its consumer loan
development offices (which offices had aggregate instalment loan
receivables at the time of sale of approximately $68,500,000) and
realized pre-tax gains of approximately $12,128,000 in connection with
the sales. Such gains are included in 1992 results of operations in
the caption, "Investment and other income."
Reinsurance receivables are net of allowance for doubtful accounts of
approximately $83,825,000 and $43,799,000 at December 31, 1993 and
1992, respectively. Amounts due from reinsurers for 1993 were
reclassified in accordance with SFAS 113 resulting in the apparent
increase in the allowance for doubtful reinsurance receivables. Had
the prior accounting been in effect, reinsurance receivables would
have been reduced by approximately $457,621,000 at December 31, 1993.
At December 31, 1993, reinsurance receivables, net includes
approximately $322,351,000 due from a subsidiary of John Hancock.
F-19
7. Prepaids and Other Assets:
-------------------------
At December 31, 1993 and 1992, a summary of prepaids and other assets
is as follows (in thousands):
[CAPTION]
1993 1992
---- ----
Inventories $ 34,817 $ 36,432
Real estate assets, net 30,443 28,419
Excess of acquisition cost over
net tangible assets acquired(*) 3,508 35,518
Amounts related to the WMAC Companies, at cost 24,051 23,348
Balances in risk sharing pools and associations 27,231 19,697
Prepaid reinsurance premium 2,639 38
Net pension asset 2,712 4,068
Unamortized debt expense 8,024 3,967
Other 28,016 23,357
-------- --------
$161,441 $174,844
======== ========
(*) Approximately $29,700,000 of the December 31, 1992 amount was
eliminated upon adoption of SFAS 109.
8. Trade Payables, Expense Accruals and Other Liabilities:
------------------------------------------------------
A summary of trade payables, expense accruals and other liabilities at
December 31, 1993 and 1992 is as follows (in thousands):
1993 1992
---- ----
Trade Payables and Expense Accruals:
Payables related to securities $ 32,393 $ 378
Amount due on reinsurance 11,671 22,988
Trade and drafts payable 35,134 43,891
Accrued compensation, severance and other
employee benefits 17,566 16,266
Accrued interest payable 8,950 4,012
Taxes, other than income 23,152 13,134
Provision for servicing carrier claims 13,159 9,761
Other 22,508 20,692
-------- --------
$164,533 $131,122
======== ========
Other Liabilities:
Lease obligations $ 12,783 $ 13,195
Customer deposits, rebates and contract adjustments 1,158 13,969
Due for purchase of Empire common shares 11,732 11,882
Recorded liability for postretirement and
postemployment benefits 26,947 15,426
Unearned service fees 12,905 9,482
Premiums received in advance 6,032 8,107
Holdbacks on loans 7,083 6,967
Unclaimed funds and dividends 4,474 5,053
Liability for stock not tendered 8,245 4,382
Other 19,037 24,781
-------- --------
$110,396 $113,244
======== ========
F-20
9. Long-term and Other Indebtedness:
--------------------------------
The principal amount, stated interest rate and maturity of long-term
debt outstanding at December 31, 1993 and 1992 are as follows (dollars
in thousands):
1993 1992
---- ----
Senior Notes:
Credit agreements $ - $ -
Term loans with banks, due in 1994 21,250 35,000
7 3/4% Senior Notes due in 2013, less debt
discount of $981 99,019 -
Industrial Revenue Bonds (principally with
variable interest) 8,058 8,604
Other 15,844 24,913
-------- --------
144,171 68,517
-------- --------
Subordinated Notes:
10 3/8% Senior Subordinated Notes due 2002,
less debt discount of $793 and $886 124,207 124,114
6% Swiss Franc Bonds due March 10, 1996
("Swiss Franc Bonds") 32,957 32,957
5 1/4% Convertible Subordinated Debentures due 2003 100,000 -
-------- --------
257,164 157,071
-------- --------
$401,335 $225,588
======== ========
Credit agreements provide for aggregate contractual credit facilities
of $150,000,000 at December 31, 1993 and bear interest based on the
prime rate or LIBOR, plus commitment and other fees. Such credit
facilities were renewed in 1994 to expire in 1997.
Approximately $16,717,000 of the manufacturing division's net
property, equipment and leasehold improvements are pledged as
collateral for the Industrial Revenue Bonds; and approximately
$2,727,000 of other property is pledged for other indebtedness
aggregating approximately $1,171,000.
The Company has interest rate swap agreements with a bank which expire
in 1996, the practical effect of which is to convert the variable
interest rate on $50,000,000 of indebtedness into fixed interest rate
obligations at an interest rate of approximately 8%.
During 1989, the Company entered into long-term hedging transactions
whereby substantially all currency rate risk related to the Swiss
Franc Bonds for their remaining term was eliminated and the cost of
which increased the cost of the issue to approximately 10.4%.
In February 1993, the Company sold $100,000,000 principal amount of
its newly authorized 5 1/4% Convertible Subordinated Debentures due
2003 (the "Convertible Debentures") in an underwritten public
offering. The Convertible Debentures are convertible into Common
Shares at $57.50 per Common Share (an aggregate of 1,739,130 Common
Shares), subject to anti-dilution provisions.
In August 1993, the Company sold $100,000,000 principal amount of its
newly authorized 7 3/4% Senior Notes due 2013 (at 99% of principal
amount) in an underwritten public offering.
The most restrictive of the Company's debt instruments requires
maintenance of minimum Tangible Net Worth, as defined, and limit
Indebtedness, as defined, to a percentage of Tangible Net Worth and
Subordinated
F-21
9. Long-term and Other Indebtedness, continued:
--------------------------------
Indebtedness, as defined. In addition, the debt instruments contain
limitations on dividends, investments, liens, contingent obligations
and certain other matters. As of January 1, 1994, cash dividends of
approximately $180,600,000 could be paid under the most restrictive
covenants.
The aggregate annual mandatory redemptions of debt during the five
year period ending December 31, 1998 (exclusive of Credit Agreements)
are as follows (in thousands): 1994 - $28,821; 1995 - $3,013; 1996 -
$35,246; 1997 - $1,017; and, 1998 - $872.
10. Common Shares, Stock Options, Warrants and Preferred Shares:
-----------------------------------------------------------
On July 14, 1993, the shareholders approved an increase in authorized
Common Shares from 60,000,000 to 150,000,000.
The Board of Directors from time to time has authorized acquisitions
of the Company's Common Shares. Pursuant to such authorization,
during the three year period ended December 31, 1993, the Company
acquired 496,031 Common Shares (282,409 in 1993, 110,800 shares in
1992 and 102,822 shares in 1991) at an average price of $30.26 per
Common Share. The Common Shares acquired in 1993, include 224,175
Common Shares acquired from John W. Jordan II.
A summary of activity with respect to the Company's stock options for
the three years ended December 31, 1993 is as follows:
Available
Common For
Shares Total Future
Subject Option Option Option
To Option Prices Price Grants
--------- ------ ------ --------
Balance at January 1, 1991 1,600,878 $ 4.97-$11.00 $13,134,392 211,900
=======
Granted 446,500 $12.25 5,469,625
Exercised (385,296) $ 4.97-$11.00 (2,337,265)
Cancelled (127,584) $ 5.03-$12.25 (1,217,449)
--------- -----------
Balance at December 31, 1991 1,534,498 $ 4.97-$12.25 15,049,303 292,984
=======
Granted 46,000 $22.50-$33.50 1,315,000
Exercised (641,130) $ 4.97-$12.25 (5,520,662)
Cancelled (79,700) $ 7.88-$12.25 (916,869)
--------- -----------
Balance at December 31, 1992 859,668 $ 7.88-$33.50 9,926,772 970,000
=======
Granted 176,500 $40.88-$43.00 7,231,938
Exercised (234,896) $ 7.69-$28.50 (2,333,357)
Cancelled (24,800) $ 7.69-$22.50 (363,350)
--------- -----------
Balance at December 31, 1993 776,472 $ 7.69-$43.00 $14,462,003 793,500
========= =========== =======
The options were granted under plans that provide for the issuance of
stock options and stock appreciation rights at not less than the fair
market value of the underlying stock at the date the options or rights
are granted. Options granted under these plans generally become
exercisable in five equal annual instalments starting one year from
date of grant; no stock appreciation rights have been granted.
At December 31, 1993 and 1992, options to purchase 221,996 and 243,904
Common Shares, respectively, were exercisable.
In January 1992, the Company redeemed certain Warrants (which
previously had been granted to the Company's Chairman and President
pursuant to shareholder approval) for an aggregate cash payment of
F-22
10. Common Shares, Stock Options, Warrants and Preferred Shares,
-----------------------------------------------------------
continued:
approximately $14,700,000, which amount was charged to additional
paid-in capital. In January 1992, pursuant to subsequent approval of
the shareholders, warrants to purchase 800,000 Common Shares at
$20.188 (the then market value of the Company's shares) per Common
Share through January 10, 1997 were granted to each of the Company's
Chairman and President. The warrants granted in 1992 became
exercisable on April 1, 1993.
At December 31, 1993 and 1992, the Company's Common Shares were
reserved as follows:
1993 1992
---- ----
Stock Options 1,569,972 1,829,668
Warrants 1,600,000 1,600,000
Convertible Debentures 1,739,130 -
--------- ---------
4,909,102 3,429,668
========= =========
At December 31, 1993 and 1992, 6,000,000 preferred shares (redeemable
and non-redeemable), par value $1 per share, were authorized.
Phlcorp, through November 1991, had warrants outstanding which were
exercisable for Phlcorp common shares at $13.425 per Phlcorp common
share. 1,203,318 of such warrants were exercised (1,176,093 in 1991,
including 74,983 exercised by the Company) prior to their expiration
in November 1991.
11. Cumulative Effects of Changes in Accounting Principles:
------------------------------------------------------
A summary of the amounts included in cumulative effects of changes in
accounting principles and related per share amounts for the year ended
December 31, 1993 is as follows (in thousands, except per share
amounts):
Per Share
---------
Fully
Amount Primary Diluted
------ ------- -------
SFAS 109 $127,152 $4.34 $4.14
SFAS 106, less income taxes of $2,298 (4,461) (.15) (.15)
SFAS 112, less income taxes of $1,632 (3,168) (.11) (.10)
EITF 93-6, less income taxes of $4,982 9,672 .33 .31
-------- ----- -----
$129,195 $4.41 $4.20
======== ===== =====
F-23
12. Net Securities Gains:
--------------------
The following summarizes net securities gains (losses) for each of the
three years in the period ended December 31, 1993 (in thousands):
1993 1992 1991
---- ---- ----
Net gains on fixed maturities:
Resulting in additional provision
for policyholder benefits $ 6,800 $ 2,700 $ 8,800
Resulting in increase in amortization
of deferred policy acquisition costs 24,100 11,230 -
Other 19,352 51,797 26,103
------- -------- -------
50,252 65,727 34,903
Provision for write-down of investments
in certain fixed maturity investments (2,000) (19,677) (7,783)
Provision for write-down of investments
in certain equity and other securities - (364) (757)
Net unrealized holding loss on trading
securities (685) - -
Gain on sale of investment in Molins PLC - - 18,437
Net gains on equity and other securities 4,356 6,092 5,591
------- -------- -------
$51,923 $ 51,778 $50,391
======= ======== =======
As a result of the realization of significant gains on sales of
securities (including dispositions in connection with the termination
or transfer of SPDA and SPWL business) and reinvestment of the
proceeds of certain dispositions at the lower prevailing interest
rates, the Company recalculated or eliminated deferred policy
acquisition costs applicable to the IOP products and provided
additional amounts for policyholder benefits applicable to certain
fixed rate products as indicated above.
Proceeds from sales of fixed maturity investments (including
securities held for sale) were approximately $1,171,574,000,
$2,421,057,000 and $1,016,645,000 during 1993, 1992 and 1991,
respectively. Gross gains of approximately $51,839,000, $70,551,000
and $50,797,000 and gross losses (including provisions for
write-downs) of approximately $3,587,000, $24,501,000 and $23,677,000
were realized on those sales during 1993, 1992 and 1991, respectively.
13. Income Taxes:
------------
As a result of adoption of SFAS 109 in 1993 the future benefit of
certain tax loss carryforwards and future deductions was recorded as
an asset (net of valuation allowance) and the provision for income
taxes for the year ended December 31, 1993 was not reduced for the
benefit from utilization of tax loss carryforwards. Adoption of SFAS
109 at January 1, 1993 was principally reflected as follows (in
thousands):
Tax benefits related to acquired companies
(utilized to eliminate acquired intangibles) $ 35,938
Tax benefits resulting from capital transactions
(credited to paid-in capital) 9,410
Other tax benefits (reflected as the cumulative
effect of a change in accounting principle) 127,152
--------
Benefit of certain tax loss carryforwards and
future deductions (net of valuation allowance)
recognized as an increase in deferred tax assets $172,500
========
F-24
13. Income Taxes, continued:
------------
The principle components of the deferred tax asset at December 31,
1993 are as follows (in thousands):
Insurance reserves and unearned premiums $ 83,051
Securities valuation reserves 7,187
Other accrued liabilities 26,260
Liability for unredeemed trading stamps 9,690
State taxes 6,421
Employee benefits and compensation 11,496
Deferred taxes on unrealized gains on investments (27,091)
Depreciation (9,480)
Policy acquisition costs 3,097
Tax loss carryforwards, net of tax sharing payments 60,310
Other, net (4,115)
--------
166,826
Valuation allowance (52,825)
--------
$114,001
========
The valuation allowance principally relates to certain acquired tax
loss carryforwards, the usage of which is subject to certain
limitations and certain other matters which may restrict the
availability of reported tax loss carryforwards. In addition, the
amounts reflected above are based on the minimum tax loss
carryforwards of Phlcorp and assume that certain proposed regulations
affecting the use of Phlcorp's tax loss carryforwards are finalized
without significant change. As described more fully herein,
substantial additional amounts may be available under certain
circumstances.
The Company believes it is more likely than not that the recorded
deferred tax asset will be realized; such realization will principally
result from taxable income generated by profitable operations.
The provision for income taxes for each of the three years in the
period ended December 31, 1993 was as follows (in thousands):
1993 1992 1991
---- ---- ----
State income taxes (principally
currently payable) $ 8,562 $ 5,847 $ 6,678
Federal income taxes:
Currently payable 16,793 19,703 4,639
Applied to reduce deferred tax asset
recorded under SFAS 109 35,254 - -
Deferred - (12,892) (8,058)
United Kingdom income taxes (principally
currently payable (refundable)) - 288 (3,059)
------- -------- -------
$60,609 $ 12,946 $ 200
======= ======== =======
F-25
13. Income Taxes, continued:
------------
The table below reconciles the "expected" statutory federal income tax
applicable to the actual income tax expense (in thousands).
1993 1992 1991
---- ---- ----
"Expected" federal income tax $61,904 $ 48,808 $ 32,310
State income taxes, net of federal
income tax benefit 5,565 3,900 4,454
Amortization of excess of acquisition
cost over net tangible assets acquired 1,154 622 616
Benefit of foreign tax credit - - (1,300)
Benefit from use of loss carryforwards - (46,796) (35,724)
Minority interest 842 7,988 5,255
Alternative minimum tax - 2,723 1,222
Amounts applicable to prior years taxes
(principally United Kingdom in 1991
and 1993) (552) (4,183) (6,514)
Effects of OBRA (defined below) (4,215) - -
Reduction in valuation reserve (4,100) - -
Other 11 (116) (119)
------- -------- --------
Actual income tax expense $60,609 $ 12,946 $ 200
======= ======== ========
The provision for income taxes for 1993 only was calculated under
SFAS 109. Accordingly, the provisions for periods ended in 1993 are
not comparable to provisions for periods ended prior to 1993.
In August 1993, the Omnibus Budget Reconciliation Act (the "OBRA") was
enacted which, among other things, increased certain corporate income
tax rates retroactive to the beginning of 1993. Under SFAS 109,
deferred income taxes are calculated at the statutory rates scheduled
to be in effect when the tax benefit is estimated to be realized.
When changes in statutory income tax rates are enacted, current and
deferred income taxes are recalculated and any resulting adjustment is
reflected in the provision for income taxes in the period in which
such legislation is enacted.
The valuation allowance applicable to the deferred income tax asset
recorded upon adoption of SFAS 109 gave effect to the possible
unavailability of certain income tax deductions. During the third
quarter of 1993 certain matters were resolved and the Company reduced
the valuation allowance, resulting in a reduction in the provision for
income taxes for the year ended December 31, 1993.
The Company estimates that if SFAS 109 had not been adopted, the
provision for income taxes for the year ended December 31, 1993 would
have been lower by, and net income (exclusive of amounts applicable to
changes in accounting principles) would have been higher by,
approximately $42,614,000 (or $1.46 per primary earnings per share and
$1.38 per fully diluted earnings per share).
As previously noted, the Company, certain of the Colonial Penn life
insurance subsidiaries and Phlcorp prior to 1993 filed consolidated
federal income tax returns with certain subsidiaries (including, with
respect to Phlcorp, the WMAC Companies). Phlcorp is included in the
Company's consolidated income tax return in 1993.
Phlcorp, in connection with its 1986 reorganization, entered into a
tax settlement agreement (the "Tax Settlement Agreement") with the
United States whereby, among other things, Phlcorp agreed that upon
utilization of certain pre-reorganization tax loss carryforwards, it
would pay 25% of any resultant tax savings to the government, subject
to certain limitations. The Tax Settlement Agreement provides that
the amount of pre-reorganization operating loss carryforwards will be
calculated by a method which, among other things, gives
F-26
13. Income Taxes, continued:
------------
consideration to the outcome of certain ruling requests made by
Phlcorp and provides that post-reorganization net operating losses
will be utilized prior to pre-reorganization operating losses in
calculating tax sharing payments. In 1991, the Internal Revenue
Service ("IRS") issued a favorable ruling on certain rulings requested
by Phlcorp. This ruling did not address all matters and, therefore,
certain matters remain unresolved. In addition, in the past, the IRS
has indicated that it disagrees with Phlcorp's reporting positions on
certain post-reorganization deductions and has suggested that such
positions violate the Tax Settlement Agreement. Because of these
uncertainties, Phlcorp is unable to state with certainty the amount of
its available carryforwards. However, Phlcorp believes that it has
minimum tax operating loss carryforwards of between $143,000,000 and
$302,000,000 at December 31, 1993. The expiration dates for Phlcorp's
carryforwards will depend on the outcome of the matters referred to
above, although it is unlikely such carryforwards will begin to expire
before 1998.
At December 31, 1993 the Company had loss carryforwards for income tax
purposes as follows (in thousands):
[CAPTION]
Year of Loss
Expiration Carryforwards
---------- -----------------
1994 $ 1,073
1995 113
1996 18,931
1997 714
1998 652
1999 1,321
2000 654
2001 621
2002 588
2003 17,509
2004 -
2005 11,651
--------
53,827
Phlcorp minimum amount, as
described above 143,000
--------
Total minimum tax loss carryforwards $196,827
========
Limitations exist under the tax law which may restrict the utilization
of the Phlcorp carryforwards subsequent to December 31, 1993 and an
aggregate of approximately $25,000,000 of non-Phlcorp tax loss
carryforwards. Further, certain of the future deductions may only be
utilized in the tax returns of certain life insurance subsidiaries.
These limitations were considered when providing the valuation
allowance under SFAS 109.
Under certain circumstances, the value of the carryforwards available
could be substantially reduced if certain changes in ownership were to
occur. In order to reduce this possibility, the Company's
shareholders at a special meeting held on December 30, 1992, approved
certain charter restrictions which prohibit transfers of the Company's
Common Stock under certain circumstances.
Under prior law, Charter National had accumulated approximately
$19,561,000 of special federal income tax deductions allowed life
insurance companies as of December 31, 1993 and the Colonial Penn life
insurance subsidiaries had accumulated approximately $161,000,000 of
such special deductions. Under certain conditions, such amounts could
become taxable in future periods. Except with respect to amounts
applicable to Colonial Penn's life insurance subsidiaries for which
the seller has assumed such liability contractually, the Company does
not anticipate any transaction occurring which would cause these
amounts to become taxable. In connection with the IRS's examination
of certain pre-acquisition tax returns of the Colonial
F-27
13. Income Taxes, continued:
------------
Penn life insurance companies, the IRS has asserted that approximately
$93,025,000 of special federal income tax deductions allowed life
insurance companies should have been reflected in taxable income in
1986, resulting in a tax (exclusive of interest and penalties) of
approximately $42,792,000. As noted above, the seller is
contractually liable for any such taxes (including interest and
penalties). The seller has contested the IRS assessment.
14. Pension Plans and Other Postemployment and Postretirement Benefits:
------------------------------------------------------------------
Pension expense charged to operations included the following
components (in thousands):
1993 1992 1991
---- ---- ----
Service cost $ 4,297 $ 4,657 $ 2,629
Interest cost 6,100 5,995 3,746
Actual return on plan assets (8,662) (4,536) (8,126)
Net amortization and deferral 2,399 (1,870) 3,521
------- ------- -------
Net pension expense $ 4,134 $ 4,246 $ 1,770
======= ======= =======
Settlement and curtailment gains (losses) of approximately ($292,000),
($366,000) and $1,154,000 were realized in the years ended December
31, 1993, 1992 and 1991, respectively.
The funded status of the pension plans at December 31, 1993 and 1992
was as follows (in thousands):
1993 1992
---- ----
Actuarial present value of
accumulated benefit obligation:
Vested $73,153 $62,101
Non-vested 2,005 3,335
------- -------
$75,158 $65,436
======= =======
Projected benefit obligation $95,849 $86,764
Plan assets at fair value 92,577 86,756
------- -------
Funded status (3,272) (8)
Unrecognized prior service cost 289 374
Unrecognized net loss at January 1, 1987 709 714
Unrecognized net loss from experience
differences and assumption changes 4,986 2,988
------- -------
Accrued pension asset $ 2,712 $ 4,068
======= =======
The plans' assets consist primarily of fixed income securities
(principally U.S. government and agencies' bonds).
The projected benefit obligation at December 31, 1993 and 1992 was
determined using an assumed discount rate of 7.0% and 7.5%,
respectively, and an assumed compensation increase rate of 5.9% and
6.6%, respectively. The assumed long-term rate of return on plan
assets was 7.3% and 7.5% at December 31, 1993 and 1992, respectively.
The Company also has defined contribution pension plans covering
certain employees. Contributions and costs are a percent of each
covered employee's salary. Amounts charged to expense related to such
plans were $2,066,000, $2,106,000 and $2,491,000 for the years ended
December 31, 1993, 1992 and 1991, respectively.
F-28
14. Pension Plans and Other Postemployment and Postretirement
---------------------------------------------------------
Benefits, continued:
--------
Several subsidiaries provide certain health care and other benefits to
certain retired employees. The costs of such benefits prior to
January 1, 1993 were expensed generally as incurred, although
liabilities for benefits were recorded in connection with certain
acquisitions, including that of Colonial Penn and the Phlcorp Minority
Interest. SFAS 106 and SFAS 112 require companies to accrue the cost
of providing certain postretirement and postemployment benefits during
the employee's period of service. Amounts charged to expense related
to such benefits were $2,594,000 in 1993 (principally interest),
$1,527,000 in 1992 and $1,256,000 in 1991.
The accumulated postretirement benefit obligation at December 31, 1993
is as follows (in thousands):
Retirees $18,154
Fully eligible active plan participants 3,481
Other active plan participants 2,067
-------
23,702
Unrecognized net loss from experience
differences and assumption changes (1,607)
-------
Accrued postretirement benefit
liability $22,095
=======
The discount rate used in determining the accumulated postretirement
benefit obligation was 7.0% at December 31, 1993. The assumed health
care cost trend rates used in measuring the accumulated postretirement
benefit obligation were between approximately 8% and 15% for 1993
declining to an ultimate rate of between 5% and 8% by 2006.
If the health care cost trend rates were increased by 1%, the
accumulated postretirement obligation as of December 31, 1993 would
have increased by approximately $1,404,000. The effect of this change
on the estimated aggregate of service and interest cost for 1993 would
be immaterial.
15. Commitments:
-----------
The Company and its subsidiaries rent office space and office
equipment under non-cancelable operating leases with terms generally
varying from one to fifteen years. Rental expense (net of sublease
rental income) charged to operations was approximately $17,555,000 in
1993, $20,791,000 in 1992 and $13,934,000 in 1991. Aggregate minimum
annual rentals (exclusive of real estate taxes, maintenance and
certain other charges) and related minimum sublease rentals relating
to facilities under lease in effect at December 31, 1993 were as
follows (in thousands):
Future Minimum Minimum Sublease Net
Rental Payments Rental Income Minimum Rentals
--------------- ---------------- ---------------
1994 $18,411 $4,287 $14,124
1995 17,216 3,258 13,958
1996 9,981 1,115 8,866
1997 5,258 - 5,258
1998 4,189 - 4,189
Thereafter 6,173 - 6,173
In connection with the sale of certain subsidiaries, the Company has
made or guaranteed the accuracy of certain representations given to
the acquirer. No material loss is expected in connection with such
matters.
F-29
15. Commitments, continued:
-----------
In addition, certain of the WMAC Companies that have been returned to
the control of the Company have guaranteed the adequacy of certain
other matters. The maximum amount of such contingencies is
approximately $5,000,000 at December 31, 1993. The Company does not
expect a material loss in connection with these guarantees.
The insurance subsidiaries and the banking subsidiaries are limited by
regulatory requirements and agreements in the amount of dividends and
other transfers of funds that are available to the Company.
Principally as a result of such restrictions, the net assets of
subsidiaries which are subject to limitations on transfer of funds to
the Company were approximately $735,000,000 at December 31, 1993.
16. Litigation:
----------
The Company is subject to various litigation which arises in the
course of its business. Based on discussions with counsel, management
is of the opinion that such litigation will have no material adverse
effect on the consolidated financial position of the Company or its
consolidated results of operations.
17. Earnings Per Common Share:
-------------------------
Earnings per common and dilutive common equivalent share was
calculated by dividing net income by the sum of the weighted average
number of Common Shares outstanding and the incremental weighted
average number of Common Shares issuable upon exercise of warrants for
the periods they were outstanding. The number of common and dilutive
common equivalent shares used for this calculation was 29,270,000 in
1993, 24,435,000 in 1992 and 23,704,000 in 1991.
Fully diluted earnings per share was calculated as described above
except that in 1992 the incremental number of shares utilized the year
end market price for the Company's Common Shares, since the year end
market price was above the average for the year. In addition, in
1993, the calculations assume the Convertible Debentures had been
converted into Common Shares for the period they were outstanding and
earnings increased for the interest on such debentures, net of the
income tax effect. The number of shares used for this calculation was
30,743,000 in 1993, 24,516,000 in 1992 and 23,916,000 in 1991.
18. Fair Value of Financial Instruments:
-----------------------------------
Statement of Financial Accounting Standards No. 107, "Disclosures
about Fair Value of Financial Instruments" ("SFAS 107"), requires
disclosure of fair value information about certain financial
instruments, whether or not recognized on the balance sheet. Where
quoted market prices are not available, fair values are based on
estimates using present value or other valuation techniques. Those
techniques are significantly affected by the assumptions used,
including the discount rate and estimates of future cash flows. In
addition, SFAS 107 excludes certain financial instruments and all
non-financial instruments from its disclosure requirements.
Therefore, the aggregate fair value amounts presented do not purport
to represent and should not be considered representative of the
underlying "market" or franchise value of the Company. The methods
and assumptions used to estimate the fair values of each class of the
financial instruments described below are as follows:
(a) Investments: The fair values of marketable equity securities and
fixed maturity securities are substantially based on quoted market
prices, as disclosed in Note 5. It is not practicable to determine
the fair value of policyholder loans since such loans generally have
no stated maturity, are not separately transferable and are often
repaid by reductions to benefits and surrenders.
(b) Cash and short-term investments: For short-term investments, the
carrying amount approximates fair value.
F-30
18. Fair Value of Financial Instruments, continued:
-----------------------------------
(c) Loans receivable of banking and lending subsidiaries: The fair
value of loans receivable of the banking and lending subsidiaries is
estimated by discounting the future cash flows using the current rates
at which similar loans would be made to borrowers with similar credit
ratings for the same remaining maturities.
(d) El Salvador Government bonds receivable, net of deferred gain:
The fair value of the bonds receivable at December 31, 1993 is based
on estimated market prices.
(e) Separate and variable accounts: Separate and variable accounts
assets and liabilities are carried at market value, which is a
reasonable estimate of fair value.
(f) Investments in Associated Companies: The fair values of certain
foreign power companies are principally estimated based upon quoted
market prices. The fair value of CAESS at December 31, 1992 was
estimated based upon the agreement with the government of El Salvador
as to the amounts to be paid to the Company for the assets which were
seized by the government.
The carrying value of the remaining investments in associated
companies approximates fair value.
(g) The WMAC Companies: The fair value of the WMAC Companies is
estimated based upon the Company's assessment of the fair value of
their underlying net tangible assets to be received.
(h) Customer banking deposits: The fair value of customer banking
deposits is estimated using rates currently offered for deposits of
similar remaining maturities.
(i) Long-term and other indebtedness: The fair values of
non-variable rate debt are estimated using quoted market prices,
estimated rates which would be available to the Company for debt with
similar terms and, with respect to the Swiss Franc Bonds, the cost to
terminate the currency and interest rate hedging agreement. The fair
value of variable rate debt is estimated to be the carrying amount.
(j) Investment contract reserves: SPDA reserves are carried at
account value, which is a reasonable estimate of fair value. The fair
value of other investment contracts is estimated by discounting the
future payments at rates which would currently be offered for
contracts with similar terms.
F-31
18. Fair Value of Financial Instruments, continued:
-----------------------------------
The carrying amounts and estimated fair values of the Company's
financial instruments at December 31, 1993 and 1992 are as follows (in
thousands):
1993 1992
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Financial Assets:
Investments:
Practicable to estimate
fair value $2,679,832 $2,682,287 $2,581,413 $2,643,692
Policyholder loans 18,138 - 119,612 -
Cash and short-term investments 291,414 291,414 670,599 670,599
Loans receivable of banking and
lending subsidiaries, net of
allowance 197,403 205,231 162,579 168,071
El Salvador Government bonds
receivable, net of deferred gain 1 8,458 - -
Separate and variable accounts 335,357 335,357 215,988 215,988
Investments in Associated
Companies 80,873 101,921 48,677 75,731
WMAC Companies 24,051 56,870 23,348 50,886
Financial Liabilities:
Customer banking deposits 173,365 174,994 186,339 188,891
Long-term and other indebtedness 401,335 418,689 225,588 236,940
Investment contract reserves 105,398 109,597 186,274 192,042
Separate and variable accounts 334,636 334,636 213,492 213,492
19. Segment Information:
-------------------
For information with respect to the Company's business segments, see
"Financial Information about Industry Segments" in Item 1 included
elsewhere herein, which is incorporated by reference into these
consolidated financial statements.
20. Other Results of Operations Information:
---------------------------------------
Investment and other income for each of the three years in the period
ended December 31, 1993 consist of the following (in thousands):
1993 1992 1991
---- ---- ----
Interest on short-term investments $ 14,867 $ 17,750 $ 13,699
Interest on fixed maturities 158,203 213,224 160,199
Service fee income 15,309 12,321 8,187
Gain on sale of Bolivian Power 12,981 - -
Gain on sale of loan origination offices - 12,128 -
Gains related to Cambrian & General - - 9,359
Other 29,873 31,929 34,977
-------- -------- --------
$231,233 $287,352 $226,421
======== ======== ========
During 1991, settlement of certain litigation related to Cambrian &
General, a subsidiary, was approved and, accordingly, reserves which
were no longer required were eliminated. In addition, payments on
certain investments, which were carried at no value, were received in
that year. As a result, during 1991, the Company recognized income of
approximately $9,359,000.
F-32
20. Other Results of Operations Information, continued:
---------------------------------------
Taxes, other than income or payroll, included in operations amounted
to approximately $36,839,000 (including $21,295,000 of premium taxes)
for the year ended December 31, 1993, $35,051,000 (including
$21,153,000 of premium taxes) for the year ended December 31, 1992 and
$19,627,000 (including $9,321,000 of premium taxes) for the year ended
December 31, 1991.
Advertising costs amounted to approximately $10,394,000, $9,578,000
and $10,623,000 for the years ended December 31, 1993, 1992 and 1991,
respectively.
Research and development costs, principally applicable to development
of a database marketing program by the trading stamp subsidiary prior
to 1992, approximated $8,928,000 in 1991 and were not material in 1992
and 1993. During 1991, the Company decided to discontinue development
of the database marketing program. Accordingly, amounts for 1991
include shutdown costs.
21. Subsequent Event:
----------------
During the first quarter of 1994, the Company and an equal partner
agreed to acquire a 60% interest in Caja de Ahorro y Seguro S.A.
("Caja") for a purchase price of approximately $85,000,000, subject to
final adjustment. Caja is a holding company whose subsidiaries are
engaged in property and casualty insurance, life insurance and banking
in Argentina. Caja has (unaudited) assets in excess of approximately
$500,000,000. Reliable historical operating data for Caja is not
available.
F-33
22. Selected Quarterly Financial Data (Unaudited):
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
1993:
- ----
Revenues $360,086 $372,068 $336,086 $339,818
======== ======== ======== ========
Income before cumulative effects
of changes in accounting principles $ 25,852 $ 32,935 $ 32,806 $ 24,666
======== ======== ======== ========
Cumulative effects of changes in
accounting principles $129,195 $ - $ - $ -
======== ======== ======== ========
Net income $155,047 $ 32,935 $ 32,806 $ 24,666
======== ======== ======== ========
Earnings per common and dilutive
common equivalent share:
Income before cumulative effects
of changes in accounting principles $ .88 $1.13 $1.12 $.85
Cumulative effects of changes in
accounting principles 4.37 - - -
----- ------ ------ -----
Net income $5.25 $1.13 $1.12 $.85
===== ===== ===== ====
Number of shares used in calculation 29,514 29,209 29,216 29,145
====== ====== ====== ======
Fully diluted earnings per common share:
Income before cumulative effects
of changes in accounting principles $ .87 $1.09 $1.09 $.83
Cumulative effects of changes in
accounting principles 4.25 - - -
----- ----- ----- ----
Net income $5.12 $1.09 $1.09 $.83
===== ===== ===== ====
Number of shares used in calculation 30,383 30,955 30,955 30,884
====== ====== ====== ======
1992:
- ----
Revenues $427,291 $383,732 $383,474 $378,518
======== ======== ======== ========
Net income $ 23,436 $ 34,256 $ 28,632 $ 44,283
======== ======== ======== ========
Earnings per common and dilutive
common equivalent share $.97 $1.42 $1.17 $1.79
==== ===== ===== =====
Number of shares used in calculation 24,214 24,188 24,578 24,763
====== ====== ====== ======
Earnings per fully diluted common share $.97 $1.42 $1.16 $1.78
==== ===== ===== =====
Number of shares used in calculation 24,292 24,188 24,670 24,916
====== ====== ====== ======
In 1993 and 1992, the total of quarterly per share amounts do not
necessarily equal annual per share amounts.
F-34
SCHEDULE I - Summary of Investments - Other Than Investments in
Affiliates
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
December 31, 1993 and 1992
1993
----------------------------------------
Original Market Book
Cost(a) Value Value
--------------------------------
(Thousands of dollars)
Investments Held to Maturity:
Bonds and notes:
U.S. Government agencies and authorities $ 55,556 $ 57,965 $ 55,556
States, municipalities and political subdivisions 2,175 2,220 2,175
All other corporates 477 470 477
Other fixed maturities 16,588 16,588 16,588
---------- ---------- ----------
Total investments held to maturity 74,796 77,243 74,796
---------- ---------- ----------
Investments Available for Sale:
Fixed maturities:
Bonds and notes:
U.S. Government agencies and authorities 1,924,697 1,965,647 1,965,647
States, municipalities and political subdivisions 68,469 69,295 69,295
Foreign governments 9,726 13,625 13,625
Public utilities 117,927 122,002 122,002
All other corporates 307,420 327,726 327,726
Preferred stock (non-equity) 392 368 368
---------- ---------- ----------
Total fixed maturities 2,428,631 2,498,663 2,498,663
---------- ---------- ----------
Equity securities:
Preferred stocks 1,346 1,412 1,412
Common stocks:
Banks, trusts and insurance companies 15,570 15,492 15,492
Industrial, miscellaneous and all other 1,633 8,926 8,926
---------- ---------- ----------
Total equity securities 18,549 25,830 25,830
---------- ---------- ----------
Total investments available for sale 2,447,180 2,524,493 2,524,493
---------- ---------- ----------
Trading Securities:
Fixed maturities - corporate bonds and notes 25,029 26,172 26,172
---------- ---------- ----------
Equity securities:
Preferred stocks 13,115 13,681 13,681
Common stocks - industrial, miscellaneous
and all other 222 220 220
---------- ---------- ----------
Total equity securities 13,337 13,901 13,901
---------- ---------- ----------
Options 2,212 1,911 1,911
---------- ---------- ----------
Total trading securities 40,578 41,984 41,984
---------- ---------- ----------
Short-term investments 247,403 247,403 247,403
Policyholder loans 18,138 18,138 18,138
Other, including accrued interest 38,745 38,747 38,739
---------- ---------- ----------
Total investments 2,866,840 2,948,008 2,945,553
Less, amounts included in cash and
short-term investments 247,583 247,583 247,583
---------- ---------- ----------
Net investments $2,619,257 $2,700,425 $2,697,970
========== ========== ==========
(a) Original cost has been adjusted for repayments and amortization of premium and discounts on bonds and
write-downs to reflect impairment in value.
F-35
SCHEDULE I - Summary of Investments - Other Than Investments in
Affiliates, continued
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
December 31, 1993 and 1992
1992
----------------------------------------------
Original Market Book
Cost(a) Value Value
--------------------------------------------
(Thousands of dollars)
Fixed maturities:
Bonds and notes:
U.S. Government agencies and authorities $1,720,936 $1,755,396 $1,720,936
States, municipalities and political subdivisions 23,709 24,789 23,709
Foreign governments 53,137 56,550 53,137
Public utilities 115,681 120,043 115,681
All other corporates 379,762 389,634 379,762
Preferred stock (non-equity) 3,194 3,194 3,194
Other 31,346 31,346 31,346
---------- ---------- ----------
Total fixed maturities 2,327,765 2,380,952 2,327,765
---------- ---------- ----------
Equity securities:
Preferred stocks 2,152 2,217 2,217
Common stocks:
Banks, trusts and insurance companies 5,763 5,925 5,763
Industrial, miscellaneous and all other 1,867 4,902 2,275
---------- ---------- ----------
Total equity securities 9,782 13,044 10,255
---------- ---------- ----------
Short-term investments 616,635 616,635 616,635
Policyholder loans 119,612 119,612 119,612
Other, including accrued interest 38,801 38,366 38,366
Investments held for sale 205,364 211,667 205,364
---------- ---------- ----------
Total investments 3,317,959 3,380,276 3,317,997
Less, amounts included in cash and
short-term investments 616,972 616,972 616,972
---------- ---------- ----------
Net investments $2,700,987 $2,763,304 $2,701,025
========== ========== ==========
(a) Original cost has been adjusted for repayments and amortization of premium and discounts on bonds and write-downs to
reflect impairment in value.
F-36
SCHEDULE III - Condensed Financial Information of Registrant
LEUCADIA NATIONAL CORPORATION
BALANCE SHEETS
December 31, 1993 and 1992
1993 1992
---- ----
(Thousands of dollars)
ASSETS
------
Investments $ 87,853 $ -
Deferred income taxes 114,001 -
Miscellaneous receivables and other assets 31,457 5,957
Investments in and advances to/from subsidiaries, net 1,069,096 817,809
---------- --------
$1,302,407 $823,766
========== ========
LIABILITIES
-----------
Accounts payable, expense accruals and income
taxes payable $ 16,458 $ 11,327
Debt, including current maturities 378,093 194,278
---------- --------
394,551 205,605
---------- --------
SHAREHOLDERS' EQUITY
--------------------
Common shares, par value $1 per share,
authorized 150,000,000 and 60,000,000 shares;
27,897,023 and 27,944,535 shares issued and
outstanding, after deducting 30,260,664 and
29,978,256 shares held in treasury 27,897 27,945
Additional paid-in capital 125,013 123,656
Net unrealized gain on investments 49,912 9
Retained earnings 705,034 466,551
---------- --------
Total shareholders' equity 907,856 618,161
---------- --------
$1,302,407 $823,766
========== ========
See notes to this schedule.
F-37
SCHEDULE III - Condensed Financial Information of Registrant,
continued:
LEUCADIA NATIONAL CORPORATION
STATEMENTS OF INCOME
For the years ended December 31, 1993, 1992 and 1991
[CAPTION]
1993 1992 1991
---- ---- ----
(In thousands, except per share amounts)
Investment income, net $23,538 $ 25,852 $ 15,257
Equity in income from
operations of subsidiaries 155,515 139,605 114,805
-------- -------- --------
179,053 165,457 130,062
-------- -------- --------
Interest expense 38,778 32,609 31,745
Other expenses, net 24,016 2,241 3,487
-------- -------- --------
62,794 34,850 35,232
-------- -------- --------
Income before cumulative effects of
changes in accounting principles 116,259 130,607 94,830
Cumulative effects of changes in
accounting principles, including amounts
related to subsidiaries 129,195 - -
-------- -------- --------
Net income $245,454 $130,607 $ 94,830
======== ======== ========
Earnings per common and dilutive
common equivalent share:
Income before cumulative effects of changes
in accounting principles $3.97 $5.35 $4.00
Cumulative effects of changes in accounting
principles 4.41 - -
----- ----- -----
Net income $8.38 $5.35 $4.00
===== ===== =====
Fully diluted earnings per common share:
Income before cumulative effects of changes
in accounting principles $3.89 $5.33 $3.97
Cumulative effects of changes in accounting
principles 4.20 - -
----- ----- -----
Net income $8.09 $5.33 $3.97
===== ===== =====
See notes to this schedule.
F-38
SCHEDULE III - Condensed Financial Information of Registrant,
continued:
LEUCADIA NATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1993, 1992 and 1991
1993 1992 1991
---- ---- ----
(Thousands of dollars)
Net cash flows from operating activities:
----------------------------------------
Net income $ 245,454 $ 130,607 $ 94,830
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Depreciation and amortization 1,066 429 390
Net securities (gains) - - (99)
Equity in earnings of subsidiaries (excluding
cumulative effects of changes in accounting
principles) (155,515) (139,605) (114,805)
Cumulative effects of changes in accounting
principles, including amounts related to
subsidiaries (129,195) - -
Net change in miscellaneous receivables (215) (257) (1,309)
Net change in other assets (13,095) (3,730) 50
Net change in investments in and advances
to/from subsidiaries, net (22,917) 45,743 23,632
Net change in accounts payable, expense
accruals and income taxes 5,131 (8,070) 6,397
Other 2,263 5,419 216
--------- -------- ---------
Net cash provided by (used for)
operating activities (67,023) 30,536 9,302
--------- -------- ---------
Net cash flows from investing activities:
----------------------------------------
Dividends received from subsidiaries - 375 9,295
Capital contribution to subsidiaries (6,008) (40) (25,464)
Purchase of investments (other than short-term) (96,349) - -
Proceeds from sales of investments - - 205
-------- --------- ---------
Net cash provided by (used for)
investing activities (102,357) 335 (15,964)
--------- --------- ---------
Net cash flows from financing activities:
----------------------------------------
Net change in credit agreement and other
short-term borrowings (1,547) (72,793) (19,000)
Issuance of long-term debt, net of issuance costs 194,140 124,063 35,000
Reduction of long-term debt (13,750) (59,217) (7,750)
Purchase of warrants to acquire common shares - (14,700) -
Purchase of common shares for treasury (2,492) (2,850) (1,373)
Dividends paid (6,971) (5,589) -
--------- --------- ---------
Net cash provided by (used for)
financing activities 169,380 (31,086) 6,877
--------- --------- ---------
Net increase (decrease) in cash and
short-term investments - (215) 215
Cash and short-term investments at January 1, - 215 -
--------- --------- ---------
Cash and short-term investments at December 31, $ - $ - $ 215
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $23,296 $24,305 $19,676
Net income tax payments (refunds) $ 19 $ 4,924 $(2,539)
See notes to this schedule.
F-39
SCHEDULE III - Condensed Financial Information of Registrant,
continued:
LEUCADIA NATIONAL CORPORATION
NOTES TO SCHEDULE
For the years ended December 31, 1993, 1992 and 1991
A. The notes to consolidated financial statements of Leucadia
National Corporation and Subsidiaries are incorporated by
reference to this schedule.
B. The statements of shareholders' equity are the same as those
presented for Leucadia National Corporation and Subsidiaries.
C. Equity in the income of the subsidiaries is after reflecting
income taxes recorded by the subsidiaries. In 1993, 1992 and
1991, there was no provision for income taxes provided by the
parent company. Tax sharing payments received from subsidiaries
were $64,566,000 in 1993, $38,773,000 in 1992, and $6,698,000 in
1991.
D. The deferred income tax asset of $114,001,000 at December 31,
1993 has not been allocated to the individual subsidiaries.
F-40
SCHEDULE V - Supplementary Insurance Information
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1993, 1992 and 1991
Life and
Other
Benefits
and
Increase in
Future
Deferred Policy
Policy Benefits
Acquisition Separate Net of
Costs and and Policy Increase in
Value of Future Variable and Net Deferred Other Non-Life
Insurance Policy Unearned Accounts Contract Premium Investment Acquisition Operating Premiums
In Force Benefits Premiums Liabilities Claims Revenue Income Costs Expenses Written
---------- -------- -------- ----------- -------- ------- ---------- ----------- --------- --------
(Thousands of dollars)
1993
- ----
Life Insurance $21,204 $1,023,736 $ 13,035 $334,636 $ 29,804 $181,802 $ 74,443 $179,127 $ 84,239 $ 60,119
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
Property and
Casualty
Insurance:
Automobile 22,230 - 254,670 - 762,228 573,037 72,937 488,472 53,214 611,530
Commercial 10,233 - 79,002 - 251,919 91,164 18,364 85,270 10,057 95,389
Miscellaneous
and personal 1,743 - 33,553 - 37,721 47,847 3,637 36,883 7,761 45,844
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
34,206 - 367,225 - 1,051,868 712,048 94,938 610,625 71,032 752,763
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
$55,410 $1,023,736 $380,260 $334,636 $1,081,672 $893,850 $169,381 $789,752 $155,271 $812,882
======= ========== ======== ======== ========== ======== ======== ======== ======== ========
1992
- ----
Life Insurance $45,700 $1,420,182 $ 19,186 $213,492 $ 31,438 $233,744 $123,217 $261,287 $ 87,160 $114,640
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
Property and
Casualty
Insurance:
Automobile 21,810 - 241,046 - 701,253 561,673 84,710 503,424 59,715 607,726
Commercial 9,574 - 46,475 - 199,934 86,596 22,797 82,555 8,725 84,015
Miscellaneous
and personal 1,811 - 32,927 - 37,412 50,930 4,419 49,407 7,656 47,592
------- ---------- -------- -------- --------- -------- -------- -------- -------- --------
33,195 - 320,448 - 938,599 699,199 111,926 635,386 76,096 739,333
------- ---------- -------- -------- --------- -------- -------- -------- -------- --------
$78,895 $1,420,182 $339,634 $213,492 $ 970,037 $932,943 $235,143 $896,673 $163,256 $853,973
======= ========== ======== ======== ========== ======== ======== ======== ======== ========
1991
- ----
Life Insurance $56,601 $1,604,090 $ 29,235 $162,424 $ 35,508 $131,379 $102,441 $196,300 $ 33,034 $ 68,790
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
Property and
Casualty
Insurance:
Automobile 15,315 - 195,889 - 717,696 272,703 40,861 267,715 12,367 253,705
Commercial 9,431 - 47,238 - 229,389 87,491 24,111 72,495 11,845 86,099
Miscellaneous
and personal 1,635 - 36,265 - 33,297 25,711 2,848 21,617 3,582 24,014
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
26,381 - 279,392 - 980,382 385,905 67,820 361,827 27,794 363,818
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
$82,982 $1,604,090 $308,627 $162,424 $1,015,890 $517,284 $170,261 $558,127 $ 60,828 $432,608
======= ========== ======== ======== ========== ======== ======== ======== ======== ========
F-41
SCHEDULE VI - Schedule of Reinsurance
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1993, 1992 and 1991
Percentage
of
Ceded Assumed Amount
Direct To Other From Other Net Assumed
Business Companies Companies Amount To Net
---------- ----------- ------------ -------- ----------
(Thousands of dollars)
1993
----
Life insurance in force $2,696,000 $623,000 $ 192,000 $ 2,265,000 8.48%
========== ======== =========== ===========
Premiums:
Life insurance $ 118,095 $ 1,084 $ 143 $ 117,154 .12%
Accident and health insurance 68,109 771 (1,735) 65,603 (2.64%)
Property and liability
insurance 707,593 31,720 35,220 711,093 4.95%
---------- -------- ----------- ----------
Total premiums $ 893,797 $ 33,575 $ 33,628 $ 893,850 3.76%
========== ======== =========== ===========
1992
----
Life insurance in force $3,540,000 $ 63,000 $ 189,000 $ 3,666,000 5.16%
========== ======== =========== ===========
Premiums:
Life insurance $ 117,539 $ (1,762) $ (632) $ 118,669 (.53%)
Accident and health insurance 87,550 822 29,377 116,105 25.30%
Property and liability
insurance 771,213 91,571 18,527 698,169 2.65%
---------- -------- ----------- -----------
Total premiums $ 976,302 $ 90,631 $ 47,272 $ 932,943 5.07%
========== ======== =========== ===========
1991
----
Life insurance in force $3,698,000 $572,000 $13,706,000 $16,832,000 81.43%
========== ======== =========== ===========
Premiums:
Life insurance $ 43,265 $ 1,585 $ 20,064 $ 61,744 32.50%
Accident and health insurance 34,084 488 37,080 70,676 52.46%
Property and liability
insurance 441,610 63,344 6,598 384,864 1.71%
---------- -------- ----------- -----------
Total premiums $ 518,959 $ 65,417 $ 63,742 $ 517,284 12.32%
========== ======== =========== ===========
F-42
SCHEDULE VIII - Valuation and Qualifying Accounts
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1993, 1992 and 1991
Additions Deductions
--------------------------------- -----------------------
Balance at Charged to Balance
Beginning Costs and Sale of at End of
Description of Period Expenses Recoveries Other(*) Write Offs Receivable Period
----------- ----------- ----------- ---------- ------ ---------- ---------- --------
(Thousands of dollars)
1993
- ----
Loan receivables of banking
and lending subsidiaries $ 6,973 $ 2,364 $1,891 $ - $ 2,887 $ - $ 8,341
Trade, notes and other
receivables 5,094 4,315 1,796 - 6,020 - 5,185
------- ------- ------ ------- ------- ----- -------
Total allowance for
doubtful accounts $12,067 $ 6,679 $3,687 $ - $ 8,907 $ - $13,526
======= ======= ====== ======= ======= ====== =======
Reinsurance receivable $ - $ 5,753 $ - $78,072 $ - $ - $83,825
======= ======= ====== ======= ======= ====== =======
1992
- ----
Loan receivables of banking
and lending subsidiaries $ 7,704 $ 4,865 $1,420 $ 2,000 $ 5,920 $3,096 $ 6,973
Trade, notes and other
receivables 5,733 4,572 1,304 - 6,515 - 5,094
------- ------- ------ ------- ------- ------ -------
Total allowance for
doubtful accounts $13,437 $ 9,437 $2,724 $ 2,000 $12,435 $3,096 $12,067
======= ======= ====== ======= ======= ====== =======
1991
- ----
Loan receivables of banking
and lending subsidiaries $ 6,782 $ 4,537 $1,143 $ - $ 4,758 $ - $ 7,704
Trade, notes and other
receivables 6,465 3,839 1,088 - 5,659 - 5,733
------- ------- ------ ------- ------- ------ -------
Total allowance for
doubtful accounts $13,247 8,376 $2,231 $ - $10,417 $ - $13,437
======= ====== ======= ======= ====== =======
Reinsurance 4,739
-------
Total charged to operations $13,115
=======
(*) Principally relates to implementation of SFAS 113 in 1993 and acquisition of companies in 1992.
F-43
SCHEDULE IX - Short-Term Borrowings
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1993, 1992 and 1991
At December 31,
--------------------
Weighted Maximum Average Weighted
Average Amount Amount Average
Interest Outstanding Outstanding Interest
Balance Rate(1) During Year(2) During Year(2) Rate(1)
------- -------- -------------- -------------- -------
(Thousands of dollars)
1993
----
Credit agreements $ - - % $ - $ 2,658 4.1%
Commercial paper 660 3.4% 1,461 979 3.4%
Other 173,365 4.7% 190,485 180,797 5.1%
-------- -------- --------
$174,025 $191,946 $184,434
======== ======== ========
1992
----
Credit agreements $ - - % $167,500 $ 68,334 5.9%
Commercial paper 2,207 3.8% 1,236 1,495 3.9%
Other 190,470 5.1% 206,916 201,190 6.2%
-------- -------- --------
$192,677 $375,652 $271,019
======== ======== ========
1991
----
Credit agreements $ 75,000 6.4% $144,000 $ 81,106 8.0%
Other 194,862 6.8% 198,927 196,691 7.7%
-------- -------- --------
$269,862 $342,927 $277,797
======== ======== ========
(1) The weighted average interest rates do not necessarily represent the
financial statement impact of short-term borrowings since the Company's
"interest rate swap" agreements have the practical effect of converting
borrowings under short-term arrangements to a fixed borrowing rate (see
Note 9).
(2) The average amount outstanding is the average of the daily balances
except for customer banking deposits which are based on month-end
balances; the maximum amount outstanding is based on the month-end which
had the highest aggregate balance.
F-44
SCHEDULE X - Schedule of Supplemental Information for Property and
Casualty Insurance
Underwriters
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1993, 1992 and 1991
Discount, if any, Claims and Claim
Deducted in Reserves Adjustment Expenses Paid Claims
for Unpaid Claims and Incurred Related to: and Claim
Claim Adjustment -------------------- Adjustment
Expenses Current Year Prior Year Expenses
-------------- ------------ ---------- -----------
(Thousands of dollars)
1993
----
Automobile $ - $512,832 $(66,571) $464,254
Commercial 271 68,543 (1,679) 53,355
Miscellaneous and personal - 42,657 (9,324) 37,301
---- -------- -------- --------
Total property and casualty $271 $624,032 $(77,574) $554,910
==== ======== ======== ========
1992
----
Automobile $ - $487,240 $(22,849) $513,165
Commercial 151 83,543 (19,063) 58,647
Miscellaneous and personal - 48,908 (2,928) 45,370
---- -------- -------- --------
Total property and casualty $151 $619,691 $(44,840) $617,182
==== ======== ======== ========
1991
----
Automobile $ - $235,943 $ 8,825 $248,341
Commercial 168 64,924 (9,963) 51,750
Miscellaneous and personal - 19,644 (771) 20,986
---- -------- -------- --------
Total property and casualty $168 $320,511 $ (1,909) $321,077
==== ======== ======== ========
F-45
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
------- ----------- ----------
3.1 Restated Certificate of Incorporation (filed as
Exhibit 5.1 to the Company's Current Report on
Form 8-K dated July 14, 1993).*
3.2 By-laws (as amended) (filed as Exhibit 4.5 to
the Company's Registration Statement No. 33-
57054).*
4.1 The Company undertakes to furnish the Securities
and Exchange Commission, upon request, a copy of
all instruments with respect to long-term debt
not filed herewith.
10.1 1982 Stock Option Plan, as amended August 28,
1991 (filed as Annex B to the Company's Proxy
Statement dated July 21, 1992).*
10.2 1992 Stock Option Plan (filed as Annex C to the
Company's Proxy Statement dated July 21, 1992).*
10.3(a) Restated Articles and Agreement of General
Partnership, effective as of February 1, 1982,
of The Jordan Company (filed as Exhibit 10.3(d)
to the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1986).*
10.3(b) Amendments dated as of December 31, 1989 and
December 1, 1990 to the Partnership Agreement
referred to in 10.3(a) above (filed as Exhibit
10.2(b) to the Company's 1991 10-K).*
10.3(c) Amendment dated as of December 17, 1992 to the
Partnership Agreement referred to in 10.3(a)
above (filed as Exhibit 10.3(c) to the l992 10-
K).*
10.3(d) Articles and Agreement of General Partnership,
effective as of April 15, 1985, of
Jordan/Zalaznick Capital Company (filed as
Exhibit 10.20 to the Company's Registration
Statement No. 33-00606).*
10.4 Agreement made as of March 12, 1984 by and
between Leucadia, Inc. and Ian M. Cumming (filed
as Exhibit 10.14 to the 1983 10-K).*
10.5 Agreement made as of March 12, 1984 by and
between Leucadia, Inc. and Joseph S. Steinberg
(filed as Exhibit 10.15 to the 1983 10-K).*
10.6 Stock Purchase and Sale Agreement dated as of
April 5, 1991, by and between FPL Group Capital
Inc. and the Company (filed as Exhibit B to the
Company's Current Report on Form 8-K dated
August 23, 1991).*
10.7 Agreement dated as of August 1, 1988 among the
Company, Ian M. Cumming and Joseph S. Steinberg
(filed as Exhibit 10.6 to the Company's 1991
10-K).*
10.8 Agreement dated as of January 10, 1992 between
Ian M. Cumming, certain other persons listed on
Schedule A thereto and the Company (filed as
Exhibit 10.7 to the Company's 1991 10-K).*
_________________________
* Incorporated by reference.
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
------- ----------- ----------
10.9 Agreement dated as of January 10, 1992 between
Joseph S. Steinberg, certain other persons
listed on Schedule A thereto and the Company
(filed as Exhibit 10.8 to the Company's 1991 10-
K).*
10.10(a) Agreement dated April 23, 1992 between AIC
Financial Services, Inc. (an Alabama
corporation), AIC Financial Services (a
Mississippi corporation) and AIC Financial
Services (a South Carolina corporation)
(collectively, "Seller") and Norwest Financial
Resources, Inc. (filed as Exhibit 10.10(a) to
the 1992 10-K).*
10.10(b) Purchase Agreement between A.I.C. Financial
Services, Inc., American Investment Bank, N.A.,
American Investment Financial and Terracor II
d/b/a AIC Financial Fund, Seller, and Associates
Financial Services Company, Inc., Buyer, dated
November 5, 1992 (filed as Exhibit 10.10(b) to
the Company's Registration Statement No. 33-
55120).*
10.11(a) Agreement and Plan of Merger, dated as of
October 22, 1992, by and among the Company,
Phlcorp Acquisition Company and PHLCORP, Inc.
(filed as Exhibit 5.2 to the Company's Current
Report on Form 8-K dated October 22, 1992).*
10.11(b) Amendment dated December 10, 1992, to the Merger
Agreement referred to in 10.11(a) above (filed
as Exhibit 5.2 to the Company's Current Report
on Form 8-K dated December 14, 1992).*
10.12(a) Agreement between Leucadia, Inc. and Ian M.
Cumming, dated as of December 28, 1992 (filed as
Exhibit 10.12(a) to the 1992 10-K).*
10.12(b) Escrow and Security Agreement by and among
Leucadia, Inc., Ian M. Cumming and Weil, Gotshal
& Manges, as escrow agent, dated as of December
28, 1992 (filed as Exhibit 10.12(b) to the 1992
10-K).*
10.13(a) Agreement between Leucadia, Inc. and Joseph S.
Steinberg, dated as of December 28, 1992 (filed
as Exhibit 10.13(a) to the 1992 10-K).*
10.13(b) Escrow and Security Agreement by and among
Leucadia, Inc., Joseph S. Steinberg and Weil,
Gotshal & Manges, as escrow agent, dated as of
December 28, 1992 (filed as Exhibit 10.13(b) to
the 1992 10-K).*
10.14 Settlement Agreement between Baldwin-United
Corporation and the United States dated August
27, 1985 concerning tax issues (filed as Exhibit
10.14 to the 1992
10-K).*
10.15 Acquisition Agreement, dated as of December 18,
1992, by and between Provident Mutual Life and
Annuity Company of America and Colonial Penn
Annuity and Life Insurance Company (filed as
Exhibit 10.15 to the 1992 10-K).*
10.16 Reinsurance Agreement, dated as of December 31,
1991, by and between Colonial Penn Insurance
Company and American International Insurance
Company (filed as Exhibit 10.16 to the 1992 10-
K).*
_________________________
* Incorporated by reference.
EXHIBIT INDEX
Exhibit Exemption
Number Description Indication
------- ----------- ----------
10.17 Agreement made as of December 28, 1993 by and
between the Company and Ian M. Cumming.
10.18 Agreement made as of December 28, 1993 by and
between the Company and Joseph S. Steinberg.
10.19(a) Agreement between the Company and Ian M.
Cumming, dated as of December 28, 1993.
10.19(b) Escrow and Security Agreement by and among the
Company, Ian M. Cumming and Weil, Gotshal &
Manges, as escrow agent, dated as of December
28, 1993.
10.20(a) Agreement between the Company and Joseph S.
Steinberg, dated as of December 28, 1993.
10.20(b) Escrow and Security Agreement by and among the
Company, Joseph S. Steinberg and Weil, Gotshal &
Manges, as escrow agent, dated as of December
28, 1993.
21 Subsidiaries of the registrant.
23 Consent of independent certified public
accountants with respect to the incorporation by
reference into the Company's Registration
Statements on Form S-8 (File No. 2-84303), Form
S-8 and S-3 (File No. 33-6054), Form S-8 and S-3
(File No. 33-26434), Form S-8 and S-3 (File No.
33-30277).
28 Schedule P of the 1993 Annual Statement to P
Insurance Departments of the Colonial Penn
Insurance Company and Affiliated Fire & Casualty
Insurers, the Empire Insurance Company,
Principal Insurer, and Colonial Penn Madison
Insurance Company.
_________________________
* Incorporated by reference.