-----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, Uv+rsUrIDLuAumUUs2AohNBFEwFfJln8m7HVeClAGzBxCSq+fMUjjd220uet5iF/ HQdLWhPACxbF7cpP2kWhwQ== 0000001985-97-000017.txt : 19970815 0000001985-97-000017.hdr.sgml : 19970815 ACCESSION NUMBER: 0000001985-97-000017 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19970630 FILED AS OF DATE: 19970814 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: 97663131 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 ACCEL INTERNATIONAL CORP. 10-Q FOR JUNE 30, 1997 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 June 30, 1997 [ ] 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, SUITE 100, 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 July 31, 1997, there were 8,603,742 shares of Common Stock, $.10 par value per Share outstanding. COMMISSION FILE NO. 0-8162 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES June 30, 1997 INDEX PART I FINANCIAL INFORMATION Item 1. Financial Statements Page Unaudited Consolidated Balance Sheets (June 30, 1997 and December 31, 1996) 1 - 2 Unaudited Consolidated Statements of Operations (Six months ended June 30, 1997 and 1996) 3 Unaudited Consolidated Statements of Common Stockholders' Equity (Six months ended June 30, 1997 and year ended December 31, 1996) 4 Unaudited Consolidated Statements of Cash Flows (Six months ended June 30, 1997 and 1996) 5 Notes to Unaudited Consolidated Financial Statements 6 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 15 PART II OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS
June 30, December 31, 1997 1996 (Thousands of dollars) ASSETS Investments: Investments available for sale, at fair value: Fixed maturities (cost: 1997--$54,931,000; 1996--$58,889,000) $ 54,324 $ 58,281 Equity securities (cost: 1997--$5,807 ,000; 1996--$5,514,000) 5,803 5,511 Short-term investments (cost: 1997--$13,184,000; 1996--$10,670,000) 13,206 10,703 Other invested assets, at cost (fair value: 1997--$314,000; 1996--$346,000) 314 346 ---------- ---------- 73,647 74,841 Cash 719 3,331 Receivables: Premiums in process of transmittal, less allowance (1997--$243,000; 1996--$223,000) 13,424 7,286 Amounts due from reinsurers, less allowance (1997 and 1996--$125,000) 18,980 11,138 Recoverable federal income taxes - 1,019 ---------- ---------- 32,404 19,443 Accrued investment income 606 652 Prepaid reinsurance premiums 18,673 15,036 Reinsurance premium deposits 31,111 42,615 Deferred policy acquisition costs 30,542 30,946 Equipment--at cost, less accumulated depreciation (1997--$159,000; 1996--$162,000) 543 231 Leasehold improvements, less accumulated amortization (1997--$44,000; 1996--$26,000) 148 152 Other assets: Cost in excess of fair value of net assets of subsidiaries at dates of acquisition ($4,448,000) less accumulated amortization 663 716 Funds held under reinsurance agreements 6,167 406 Other 882 939 ---------- ---------- 7,712 2,061 ---------- ---------- $ 196,105 $ 189,308 ========== ==========
(Continued) 1 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
June 30, December 31, 1997 1996 (Thousands of dollars) LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Policy reserves and liabilities: Unearned premium reserves $ 84,070 $ 81,820 Insurance claims 24,927 25,256 Other 7 7 ---------- ---------- 109,004 107,083 Other liabilities: Funds held under reinsurance agreements 2,855 2,920 Deferred reinsurance commissions 14,047 13,902 Amounts due reinsurers 11,285 6,133 Notes payable 15,000 15,000 Commissions payable 5,353 5,163 Accounts payable and other liabilities 1,781 2,788 Federal income taxes: Current 283 - Deferred 4,232 4,678 ---------- ---------- 54,836 50,584 ---------- ---------- 163,840 157,667 ---------- ---------- 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 (1997 and 1996--15,000,000) Issued shares (1997 and 1996--9,401,162) 940 940 Additional paid-in capital 32,507 32,507 Retained earnings 6,006 5,403 Less 797,420 treasury shares at cost (6,599) (6,599) ESOP loan - (32) Net unrealized depreciation on investment securities (589) (578) ---------- ---------- 32,265 31,641 ---------- ---------- $ 196,105 $ 189,308 ========== ========== See notes to unaudited consolidated financial statements.
2 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30, 1997 1996 1997 1996 (Thousands of dollars, except per share data) REVENUE: Gross premiums written $ 19,146 $ 17,169 $ 32,545 $ 33,865 Less reinsurance ceded 6,704 4,754 10,138 9,254 ------------ ------------ ------------ ------------ Net premiums written 12,442 12,415 22,407 24,611 Decrease (increase) in unearned premium reserves 165 (917) 751 (3,048) ------------ ------------ ------------ ------------ Premiums earned 12,607 11,498 23,158 21,563 Net investment income: Interest and dividends 1,176 1,057 2,331 2,059 Realized gains (losses) (9) (13) 65 275 Service fees on extended service contracts 972 638 1,517 1,223 Other income 88 36 150 272 ------------ ------------ ------------ ------------ 14,834 13,216 27,221 25,392 ------------ ------------ ------------ ------------ BENEFITS AND EXPENSES: Policy benefits 6,228 5,594 12,242 (10,685) Commissions and selling expenses 6,424 6,847 11,198 12,055 Reinsurance expense recovery (662) (945) (2,883) (1,619) General and administrative 1,948 1,656 3,814 3,359 Taxes, licenses and fees 692 357 1,090 871 Interest 357 548 713 1,088 Decrease (increase) in deferred policy acquisition costs (561) (855) 404 (1,099) ------------ ------------ ------------ ------------ 14,426 13,202 26,578 25,340 ------------ ------------ ------------ ------------ INCOME BEFORE FEDERAINCOME TAXES 408 14 643 52 Federal income taxes: Current expense 303 393 486 513 Deferred benefit (273) (425) (446) (553) ------------ ------------ ------------ ------------ 30 (32) 40 (40) ------------ ------------ ------------ ------------ NET INCOME $ 378 $ 46 $ 603 $ 92 ============ ============ ============ ============ Per Common Share: Net income $ 0.04 $ 0.01 $ 0.07 $ 0.02 ============ ============ ============ ============ Weighted average number of common shares outstanding 8,603,742 4,506,432 8,603,742 4,483,575 ============ ============ ============ ============ See notes to unaudited consolidated financial statements.
3 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY
Net unrealized Additional Common depreciation Common paid-in Retained stock held in on investment stock capital earnings treasury ESOP loan securities Net ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Thousands of dollars) Balances at December 31, 1995 $ 524 $ 23,702 $ 3,299 $ (6,599) $ (161) $ (205) $ 20,560 Payments on ESOP loan - - - - 129 - 129 Change in net unrealized depreciation on investment securities - - - - - (373) (373) Issuance of 110,000 shares of Common Stock under Common Stock Option Plan 11 223 - - - - 234 Issuance of 4,047,310 shares of Common Stock in conjuction with the Rights Offering and the Supplemental Offering 405 8,582 - - - - 8,987 Net income - - 2,104 - - - 2,104 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balances at December 31, 1996 940 32,507 5,403 (6,599) (32) (578) 31,641 Payments on ESOP loan - - - - 32 - 32 Change in net unrealized depreciation on investment securities - - - - - (11) (11) Net income - - 603 - - - 603 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balances at June 30, 1997 $ 940 $ 32,507 $ 6,006 $ (6,599) $ - $ (589) $ 32,265 ========== ========== ========== ========== ========== ========== ========== See notes to unaudited consolidated financial statements.
4 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 1997 1996 ------------ ------------ (Thousands of dollars) OPERATING ACTIVITIES: Net income $ 603 $ 92 Adjustments to reconcile net income to net cash used in operating activities: Change in premiums receivable (6,158) (5,021) Change in accrued investment income 46 (14) Change in prepaid reinsurance premiums (3,637) (26,416) Change in funds held under reinsurance agreements (5,826) (3,129) Change in unearned premium reserves 2,250 5,997 Change in insurance claim reserves (329) 653 Change in amounts due reinsurers and amounts due from reinsurers (2,690) (21,539) Change in other assets, other liabilities and accrued income taxes 133 (1,188) Interest paid in kind - 306 Accrual of discount on bonds (114) (117) Amortization of premium on bonds 54 51 Amortization of deferred policy acquisition costs 10,406 9,897 Policy acquisition costs deferred (10,002) (10,996) Reinsurance commissions earned (2,773) (9,416) Reinsurance commissions received 2,918 10,376 Provision for depreciation and amortization 132 151 Net realized gains on investments (65) (275) ------------ ------------ NET CASH USED IN OPERATING ACTIVITIES (15,052) (50,588) INVESTING ACTIVITIES: Sale of investments available for sale 13,331 6,576 Purchase of investments available for sale (12,040) (11,545) Sale of property occupied by the Company - 3,298 Other, net (387) (286) ------------ ------------ NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 904 (1,957) FINANCING ACTIVITIES: Payment on ESOP loan 32 73 Issuance of Common Stock under Stock Option Plan - 234 Change in reinsurance premium deposits 11,504 48,343 ------------ ------------ NET CASH PROVIDED BY FINANCING ACTIVITIES 11,536 48,650 ------------ ------------ NET DECREASE IN CASH (2,612) (3,895) Cash at beginning of year 3,331 5,039 ------------ ------------ CASH AT END OF PERIOD $ 719 $ 1,144 ============ ============ See notes to unaudited consolidated financial statements.
5 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 1997 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 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 in the Company's Annual Report on Form 10-K for the year ended December 31, 1996. Principles of Consolidation: The accompanying unaudited consolidated financial statements include the accounts of ACCEL and its wholly-owned subsidiaries. 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, commercial auto and other specialty casualty products. 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 specialty casualty products are offered through general agents. 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. 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 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 fair value which approximates cost. 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. 6 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) 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, 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 recognized by writing the investment down to its fair value. Deferred Policy Acquisition Costs: The costs (principally commissions and certain expenses of policy issuance) of acquiring or renewing insurance business, all of which vary with and are directly related to the production of business, have been deferred. These deferred policy acquisition costs are amortized in a manner related to the recognition of premiums earned. Substantially all such deferred costs are amortized within a four-year period. Anticipated investment income is considered in determining recoverability of deferred costs. Equipment and Depreciation: Equipment is carried at cost less accumulated depreciation. Depreciation is provided using the straight-line method over an estimated useful asset life of five years. Leasehold Improvements: Leasehold improvements are carried at cost less accumulated amortization. Amortization is provided using the straight-line method over the term of the five year lease. Goodwill Amortization: Cost in excess of fair value of net assets of subsidiaries at dates of acquisition is being amortized primarily over a thirty-five year period. It is the Company's policy to account for goodwill at the lower of amortized cost or fair value. On an ongoing basis, management reviews the valuation and amortization of its goodwill. Premium Income Recognition and Unearned Premium Reserves: Unearned premium reserves on credit life and credit accident and health insurance are calculated primarily under the "Rule of 78's Method", which results in premium income being recognized in decreasing proportions over the terms of the policies, which approximates the pattern of policy benefits incurred. Unearned premium reserves on the extended service contracts are based on the historical emergence pattern of claims. The Company's primary liability on new car contracts exists subsequent to the expiration of manufacturers' warranties. This method results in premium being recognized in direct proportion to the emergence of benefits on these contracts. Unearned premium reserves on property and casualty products are calculated on the pro rata method. Insurance Claims: The liabilities for insurance claims are determined using statistical analyses and represent estimates of the ultimate net cost of all reported and unreported claims that are unpaid at year end. Considerable variability is inherent in such estimates and actual results will likely differ from those estimates. Federal Income Taxes: ACCEL and its subsidiaries file a consolidated federal income tax return. The provision for income taxes is based on income for financial reporting purposes, after permanent differences. Deferred tax assets and liabilities are recognized for the 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. Reinsurance: Reinsurance premiums ceded and reinsurance recoveries on policy benefits incurred are deducted from the respective income and expense accounts. Assets and liabilities related to reinsurance ceded are reported on a gross basis. Amounts related to reinsurance contracts, where it is not reasonably possible for the reinsurer to realize a significant loss, are recorded based on the deposit accounting method. 7 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Deferred Reinsurance Commissions: Commissions and ceding fees received in connection with premiums ceded are deferred and amortized in a manner related to the recognition of premiums earned. Substantially all such commissions and ceding fees are amortized within a four-year period. Earned ceding fees, commissions and experience refunds are reported as reinsurance expense recoveries in the unaudited consolidated statements of operations. Stock Option Plans: Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted the Financial Accounting Standards Board's (FASB) Statement No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize as expense over the vesting period the fair value of all stock-based awards on the date of grant. Alternatively, FASB No. 123 also allows entities to continue to apply the provisions of APB Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures for employee stock option grants made in 1995 and future years as if the fair-value-based method defined in FASB No. 123 had been applied. Earnings Per Common Share: Net income per common share is 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 1996 unaudited consolidated financial statements have been reclassified to conform with the 1997 presentation. NOTE B--NOTES PAYABLE In 1991, ACCEL issued $5,848,000 of subordinated notes (the "Subordinated Notes"). The Subordinated Notes had a nine-year term with no principal payable until maturity, and bore 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 $306,000 for the six months ended June 30, 1996. Of the Subordinated Notes described above, a significant portion were held by Chase Insurance Holdings Corporation ("CIHC"), a company related through common ownership by a stockholder and director of the Company. On July 25, 1996, the Company commenced an offering of non-transferable rights (the "Rights Offering") to stockholders of record as of June 18, 1996. Under the provisions of the Rights Offering, the Company permitted CIHC and its affiliate to tender the principal amount of their Subordinated Notes for cancellation as consideration (in lieu of cash) for the purchase of shares of common stock pursuant to the Rights Offering. On August 23, 1996, CIHC and its affiliate tendered $5,619,046 principal amount of their Subordinated Notes plus an additional $83,759 of accrued interest thereon under the terms of the Rights Offering. At the conclusion of the offering, CIHC and its affiliate had reduced their holding of Subordinated Notes to $0. In a separate transaction, the Company retired $731,533 principal amount of Subordinated Notes held by an unrelated third party for consideration of $600,000. The Company recognized an extraordinary gain on this transaction of $131,533 during the third quarter of 1996. No federal income tax was recognized related to this gain due to the consolidated tax position of the Company. The result of the two aforementioned transactions was to retire all outstanding Subordinated Notes. 8 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE B--NOTES PAYABLE (CONTINUED) 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 an existing credit agreement and to liquidate an intercompany loan between ACCEL and an insurance subsidiary. In addition, as of January 1, 1996, Acceleration Life Insurance Company ("ALIC") entered into a reinsurance agreement with an unaffiliated company to reinsure the majority of the in-force credit business. The Senior Notes are payable to the same unaffiliated company which is a party to the reinsurance agreement dated January 1, 1996. This agreement is structured such, that as future profits emerge on this block of business, these profits are held by the reinsurance company, and ultimately applied to pay interest on and to redeem the Senior Notes. This is accomplished by the following transactions. The reinsurance company distributes profits to ALIC as periodically agreed to by the reinsurance company and ALIC. ALIC then, subject to the Department of Insurance of the State of Ohio (Ohio Department) approval, dividends funds to ACCEL. ACCEL then uses these funds to redeem a portion of the senior notes and the interest thereon. Profits in excess of the amount required to retire the Senior Notes are to be returned to ALIC from the reinsurer. As of December 31, 1996, $1,500,000 of the profits on this block of business were released to ALIC in the form of the aforementioned Senior Notes This release resulted in a balance of $15,000,000 of Senior Notes outstanding as of June 30, 1997 and December 31, 1996. NOTE C--REINSURANCE On January 1, 1996 the Company terminated its then existing quota share reinsurance agreement and elected to recapture the liabilities subject to the treaty. The liabilities recaptured thereunder were then available for cession under the treaty described below. The unearned premium reserves and claim liabilities recaptured were $29,753,000 and $8,424,000, respectively. 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 B) 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 (see Note B). 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 approximated $48,616,000 and $9,919,000, respectively, as of January 1, 1996. The Company also has an agreement in place which covers a substantial portion of its credit insurance business produced in 1996 and 1997. 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 Company ultimately retains a substantial part of the insurance risk, the underwriting income or loss and the investment income on net funds. 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. 9 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE C--REINSURANCE (CONTINUED) The following data summarizes certain aspects of the Company's reinsurance activity for the periods presented. Premiums written and earned in 1997 and 1996 are summarized as follows: WRITTEN EARNED ----------------------------------- ----------------------------------- Period Ended June 30 Six Months Ended Three Months Ended Six Months Ended Three Months Ended 1997 1996 1997 1996 1997 1996 1997 1996 ---- ---- ---- ---- ---- ---- ---- ---- (Thousands of dollars) Direct $33,092 $31,284 $19,399 $15,422 $28,070 $25,147 $14,376 $11,527 Assumed (547) 2,581 (253) 1,747 2,226 2,732 1,026 1,644 Ceded 10,138 9,254 6,704 4,754 7,138 6,316 2,795 1,673 -------- -------- -------- -------- -------- -------- -------- -------- Net $22,407 $24,611 $12,442 $12,415 $23,158 $21,563 $12,607 $11,498 ======== ======== ======== ======== ======== ======== ======== ======== Policy benefits incurred in 1997 and 1996 are summarized as follows: Six Months Ended Three Months Ended June 30 1997 1996 1997 1996 (Thousands of dollars) Direct $13,973 $ 8,804 $ 7,460 $ 3,752 Assumed 1,545 1,869 672 1,038 Ceded 3,276 (12) 1,904 (804) -------- -------- -------- -------- Net policy benefits $12,242 $10,685 $ 6,228 $ 5,594 ======== ======== ======== ======== NOTE D--COMMITMENTS AND CONTINGENCIES In May 1996, the Liquidation Bureau of the New York Department ("Liquidation Bureau"), acting on behalf of the New York Property/Casualty Insurance Security Funds (the "Guaranty Fund"), during a meeting with Company representatives informally advised the Company that on behalf of the Guaranty Fund it intended to seek indemnification or reimbursement from Acceleration National Insurance Company ("ANIC") for claims paid by the Guaranty Fund to Galaxy Insurance Company ("Galaxy", a subsidiary of the Company), insureds on policies which may have been covered by certificates of suretyship ("Certificates") which ANIC had issued with respect to certain Galaxy insurance policies. The Liquidation Bureau has provided some information in response to the Company's request for accounting data and other information with respect to the Liquidation Bureau's analysis of the Guaranty Fund's right to indemnification; however, the Company is not yet able to quantify the magnitude of the potential claim, if any, for indemnification or reimbursement. The Company has taken the position that the Guaranty Fund has no right to seek indemnification unless Galaxy insureds who hold properly issued Certificates have executed assignments and evidences of subrogation. Even if any Galaxy insured properly made such a claim directly to ANIC, the Company has been advised by counsel that if ANIC paid any such claim, it would have the right, under assignment and subrogation agreements with its insureds, to assert all rights that the insureds could have asserted to recover the loss amounts from any other source, including the Guaranty Fund. The Company intends to fully investigate each claim which the Liquidation Bureau, acting on behalf of the Guaranty Fund, formally asserts is entitled to the benefits of a Certificate to determine whether such Certificate was properly endorsed by ANIC and issued with proper authority and if so, whether proper agreements, assignments and evidences of subrogation have been executed. The Company intends to vigorously defend any claims for indemnification or reimbursement made by the Liquidation Bureau, on behalf of the Guaranty Fund, with respect to the Certificates. Although the Company is not in a position to estimate the magnitude of the potential claims for indemnification or reimbursement, it does not believe that the ultimate resolution of such claims will have a material adverse effect on the financial condition or results of operations of the Company. 10 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE E--SUBSEQUENT EVENT On August 13, 1997, ACCEL announced it has reached an agreement in principle pursuant to which ACCEL will sell its auto aftermarket product group along with the stock of its Acceleration Life Insurance Company (ALIC) subsidiary and two other subsidiaries to Frontier Insurance Group, Inc. for an undisclosed amount. The closing of the sale is expected to occur during the fourth quarter of 1997 and is subject to the completion of due diligence by Frontier, negotiation of a definitive agreement, the approval of the stockholders of ACCEL and the receipt of certain regulatory approvals and satisfaction of certain customary conditions. 11 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Results for the Six Months Ended June 30, 1997 and 1996 Operating Results The income before federal income taxes for the six months ended June 30, 1997 was $643,000 compared to $52,000 for the same period in 1996. The income before federal income taxes for the three months ended June 30, 1997 was $408,000 compared to $14,000 for the same period in 1996. The Company's three primary product lines; credit, extended service contracts and commercial auto all produced positive underwriting margins in the first half of 1997. Loss ratios for these products were at or below targeted levels. The Company's new Property and Casualty programs continued their growth, producing $14,950,000 of annualized premium in the first half of 1997 compared to $10,300,000 in the first half of 1996. These programs, primarily Commercial Auto, have now matured to the point where they are generating a contribution to the Company's financial results. The Company's general and administrative expenses have increased by $455,000 or 13.5% in 1997 compared to 1996. These expenses are being incurred in order to prepare the Company to add additional product lines and to enhance current offerings. Revenue Premium writings for the first half of 1997 were $32.5 million compared to $33.9 million for the first half of 1996. Premiums written increased by $650,000 for the extended service contract program and by $4,650,000 for the new property and casualty programs. These increases were offset by a decrease in credit premium written of $6,250,000. The decrease in credit premium is attributable to the termination of a joint marketing agreement covering credit business written in the commonwealth of Pennsylvania, the loss of a significant account and the Companys' withdrawal from the state of Michigan. Liquidity and Capital Resources The Company's cash flows from operations have generally been adequate for its current operating needs. 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's long haul trucking and charter bus business generally is written for a term of one year with the casualty claim related liabilities extending beyond that period. The Company, therefore, maintains liquidity in its investment portfolio to correspond with the liabilities outstanding on its lines of business. At June 30, 1997, the estimated duration of the Company's fixed income investment portfolio was 2.9 years while the estimated liability duration was approximately 3.5 years. Currently, an interest rate change of 1% would impact the fair value of the fixed maturity portfolio and stockholders' equity by a decline of approximately $1.9 million if interest rates rose and an increase of approximately $1.9 million if interest rates declined. The Company's "available for sale" fixed maturity portfolio at June 30, 1997 and 1996 includes mortgage-backed securities, collateralized mortgage obligation securities and asset-backed collateralized securities. The mortgage and asset-backed securities 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 June 30, 1997, 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 portfolios 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. 12 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 Ohio Department. Based on this regulation, ALIC could pay a dividend of $1,543,315 without Ohio Department approval to ACCEL in 1997 and ANIC would require Ohio Department approval to pay any dividend to ACCEL during 1997. On May 8, 1997, ALIC paid a cash dividend to ACCEL in the amount of $1,500,000. The Company will monitor its current and future debt service requirements to coincide with cash flow availability. In 1996, the Company used a portion of the proceeds from a Rights Offering and the payment from a judgment entered in its favor in a legal proceeding (see Rights Offering and Discontinued Realtor's Errors and Omissions Program under Certain Events) to repay $4,296,000 in advances received in 1992 and 1993 from ACCEL's subsidiaries. These outstanding advances were eliminated in consolidation. On July 25, 1996, the Company commenced an offering of non-transferable rights to stockholders of record as of June 18, 1996 (see Rights Offering under Certain Events). The Rights Offering concluded on August 28, 1996 and generated $3,261,780 in cash proceeds. A supplemental offering to employees, agents and customers concluded on September 30, 1996 and generated $141,862 in cash proceeds of which $113,355 had been received by the Company as of December 31, 1996. The cash proceeds from these offerings have been used to repay intercompany advances ($2,647,000), for the redemption of Subordinated Notes which were not tendered in the Rights Offering ($600,000) (see "Note B" in the Notes to Unaudited Consolidated Financial Statements), and for general corporate purposes. Also, under the provisions of the Rights Offering, the Company permitted Chase Insurance Holdings Corporation ("CIHC") and its affiliates to tender the principal amount of their Subordinated Notes (See "Note B" in the Notes to Unaudited Consolidated Financial Statements) for cancellation as consideration (in lieu of cash) for the purchase of shares of common stock pursuant to the Rights Offering. On August 23, 1996, CIHC and its affiliates tendered $5,619,046 principal amount of their Subordinated Notes plus an additional $83,759 of accrued interest thereon under the terms of the Rights Offering. At the conclusion of the offering, CIHC and its affiliate had reduced their holding of Subordinated Notes to $0. In a separate transaction, ACCEL retired $731,533 principal amount of Subordinated Notes held by an unrelated third party for consideration of $600,000. ACCEL recognized an extraordinary gain on this transaction of $131,533 during the third quarter of 1996. No federal income tax was recognized related to this gain due to the current consolidated tax position of the Company. The result of the two aforementioned transactions was to retire all outstanding Subordinated Notes. 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 an existing credit agreement (see "Note B" in the Notes to Unaudited Consolidated Financial Statements) and to liquidate an intercompany loan between ACCEL and an insurance company 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. The Senior Notes are payable to the same unaffiliated company which is a party to the reinsurance agreement dated January 1, 1996. This agreement is structured such, that as future profits emerge on this block of business, these profits are held by the reinsurance company, and ultimately applied to pay interest on and to redeem the Senior Notes. This is accomplished by the following transactions. The reinsurance company distributes profits to ALIC as periodically agreed to by the reinsurance company and ALIC. ALIC then, subject to Ohio Department approval, dividends funds to ACCEL. ACCEL then uses these funds to redeem a portion of the senior notes and the interest thereon. Profits in excess of the amount required to retire the Senior Notes are to be returned to ALIC from the reinsurer. As of December 31, 1996, $1,500,000 of the profits on this block of business were released to ALIC in the form of the aforementioned Senior Notes issued by ACCEL. This release resulted in a balance of $15,000,000 of Senior Notes outstanding as of June 30, 1997 and December 31, 1996. 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 bore interest at 10%. 13 The unpaid balance of the loan has been reflected as a reduction in common stockholders' equity in the accompanying unaudited consolidated balance sheets. During the first quarter of 1997, ACCEL made the final payment and retired this loan. The Company currently has three material lines of business that are in run-off status: the REO line, the farmowner's multi-peril and ancillary inland marine products and the auto dealers' commercial multi-peril line. 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 management believes that the current level of policy reserves will be adequate to cover anticipated claim 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. In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 125 - Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities (SFAS 125). SFAS 125 provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The accounting and disclosure requirements of SFAS 125 are effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after December 31, 1996 and is to be applied prospectively. Earlier or retroactive application was not permitted. ACCEL adopted SFAS 125 in 1997 and the impact on the unaudited consolidated financial statements was not material. In February 1997, the FASB issued Statement of Financial Accounting Standards No. 128 - Earnings per Share (SFAS 128). SFAS 128 establishes standards for computing and presenting earnings per share (EPS). The accounting and disclosure requirements of SFAS 128 are effective for financial statements issued for periods ending after December 15, 1997, including interim periods and earlier adoption is not permitted. SFAS 128 also requires restatement of all prior-period EPS data presented. ACCEL will adopt SFAS 128 in December 1997 and the impact on the unaudited consolidated financial statements is not expected to be material. 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 Rights Offering: On July 25, 1996, the Company commenced a Rights Offering to stockholders of record as of June 18, 1996. The non-transferable subscription rights entitled stockholders of record to receive one right for each share of stock held and each right entitled the holder thereof to purchase one and one-half shares of the common stock of the Company at a subscription price of $2.25 per share. The rights expired on August 28, 1996. No commission or compensation was paid in connection with the Rights Offering. As part of the Rights Offering, the Company permitted the outstanding Subordinated Notes held by CIHC and its affiliates to be tendered for cancellation as consideration (in lieu of cash) for the purchase of shares of common stock pursuant to the Rights Offering. A total of 3,984,260 shares were subscribed for under the Rights Offering. Total consideration of $8,964,585 consisted of $5,702,805 in Subordinated Notes and $3,261,780 in cash. Subsequent to the Rights Offering, the Company commenced a Supplemental Offering to employees, agents and customers which concluded on September 30, 1996. Shares were offered under this Supplemental Offering at $2.25 per share. A total of 63,050 shares were subscribed for under this offering. No soliciting fees or other compensation were paid in connection with such offering. The net cash proceeds from these offerings have been used to repay intercompany advances ($2,647,000), for the redemption of Subordinated Notes which were not tendered in the Rights Offering ($600,000) and for general corporate purposes. 14 Claims Asserted by Liquidation Bureau under Certificates of Suretyship: On October 7, 1994, the Liquidation Bureau of the New York Department (the "Liquidation Bureau") took control of Galaxy pursuant to an order of liquidation of the New York Supreme Court. Prior to the liquidation of Galaxy, ANIC had issued certain certificates of suretyship ("Certificates") with respect to certain Galaxy insurance policies each of which provided that ANIC would assume the responsibilities of Galaxy under the specified policy if Galaxy became insolvent or financially unable to meet its obligations on the underlying policy, but only if certain conditions were met. In particular, the Certificates provided that ANIC's assumption of liability was contingent upon the insured's executing and delivering all agreements, assignments or evidences of subrogation satisfactory to ANIC respecting payments made or liabilities assumed. During 1996, the Liquidation Bureau, acting on behalf of the New York Property/Casualty Insurance Security Funds (the "Guaranty Fund"), informally advised the Company that on behalf of the Guaranty Fund it intended to seek indemnification or reimbursement from ANIC for claims paid by the Guaranty Fund to Galaxy insureds on policies which may have been covered by the Certificates. The Liquidation Bureau has provided some information in response to the Company's request for accounting data and other information with respect to the Liquidation Bureau's analysis of the Guaranty Fund's right to indemnification; however, the Company has not been able to evaluate or quantify the magnitude of the potential claim, if any, for indemnification or reimbursement. The Company has taken the position that the Guaranty Fund has no right to seek indemnification unless Galaxy insureds who hold properly issued Certificates have executed assignments and evidences of subrogation. Even if any Galaxy insureds properly made such a claim directly to ANIC, the Company has been advised by its legal counsel that if ANIC paid any such claim, it would have the right, under assignment and subrogation agreements with its insureds, to assert all rights that the insureds could have asserted to recover the loss amounts from any other source, including the Guaranty Fund. In early 1997, the Liquidation Bureau requested of the Companys' counsel the basis for the position taken by the Company. A written analysis supporting the Company's position was subsequently issued to the Liquidation Bureau. The Company intends to vigorously defend any claims for indemnification or reimbursement made by the Liquidation Bureau, on behalf of the Guaranty Fund, with respect to the Certificates. Although the Company is not in a position to estimate the magnitude of the potential claims for indemnification or reimbursement, it does not believe that the ultimate resolution of such claims will have a material adverse effect on the financial condition or results of operations of the Company. Discontinued Realtors' Errors and Omissions Program: As a result of the losses sustained in the REO program, 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 ACCEL 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. In late 1995, ACCEL was awarded $5,300,000 in damages related to this litigation. Pursuant to settlements reached with all of the parties, ACCEL received a total of $4,291,085 in 1996 ($140,000 in the first quarter of 1996). With the approval of the Ohio Department, the proceeds from the settlement were shared equally between ACCEL and ANIC. The Company requested the sharing agreement due to the continuing losses in the REO program realized by ANIC since 1991. The Company has recorded the $140,000 recovery as "Other income" in the accompanying unaudited consolidated statement of operations for the six months ended June 30, 1996. Sale of Auto Aftermarket Product Group: On August 13, 1997, ACCEL announced it has reached an agreement in principle pursuant to which ACCEL will sell its auto aftermarket product group along with the stock of its Acceleration Life Insurance Company (ALIC) subsidiary and two other subsidiaries to Frontier Insurance Group, Inc. for an undisclosed amount. The closing of the sale is expected to occur during the fourth quarter of 1997 and is subject to the completion of due diligence by Frontier, negotiation of a definitive agreement, the approval of the stockholders of ACCEL and the receipt of certain regulatory approvals and satisfaction of certain customary conditions. 15 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 June 30, 1997. 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: August 14, 1997 By: /S/ Kurt L. Mueller --------------------- ------------------- Kurt L. Mueller Vice President, Treasurer and Controller* - ----- * Mr. Mueller is Vice President, Treasurer and Controller and has been duly authorized to execute the report on behalf of the Registrant. 17 EX-27 2
7 This schedule contains summary financial information extracted from ACCEL International Corporation's second quarter 1997 Form 10-Q and is qualified in its entirety by reference to such Form 10-Q. 0000001985 ACCEL INTERNATIONAL CORPORATION 1,000 6-MOS DEC-31-1997 JAN-01-1997 JUN-30-1997 54,324 0 0 5,803 0 0 73,647 719 18,980 30,542 196,105 24,927 84,070 7 0 15,000 0 0 940 0 196,105 23,158 2,331 65 1,667 12,242 14,336 0 643 40 603 0 0 0 603 .07 0 25,256 0 0 0 0 24,927 0
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