-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Gytadv8gKMc7Md2hShRaNx7K6c1mwASOcZVb8SpGeNfWQe/3/+UnmXUzfYBPlu0q 2pLB7W7nO4YOKs4mNEiU0A== 0000001985-96-000006.txt : 19960517 0000001985-96-000006.hdr.sgml : 19960517 ACCESSION NUMBER: 0000001985-96-000006 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19960331 FILED AS OF DATE: 19960515 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCEL INTERNATIONAL CORP CENTRAL INDEX KEY: 0000001985 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 310788334 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-08768 FILM NUMBER: 96566128 BUSINESS ADDRESS: STREET 1: 475 METRO PLACE N CITY: DUBLIN STATE: OH ZIP: 43017 BUSINESS PHONE: 6147647000 MAIL ADDRESS: STREET 1: 475 METRO PLACE NORTH CITY: DUBLIN STATE: OH ZIP: 43017 FORMER COMPANY: FORMER CONFORMED NAME: ACCELERATION CORP DATE OF NAME CHANGE: 19870814 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 1996 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____________ TO ____________ COMMISSION FILE NUMBER 0-8162 ACCEL INTERNATIONAL CORPORATION (Exact name of registrant as specified in its charter) DELAWARE 31-0788334 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 475 METRO PLACE NORTH, DUBLIN, OHIO 43017 (Address of principal executive offices) (Zip Code) 614-764-7000 (Registrant's Telephone Number) SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: Title of each class COMMON STOCK, $.10 PAR VALUE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulations S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-Q or any amendment to this Form 10-Q. _____ 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 ----- ----- As of April 30, 1996, there were 4,456,432 shares of Common Stock, $.10 par value per Share outstanding. COMMISSION FILE NO. 0-8162 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES MARCH 31, 1996 INDEX PART I FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Unaudited Consolidated Balance Sheets (March 31, 1996 and December 31, 1995) 1 - 2 Unaudited Consolidated Statements of Income (Three months ended March 31, 1996 and 1995) 3 Unaudited Consolidated Statements of Common Stockholders' Equity (Three months ended March 31, 1996 and year ended December 31, 1995) 4 Unaudited Consolidated Statements of Cash Flows (Three months ended March 31, 1996 and 1995) 5 Notes to Unaudited Consolidated Financial Statements 6 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 17 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 18 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS March 31, December 31, 1996 1995 --------- --------- (Thousands of dollars) ASSETS Investments: Investments available for sale, at fair value Fixed maturities (cost: 1996--$53,902,000; 1995--$53,427,000) $ 52,649 $ 53,204 Equity securities (cost: 1996--$5,628,000; 1995--$5,433,000) 5,622 5,451 Short-term investments (cost: 1996--$10,446,000; 1995--$4,278,000) 10,446 4,278 Other invested assets (cost: 1996--$379,000; 1995--$364,000) 379 364 --------- --------- 69,096 63,297 Cash 550 5,039 Receivables: Premiums in process of transmittal, less allowance (1996--$287,000; 1995--$279,000) 5,952 1,779 Amounts due from reinsurers 22,785 9,119 Recoverable federal income taxes - 70 --------- --------- 28,737 10,968 Accrued investment income 625 557 Prepaid reinsurance premiums 44,641 14,895 Reinsurance premium deposits 2,136 51,634 Deferred policy acquisition costs 32,084 31,839 Equipment--at cost, less accumulated depreciation (1996--$563,000; 1995--$564,000) 213 187 Leasehold improvements 175 - Property occupied by the Company--at cost, less accumulated depreciation (1995--$2,382,000) - 3,167 Other assets: Cost in excess of fair value of net assets of subsidiaries at dates of acquisition ($4,448,000) less accumulated amortization 796 822 Funds held under reinsurance agreements 1,906 829 Other 446 273 --------- --------- 3,148 1,924 --------- --------- $ 181,405 $ 183,507 ========= ========= (Continued) ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED) March 31, December 31, 1996 1995 --------- --------- (Thousands of dollars) LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Policy Reserves and Liabilities: Unearned premium reserves $ 84,069 $ 82,080 Insurance claims 23,120 22,761 Other 10 11 --------- -------- 107,199 104,852 Other Liabilities: Funds held under reinsurance agreements 58 3,072 Accounts payable and other liabilities 2,266 2,353 Commissions payable 5,014 5,010 Amounts due reinsurers 5,843 4,442 Federal income taxes: Current 50 - Deferred 4,896 5,024 Deferred reinsurance commissions 13,787 15,663 Notes payable--Note D 22,682 22,531 --------- -------- 54,596 58,095 Commitments and Contingencies Redeemable Preferred Stock: Authorized shares--1,000,000; no issued or outstanding shares - - Common stockholders' equity: Common Stock, $.10 par value Authorized shares--10,000,000 Issued shares (1996--5,253,852; 1995--5,243,852) 525 524 Additional paid-in capital 23,722 23,702 Retained earnings 3,345 3,299 Less 797,420 treasury shares at cost (6,599) (6,599) ESOP loan (124) (161) Net unrealized depreciation on investment securities (1,259) (205) --------- --------- Total Common Stockholders' Equity 19,610 20,560 --------- --------- $ 181,405 $ 183,507 See notes to unaudited consolidated financial statements. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF INCOME Three Months Ended March 31, 1996 1995 ---------- ---------- (Thousands of dollars, except per share data) REVENUE: Gross premiums written--Note E $ 16,697 $ 13,247 Less reinsurance ceded--Note E 9,070 3,530 ---------- ---------- Net premiums written 7,627 9,717 (Increase) decrease in unearned premium reserves (4,114) 70 ---------- ---------- Premiums earned--Note E 3,513 9,787 Net investment income: Interest and dividends 1,002 1,567 Realized gains 288 68 Service fees on extended service contracts 585 484 Other income 236 45 ---------- ---------- 5,624 11,951 BENEFITS AND EXPENSES: Policy benefits--Note E 2,336 4,138 Commissions and selling expenses 5,209 4,827 Reinsurance expense recovery (4,471) (301) General and administrative 1,704 1,877 Taxes, licenses and fees 513 483 Interest 540 442 (Increase) decrease in deferred policy acquisition costs (245) 222 ---------- ---------- 5,586 11,688 ---------- ---------- INCOME BEFORE FEDERAL INCOME TAXES 38 263 Federal income taxes: Current 120 64 Deferred (benefit) (128) (69) ---------- ---------- (8) (5) NET INCOME $ 46 $ 268 ========== ========== Net income per common share $ .01 $ .06 ========== ========== Weighted average number of common shares outstanding 4,453,932 4,446,432 ========== ========== See notes to unaudited consolidated financial statements. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Net unrealized appreciation Foreign Common (depreci- currency Additional stock ation) on translation Common paid-in Retained held in ESOP investment adjust- stock capital earnings treasury loan securities ments Total ----- ------- -------- -------- ---- ---------- ----- ------- (Thousands of dollars) Balances at December 31, 1994 $ 524 $ 24,066 $ 4,759 $ (6,599) $ (627) $(6,672) $ (85) $ 15,366 Payments on and write down of ESOP loan - (364) - - 466 - - 102 Change in net unrealized depreciation on investment securities - - - - - 6,467 - 6,467 Change in foreign currency translation adjustment - - - - - - 85 85 Net loss - - (1,460) - - - - (1,460) ----- ------- -------- ---------- ------- ------- ------ -------- Balances at December 31, 1995 524 23,702 3,299 (6,599) (161) (205) - 20,560 Payments on ESOP loan - - - - 37 - - 37 Issuance of 10,000 shares of Common Stock under Common Stock Option Plan 1 20 - - - - - 21 Change in net unrealized depreciation on investment securities - - - - - (1,054) - (1,054) Net income - - 46 - - - - 46 ------ -------- ------- ---------- ------- ------- ------ --------- Balances at March 31, 1996 $ 525 $ 23,722 $ 3,345 $ (6,599) $ (124) $(1,259) $ - $ 19,610 ====== ======== ======= ========== ======= ======= ====== ========= See notes to unaudited consolidated financial statements.
ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS Three Months Ended March 31, 1996 1995 ---------- ---------- (Thousands of dollars, except per share data) OPERATING ACTIVITIES: Net Income $ 46 $ 268 Adjustments to reconcile net income to net cash used in operating activities: Change in premiums receivable (4,181) 181 Change in accrued investment income (68) 18 Change in prepaid reinsurance premiums (29,746) 749 Change in reinsurance premium deposits 49,498 264 Change in funds held under reinsurance agreements (4,091) (400) Change in unearned premium reserves 1,989 1,000) Change in insurance claim reserves 359 (515) Change in amounts due reinsurers and amounts due from reinsurers (12,265) (950) Change in other assets, other liabilities, and accrued income taxes (270) (172) Interest paid in kind 151 137 Accrual of discount on bonds (46) (24) Amortization of premium on bonds 22 21 Amortization of deferred policy acquisition costs 4,758 5,320 Policy acquisition costs deferred (5,003) (5,098) Reinsurance commissions earned 663 (3,304) Reinsurance commissions received (2,539) 2,664 Provision for depreciation and amortization 98 132 Net realized gains on investments (288) (68) ---------- ---------- NET CASH USED IN OPERATING ACTIVITIES (913) (1,777) INVESTING ACTIVITIES: Sale of investments available for sale 3,415 4,863 Purchase of investments available for sale (10,113) (3,515) Sale of property occupied by the Company 3,298 - Other, net (234) (25) ---------- ---------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (3,634) 1,323 FINANCING ACTIVITIES: Payment on ESOP loan 37 24 Issuance of Common Stock under Stock Option Plan 21 - ---------- ---------- NET CASH PROVIDED BY FINANCING ACTIVITIES 58 24 ---------- ---------- NET DECREASE IN CASH (4,489) (430) Cash at beginning of period 5,039 1,044 ---------- ---------- CASH AT END OF PERIOD $ 550 $ 614 ========== =========== See notes to unaudited consolidated financial statements. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1996 NOTE A--SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation: The accompanying unaudited consolidated financial statements of ACCEL International Corporation ("ACCEL") and subsidiaries (collectively referred to herein as the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X which, as to the insurance company subsidiaries, differ in some respects from statutory accounting practices prescribed or permitted by state insurance departments. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for all periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included the Company's annual report on Form 10-K for the year ended December 31, 1995. PRINCIPLES OF CONSOLIDATION: The accompanying unaudited consolidated financial statements include the accounts of ACCEL and its wholly-owned subsidiaries, except for Randjill Group Ltd. ("RGL"). All significant intercompany accounts and transactions have been eliminated in the unaudited consolidated financial statements. DESCRIPTION OF BUSINESS: ACCEL is an insurance holding company incorporated in Delaware in June 1978 as the successor to an Ohio corporation, formerly Acceleration Corporation, organized in 1969. The Company has been engaged in the sale and underwriting of credit life and credit accident and health insurance, extended service contracts, vendor's single interest and other specialty casualty products. Beginning in the first quarter of 1996, the Company began to offer coverages for long haul trucking and commercial buses. The credit insurance and extended service contract products continue to be offered to consumers, principally through automobile dealers, financial institutions and other business entities. The Company is subject to competition from other insurers throughout the states in which it writes business. The Company is also subject to regulation by the Insurance Departments of states in which it is licensed, and undergoes periodic examinations by those departments. The following is a description of the most significant risks facing life and health and property/casualty insurers and how the Company mitigates those risks: LEGAL/REGULATORY RISK is the risk that changes in the legal or regulatory environment in which an insurer operates will create additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives designed to reduce insurer profits, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those currently recorded in the unaudited consolidated financial statements. The Company mitigates this risk by operating throughout the United States, thus reducing its exposure to any single jurisdiction, and also by employing underwriting and loss adjusting practices which identify and minimize the adverse impact of this risk. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) CREDIT RISK is the risk that issuers of securities owned by the Company will default or that other parties, including reinsurers, which owe the Company money, will not pay. The Company minimizes this risk by adhering to a conservative investment strategy, by maintaining sound reinsurance and credit and collection policies and by providing for any amounts deemed uncollectible. INTEREST RATE RISK is the risk that interest rates will change and cause a decrease in the value of an insurer's investments. The Company mitigates this risk by attempting to match the maturity schedule of its assets with the expected payouts of its liabilities. To the extent that liabilities come due more quickly than assets mature, an insurer would have to borrow funds or sell assets prior to maturity and potentially recognize a gain or loss. ACCOUNTING ESTIMATES: In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the unaudited consolidated financial statements and revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. The most significant estimates include those used in determining deferred policy acquisition costs and the liability for unearned premium reserves and insurance claims. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. The estimates are continually reviewed and adjusted as necessary. Such adjustments are generally reflected in current operations. INVESTMENTS: The Company classifies all of its fixed maturity and equity securities as available for sale, therefore these securities are carried at fair value and the unrealized appreciation or depreciation is reported as a separate component of common stockholders' equity after giving effect to applicable income taxes. Short-term investments which include U.S. Treasury securities, commercial paper and certificates of deposit are carried at cost which approximates fair value. Other invested assets are carried at cost which approximates fair value. Realized gains and losses on the disposal of investments are determined by specific identification and are included in the unaudited consolidated statements of operations. When an other than temporary decline in value is recognized, the specific investment is carried at estimated realizable value and its original book value is reduced to reflect such impairment of the investment. Such reductions in book value are reflected in realized investment losses for the period in which they were written down. For mortgage backed securities, the Company's accounting follows the provisions of Financial Accounting Standards Board Emerging Issues Tasks Force ("EITF") Consensus No. 93-18. This EITF requires that when the present value of estimated future cash flows discounted at a risk-free rate of return is less than the cost basis of the investment, an impairment loss is to be recognized by writing the investment down to its fair value. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) FEDERAL INCOME TAXES: Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized. EARNINGS PER COMMON SHARE: Net income and net loss per common share are computed using the weighted average number of common shares outstanding during the period. The inclusion of common stock equivalents (options) would not be dilutive. RECLASSIFICATIONS: Certain amounts in the 1995 unaudited consolidated financial statements have been reclassified to conform with the 1996 presentation. NOTE B--FOREIGN CURRENCY TRANSLATION The financial statements of Acceleration Insurance Company Limited ("AICL"), a United Kingdom subsidiary, have been translated into U.S. dollars using the British pound as the functional currency. The balance sheets of AICL have been translated into U.S. dollars using exchange rates as of the date of the unaudited consolidated financial statements. The operating results of AICL have been translated into U.S. dollars using the average exchange rates in effect during the respective periods. Included in foreign currency translation adjustments are unrealized exchange gains of $85,000 in 1995. During 1995, the Company redeemed most of its shares of AICL, which resulted in proceeds approximating the Company's original investment in AICL. The transaction was approved by the Department of Trade and Insurance (United Kingdom). On February 7, 1996, the Company received the final proceeds for redemption of its remaining shares, and AICL ceased to exist. NOTE C--FEDERAL INCOME TAXES The Company files a consolidated federal income tax return. The provision for income taxes is based on income for financial reporting purposes, after permanent differences. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE D--NOTES PAYABLE In July 1991, ACCEL issued $5,848,000 of subordinated notes (the "Subordinated Notes") in connection with the purchase of all outstanding common shares of RGL. The Subordinated Notes have a nine-year term with no principal payable until maturity, and bear interest at 10.125% per annum. Effective June 30, 1992, ACCEL amended the notes to permit the issuance of additional notes for the purpose of making interest payments, provided, however, that ACCEL may at its option pay cash in lieu of issuing additional notes in any denomination of less than $1,000. As a result, ACCEL issued additional notes totaling $151,000 and $569,000 for the three months ended March 31, 1996 and the full year 1995, respectively. Of the Subordinated Notes described above, $5,371,000 were initially issued to Ranger Insurance Company ("Ranger"), a company related through common ownership by a stockholder and director of the Company. In 1993, Ranger sold all of the Subordinated Notes held by it to Chase Insurance Holdings Corporation ("CIHC"), another company related through common ownership by a stockholder and director of the Company. Additional Subordinated Notes in the amount of $134,000 and $506,000 were issued as interest payments to related parties for the three months ended March 31, 1996 and the full year 1995, respectively. At December 31, 1994, the Company had an outstanding loan balance of $13,000,000 under the terms of a credit agreement (the "Credit Agreement") with a bank. On February 7, 1995 the Company renegotiated the terms of the Credit Agreement. Under the amended Credit Agreement, the quarterly principal payments scheduled to begin in 1995 were waived. Specific principal payments totaling up to $1.5 million were due on June 30, 1995 and December 31, 1995, respectively, from the liquidation of AICL and the projected sale of the building used as the corporate home office. The loan was to be payable in full on June 30, 1997. The Credit Agreement also required that during the period the loan was outstanding, the Company maintain consolidated tangible net worth, as defined in the agreement. At December 31, 1994, required tangible net worth was $13,000,000. At December 31, 1994, the Company's consolidated tangible net worth, as defined, was $14,438,000. On December 29, 1995, the Company issued senior notes (the "Senior Notes") totaling $16,500,000 at 9.50%, maturing on April 1, 2001. The proceeds from these notes were used to retire the loan outstanding under the aforementioned Credit Agreement and to liquidate an intercompany loan between ACCEL and an insurance subsidiary. In addition, as of January 1, 1996, a subsidiary of the Company entered into a reinsurance agreement with an unaffiliated company to reinsure the in-force Credit Business. This agreement is structured, such, that as future profits emerge on this block of business, a substantial portion of the Company's share of the profits will be used over the next four to five years to pay the interest thereon and redeem these Senior Notes. NOTE E--REINSURANCE During 1995, the Company had an agreement in place which covered a substantial portion of its credit insurance business. The agreement contained an experience adjustment computation that resulted in the ultimate cost of this agreement being a stated percentage related to the business covered by the agreement. The Company ultimately retained a substantial part of the insurance risk, the underwriting income or loss and the investment income on net funds. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE E--REINSURANCE--(CONTINUED) The Company determined that deposit accounting is the appropriate method of accounting for this agreement since it is not reasonably possible for the reinsurer to realize a significant loss from the transaction. The unaudited consolidated financial statements have been prepared on this basis. On January 1, 1996 the Company terminated this quota share reinsurance agreement and elected to recapture the liabilities subject to this treaty. The liabilities recaptured thereunder were then available for cession under the treaty described below. Concurrent with this termination, the Company entered into a reinsurance agreement with a different unaffiliated reinsurer (which is also the buyer of the Senior Notes discussed in Note D) to reinsure a substantial portion of the in-force credit life and accident and health insurance business, including the amounts recaptured. This agreement is structured in such a way that as future profits emerge on this block of business, a substantial portion of the Company's share of the profits will be used over the next four to five years to pay fees and interest to the reinsurer and redeem the new Senior Notes of $16,500,000. In connection with this agreement, approximately $40,000,000 of assets were transferred to the reinsurer on December 29, 1995, as agreed to by all parties. The unearned premium reserves and liability for insurance claims subject to cession under this treaty were $43,107,000 and $9,868,000, respectively, as of March 31, 1996. Prior to December 31, 1995, a security fund had been maintained, primarily comprised of fixed maturities, for the benefit of the reinsurer. Pursuant to the termination of the agreement effective January 1, 1996, as discussed above, certain investments were liquidated from the security fund on December 29, 1995. Proceeds from this liquidation, along with other funds, were transferred on December 29, 1995 to the reinsurer who is party to the agreement dated January 1, 1996. These amounts are included in "Reinsurance Premium Deposits" on the accompanying unaudited consolidated balance sheets as of December 31, 1995. Effective January 1, 1996, the Company entered into a reinsurance agreement with the same unaffiliated reinsurer referenced above to reinsure a substantial portion of the credit life and accident and health insurance produced in 1996. This agreement contains an experience adjustment computation that results in the ultimate cost of this agreement being a stated percentage related to the business covered by the agreement. The following data summarizes certain aspects of the Company's reinsurance activity for the periods presented. ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE E--REINSURANCE--(CONTINUED) Premiums written and earned in 1996 and 1995 are summarized as follows: WRITTEN EARNED Three months ended March 31, 1996 1995 1996 1995 ---- ---- ---- ---- (Thousands of dollars) Direct $ 15,862 $ 11,816 $ 13,620 $ 12,690 Assumed 835 1,431 1,088 1,558 Ceded 9,070 3,530 11,195 4,461 -------- -------- -------- -------- Net premiums $ 7,627 $ 9,717 $ 3,513 $ 9,787 ======== ======== ======== ======== Policy benefits incurred for the periods presented are as follows: Three months ended March 31, 1996 1995 -------- -------- (Thousands of dollars) Direct $ 5,052 $ 5,688 Assumed 831 874 Ceded 3,547 2,424 -------- -------- Net policy benefits $ 2,336 $ 4,138 ======== ======== NOTE F--PROPERTIES Since July 1981 the Company's executive offices have been located at 475 Metro Place North, Dublin, Ohio. The four-story office building has been owned by Acceleration Life Insurance Company ("ALIC"), a wholly owned subsidiary of ACCEL, and consists of approximately 80,000 square feet of office space. On March 21, 1996, the building was sold by ALIC to an unrelated party for a price of $3.5 million. The Company realized a pre-tax gain of $170,000 on this sale. The Company will remain in the building and occupy approximately 16,000 square feet of home office space under a five-year lease at an annual rental of approximately $256,000. NOTE G--COMMITMENTS AND CONTINGENCIES Due to the nature of its operations, the Company is at all times subject to pending and threatened legal actions which arise in the normal course of its activities. In management's opinion, based on the advice of outside counsel, the unaudited consolidated financial statements will not be materially affected by the ultimate outcome of any legal proceedings or contingent liabilities. Acceleration National Insurance Company ("ANIC"), a wholly owned subsidiary of ACCEL, in the normal course of business, issued certain policy endorsements on Galaxy Insurance Company policies in 1992, some of which had pending claims open at the time of liquidation. Management believes that these endorsements will not have a material impact on the Company's financial condition. As of March 31, 1996, ANIC had not incurred any costs related to these endorsements. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Results for the Three Months Ended March 31, 1996 and March 31, 1995 OPERATING RESULTS The income before federal income taxes for 1996 was $38,000 compared to income of $263,000 in 1995. The reduction in income in 1996 can be attributed to increased policy benefits on the Company's credit business and continuing expenses related to the realtors' errors and omissions litigation. The Company's new Property and Casualty programs, while producing $4,600,000 of annualized premium in the first quarter, have not yet matured to the point of having a material bottom line impact. The Company's concerted efforts to reduce general and administrative expenses were manifested in the quarterly expense numbers. Operating expenses (excluding taxes, licenses and fees) decreased by 9.2% when compared to the first quarter of 1995. These expense savings are primarily the result of staff reductions, the benefit of which is now being realized by the Company. REVENUE Premium writings for 1996 were $16.7 million compared to $13.2 million for 1995. The increase in 1996 was the result of marketing new Property and Casualty programs and an increase in extended service contract premiums. These increases were partially offset by a $1.4 million decrease in premium written on credit insurance. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows from operations have generally been adequate for its current operating needs. Cash flows from operating activities in 1995 were adversely impacted by the reinsurance transaction dated December 29, 1995 described in Note E in the notes to unaudited consolidated financial statements. The Company's credit insurance policy terms and related liabilities are generally limited to a four-year period during which the consumer makes payments on the loan. The Company's liability on extended service contracts typically extends for either one-year or five-year periods. The Company, therefore, maintains liquidity in its investment portfolio to correspond with the liability outstanding on its lines of business. The mortgage and asset-backed securities held by the Company are subject to risks associated with variable prepayments. As such, those securities may have a different actual maturity and yield than planned at the time of purchase. The degree to which a security is susceptible to either gains or losses is influenced by the difference between its amortized cost and par value, relative sensitivity of the underlying mortgages to prepayment risk in a changing interest rate environment and relative priority of the securities in the overall securitization. The Company limits the extent of its risks on fixed maturity securities by generally avoiding securities whose cost significantly exceeds par, by purchasing securities which are backed by stable collateral, and by concentrating on securities that are either planned amortization or sequential pay classes. The collateralized mortgage obligations and asset backed securities owned have primarily short to intermediate average lives. At March 31, 1996, the Company did not have a significant amount of higher risk mortgage or asset backed securities. There are negligible default risks on the mortgage and asset backed security portfolio as a whole as the vast majority of the assets are either guaranteed by U.S. government-sponsored entities or are supported in the securitization structure by junior securities enabling the assets to achieve high investment grade status. Ohio domiciled insurance companies are subject to Ohio law which regulates the ability of insurance companies to pay dividends. The regulation limits the annual dividend or distribution of an insurer to the greater of (1) net income of the previous year or (2) 10% of unassigned surplus as of the end of the previous year. In addition, all dividends must come from earned surplus to qualify as a non-extraordinary dividend. Amounts greater than this would be considered extraordinary dividends and could not be paid without permission of the Department of Insurance of the State of Ohio ("Ohio Department"). Based on this regulation, Acceleration Life Insurance Company ("ALIC") could pay a dividend of $8,000 and Acceleration National Insurance Company ("ANIC") would require Ohio Department approval to pay any dividend to the registrant during 1996. The Company's cash flow projections for 1996 assume that certain events will take place in order to have sufficient cash to meet its debt service and other requirements. One of these events included the liquidation of Acceleration Insurance Company Limited ("AICL"), which was in fact concluded in the first quarter of 1996. The Company will monitor its current and future debt service requirements to coincide with cash flow availability as well as explore various capital raising alternatives. The Company intends to use any proceeds from a judgement entered in its favor in a legal proceeding (see CERTAIN EVENTS) to repay $3,700,000 in advances received in 1992 and 1993 from the registrant's subsidiaries. These advances are eliminated in consolidation. In July 1991, ACCEL International Corporation ("ACCEL") issued $5,848,000 of subordinated notes (the "Subordinated Notes") in connection with the purchase of all outstanding common shares of Randjill Group Ltd. ("RGL"). The Subordinated Notes have a nine-year term with no principal payable until maturity, and bear interest at 10.125% per annum. Effective June 30, 1992, ACCEL amended the notes to permit the issuance of additional notes for the purpose of making interest payments, provided, however, that ACCEL could, at its option, pay cash in lieu of issuing additional notes in any denomination of less than $1,000. As a result, ACCEL issued additional notes totaling $151,000 and $569,000 for the three months ended 1996 and the full year 1995 interest payments, respectively. Of the Subordinated Notes described above, $5,371,000 were initially issued to Ranger Insurance Company ("Ranger"), a company related through common ownership by a stockholder and director of the Company. In 1993, Ranger sold all of the subordinated notes held by it to Chase Insurance Holdings Corporation ("CIHC"), a company related through common ownership by a stockholder and director of the Company. Additional Subordinated Notes in the amount of $134,000 and $506,000 were issued to related parties for the three months ended 1996 and the full year 1995 interest payments, respectively. The total outstanding Subordinated Notes were $6,182,000 and $6,031,000 ($5,481,000 and $5,347,000 held by related parties at March 31, 1996 and December 31, 1995, respectively) and the fair value of these notes approximated $6,447,000 and $5,783,000 at March 31, 1996 and December 31, 1995, respectively. At December 31, 1994, the Company had an outstanding loan balance of $13,000,000 under the terms of a credit agreement (the "Credit Agreement") with a bank. On February 7, 1995 the Company renegotiated the terms of its Credit Agreement. Under the amended Credit Agreement, the quarterly principal payments scheduled to begin in 1995 were waived. Specific principal payments totaling up to $1.5 million were due on June 30, 1995 and December 31, 1995, respectively, from the liquidation of AICL and the projected sale of the building used as the corporate home office. The loan was to be payable in full on June 30, 1997. The Credit Agreement also required that during the period the loan was outstanding, the Company had to maintain consolidated tangible net worth, as defined in the agreement. At December 31, 1994, required tangible net worth was $13,000,000. At December 31, 1994, the Company's consolidated tangible net worth, as defined, was $14,438,000. On December 29, 1995, the Company issued new senior notes (the "Senior Notes") totaling $16,500,000 at 9.50%, maturing on April 1, 2001. The proceeds from these notes were used to retire the loan outstanding under the aforementioned Credit Agreement and to liquidate an intercompany loan between ACCEL and an insurance subsidiary. In addition, as of January 1, 1996 ALIC entered into a reinsurance agreement with an unaffiliated company to reinsure its in-force Credit Business. This agreement is structured, such, that as future profits emerge on this block of business, a substantial portion of the Company's share of the profits will be used over the next four to five years to pay the interest thereon and redeem these Senior Notes. ACCEL's Board of Directors approved an Employee Stock Ownership Plan ("ESOP") during 1989. In 1990, the ESOP entered into an agreement with ALIC to borrow up to $1,000,000 for the purchase of ACCEL's common stock. Company contributions into the ESOP have been used to pay down the loan from ALIC and release shares into the participants' accounts as the Company's matching contribution. The ESOP purchased 136,887 shares (adjusted for the 1990 5% common stock dividend) under this loan agreement with ALIC at a cost of $1,000,000. In addition to the shares purchased under the loan agreement, the ESOP purchased 90,088 common shares at a cost of $603,000. The loan bears interest at 10%. At December 31, 1995, the loan had an unpaid balance of $525,239. The market value of the underlying shares was $161,000. The Company revalued this loan to market value as of December 31, 1995. This will allow the release of shares to participants' accounts at an average price which more closely approximates recent market values on the Company's stock. The decrease in the loan has been reflected through a decrease in additional paid-in capital in the accompanying unaudited consolidated balance sheets. The unpaid balance of the loan ($124,000 at March 31, 1996 and $161,000 at December 31, 1995) has been reflected as a reduction in common stockholders' equity in the accompanying unaudited consolidated financial statements. The Company currently has two business lines that are in run-off status: the realtors' errors and omissions line and the farmowner's multi-peril and ancillary inland marine products. The estimates for policy reserves are continually under review and adjusted as necessary as experience develops or new information becomes known, such adjustments are included in current operations. These liabilities are necessarily subject to the impact of future changes in claim severity, frequency and other factors. Although considerable variability is inherent in such estimates, based on recent evaluations conducted by experienced consultants and internal reviews, management believes that the current level of policy reserves will be adequate to cover anticipated claim liabilities. However, because the realtors' errors and omission risk was written from the first quarter 1986 through the first quarter of 1991; and considering the length of time involved in the settlement of some claims, there remains a lack of credible experience needed to determine whether actual incurred policy benefits will conform to the assumptions inherent in the determination of these liabilities. Accordingly, the ultimate amounts required for settlement of policy benefits may vary significantly from the amounts included in the accompanying unaudited consolidated financial statements. The Company has reviewed Financial Accounting Standards Board ("FASB") Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of" which becomes effective in 1996. The Company has also reviewed FASB Statement No. 123, "Accounting for Stock-Based Compensation" which becomes effective in 1996. The Company does not expect the impact of either of these FASB Statements to be material to the financial condition of the Company. Although the cumulative effects of inflation on premium growth cannot be fully determined, increases in the retail price of automobiles have generally resulted in increased amounts being financed which constitute the basis of premiums charged for credit insurance. Anticipated increases in automobile repairs also provide the primary basis for increases in extended service contract premium rates. CERTAIN EVENTS WRITE OFF OF INVESTMENT IN RGL AND GALAXY: During December 1986, ACCEL invested $1,370,000 (a 20% interest) in RGL. RGL was formed to acquire all the outstanding shares of Galaxy Reinsurance Company, the name was ultimately changed to Galaxy Insurance Company ("Galaxy"). Galaxy was writing commercial property insurance, property and casualty, and assumed treaty reinsurance. During the second quarter of 1991, the Company purchased 11,000 additional common shares of RGL at a cost of $992,000. The additional investment increased the Company's ownership to 31% at June 30, 1991. In July 1991, the Company purchased the remaining 69% of RGL for cash and subordinated notes of $2.1 million and $5.8 million, respectively. The purchase price included goodwill of $1.2 million. Members of CIHC held a 45% interest in RGL prior to the acquisition by ACCEL. For the three years ended December 31, 1993, RGL recorded losses and Galaxy's underwriting results deteriorated. The statutory capital and surplus of Galaxy declined significantly (from $7.3 million to $6.1 million to $2.9 million at December 31, 1991, 1992 and 1993, respectively), resulting in the New York Department of Insurance ("New York Department") placing a moratorium on all new business as of February 28, 1994. As a result of the unsatisfactory underwriting performance of Galaxy and the moratorium placed on Galaxy's underwriting operations by the New York Department, the Company elected to write-off the unamortized goodwill related to Galaxy, which resulted in a charge to operations (general and administrative expenses) for 1993 of $1,643,000. Due to significant loss development during 1994 on Galaxy's liability lines of business, the Company contracted with an independent actuarial consultant to review the adequacy of Galaxy's loss and LAE reserves as of June 30, 1994. The findings of this review indicated the need for additional reserves which resulted in the statutory insolvency of Galaxy at June 30, 1994. Statutory capital and surplus after the reserve strengthening was a negative $2.3 million. Due to the significance of the statutory loss and the loss of the Company's control of Galaxy as a result of the insolvency, the Company wrote off its investment in RGL ($3.8 million) during the second quarter of 1994. As a result of this action, the consolidated results of operations for 1994 include a charge to operations of $3.8 million, representing the Company's net investment in Galaxy as of April 1, 1994, in addition to operating losses of $205,000 incurred during the first quarter. The Company wrote down its investment in RGL to zero and deconsolidated RGL as of April 1, 1994. Pursuant to an Order of Liquidation dated October 7, 1994, issued by the Supreme Court of the State of New York, the Liquidation Bureau of the New York Department took control of Galaxy on October 11, 1994. ANIC, in the normal course of business, issued certain policy endorsements on Galaxy policies in 1992, some of which had pending claims open at the time of liquidation. Management believes that these endorsements will not have a material impact on the Company's financial condition. As of March 31, 1996, ANIC had not incurred any costs related to these endorsements. DISCONTINUED REALTORS' ERRORS AND OMISSIONS PROGRAM: As a result of the losses sustained in the realtors' errors and omissions ("REO"), and in particular, conduct discovered by the Company after it assumed responsibility for claims processing and handling, the Company filed suit in November 1991 against the non-affiliated marketing organization and broker involved in the program. The lawsuit sought to recover funds improperly withdrawn from the account established for the payment of claims under the program; for damages due to business expenses improperly charged against such funds; and for improper administration of the program. ACCEL and ANIC entered into an arrangement whereby ANIC's rights under the lawsuit were transferred to the Company in exchange for a $4,000,000 collateral loan issued to ANIC which was recorded as a capital contribution. The transaction and related agreements were approved by the Ohio Department. The loan agreement and accompanying promissory note called for interest at the 13 week Treasury Bill rate plus 100 basis points. The principal of $4,000,000 was paid in full on December 29, 1995. ACCEL pursued the litigation vigorously and in late 1995 ANIC was awarded $5.3 million in damages with $5.1 million thereof being obtained against the marketing organization. A settlement has been reached with the broker defendant, however, the remaining defendant has indicated its intention to appeal the verdict. The Company is aggressively pursuing efforts to collect on the remaining judgement. PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (b) No reports on Form 8-K have been filed by the Registrant during the quarter ended March 31, 1996. SIGNATURE Pursuant to the requirements 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. ACCEL INTERNATIONAL CORPORATION Dated: May 15, 1996 By: /S/ Kurt L. Mueller ------------------------------ ---------------------------- Kurt L. Mueller Vice President and Controller _____ * Mr. Mueller is Vice President and Controller and has been duly authorized to execute the report on behalf of the Registrant. EX-27 2
7 This schedule contains summary financial information extracted from ACCEL International Corporation's first quarter 1996 Form 10-Q and is qualified in its entirety by reference to such Form 10-Q. 0000001985 ACCEL INTERNATIONAL CORPORATION 1,000 3-MOS DEC-31-1996 JAN-01-1996 MAR-31-1996 52,649 0 0 5,622 0 0 69,096 550 0 32,084 181,405 23,120 84,069 10 0 22,682 0 0 525 0 181,405 3,513 1,002 288 821 2,336 493 2,757 38 (8) 0 0 0 0 46 .01 0 22,761 0 0 0 0 23,120 0
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