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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
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, 1995
or
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required) For the transition period from
___________ to ___________
Commission file number: 1-5721
LEUCADIA NATIONAL CORPORATION
- --------------------------------------------------------------------------
(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
- ---------------------------------------------------------------------------
(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
8-1/4% Senior Subordinated Notes due New York Stock Exchange
June 15, 2005
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 22, 1996 (computed by reference to
the last reported closing sale price of the Common Stock on the New York
Stock Exchange on such date): $954,574,269.
On March 22, 1996, the registrant had outstanding 60,241,006 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 1996 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 diversified financial services holding company
principally engaged in personal and commercial lines of property and
casualty insurance, life and health insurance, banking and lending and
manufacturing. The Company concentrates on return on investment and
cash flow to build long-term shareholder value, rather than
emphasizing volume or market share. Additionally, the Company
continuously evaluates the retention and disposition of its existing
operations and investigates possible acquisitions of new businesses in
order to maximize shareholder value.
Shareholders' equity has grown from a deficit of $7,657,000 at
December 31, 1978 (prior to the acquisition of a controlling interest
in the Company by the Company's Chairman and President), to a positive
shareholders' equity of $1,111,491,000 at December 31, 1995, equal to
a book value per common share of negative $.11 at December 31, 1978
and $18.47 at December 31, 1995.
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
livery vehicles in the New York metropolitan area. For the year ended
December 31, 1995, the Company's insurance segments contributed 78% of
total revenue and, at December 31, 1995, constituted 77% 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 2.5% of the insurance subsidiaries' portfolio
at December 31, 1995.
The Company's banking and lending operations principally consist
of making instalment loans to niche markets primarily funded by
customer banking deposits insured by the Federal Deposit Insurance
Company (the "FDIC"). One of the Company's principal lending
activities is providing automobile loans to individuals with poor
credit histories. The Company's manufacturing operations primarily
manufacture products for the "do-it-yourself" home improvement market
and for industrial and agricultural markets.
Starting in 1994, the Company has made investments outside the
United States in Russia and Argentina and expects to increase its
investments in Russia in 1996. For more information concerning these
investments see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of this Report.
The Company and certain of its subsidiaries have substantial tax
loss carryforwards. The amount and availability of the tax loss
carryforwards are subject to certain qualifications, limitations and
uncertainties as more fully discussed in the Notes to the Consolidated
Financial Statements.
On November 15, 1995, the Company effected a two-for-one stock
split of the common shares of the Company (the "Common Shares") in the
form of a 100% stock dividend (the "Stock Split"). The dividend was
paid to shareholders of record at the close of business on November 1,
1995. Per share amounts set forth in this Report have been adjusted
to reflect the Stock Split.
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.
Financial Information About Industry Segments
---------------------------------------------
Certain information concerning the Company's operations is
presented in the following table.
Year Ended December 31,
-------------------------------
1995 1994 1993
---- ---- ----
(In millions)
Revenues:
--------
Property and Casualty Insurance $ 984.3 $ 872.1 $ 842.1
Life Insurance 223.6 223.3 286.3
Banking and Lending 58.6 49.0 38.2
Manufacturing 166.3 180.1 173.8
Corporate and Other (a) 125.5 59.9 67.7
-------- -------- --------
$1,558.3 $1,384.4 $1,408.1
======== ======== ========
Income (loss) before income taxes:
---------------------------------
Property and Casualty Insurance $ 78.9 $ 96.4 $ 128.0
Life Insurance 53.7 49.1 62.0
Banking and Lending 16.7 16.3 12.6
Manufacturing (18.0) (11.7) (2.2)
Corporate and Other (a)(b) .9 (49.8) (23.5)
-------- -------- --------
$ 132.2 $ 100.3 $ 176.9
======== ======== ========
Identifiable assets employed:
----------------------------
Property and Casualty Insurance $2,374.2 $2,117.9 $2,169.6
Life Insurance 1,538.4 1,515.1 1,610.5
Banking and Lending 336.8 316.4 262.6
Manufacturing 83.6 93.5 101.0
Corporate and Other (c) 774.9 631.1 545.6
-------- -------- --------
$5,107.9 $4,674.0 $4,689.3
======== ======== ========
At December 31, 1995, the Company and its consolidated
subsidiaries had 4,271 full-time employees.
----------------
(a) Includes Jordan Associated Companies (described below), gains
(losses) from certain investments and real estate and other
operations, including incentive services. Incentive services is
no longer considered a material segment of the Company's
operations principally due to declining sales and profits. In
1995, includes a $41,030,000 gain related to the return of two of
the Company's legal subsidiaries, which were formerly under the
control of the Wisconsin Insurance Commissioner (the "WMAC
Companies").
(b) Includes corporate interest expense and overhead, including
expenses related to certain acquisition and investing activities.
(c) Principally consists of cash, investments, real estate,
receivables and, at December 31, 1995, 1994 and 1993, the
deferred income tax asset of $103,466,000, $144,631,000 and
$114,001,000, respectively.
2
INSURANCE OPERATIONS
GENERAL
The Company engages in the personal property and casualty and
life and health insurance businesses on a nationwide basis and
specializes in commercial property and casualty insurance business in
the New York metropolitan area. The Company's principal property and
casualty insurance subsidiaries are the Colonial Penn P&C Group,
consisting of Colonial Penn Insurance Company ("CPI"), Colonial Penn
Madison Insurance Company ("Madison"), Colonial Penn Franklin
Insurance Company ("Franklin"), Bayside Casualty Insurance Company
("Bayside") and Bay Colony Insurance Company ("Bay Colony"), and the
Empire Group, consisting of Empire Insurance Company ("Empire") and
Allcity Insurance Company ("Allcity"). The Company's principal life
insurance subsidiaries are Charter National Life Insurance Company
("Charter"), Colonial Penn Life Insurance Company ("CPL") and
Intramerica Life Insurance Company ("Intramerica"). 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 and Charter "A" (excellent) and CPI, Madison, Franklin, the
Empire Group and Intramerica "A-" (excellent). Bayside and Bay Colony
were not assigned ratings. Ratings are subject to change at any time.
PROPERTY AND CASUALTY INSURANCE
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 Valley Forge, Pennsylvania, Tampa,
Florida and Phoenix, Arizona. The Empire Group is licensed in six
states and operates primarily in the New York metropolitan area.
During the year ended December 31, 1995, 82%, 13% and 5% of net
earned premiums of the Company's property and casualty insurance
operations were derived from personal and commercial automobile lines,
other commercial lines and other personal lines, respectively. Total
property and casualty net earned premiums for the year ended December
31, 1995 were $816,600,000, of which $490,500,000 was attributable to
the Colonial Penn P&C Group.
Set forth below is certain statistical information for the
Company's property and casualty operations prepared in accordance with
generally accepted accounting principles ("GAAP") and statutory
accounting principles ("SAP"). The Loss Ratio is the ratio of
incurred losses and loss adjustment expenses to net premiums earned.
The Expense Ratio is the ratio of underwriting expenses (policy
acquisition costs, commissions, and a portion of administrative,
general and other expenses attributable to underwriting operations) to
net premiums written, if determined in accordance with SAP, or to net
premiums earned, if determined in accordance with GAAP. A Combined
Ratio below 100% indicates an underwriting profit and a Combined Ratio
above 100% indicates an underwriting loss. The Combined Ratio does
not include the effect of investment income.
3
YEAR ENDED DECEMBER 31,
-----------------------------
1995 1994 1993
---- ---- ----
Loss Ratio:
GAAP 87.7% 81.2% 76.9%
SAP 85.9% 81.6% 76.1%
Industry (SAP) (a) N/A 81.1% 79.5%
Expense Ratio:
GAAP 15.8% 17.9% 20.0%
SAP 15.3% 17.2% 17.6%
Industry (SAP) (a) N/A 27.4% 27.4%
Combined Ratio (b):
GAAP 103.5% 99.1% 96.9%
SAP 101.2% 98.8% 93.7%
Industry (SAP) (a) N/A 108.5% 106.9%
_______________
(a) Source: Best's Aggregates & Averages, Property/Casualty, 1995 Edition.
Industry combined ratios may not be fully comparable as a result of,
among other things, differences in geographical concentration and in the
mix of property and casualty insurance products.
(b) For 1995, a change in the statutory accounting treatment for retrospec-
tively rated reinsurance agreements was the principal reason for the
difference between the GAAP Combined Ratio and the SAP Combined Ratio.
For 1993, the difference reflects the different treatment of certain
costs for GAAP and SAP purposes.
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
mature adult population. Substantially all of the Group's policies
are written for a one-year period. However, in many states CPI and
Franklin offer a "guaranteed lifetime protection" provision to certain
qualifying policyholders that ensures their policies will be renewed
at rates then in effect for their classification. As of December 31,
1995, the Group had approximately 356,000 voluntary auto policies in
force.
In 1995, for the first time since acquisition in 1991, the
Colonial Penn P&C Group's voluntary automobile policies in force have
grown during the year. The Company believes that this is attributable
to its low cost direct response marketing methods. The Company
believes the Colonial Penn P&C Group will continue to grow its
voluntary automobile business during 1996, although the Company is
unable to estimate the rate of growth or state with certainty that
such growth will actually occur.
The Colonial Penn P&C Group primarily markets its insurance
products to the standard and preferred risk market segments 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. The Colonial
Penn P&C Group has become a low cost provider of its products to its
niche markets, enabling it to charge competitive rates.
4
Based on published reports, the Colonial Penn P&C Group's SAP
Expense Ratio for 1994, the last year for which annual industry data
is available, is among the lowest in the industry.
Net earned premiums for the Colonial Penn P&C Group for the year
ended December 31, 1995 were concentrated in the states listed below:
Percentage of Net
Earned Premiums
-----------------
State Automobile(1) Homeowners
----- ------------- ----------
California 20% 15%
Florida 18 24
New York 13 12
Connecticut 7 5
Arizona 7 7
Pennsylvania 4 6
All others 31 31
--- ---
Total 100% 100%
=== ===
______________
(1) Excludes net earned premiums related to acquired blocks of assigned risk
business described below and mandatory assumed risk business, which generally
relates to the amount of writings in the applicable state.
In recent years, the Colonial Penn P&C Group has acquired blocks
of private passenger automobile assigned risk business from other
insurance companies. In addition to the premiums paid by
policyholders, the Group also receives fee income from the insurance
company from which the business was acquired. The Group's low expense
ratio enables it to offer competitive rates for this business. The
Colonial Penn P&C Group currently has contracts in force covering
approximately $110,000,000 of annualized written premium.
Prior to its acquisition by the Company, CPI wrote as primary
insurer or as a reinsurer a variety of diverse commercial property and
casualty insurance business known as "Special Risks." The nature of
most of this insurance, which was not written after 1988, 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 and the relevant
reinsurance collected. Although losses with respect to this block of
business are particularly difficult to predict accurately, the Company
believes, based in part upon a recently completed independent
actuarial review, that it has recorded adequate reserves as of
December 31, 1995 ($59,400,000, before reinsurance).
The Empire Group
The Empire Group provides personal insurance coverage to
automobile owners and homeowners and commercial insurance for
residential real estate, restaurants, retail establishments, livery
vehicles (both medallion and radio-controlled) and several types of
service contractors.
For the years ended December 31, 1995, 1994 and 1993, net earned
premiums and commissions for the Empire Group were $326,100,000,
$299,200,000 and $259,400,000, respectively. Substantially all of the
Empire Group policies are written in New York for a one-year period.
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.
5
The voluntary 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 385 local agents and insurance
brokers presently acting under agreements with the Empire Group.
These agents and brokers also represent other competing insurance
companies.
Like the Colonial Penn P&C Group, the Empire Group also has
acquired blocks of private passenger automobile and commercial
automobile assigned risk business from other insurance companies. The
Empire Group currently has contracts in force covering approximately
$100,000,000 of annualized written premiums. In addition, the Empire
Group receives a fee as a "servicing carrier," providing
administrative services, including claims processing, underwriting and
collection activities, for the New York Public Automobile Pool and the
Massachusetts Taxi and Limousine Pool. These latter arrangements do
not involve the assumption of any material underwriting risk by the
Empire Group.
During 1995, the Empire Group strengthened reserves in certain
lines of business, as more fully discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," of this Report. As a result of the Empire Group's poor
operating results in 1995, management is currently evaluating its
operations, including policy pricing, underwriting, claims handling
procedures and market segment profitability. The Empire Group intends
to concentrate its efforts on the profitability of its products and,
as a result, premium volume may decline.
Losses and Loss Adjustment Expenses
Liabilities for unpaid losses, which are not discounted (except
for certain workers' compensation liabilities), and loss adjustment
expenses ("LAE") are determined using case-basis evaluations,
statistical analyses and estimates for salvage and subrogation
recoverable and represent estimates of the ultimate claim costs of all
unpaid losses and LAE. Liabilities include a provision for losses
which have occurred but have not yet been reported. These estimates
are subject to the effect of trends in future claim severity and
frequency experience. Adjustments to such estimates are made from
time to time due to changes in loss experience and are reflected in
current earnings.
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 range of estimates for setting the reserve levels. For
further input, changes in operations in pertinent areas including
underwriting standards, product mix, claims management and legal
climate are periodically reviewed.
In the following table, the liability for losses and LAE of the
Company's property and casualty insurance subsidiaries are reconciled
for each of the three years ended December 31, 1995. Included therein
are current year data and prior year development.
6
RECONCILIATION OF LIABILITY FOR LOSSES AND
LOSS ADJUSTMENT EXPENSES
1995 1994 1993
---- ---- ----
(In thousands)
Net liability for losses
and LAE at
beginning of year $ 923,905 $ 889,082 $ 904,326
---------- ---------- ----------
Provision for losses and
LAE for claims occurring
in the current year 735,071 679,377 624,048
Decrease in estimated
losses and LAE for
claims occurring in
prior years (16,378) (71,484) (84,382)
---------- ---------- ----------
Total incurred losses
and LAE 718,693 607,893 539,666
---------- ---------- ----------
Reclassification of
uncollectible
reinsurance reserves
due to commutations-
prior years - 15,528 -
---------- ---------- ----------
Losses and LAE payments for
claims occurring during:
Current year 276,212 259,295 236,369
Prior years 366,745 329,303 318,541
---------- ---------- ----------
642,957 588,598 554,910
---------- ---------- ----------
999,641 923,905 889,082
Reserve deducted above for
reinsurance not considered
collectible 22,432 26,547 41,065
---------- ---------- ----------
1,022,073 950,452 930,147
Reinsurance
recoverable 106,879 117,566 121,721
---------- ---------- ----------
Liability for losses and
LAE at end of year as
reported in financial
statements $1,128,952 $1,068,018 $1,051,868
========== ========== ==========
The Company's property and casualty insurance subsidiaries'
liability for losses and LAE as of December 31, 1995 was
$1,005,354,000 determined in accordance with SAP and $1,128,952,000
determined in accordance with GAAP. The difference principally
relates to liabilities assumed by reinsurers, which are not deducted
from GAAP liabilities.
The following tables present the development of balance sheet
liabilities from 1985 through 1995 and include periods prior to
acquisition for the Empire Group and the Colonial Penn P&C Group.
Because of substantial differences in the development of reserves of
the Empire Group and the Colonial Penn P&C Group, loss and LAE
development data is presented separately for each group. The
liability line at the top of each table indicates the estimated
liability for unpaid losses and LAE recorded as of the dates
indicated. The middle section of the table shows the re-estimated
7
amount of the previously recorded liability based on experience as of the
end of each succeeding year. As more information becomes available and
claims are settled, the estimated liabilities are adjusted upward or
downward with the effect of decreasing or increasing net income at the time
of adjustment. The 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.
The "cumulative redundancy (deficiency)" represents the aggregate
change in the estimates over all prior years. For example, the
initial 1985 liability estimate indicated on the Empire Group table
($165,713,000) has been re-estimated during the course of the
succeeding ten years, resulting in a re-estimated liability at
December 31, 1995 of $156,838,000, or a redundancy of $8,875,000. If
the re-estimated liability exceeded the liability initially
established, a cumulative deficiency would be indicated. The
cumulative deficiencies reflected in the Colonial Penn P&C Group table
are for periods prior to the Company's acquisition of that Group. The
Company believes that the Colonial Penn P&C Group's conservatism and
improved claims management procedures since acquisition in 1991 have
contributed significantly to the creation of the redundancies included
in its table below.
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
1989, but incurred in 1985, will be included in the cumulative
redundancy (deficiency) amount for 1985, 1986, 1987 and 1988. This
table is not intended to and does not present accident or policy year
loss and LAE development data. Conditions and trends that have
affected development of the liability in the past may not necessarily
occur in the future. Accordingly, it would not be appropriate to
extrapolate future redundancies or deficiencies based on these tables.
For further discussion of the Company's loss development
experience, see Item 7, "Management's Discussion and Analysis of
Financial Condition and Results of Operations," of this Report.
8
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE EMPIRE GROUP)
Year Ended December 31,
---------------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
Liability for
Unpaid Losses and
Loss Adjustment
Expenses $165,713 $182,133 $206,709 $222,814 $235,223 $251,401 $280,679 $322,516 $353,917 $406,695 $476,692
Liability
Re-estimated
as of:
One Year Later $160,728 $180,975 $198,384 $213,671 $227,832 $249,492 $280,020 $321,954 $344,156 $441,165 $ -
Two Years Later 162,962 175,305 194,530 206,088 217,432 245,141 277,866 324,262 374,158
Three Years Later 156,870 170,152 188,843 198,500 212,649 243,849 284,052 345,576
Four Years Later 157,001 168,574 184,564 194,324 211,859 247,314 296,484
Five Years Later 155,413 165,717 181,990 196,070 211,952 255,045
Six Years Later 154,045 164,487 183,015 196,646 216,545
Seven Years Later 154,151 166,266 183,082 199,502
Eight Years Later 155,727 165,953 185,609
Nine Years Later 155,411 167,719
Ten Years Later 156,838
Cumulative
Redundancy
(Deficiency) $ 8,875 $ 14,414 $ 21,100 $ 23,312 $ 18,678 $ (3,644) $(15,805) $(23,060) $(20,241) $(34,470) $ -
======== ======== ======== ======== ======== ======== ======== ======== ======== ======== ========
Cumulative Amount
of Liability
Paid Through:
One Year Later $ 51,795 $ 54,359 $ 60,446 $ 64,140 $ 65,822 $ 78,954 $ 89,559 $113,226 $116,986 $152,904 $ -
Two Years Later 83,249 88,770 97,627 101,206 109,479 126,908 150,043 182,250 199,214
Three Years Later 106,348 114,322 123,092 131,705 140,916 167,330 197,848 239,092
Four Years Later 123,275 130,433 142,910 152,330 166,023 196,099 233,244
Five Years Later 132,618 141,346 155,786 168,117 182,001 216,749
Six Years Later 139,276 149,079 164,213 178,095 193,943
Seven Years Later 143,926 153,681 170,215 185,310
Eight Years Later 146,840 157,332 175,117
Nine Years Later 149,645 160,497
Ten Years Later 151,616
Gross Liability -
End of Year $391,829 $451,442 $517,422
Reinsurance 37,912 44,747 40,730
-------- -------- --------
Net Liability -
End of Year as
Shown Above $353,917 $406,695 $476,692
======== ======== ========
Gross Re-estimated
Liability - Latest $424,727 $486,046
Re-estimated
Reinsurance - Latest 50,569 44,881
-------- --------
Net Re-estimated
Liability - Latest $374,158 $441,165
======== ========
Gross Cumulative
Deficiency $(32,898) $(34,604)
======== ========
9
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE COLONIAL PENN P&C GROUP)
Year Ended December 31,
-----------------------------------------------------------------------------------------------------------
1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
Liability for
Unpaid Losses and
Loss Adjustment
Expenses $217,000 $324,700 $386,200 $ 410,500 $ 448,800 $626,300 $657,700 $581,810 $535,165 $517,210 $522,949
Liability
Re-estimated
as of:
One Year Later $236,500 $352,600 $389,900 $ 445,600 $ 555,900 $659,800 $616,400 $497,994 $473,442 $466,362 $ -
Two Years Later 245,900 340,600 409,000 506,800 588,600 619,600 574,000 463,885 444,554
Three Years Later 241,600 338,700 443,700 535,600 563,800 614,000 555,800 450,542
Four Years Later 248,100 359,400 467,300 522,800 565,800 605,900 547,800
Five Years Later 231,200 384,000 459,400 526,700 562,900 599,700
Six Years Later 257,600 375,700 464,700 526,200 559,200
Seven Years Later 250,800 381,300 465,300 524,400
Eight Years Later 255,900 384,900 464,800
Nine Years Later 261,700 386,000
Ten Years Later 264,700
Cumulative
Redundancy
(Deficiency) $(47,700)$(61,300) $(78,600) $(113,900)$(110,400) $ 26,600 $109,900 $131,268 $ 90,611 $ 50,848 $ -
======== ======== ======== ========= ========= ======== ======== ======== ======== ======== ========
Cumulative Amount
of Liability
Paid Through:
One Year Later $126,200 $177,100 $207,700 $ 243,300 $ 258,500 $279,300 $283,200 $205,200 $212,317 $213,841 $ -
Two Years Later 178,500 249,800 304,000 353,300 387,500 432,500 390,100 317,492 319,253
Three Years Later 208,600 288,700 356,800 419,900 467,500 492,900 461,000 379,521
Four Years Later 227,600 313,700 393,100 462,200 496,400 536,500 496,400
Five Years Later 213,100 332,700 416,800 476,400 523,400 559,100
Six Years Later 223,000 343,600 425,500 496,900 536,500
Seven Years Later 227,800 349,200 441,800 505,800
Eight Years Later 231,100 366,000 448,900
Nine Years Later 245,800 371,600
Ten Years Later 251,000
Gross Liability -
End of Year $660,039 $616,576 $611,530
Reinsurance 124,874 99,366 88,581
-------- -------- --------
Net Liability -
End of Year as
Shown Above $535,165 $517,210 $522,949
======== ======== ========
Gross Re-estimated
Liability - Latest $553,801 $561,098
Re-estimated
Reinsurance - Latest 109,247 94,736
-------- --------
Net Re-estimated
Liability - Latest $444,554 $466,362
======== ========
Gross Cumulative
Redundancy $106,238 $ 55,478
======== ========
10
LIFE INSURANCE
The principal life insurance products offered during the three
year period ended December 31, 1995 were "Graded Benefit Life" and a
variable annuity product. 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 sells its
products throughout most of the United States. Total direct life
insurance in force as of December 31, 1995 was $2.2 billion.
The following table reflects premium receipts on variable annuity
and other investment oriented products and premiums earned on other
life and health insurance products. 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,
----------------------------------------
1995 1994 1993
---- ---- ----
(In thousands)
Graded Benefit Life $117,691 $113,678 $109,838
Variable Annuity 43,708 98,557 81,484
Other Investment
Oriented Products 6,494 9,523 6,828
Agent-sold Medicare
Supplement Products(1) 27,982 35,967 47,364
Other Health Products 13,919 16,225 18,992
Other 566 2,629 495
-------- -------- --------
Total $210,360 $276,579 $265,001
======== ======== ========
__________________
(1) Effective December 31, 1992, the Company ceased marketing Medicare
Supplement products through agents.
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.
Benefits paid are less than the face amount of the policy during the
first two years, except in cases of accidental death. Graded Benefit
Life is marketed using direct response marketing techniques. New
policyholder leads are generated primarily from television
advertisements. The Company intends to continue 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.
Investment Oriented Products. The principal investment oriented
product ("IOP" product) offered is 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 Scudder, Stevens and Clark, a
mutual fund manager.
11
Medicare Supplement Products. In 1992, the Company decided to
discontinue actively marketing Medicare supplement products due to
increased competition in this market. The increased competition
resulted from federal and state regulation that mandated
standardization of such products. The Company does continue to offer,
on a profitable basis, renewals of its non-standardized products to
existing policyholders. In addition, in 1996 the Company entered into
an agreement to acquire a small block of Medicare supplement business;
the Company will continue to explore the acquisition of additional
blocks of this business on a profitable basis.
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 from time to time they may make such investments
in amounts not expected to be material.
The composition of the Company's insurance subsidiaries'
investment portfolio as of December 31, 1995 and 1994 was as follows:
PROPERTY AND CASUALTY LIFE AND HEALTH
--------------------- ---------------------
1995 1994 1995 1994
---- ---- ---- ----
(Dollars in thousands)
Bonds and notes:
U.S. Government and agencies 83% 73% 72% 77%
Rated investment grade 13 23 18 16
Non rated - other - - 4 1
Rated less than investment grade 1 1 1 1
Policyholder loans - - 2 2
Equity securities 1 1 1 1
Other, principally accrued interest 2 2 2 2
--- --- --- ---
Total 100% 100% 100% 100%
=== === === ===
Estimated average yield to maturity
of bonds and notes (a) 6.6% 6.5% 6.8% 6.2%
Estimated average remaining life of bonds
and notes (a) 3.6 yrs. 3.5 yrs. 6.9 yrs. 3.9 yrs.
Carrying value of investment portfolio $1,861,301 $1,603,083 $780,633 $772,137
Market value of investment portfolio $1,862,094 $1,602,242 $780,710 $771,553
_________________
(a) Excludes trading securities, which are not significant.
Reinsurance
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 have a low face
amount. The Colonial Penn P&C Group obtained reinsurance for casualty
risks in excess of $2,000,000 in 1995, 1994 and 1993, although 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 retained limit for workers' compensation was $500,000
for 1995, 1994 and 1993; for other property and casualty lines, the
12
Empire Group's maximum retained limit was $225,000 for 1995, 1994 and 1993.
Additionally, the Company's property and casualty insurance
subsidiaries have entered into certain excess of loss and catastrophe
treaties to protect against certain losses. The Colonial Penn P&C
Group's retention of lower level losses in such treaties was
$15,000,000 in 1995 and $11,000,000 in 1994 and 1993. The Empire
Group's retention of lower level losses in such treaties was
$3,000,000 for 1995, 1994 and 1993.
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,
including (with their respective Best ratings) General Reinsurance
Corporation (A++), Metropolitan Life Insurance Co. (A+), AXA
Reinsurance Company (A), Zurich Reinsurance Center, Inc. (A) and
Munich American Reinsurance Company (A+), each of which the Company
believes to be financially capable of meeting its 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. The Company has established
reserves, which the Company believes are adequate, for any
nonrecoverable 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. Recent federal legislative and judicial
activity may result in changes to federal banking laws that will
enable banks to offer certain insurance products in direct competition
with the Company. The Company is unable to determine what effect, if
any, such changes may have on the Company's operations.
The Company believes that property and casualty insurers
generally compete on the basis of price, customer service, consumer
recognition and financial stability. The industry has historically
been cyclical in nature, with periods of less intense price competi-
tion generating significant profits, followed by periods of increased
price competition resulting in reduced profitability or loss. The
current cycle of intense price competition has continued for a longer
period than in the past, suggesting that the significant infusion of
capital into the industry in recent years, coupled with larger
investment returns has been, and may continue to be, a depressing
influence on policy rates. The profitability of the property and
casualty insurance industry is affected by many factors, including
rate competition, severity and frequency of claims (including
catastrophe losses), interest rates, state regulation, court decisions
and judicial climate, all of which are outside the Company's control.
13
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. The majority of
the Company's property 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.
Increased regulation of insurance companies at the state level and new
regulation at the federal level is possible, although the Company
cannot predict the nature or extent of any such regulation or what
impact it would have on the Company's operations.
The National Association of Insurance Commissioners ("NAIC") has
adopted model laws incorporating the concept of a "risk based capital"
("RBC") requirement for insurance companies. Generally, the RBC
formula is designed to measure the adequacy of an insurer's statutory
capital in relation to the risks inherent in its business. The RBC
formula is used by the states as an early warning tool to identify
weakly capitalized companies for the purpose of initiating regulatory
action. Each of the Company's insurance subsidiaries' RBC ratio as of
December 31, 1995 substantially exceeded minimum requirements.
The NAIC also has adopted various ratios for insurance companies
which, in addition to the RBC ratio, are designed to serve as a tool
to assist state regulators in discovering potential weakly capitalized
companies or companies with unusual trends. The life insurance
companies had certain "other than normal" NAIC ratios for the year
ended December 31, 1995. The Company believes that there are no
underlying problems or weaknesses at any of its life insurance
subsidiaries and that it is unlikely that material adverse regulatory
action will be taken.
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
During 1995 the Company's banking and lending operations
principally were conducted through American Investment Bank, N.A.
("AIB"), its national bank subsidiary, American Investment Financial
("AIF"), an industrial loan corporation, and Transportation Capital
Corp. ("TCC"), a specialized small business investment company. AIB
and AIF take money market and other non-demand deposits that are
eligible for insurance provided by the FDIC. AIB and AIF had deposits
of $203,061,000 and $179,888,000 at December 31, 1995 and 1994,
respectively. AIB and AIF currently have several deposit-taking and
lending facilities in the Salt Lake City area. TCC makes
collateralized loans to operators of medallion taxicabs and
limousines. In February 1996, the Company entered into an agreement
to sell TCC to an unrelated third party. The sale, which is subject
to regulatory approval and certain other conditions, would result in a
gain of approximately $1,600,000.
14
The Company's consolidated banking and lending operations had
outstanding loans (net of unearned finance charges) of $278,391,000
and $264,196,000 at December 31, 1995 and 1994, respectively. At
December 31, 1995, 48% were loans to individuals generally
collateralized by automobiles; 15% were unsecured loans to individuals
acquired from others in connection with investments in limited
partnerships; 29% were unsecured loans to executives and
professionals; 4% were loans to small business concerns collateralized
principally by taxicab medallions and other personal property; and 4%
were instalment loans to consumers, substantially all of which were
collateralized by real or personal property.
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, 1995, the
allowance for loan losses for the Company's entire loan portfolio was
$13,893,000 or 5% of the net outstanding loans, compared to
$12,308,000 or 4.7% of net outstanding loans at December 31, 1994.
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 closely monitors these loans and takes
prompt possession of the collateral in the event of a default. For
the three year period ended December 31, 1995, the Company generated
$231,825,000 of these loans ($79,481,000 during 1995). In 1995,
primarily as a result of increased competition together with the
Company's unwillingness to lower its underwriting standards and
interest rate charges, the portfolio has not grown at the rate
previously experienced and loan losses have increased. At December
31, 1995, the allowance for loan losses for this portfolio was
$8,822,000 or 6.6% of net outstanding loans. The Company expects that
the increased level of competition will continue and, together with
the Company's unwillingness to lower rates, is likely to result in a
contraction in the size of this portfolio in the future.
The Company's lending operations compete with banks, savings and
loan associations, credit unions, credit card issuers and consumer
finance companies, many of which are able to offer financial services
on very competitive terms. 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.
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 by the Federal Trade Commission. The
Company's banking operations are subject to 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 AIF is the FDIC.
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 AIF as currently operated.
15
MANUFACTURING
The Company's manufacturing operations consist primarily of the
manufacture of bathroom vanities and related products for the "do-it-
yourself" market, electrical products and proprietary plastic netting
for various industrial and agricultural markets.
Bathroom vanities and related products are sold through
manufacturers' representatives, primarily to home improvement centers.
Principally due to operating inefficiencies and pricing pressures,
this division has not operated profitably in recent years. In 1995,
the Company completed a restructuring program at this division and, as
a result, operating results were significantly improved, although the
division had a loss for the year. The division is exploring new
product opportunities to compensate for declining sales. The plastics
division manufactures and markets plastic netting used for a variety
of purposes including among other things, construction, packaging,
agriculture, carpet backing and filtration. The electrical division
primarily produces wire cable and power cords for industrial
customers.
The manufacturing operations are subject to a high degree of
competition, generally on the basis of price, service and quality.
Additionally, certain of these manufacturing operations are dependent
on cyclical industries, including the construction industry. 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 manufacturing operations.
OTHER OPERATIONS AND INVESTMENTS
The Company owns equity interests representing more than 5% of
the outstanding capital stock of each of the following domestic public
companies at December 31, 1995: Carmike Cinemas, Inc. ("Carmike")
(approximately 6% of Class A shares), HomeFed Corporation ("HFC")
(approximately 41%), Jordan Industries, Inc. ("JII") (approximately
11%), MK Gold Company ("MK Gold") (approximately 46%) and Rockefeller
Center Properties, Inc. ("RCP") (approximately 7%).
In June 1995, the Company purchased a 46.4% common stock interest
in MK Gold for an aggregate cash purchase price of $22,500,000. In
addition, the Company purchased at par all of a lender's interest
under a $20,000,000 revolving credit facility with MK Gold, of which
$15,000,000 was outstanding. This amount was repaid during the third
quarter of 1995. MK Gold is an international gold mining company
whose shares are quoted on the Nasdaq National Market System.
In July 1995, pursuant to the chapter 11 reorganization of HFC,
the Company acquired 41.2% of HFC's common stock for a net cash
investment of approximately $4,200,000. As part of the reorganization
plan, the Company provided HFC with a $20,000,000 eight year secured
loan, which is convertible into additional shares of HFC common stock
after three years (subject to certain conditions) and which bears
interest at the rate of 12% per year. HFC is a public company whose
subsidiaries develop real property.
The Company owns a 30% interest in Caja de Ahorro y Seguro S.A.
("Caja"), a holding company whose subsidiaries are engaged in
property and casualty insurance, life insurance and banking in
Argentina. Caja distributes its insurance products primarily on a
direct basis, and therefore does not pay commissions to agents. Caja
is the largest insurance company in Argentina, with total annual
premium revenues of approximately $500,000,000 and total assets
(including banking operations) of approximately $590,000,000.
At December 31, 1995, the carrying amount of the Company's investment
in Caja was $44,657,000. The Company's equity in Caja's earnings
since acquisition has not been material.
16
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. Since 1982, the
Company has invested an aggregate of $34,377,000 in these partnerships
and related companies and, through December 31, 1995, has received
$73,940,000 (including cash, interest bearing notes and other
receivables) relating to the disposition of investments and management
and other fees. At December 31, 1995, through these partnerships, the
Company had interests in JII, Carmike and a total of twenty other
companies (the "Jordan Associated Companies"), all of which are
carried at cost in the Company's consolidated financial statements at
$12,623,000.
The Company's real estate investments include a 615,000 square
foot office building located near Grand Central Terminal in New York
City (carried at $55,490,000 at December 31, 1995), and two luxury
residential condominium towers in downtown San Diego, California
(carried at $40,028,000 at December 31, 1995). The New York City
office building has 355,000 square feet of contiguous space available
for occupancy. After certain improvements to the building are
completed, the Company intends to lease the available space to one or
more entities and/or sell the building. The San Diego towers consist
of 201 residential units, 162 of which were available for sale at
December 31, 1995, and 42,000 square feet of retail space.
For further information about the Company's business, reference
is made to Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations," of this report.
Item 2. Properties.
------ ----------
Through its various subsidiaries, the Company owns and utilizes
in its operations the following significant properties: two office
buildings located in Valley Forge, Pennsylvania used by the Colonial
Penn P&C Group (totaling approximately 198,700 sq. ft.), one of which
is located on land leased from a third party; two offices in Salt Lake
City, Utah used for corporate and banking and lending activities
(totaling approximately 77,000 sq. ft.); and an office building in
Philadelphia, Pennsylvania used by the life insurance companies
(approximately 127,000 sq. ft.). In addition, subsidiaries of the
Company own eight facilities (totaling approximately 1,102,000 sq.
ft.) primarily used for manufacturing and storage located in Georgia,
New Jersey, New York, North Carolina, Pennsylvania and Canada.
The Company and its 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 Notes to Consolidated Financial
Statements.
Item 3. Legal Proceedings.
------ -----------------
PINNACLE LITIGATION
On May 11, 1994, a shareholder of the Company filed a purported
derivative action entitled Pinnacle Consultants, Ltd. v. Leucadia
-------------------------- --------
National Corporation, et al. (C.A. No. 94 Civ. 3496) against the
----------------------------
Company's current Board of Directors and two former directors, John W.
Jordan II and Melvin Hirsch. The action, which was filed in the
United States District Court for the Southern District of New York,
alleged certain Racketeer Influence and Corrupt Organizations Act,
securities law, conversion and fraud claims that were dismissed with
prejudice by the Court and two state law claims of waste and breach of
fiduciary duty that were dismissed by the Court for lack of
jurisdiction. On January 11, 1996, plaintiff filed a notice of appeal
with the Second Circuit Court of Appeals.
17
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.
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 22, 1996, 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 55 Chairman of the Board June 1978
Joseph S. Steinberg 52 President January 1979
Thomas E. Mara 50 Executive Vice President May 1980;
and Treasurer January 1993
Joseph A. Orlando 40 Vice President and January 1994;
Comptroller March 1994
Paul J. Borden 47 Vice President August 1988
Mark Hornstein 48 Vice President July 1983
Ruth Klindtworth 61 Secretary and Vice President- February 1976;
Corporate Administrator January 1990
David K. Sherman 30 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 Allcity since February 1988 and MK Gold since June 1995. 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 Allcity since February 1988,
as a director of MK Gold since June 1995 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. In addition, he has served as a director
of Allcity since October 1994.
18
Mr. Orlando, a certified public accountant, has served as
Comptroller of the Company since March 1994 and as Vice President of
the Company since January 1994. Mr. Orlando previously served in a
variety of capacities with the Company and its subsidiaries since
1987.
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.
Mr. Hornstein joined the Company as Vice President in July 1983
and has served in a variety of other capacities with the Company and
its subsidiaries.
Ms. Klindtworth has been employed by the Company since July 1960
and has served as Secretary of the Company since February 1976 and as
Vice President-Corporate Administrator of the Company since January
1990.
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.
19
PART II
Item 5. Market for Registrant's Common Equity and Related
------ -------------------------------------------------
Stockholder Matters.
-------------------
(a) Market Information.
------------------
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. As discussed in Part I of this Report, in November 1995, the
Company effected the Stock Split. Per share amounts set forth in this
Report have been adjusted to reflect the Stock Split.
COMMON SHARE
------------
HIGH LOW
---- ---
1994
----
First Quarter $21.81 $19.13
Second Quarter 19.44 17.75
Third Quarter 18.81 17.31
Fourth Quarter 23.13 18.06
1995
----
First Quarter $24.31 $21.44
Second Quarter 26.00 21.81
Third Quarter 29.63 24.56
Fourth Quarter 29.44 24.50
1996
----
First Quarter (through March 22, 1996) $29.00 $23.75
(b) Holders.
-------
As of March 22, 1996, there were approximately 4,594 record
holders of the Common Shares.
(c) Dividends.
---------
The Company paid dividends of $.25 per Common Share on December
29, 1995 and $.125 per Common Share on December 30, 1994. 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.
20
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 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA: (a)
Revenues $1,558,314 $1,384,385 $1,408,058 $1,573,015 $1,086,748
Net securities gains (losses) 20,027 (12,004) 51,923 51,778 50,391
Interest expense (b) 52,871 44,003 39,465 38,507 36,925
Insurance losses, policy benefits and
amortization of deferred acquisition costs 942,803 819,010 789,752 896,673 558,127
Income before income taxes and
cumulative effects of changes
in accounting principles 132,182 100,318 176,868 143,553 95,030
Income before cumulative effects of
changes in accounting principles 107,503 70,836 116,259 130,607 94,830
Cumulative effects of changes in
accounting principles - - 129,195 - -
Net income 107,503 70,836 245,454 130,607 94,830
Per share:
Primary earnings per common and dilutive
common equivalent share:
Income before cumulative effects
of changes in accounting principles $1.81 $1.22 $1.98 $2.67 $2.00
Cumulative effects of changes in
accounting principles - - 2.21 - -
----- ----- ----- ----- -----
Net income $1.81 $1.22 $4.19 $2.67 $2.00
===== ===== ===== ===== =====
Fully diluted earnings per common share:
Income before cumulative effects
of changes in accounting principles $1.77 $1.21 $1.94 $2.66 $1.98
Cumulative effects of changes in
accounting principles - - 2.10 - -
----- ----- ----- ----- -----
Net income $1.77 $1.21 $4.04 $2.66 $1.98
===== ===== ===== ===== =====
AT DECEMBER 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED BALANCE SHEET DATA: (a)
Cash and investments $3,146,639 $2,764,890 $2,989,384 $3,371,624 $3,627,542
Total assets 5,107,874 4,674,046 4,689,272 4,330,580 4,590,096
Debt, including current maturities 520,862 425,848 401,335 225,588 220,728
Customer banking deposits 203,061 179,888 173,365 186,339 194,862
Common shareholders' equity 1,111,491 881,815 907,856 618,161 365,495
Book value per common share $18.47 $15.72 $16.27 $11.06 $7.95
YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
SELECTED INFORMATION ON PROPERTY AND CASUALTY
INSURANCE OPERATIONS (Unaudited): (a)(c)
GAAP Combined Ratio 103.5% 99.1% 96.9% 101.7% 102.1%
SAP Combined Ratio 101.2% 98.8% 93.7% 102.8% 103.3%
Industry SAP Combined Ratio (d) N/A 108.5% 106.9% 115.7% 108.8%
Premium to Surplus Ratio (e) 1.8x 1.9x 1.6x 2.0x 2.2x
- --------------------------------
Footnotes on following page.
21
(a) Data includes acquired companies from date of acquisition.
(b) Includes interest on customer banking deposits.
(c) 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. For 1995, a change in the statutory accounting
treatment for retrospectively rated reinsurance agreements was the principal reason for the difference between the
GAAP Combined Ratios and the SAP Combined Ratios. For 1993, the difference reflects the different treatment of
certain costs for GAAP and SAP purposes. For 1992, the results of certain accident and health insurance business 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.
(d) Source: Best's Aggregates & Averages, Property/Casualty, 1995 Edition. Industry Combined Ratios may not be fully
comparable as a result of, among other things, differences in geographical concentration and in the mix of property
and casualty insurance products.
(e) Premium to Surplus Ratio was calculated by dividing statutory property and casualty insurance premiums written by
statutory capital at the end of the year.
22
Item 7. Management's Discussion and Analysis of Financial Condition
------ -----------------------------------------------------------
and Results of Operations.
-------------------------
The purpose of this section is to discuss and analyze the
Company's consolidated financial condition, liquidity and capital
resources and results of operations. This analysis should be read in
conjunction with the consolidated financial statements and related
notes which appear elsewhere in this Report.
LIQUIDITY AND CAPITAL RESOURCES
Parent Company Liquidity. Leucadia National Corporation (the
------------------------
"Parent") is a holding company whose assets principally consist of the
stock of its several direct subsidiaries. Additionally, the Parent
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 Parent does not have any material arrangement,
commitment or understanding with respect thereto (except as disclosed
in this Report), further acquisitions, divestitures, investments and
changes in capital structure are possible. Its principal sources of
funds are its available cash resources, bank borrowings, public
financings, repayment of subsidiary 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
corporate overhead expenses.
The Parent maintains the principal borrowings for the Company and
its non-banking subsidiaries and has provided working capital to
certain of its 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. During the
year ended December 31, 1995, the Company used a portion of its
$150,000,000 bank credit agreement facilities in connection with the
MK Gold transaction and to meet daily cash requirements. At December
31, 1995, there were no amounts outstanding under such bank credit
agreement facilities. The Company's bank borrowings bear interest
based on the prime rate or LIBOR. The Company is exposed to interest
rate risk related to its variable rate borrowings. The Company has
entered into interest rate swap and interest rate option agreements to
reduce the impact of changes in interest rates on its variable rate
debt. Counterparties to these agreements are major financial
institutions, which the Company believes are able to fulfill their
obligations; however, if they are not, the Company believes that any
losses are unlikely to be material.
In June 1995, the Company sold $100,000,000 principal amount of
its newly authorized 8 1/4% Senior Subordinated Notes due 2005 in an
underwritten public offering. A portion of the proceeds was used to
repay indebtedness outstanding under the Company's bank credit
agreement facilities incurred in connection with the MK Gold
transaction. The remaining proceeds were added to working capital.
On September 13, 1995, Ian M. Cumming and Joseph S. Steinberg,
Chairman of the Board and President of the Company, respectively, and
certain members of Mr. Cumming's family exercised previously granted
warrants to purchase an aggregate of 3,188,000 Common Shares and sold
such shares in an underwritten public offering. In connection with
such public offering, the Company granted the underwriters an over
allotment option, which was exercised, for 478,200 Common Shares.
Under the terms of the warrant agreement, the Company was required to
pay expenses of the sale, other than underwriting discounts. As a
result of the exercise of the warrants and the exercise of the over
allotment option, the Company realized aggregate cash proceeds, net of
expenses, of $43,736,000. For income tax purposes, the exercise of
the warrants results in the Company receiving a current income tax
deduction of $57,305,000. For financial reporting purposes, the
benefit of such deduction ($20,057,000) was credited directly to
shareholders' equity.
23
At December 31, 1995, a maximum of approximately $60,200,000 was
available to the Parent as dividends from its regulated subsidiaries
without regulatory approval. Additional amounts may be available to
the Parent in the form of loans or cash advances from regulated
subsidiaries, although no amounts were outstanding at December 31,
1995 or borrowed to date in 1996. There are no restrictions on
distributions from the non-regulated subsidiaries; the Parent and its
non-regulated subsidiaries had aggregate cash and temporary
investments of approximately $164,400,000 at December 31, 1995. The
Parent also receives tax sharing payments from subsidiaries included
in its consolidated income tax return, including certain regulated
subsidiaries. Because of the tax loss carryforwards available to the
Parent and certain subsidiaries, together with current interest
deductions and corporate expenses, the amount paid by the Parent for
income taxes is substantially less than tax sharing payments received
from its subsidiaries. In addition, the Parent receives payments from
the regulated and non-regulated entities for services provided by the
Parent. Payments from regulated subsidiaries for dividends, tax
sharing payments and other services totaled approximately $64,900,000
during the year ended December 31, 1995.
Based on discussions with commercial and investment bankers, the
Company believes that it has the ability to raise additional funds
under acceptable conditions for use in its existing businesses or for
appropriate investment opportunities. Since 1993, the Company's
senior debt obligations have been rated as "investment grade" by
Moody's, S&P and Duff & Phelps Inc. Ratings issued by bond rating
agencies are subject to change at any time.
In March 1996, the Company retired at maturity its 6% Swiss Franc
Bond issue and underlying currency swap agreement, which had an
outstanding principal balance of $27,255,000.
Consolidated Liquidity. During each of the three years in the
----------------------
period ended December 31, 1995, the Company operated profitably and in
the years ended December 31, 1995 and 1994, net cash was provided from
operations. For the year ended December 31, 1993, in spite of
increased earnings, net cash was used for operations, principally as a
result of payments made in connection with a reinsurance transaction.
In June 1995, the Company purchased a 46.4% common stock interest
in MK Gold for an aggregate cash purchase price of $22,500,000. In
addition, the Company purchased at par all of a lender's interest
under a $20,000,000 revolving credit facility with MK Gold, of which
$15,000,000 was outstanding. This amount was repaid during the third
quarter of 1995.
During the second quarter of 1995, the Company purchased
2,365,200 common shares of RCP for approximately $11,130,000, which
increased its equity interest in RCP to 2,714,000 shares (7.1%). RCP
is a real estate investment trust, the principal asset of which is a
$1.3 billion collateralized loan to the owners of the land and
buildings known as Rockefeller Center in New York City. In March
1996, shareholders of RCP approved a merger transaction pursuant to
which shareholders will receive $8.00 per share. If the merger is
consummated, the Company expects to report a pre-tax gain of
approximately $8,900,000 in 1996.
In July 1995, pursuant to the chapter 11 reorganization plan of
HFC, the Company acquired 41.2% of HFC's common stock for a net cash
investment of approximately $4,200,000. As part of the reorganization
plan, the Company provided HFC with a $20,000,000 eight year secured
loan, which is convertible into additional shares of HFC common stock
after three years (subject to certain conditions) and which bears
interest at the rate of 12% per year.
The Company has entered into a letter of intent with PepsiCo, Inc. for the
formation of a joint venture (the "JV") that will be the exclusive bottler
and distributor of PepsiCo beverages in a large portion of eastern Russia,
Kyrgyzstan and Kazakhstan. The Company has agreed to invest approximately
$79,000,000 in the JV, for which it will receive a 75% economic interest.
24
It is currently anticipated that the joint venture agreement will be
executed during the second quarter of 1996.
The Company's investments in Russia and Argentina are subject to
foreign exchange and other risks. Investing in the emerging markets
of Russia is subject to political risk and uncertainty concerning the
government's ability to succeed in its program to convert to a market
economy, both of which are beyond the Company's control. In
Argentina, the Company's investment is subject to the foreign currency
exchange risk of a devaluation of the Argentine peso against the
United States dollar, which the Argentine government has indicated is
not being considered, the volatility of the Argentine banking system,
the overall health of the Argentine economy and the usual competitive
factors experienced by insurance companies.
The source of the funds for the investments described above is
general corporate funds available to the Parent company.
Effective as of December 31, 1995, control of the WMAC Companies
was returned to the Company and such subsidiaries were consolidated.
As a result, the Company recorded a gain of $41,030,000, representing
the difference between the carrying amount of the Company's investment
prior to consolidation and the net assets of such subsidiaries.
The investment portfolios of the Company's insurance subsidiaries
are principally fixed maturity investments rated "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 investment
strategy of the insurance subsidiaries has been to maintain a high
quality portfolio of publicly traded, fixed income securities with a
relatively short duration. Principally as a result of decreases in
market interest rates during 1995, the unrealized loss on investments
at the end of 1994 of approximately $41,309,000 (net of taxes) became
an unrealized gain of approximately $30,086,000 (net of taxes) as of
December 31, 1995. While this has resulted in an increase in
shareholders' equity, it had no effect on results of operations or
cash flows.
As a result of significant losses from natural disasters suffered
by the property and casualty insurance industry in recent years, the
Company has seen a notable decrease in the availability of reinsurance
at reasonable rates, particularly at low levels of deductibility. The
Company's insurance subsidiaries also suffered certain of such losses,
although catastrophe reinsurance programs substantially reduced the
economic losses in 1994. As a result of increased reinsurance rates,
in 1995 the Company raised its retention of lower level losses from
$11,000,000 to $15,000,000. The Company has benefited from a modest
decline in reinsurance rates for its 1996 catastrophe reinsurance
program and has not adjusted its retention of lower level losses.
In December 1995, the Company entered into an agreement with the
California Department of Insurance to settle its Proposition 103
liability for $17,700,000. The settlement did not exceed reserves
established in prior years. The Company paid the settlement amount
during the first quarter of 1996.
The Company provides collateralized automobile loans to
individuals with poor credit histories. In 1995, primarily as a
result of increased competition together with the Company's
unwillingness to lower its underwriting standards and interest rate
charges, the loan portfolio did not grow at the rate previously
experienced. Additionally, loan losses have increased but remain less
than the 6.6% reserve maintained on this portfolio. The Company
expects that the increased level of competition will continue, and,
together with the Company's unwillingness to lower rates, is likely to
result in a contraction in the size of this portfolio in the future.
The Company's investment in these loans was $134,668,000, $129,512,000
and $73,321,000 at December 31, 1995, 1994 and 1993, respectively.
25
The Company and certain of its subsidiaries, including Phlcorp
and its subsidiaries, have substantial loss carryforwards and other
tax attributes (as more fully discussed in the 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,
the Company's certificate of incorporation contains provisions which
generally restrict the ability of a person or entity from accumulating
at least five percent 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. The Company has 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 is based, in part, on certain proposed regulations
affecting the use of Phlcorp's tax loss carryforwards. As described
in the Notes to the Consolidated Financial Statements, significant
additional amounts may be available under certain circumstances.
Results of Operations
---------------------
The Company's most significant operations are its insurance
businesses, where it is a specialty markets provider of property and
casualty and life insurance to its niche markets. For the year ended
December 31, 1995, the Company's insurance segments contributed 78% of
total revenues and, at December 31, 1995, constituted 77% of total
assets.
Earned premium revenues and commissions of the property and
casualty insurance operations of the Empire Group were $326,100,000 in
1995, $299,200,000 in 1994 and $259,400,000 in 1993. The increase in
1995 principally was attributable to growth in policies in force and
increased premium rates, while the increase in 1994 resulted from
increased policies in force. The majority of the growth in each of
1995 and 1994 resulted from acquired blocks of assigned risk business
from other insurance companies.
Earned premium revenues of the Colonial Penn P&C Group were
approximately $490,500,000 in 1995, $447,200,000 in 1994 and
$452,600,000 in 1993. The growth in earned premiums in 1995
principally resulted from acquired blocks of assigned risk automobile
business from other insurance companies and a modest increase in
earned premiums related to voluntary automobile policies. Voluntary
automobile policies in force at December 31, 1995 were almost 1%
greater than the prior year end, and written premiums increased 5.7%
from 1994. When the Colonial Penn P&C Group was acquired in 1991, the
Company substantially reduced its existing marketing programs, which
the Company believes were not justified by prior operating results,
and instituted new low cost direct marketing methods. Prior to 1995,
this strategy resulted in declining polices in force and earned
premiums, as new business was not sufficient to offset the normal
attrition of existing business. The Company believes that new
business generated in 1996 will continue to exceed lapsed business and
the rate of growth in policies in force will also increase, although
there can be no assurance that this will be achieved. Earned premiums
in 1994 also reflect an increase, as compared to the prior year,
resulting from acquired blocks of automobile assigned risk business
from other insurance companies.
26
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
----------------------- ---- ---
1995 103.5% 101.2%
1994 99.1% 98.8%
1993 96.9% 93.7%
The provision for insurance losses and policy benefits includes
catastrophe losses, net of reinsurance recoveries, estimated at
approximately $4,600,000, $18,300,000 and $10,900,000 for the years
ended December 31, 1995, 1994 and 1993, respectively. The 1994 losses
include approximately $11,700,000 related to the Northridge,
California earthquake.
The increase in the combined ratios is primarily attributable to
the Empire Group, which strengthened reserves in automobile and
workers compensation lines by approximately $34,470,000. Actuarial
studies conducted during 1995 have identified revised loss development
patterns in automobile lines, which may indicate greater ultimate loss
experience than previously expected. The Empire Group also reopened
closed no-fault claims files during 1995 and made additional payments
on prior years' claims. This, along with changes in claim handling
practices, have increased the difficultly of estimating ultimate losses,
and actual losses may be different than the studies indicated.
However, the Empire Group strengthened reserves to the levels
indicated in the actuarial studies. The Empire Group will continue to
analyze loss development patterns on a quarterly basis and will
evaluate the adequacy of its loss reserves.
The combined ratios for the Colonial Penn P&C Group increased
slightly in 1995 as compared to 1994. The 1995 combined ratios
reflect higher losses related to acquired blocks of automobile
assigned risk business that are partially offset by increased service
fee income. In addition, the combined ratios in 1995 were favorably
affected by reduced catastrophe losses as compared to 1994. The
combined ratios of the Colonial Penn P&C Group's core line of
business, voluntary auto, were essentially unchanged. The Colonial
Penn P&C Group believes that its strong underwriting procedures,
emphasis on mature adult insureds, prior rate increases and claims
handling and settlement practices have enabled it to record combined
ratios that compare favorably with the industry.
In addition to higher catastrophe losses, the combined ratios for
1994 increased as compared to 1993 principally due to settlements in
1993 of Colonial Penn P&C Group prior years' claims at amounts less
than provided.
Premium revenue receipts on IOP products of the life insurance
subsidiaries (which are not reflected as revenues) were $50,202,000 in
1995, $108,080,000 in 1994 and $88,312,000 in 1993. The principal IOP
product sold during the three year period ended December 31, 1995 was
a VA product marketed directly to consumers. The Company believes the
decline in premium revenue receipts of the VA product is due to a
combination of factors, including the public's perception of potential
tax law changes, increased competition and the performance of the
fund manager.
Earned premium revenues of the life and health insurance
operations were $165,800,000 for 1995, $172,400,000 for 1994 and
$181,800,000 for 1993. The decline in earned premium revenues reflect
the run-off of the agent sold Medicare supplement business, which the
Company ceased marketing at December 31, 1992 due to inadequate
profitability.
27
Earned premiums revenues for the Company's Graded Benefit Life
business were $117,700,000, $113,700,000 and $109,800,000 for the
years ended December 31, 1995, 1994 and 1993, respectively. The
growth in earned premiums reflects the Company's increased marketing
efforts with respect to this product, which have been conducted at
acquisition cost levels that result in adequate profitability.
Insurance losses, policy benefits and amortization of deferred
acquisition costs of the life and health insurance operations were
$133,200,000, $138,300,000 and $179,100,000 for the years ended
December 31, 1995, 1994 and 1993, respectively. The decrease in 1995
reflects the run-off of the agent sold Medicare supplement business,
which had less favorable loss experience in 1995, reduced IOP
insurance in force and a $3,500,000 gain recognized from the
termination of a reinsurance agreement. The decrease in 1995 was
partially offset by the growth of the Graded Benefit Life product.
The decrease in 1994 as compared to the prior year primarily reflects
the run-off of the agent sold Medicare supplement business and certain
non-recurring transactions in 1993 which are described below.
In 1993, due to expectations of decreased or inadequate future
profitability of its Single Premium Whole Life ("SPWL") products, the
Company reinsured its SPWL business and recorded a net pre-tax gain of
approximately $16,700,000. Such net pre-tax gain consists of the
premium received on the transaction of $19,500,000, which is reflected
as a credit in the caption "Provision for insurance losses and policy
benefits," and net security gains on investments sold in connection
with the transaction of $24,100,000, reduced by the write-off of
deferred policy acquisition costs of $26,900,000.
During 1993, the Company reinvested proceeds from sales of
certain securities at the lower prevailing interest rates. Since
these reinvestment rates were, in certain instances, lower than had
previously been expected on certain fixed rate annuity policies, the
Company recorded an additional provision for insurance losses of
$6,800,000.
Manufacturing revenues decreased in 1995 principally due to
reduced demand from customers of the bathroom vanities division and a
factory fire at the fibers division, offset in part by increased sales
at the plastics division. The decrease in manufacturing gross profit
in 1995 principally reflects the decrease in manufacturing sales,
increased raw material costs at most divisions and the fire at the
fibers division. Although manufacturing revenues increased in 1994 as
compared to 1993, gross profit declined significantly, principally at
the bathroom vanities division, which experienced manufacturing
inefficiencies, pricing pressures and recorded provisions for obsolete
inventory in 1994.
As a result of the factory fire at the fibers division and
historical operating losses, in the fourth quarter of 1995 the Company
decided to close the factory and recorded a loss of approximately
$6,200,000 for shutdown expenses. In addition, during the third
quarter of 1995, the Company sold a division that manufactured office
furnishing systems and recognized a loss of $1,100,000. Such losses
are reflected in the caption "Selling, general and other expenses."
Finance revenues reflect the level of consumer instalment loans,
which have increased during 1995 and 1994 as discussed above. The
operating profit applicable to this segment did not change
significantly in 1995 as compared to 1994, principally due to
increased interest expense on customer banking deposits and greater
losses on automobile loans.
Investment and other income increased in 1995 principally due to
the return of the WMAC Companies, which resulted in a gain of
$41,030,000 as discussed above. Interest and dividend income
increased in 1995 reflecting higher investment yields and increased
funds available for investment. Investment and other income reflects
increased fee income in 1995 related to acquired blocks of automobile
assigned risk business.
28
Investment and other income in 1994 includes $8,458,000 related
to the disposition of El Salvador government bonds and $14,490,000
related to the sale of the Company's remaining shares in Bolivian
Power Company. Investment and other income in 1993 includes a
$12,981,000 gain from the sale of a portion of the investment in
Bolivian Power Company.
Net securities gains (losses) were $20,027,000, ($12,004,000) and
$51,923,000 for the years ended December 31, 1995, 1994 and 1993,
respectively. Realized security losses during 1994 principally
reflected the Company's strategy to further shorten the duration of
its investment portfolio during a time of rising interest rates.
Security gains in 1993 were realized, in part, to effect the
reinsurance and transfer of the SPWL business described above.
Higher interest expense in each of 1995 and 1994 compared to the
prior year principally reflects the increased level of outstanding
debt. Interest expense also reflects the increased level of deposits
at AIB and AIF and an increase in rates related to those deposits.
Generally, interest rates on deposits are lower than on other
available funds. Interest expense on deposits was $12,034,000 in
1995, $8,304,000 in 1994 and $9,001,000 in 1993.
The increase in selling, general and other expenses in 1995
principally reflects the losses recorded by the manufacturing segment
as described above, operating expenses of real estate properties
acquired during 1994, expenses relating to certain investing
activities, including expenses related to exploring opportunities in
Russia, and increased provisions for bad debts at the banking and
lending segment.
During each of the last three years, statistical studies and
estimates of service costs indicated that the recorded liability for
unredeemed trading stamps was in excess of the amount that ultimately
would be required to redeem trading stamps outstanding. As a result,
selling, general and other expenses applicable to the trading stamp
operations include credits of $9,400,000, $11,700,000 and $11,900,000
for the years ended December 31, 1995, 1994 and 1993, respectively,
reflecting adjustments made to the liability for unredeemed trading
stamps. The Company's most recent analysis of the liability for
unredeemed trading stamps has not identified any remaining excess as
of December 31, 1995.
The provision for income taxes for 1995 is below the expected
normal corporate income tax rate principally due to the gain related
to the return of the WMAC Companies, which is not taxable, and the
favorable resolution of certain contingencies. The provision for
income taxes for 1994 and 1993 is below the expected normal corporate
income tax rate principally because of a reduction in the valuation
allowance applicable to the deferred tax asset due to the resolution
of certain contingencies. In addition, the provision for income taxes
for 1993 was reduced by approximately $4,215,000 as a result of
changes in federal income tax rates.
The number of shares used to calculate primary earnings per share
was 59,271,000, 58,202,000 and 58,539,000 for 1995, 1994 and 1993,
respectively. The number of shares used to calculate fully diluted
earnings per share was 62,807,000, 61,715,000 and 61,486,000 for 1995,
1994 and 1993, respectively. The increase in the number of shares
utilized in calculating per share amounts in 1995 principally relates
to the exercise of previously granted warrants to the Company's
Chairman and President, the selling of such shares in an underwritten
public offering and the exercise by the underwriters of the over
allotment option, all as discussed above.
29
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.
30
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 1996 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.
31
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
------- ------------------------------------------------------------
8-K.
---
(a)(1)(2) Financial Statements and Schedules.
----------------------------------
Report of Independent Accountants . . . . . F-1
Financial Statements:
Consolidated Balance Sheets at
December 31, 1995 and 1994 . . . . . . . . F-2
Consolidated Statements of Income
for the years ended December 31,
1995, 1994 and 1993 . . . . . . . . . . . F-3
Consolidated Statements of Cash
Flows for the years ended
December 31, 1995, 1994 and 1993 . . . . . F-4
Consolidated Statements of Changes
in Shareholders' Equity for the
years ended December 31, 1995, 1994
and 1993 . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . F-7
Financial Statement Schedules:
Schedule II - Condensed Financial
Information of Registrant . . . . . . . . F-35
Schedule III - Supplementary
Insurance Information . . . . . . . . . . F-39
Schedule IV - Schedule of
Reinsurance . . . . . . . . . . . . . . . F-40
Schedule V - Valuation and
Qualifying Accounts . . . . . . . . . . . F-41
Schedule VI - Schedule of Supplemental
Information for Property and
Casualty Insurance Underwriters . . . . . F-42
32
(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 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
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 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 the Company's Annual Report on Form 10-K for
the fiscal year ended December 31, 1993 (the "1993
10-K")).
Agreement made as of December 28, 1993 by and between
the Company and Joseph S. Steinberg (filed as Exhibit
10.18 to the 1993 10-K).
33
Agreement between the Company and Ian M. Cumming
dated as of December 28, 1993 (filed as Exhibit
10.19(a) to the 1993 10-K).
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 the 1993 10-K).
Agreement between the Company and Joseph S.
Steinberg, dated as of December 28, 1993 (filed as
Exhibit 10.20(a) to the 1993 10-K).
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 the 1993 10-K).
Deferred Compensation Agreement between the Company
and Lawrence S. Hershfield, dated March 29, 1995
(filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q For the Quarterly Period ended
March 31, 1995).
Agreement between the Company and Lawrence S.
Hershfield, dated as of May 4, 1995 (filed as Exhibit
10.22(a) to this Report).
Escrow and Security Agreement by and among the
Company, Lawrence S. Hershfield and Weil, Gotshal &
Manges, as escrow agent, dated as of May 4, 1995
(filed as Exhibit 10.22(b) to this Report).
(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).*
___________________
* Incorporated by reference.
34
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 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).*
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 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 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 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).*
___________________
* Incorporated by reference.
35
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).*
10.17 Agreement made as of December 28, 1993 by and
between the Company and Ian M. Cumming (filed as
Exhibit 10.17 to the 1993 10-K).*
___________________
* Incorporated by reference.
36
10.18 Agreement made as of December 28, 1993 by and
between the Company and Joseph S. Steinberg (filed
as Exhibit 10.18 to the 1993 10-K).*
10.19(a) Agreement between the Company and Ian M. Cumming,
dated as of December 28, 1993 (filed as Exhibit
10.19(a) to the 1993 10-K).*
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
(filed as Exhibit 10.19(b) to the 1993 10-K).*
10.20(a) Agreement between the Company and Joseph S.
Steinberg, dated as of December 28, 1993 (filed as
Exhibit 10.20(a) to the 1993 10-K).*
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 (filed as Exhibit 10.20(b) to the 1993 10-K).*
10.21 Deferred Compensation Agreement between the Company
and Lawrence S. Hershfield, dated March 29, 1995
(filed as Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q For the Quarterly Period ended
March 31, 1995).*
10.22(a) Agreement between the Company and Lawrence S.
Hershfield, dated as of May 4, 1995.
10.22(b) Escrow and Security Agreement by and among the
Company, Lawrence S. Hershfield and Weil, Gotshal &
Manges, as escrow agent, dated as of May 4, 1995.
21 Subsidiaries of the registrant.
23 Consent of independent 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), Form S-8 (File No. 33-61680)
and Form S-8 (File No. 33-61718).
27 Financial Data Schedule.
28 Schedule P of the 1995 Annual Statement to
Insurance Departments of the Colonial Penn
Insurance Company and Affiliated Property/Casualty
Insurers, the Empire Insurance Company, Principal
Insurer, the WMAC Credit Insurance Corporation and
the Commercial Loan Insurance Corporation. (P)
___________________
* Incorporated by reference.
37
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 28, 1996 By: /s/ Joseph A. Orlando
-----------------------------------
Joseph A. Orlando
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
------------------------------ (Principal Executive Officer)
Ian M. Cumming
/s/ Joseph S. Steinberg President and Director
------------------------------ (Principal Executive Officer)
Joseph S. Steinberg
/s/ Joseph A. Orlando Vice President and Comptroller
------------------------------ (Principal Financial and
Joseph A. Orlando 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/ Jesse Clyde Nichols, III Director
------------------------------
Jesse Clyde Nichols, III
38
REPORT OF INDEPENDENT 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, 1995 and 1994, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1995, in conformity with generally
accepted accounting principles. 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 discussed in the notes to the consolidated financial statements, in 1993 the
Company changed its method of accounting for Income Taxes, Postretirement
Benefits Other Than Pensions, Postemployment Benefits, 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 L.L.P.
New York, New York
March 22, 1996
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
December 31, 1995 and 1994
(Dollars in thousands, except par value)
1995 1994
---- ----
ASSETS
- ------
Investments:
Available for sale (aggregate cost of $2,618,363
and $2,396,288) $2,664,471 $2,331,288
Trading securities (aggregate cost of $52,153
and $53,312) 55,702 52,231
Held to maturity (aggregate fair value of $65,416
and $52,820) 64,546 54,586
Policyholder loans 17,768 17,943
Other investments, including accrued interest income 77,994 56,347
---------- ----------
Total investments 2,880,481 2,512,395
Cash and cash equivalents 266,158 252,495
Reinsurance receivable, net 261,267 310,682
Trade, notes and other receivables, net 497,753 463,981
Prepaids and other assets 238,306 245,476
Property, equipment and leasehold improvements, net 111,374 110,887
Deferred policy acquisition costs 92,144 74,536
Deferred income taxes 103,466 144,631
Separate and variable accounts 472,837 420,398
Investments in associated companies 184,088 138,565
---------- ----------
Total $5,107,874 $4,674,046
========== ==========
LIABILITIES
- -----------
Customer banking deposits $ 203,061 $ 179,888
Trade payables and expense accruals 209,362 189,280
Other liabilities 134,772 148,479
Income taxes payable 39,596 39,491
Policy reserves 1,971,080 1,964,730
Unearned premiums 434,773 413,546
Separate and variable accounts 472,837 419,355
Debt, including current maturities 520,862 425,848
---------- ----------
Total liabilities 3,986,343 3,780,617
---------- ----------
Minority interest 10,040 11,614
---------- ----------
SHAREHOLDERS' EQUITY
- --------------------
Common shares, par value $1 per share, authorized
150,000,000 shares; 60,163,824 and 56,100,074 shares
issued and outstanding, after deducting 54,319,654 and
54,305,016 shares held in treasury 60,164 56,100
Additional paid-in capital 159,914 98,175
Net unrealized gain (loss) on investments 30,086 (41,309)
Retained earnings 861,327 768,849
---------- ----------
Total shareholders' equity 1,111,491 881,815
---------- ----------
Total $5,107,874 $4,674,046
========== ==========
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, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
(In thousands, except per share amounts)
Revenues:
Insurance revenues and commissions $ 982,388 $ 918,886 $ 893,850
Manufacturing 166,237 180,050 173,638
Finance 53,958 45,835 33,587
Investment and other income 335,704 251,618 255,060
Net securities gains (losses) 20,027 (12,004) 51,923
---------- ---------- ----------
1,558,314 1,384,385 1,408,058
---------- ---------- ----------
Expenses:
Provision for insurance losses and policy
benefits 842,126 737,630 688,302
Amortization of deferred acquisition costs 100,677 81,380 101,450
Manufacturing cost of goods sold 129,279 137,507 122,815
Interest 52,871 44,003 39,465
Salaries 90,334 87,650 83,179
Selling, general and other expenses 210,845 195,897 195,979
---------- ---------- ----------
1,426,132 1,284,067 1,231,190
---------- ---------- ----------
Income before income taxes and cumulative
effects of changes in accounting principles 132,182 100,318 176,868
---------- ---------- ----------
Income taxes:
Current 2,366 9,085 25,355
Deferred 22,313 20,397 35,254
---------- ---------- ----------
24,679 29,482 60,609
---------- ---------- ----------
Income before cumulative effects of
changes in accounting principles 107,503 70,836 116,259
Cumulative effects of changes in
accounting principles - - 129,195
---------- ---------- ----------
Net income $ 107,503 $ 70,836 $ 245,454
========== ========== ==========
Earnings per common and dilutive common equivalent share:
Income before cumulative effects of
changes in accounting principles $1.81 $1.22 $1.98
Cumulative effects of changes in
accounting principles - - 2.21
----- ----- -----
Net income $1.81 $1.22 $4.19
===== ===== =====
Fully diluted earnings per common share:
Income before cumulative effects of
changes in accounting principles $1.77 $1.21 $1.94
Cumulative effects of changes in
accounting principles - - 2.10
----- ----- -----
Net income $1.77 $1.21 $4.04
===== ===== =====
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, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
(Thousands of dollars)
Net cash flows from operating activities:
- ----------------------------------------
Net income $ 107,503 $ 70,836 $ 245,454
Adjustments to reconcile net income to net
cash provided by (used for) operations:
Cumulative effects of changes in accounting principles - - (129,195)
Provision for deferred income taxes 22,313 20,397 35,254
Depreciation and amortization of property,
equipment and leasehold improvements 17,927 17,075 16,378
Other amortization 102,194 88,485 113,450
Provision for doubtful accounts 17,849 10,579 12,432
Net securities (gains) losses (20,027) 12,004 (51,923)
Premium on reinsurance transaction with John Hancock - - (19,456)
Equity in losses of associated companies 2,613 5,176 2,064
(Gains) related to foreign power companies - (22,948) (13,111)
(Gain) related to the return of the WMAC Companies (41,030) - -
Purchases of investments classified as trading (177,281) (132,752) (77,333)
Proceeds from sales of investments classified
as trading 182,894 119,042 38,118
Deferred policy acquisition costs incurred and deferred (118,285) (100,506) (81,746)
Reinsurance payment to John Hancock - - (510,698)
Net change in:
Reinsurance receivable 48,446 154,788 46,603
Trade, notes and other receivables (26,548) (23,661) (55,439)
Prepaids and other assets (18,101) (23,488) (49,183)
Trade payables and expense accruals 4,682 35,973 44,663
Other liabilities (18,206) (22,285) (20,377)
Income taxes 105 (1,844) 8,195
Policy reserves 21,152 (123,376) (56,327)
Unearned premiums 21,227 33,286 35,020
Other 7,870 2,755 4,236
---------- ---------- ----------
Net cash provided by (used for)
operating activities 137,297 119,536 (462,921)
---------- ---------- ----------
Net cash flows from investing activities:
- ----------------------------------------
Acquisition of real estate, property, equipment
and leasehold improvements (54,696) (122,122) (19,368)
Proceeds from disposals of real estate, property
and equipment 22,533 7,741 5,760
Investment in MK Gold Company in 1995 and Caja in 1994 (22,593) (45,711) -
Advances on loan receivables (154,329) (182,289) (132,324)
Principal collections on loan receivables 123,266 118,484 95,535
Purchases of investments (other than short-term) (1,893,387) (1,251,643) (1,582,856)
Proceeds from maturities of investments 636,076 425,582 471,440
Proceeds from sales of investments 1,091,573 888,474 1,193,141
---------- ---------- ----------
Net cash provided by (used for)
investing activities (251,557) (161,484) 31,328
---------- ---------- ----------
(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, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
(Thousands of dollars)
Net cash flows from financing activities:
- ----------------------------------------
Net change in short-term borrowings $ (80) $ (582) $ (5,678)
Net change in customer banking deposits 22,785 6,346 (12,817)
Net change in policyholder account balances (14,802) (17,302) (95,554)
Issuance of long-term debt, net of issuance
costs 101,390 50,000 194,157
Reduction of long-term debt (9,475) (27,940) (18,237)
Sale of common shares and exercise of warrants,
net of expenses 43,857 - -
Purchase of common shares for treasury (727) (472) (2,492)
Dividends paid (15,025) (7,021) (6,971)
---------- ---------- ----------
Net cash provided by financing activities 127,923 3,029 52,408
---------- ---------- ----------
Net increase (decrease) in cash and
cash equivalents 13,663 (38,919) (379,185)
Cash and cash equivalents at January 1, 252,495 291,414 670,599
---------- ---------- ----------
Cash and cash equivalents at December 31, $ 266,158 $ 252,495 $ 291,414
========== ========== ==========
Supplemental disclosures of cash flow information:
- -------------------------------------------------
Cash paid during the year for:
Interest $52,919 $43,137 $34,574
Income tax payments, net of refunds $ 2,267 $10,731 $17,025
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, 1995, 1994 and 1993
Net
Common Unrealized
Shares Additional Gain (Loss)
$1 Par Paid-in On Retained
Value Capital Investments Earnings Total
------ --------- ----------- -------- -----
(Thousands of dollars)
Balance, January 1, 1993 $55,890 $ 95,711 $ 9 $466,551 $ 618,161
Exercise of options to
purchase common shares 470 1,865 2,335
Purchase of stock for treasury (566) (10,220) (10,786)
Income tax benefit related to
warrant and option transactions 9,760 9,760
Net change in unrealized gain
(loss) on investments 49,903 49,903
Dividend ($.125 per Common Share) (6,971) (6,971)
Net income 245,454 245,454
------- -------- -------- -------- ----------
Balance, December 31, 1993 55,794 97,116 49,912 705,034 907,856
Exercise of options to
purchase common shares 330 1,507 1,837
Purchase of stock for treasury (24) (448) (472)
Net change in unrealized gain
(loss) on investments (91,221) (91,221)
Dividend ($.125 per Common Share) (7,021) (7,021)
Net income 70,836 70,836
------- -------- -------- -------- ----------
Balance, December 31, 1994 56,100 98,175 (41,309) 768,849 881,815
Exercise of options to
purchase common shares 415 2,201 2,616
Purchase of stock for treasury (29) (698) (727)
Exercise of warrants to purchase
common shares (net of expenses)
and related income tax benefit 3,200 47,845 51,045
Issuance of common shares, net
of underwriting discounts 478 12,391 12,869
Net change in unrealized gain
(loss) on investments 71,395 71,395
Dividend ($.25 per Common Share) (15,025) (15,025)
Net income 107,503 107,503
------- -------- -------- -------- ----------
Balance, December 31, 1995 $60,164 $159,914 $ 30,086 $861,327 $1,111,491
======= ======== ======== ======== ==========
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. Nature of Operations:
---------------------
The Company is a diversified financial services holding company engaged in
personal and commercial lines of property and casualty insurance, life and
health insurance, banking and lending and manufacturing, principally in markets
throughout the United States. 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 livery vehicles in the New
York metropolitan area.
The Company's banking and lending operations principally consist of making
instalment loans primarily funded by deposits insured by the Federal Deposit
Insurance Company. The Company's manufacturing operations primarily manufacture
products for the "do-it-yourself" home improvement market and for industrial and
agricultural markets.
2. Significant Accounting Policies:
--------------------------------
(a) Use of Estimates in Preparing Financial Statements: The preparation of
--------------------------------------------------
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts in the financial statements and disclosures of contingent assets and
liabilities at the date of the financial statements. Actual results could differ
from those estimates.
(b) Consolidation Policy: The consolidated financial statements include the
--------------------
accounts of the Company and all majority-owned subsidiaries. Two of the
Company's legal subsidiaries (the "WMAC Companies") were not consolidated while
under the control of the Wisconsin Insurance Commissioner. Effective as of
December 31, 1995, control of the WMAC Companies was returned to the Company and
such subsidiaries are included in the consolidated balance sheet as of December
31, 1995.
Investments in 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.
Certain amounts for prior periods have been reclassified to be consistent with
the 1995 presentation.
(c) Stock Split: On November 15, 1995, a two-for-one stock split was effected
-----------
in the form of a 100% stock dividend. The financial statements (and notes
F-7
2. Significant Accounting Policies, continued:
-------------------------------
thereto) give retroactive effect to the stock split for all periods presented.
(d) Statements of Cash Flows: The Company considers short-term investments,
------------------------
which have maturities of less than three months at the time of acquisition, to
be cash equivalents. Cash and cash equivalents include short-term investments of
$199,725,000 and $200,232,000 at December 31, 1995 and 1994, respectively.
On June 1, 1993, the Company received 448,350 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 former director of the Company. The value of the shares received,
which was based on the market price on the date of the transaction, was equal to
the maturity value of the note.
(e) Investments: 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"). The adoption of SFAS
115 resulted in an increase in reported shareholders' equity of $49,500,000 at
December 31, 1993.
At acquisition, marketable debt and equity securities are designated as either
i) held to maturity, which are carried at amortized cost, ii) trading, which are
carried at estimated fair value with unrealized gains and losses reflected in
results of operations, or iii) available for sale, which are carried at
estimated fair value with unrealized gains and losses reflected as a separate
component of shareholders' equity, net of taxes. Held to maturity investments
are made with the intention of holding such securities to maturity, which the
Company has the ability to do. Estimated fair values are principally based on
quoted market prices.
Investments with an impairment in value considered to be other than temporary
are written down to estimated net realizable values. The writedowns are included
in "Net securities gains (losses)" in the Consolidated Statements of Income. The
cost of securities sold is based on average cost.
The Company's investments in Russian equity securities ($39,700,000 and
$19,600,000 as of December 31, 1995 and 1994, respectively), none of which is
held by its insurance or banking subsidiaries, do not have readily determinable
fair values. Given the uncertainties inherent in investing in the emerging
markets of Russia, the Company is accounting for these investments under the
cost recovery method, whereby all receipts are applied to reduce the investment.
These investments are included in "Other investments" in the Consolidated
Balance Sheets.
(f) Property, Equipment and Leasehold Improvements: Property, equipment and
----------------------------------------------
leasehold improvements are stated at cost, net of accumulated depreciation and
amortization ($101,568,000 and $87,067,000 at December 31, 1995 and 1994,
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 underlying lease.
F-8
2. Significant Accounting Policies, continued:
-------------------------------
(g) Income Recognition from Insurance Operations: Premiums on property and
--------------------------------------------
casualty and health insurance products are recognized as revenues over the
term of the policy using the monthly pro rata basis.
Premiums for investment oriented insurance products ("IOP products") 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. The principal IOP product offered during the three year
period ended December 31, 1995 was a variable annuity ("VA") product. Other life
premiums are recognized as revenues over the premium paying period.
Premiums for the VA product are directed by the policyholder to be invested in a
unit trust solely for the benefit and risk of the policyholder. Policyholders'
accounts are charged for the cost of insurance provided, administrative and
certain other charges. The amount included in the balance sheet liability
caption "Separate and variable accounts" represents 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 from future premiums and related investment income is not anticipated, the
amounts not considered recoverable are charged to operations. Deferred policy
acquisition costs also have been charged to operations in connection with
dispositions of blocks of business or reinvestment of proceeds from security
sales at prevailing lower 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. 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 and to limit losses from large
exposures by reinsuring certain levels of risk with other insurance enterprises.
Catastrophe reinsurance treaties serve to reduce property and casualty insurance
risk in geographic areas where the Company is exposed to natural disasters,
principally Florida, California and the East Coast. The Company has also entered
into reinsurance transactions in connection with dispositions of blocks of
businesses. Reinsurance contracts do not necessarily legally relieve the Company
from its obligations to policyholders.
Reinsurance recoverables are reported as assets net of provisions for
uncollectible amounts. Premiums earned and other underwriting expenses are
stated net of reinsurance.
F-9
2. Significant Accounting Policies, continued:
--------------------------------
(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. As more information becomes available and claims are settled, the
estimated liabilities are adjusted upward or downward with the effect of
decreasing or increasing net income at the time of adjustment.
Effective as of January 1, 1993, the Company adopted 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"), which specifies the accounting for certain
retrospectively rated reinsurance agreements. As a result of the adoption of
EITF 93-6, the Company reduced its premium payable at January 1, 1993 by
$14,654,000 and recorded a credit of $9,672,000 (net of income taxes of
$4,982,000) which is included in the caption "Cumulative effects of changes in
accounting principles."
(k) Liability for Unredeemed Trading Stamps: The Company's liability for
---------------------------------------
unredeemed trading stamps is estimated based upon recent experience, statistical
evaluation and estimated costs to service redemptions of unredeemed trading
stamps in the future. Recent statistical studies and current estimates of
service costs have indicated that the recorded liability for unredeemed trading
stamps was in excess of the amount that ultimately will be required to redeem
trading stamps outstanding. As a result, selling, general and other expenses
applicable to the trading stamp operations include credits of $9,400,000,
$11,700,000 and $11,900,000 for the years ended December 31, 1995, 1994 and
1993, respectively, reflecting the adjustments made to the liability for
unredeemed trading stamps. The Company's most recent analysis of the liability
for unredeemed trading stamps has not identified any remaining excess as of
December 31, 1995.
(l) Pension, Postemployment and Postretirement Costs: The Company has
------------------------------------------------
non-contributory trusteed pension plans covering certain employees, which
generally provide retirement benefits based on salary and length of service. The
plans are funded in amounts sufficient to satisfy minimum ERISA funding
requirements.
Effective January 1, 1993, the Company adopted Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits Other than
Pensions" ("SFAS 106") and Statement of Financial Accounting Standards No. 112,
"Employers' Accounting for Postemployment Benefits" ("SFAS 112"), which require
accruals for benefits that previously had been expensed as incurred. The Company
does not expect SFAS 106 and SFAS 112 to have a material effect on results of
operations.
F-10
2. Significant Accounting Policies, continued:
--------------------------------
(m) Income Taxes: The Company provides for income taxes using the liability
------------
method. Effective as of January 1, 1993, the Company adopted Statement of
Financial Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS
109"). 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. The future
benefit of certain tax loss carryforwards and future deductions is recorded as
an asset and the provisions for income taxes are not reduced for the benefit
from utilization of tax loss carryforwards. A valuation allowance is provided if
deferred tax assets are not considered more likely than not to be realized.
(n) Derivative Financial Instruments: The Company has entered into interest rate
--------------------------------
swap and interest rate option agreements to reduce the impact of changes in
interest rates on its variable rate debt. The difference between the amounts
paid and received is accrued as an adjustment to interest expense over the term
of the agreements. The premiums paid for interest rate option agreements are
included in other assets and are amortized to expense over the term of the
agreements. The Company does not have material derivative financial instruments
for trading purposes.
(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.
(p) Recently Issued Accounting Standards: Effective January 1, 1996, Statement
------------------------------------
of Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of" ("SFAS 121"),
will require the Company to review the recoverability of the carrying amount of
long-lived assets and recognize an impairment loss under certain circumstances.
The impact of implementation of SFAS 121 on the Company's financial position and
results of operations is not expected to be material.
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"), which is effective January 1, 1996, establishes a
fair value method for accounting for stock-based compensation plans, either
through recognition in the statement of operations or disclosure. The Company
expects to implement SFAS 123 by providing the required disclosures in the notes
to the financial statements.
3. Acquisitions:
-------------
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 former director of the Company, 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 the Jordan
Associated Companies on the cost method of accounting. The investments
F-11
3. Acquisitions, continued:
------------
acquired as a result of the partnership interests are considered Associated
Companies.
In April 1994, the Company acquired a 30% interest in Caja de Ahorro y Seguro
S.A. ("Caja") from the government of Argentina for a purchase price of
$46,000,000, including costs. Caja is a holding company whose subsidiaries are
engaged in property and casualty insurance, life insurance and banking in
Argentina. The difference between the Company's investment in Caja and its share
of Caja's underlying net tangible assets is being amortized over 20 years.
In May 1994, the Company acquired a 615,000 square foot office building located
near Grand Central Terminal in New York City for $50,800,000. The building has
355,000 square feet of contiguous space available for occupancy. After certain
improvements to the building are completed, the Company intends to lease the
available space to one or more entities and/or sell the building. The investment
is included in other assets.
In July 1994, the Company acquired two luxury condominium towers in downtown San
Diego, California for $42,000,000. The property includes 201 residential units,
of which 162 were available for sale at December 31, 1995, and 42,000 square
feet of retail space. The investment is included in other assets.
In June 1995, the Company purchased a 46.4% common stock interest in MK Gold
Company ("MK Gold") for an aggregate cash purchase price of $22,500,000. In
addition, the Company purchased at par all of a lender's interest under a
$20,000,000 revolving credit facility with MK Gold, of which $15,000,000 was
outstanding. This amount was repaid during the third quarter of 1995. MK Gold is
an international gold mining company whose shares are quoted on the Nasdaq
National Market System.
In July 1995, pursuant to the chapter 11 reorganization of HomeFed Corporation
("HFC"), the Company acquired 41.2% of HFC's common stock for a net cash
investment of approximately $4,200,000. As part of the reorganization plan, the
Company provided HFC with a $20,000,000 eight year secured loan, which is
convertible into additional shares of HFC common stock after three years
(subject to certain conditions) and which bears interest at the rate of 12% per
year. HFC is a public company whose subsidiaries develop real property.
The Company accounts for its investments in Caja, MK Gold and HFC under the
equity method of accounting based on fiscal periods ended three months prior to
the end of the Company's reporting period. The Company's investments in Caja, MK
Gold and HFC are included in the caption "Investments in associated companies."
4. 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 the Canadian International Power Company
Limited Liquidating Trust, The Barbados Light and Power Company Limited.
F-12
4. Investments in Associated Companies, continued:
------------------------------------
In March 1993, in settlement of claims related to El Salvador's 1986 seizure of
CAESS's assets, the Company received cash of $5,300,000 and $12,000,000
principal amount of 6% U.S. dollar denominated El Salvador Government bonds due
in instalments through 1996. The Company has recognized the gain on the cash
basis. During 1994, the Company disposed of the remaining bonds and reported a
pre-tax gain of $8,458,000, which is included in the caption "Investment and
other income." Gains recognized in 1993 were not significant.
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 $12,981,000.
During 1994, the Company sold its remaining interest in Bolivian Power to an
unaffiliated party and realized a pre-tax gain of $14,490,000. The gains are
reflected in the caption "Investment and other income."
5. Insurance Operations:
---------------------
Premiums received on IOP products were $50,202,000, $108,080,000 and $88,312,000
for the years ended December 31, 1995, 1994 and 1993, respectively.
The changes in deferred policy acquisition costs were as follows (in thousands):
1995 1994 1993
---- ---- ----
Balance, January 1, $ 74,536 $ 55,410 $ 78,895
--------- -------- ---------
Additions 118,285 100,506 81,746
--------- -------- ---------
Amortization of deferred
acquisition costs:
Provided in connection with
disposition and/or transfers
of business - - (29,748)
Other amortization (100,677) (81,380) (71,702)
--------- -------- ---------
(100,677) (81,380) (101,450)
--------- -------- ---------
Adoption of SFAS 109 - - (3,781)
--------- -------- ---------
Balance, December 31, $ 92,144 $ 74,536 $ 55,410
========= ======== =========
On June 23, 1993, the Company reinsured substantially all of its existing single
premium whole life business ("SPWL") with a subsidiary of John Hancock Mutual
Life Insurance Company ("John Hancock"), and realized a net pre-tax gain of
approximately $16,700,000. Such net pre-tax gain consists of the premium
received on the transaction of approximately $19,500,000, which is reflected as
a credit in the caption "Provision for insurance losses and policy benefits,"
and net security gains on investments sold in connection with the transaction of
$24,100,000, reduced by the write-off of deferred policy acquisition costs of
$26,900,000. For financial reporting purposes, the Company reflects 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 legally relieved of its obligation to the SPWL
policyholders. At December 31, 1995, reinsurance receivables, net includes
$141,084,000 due from John Hancock.
F-13
5. Insurance Operations, continued:
--------------------
During 1993, the Company sold, at gains, substantial amounts of investments,
including dispositions in connection with the transfer of blocks of business,
and, in certain cases, reinvested proceeds at prevailing lower interest rates.
Since certain of these rates were lower than had previously been expected on
certain fixed rate annuity policies, the Company recorded an additional
provision for insurance losses of $6,800,000.
The effect of reinsurance on premiums written and earned for the years ended
December 31, 1995, 1994 and 1993 is as follows (in thousands):
1995 1994 1993
---- ---- ----
Premiums Premiums Premiums Premiums Premiums Premiums
Written Earned Written Earned Written Earned
-------- -------- -------- -------- -------- --------
Direct $1,036,120 $1,004,496 $960,463 $923,131 $930,424 $893,797
Assumed 7,738 22,530 31,804 32,261 34,102 33,628
Ceded (49,092) (44,638) (39,722) (36,506) (33,191) (33,575)
---------- ---------- -------- -------- -------- --------
Net $ 994,766 $ 982,388 $952,545 $918,886 $931,335 $893,850
========== ========== ======== ======== ======== ========
Recoveries recognized on reinsurance contracts were $28,900,000 in 1995,
$44,300,000 in 1994 and $22,800,000 in 1993.
Net income (loss) 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,
-----------------------
1995 1994 1993
---- ---- ----
Net income (loss):
Property and casualty insurance $69,145 $59,048 $96,279
Life insurance $13,465 $14,142 $(2,951)
At December 31,
---------------
1995 1994 1993
---- ---- ----
Statutory surplus:
Property and casualty insurance $520,700 $425,128 $475,408
Life insurance $376,223 $335,903 $303,986
The statutory net income (loss) of the life insurance subsidiaries is net of
certain management and other fees paid to the Company or other subsidiaries of
the Company. Under generally accepted accounting principles, the reported income
of the life insurance segment is increased by these fees, since all intercompany
transactions are eliminated in consolidation.
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, 1995, 1994 and 1993, statutory surplus of
$292,800,000, $252,800,000 and $246,600,000, respectively, related to property
F-14
5. Insurance Operations, continued:
--------------------
and casualty operations is also included in the statutory surplus of the life
insurance parent, and statutory surplus of $29,300,000, $35,900,000 and
$42,200,000, respectively, related to life operations is also included in the
statutory surplus of the property and casualty insurance parent. 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, 1995, $52,167,000 could be distributed to the Company
without regulatory approval.
In December 1995, the Company entered into an agreement with the California
Department of Insurance to settle its Proposition 103 liability for $17,700,000.
The settlement did not exceed reserves established in prior years. The Company
paid the settlement amount during the first quarter of 1996.
The Company's insurance subsidiaries are contingently liable for possible
assessments under state regulatory requirements pertaining to potential
insolvencies of unaffiliated insurance companies. Liabilities, which are
established based upon regulatory guidance, have not been material.
For information with respect to the activity in property and casualty loss
reserves, see "Reconciliation of Liability for Losses and Loss Adjustment
Expenses" in Item 1 included elsewhere herein, which is incorporated by
reference into these consolidated financial statements.
F-15
6. Investments:
-----------
The amortized cost, gross unrealized gains and losses and estimated fair value
of investments classified as held to maturity and as available for sale at
December 31, 1995 and 1994 are as follows (in thousands):
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Held to maturity:
1995
- ----
Bonds and notes:
United States Government
agencies and authorities $49,823 $1,011 $ 139 $50,695
States, municipalities
and political subdivisions 920 8 - 928
All other corporates 310 - 10 300
Other fixed maturities 13,493 - - 13,493
------- ------ ------ -------
$64,546 $1,019 $ 149 $65,416
======= ====== ====== =======
1994
- ----
Bonds and notes:
United States Government
agencies and authorities $40,300 $ 117 $1,861 $38,556
States, municipalities
and political subdivisions 818 10 - 828
All other corporates 385 - 40 345
Other fixed maturities 13,083 8 - 13,091
------- ------ ------ -------
$54,586 $ 135 $1,901 $52,820
======= ====== ====== =======
Available for sale:
1995
- ----
Bonds and notes:
United States Government
agencies and authorities $2,161,873 $24,503 $3,097 $2,183,279
States, municipalities
and political subdivisions 3,367 50 32 3,385
Foreign governments 21,435 3,242 1,372 23,305
Public utilities 50,158 1,123 501 50,780
All other corporates 354,804 14,144 2,192 366,756
---------- ------- ------ ----------
Total fixed maturities 2,591,637 43,062 7,194 2,627,505
---------- ------- ------ ----------
Equity securities:
Common stocks:
Banks, trusts and
insurance companies 10,001 3,217 1 13,217
Industrial, miscellaneous
and all other 16,725 7,919 895 23,749
---------- ------- ------ ----------
Total equity securities 26,726 11,136 896 36,966
---------- ------- ------ ----------
$2,618,363 $54,198 $8,090 $2,664,471
========== ======= ====== ==========
F-16
6. Investments, continued:
-----------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
Available for sale:
1994
- ----
Bonds and notes:
United States Government
agencies and authorities $1,866,752 $ 2,241 $71,625 $1,797,368
States, municipalities
and political subdivisions 91,892 63 771 91,184
Foreign governments 3,576 1,838 220 5,194
Public utilities 77,518 123 2,756 74,885
All other corporates 339,478 11,424 10,451 340,451
---------- ------- ------- ----------
Total fixed maturities 2,379,216 15,689 85,823 2,309,082
---------- ------- ------- ----------
Equity securities:
Preferred stocks 39 - - 39
Common stocks:
Banks, trusts and
insurance companies 10,001 312 1 10,312
Industrial, miscellaneous
and all other 6,507 6,773 1,950 11,330
---------- ------- ------- ----------
Total equity securities 16,547 7,085 1,951 21,681
---------- ------- ------- ----------
Other 525 - - 525
---------- ------- ------- ----------
$2,396,288 $22,774 $87,774 $2,331,288
========== ======= ======= ==========
The amortized cost and estimated fair value of investments classified as held to
maturity and as available for sale at December 31, 1995, 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 Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
(In thousands)
Due in one year or less $19,156 $19,166 $ 489,100 $ 495,389
Due after one year
through five years 39,066 39,750 1,136,653 1,155,177
Due after five years
through ten years 1,415 1,426 72,938 75,773
Due after ten years 1,134 1,314 135,385 136,139
------- ------- ---------- ----------
60,771 61,656 1,834,076 1,862,478
Mortgage-backed securities 3,775 3,760 757,561 765,027
------- ------- ---------- ----------
$64,546 $65,416 $2,591,637 $2,627,505
======= ======= ========== ==========
F-17
6. Investments, continued:
-----------
At December 31, 1995 and 1994 securities with book values aggregating
$45,069,000 and $39,908,000, respectively, were on deposit with various
regulatory authorities.
At December 31, 1995, 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. (6% of Class A
shares), HFC (41%), MK Gold (46%) and Rockefeller Center Properties, Inc. (7%).
Certain information with respect to trading securities at December 31, 1995 and
1994 is as follows (in thousands):
Amortized Estimated Carrying
Cost Fair Value Value
--------- ---------- --------
1995
- ----
Fixed maturities:
Corporate bonds and notes $26,356 $27,194 $27,194
Foreign governments 2,080 3,880 3,880
Equity securities:
Preferred stocks 17,785 19,079 19,079
Common stocks - industrial,
miscellaneous and all other 142 148 148
Options 5,790 5,401 5,401
------- ------- -------
Total trading securities $52,153 $55,702 $55,702
======= ======= =======
1994
- ----
Fixed maturities-
Corporate bonds and notes $37,478 $37,961 $37,961
Equity securities-
Preferred stocks 13,750 13,532 13,532
Options 2,084 738 738
------- ------- -------
Total trading securities $53,312 $52,231 $52,231
======= ======= =======
F-18
7. Trade, Notes and Other Receivables, Net:
---------------------------------------
A summary of trade, notes and other receivables, net at December 31, 1995 and
1994 is as follows (in thousands):
1995 1994
---- ----
Instalment loan receivables net of unearned
finance charges of $3,680 and $5,118 (a) $268,470 $253,089
Loans to small business concerns, including
accrued interest 9,921 11,107
Premiums receivable 187,425 171,975
Amount due on sale of securities 6,808 6,133
Trade receivables 22,669 28,092
Service fee receivable 5,176 3,653
Other 17,786 8,013
-------- --------
518,255 482,062
Allowance for doubtful accounts (including
$13,893 and $12,308 applicable to loan
receivables of banking and lending subsidiaries) (20,502) (18,081)
-------- --------
$497,753 $463,981
======== ========
(a) Contractual maturities of instalment loan receivables at December 31, 1995
were as follows (in thousands): 1996 - $109,024; 1997 - $64,216; 1998 - $44,452;
1999 - $29,842 and 2000 and thereafter - $20,936. 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.
8. Prepaids and Other Assets:
-------------------------
At December 31, 1995 and 1994, a summary of prepaids and other assets is as
follows (in thousands):
1995 1994
---- ----
Real estate assets, net $147,508 $123,423
Inventories, net 30,573 30,974
Excess of acquisition cost over net
tangible assets acquired 173 2,369
Amounts related to the WMAC Companies - 24,611
Balances in risk sharing pools and associations 9,896 16,926
Prepaid reinsurance premium 6,528 5,127
Unamortized debt expense 7,588 7,143
Other 36,040 34,903
-------- --------
$238,306 $245,476
======== ========
F-19
9. Trade Payables, Expense Accruals and Other Liabilities:
------------------------------------------------------
A summary of trade payables, expense accruals and other liabilities at December
31, 1995 and 1994 is as follows (in thousands):
1995 1994
---- ----
Trade Payables and Expense Accruals:
Payables related to securities $ 43,635 $ 42,614
Amount due on reinsurance 11,798 8,787
Trade and drafts payable 40,003 33,629
Accrued compensation, severance and other
employee benefits 28,084 29,189
Pension liability 5,735 1,192
Accrued interest payable 8,965 9,253
Taxes, other than income 23,505 22,831
Provision for servicing carrier claims 23,513 17,935
Other 24,124 23,850
-------- --------
$209,362 $189,280
======== ========
Other Liabilities:
Unearned service fees $ 32,333 $ 28,584
Lease obligations 3,815 9,909
Liability for unredeemed trading stamps 30,574 42,433
Postretirement and postemployment benefits 25,560 25,949
Premiums received in advance 4,871 5,300
Holdbacks on loans 6,035 7,363
Unclaimed funds and dividends 3,622 3,728
Other 27,962 25,213
-------- --------
$134,772 $148,479
======== ========
10. Long-term and Other Indebtedness:
--------------------------------
The principal amount, stated interest rate and maturity of long-term debt
outstanding at December 31, 1995 and 1994 are as follows (dollars in thousands):
1995 1994
---- ----
Senior Notes:
Term loans with banks $ 50,000 $ 50,000
7 3/4% Senior Notes due 2013, less debt
discount of $881 and $931 99,119 99,069
Industrial Revenue Bonds (principally with
variable interest) 5,600 6,811
Other 14,493 12,710
-------- --------
169,212 168,590
-------- --------
Subordinated Notes:
10 3/8% Senior Subordinated Notes due 2002,
less debt discount of $605 and $699 124,395 124,301
8 1/4% Senior Subordinated Notes due 2005 100,000 -
6% Swiss Franc Bonds due March 10, 1996 27,255 32,957
5 1/4% Convertible Subordinated Debentures due 2003 100,000 100,000
-------- --------
351,650 257,258
-------- --------
$520,862 $425,848
======== ========
F-20
10. Long-term and Other Indebtedness, continued:
--------------------------------
Credit agreements provide for aggregate contractual credit facilities of
$150,000,000 and bear interest based on the prime rate or LIBOR, plus commitment
and other fees. Such credit facilities were renewed in 1994 and expire in June
1997. No amounts were borrowed under these facilities as of December 31, 1995
and 1994. The term loans with banks also bear interest based on the prime rate
or LIBOR.
In June 1995, the Company sold $100,000,000 principal amount of its newly
authorized 8 1/4% Senior Subordinated Notes due 2005 in an underwritten public
offering.
Approximately $9,525,000 of the manufacturing division's net property, equipment
and leasehold improvements are pledged as collateral for the Industrial Revenue
Bonds; and approximately $12,716,000 of other assets (primarily property) are
pledged for other indebtedness aggregating approximately $7,585,000.
Interest rate swap and interest rate option agreements are used to reduce the
potential impact of increases in interest rates on term loans with banks,
customer banking deposits and credit agreement borrowings. Under the interest
rate swap agreements, the Company has agreed with other parties to pay fixed
rate interest amounts and receive variable rate interest amounts calculated by
reference to an agreed notional amount. The variable interest rate portion of
the swaps is a specified LIBOR interest rate. Swaps that expire in 1996 require
fixed rate payments of 7.23% on a $50,000,000 notional amount. Swaps that expire
in 1999 require fixed rate payments of 7.33% on a $25,000,000 notional amount.
The weighted average LIBOR rate at December 31, 1995 is 5.8%. Changes in LIBOR
interest rates in the future will change the amounts to be received under the
agreements as well as interest to be paid under the related variable debt
obligations.
In 1994, the Company purchased an option for $2,564,000 to enter into an
interest rate swap, which is exercisable in August 1996. If exercised, the
Company would be required to make fixed rate payments of 7.64% in exchange for
receiving a LIBOR based variable payment on a $50,000,000 notional amount for
the subsequent eight year term.
Counterparties to interest rate swap agreements are major financial
institutions, which management believes are able to fulfill their obligations.
However, any losses due to default by the counterparties are likely to be
immaterial.
During 1989, the Company entered into long-term hedging transactions whereby
substantially all currency rate risk related to the Swiss Franc Bonds was
eliminated and the cost of which increased the cost of the issue to
approximately 10.4%.
The 5 1/4% Convertible Subordinated Debentures due 2003 are convertible into
Common Shares at $28.75 per Common Share, an aggregate of 3,478,261 Common
Shares, subject to anti-dilution provisions.
The most restrictive of the Company's debt instruments require maintenance of
minimum Tangible Net Worth and limit Indebtedness, as defined in the agreements.
In addition, the debt instruments contain limitations on dividends, investments,
liens, contingent obligations and certain other matters. As of January 1, 1996,
cash dividends of $346,100,000 could be paid under the most restrictive
covenants.
F-21
10. Long-term and Other Indebtedness, continued:
--------------------------------
The aggregate annual mandatory redemptions of debt during the five year period
ending December 31, 2000 are as follows (in thousands): 1996 - $30,987; 1997 -
$2,134; 1998 - $2,106; 1999 - $51,663; and, 2000 - $31,975.
The weighted average interest rate on short-term borrowings (primarily customer
banking deposits) was 6.1% and 5.4% at December 31, 1995 and 1994, respectively.
11. Common Shares, Stock Options, Warrants and Preferred Shares:
-----------------------------------------------------------
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, 1995, the Company acquired 618,066 Common Shares
(29,276 shares in 1995, 23,972 shares in 1994 and 564,818 shares in 1993) at an
average price of $19.39 per Common Share. The Common Shares acquired in 1993
include 448,350 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, 1995 is as follows:
Available
Common for
Shares Total Future
Subject Option Option Option
to Option Prices Price Grants
--------- ------ ------ ---------
Balance at January 1, 1993 1,719,336 $ 3.94-$16.75 $ 9,926,772 1,940,000
=========
Granted 353,000 $20.44-$21.50 7,231,938
Exercised (469,792) $ 3.84-$14.25 (2,333,357)
Cancelled (49,600) $ 3.84-$11.25 (363,350)
--------- -----------
Balance at December 31, 1993 1,552,944 $ 3.84-$21.50 14,462,003 1,587,000
=========
Granted 26,000 $17.88-$18.50 475,375
Exercised (330,000) $ 3.84-$20.44 (1,837,627)
Cancelled (33,000) $ 4.69-$20.44 (368,388)
--------- -----------
Balance at December 31, 1994 1,215,944 $ 3.84-$21.50 12,731,363 1,574,800
=========
Granted 10,000 $23.25 232,500
Exercised (414,826) $ 3.84-$21.50 (2,615,642)
Cancelled (38,500) $ 3.84-$23.25 (468,163)
--------- -----------
Balance at December 31, 1995 772,618 $ 5.50-$23.25 $ 9,880,058 1,583,100
========= =========== =========
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, 1995 and 1994, options to purchase 443,018 and 553,868 Common
Shares, respectively, were exercisable.
On September 13, 1995, Ian M. Cumming and Joseph S. Steinberg, Chairman of the
Board and President of the Company, respectively, and certain members of Mr.
Cumming's family exercised previously granted warrants to purchase an aggregate
of 3,188,000 Common Shares and sold such shares in an underwritten public
offering. In connection with such public offering, the Company granted the
underwriters an over allotment option, which was exercised, for 478,200 Common
F-22
11. Common Shares, Stock Options, Warrants and Preferred Shares, continued:
----------------------------------------------------------
Shares. Under the terms of the warrant agreement, the Company was required to
pay expenses of the sale, other than underwriting discounts. As a result of the
exercise of the warrants and the exercise of the over allotment option, the
Company realized aggregate cash proceeds, net of expenses, of $43,736,000. For
income tax purposes, the exercise of the warrants results in a current income
tax deduction of $57,305,000. For financial reporting purposes, the benefit of
such deduction ($20,057,000) was credited directly to shareholders' equity.
At December 31, 1995 and 1994, the Company's Common Shares were reserved as
follows:
1995 1994
---- ----
Stock Options 2,355,718 2,790,744
Warrants - 3,200,000
Convertible Debentures 3,478,261 3,478,261
--------- ---------
5,833,979 9,469,005
========= =========
At December 31, 1995 and 1994, 6,000,000 preferred shares (redeemable and
non-redeemable), par value $1 per share, were authorized.
12. Net Securities Gains (Losses):
-----------------------------
The following summarizes net securities gains (losses) for each of the three
years in the period ended December 31, 1995 (in thousands):
1995 1994 1993
---- ---- ----
Net realized gains (losses) on fixed maturities $14,430 $(11,246) $50,252
Provision for write-down of fixed
maturity investments - (3,126) (2,000)
Net unrealized gain (loss) on trading
securities 3,639 (1,500) (685)
Net realized gains on equity and other
securities 1,958 3,868 4,356
------- -------- -------
$20,027 $(12,004) $51,923
======= ======== =======
Proceeds from sales of investments classified as available for sale were
$1,085,764,000 and $854,824,000 during 1995 and 1994, respectively. Gross gains
of $22,766,000 and $8,461,000 and gross losses of $8,119,000 and $18,446,000
were realized on these sales during 1995 and 1994, respectively.
Proceeds from sales of fixed maturity investments were $1,171,574,000 during
1993. Gross gains of $51,839,000 and gross losses of $1,587,000 were realized on
those sales during 1993.
F-23
13. Other Results of Operations Information:
---------------------------------------
Investment and other income for each of the three years in the period ended
December 31, 1995 consist of the following (in thousands):
1995 1994 1993
---- ---- ----
Interest on short-term investments $ 22,499 $ 13,555 $ 14,867
Interest on fixed maturities 153,034 141,279 158,203
Service fee income 54,481 31,608 15,309
Trading stamp revenues 17,957 19,489 23,827
Rent income 10,730 7,691 3,857
Gain on disposition of the El Salvador
government bonds receivable - 8,458 130
Gain on sale of Bolivian Power - 14,490 12,981
Gain on return of the WMAC Companies 41,030 - -
Litigation settlements 4,666 - -
Other 31,307 15,048 25,886
-------- -------- --------
$335,704 $251,618 $255,060
======== ======== ========
Effective as of December 31, 1995, control of the WMAC Companies was returned to
the Company and such subsidiaries were consolidated. The gain related to the
return of the WMAC Companies reflects the difference between the carrying amount
of the Company's investment prior to consolidation and the net assets of such
subsidiaries.
Taxes, other than income or payroll, included in operations amounted to
$36,978,000 (including $21,687,000 of premium taxes) for the year ended December
31, 1995, $37,310,000 (including $21,330,000 of premium taxes) for the year
ended December 31, 1994 and $36,839,000 (including $21,295,000 of premium taxes)
for the year ended December 31, 1993.
Advertising costs amounted to $13,079,000, $12,541,000 and $10,394,000 for the
years ended December 31, 1995, 1994 and 1993, respectively.
F-24
14. Income Taxes:
------------
The principal components of the deferred tax asset at December 31, 1995 and 1994
are as follows (in thousands):
1995 1994
---- ----
Insurance reserves and unearned premiums $ 95,453 $ 91,177
Securities valuation reserves 8,392 13,915
Other accrued liabilities 15,030 11,090
State taxes 6,728 6,071
Employee benefits and compensation 7,554 7,013
Unrealized losses (gains) on investments (16,174) 22,736
Depreciation (6,557) (4,901)
Policy acquisition costs (10,254) (2,569)
Tax loss carryforwards, net of tax sharing payments 49,026 45,332
Other, net (1,672) (1,173)
-------- --------
147,526 188,691
Valuation allowance (44,060) (44,060)
-------- --------
$103,466 $144,631
======== ========
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 their availability, and unrealized capital
losses.
In addition, the amounts reflected above are based on the minimum tax loss
carryforwards of Phlcorp, Inc. ("Phlcorp") and certain proposed regulations
affecting the use of Phlcorp's tax loss carryforwards. As described more fully
herein, substantial additional amounts may be available under certain
circumstances and as uncertainties are resolved. If these uncertainties are
resolved in the Company's favor, the deferred tax asset related to tax loss
carryforwards would increase by approximately $79,000,000, exclusive of any
additional valuation allowance.
The Company believes it is more likely than not that the recorded deferred tax
asset will be realized principally from taxable income generated by profitable
operations.
The provision for income taxes for each of the three years in the period ended
December 31, 1995 was as follows (in thousands):
1995 1994 1993
---- ---- ----
State income taxes (principally
currently payable) $ 2,500 $ 6,000 $ 8,562
Federal income taxes:
Current (630) 2,906 16,793
Deferred 22,313 20,397 35,254
Foreign income taxes (principally
currently payable) 496 179 -
------- ------- -------
$24,679 $29,482 $60,609
======= ======= =======
F-25
14. Income Taxes, continued:
------------
The table below reconciles expected statutory federal income tax to actual
income tax expense (in thousands):
1995 1994 1993
---- ---- ----
Expected federal income tax $ 46,264 $35,111 $61,904
State income taxes, net of federal
income tax benefit 1,625 3,900 5,565
Amortization of excess of acquisition
cost over net tangible assets acquired 910 1,028 1,154
Tax exempt interest (469) (1,144) (155)
Return of the WMAC Companies (14,360) - -
Effects of changes in federal tax rates - - (4,215)
Reduction in valuation allowance - (5,340) (4,100)
Recognition of additional tax benefits (9,547) (4,450) -
Other 256 377 456
-------- ------- -------
Actual income tax expense $ 24,679 $29,482 $60,609
======== ======= =======
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 1994 and 1993 certain matters were resolved and
the Company reduced the valuation allowance as reflected in the above
reconciliation. Since the WMAC Companies have previously been included in the
Company's consolidated federal income tax return, the gain recorded upon return
of the WMAC Companies is not taxable.
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
========
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 post-reorganization tax attributes and net operating
losses will be utilized prior to pre-reorganization operating losses in
calculating tax sharing payments. Due to unresolved issues concerning certain
post-reorganization deductions, Phlcorp is unable to state with certainty the
F-26
14. Income Taxes, continued:
------------
amount of its available carryforwards. However, Phlcorp believes that it has
minimum tax operating loss carryforwards of between $93,000,000 and $318,000,000
at December 31, 1995. 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 1999.
At December 31, 1995 the Company had tax loss carryforwards, which have been
reflected in the deferred tax asset after applying the statutory federal income
tax rate, as follows (in thousands):
Year of Loss
Expiration Carryforwards
---------- -------------
1996 $ 11,887
1997 463
1998 1,311
1999 433
2000 21
2002 430
2003 17,318
2005 13,805
2010 2,918
--------
48,586
Phlcorp minimum amount, as
described above 93,000
--------
Total minimum tax loss carryforwards $141,586
========
Limitations exist under the tax law which may restrict the utilization of the
Phlcorp carryforwards and the utilization of an aggregate of approximately
$14,842,000 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 are considered in the determination of
the valuation allowance.
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 certificate of incorporation was amended
to include certain charter restrictions which prohibit transfers of the
Company's Common Stock under certain circumstances.
Under prior law, Charter National had accumulated $15,447,000 of special federal
income tax deductions allowed life insurance companies and the Colonial Penn
life insurance subsidiaries had accumulated $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, the Company does not anticipate any transaction
occurring which would cause these amounts to become taxable. With respect to
Colonial Penn's life insurance subsidiaries, the IRS has asserted that certain
of such special federal income tax deductions should have been reflected in
taxable income in prior years, and has assessed additional taxes (excluding
interest) of $2,899,000 and $19,132,000, for 1989 and 1988, respectively.
F-27
14. Income Taxes, continued:
------------
Under the terms of the purchase agreement whereby Colonial Penn was acquired
from FPL Group Capital Inc (the "Seller"), the Seller assumed the obligation to
reimburse the Company for any such taxes.
Pursuant to the purchase agreement, the Company complied with the Seller's
instructions and agreed to the 1989 assessment. To date, Seller has failed to
comply with its contractual obligation to reimburse the Company for payment of
the 1989 assessment, the related interest and the loss of certain minimum tax
credit carryforwards, an aggregate of $3,766,000, to which the Company is
entitled under Seller's indemnification. In a response to a legal proceeding
initiated by the Company to collect such amount due under the Seller's
indemnification obligation, the Seller has alleged that the Company has breached
the purchase agreement and, on that basis, Seller has denied liability for the
1989 assessment. The Company believes it has not breached the purchase agreement
and the Seller remains liable for all such taxes and interest. The Seller is
currently exercising its right under the purchase agreement to control the
contest of the 1988 IRS assessment. If the Seller is unsuccessful in contesting
the 1988 IRS assessment, no assurance can be given that the Seller will comply
with its indemnification obligations under the purchase agreement. The Company
intends to enforce its indemnification rights against the Seller and to seek
other relief, including relief for Seller's bad faith.
During 1995, the Company entered into an agreement with the Seller to settle a
lawsuit initiated by the Company to collect certain amounts due from the Seller
under a tax indemnification included in the purchase agreement for other taxable
periods. The settlement required the Seller to pay certain amounts to the
Company, which are reflected in investment and other income for the year ended
December 31, 1995.
15. 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 $2.17 $2.07
SFAS 106, less income taxes of $2,298 (4,461) (.08) (.07)
SFAS 112, less income taxes of $1,632 (3,168) (.05) (.05)
EITF 93-6, less income taxes of $4,982 9,672 .17 .15
-------- ----- -----
$129,195 $2.21 $2.10
======== ===== =====
F-28
16. Pension Plans and Other Postemployment and Postretirement Benefits:
------------------------------------------------------------------
Pension expense charged to operations included the following components (in
thousands):
1995 1994 1993
---- ---- ----
Service cost $ 4,603 $ 5,529 $ 4,297
Interest cost 7,020 6,596 6,100
Actual return on plan assets (11,501) 2,610 (8,662)
Net amortization and deferral 4,400 (8,507) 2,399
-------- ------- -------
Net pension expense $ 4,522 $ 6,228 $ 4,134
======== ======= =======
The funded status of the pension plans at December 31, 1995 and 1994 was as
follows (in thousands):
1995 1994
---- ----
Actuarial present value of accumulated benefit obligation:
Vested $ 81,245 $69,493
Non-vested 1,880 1,640
-------- -------
$ 83,125 $71,133
======== =======
Projected benefit obligation $103,683 $88,452
Plan assets at fair value 85,033 85,574
-------- -------
Funded status (18,650) (2,878)
Unrecognized prior service cost 2,953 3,354
Unrecognized net loss at January 1, 1987 1,706 675
Unrecognized net (gain) loss from experience
differences and assumption changes 8,256 (2,343)
-------- -------
Accrued pension liability $ (5,735) $(1,192)
======== =======
The plans' assets consist primarily of U.S. government and agencies' bonds. The
projected benefit obligation at December 31, 1995 and 1994 was determined using
an assumed discount rate of 7.0% and 8.0%, respectively, and an assumed
compensation increase rate of 5.6%. The assumed long-term rate of return on plan
assets was 7.4% at December 31, 1995 and 1994.
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 $2,262,000,
$3,292,000 and $2,066,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Several subsidiaries provide certain health care and other benefits to certain
retired employees. 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 (principally interest)
related to such benefits were $1,679,000 in 1995, $1,762,000 in 1994 and
$2,594,000 in 1993.
F-29
16. Pension Plans and Other Postemployment and Postretirement Benefits,
------------------------------------------------------------------
continued:
The accumulated postretirement benefit obligation at December 31, 1995 and 1994
is as follows (in thousands):
1995 1994
---- ----
Retirees $16,091 $15,928
Fully eligible active plan participants 2,827 3,377
Other active plan participants 2,218 1,830
------- -------
21,136 21,135
Unrecognized prior service cost 455 503
Unrecognized net gain from experience
differences and assumption changes 436 820
------- -------
Accrued postretirement benefit liability $22,027 $22,458
======= =======
The discount rate used in determining the accumulated postretirement benefit
obligation was 7% and 8% at December 31, 1995 and 1994, respectively. The
assumed health care cost trend rates used in measuring the accumulated
postretirement benefit obligation were between 7.6% and 14.0% for 1995 and 8.4%
and 15% for 1994, declining to an ultimate rate of between 5.0% and 8.0% by
2006.
If the health care cost trend rates were increased by 1%, the accumulated
postretirement obligation as of December 31, 1995 and 1994 would have increased
by $1,317,000 and $1,335,000, respectively. The effect of this change on the
aggregate of service and interest cost for 1995 and 1994 would be immaterial.
17. 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
$14,461,000 in 1995, $16,566,000 in 1994 and $17,555,000 in 1993. 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, 1995 were as follows (in thousands):
Future Minimum Minimum Sublease Net
Rental Payments Rental Income Minimum Rentals
--------------- ------------- ---------------
1996 $12,239 $1,580 $10,659
1997 7,187 - 7,187
1998 5,603 - 5,603
1999 3,711 - 3,711
2000 1,465 - 1,465
Thereafter 946 - 946
In connection with the sale of certain subsidiaries, the Company has made or
guaranteed the accuracy of certain representations given to the acquiror. No
material loss is expected in connection with such matters.
F-30
17. Commitments, continued:
-----------
In connection with the return of the WMAC Companies, the WMAC Companies have
guaranteed the collectibility of reinsurance agreements applicable to a block of
mortgage reinsurance business. The maximum amount of such contingency is
$42,147,000 at December 31, 1995, which amount has been placed on deposit with a
trustee. The reinsurance agreements are with highly rated institutions and/or
are secured in part by letters of credit or trust funds; as a result the
Company does not expect a material loss in connection with this guarantee.
The insurance and the banking and lending 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 $847,300,000 at December 31,
1995.
18. 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.
19. 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 options and warrants for the periods they were
outstanding. The number of common and dilutive common equivalent shares used for
this calculation was 59,271,000 in 1995, 58,202,000 in 1994 and 58,539,000 in
1993.
Fully diluted earnings per share was calculated as described above except that
in 1994 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, the calculations assume the 5 1/4%
Convertible Subordinated 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 62,807,000 in 1995, 61,715,000 in 1994 and 61,486,000 in 1993.
20. Fair Value of Financial Instruments:
-----------------------------------
The following table presents 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. The 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.
F-31
20. Fair Value of Financial Instruments, continued:
-----------------------------------
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 6. 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 cash equivalents: For cash equivalents, the carrying amount
approximates fair value.
(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) Separate and variable accounts: Separate and variable accounts assets and
liabilities are carried at market value, which is a reasonable estimate of fair
value.
(e) Investments in associated companies: The fair values of a foreign power
company are principally estimated based upon quoted market prices. The carrying
value of the remaining investments in associated companies approximates fair
value.
(f) The WMAC Companies: In 1994, the fair value of the WMAC Companies was
estimated based upon the Company's assessment of the fair value of their
underlying net tangible assets to be received. Effective as of December 31,
1995, the WMAC Companies were returned to the Company and are included in the
consolidated financial statements.
(g) Derivatives: The fair values of derivatives generally reflect the amounts
that the Company would receive or pay to terminate the interest rate and
currency swap contracts.
(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 and estimated rates which would be
available to the Company for debt with similar terms. The fair value of variable
rate debt is estimated to be the carrying amount.
(j) Investment contract reserves: Single premium deferred annuity 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-32
20. Fair Value of Financial Instruments, continued:
-----------------------------------
The carrying amounts and estimated fair values of the Company's financial
instruments at December 31, 1995 and 1994 are as follows (in thousands):
1995 1994
---- ----
Carrying Fair Carrying Fair
Amount Value Amount Value
-------- ----- -------- -----
Financial Assets:
Investments:
Practicable to estimate
fair value $2,862,713 $2,863,583 $2,494,452 $2,492,686
Policyholder loans 17,768 - 17,943 -
Cash and cash equivalents 266,158 266,158 252,495 252,495
Loans receivable of banking and
lending subsidiaries, net of
allowance 264,498 277,676 251,888 262,536
Separate and variable accounts 472,837 472,837 420,398 420,398
Investments in associated
companies 184,088 192,166 138,565 146,469
WMAC Companies - - 24,611 58,573
Other assets (derivatives) 1,838 6,829 2,350 8,337
Financial Liabilities:
Customer banking deposits 203,061 204,192 179,888 179,275
Long-term and other indebtedness 520,862 546,140 425,848 417,016
Investment contract reserves 67,254 72,803 84,606 86,170
Separate and variable accounts 472,837 472,837 419,355 419,355
21. 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.
F-33
22. Selected Quarterly Financial Data (Unaudited):
---------------------------------------------
First Second Third Fourth
Quarter Quarter Quarter Quarter
------- ------- ------- -------
(In thousands, except per share amounts)
1995:
- ----
Revenues $360,688 $376,757 $390,987 $429,882
======== ======== ======== ========
Net income $ 16,323 $ 17,409 $ 21,726 $ 52,045
======== ======== ======== ========
Earnings per common and dilutive
common equivalent share $.28 $.30 $.37 $.86
==== ==== ==== ====
Number of shares used in calculation 58,590 58,591 59,427 60,565
====== ====== ====== ======
Earnings per fully diluted common share $.28 $.29 $.36 $.83
==== ==== ==== ====
Number of shares used in calculation 62,069 62,218 62,984 64,043
====== ====== ====== ======
1994:
- ----
Revenues $336,108 $325,660 $347,463 $375,154
======== ======== ======== ========
Net income $ 14,219 $ 12,348 $ 21,244 $ 23,025
======== ======== ======== ========
Earnings per common and dilutive
common equivalent share $.24 $.21 $.37 $.39
==== ==== ==== ====
Number of shares used in calculation 58,292 58,119 58,055 58,344
====== ====== ====== ======
Earnings per fully diluted common share $.24 $.21 $.36 $.39
==== ==== ==== ====
Number of shares used in calculation 58,292 58,119 61,533 61,963
====== ====== ====== ======
In 1995 and 1994, the totals of quarterly per share amounts do not necessarily
equal annual per share amounts.
F-34
SCHEDULE II - Condensed Financial Information of Registrant
LEUCADIA NATIONAL CORPORATION
BALANCE SHEETS
December 31, 1995 and 1994
1995 1994
---- ----
(Thousands of dollars)
ASSETS
- ------
Cash and cash equivalents $ 14,877 $ 10,275
Investments 107,087 23,270
Deferred income taxes 103,466 144,631
Miscellaneous receivables and other assets 52,119 27,977
Investments in and advances to/from subsidiaries, net 1,364,275 1,102,586
---------- ----------
$1,641,824 $1,308,739
========== ==========
LIABILITIES
- -----------
Accounts payable, expense accruals and income taxes $ 29,386 $ 20,339
Debt, including current maturities 500,947 406,585
---------- ----------
530,333 426,924
---------- ----------
SHAREHOLDERS' EQUITY
- --------------------
Common shares, par value $1 per share,
authorized 150,000,000 shares; 60,163,824
and 56,100,074 shares issued and
outstanding, after deducting 54,319,654
and 54,305,016 shares held in treasury 60,164 56,100
Additional paid-in capital 159,914 98,175
Net unrealized gain (loss) on investments 30,086 (41,309)
Retained earnings 861,327 768,849
---------- ----------
Total shareholders' equity 1,111,491 881,815
---------- ----------
$1,641,824 $1,308,739
========== ==========
See notes to this schedule.
F-35
SCHEDULE II - Condensed Financial Information of Registrant, continued:
LEUCADIA NATIONAL CORPORATION
STATEMENTS OF INCOME
For the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
(In thousands, except per share amounts)
Investment income, net $ 38,907 $ 22,700 $ 23,538
Net securities losses (1) (2,160) -
Equity in income of subsidiaries 153,213 130,266 155,515
-------- -------- --------
192,119 150,806 179,053
-------- -------- --------
Interest expense 58,723 50,060 38,778
Other expenses, net 25,893 29,910 24,016
-------- -------- --------
84,616 79,970 62,794
-------- -------- --------
Income before cumulative effects of
changes in accounting principles 107,503 70,836 116,259
Equity in cumulative effects of changes
in accounting principles related to
subsidiaries - - 129,195
-------- -------- --------
Net income $107,503 $ 70,836 $245,454
======== ======== ========
Earnings per common and dilutive common equivalent share:
Income before cumulative effects of changes
in accounting principles $1.81 $1.22 $1.98
Cumulative effects of changes in accounting
principles - - 2.21
----- ----- -----
Net income $1.81 $1.22 $4.19
===== ===== =====
Fully diluted earnings per common share:
Income before cumulative effects of changes
in accounting principles $1.77 $1.21 $1.94
Cumulative effects of changes in accounting
principles - - 2.10
----- ----- -----
Net income $1.77 $1.21 $4.04
===== ===== =====
See notes to this schedule.
F-36
SCHEDULE II - Condensed Financial Information of Registrant, continued:
LEUCADIA NATIONAL CORPORATION
STATEMENTS OF CASH FLOWS
For the years ended December 31, 1995, 1994 and 1993
1995 1994 1993
---- ---- ----
(Thousands of dollars)
Net cash flows from operating activities:
- ----------------------------------------
Net income $ 107,503 $ 70,836 $ 245,454
Adjustments to reconcile net income to net
cash (used for) operations:
Amortization 681 1,486 1,066
Net securities losses 1 2,160 -
Equity in earnings of subsidiaries (excluding
cumulative effects of changes in accounting
principles) (153,213) (130,266) (155,515)
Cumulative effects of changes in accounting
principles related to subsidiaries - - (129,195)
Net change in:
Miscellaneous receivables (582) 221 (215)
Other assets (1,714) (5,347) (13,095)
Investments in and advances to/from
subsidiaries, net 26,641 (19,051) (22,917)
Accounts payable, expense accruals and income taxes 9,047 3,881 5,131
Other 2,640 1,840 2,263
--------- --------- ---------
Net cash (used for) operating activities (8,996) (74,240) (67,023)
--------- --------- ---------
Net cash flows from investing activities:
- ----------------------------------------
Dividends received from subsidiaries 10,076 8,422 -
Capital contribution to subsidiaries (13,319) (6,008) (6,008)
Investment in MK Gold Company (22,593) - -
Purchase of investments (other than short-term) (124,855) (8,022) (96,349)
Proceeds from maturities of investments 43,300 1,000 -
Proceeds from sales of investments 76 68,268 -
--------- --------- ---------
Net cash provided by (used for)
investing activities (107,315) 63,660 (102,357)
--------- --------- ---------
Net cash flows from financing activities:
- ----------------------------------------
Net change in short-term borrowings (80) (402) (1,547)
Issuance of long-term debt, net of issuance costs 98,590 50,000 194,140
Reduction of long-term debt (5,702) (21,250) (13,750)
Sale of common shares and exercise of warrants,
net of expenses 43,857 - -
Purchase of common shares for treasury (727) (472) (2,492)
Dividends paid (15,025) (7,021) (6,971)
--------- --------- ---------
Net cash provided by financing activities 120,913 20,855 169,380
--------- --------- ---------
Net increase in cash and cash equivalents 4,602 10,275 -
Cash and cash equivalents at January 1, 10,275 - -
--------- --------- ---------
Cash and cash equivalents at December 31, $ 14,877 $ 10,275 $ -
========= ========= =========
Supplemental disclosures of cash flow information:
Cash paid during the year for:
Interest $39,768 $33,512 $23,296
Income tax payments, net of refunds $(3,723) $ 5,799 $ 19
See notes to this schedule.
F-37
SCHEDULE II - Condensed Financial Information of Registrant, continued:
LEUCADIA NATIONAL CORPORATION
NOTES TO SCHEDULE
For the years ended December 31, 1995, 1994 and 1993
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 1995, 1994 and 1993, there was no
provision for income taxes provided by the parent company. Tax sharing
payments received from subsidiaries were $42,078,000 in 1995,
$35,385,000 in 1994 and $64,566,000 in 1993.
D. The deferred income tax asset of $103,466,000 and $144,631,000 at
December 31, 1995 and 1994, respectively, had not been allocated to
the individual subsidiaries.
F-38
SCHEDULE III - Supplementary Insurance Information
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1995, 1994 and 1993
Insurance
Losses,
Policy
Benefits
and
Separate Amortization
Deferred and Policy of
Policy Future Variable and Net Deferred Other Non-Life
Acquisition Policy Unearned Accounts Contract Premium Investment Acquisition Operating Premiums
Costs Benefits Premiums Liabilities Claims Revenue Income Costs Expenses Written
----------- -------- -------- ----------- -------- ------- ---------- ----------- --------- --------
(Thousands of dollars)
1995
- ----
Life insurance $45,423 $ 815,310 $ 7,950 $472,837 $ 26,818 $165,820 $ 56,651 $133,214 $ 65,068 $ 39,885
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
Property and casualty
insurance:
Automobile 34,054 - 338,439 - 805,926 667,365 80,228 688,708 12,594 684,683
Commercial 10,141 - 51,808 - 285,637 102,722 19,936 85,493 9,679 100,351
Miscellaneous
and personal 2,526 - 36,576 - 37,389 46,481 5,601 35,388 5,672 49,134
------- ---------- -------- -------- --------- -------- -------- -------- -------- --------
46,721 - 426,823 - 1,128,952 816,568 105,765 809,589 27,945 834,168
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
$92,144 $ 815,310 $434,773 $472,837 $1,155,770 $982,388 $162,416 $942,803 $ 93,013 $874,053
======= ========== ======== ======== ========== ======== ======== ======== ======== ========
1994
- ----
Life insurance $32,286 $ 870,910 $ 10,039 $419,355 $ 25,802 $172,445 $ 55,218 $138,324 $ 68,872 $ 49,319
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
Property and casualty
insurance:
Automobile 29,741 - 314,145 - 766,276 599,180 70,275 553,916 33,093 629,555
Commercial 10,567 - 54,208 - 263,400 101,394 18,107 77,471 12,302 101,221
Miscellaneous
and personal 1,942 - 35,154 - 38,342 45,867 4,964 49,299 6,220 46,968
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
42,250 - 403,507 - 1,068,018 746,441 93,346 680,686 51,615 777,744
------- ---------- -------- -------- ---------- -------- -------- -------- -------- --------
$74,536 $ 870,910 $413,546 $419,355 $1,093,820 $918,886 $148,564 $819,010 $120,487 $827,063
======= ========== ======== ======== ========== ======== ======== ======== ======== ========
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
======= ========== ======== ======== ========== ======== ======== ======== ======== ========
F-39
SCHEDULE IV - Schedule of Reinsurance
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1995, 1994 and 1993
Percentage
of
Ceded Assumed Amount
Direct To Other From Other Net Assumed
Business Companies Companies Amount To Net
-------- --------- ---------- ------ ----------
(Thousands of dollars)
1995
- ----
Life insurance in force $2,168,000 $187,000 $ 36,000 $2,017,000 1.78%
========== ======== ======== ==========
Premiums:
Life insurance $ 124,576 $ 904 $ 392 $ 124,064 .32%
Accident and health insurance 43,538 617 4 42,925 .01%
Property and liability
insurance 836,382 43,117 22,134 815,399 2.71%
---------- -------- -------- ----------
Total premiums $1,004,496 $ 44,638 $ 22,530 $ 982,388 2.29%
========== ======== ======== ==========
1994
- ----
Life insurance in force $2,285,000 $271,000 $161,000 $2,175,000 7.40%
========== ======== ======== ==========
Premiums:
Life insurance $ 120,761 $ 1,484 $ 1,121 $ 120,398 .93%
Accident and health insurance 53,775 683 6 53,098 .01%
Property and liability
insurance 748,595 34,339 31,134 745,390 4.18%
---------- -------- -------- ----------
Total premiums $ 923,131 $ 36,506 $ 32,261 $ 918,886 3.51%
========== ======== ======== ==========
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%
========== ======== ======== ==========
F-40
SCHEDULE V - Valuation and Qualifying Accounts
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1995, 1994 and 1993
Additions Deductions
------------------------------------ ---------------------------
Charged
Balance at (Credited) Balance
Beginning to Costs and Sale of at End of
Description of Period Expenses Recoveries Other Write-Offs Receivables Period
----------- ---------- ------------ ---------- ----- ---------- ----------- --------
(Thousands of dollars)
1995
- ----
Loan receivables of banking
and lending subsidiaries $12,308 $ 9,467 $4,163 $ - $12,045 $ - $13,893
Trade, notes and other
receivables 5,773 6,832 1,283 - 7,124 155 6,609
------- ------- ------ ------- ------- ---- -------
Total allowance for
doubtful accounts $18,081 $16,299 $5,446 $ - $19,169 $155 $20,502
======= ======= ====== ======= ======= ==== =======
Reinsurance receivable $ 4,046 $ 969 $ - $ - $ 211 $ - $ 4,804
======= ======= ====== ======= ======= ==== =======
1994
- ----
Loan receivables of banking
and lending subsidiaries $ 8,341 $ 7,634 $2,702 $ - $ 6,369 $ - $12,308
Trade, notes and other
receivables 5,185 5,744 1,449 - 6,605 - 5,773
------- ------- ------ ------- ------- ---- -------
Total allowance for
doubtful accounts $13,526 $13,378 $4,151 $ - $12,974 $ - $18,081
======= ======= ====== ======= ======= ==== =======
Reinsurance receivable $83,825 $(2,799) $ - $ - $76,980 (b) $ - $ 4,046
======= ======= ====== ======= ======= ==== =======
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(a) $ - $ - $83,825
======= ======= ====== ======= ======= ==== =======
(a) Principally relates to implementation of SFAS 113 in 1993.
(b) Principally relates to the write-off of fully reserved receivables for unpaid losses.
F-41
SCHEDULE VI - Schedule of Supplemental Information for Property and Casualty
Insurance Underwriters
LEUCADIA NATIONAL CORPORATION AND SUBSIDIARIES
For the years ended December 31, 1995, 1994 and 1993
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)
1995
- ----
Automobile $ - $626,781 $ (6,614) $573,055
Commercial 252 71,329 (7,604) 38,497
Miscellaneous and personal - 36,961 (6,040) 31,640
---- -------- -------- --------
Total property and casualty $252 $735,071 $(20,258) $643,192
==== ======== ======== ========
1994
- ----
Automobile $ - $556,736 $(55,771) $483,120
Commercial 276 70,658 (12,822) 59,436
Miscellaneous and personal - 51,983 (6,221) 46,042
---- -------- -------- --------
Total property and casualty $276 $679,377 $(74,814) $588,598
==== ======== ======== ========
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
==== ======== ======== ========
F-42
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 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).*
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 1991 10-K).*
_________________________
* Incorporated by reference.
Exhibit Exemption
Number Description Indication
------ ----------- ----------
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 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).*
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).*
_________________________
* Incorporated by reference.
Exhibit Exemption
Number Description Indication
------ ----------- ----------
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 (filed as
Exhibit 10.17 to the 1993 10-K).*
10.18 Agreement made as of December 28, 1993 by and
between the Company and Joseph S. Steinberg
(filed as Exhibit 10.18 to the 1993 10-K).*
10.19(a) Agreement between the Company and Ian M.
Cumming, dated as of December 28, 1993 (filed as
Exhibit 10.19(a) to the 1993 10-K).*
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 (filed as Exhibit 10.19(b) to the 1993
10-K).*
10.20(a) Agreement between the Company and Joseph S.
Steinberg, dated as of December 28, 1993 (filed
as Exhibit 10.20(a) to the 1993 10-K).*
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 (filed as Exhibit 10.20(b) to the 1993
10-K).*
10.21 Deferred Compensation Agreement between the
Company and Lawrence S. Hershfield, dated March
29, 1995 (filed as Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q For the Quarterly
Period ended March 31, 1995).*
10.22(a) Agreement between the Company and Lawrence S.
Hershfield, dated as of May 4, 1995.
10.22(b) Escrow and Security Agreement by and among the
Company, Lawrence S. Hershfield and Weil,
Gotshal & Manges, as escrow agent, dated as of
May 4, 1995.
21 Subsidiaries of the registrant.
_________________________
* Incorporated by reference.
Exhibit Exemption
Number Description Indication
------ ----------- ----------
23 Consent of independent 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), Form S-8
(File No. 33-61680) and Form S-8 (File No. 33-
61718).
27 Financial Data Schedule.
28 Schedule P of the 1995 Annual Statement to P
Insurance Departments of the Colonial Penn
Insurance Company and Affiliated
Property/Casualty Insurers, the Empire Insurance
Company, Principal Insurer, the WMAC Credit
Insurance Corporation and the Commercial Loan
Insurance Corporation.
NYFS04...:\30\76830\0001\1980\FRM1176J.55H