-----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, RxX5kqhou65lSkT7dmagFH16XYhEQ9po1bKkyrezSOcA1LlZCP3vFNbNliNV6x/P n/Ym1PfvSQ07n54ByFhwOQ== 0000914039-00-000189.txt : 20000418 0000914039-00-000189.hdr.sgml : 20000418 ACCESSION NUMBER: 0000914039-00-000189 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000417 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-K SEC ACT: SEC FILE NUMBER: 000-08768 FILM NUMBER: 602727 BUSINESS ADDRESS: STREET 1: 75 WEST ST CITY: SIMSBURY STATE: CT ZIP: 06070 BUSINESS PHONE: 2815659010 MAIL ADDRESS: STREET 1: 75 WEST ST CITY: SIMSBURY STATE: CT ZIP: 06070 FORMER COMPANY: FORMER CONFORMED NAME: ACCELERATION CORP DATE OF NAME CHANGE: 19870814 10-K 1 10-K 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-K (Mark One) [X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 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.) 75 WEST STREET, SIMSBURY, CONNECTICUT 06070__ (Address of principal executive offices) (Zip Code) 860-843-7600 (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-K or any amendment to this Form 10-K. ____ Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The aggregate market value of Common Stock held by non-affiliates on February 29, 2000 was approximately $9,084,000. As of February 29, 2000, there were 9,084,004 shares of Common Stock, $.10 par value per share outstanding. DOCUMENTS INCORPORATED BY REFERENCE: Not applicable. 2 PART I ITEM 1. BUSINESS (a) GENERAL DEVELOPMENT OF BUSINESS ACCEL International Corporation ("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. Unless the context requires otherwise, the "Company" includes ACCEL and its subsidiaries. The Company, through its subsidiary, Acceleration National Insurance Company ("ANIC"), is engaged in the underwriting and sale of property/casualty insurance products. The Company announced on July 2, 1999 its intent of exiting its then current lines of commercial property and casualty business due to its loss experience from 1998 and the current year. Except for a certain aviation risks program, the Company ceased writing new policies of insurance and non-renewed its in-force policies upon expiration date. The net unearned premium reserve at December 31, 1999 is $1.2 million, a reduction of $11.2 million from December 31, 1998. Management is restructuring the Company so that it can re-enter other areas of the insurance market, especially the non-standard automobile line, in which the Company's new subsidiary, as of January 14, 2000, Allegiance Insurance Managers, Ltd. ("AIM"), has a recognized expertise. The Company is also concentrating its efforts to capture fee related business using ANIC's property and casualty insurance licenses and strategic insurance services related acquisitions. See NARRATIVE DESCRIPTION OF BUSINESS for further information. In addition to property and casualty insurance products, the Company historically sold, principally through automobile dealers, credit life and credit accident and health insurance and extended service contracts (collectively the "Auto Aftermarket Group"). Effective December 31, 1997, the Company sold its entire Auto Aftermarket Group to Lyndon Insurance Group, Inc., Lyndon Life Insurance Company and Lyndon Property Insurance Company, all of which are subsidiaries of Frontier Insurance Group, Inc. (collectively, "Lyndon"), for approximately $41 million (the "Lyndon Transaction"). As a result of the Lyndon Transaction, the Company ceased to be engaged in the Auto Aftermarket Group, which businesses are described below under "NARRATIVE DESCRIPTION OF BUSINESS - Disposed Lines of Business". (b) FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS The Company has operated predominantly in the property and casualty insurance segment with a second segment for Corporate which, prior to its sale on August 9, 1999, included ACCEL's equity method investment in USA Insurance Group, Inc. (see "Note C" in the Notes to Consolidated Financial Statements) and other corporate investments. See NARRATIVE DESCRIPTION OF BUSINESS and "Note K" in the Notes to Consolidated Financial Statements. (c) NARRATIVE DESCRIPTION OF BUSINESS GENERAL The Company's property and casualty segment currently consists of a 100%-ceded active aviation risks program, and run-off operations for long haul trucking, charter buses and limousines, crane operators and gun dealers, all of which were coverages previously sold through general agents. Also included in this segment, are lines previously discontinued which include commercial multi-peril, farmowners' multi-peril, ancillary inland marine and realtors' errors and omissions coverages ("REO"). The Company's property and casualty segment also includes extended service contracts which were insured by ANIC and sold primarily through automobile dealers, and which were wholly reinsured on January 1, 1998 as part of the Company's sale of the Auto Aftermarket Group to Lyndon. Premiums for the Company's now non-renewed long haul trucking and charter bus line comprised 79.4%, 82.4 % and 74.1% of the Company's gross premiums written in 1999, 1998 and 1997, respectively. Extended service contracts (which the Company sold as a result of the Lyndon Transaction) represented 1.9%, 15.4% and 23.8% of the Company's gross premiums written in 1999, 1998 and 1997, respectively. The extended service contract business was ceded 100% to Lyndon effective as of January 1, 1998. The Company's only active business, a 100%-ceded aviation risks program, comprised 9.9% of the Company's gross premiums written in 1999. OPERATIONS General. As a result of the Lyndon Transaction, the Company ceased to be engaged in the Auto Aftermarket Group, which is described below under Disposed Lines of Business. Further, as a result of the Company's loss experience from 1998 and 1999, the Company ceased writing new policies and has non-renewed its entire in-force book of commercial property and casualty business, except for a 100%-ceded aviation risks program. Management intends to use its remaining resources to re-enter other areas of the insurance market, especially the non-standard automobile line. The Company is also concentrating its efforts to capture fee related business using ANIC's property and casualty insurance licenses and strategic insurance services related acquisitions as described below. Commercial Auto Liability. In 1999, the Company ceased new business production and began non-renewing coverage to operators of long-haul trucks and charter buses. The program is in run-off. Gross premiums written by the Company for this product line were approximately 2 3 $17.6 million, $35.7 million and $30.3 million in 1999, 1998 and 1997 respectively (see "Note F" in the Notes to Consolidated Financial Statements). Other Property and Casualty Products. In 1999, the Company ceased new business production and began non-renewing other property and casualty products including a package policy for crane operators consisting of general liability, inland marine and commercial auto coverages, that began in 1997. Direct premiums written by the Company for this product line were $322,000, $485,000 and $198,000 in 1999, 1998 and 1997, respectively. The Company's property and casualty business is conducted through ANIC. ANIC has licenses to conduct business in 47 states and the District of Columbia. The majority of the Company's direct premiums written in 1999, 1998 and 1997 were derived from sales in Florida (19.2%, 16.2% and 16.7%, respectively), New York (10.4%, 19.2% and 11.8%, respectively), Texas (7.9%, 2.6% and 3.6%, respectively), Arizona (7.6%, 4.7% and 1.8%, respectively), Ohio (4.6%, 6.8% and 12.5%, respectively), and Arkansas (4.4%, 4.9% and 3.8%, respectively). Business Restructuring. On January 14, 2000, the Company acquired 100% of the stock of AIM. Gerald H. Pastor, FCAS, President, CEO and principal shareholder of AIM was elected President & CEO of ACCEL's subsidiary, ANIC in October, 1999 and of ACCEL in November, 1999. In consideration for the acquisition, ACCEL has issued 529,040 shares of its common stock to shareholders of AIM, other than Pastor, and will issue an additional 997,036 shares to Pastor upon, and subject to receipt of clearance by the Ohio Department of Insurance. Should the foregoing clearance not be received, ACCEL will issue to Pastor such other consideration as may be mutually agreed upon by ACCEL and Pastor, which may include a lesser number of shares of ACCEL common stock (subject to the foregoing clearance) and/or other securities. Under the terms of the transaction, ACCEL will also issue up to an additional 2,180,110 shares of its common stock to the shareholders of AIM if the combined business meets certain performance criteria over the six years after the acquisition. If the business does not achieve certain cumulative earnings by December 21, 2002, the former AIM shareholders will return 763,038 shares to ACCEL. AIM operates as an underwriting manager, managing general agency, and claims administrator for various programs, companies and clients. It will continue to expand its operations in these areas. ANIC is presently running off all of its underperforming products. Going forward, the primary focus of ACCEL and ANIC will be the non-standard automobile line of business, a business in which AIM and Pastor are proficient. ANIC has consolidated its administrative offices with AIM in Simsbury, Connecticut. Also on January 14, 2000, ACCEL completed arrangements for a credit facility of $5,000,000. Terms of the facility are 10% interest payable quarterly, plus 280,000 warrants per $1,000,000 borrowed, at a price of $2.00 per share. All monies owed under the facility will be due in full by December 31, 2003. Applicable warrants will expire on December 31, 2004. On January 19, 2000 ACCEL acquired the assets of Payless Insurance Agencies ("Payless"). Payless is comprised of two locations in the Fort Lauderdale/Broward County area, specializing in non-standard automobile insurance. On January 20, 2000 ACCEL acquired substantially all of the assets of Unistar Florida Holdings, Inc. ("Unistar"), representing 49 agency locations throughout the State of Florida, also specializing in non-standard automobile insurance. DISPOSED LINES OF BUSINESS The Lyndon Transaction. As noted above, effective as of December 31, 1997, the Company consummated the sale of its entire Auto Aftermarket Group, consisting of credit insurance and extended service contracts sold primarily through automobile dealers, to Lyndon for approximately $41 million in cash. More specifically, such transaction included (i) the sale by the Company to Lyndon Insurance Group, Inc. and Lyndon Life Insurance Company of all the outstanding capital stock of the Company's wholly owned subsidiaries, Acceleration Life Insurance Company ("ALIC"), Acceleration National Service Corporation ("ANSC") and Dublin International Limited ("Dublin") and (ii) the sale by the Company's wholly owned subsidiary, ANIC, to Lyndon Property Insurance Company ("Lyndon Property"), of ANIC's vehicle extended service contract business. See "Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" and "Note B" to the Notes to Consolidated Financial Statements. As a result of the Lyndon Transaction, the Company ceased to be engaged in the Auto Aftermarket Group businesses. In connection with the Lyndon Transaction, Lyndon Property and ANIC entered into two reinsurance agreements effective January 1, 1998 pursuant to which ANIC ceded to Lyndon Property the extended service programs and all insurance policies issued after the closing date of the Lyndon Transaction by Lyndon Property in the name of ANIC. The Company recognized a gain on the sale of the Auto Aftermarket Group in 1997 totaling $3.2 million after federal income taxes. The gain on sale was reflected in the accompanying Consolidated Statement of Operations in 1997 as a gain from continuing operations of $10.3 million from the sale of ANIC's vehicle extended service contract business and ANSC and a loss from discontinued operations of $7.1 million from the sale of ALIC and Dublin (excluding the provision for operating loss of $495,000 during the phase-out period). See "Note B" in the Notes to Consolidated Financial Statements. Extended Service Contracts. Prior to the sale of the Company's Auto Aftermarket Group to Lyndon, the Company sold extended service contracts under the name "Co$tguard" which covered the cost of labor and certain parts for the repair of automobiles and watercraft. In addition, the Company agreed to sell extended service contracts for a period of eighteen months following closing of the sale to Lyndon 3 4 which period expired in July 1999 with the underlying business being fully ceded to Lyndon Property. The Company's product covered towing, rental car reimbursement and other benefits during the entire contract term and enabled a purchaser to obtain from the selling dealer a service contract covering the cost (in excess of a deductible amount where applicable) of repairs to covered parts subsequent to the expiration of the applicable manufacturer's warranty. The Company marketed its extended service contracts primarily through the same group of automobile dealers who marketed the Company's credit insurance. The extended service contract program was marketed on a net cost basis to automobile dealers who then established the retail price for the contract. The net cost paid by the dealer included (i) the premiums for a contractual liability policy provided the dealer by ANIC and (ii) administrative and marketing fees. In 1999, 1998, and 1997, the program accounted for approximately 1.9%, 15.4%, and 23.8%, respectively, of the Company's gross premiums written. There will be no gross written premium on this business on ANIC's books in the year 2000 and forward. EMPLOYEES As of December 31, 1999, the Company employed 8 full-time equivalent employees compared to 28 full-time equivalent employees as of December 31, 1998. After the purchase of AIM on January 14, 2000, the Company employed 16 full-time equivalent employees. After the purchase of Payless and Unistar on January 19 and 20, 2000 respectively, the company employs 140 full-time equivalent employees. REINSURANCE WITH UNAFFILIATED INSURANCE COMPANIES Reinsurance enables insurance companies to provide greater diversification of risks and at the same time minimize risk exposure. The reinsurer reimburses the Company for any claims on the reinsured portion of the risk. Reinsurance does not discharge the Company from primary liability to the insured for the full amount of the insurance coverage. COMPETITION In the property and casualty insurance business, the Company competes with insurance companies which are larger and have greater capital resources available and whose industry ratings are at higher levels than ANIC. The Company's strategy with respect to the property-casualty business is to attempt to focus on product categories and market areas in which the major property-casualty insurance companies are not fully addressing. REGULATION The Company is subject to regulation in the states in which it conducts business. The extent of such regulation varies from state to state; but in general, all states have statutory restrictions and a supervisory agency that has broad discretionary administrative powers. Such regulation is designed primarily to protect policyholders and relates to the licensing of insurers and their agents, the approval of policy forms, the methods of computing reserves, the form and content of financial reports and the type and concentration of permitted investments. Ohio and other jurisdictions in which the Company conducts business have enacted legislation providing for specific regulation of the relationship between licensed insurers and affiliated members of a holding company group. Such legislation generally (1) establishes requirements and procedures relative to the approval or disapproval of mergers and other acquisitions of control, (2) prescribes the filing of registration statements by insurers which are members of the holding company group, (3) subjects the holding company to reporting requirements, (4) establishes standards for transactions between insurers and their holding companies and between members of a holding company group and (5) controls the payment of extraordinary dividends. The dividends, which the Company may receive from ANIC, are subject to regulatory requirements as to minimum capital and surplus. In addition to regulatory considerations, management considers the overall financial strength of an operating entity before dividends are paid to ACCEL. Generally, the net assets of ANIC available for transfer to ACCEL are limited to the amounts that ANIC's net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital and surplus requirements; however, payments of such amounts as dividends are currently subject to regulation by Ohio law. 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, any dividend distribution by ANIC in 2000 would be subject to the approval of the Ohio Department. The Ohio Department imposes risk based capital ("RBC") requirements on insurance enterprises, including ANIC. The RBC Model serves as a benchmark for the regulation of property/casualty insurance companies by state insurance regulators. RBC provides for targeted surplus levels based on formulas which specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk, and are set forth in the RBC requirements. Such formulas focus on four general types of risk: (a) the risk with respect to the company's assets (asset or default risk); (b) the risk of default on amounts due from reinsurers, policyholders or other creditors (credit risk); (c) the risk of under-estimating liabilities from business already written or inadequately pricing business to be written in the coming year (underwriting risk); and, (d) the risk associated with items such as excessive premium growth, contingent liabilities and other items not reflected on the balance sheet (off-balance sheet risk). The amount determined under such formulas is called the authorized control level RBC ("ACLC"). 4 5 The RBC guidelines define specific capital levels based on a company's ACLC that are determined by the ratio of the company's total adjusted capital ("TAC") to its ACLC. TAC is equal to statutory capital, plus or minus certain other specified adjustments. The specific capital levels, in declining order, and applicable ratios are generally as follows: "Company Action Level" where TAC is less than or equal to 2.0 times ACLC; "Regulatory Action Level" where TAC is less than or equal to 1.5 ACLC; "Authorized Control Level" where TAC is less than or equal to 1.0 times ACLC; and, "Mandatory Control Level" where TAC is less than or equal to 0.7 times ACLC. Companies at the Company Action Level must submit a comprehensive financial plan to the insurance commissioner of the state of domicile. Companies at the Regulatory Action Level are subject to a mandatory examination or analysis by the commissioner and possible required corrective actions. At the Authorized Control Level, a company is subject to, among other things, the commissioner placing it under regulatory control. At the Mandatory Control Level, the insurance commissioner is required to place a company under regulatory control. At December 31, 1999, ANIC's TAC was $4,105,000 or 0.97 times its ACLC. Accordingly, ANIC is within the Authorized Control Level. This RBC level is based on ANIC's recording of additional incurred losses and loss adjustment expenses of $1.4 million above the amounts reflected in the 1999 statutory annual statement as filed with the Ohio Department of Insurance. ANIC has not been required to file an amended 1999 statutory annual statement. The Company was already in discussion with the Ohio Insurance Department regarding its 1998 RBC calculation, and its expected December 31, 1999 calculation. Following a targeted examination held in January, 2000 by the Ohio Department, the Department is planning to visit the Company in the early Spring, 2000 for a mandatory examination to review and comment on corrective actions already taken and further planned by the Company's new management. On March 8, 2000, ANIC received a letter from the Department requesting that the Company file a RBC plan by April 18, 2000. On March 29, 2000, management met with the Ohio Department of Insurance. As a result of the meeting, ANIC has agreed to take the following corrective steps: (1) beginning in March 2000, ANIC will file an abbreviated monthly statutory financial report with the Ohio Department of Insurance; (2) ANIC will continue its current strategy to no longer write any new or renewal business in any state until a further agreement can be made with the Department; and (3) ANIC will file a RBC financial plan which includes the run-off of the existing business as well as management's expected plan for both raising capital and entering into the non-standard auto business. In the future, the Company intends for ANIC to insure a portion of the non-standard auto business produced by the Company's recently acquired agencies. The Company expects this owned agency business to grow and be successful both in terms of producing after-tax profits for its own agency operating segment, as well as producing profitable non-standard auto business for ANIC. The Company also expects the AIM acquisition will produce profitable service-fee business from underwriting management, managing general agency fees, and claims administration. Finally, management acknowledges the need for additional capital for ANIC and is considering various alternatives, including utilization of the credit facility described in "Note Q" in the Notes to Consolidated Financial Statements and other sources of capital. ITEM 2. PROPERTIES The Company's main administrative offices are located at 75 West Street, Simsbury, Connecticut. This office space was previously solely occupied by one of the Company's new subsidiaries, AIM. The jointly occupied leased space is approximately 6,000 square feet at this location with annual rental on a five-year lease expiring in April 30, 2004. As of December 31, 1999, the Company's information systems are provided through a month-to-month arrangement with Data-Tech, Inc. at 2550 Corporate Exchange Drive, Columbus, Ohio. ITEM 3. LEGAL PROCEEDINGS Due to the nature of its operations, the Company is at all times subject to pending and threatened legal actions that arise in the normal course of its activities. In management's evaluation of certain pending matters, based on the advice or information and analysis of outside counsel, the accompanying consolidated financial statements would not be materially affected by the outcome of any legal proceedings or contingent liabilities. In July 1991, the Company acquired 100% of RGL. Galaxy Insurance Company ("Galaxy"), a wholly owned subsidiary of RGL, wrote commercial property insurance, property and casualty, and assumed treaty reinsurance. Galaxy became statutorily insolvent at June 30, 1994. Due to the insolvency of Galaxy, the Company wrote its investment in RGL to zero and deconsolidated RGL as of April 1, 1994. On October 7, 1994, 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. In May 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 5 6 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 to ANIC. 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. In early 1998, the Superintendent of Insurance of the State of New York, as Liquidator of Galaxy and Administrator of the Guaranty Fund ("Superintendent"), filed suit against ANIC in New York State Supreme Court. The complaint alleged, among other things, breach of contract and demanded that ANIC specifically perform its alleged obligations under the Certificates. The complaint asked for an amount in excess of $6.5 million in damages. As reflected above, the suit requested indemnification or reimbursement for the claims paid or to be paid by the Guaranty Fund to Galaxy insureds on policies which may have been covered by the Certificates. ANIC has maintained that the Guaranty Fund does not have the right to seek indemnification unless the terms and conditions of validly issued Certificates have been strictly complied with. Accordingly, ANIC filed for dismissal of the suit which motion was granted by the Court on October 6, 1998. Thereafter, the Superintendent moved to reargue and renew his opposition to ANIC's motion to dismiss. By an Order dated February 23, 1999, the Court denied the Superintendent's motion. The Superintendent has filed a Notice of Appeal of the Court's Decision and Order dismissing the complaint, and has filed a brief in support of the appeal. ANIC will continue to defend vigorously against the Superintendent's lawsuit. On October 1, 1999 settlement was reached regarding a November 1997 suit that was filed against ALIC by three long-term care policyholders seeking to represent a class of North Dakota policyholders alleging breach of contract, fraud and misrepresentation. Pursuant to the settlement agreement, ALIC paid $4.0 million toward a global, nationwide settlement. ACCEL, which had conditionally contracted with Lyndon Life (to whom ALIC was sold), agreed to pay $2.3 million plus the proceeds from a suit against Lyndon Life that was expected to produce in excess of $.7 million, previously carried as a receivable. The total reimbursement to Lyndon was therefore in excess of $3.0 million. Lyndon maintains that ACCEL owes at least $.7 million additional, that ACCEL refuses to pay on the grounds that it only authorized a total of $3.0 million in accordance with the sale contract. ACCEL will vigorously oppose making any additional payments. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS Not Applicable 6 7 PART II ITEM 5. MARKET FOR ACCEL'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS (a) ACCEL's common stock is traded over-the-counter National Market Issues, under the NASDAQ symbol ACLE. The following table sets forth the quarterly range of over-the-counter prices for ACCEL's stock during the last two years. These prices have been adjusted for common stock dividends, if any, and do not include retail mark-up, mark-down, or commissions and do not always necessarily represent actual transactions.
1999 High Low 1998 High Low ---- ---- --- ---- ---- --- 4th Quarter $1.188 $0.563 4th Quarter $3.375 $2.125 3rd Quarter 1.875 0.875 3rd Quarter 3.375 2.188 2nd Quarter 2.688 1.625 2nd Quarter 3.500 2.875 1st Quarter 3.125 2.500 1st Quarter 3.500 3.063
(b) The approximate number of holders of record of ACCEL's common stock ($.10 par value) as of January 31, 2000, was 552 holders. (c) Dividends paid on common stock: 1999, 1998 and 1997-- $0.00 per share Restrictions on present or future ability to pay dividends: Since June 1992, ACCEL's Board of Directors have suspended payment of cash dividends on the common stock until the Company returns to a level of profitability which will sustain such payments. 7 8 ITEM 6. SELECTED FINANCIAL DATA ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
1999 1998 1997 1996 1995 --------------------------------------------------------------- (Thousands of dollars, except per share data & ratios) Gross premiums written $ 21,759 $ 43,285 $ 40,897 $ 25,629 $ 12,371 Premiums ceded (6,789) (27,300) (17,118) (9,416) (5,435) Net premiums written 14,970 15,985 23,779 16,213 6,936 Premiums earned 20,299 16,000 18,717 12,466 7,459 Net investment income: Interest and dividends 1,772 2,150 1,939 1,692 1,570 Realized gains (losses) 101 (44) 1,051 432 201 Total revenue 22,438 18,483 35,286 21,529 11,653 Loss and loss adjustment expenses 23,922 19,227 15,373 10,145 6,878 Income (loss) before taxes and other items (17,245) (10,721) 8,116 1,370 (3,601) Income (loss) from operations (17,245) (10,451) 7,015 1,327 (2,964) Income (loss) from discontinued operations -- -- (5,900) 646 1,504 Extraordinary item -- -- -- 131 -- Net income (loss) (17,245) (10,451) 1,115 2,104 (1,460) Earnings per common share--basic: Income (loss) from operations (2.02) (1.22) .82 .23 (.67) Income (loss) from discontinued operations -- -- (.69) .11 .34 Extraordinary item -- -- -- .02 -- Net income (loss) (2.02) (1.22) .13 .36 (.33) Earnings per common share--assuming dilution: Income (loss) from operations (2.02) (1.22) .82 .23 (.67) Income (loss) from discontinued operations -- -- (.69) .11 .34 Extraordinary item -- -- -- .02 -- Net income (loss) (2.02) (1.22) .13 .36 (.33) At end of year: Invested assets 22,370 36,294 33,921 30,302 23,697 Total assets 73,035 97,442 104,094 191,325 183,507 Policy reserves and liabilities 62,546 61,984 52,014 31,945 21,942 Notes payable -- -- -- 15,000 22,531 Common stockholders' equity 4,886 23,101 33,589 31,641 20,560 Return on average common stockholders' equity (123.24)% (36.87)% 3.42% 8.06% (8.13)% Book value per common share $ 0.57 $ 2.70 $ 3.88 $ 3.68 $ 4.62
Note: Net income (loss) per share reflects the adoption of the Financial Accounting Standards Board's Statement of Financial Accounting Standards No. 128, Earnings per Share ("EPS"). Both basic EPS and EPS assuming dilution have been presented accordingly. 8 9 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OPERATING RESULTS FOR THE THREE YEARS ENDED DECEMBER 31, 1999 OPERATING RESULTS AND DISCONTINUED OPERATIONS The Company's loss before income taxes for 1999 was $17.2 million. A major factor affecting the loss was adverse development of insurance losses (excluding unallocated loss adjustment expense) of $4.4 million, all of which was commercial auto business. The adverse development for commercial auto consisted primarily of a revision of the actuarial ultimate losses in 1999 for the 1997 and 1998 loss years. This adverse development was attributable to certain types of commercial auto insurance that the Company is no longer writing, including large and small fleets, paratransit vehicles and charter buses. The Company is focusing its ongoing efforts in substandard auto, and in obtaining fees for insurance services. Commercial auto produced a negative underwriting margin of $7.2 and $6.4 million in 1999 and 1998, respectively, including the effects of loss development. Also contributing to the loss before income taxes in 1999 were $2.4 million of losses incurred on other discontinued lines of business, primarily consisting of agriculture, realtors' errors and omissions and auto dealership coverages; general and administrative expenses of $7.2 million; commission and selling expenses net of reinsurance expense recoveries of $1.9 million; taxes, licenses and fees other than premium taxes of $0.8 million; and a legal settlement agreement expense of $3.0 million offset by net investment gain of $1.9 million and other income of $0.3 million. Commercial auto produced gross premiums of $17.6 million in 1999 compared to $35.7 and $30.3 million in 1998 and 1997, respectively. The Company's other discontinued products within the property and casualty segment (excluding extended service contracts which were sold to Lyndon effective December 31, 1997) produced $3.8 million in gross premiums written in 1999 compared to $1.5 million and $.4 million in 1998 and 1997, respectively. Of the $3.8 million of other gross premiums written in 1999, $2.2 million were from the 100%-ceded aviation business. On October 20, 1997, ACCEL entered into agreements to sell to Lyndon Insurance Group, Inc. and Lyndon Life Insurance Company (collectively, "Lyndon") the outstanding capital stock of ALIC, ANSC and Dublin (collectively, the "Target Corporations") for $30.2 million in cash and to sell to Lyndon Property Insurance Company ("Lyndon Property") the vehicle extended service contract business of ACCEL's wholly owned subsidiary, ANIC, for $10.3 million in cash. The sale was effective December 31, 1997. As discussed further below, the after-tax net gain in 1997 on the sale of the Auto Aftermarket Group was $3.2 million which was comprised of a gain of $10.3 million in continuing operations and a loss of $7.1 million in discontinued operations (excluding the provision for operating loss of $495,000 during the phase-out period). The gain was based upon the purchase price of approximately $41 million offset by the Company's equity in the sold subsidiaries of approximately $32.1 million, the write-off of goodwill related to ALIC of $.6 million, costs associated with the sale of $.8 million and federal income taxes related to the sale of $4.3 million. Upon consummation of the aforementioned sale, the Company ceased to be engaged in the Auto Aftermarket Group business. The consolidated financial statements of the Company for 1997 reflect the disposition of ALIC and Dublin which comprised the Life/Health business segment. Accordingly, the revenues, benefits and expenses, assets and liabilities, and cash flows of ALIC and Dublin have been excluded from the respective captions in the consolidated statements of operations and consolidated statements of cash flows. The net operating results of these entities have been reported, net of applicable income taxes, as "Income from discontinued operations" and the net cash flows of these entities have been reported as "Net cash (used in) provided by discontinued operations." The gain of $10.3 million from the sale of the vehicle extended service contract business was reflected within continuing operations of the Company in 1997 as a result of this business comprising only a portion of the Company's property and casualty business segment. Income before federal income taxes related to the vehicle extended service contract business included in continuing operations was $360,000 for 1997. Effective January 1, 1998, ANIC ceded to Lyndon via quota share reinsurance 100% of its liability related to existing and future vehicle extended service business written on ANIC's policy forms. In connection with the sale, ANIC granted Lyndon the authority to write new vehicle extended service contracts insured by contractual liability policies issued in the name of ANIC for a maximum period of eighteen months which expired in July 1999. All new business written by Lyndon utilizing ANIC's policy forms was automatically reinsured by Lyndon under the terms of the aforementioned reinsurance agreements. The Company's income before income taxes and discontinued operations for 1997 was $8.1 million. This income was primarily the result of the gain on the sale of the vehicle extended service contract business to Lyndon which amounted to $10.3 million. 9 10 The operating results for 1997 were impacted by the write-off of approximately $150,000 in capitalized software costs related to software which was included in the sale of assets for the vehicle extended service contract business and the write-off of approximately $1.25 million in deferred tax assets for ACCEL and ANIC in order to reflect deferred tax realizable values as a result of the sale of the Auto Aftermarket Group. REVENUE Gross premium writings for 1999 were $21.8 million compared to $43.3 million and $40.9 million for 1998 and 1997, respectively. Except for the 100%-ceded aviation risks program, the Company ceased writing new and renewal business in all other programs by no later than September 1999. Premiums written increased in 1998 from 1997 by $5.4 million for commercial auto and $1.0 million for other property and casualty programs offset by a decrease of $3.9 million for the vehicle extended service contract program that was fully ceded to Lyndon Property. See Table II following the narrative in Management's Discussion and Analysis. Net premium earned was $20.6 million, $16.0 million and $18.7 million for 1999, 1998 and 1997, respectively. Commercial auto net premium earned was $16.5 million, $18.3 million and $11.2 million in 1999, 1998 and 1997, respectively. Despite the significant decrease in 1999 gross premiums written, the run-off of the December 31, 1998 unearned premium reserve of $12.4 million to a balance of only $1.2 million at December 31, 1999, as well as a significant decrease in ceded premiums due to the termination of certain reinsurance coverages, provided stable earned premium for 1999 comparable to 1998. The total net premium earned was comparable in 1998 and 1997 as the increase in commercial auto net premium earned offset the decrease of $6.2 million in the extended service contract line. LOSS, LOSS ADJUSTMENT AND OTHER EXPENSES The net loss and loss adjustment expense ratios decreased to 117.8% in 1999 from 120.2% in 1998 and 82.1% in 1997. See Table I following the narrative in Management's Discussion and Analysis for further information on key operating ratios and see Table III for reserve development for the preceding ten years and a reconciliation of the beginning and ending liability for unpaid losses and loss adjustment expense. The effect of the Company's other lines of business that are in runoff was as follows for 1999: net incurred losses and loss adjustment expenses ("LAE") for the discontinued REO line of business were $182,000 in relation to zero earned premium. The total number of open claims at December 31, 1999 was 4 and the related reserves were $35,000. Net incurred losses and LAE for the discontinued agriculture lines of business at December 31, 1999 were $140,000. The net impact on the Company's loss ratio and net loss for these two discontinued lines of business in 1999 was approximately 2.2% and $300,000 loss, respectively. The effect of the Company's other lines of business that are in runoff was as follows for 1998: net incurred losses and loss adjustment expenses ("LAE") for the discontinued REO line of business were $245,000 in relation to zero earned premium. The total number of open claims at December 31, 1998 was 7 and the related reserves were $90,000. Net incurred losses and LAE for the discontinued agriculture lines of business at December 31, 1998 were $541,000. The net impact on the Company's loss ratio and net loss for these two discontinued lines of business in 1998 was approximately 4% and $.7 million loss, respectively. The effect of the Company's other lines of business that are in runoff was as follows for 1997: net incurred losses and loss adjustment expenses ("LAE") for the discontinued REO line of business were ($355,000) in relation to zero earned premium. This result was due in large part to a re-evaluation of LAE reserves that lowered the reserve to the expected ultimate cost of settling the claims. The total number of open claims at December 31, 1997 was 10 and the related reserves were $351,000. Net incurred losses and LAE for the discontinued agriculture lines of business at December 31, 1997 were ($77,000). The net impact on the loss ratio and net income for these discontinued lines of business in 1997 was immaterial. A positive impact on 1997 earnings was the level of service fees on the extended service contracts of $3.1 million in 1997. These service fees were non-recurring in 1998 due to the sale of the extended service contract business to Lyndon Property as discussed previously. The Company's general and administrative expenses increased in 1999 by $1.8 million, or 31.4%, to $7.4 million from $5.6 million in 1998. In 1998, general and administrative expenses increased by $.8 million, or 18%, from $4.8 million in 1997. In 1999, the company accrued $1.8 million in restructuring costs that are included in its general and administrative expenses. Of the $1.8 million, $.7 million was severance and other employee termination costs, $.8 million was for cancellation of a certain stop loss agreement, $.2 million was additional commission for moving part of the company's book of business, and the remainder was for various lease agreement accruals. A factor affecting the comparison of general and administrative expenses in 1998 versus previous years, was the allocation of overhead expenses in previous years among the Company and its subsidiaries that were sold effective December 31, 1997. In 1998, overhead expenses were fully absorbed by the Company. The increase in 1998 was primarily due to increased salaries of $.6 million of which the majority related to the change in allocation as previously discussed, increased legal fees of $.2 million, increased underwriting costs and 10 11 association dues of $.1 million each which were both the result of increased commercial auto premium writings since 1996 and various other expenses totaling $.3 million. These increases were offset by decreased consulting fees of $.2 million and $.3 million in expense reimbursements received from Lyndon in connection with Lyndon's usage of the Company's information systems. Commissions and selling expenses net of reinsurance expense recoveries as a percent of net premiums written decreased to 13.5% in 1999 from 15.6% in 1998. This is due largely to changes in certain producer commission rates during 1999. Commissions and selling expenses net of reinsurance expense recoveries as a percent of net premiums written decreased to 15.6% in 1998 from 25.3% in 1997. The decrease in 1998 is due largely to commercial auto becoming the predominant product line for the Company. Commercial auto has significantly lower acquisition costs than the Company's extended service contract business that was fully ceded to Lyndon effective January 1, 1998. On August 10, 1999, the Company sold its 25% interest in USA Insurance Group, Inc. ("USAIG"), the parent company of Transportation Insurance Specialists, the Company's former general agent, producing a capital gain of $0.3 million. The Company also received interest income associated with the sale of approximately $0.3 million from a put option available in the purchase documents. The original purchase of the USAIG investment was April 1, 1998, for $5 million. This investment was accounted for using the equity method. At December 31, 1998, the investment in USAIG exceeded the Company's share of the underlying net assets by $4.1 million and was being amortized on the straight-line method over 10 years based upon a review of the operations, including a persistency review of USAIG's producing sub-agents. The Company recorded a net expense of $65,000 and $189,000 in 1999 and 1998 respectively for its investment in USAIG that was comprised of its share of USAIG's earnings of $156,000 and $142,000 offset by amortization of $221,000 and $331,000 in 1999 and 1998 respectively. LIQUIDITY, CAPITAL RESOURCES AND OTHER The Company's cash flows from operations have generally been adequate for its current operating needs. The Company's non-renewed long haul trucking, charter bus and paratransit business was generally written for a term of one year, with the casualty claim-related liabilities extending beyond that period. The Company's liability on vehicle extended service contracts typically has extended for either one-year or five-year periods. However as previously discussed, the Company's existing vehicle extended service contract business was ceded to Lyndon Property effective January 1, 1998. The Company's gross amounts due from reinsurers increased $6.0 million in 1999, to $45.7 million from $39.7 million at year end 1998. Therefore, the Company has approximately 9.3 times its stockholders' equity in its amounts due from reinsurers. The Company and its professional reinsurance intermediaries carefully monitor cash call positions and the financial ability of its reinsurers to fulfill their obligations to the Company. The Company maintains liquidity in its investment portfolio to correspond with the liabilities outstanding on its lines of business. At December 31, 1999, the estimated duration of the Company's fixed income investment portfolio was 2.4 years while the estimated liability duration was approximately 1.6 years. Currently, an interest rate increase of 1% would negatively impact the fair value of the fixed maturity portfolio and stockholders' equity by a decline of approximately $.6 million. Conversely, an interest rate decrease of 1%, would positively impact the same two accounts by approximately $.5 million The Company's "available for sale" fixed maturity securities at December 31, 1999 included $2.8 million of mortgage-backed securities, $.8 million of collateralized mortgage obligation securities, and $6.5 million of 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 that are backed by stable collateral, and by concentrating on securities that have either a planned amortization or sequential pay classes. The collateralized mortgage obligations and asset backed securities owned have primarily short to intermediate average lives. At December 31, 1999, the Company did not have a significant amount of higher risk mortgage or asset backed securities, which had a significant risk of loss or principal. 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. The Company's collateralized mortgage obligations and asset backed securities are predominantly sequential pay with little or no exposure to interest only obligations ("IOs") or inverse IOs. 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 11 12 the Ohio Department. Based on this regulation, ANIC would require Ohio Department approval to pay any dividend to ACCEL during 2000. See "Note O" in the Notes to Consolidated Financial Statements for a discussion regarding Risk Based Capital. In January 1998, upon closing the sale of the Auto Aftermarket Group, the Company used a portion of the proceeds to retire the outstanding balance of $15 million of senior notes held by ALIC. ALIC had received these senior notes from an unaffiliated company, along with accrued interest of approximately $1.1 million. The Company utilized a portion of the sale proceeds to make a capital contribution of $3.5 million to ANIC, to pay taxes on the sale of approximately $4.3 million, to transfer $8.8 million in cash to Lyndon in connection with the ceding of the existing vehicle extended service contract business on January 1, 1998 and utilized the remainder for general corporate purposes. The estimates for the Company's 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 consolidated financial statements. Due to the nature of its operations, the Company is at all times subject to pending and threatened legal actions that arise in the normal course of its activities. For information regarding legal proceedings involving the Company including developments relating to the insolvency of Galaxy Insurance Company (a former subsidiary of the Company) see "Note M" in the Notes to Consolidated Financial Statements. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 is effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. SFAS No. 133 requires that all derivative instruments be recorded on the balance sheet at their fair value. Changes in the fair value of derivatives are recorded each period in current earnings or other comprehensive income, depending on whether a derivative is designed as part of a hedge transaction and, if it is, the type of hedge transaction. The Company does not expect the adoption of SFAS No. 133 to have a material impact on its consolidated financial statements because the Company does not currently hold any derivative instruments. Although the cumulative effects of inflation on premium growth cannot be fully determined, increases in the value of commercial property results in increased premiums for property coverages. The combination of severity (which is affected by inflation) and frequency of loss trends in commercial auto and general liability are recognized in premium increases or decreases by the adoption of filed premium rates. The National Association of Insurance Commissioners ("NAIC") has completed and adopted a project to codify statutory accounting principles with a provision for commissioner discretion in the determination of appropriate statutory accounting for insurers. Although the NAIC has indicated that January 1, 2001 is the expected date of implementation, the implementation is ultimately dependent upon the insurer's state of domicile. Implementation of the codified statutory principles may affect the surplus level of ANIC on a statutory basis. Management has not determined what impact, if any, this project will have on the statutory surplus of ANIC. CAUTIONARY STATEMENT REGARDING FORWARD LOOKING STATEMENTS The 1995 Private Securities Litigation Reform Act provides issuers the opportunity to make cautionary statements regarding forward-looking statements. Accordingly, any forward-looking statement contained herein or in any other oral or written statement by the Company or any of its officers, directors or employees is qualified by the fact that actual results of the Company may differ materially from such statement due to the following important factors, among other risks and uncertainties inherent in the Company's business: state insurance regulations, rate competition, adverse changes in interest rates, unforeseen losses with respect to loss and settlement expense reserves for unreported and reported claims, and catastrophic events. 12 13 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES TABLE I Several key operating ratios of the Company are as follows:
Consolidated Results (Thousands of dollars, except ratios) 1999 1998 1997 --------- --------- --------- Gross premiums written $ 21,759 $ 43,285 $ 40,897 Net premiums earned $ 20,299 $ 16,000 $ 18,717 RATIOS: Loss and LAE incurred to net premiums earned 117.8% 120.2% 82.1% Commissions and selling expenses and general and administrative expenses to gross premiums written(1) 53.2% 30.0% 33.9% Commissions and selling expenses, reinsurance expense recovery and change in deferred policy acquisition costs to net premiums earned 22.5% 17.5% 22.9% Taxes, licenses and fees to gross premiums written 3.7% 3.6% 3.2%
(1) Excluding restructuring expense of $1,844 in 1999. 13 14 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES TABLE II Changes in Gross Premiums Written Year Ended December 31 (Thousands of dollars, except ratios)
1999 1998 vs. % vs. % Gross Premiums Written 1999 1998 1997 1998 Change 1997 Change - --------------------------------------------------------------------------------------------------------------------- Continuing lines of business: Commercial auto $ 17,571 $ 35,678 $ 30,293 $(18,107) (50.8)% $ 5,385 17.8% Commercial multi-peril 594 543 215 51 9.4% 328 152.6% Extended service contracts 414 5,821 9,744 (5,407) (92.9)% (3,923) (40.3)% Aircraft 2,157 -- -- 2,157 -- -- -- Other property/casualty lines 661 958 230 (297) (31.0)% 527 229.1% -------- -------- -------- -------- ------ -------- ----- Total continuing lines 21,397 43,000 40,482 (21,603) (50.2)% 2,317 5.7% -------- -------- -------- -------- ------ -------- ----- Discontinued lines of business included in continuing operations: Medical and miscellaneous life and health 362 306 441 56 18.3% (135) (30.6)% Vendor's single interest -- (21) (35) 21 (100.0)% 14 (40.0)% Agriculture, REO and other property & casualty -- -- 1 -- -- (1) (100.0)% Other -- -- 8 -- -- (8) (100.0)% -------- -------- -------- -------- ------ -------- ------- Total discontinued lines 362 285 415 77 27.0% (130) (31.3)% -------- -------- -------- -------- ------ -------- ------- Gross premiums written from continuing operations $ 21,759 $ 43,285 $ 40,897 $(21,526) (49.7)% $ 2,187 5.3% ======== ======== ======== ======== ======= ======== =======
14 15 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES TABLE III Analysis of Loss and Loss Adjustment Expense Development (Thousands of dollars)
1988 1989 1990 1991 1992 1993 1994 1995 ====================================================================================== Reserves for unpaid losses and loss adjustment expenses, net of reinsurance recoverable $ 2,266 $ 2,978 $ 3,415 $ 26,038 $ 15,689 $ 9,380 $ 5,489 $ 5,413 Liability reestimated as of: One year later $ 2,281 $ 2,416 $ 2,871 $ 31,548 $ 14,945 $ 9,335 $ 6,146 $ 5,606 Two years later 2,262 979 5,386 31,791 15,552 10,036 7,473 5,216 Three years later 1,495 2,054 5,966 32,387 16,345 11,132 7,100 6,227 Four years later 2,248 2,172 6,245 32,963 17,195 10,776 8,077 6,168 Five years later 2,365 2,054 6,502 33,751 16,916 11,240 8,017 Six years later 2,302 2,083 6,952 33,529 17,369 11,083 Seven years later 2,323 2,121 6,871 33,842 17,239 Eight years later 2,372 2,116 7,195 33,712 Nine years later 2,418 2,126 7,150 Ten years later 2,418 2,081 Cumulative redundancy (deficiency) $ (152) $ 897 $ (3,735) $ (7,674) $ (1,550) $ (1,703) $ (2,528) $ (755) Cumulative amount of liability paid, net of reinsurance recoverables, paid through: One year later $ 1,866 $ 1,235 $ (9,966) $ 19,319 $ 8,802 $ 5,779 $ 2,702 $ 3,280 Two years later 1,953 (3,875) (492) 26,487 12,442 7,346 5,561 4,532 Three years later 367 (164) 3,313 29,815 13,820 9,624 6,594 5,837 Four years later 1,551 1,373 4,726 30,949 15,834 10,337 7,687 5,989 Five years later 2,096 1,681 5,477 32,622 16,493 11,040 7,839 Six years later 2,207 1,708 6,330 33,126 17,199 11,040 Seven years later 2,312 1,921 6,727 33,672 17,199 Eight years later 2,323 2,046 7,150 33,672 Nine years later 2,418 2,081 7,150 Ten years later 2,418 2,081 Net reserve - December 31 $ 9,380 $ 5,489 $ 5,413 Reinsurance recoverables 1,400 891 2,238 ---------------------------------- Gross reserve $ 10,780 $ 6,380 $ 7,651 ==================================
1996 1997 1998 1999 ========================================== Reserves for unpaid losses and loss adjustment expenses, net of reinsurance recoverable $ 5,198 $ 7,778 $ 13,326 $ 19,428 Liability reestimated as of: One year later $ 5,124 $ 12,429 $ 15,996 Two years later 7,468 13,191 Three years later 7,098 Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later Cumulative redundancy (deficiency) $ (1,900) $ (5,413) $ (2,670) Cumulative amount of liability paid, net of reinsurance recoverables, paid through: One year later $ 3,490 $ 6,008 $ 8,917 Two years later 5,567 8,484 Three years later 6,392 Four years later Five years later Six years later Seven years later Eight years later Nine years later Ten years later Net reserve - December 31 $ 5,198 $ 7,778 $ 13,326 $ 19,428 Reinsurance recoverables 5,818 14,250 36,209 39,993 ------------------------------------------- Gross reserve $ 11,016 $ 22,028 $ 49,535 $ 59,421 ===========================================
Note: This table excludes the consolidated reserves of Randjill Group, Ltd which was acquired by the Company in 1991 and deconsolidated by the Company in 1994. 15 16 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES TABLE III - (CONTINUED) Reconciliation of Liability for Unpaid Losses and Loss Adjustment Expense
1999 1998 1997 --------------------------------- (Thousands of dollars) Liability for insurance claims at beginning of year $ 49,535 $ 22,028 $ 11,016 Less reinsurance recoverables (36,209) (14,250) (5,820) --------------------------------- Net balances at beginning of year 13,326 7,778 5,196 Loss and loss adjustment expenses incurred: Loss and loss adjustment expense incurred for events of the current year 21,252 14,507 15,705 Loss and loss adjustment expense incurred for events of prior years 2,670 4,720 (332) --------------------------------- Total loss and loss adjustment expenses incurred 23,922 19,227 15,373 Payments: Loss and loss adjustment expenses for insured events of the current year 8,918 7,616 9,558 Loss and loss adjustment expenses for insured events in prior years 8,902 6,063 3,233 --------------------------------- Total payments 17,820 13,679 12,791 --------------------------------- Net balances at end of year 19,428 13,326 7,778 Plus reinsurance recoverables 39,993 36,209 14,250 --------------------------------- Liability for insurance claims at end of year $ 59,421 $ 49,535 $ 22,028 =================================
The table above reflects increases in the liability for insurance claims resulting from the Company's continued expansion into the Commercial Auto line of business (until all programs were discontinued in mid-1999). Maturity of claims for this line of business has resulted in recording, in 1999 and 1998, $2,670,000 and $3,667,000, respectively, in additional losses incurred for prior policy years. Additionally, lines of business discontinued prior to 1995 reevaluated in 1998, resulted in the recording, in 1998, of $859,000 in additional losses incurred. 16 17 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK MARKET RISK MANAGEMENT The Company is exposed to market risk, including changes in interest rates. To manage the volatility relating to this exposure, the Company manages the duration of its invested assets to stay within a reasonable range of the duration of its liabilities. The Company does not hold or issue derivative instruments. The table below provides information about the Company's other financial instruments that are sensitive to changes in interest rates. The financial instruments are grouped by market risk exposure category. All instruments are denominated in U.S. dollars. Significant interest rate risk sensitive instruments as of December 31, 1999 were:
TOTAL FAIR 2000 2001 2002 2003 2004 Thereafter TOTAL VALUE - ------------------------------------------------------------------------------------------------------------------ (Millions of dollars) INVESTMENTS IN FIXED MATURITY SECURITIES Principal Amount $1.93 $4.76 $6.19 $3.04 $0.36 $4.72 $21.01 $21.01 Book Value 1.94 4.79 6.27 3.07 0.36 5.16 21.59 Average Interest Rate 6.64% 6.26% 6.18% 6.14% 6.06% 6.72% 6.36% 7.18% SHORT-TERM INVESTMENTS Principal Amount $1.36 - - - - - $1.36 $1.36 Book Value 1.36 - - - - - 1.36 Average Interest Rate 5.25% - - - - - 5.25% 5.25%
17 18 ANNUAL REPORT ON FORM 10-K ITEM 8, ITEM 14 (a) (1) and (2), (c) and (d) FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA LIST OF FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES CERTAIN EXHIBITS FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1999 ACCEL INTERNATIONAL CORPORATION SIMSBURY, CONNECTICUT 18 19 INDEPENDENT AUDITORS' REPORT The Board of Directors and Stockholders ACCEL International Corporation: We have audited the consolidated financial statements of ACCEL International Corporation and subsidiaries (the Company) as listed in the accompanying index. In connection with our audits of the consolidated financial statements, we also have audited the financial statement schedules as listed in the accompanying index. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of ACCEL International Corporation and subsidiaries as of December 31, 1999 and 1998, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 1999, in conformity with generally accepted accounting principles. Also in our opinion, the related financial statement schedules when considered in relation to the basic consolidated financial statements taken as a whole, present fairly, in all material respects, the information set forth therein. The accompanying consolidated financial statements and financial statement schedules have been prepared assuming that the Company will continue as a going concern. As discussed in Note N to the consolidated financial statements, the Ohio Department of Insurance imposes risk-based capital requirements on insurance enterprises, including the Company's wholly-owned subsidiary, Acceleration National Insurance Company (ANIC). The net assets of ANIC represent approximately 97% of the Company's total consolidated stockholders' equity at December 31, 1999. At December 31, 1999, ANIC's total adjusted capital is at the Authorized Control Level based on the risk-based capital calculation required by the Ohio Department of Insurance. ANIC will file a comprehensive financial plan with the Ohio Department of Insurance outlining its plan for attaining the required levels of capital and surplus. Failure to meet the capital and surplus requirements included in this comprehensive financial plan would expose ANIC to regulatory sanctions that may include restrictions on operations and growth, mandatory asset dispositions, and placing ANIC under regulatory control. These matters raise substantial doubt about the ability of the Company to continue as a going concern. The ability of the Company to continue as a going concern is dependent on many factors, one of which is regulatory action, including ultimate acceptance of ANIC's comprehensive financial plan. Management's plans in regard to these matters are described in Note N to the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustment that might result from the outcome of this uncertainty. KPMG LLP Houston, Texas April 14, 2000 19 20 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
December 31, 1999 1998 ---- ---- (Thousands of dollars) ASSETS Investments Investments available for sale, at fair value: Fixed maturities (cost: 1999--$21,592,000; 1998--$29,953,000) $ 21,012 $ 30,343 Short-term investments (cost: 1999--$1,358,000; 1998--$1,204,000) 1,358 1,204 Other invested assets -- 4,747 -------- -------- 22,370 36,294 Cash -- 2,587 Receivables: Premiums in process of transmittal, less allowance (1999--$359,000; 1998--$200,000) 1,637 7,975 Amounts due from reinsurers 45,671 39,701 Amounts due from former subsidiaries -- 65 -------- -------- 47,308 47,741 Accrued investment income 234 282 Prepaid reinsurance premiums 1,918 5,913 Deferred policy acquisition costs 280 2,803 Equipment--at cost, less accumulated depreciation (1999--$1,066,000; 1998--$1,673,000) 444 474 Leasehold improvements, less accumulated amortization (1999--$0; 1998--$13,000) -- 24 Receivable from sale of discontinued and disposed of operations -- 703 Other assets 481 621 -------- -------- 3,357 10,820 -------- -------- Total assets $ 73,035 $ 97,442 ======== ========
(Continued) 20 21 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
December 31, 1999 1998 ---- ---- (Thousands of dollars) LIABILITIES AND STOCKHOLDERS' EQUITY Policy Reserves and Liabilities: Unearned premium reserves $ 3.125 $ 12,449 Insurance claim reserves 59,421 49,535 -------- -------- 62,546 61,984 Other Liabilities: Bank overdrafts 3,714 -- Amounts withheld for others 122 2,118 Deferred reinsurance commissions 114 1,508 Amounts due reinsurers 828 6,407 Accounts payable and other liabilities 653 2,165 Current federal income taxes 172 159 -------- -------- 5,603 12,357 -------- -------- 68,149 74,341 -------- -------- 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 (1999 and 1998--15,000,000) Issued shares (1999 and 1998--9,468,196) 947 947 Additional paid-in capital 32,659 32,659 Accumulated deficit (21,178) (3,933) Less treasury shares at cost (1999 and 1998--913,230) (6,962) (6,962) Accumulated other comprehensive income (loss) (580) 390 -------- -------- Net stockholders' equity 4,886 23,101 -------- -------- Total liabilities & stockholders' equity $ 73,035 $ 97,442 ======== ========
See notes to consolidated financial statements. 21 22 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS
Year Ended December 31, 1999 1998 1997 ---- ---- ---- (thousands of dollars) REVENUE: Gross premiums written $ 21,759 $ 43,285 $ 40,897 Less reinsurance ceded 6,789 27,300 17,118 -------- -------- -------- Net premiums written 14,970 15,985 23,779 Decrease (increase) in unearned premium reserves 5,329 15 (5,062) -------- -------- -------- Net premiums earned 20,299 16,000 18,717 Net investment income: Interest and dividends 1,772 2,150 1,939 Realized gains (loss) 101 (44) 1,051 Equity in loss of affiliated company -- (189) -- Service fees on extended service contracts -- -- 3,051 Other income 266 566 10,528 -------- -------- -------- 22,438 18,483 35,286 -------- -------- -------- BENEFITS AND EXPENSES: Loss and loss adjustment expenses 23,922 19,227 15,373 Commissions and selling expenses 4,197 7,355 9,100 Reinsurance expense recovery (2,147) (4,868) (3,083) General and administrative 7,377 5,615 4,776 Taxes, licenses and fees 808 1,567 1,312 Legal settlement agreement 3,003 -- -- Interest -- -- 1,425 Decrease (increase) in deferred policy acquisition costs 2,523 308 (1,733) -------- -------- -------- 39,683 29,204 27,170 -------- -------- -------- INCOME (LOSS) BEFORE FEDERAL INCOME TAXES AND DISCONTINUED OPERATIONS (17,245) (10,721) 8,116 Federal income taxes: Current (benefit) -- (270) (52) Deferred expense -- -- 1,153 -------- -------- -------- -- (270) 1,101 -------- -------- -------- INCOME (LOSS) FROM OPERATIONS (17,245) (10,451) 7,015 Discontinued operations: Income from operations of discontinued business segment (net of income tax of $93,000) -- -- 1,744 Loss on disposal of business segment, including provision for operating loss of $495,000 during phase-out period (net of income tax of $2,020,000) -- -- (7,644) -------- -------- -------- NET INCOME (LOSS) $(17,245) $(10,451) $ 1,115 ======== ======== ========
(Continued) 22 23 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS - (CONTINUED)
Year Ended December 31, 1999 1998 1997 ---- ---- ---- Earnings per common share--basic: Income (loss) from operations $ (2.02) $ (1.22) $ 0.82 Income from discontinued operations -- -- 0.20 Loss on disposal of business segment -- -- (0.89) ============= ============= ============= Net income (loss) $ (2.02) $ (1.22) $ 0.13 ============= ============= ============= Earnings per common share--assuming dilution: Income (loss) from continuing operations $ (2.02) $ (1.22) $ 0.82 Income from discontinued operations -- -- 0.20 Loss on disposal of business segment -- -- (0.89) ============= ============= ============= Net income (loss) $ (2.02) $ (1.22) $ 0.13 ============= ============= ============= Weighted average number of common shares outstanding 8,554,966 8,573,574 8,610,757 ============= ============= =============
See notes to consolidated financial statements. 23 24 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY Years Ended December 31, 1999, 1998 and 1997 (Thousands of dollars)
Retained earnings Common stock Additional (accumulated held in Common stock paid-in capital deficit) treasury ESOP loan ------------ --------------- -------- -------- --------- Balances at December 31, 1996 $ 940 $ 32,507 $ 5,403 $ (6,599) $ (32) Comprehensive income: Net income -- -- 1,115 -- -- Other comprehensive income - change in net unrealized gains (losses) on investment securities -- -- -- -- -- -------- -------- -------- -------- -------- Comprehensive income -- -- 1,115 -- -- Payments on ESOP loan -- -- -- -- 32 Issuance of 44,021 shares of Common Stock under Common Stock Option Plan (Note J) 4 103 -- -- -- -------- -------- -------- -------- -------- Balances at December 31, 1997 944 32,610 6,518 (6,599) -- Comprehensive income (loss): Net loss -- -- (10,451) -- -- Other comprehensive income - change in net unrealized gains (losses) on investment securities -- -- -- -- -- -------- -------- -------- -------- -------- Comprehensive income (loss) (10,451) Purchase of 115,810 shares as treasury stock -- -- -- (363) -- Issuance of 23,013 shares of Common Stock under Common Stock Option Plan 3 49 -- -- -- -------- -------- -------- -------- -------- Balances at December 31, 1998 $ 947 $ 32,659 $ (3,933) $ (6,962) $ --
Accumulated other comprehensive income (loss) Net ------------- --- Balances at December 31, 1996 $ (578) $ 31,641 Comprehensive income: Net income -- 1,115 Other comprehensive income - change in net unrealized gains (losses) on investment securities 694 694 -------- -------- Comprehensive income 694 1,809 Payments on ESOP loan -- 32 Issuance of 44,021 shares of Common Stock under Common Stock Option Plan (Note J) -- 107 -------- -------- Balances at December 31, 1997 116 33,589 Comprehensive income (loss): -- Net loss -- (10,451) Other comprehensive income - change in net unrealized gains (losses) on investment securities 274 274 -------- -------- Comprehensive income (loss) 274 (10,177) Purchase of 115,810 shares as treasury stock -- (363) Issuance of 23,013 shares of Common Stock under Common Stock Option Plan -- 52 -------- -------- Balances at December 31, 1998 $ 390 $ 23,101
(Continued) 24 25 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY - (CONTINUED) Years Ended December 31, 1999, 1998 and 1997 (Thousands of dollars)
Retained earnings Common stock Additional (accumulated held in Common stock paid-in capital deficit) treasury ESOP loan ------------ --------------- -------- -------- --------- Balances at December 31, 1998 $ 947 $ 32,659 $ (3,933) $ (6,962) $ -- Comprehensive loss: Net loss -- -- (17,245) -- -- Other comprehensive income--change in net unrealized gains (losses) on investment securities -- -- -- -- -- -------- -------- -------- -------- -------- Comprehensive loss -- -- (17,245) -- -- -------- -------- -------- -------- -------- Balances at December 31, 1999 $ 947 $ 32,659 $(21,178) $ (6,962) $ -- ======== ======== ======== ======== ========
Accumulated other comprehensive income (loss) Net ------------- --- Balances at December 31, 1998 $ 390 $ 23,101 Comprehensive loss: Net loss -- (17,245) Other comprehensive income--change in net unrealized gains (losses) on investment securities (970) (970) -------- -------- Comprehensive loss (970) (18,215) -------- -------- Balances at December 31, 1999 $ (580) $ 4,886 ======== ========
See notes to consolidated financial statements. 25 26 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS
Year Ended December 31, 1999 1998 1997 ---- ---- ---- (Thousands of dollars) OPERATING ACTIVITIES: Income (loss) from continuing operations $(17,245) $(10,451) $ 7,015 Adjustments to reconcile income (loss) from continuing operations to net cash (used in) provided by operating activities: Equity method investment, net -- 189 -- Change in premiums receivable 6,338 3,658 (5,174) Change in accrued investment income 48 (30) 11 Change in prepaid reinsurance premiums 3,995 3,654 (3,995) Change in amounts withheld for others (1,996) 42 1,713 Change in unearned premium reserves (9,324) (17,537) 9,057 Change in insurance claim reserves 9,886 27,507 11,012 Change in amounts due to and from reinsurers (11,549) (21,118) (8,087) Change in other assets, other liabilities and accrued income taxes (554) (6,729) 935 Accrual of discount on fixed maturity securities (6) (40) (51) Amortization of premium on fixed maturity securities 75 79 52 Amortization of deferred policy acquisition costs 3,844 7,925 4,457 Policy acquisition costs deferred (1,321) (7,616) (6,151) Reinsurance commissions earned (4,355) (4,870) (3,122) Reinsurance commissions received 2,961 4,743 4,102 Provision for depreciation and amortization 265 267 110 Net realized gains on investments 101 (44) (1,051) -------- -------- -------- Net cash (used in) provided by continuing operations (18,887) (20,371) 10,833 Net cash (used in) provided by discontinued operations -- 39,431 (7,605) -------- -------- -------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (18,887) 19,060 3,228 INVESTING ACTIVITIES: Sale of investments available for sale 12,601 15,824 17,677 Purchase of investments available for sale (4,093) (13,318) (19,552) Equity method investment, net 4,747 (4,936) -- Other, net (719) (321) (318) -------- -------- -------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 12,536 (2,751) (2,193) -------- -------- -------- FINANCING ACTIVITIES: Change in Drafts Outstanding 3,714 -- -- Payment of ESOP loan -- -- 32 Repayment of notes payable -- (15,000) -- Issuance of Common Stock under Stock Option Plan -- 52 107 Issuance of Common Stock under Rights Offering -- -- -- Repurchase of Treasury Shares -- (363) -- -------- -------- -------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 3,714 (15,311) 139 -------- -------- -------- NET INCREASE (DECREASE) IN CASH (2,587) 998 1,174 Cash at beginning of year 2,587 1,589 415 -------- -------- -------- CASH AT END OF YEAR $ -- $ 2,587 $ 1,589 ======== ======== ======== Transfer of note payable to ALIC--Note E -- -- $ 15,000 ======== ======== ========
See notes to consolidated financial statements. 26 27 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DECEMBER 31, 1999, 1998 AND 1997 NOTE A--SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying 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 ("GAAP") which, as to the insurance company subsidiaries, differ in some respects from statutory accounting practices prescribed or permitted by state insurance departments. The significant accounting policies followed by the Company that materially affect financial reporting are summarized below. PRINCIPLES OF CONSOLIDATION: The accompanying consolidated financial statements include the accounts of ACCEL and its wholly-owned subsidiaries except for Randjill Group, Ltd ("RGL") (see Note M). As discussed more fully in Note B, Acceleration Life Insurance Company ("ALIC") and Dublin International Limited ("Dublin") are presented as discontinued operations. All significant intercompany accounts and transactions have been eliminated in the consolidated financial statements. DESCRIPTION OF BUSINESS: ACCEL is an insurance holding company incorporated in Delaware. The Company is engaged in the underwriting and sale of property and casualty insurance products, primarily concentrating, up to mid-1999, on the commercial auto line of business. Before the Company announced its full exit from its current lines of business, it offered various policies covering long-haul trucking, charter bus, limousine and paratransit vehicle fleets, as well as other specialized products tailored to other groups such as crane operators and gun dealers. The Company offered these products 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 (see note N). In addition to the property and casualty insurance products described above, the Company historically sold, principally through automobile dealers, credit life and credit accident and health insurance and extended service contracts ("Auto Aftermarket Group"). Effective December 31, 1997, the Company sold its Auto Aftermarket Group as discussed more fully in Note B. As a result of this transaction, the Company ceased to be engaged in the auto aftermarket credit insurance and extended service contract businesses. The following is a description of the most significant risks facing property and 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 may result in additional expenses not anticipated by the insurer in pricing its products. That is, regulatory initiatives, new legal theories or insurance company insolvencies through guaranty fund assessments may create costs for the insurer beyond those currently recorded in the consolidated financial statements. The Company mitigated 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. 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 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 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 consolidated financial statements and revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. 27 28 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) The most significant estimates include those used in determining deferred policy acquisition costs and the liability for 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 in accumulated other comprehensive income as a separate component of 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. Realized gains and losses on the disposal of investments are determined by specific identification and are included in the 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, 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. FAIR VALUES OF FINANCIAL INSTRUMENTS: The fair value of a financial instrument is the amount at which the financial instrument could be exchanged in a current transaction between willing parties. In cases where quoted market prices are not available, fair value is based on estimates using present value or other valuation techniques. These techniques are significantly affected by the assumptions used, including the discount rate and estimates of future cash flows. Although fair value estimates are calculated using assumptions that management believes are appropriate, changes in assumptions could cause these estimates to vary materially. In that regard, the derived fair value estimates cannot be substantiated by comparison to independent markets and, in many cases, could not be realized in the immediate settlement of the instruments. The disclosure requirements related to financial instruments exclude certain assets and liabilities. Accordingly, the aggregate fair value amounts presented do not represent the underlying value of the Company. The tax ramifications of the related unrealized gains and losses may have a significant effect on fair value estimates and have not been considered in the estimates. The carrying amounts reported in the consolidated balance sheets for cash, short-term investments, accrued investment income, premiums in process of transmittal, and amounts due from reinsurers approximate their fair value. Fair values for fixed maturity, equity and asset and mortgage-backed securities are based on quoted market prices, where available. If quoted market prices are not available, fair values are based on quoted market prices of comparable instruments at amortized value (see Note C). 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. 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: Net leasehold improvements on previously occupied office space were written off through general and administrative expense in 1999, as the company is no longer utilizing this office space. 28 29 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) PREMIUM INCOME RECOGNITION AND UNEARNED PREMIUM RESERVES: Unearned premium reserves on property and casualty products are calculated on the pro rata method. 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. 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 losses and loss adjustment expenses incurred are deducted from the respective income and expense accounts. Assets and liabilities related to reinsurance ceded are reported on a gross basis. 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. Earned ceding fees, commissions and experience refunds are reported as reinsurance expense recoveries in the 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 Statement of Financial Accounting Standards ("SFAS") 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, SFAS 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 SFAS No. 123 had been applied. The Company has elected to continue to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123 (see Note J). RECLASSIFICATIONS: The Company has reclassified reinsurance premiums ceded of approximately $2,824,000 in the accompanying consolidated financial statements as of and for the year ended December 31, 1998. The effect of this reclassification was to increase ceded reinsurance premiums and ceded loss and loss adjustment expenses. Additionally, this increased amounts due from reinsurers and amounts due from reinsurers on the accompanying consolidated balance sheet. Certain other amounts in the 1998 and 1997 consolidated financial statements have been reclassified to conform with the 1999 presentation. All of these reclassifications had no impact on the net income (loss) and stockholder's equity as previously reported. NOTE B - SALE OF AUTO AFTERMARKET GROUP On October 20, 1997, ACCEL entered into agreements to sell to Lyndon Insurance Group, Inc. and Lyndon Life Insurance Company (collectively, "Lyndon") the outstanding capital stock of ALIC, Acceleration National Service Company ("ANSC") and Dublin (collectively, the "Target Corporations") for $30.2 million in cash and to sell to Lyndon Property Insurance Company ("Lyndon Property") assets related to the vehicle extended service contract business of ACCEL's wholly owned subsidiary, Acceleration National Insurance Company ("ANIC"), for $10.3 million in cash. The sale was effective December 31, 1997. The "Receivable from sale of discontinued and disposed of operations" of approximately $703,000 as of December 31, 1998 in the Consolidated Balance Sheets, represented the remaining unpaid portion of the adjusted sales price determined by the Company under the sales agreements. This receivable was utilized in connection with the settlement of a lawsuit in 1999. (see note M) 29 30 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE B - SALE OF AUTO AFTERMARKET GROUP (CONTINUED) The after-tax net gain on sale of the Auto Aftermarket Group in 1997 was $3.2 million, which was comprised of a gain of $10.3 million in continuing operations (included in "Other income" in the 1997 Consolidated Statement of Operations) and a loss of $7.1 million in discontinued operations (excluding the provision for operating loss of $495,000 during the phase-out period). The income tax expense of $2.0 million included in the loss on disposal of business segment in the 1997 Consolidated Statement of Operations includes $1.5 million of current tax expense for the distribution of the policyholders' surplus account as a result of the sale of ALIC (see Note H), current tax expense of $2.8 million for the gain on the sale of the subsidiaries included in discontinued operations, and $2.5 million deferred tax benefit and $.2 million current tax expense, respectively, related to the operations during the phase-out period of the subsidiaries included in discontinued operations. In conjunction with the sale, on January 1, 1998, ANIC ceded via a quota share reinsurance agreement 100% of its liability related to the vehicle extended service contract business to Lyndon Property. Upon consummation of the aforementioned sale, the Company ceased to be engaged in the auto aftermarket credit insurance and extended service contract businesses. The consolidated financial statements of the Company have been reclassified to reflect the disposition of ALIC, ANSC and Dublin that comprised the Life/Health business segment. Accordingly, the assets, liabilities, revenues, benefits and expenses, and cash flows of ALIC and Dublin have been excluded from the respective captions in the consolidated balance sheets, consolidated statements of operations, and consolidated statements of cash flows for periods presented prior to 1998. The net operating results of these entities have been reported, net of applicable income taxes, as "Income from discontinued operations", the assets and liabilities of these entities have been reported as "Assets of discontinued operations" and "Liabilities of discontinued operations", and the net cash flows of these entities have been reported as "Net cash (used in) provided by discontinued operations." Summarized information for the discontinued operations is as follows:
Year Ended December 31, 1997 ----------------- (Thousands of dollars) Revenue $ 31,815 Income before provision for income taxes (3,787) Income from discontinued operations, including loss on disposal, net of income taxes (5,900)
Prior to Sale on December 31, 1997 ---- (Thousands of dollars) Total assets, consisting primarily of investments, receivables, prepaid reinsurance premiums and deposits, and deferred policy acquisition costs $124,011 Total liabilities, consisting primarily of policy reserves and claims 91,855 -------- Net assets of discontinued operations $ 32,156 ========
The vehicle extended service contract business sold to Lyndon Property and ANSC were components of the Company's property/casualty business segment, and therefore are included in continuing operations for all periods presented. 30 31 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE B - SALE OF AUTO AFTERMARKET GROUP (CONTINUED) Total assets consisting primarily of investments, cash, premiums receivable and amounts due from affiliates for the vehicle extended service contract business were $17.6 million as of December 31, 1997. Total liabilities consisting primarily of unearned premium reserves, loss reserves and commissions payable for the vehicle extended service contract business were $17.6 million as of December 31, 1997. Other summarized financial information for the vehicle extended service contract business is as follows:
Year Ended December 31, 1997 ----------------- (Thousands of dollars) Revenue, primarily premiums and fee income on vehicle extended service contracts $9,223 Net income 360
NOTE C--INVESTMENTS At December 31, 1999 and 1998, investments in cash and securities with a carrying value of $5,886,000 and $5,458,000 respectively, were on deposit with state insurance departments to satisfy regulatory requirements.
Year Ended December 31, 1999 1998 1997 ------- ------- ------- (Thousands of dollars) The change in net unrealized gains (losses) on fixed maturity and equity securities, is summarized as follows: Securities available for sale: Fixed maturities $ (970) $ 274 $ 250 Equity securities -- -- 444 ------- ------- ------- $ (970) $ 274 $ 694 ======= ======= ======= Realized gains (losses) on investments are summarized as follows: Securities available for sale: Fixed maturities: Gross realized gains $ 5 $ 20 $ 102 Gross realized losses (129) -- (14) Equity securities: Gross realized gains -- 77 1,206 Gross realized losses -- (131) (243) Short-term investments: Gross realized losses (27) (10) -- Other Invested Assets Gross realized gains 252 -- -- ------- ------- ------- $ 101 $ (44) $ 1,051 ======= ======= ======= The major sources of investment income are summarized as follows: Fixed maturities $ 1,785 $ 1,847 $ 1,465 Equity securities -- -- 312 Short-term investments 72 505 297 Other -- -- -- ------- ------- ------- 1,857 2,352 2,074 Investment expenses (85) (202) (135) ------- ------- ------- Net investment income $ 1,772 $ 2,150 $ 1,939 ======= ======= =======
31 32 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE C--INVESTMENTS--(CONTINUED) The amortized cost and estimated fair value of fixed maturity securities by category, all of which were available for sale, are as follows:
Gross Gross Amortized unrealized unrealized Fair cost gains losses value ------- ------- ------- ------- (Thousands of dollars) December 31, 1999 U. S. Treasury and U. S. government agency securities $ 8,521 $ 8 $ (84) $ 8,445 State and political subdivision securities 40 1 -- 41 Mortgage-backed securities 2,753 -- (109) 2,644 Collateralized mortgage obligations 887 -- (49) 838 Asset-backed securities 6,463 3 (220) 6,246 U. S. corporate securities 2,928 -- (130) 2,798 ------- ------- ------- ------- Total $21,592 $ 12 $ (592) $21,012 ======= ======= ======= ======= December 31, 1998 U. S. Treasury and U. S. government agency securities $ 6,688 $ 195 $ -- $ 6,883 State and political subdivision securities 110 5 -- 115 Mortgage-backed securities 4,499 68 (2) 4,565 Collateralized mortgage obligations 2,031 15 -- 2,046 Asset-backed securities 12,655 94 (18) 12,731 U. S. corporate securities 3,970 41 (8) 4,003 ------- ------- ------- ------- Total $29,953 $ 418 $ (28) $30,343 ======= ======= ======= =======
The amortized cost and estimated fair value of fixed maturity securities, all of which were available for sale, at December 31, 1999, by contractual maturity, are summarized as follows:
Amortized Fair Maturity cost value ------- ------- (Thousands of dollars) Due in one year or less $ 792 $ 790 Due after one year through five years 8,452 8,355 Due after five years through ten years 2,245 2,139 Due after ten years -- -- Mortgage-backed securities 2,753 2,644 Collateralized mortgage obligations 887 838 Asset-backed securities 6,463 6,246 ------- ------- Total $21,592 $21,012 ======= =======
The expected maturities in the foregoing table will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. Mortgage-backed securities owned have an expected weighted average maturity of over 10 years. Proceeds from the sale of securities available-for-sale during 1999, 1998 and 1997 were $25,207,000, $70,234,000 and $80,615,000, respectively. Gross gains of $5,000 ($97,000 in 1998 and $1,308,000 in 1997) and gross losses of $129,000 in 1999 ($131,000 in 1998 and $257,000 in 1997) were realized on those sales. On August 10, 1999, the Company sold its 25% interest in USA Insurance Group, Inc., the parent company of Transportation Insurance Specialists, the Company's former general agent, producing a capital gain of $252,000. The Company also received interest income associated with the sale of approximately $300,000. The Company originally purchased the USAIG investment on April 1, 1998 for $5 million. This investment was accounted for using the equity method. At December 31, 1998, the investment in USAIG exceeded the Company's share of the underlying net assets by $4.1 million and was being amortized on the straight-line method over 10 years. At December 31, 1998, the investment in USAIG was included in other invested assets. The Company recorded a net expense of $65,000 and $189,000 in 1999 and 1998 respectively for its investment in USAIG that is comprised of its share of USAIG's earnings of $(166,000) and $142,000 in 1999 and 1998 respectively, offset by amortization of $221,000 and $331,000 in 1999 and 1998 respectively. 32 33 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE D--STOCKHOLDERS' EQUITY AND TRANSFER LIMITATIONS Generally, the net assets of ANIC available for transfer to ACCEL are limited to the amounts that ANIC's net assets, as determined in accordance with statutory accounting practices, exceed minimum statutory capital and surplus requirements; however, payments of such amounts as dividends are currently subject to regulation by Ohio law. 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, ANIC would require Ohio Department approval to pay any dividend to ACCEL during 2000. See Note N regarding the Company's Risk Based Capital position at the Authorized Control level. The statutory basis capital and surplus and net income (loss) of ANIC, as reported to insurance regulatory authorities, are summarized as follows:
ANIC ---- (Thousands of dollars) Statutory capital and surplus at December 31: 1999 $ 4,105 1998 16,010 Statutory net income (loss) for year ended December 31: 1999 $ (11,001) 1998 (9,173) 1997 8,826
NOTE E - NOTES PAYABLE On December 29, 1995, the Company issued senior notes (the "Senior Notes") totaling $16.5 million at 9.50%, maturing on April 1, 2001. The proceeds from these notes were used to retire a previous loan outstanding and to liquidate an intercompany loan between ACCEL and an insurance subsidiary. The Senior Notes were payable to the same unaffiliated company which was a party to a reinsurance agreement with ALIC. This reinsurance agreement was structured such, that as future profits emerged on the reinsured block of business, the profits would be held by the reinsurance company, and ultimately applied to pay interest on and to redeem the Senior Notes. Profits in excess of the amount required to retire the Senior Notes were to be returned to ALIC. As of December 31, 1996, $1.5 million 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 $15.0 million of Senior Notes outstanding as of December 31, 1996. The reinsurance agreement between ALIC and the unaffiliated company was commuted on December 31, 1997 as a condition of the sale of the Auto Aftermarket Group. The Senior Notes were transferred from the unaffiliated company to ALIC in connection with the commutation of the reinsurance agreement on December 31, 1997 and retired with proceeds from the sale. During 1997, ACCEL paid interest on notes of $1,069,000. NOTE F--BUSINESS CONCENTRATION Commercial Auto was the primary product line for the Company since its introduction as a new product in 1996. The program was marketed by a general agent located in Florida, Transportation Insurance Specialists ("TIS"), and its affiliate, Countrywide Insurance Agency, Inc. ("Countrywide"). Gross written premium was $17.6 million, $35.7 million and $30.3 million, respectively for 1999, 1998 and 1997. Gross earned premium was $26.8 million, $37.2 million and $23.6 million, respectively, for 1999, 1998 and 1997, while premium receivable, net of commission, due from the general agents was $1.0 million and $7.7 million, respectively, as of December 31, 1999 and 1998. 33 34 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE G--REINSURANCE The ceding of insurance through reinsurance agreements does not discharge the primary liability of the original underwriter to the insured, but it is the practice of insurers to treat risks that have been reinsured with other companies, to the extent of the reinsurance, as though they were not risks for which the original insurer is liable. Should the reinsurer not be able to meet its obligations, those obligations are the ultimate responsibility of the Company. Therefore, in financial statement presentation, premiums earned and loss and loss adjustment expenses are presented net of that portion of risks reinsured with other companies. In 1996, the Company entered into reinsurance contracts associated with its property and casualty lines. Under these agreements, the Company transfers a percentage of risk to the related reinsurer. The Company also has agreements that transfer risks after a predetermined loss has been reached. Premiums ceded amounted to $6.5 million, $27.3 million and $17.1 million for 1999, 1998 and 1997, respectively. Unearned premium reserves associated with these agreements at December 31, 1999 and 1998 are $11.0 million and $19.8 million, respectively; and the liability for reinsurance claims is $40.0 million and $33.4 million at December 31, 1999 and 1998, respectively. Premiums written and earned in 1999, 1998 and 1997 are summarized as follows:
1999 1998 1997 -------- -------- -------- Written Earned Written Earned Written Earned -------- -------- -------- -------- -------- -------- (Thousands of dollars) Direct $ 17,140 $ 29,984 $ 37,872 $ 42,297 $ 38,848 $ 30,885 Assumed 4,619 6,120 5,413 4,660 2,049 957 Ceded (6,789) (15,805) (27,300) (30,957) (17,118) (13,125) -------- -------- -------- -------- -------- -------- Net premiums $ 14,970 $ 20,299 $ 15,985 $ 16,000 $ 23,779 $ 18,717 ======== ======== ======== ======== ======== ========
Loss and loss adjustment expenses incurred in 1999, 1998 and 1997 are summarized as follows:
1999 1998 1997 -------- -------- -------- (Thousands of dollars) Direct $ 47,091 $ 48,296 $ 27,593 Assumed 5,620 5,007 1,150 Ceded (23,922) (34,076) (13,370) -------- -------- -------- Net loss and loss adjustment expenses $ 23,922 $ 19,227 $ 15,373 ======== ======== ========
NOTE H--FEDERAL INCOME TAXES The Company files a consolidated federal income tax return with its subsidiaries. In 1998 and 1997 the Company paid $3,856,000 and $825,000, respectively, in federal income taxes. During 1999, the Company did not pay any federal income taxes. Total income tax expense (benefit) differed from the amount computed by applying the statutory federal income tax rate to income (loss) before taxes as follows:
Year Ended December 31, 1999 1998 1997 ------- ------- ------- (Thousands of dollars) Income tax (benefit) at statutory rate $(5,863) $(3,645) $ 2,769 Amortization of goodwill 75 104 36 Dividends-received deduction -- -- (50) Tax-exempt interest -- -- (10) Net operating loss -- -- (1,656) Net operating loss for future use -- -- (2,353) Valuation allowance 5,788 3,553 2,329 Refund of prior year taxes -- (270) -- Other, net -- (12) 36 ------- ------- ------- Federal income tax expense (benefit) $ -- $ (270) $ 1,101 ------- ======= =======
34 35 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE H--FEDERAL INCOME TAXES--(CONTINUED) The tax effects of temporary differences that give rise to significant components of the deferred tax assets and liabilities at December 31, 1999 and 1998 are summarized as follows:
December 31, 1999 1998 -------- -------- (Thousands of dollars) Deferred Tax Liabilities: Deferred policy acquisition costs $ 95 $ 953 Other -- 293 -------- -------- 95 1,246 -------- -------- Deferred Tax Assets: Unearned premium reserves 82 444 Deferred reinsurance commissions 39 513 Net operating loss carryforward 11,939 6,660 Insurance reserves 1,202 275 Other 263 36 -------- -------- Total deferred tax assets 13,525 7,928 Valuation allowance (13,430) (6,682) -------- -------- 95 1,246 -------- -------- Net deferred tax assets $ 0 $ 0 ======== ========
The Company has $35.1 million of net operating losses that are available to reduce future income taxes and will expire as follows: $6.9 million in 2009, $11.6 million in 2018, and $16.6 million in 2019. The Company has determined the valuation allowance related to the deferred tax assets based on its analysis of future deductible amounts. This analysis included a schedule of the deductibility of non-life items pursuant to Section 801 of the Internal Revenue Code and a determination of the realization of losses generated by available for sale securities. The Company recorded a valuation allowance of $13,430,000 and $6,682,000 as of December 31, 1999 and 1998, respectively. A portion of the change in the valuation allowance in both 1999 and 1998 is due to an increase in the deferred tax liability for unrealized gains on investments. This decrease in the valuation allowance is reflected as an increase to accumulated other comprehensive income in the accompanying consolidated statement of stockholders' equity. 35 36 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE I--LIABILITY FOR INSURANCE CLAIMS The following table provides a reconciliation of beginning and ending liability balances for the Company's insurance claims for 1999, 1998 and 1997.
1999 1998 1997 -------- -------- -------- (Thousands of dollars) Liability for insurance claims at beginning of year $ 49,535 $ 22,028 $ 11,016 Less reinsurance recoverables (36,209) (14,250) (5,820) -------- -------- -------- Net balances at beginning of year 13,326 7,778 5,196 Loss and loss adjustment expenses incurred: Loss and loss adjustment expenses incurred for events of the current year 21,252 14,506 15,705 Loss and loss adjustment expenses incurred for events of prior years 2,670 4,721 (332) -------- -------- -------- Total loss and loss adjustment expenses incurred 23,922 19,227 15,373 -------- -------- -------- Payments: Loss and loss adjustment expenses for insured events of the current year 8,918 7,616 9,558 Loss and loss adjustment expenses for insured events in prior years 8,902 6,063 3,233 -------- -------- -------- Total payments 17,820 13,679 12,791 -------- -------- -------- Net balances at end of year 19,428 13,326 7,778 Plus reinsurance recoverables 39,993 36,209 14,250 -------- -------- -------- Liability for insurance claims at end of year $ 59,421 $ 49,535 $ 22,028 ======== ======== ========
The table above reflects increases in the liability for insurance claims resulting from the Company's continued expansion into the Commercial Auto business (until all programs were discontinued in mid-1999). Maturity of claims for this line of business has resulted in recording, in 1999 and 1998, $2,670,000 and $3,667,000, respectively, in additional loss and loss adjustment expenses incurred for prior policy years. In establishing the liability for insurance claims, management considers facts currently known and the current state of the law and coverage litigation. Liabilities are recognized for known claims (including the cost of related litigation) when sufficient information has been developed to indicate the involvement of a specific insurance policy, and management can reasonably estimate its liability. In addition, liabilities have been established to cover additional exposures on both known and unasserted claims. Estimates of the liabilities are reviewed and updated continually. NOTE J--COMMON STOCKS AND COMMON STOCK OPTIONS In 1992, the Board of Directors voted to suspend payment of cash dividends on the common stock until the Company returns to a level of profitability that will sustain the payment of cash dividends. 36 37 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE J--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED) 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 $1.0 million for the purchase of ACCEL's common stock. This loan was retired in 1997. During 1982, ACCEL adopted a stock option plan (the "82 Plan") under which shares of common stock were made available to eligible officers and key personnel. Under the terms of the 82 Plan, the option price had to be at least 100% of the fair value at the date of grant, and, accordingly, there were no charges to income resulting from grants. Options were granted at prices ranging from $2.769 to $11.750 per share from April 1982 through April 1992. The options become exercisable after one year of continuous employment in installments of 50% at the end of the first and the second year from the date of grant and expired ten years from the date of grant. A total of 300,000 (349,672 after giving effect to all subsequent stock dividends) shares had been reserved for options under the 82 Plan. No additional shares may be granted under the 82 Plan. During 1987, ACCEL adopted the 1987 Incentive Stock Option Plan (the "87 Plan"). The 87 Plan provided for incentive stock options with respect to a maximum of 300,000 (347,287 after giving effect to all subsequent stock dividends) shares of common stock of ACCEL prior to the expiration of the 87 Plan in April 1997. During June of 1991, ACCEL's Board of Directors and shareholders approved the First Restatement of the 1987 Stock Incentive Plan (the "Restated Plan"). The Restated Plan replaced the 87 Plan except as to options granted and outstanding under the 87 Plan. The Restated Plan reserved an additional 450,000 shares for key employees and 50,000 shares for non-employee directors. Options could be granted prior to expiration of the Restated Plan covering shares subject to lapsed or terminated options. No additional shares may be granted under the 87 Plan or the Restated Plan. During May 1995, two new key employees were granted stock options under ACCEL's Restated Plan. Under the terms of their arrangement with ACCEL, both were granted stock options for ACCEL's common stock in lieu of salary for their first year of service. Options for 150,000 shares were granted at an option price per share of $2.125, the fair value of ACCEL's common stock on the date of grant. The options vest immediately and become exercisable one year following the date of grant; however, they would become exercisable immediately upon either a) change of control of ACCEL, or b) involuntary termination. The options would be forfeited if employment with ACCEL was voluntarily terminated prior to May 23, 1996. The options will lapse five years from the effective date of grant. At the end of their first and second years of service, the status of these two key employees was evaluated by the Compensation Committee and based on the value of their services, began receiving compensation effective June 1, 1996. As part of their compensation both were granted stock options pursuant to the 1996 Stock Incentive Plan (the "96 Plan"). In 1996, options for 165,000 shares were granted at an option price per share of $2.50, the fair value of ACCEL's common stock on the date of grant. In 1997, options for 90,000 shares were granted at an option price per share of $2.75, the fair value of ACCEL's common stock on the date of grant. The terms are identical to the aforementioned options granted in May 1995. In June 1996, ACCEL stockholders approved the adoption of the 96 Plan. The 96 Plan provides for stock options, stock appreciation rights, restricted stock, phantom stock and performance awards. No award may be granted after June 11, 2006, the expiration date of the 96 Plan. The total number of shares of common stock available under the 96 Plan is 1,000,000 shares and up to 100,000 shares may be issued pursuant to the exercise of outside directors' stock options. Options granted to employees or independent agents of the Company under the 96 Plan will be priced at not less than 100% of the fair value of the common stock on the date of grant and will become exercisable as to 25% of the shares subject to the option upon completion of each full year of employment until fully vested. Grants of options to outside directors under the 96 Plan will also be priced at 100% of fair value on the date of grant but, in the absence of any provisions in an option to the contrary, the options will become exercisable as to 50% of the shares subject to the option upon completion of each full year until vested. In substantially all other respects, the 96 Plan contains provisions similar to the previous plans. 37 38 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE J--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED) On August 28, 1996, the Board of Directors of the Company approved a resolution to offer to all key employees holding options outstanding that were priced in excess of the current market value the opportunity to receive "re-priced" options. Such key employees were permitted to surrender, cancel and terminate any or all outstanding options (whether vested or not) and receive options for an equal number of shares under the 96 Plan at the then current price of $2.50 per share. The re-priced or "replacement" options would be newly granted options and become exercisable in accordance with the vesting provisions of the 96 Plan. A total of 161,371 shares were surrendered by key employees as part of the re-pricing opportunity and 4,500 shares were not surrendered. The following table summarizes activity under the respective plans.
1999 1998 1997 ------------------------- -------------------------- ------------------------- Number Weighted Number Weighted Number Weighted of Shares Avg. Price of Shares Avg. Price Of Shares Avg. Price --------- ---------- --------- ---------- --------- ---------- 1996 Plan Outstanding at Beginning of year 858,623 $2.720 558,054 $2.595 430,371 $2.514 Outstanding at End of year 480,868 $2.635 858,623 $2.720 558,054 $2.595 Exercisable 255,262 $2.635 368,359 $2.589 205,821 $2.509 Granted 80,000 $0.688 338,500 $2.933 207,000 $2.750 Exercised -- -- 4,513 $2.569 28,021 $2.554 Forfeited 457,755 $2.740 33,418 $2.798 51,296 $2.563 Expired -- -- -- -- -- -- 1987 Restated Plan-Employees Outstanding at beginning of year 67,500 $2.238 122,285 $3.347 191,881 $4.503 Outstanding at end of year 54,250 $2.238 67,500 $2.238 122,285 $3.347 Exercisable 54,250 $2.238 67,500 $2.238 122,285 $3.328 Granted -- -- -- -- -- -- Exercised -- -- 19,500 $2.125 12,000 $2.125 Forfeited 13,250 $2.391 35,285 $6.035 -- $ -- Expired -- -- -- -- 57,596 $7.451
38 39 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE J--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED)
1999 1998 1997 ------------------------------- ------------------------------- ------------------------------- Number Weighted Number Weighted Number Weighted of Shares Avg. Price of Shares Avg. Price of Shares Avg. Price --------- ---------- --------- ---------- --------- ---------- 1987 Restated Plan-Non Employee Directors Outstanding at beginning of year 35,000 $ 6.025 36,000 $ 6.025 49,000 $ 5.860 Outstanding at end of year 30,000 $ 5.916 35,000 $ 6.025 36,000 $ 6.025 Exercisable 30,000 $ 5.916 35,000 $ 6.025 36,000 $ 6.025 Granted - - - - - - Exercised - - - - 4,000 $ 2.375 Forfeited 5,000 $ 6.675 1,000 $ 6.025 9,000 $ 6.347 Expired - - - - - - 1982 Plan Outstanding at beginning of year - - 15,049 $ 6.263 18,524 $ 6.486 Outstanding at end of year - - - - 15,049 $ 6.263 Exercisable - - - - 15,049 $ 6.263 Granted - - - - - - Exercised - - - - - - Forfeited - - - - - - Expired - - 15,049 $ 6.263 3,475 $ 7.451
The following table summarizes information about stock options outstanding at December 31, 1999:
Range of # Outstanding Weighted Avg. Weighted Avg. # Exercisable Weighted Avg. Exercise Prices at 12/31/99 Remaining Life Exercise Prices at 12/31/99 Exercise Prices --------------- ----------- -------------- --------------- ----------- ---------------- $2 - $4 545,118 7.0 $2.341 319,512 $2.193 $4 - $6 10,000 3.5 $5.188 10,000 $5.188 $6 - $8 - - - - - $8 - $10 10,000 1.5 $9.750 10,000 $9.750 ------ --- ------ ------ ------ Total 565,118 6.8 $2.771 339,512 2.861 ======= === ====== ======= =====
The per share weighted-average fair value of stock options granted during 1999, 1998 and 1997 was $0.94, $1.56 and $1.42, respectively, on the date of grant using the Black Scholes option-pricing model with the following weighted-average assumptions: 1999 - expected dividend yield 0%, risk-free interest rate of 6.00% and expected lives of 10 years (based on the terms of the grant); 1998 - expected dividend yield 0%, risk-free interest rate of 6.00%, and expected lives of 5 to 10 years (based on the terms of the grant); 1997 - expected dividend yield 0%, risk-free interest rate of 6.00%, and expected lives of 5 to 10 years (based on the terms of the grant). The Company used a volatility factor of 25% in determining the fair value of options for pro forma purposes. The Company applies APB Opinion No. 25 in accounting for these plans and, accordingly, no compensation cost has been recognized for its stock options in the consolidated financial statements. 39 40 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE J--COMMON STOCKS AND COMMON STOCK OPTIONS--(CONTINUED) Had the Company determined compensation cost based on the fair value at the grant date for its stock options under SFAS No. 123, the Company's net income (loss) would have been reduced to the pro forma amounts indicated below:
1999 1998 1997 ---------- ---------- ---------- Net income (loss) as reported (in millions) $ (17,245) $ (10,451) $ 1,115 Pro forma net income (loss) (in millions) (17,245) (10,603) 1,044 Net income (loss) per share as reported - basic $ (2.02) $ (1.22) $ .13 Net income (loss) per share as reported - assuming dilution (2.02) (1.22) .13 Pro forma net income (loss) per share - basic (2.02) (1.24) .12 Pro forma net income (loss) per share - assuming dilution (2.02) (1.24) .12
Pro forma net income reflects only options granted subsequent to 1994. Therefore, the full impact of calculating compensation cost for stock options under SFAS No. 123 is not reflected in the pro forma net income amounts presented above because compensation cost is reflected over the options' vesting periods from one to four years and compensation cost for options granted prior to January 1, 1995 is not considered. The Company's stock options were not included in diluted earnings per share because their effect on the periods presented was antidilutive. NOTE K--SEGMENT INFORMATION The Company adopted SFAS No. 131, Disclosures about Segments of an Enterprise and Related Information, in 1998. This standard, which does not have an effect on net income, established standards for disclosing segment information. The Company operated primarily in the property & casualty insurance industry within the United States with a second segment for Corporate which includes the Company's equity method of accounting for the former investment in USAIG (see Note C) and other corporate investments. The Company's management has determined the operating segments based upon how the business is managed and operated. There are no intersegment sales. The allocations of certain general expenses and investment income within segments are based on a number of assumptions, and the reported operating results would change if different methods were applied. Depreciation and capital expenditures are not considered material. Segment information is summarized as follows:
Year Ended December 31, 1999 1998 1997 --------- --------- --------- (Thousands of dollars) Revenue: Property/Casualty $ 21,901 $ 21,058 $ 35,055 Corporate 537 249 231 --------- --------- --------- Total $ 22,438 $ 21,307 $ 35,286 ========= ========= ========= Equity in net income (loss) of equity method investees: Property/Casualty -- -- -- Corporate $ -- $ (189) -- --------- --------- --------- Total $ -- $ (189) -- ========= ========= ========= Income (loss) before federal income taxes and discontinued operations: Property/Casualty $ (12,725) $ (9,682) $ 9,901 Corporate (4,520) (1,039) (1,785) --------- --------- --------- Total $ (17,245) $ (10,721) $ 8,116 ========= ========= ========= Identifiable assets: Property/Casualty $ 72,629 $ 90,758 $ 89,303 Corporate 406 6,684 14,791 --------- --------- --------- Total $ 73,035 $ 97,442 $ 104,094 ========= ========= ========= Investment in equity method investees: Property/Casualty $ -- $ -- $ -- Corporate -- 4,747 --------- --------- Total $ -- $ 4,747 $ -- ========= ========= =========
40 41 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE L--RETIREMENT SAVINGS AND STOCK OWNERSHIP PLAN The Acceleration Retirement Savings Plan became effective in 1985. During 1989, ACCEL's Board of Directors approved changes to this plan to include an ESOP and concurrently changed the plan name to the "Acceleration Retirement Savings and Stock Ownership Plan" ("Plan"). For the first six months of 1997, the Board authorized contributions to the Plan at a level that would fund a 100% match of the first 6% of each participating employee's tax deferred contributions. Effective July 1, 1997, the Company reorganized the Plan into two separate Plans. One plan, the ACCEL International Corporation 401K Plan ("401K Plan"), authorized contributions at a level that would fund a 75% match of the first 6% of each participating employee's tax deferred contributions. The second plan, the ACCEL International Corporation Stock Ownership Plan ("ESOP Plan"), authorized a 2% discretionary funding to the plan for each eligible employee. The Company incurred contribution expense for 1999, 1998, and 1997 of $70,070, $111,000 and $209,000, respectively. The 401K Plan allowed all employees who meet certain eligibility requirements and choose to participate to defer a percentage of their salary and contribute to the 401K Plan on a tax deferred basis. Company contributions to the ESOP Plan were used to purchase shares of ACCEL's common stock. As a result of the reorganization of the 401K and ESOP Plans, the Company funded $68,000 as a partial termination in 1997. As of December 31, 1999 the 401K and ESOP Plans were still operative, but no further contributions are being made to either of the plans as of year-end. The plans are in the process of termination pending receipt of determination letters from the IRS. NOTE M--COMMITMENTS AND CONTINGENCIES Due to the nature of its operations, the Company is at all times subject to pending and threatened legal actions that arise in the normal course of its activities. In management's evaluation of certain pending matters, based on the advice or information and analysis of outside counsel, the accompanying consolidated financial statements would not be materially affected by the outcome of any legal proceedings or contingent liabilities. In July 1991, the Company acquired 100% of RGL. Galaxy Insurance Company ("Galaxy"), a wholly owned subsidiary of RGL, wrote commercial property insurance, property and casualty, and assumed treaty reinsurance. Galaxy became statutorily insolvent at June 30, 1994. Due to the insolvency of Galaxy, the Company wrote its investment in RGL to zero and deconsolidated RGL as of April 1, 1994. On October 7, 1994, 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. In May 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 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 to ANIC. 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. In early 1998, the Superintendent of Insurance of the State of New York, as Liquidator of Galaxy and Administrator of the Guaranty Fund ("Superintendent"), filed suit against ANIC in New York State Supreme Court. The complaint alleged, among other things, breach of contract and demanded that ANIC specifically perform its alleged obligations under the Certificates. The complaint asked for an amount in excess of $6.5 million in damages. 41 42 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE M--COMMITMENTS AND CONTINGENCIES -- (CONTINUED) As reflected above, the suit requested indemnification or reimbursement for the claims paid or to be paid by the Guaranty Fund to Galaxy insureds on policies which may have been covered by the Certificates. ANIC has maintained that the Guaranty Fund does not have the right to seek indemnification unless the terms and conditions of validly issued Certificates have been strictly complied with. Accordingly, ANIC filed for dismissal of the suit which motion was granted by the Court on October 6, 1998. Thereafter, the Superintendent moved to reargue and renew his opposition to ANIC's motion to dismiss. By an Order dated February 23, 1999, the Court denied the Superintendent's motion. The Superintendent has filed a Notice of Appeal of the Court's Decision and Order dismissing the complaint, and has filed a brief in support of the appeal. ANIC will continue to defend vigorously against the Superintendent's lawsuit. On October 1, 1999 settlement was reached regarding a November 1997 suit that was filed against ALIC by three long-term care policyholders seeking to represent a class of North Dakota policyholders alleging breach of contract, fraud and misrepresentation. Pursuant to the settlement agreement, ALIC paid $4.0 million toward a global, nationwide settlement. ACCEL, which had conditionally contracted with Lyndon Life (to whom ALIC was sold), agreed to pay $2.3 million plus the proceeds from a suit against Lyndon Life that was expected to produce in excess of $.7 million, previously carried as a receivable. The total reimbursement to Lyndon was therefore in excess of $3.0 million. Lyndon maintains that ACCEL owes at least an additional $.7 million, that ACCEL refuses to pay on the grounds that ACCEL only authorized a total of $3.0 million in accordance with the sale contract. ACCEL will vigorously oppose making any additional payments. Although the Company does not currently operate from certain office space, it is still obligated under two operating leases that expire in 2000 and 2001. These leases are accounted for as operating leases. Minimum rental commitments in effect at December 31, 1999 are as follows:
Year Payable Annual Minimum Rentals ------------ ---------------------- 2000 $ 125,000 2001 38,000 --------- Total $ 163,000 =========
The amount of rent charged to operations was $197,234 and $80,000 in 1999 and 1998, respectively. NOTE N--RISK BASED CAPITAL The Ohio Department imposes risk based capital ("RBC") requirements on insurance enterprises, including ANIC. The RBC Model serves as a benchmark for the regulation of property/casualty insurance companies by state insurance regulators. RBC provides for targeted surplus levels based on formulas which specify various weighting factors that are applied to financial balances or various levels of activity based on the perceived degree of risk, and are set forth in the RBC requirements. Such formulas focus on four general types of risk: (a) the risk with respect to the company's assets (asset or default risk); (b) the risk of default on amounts due from reinsurers, policyholders or other creditors (credit risk); (c) the risk of under-estimating liabilities from business already written or inadequately pricing business to be written in the coming year (underwriting risk); and, (d) the risk associated with items such as excessive premium growth, contingent liabilities and other items not reflected on the balance sheet (off-balance sheet risk). The amount determined under such formulas is called the authorized control level RBC ("ACLC"). The RBC guidelines define specific capital levels based on a company's ACLC that are determined by the ratio of the company's total adjusted capital ("TAC") to its ACLC. TAC is equal to statutory capital, plus or minus certain other specified adjustments. The specific capital levels, in declining order, and applicable ratios are generally as follows: "Company Action Level" where TAC is less than or equal to 2.0 times ACLC; "Regulatory Action Level" where TAC is less than or equal to 1.5 ACLC; "Authorized Control Level" where TAC is less than or equal to 1.0 times ACLC; and, "Mandatory Control Level" where TAC is less than or equal to 0.7 times ACLC. Companies at the Company Action Level must submit a comprehensive financial plan to the insurance commissioner of the state of domicile. Companies at the Regulatory Action Level are subject to a mandatory examination or analysis by the commissioner and possible required corrective actions. At the Authorized Control Level, a company is subject to, among other things, the commissioner placing it under regulatory control. At the Mandatory Control Level, the insurance commissioner is required to place a company under regulatory control. At December 31, 1999, ANIC's TAC was $4,105,000 or 0.97 times its ACLC. Accordingly, ANIC is within the Authorized Control Level. This RBC level is based on ANIC's recording of additional incurred losses and loss adjustment expenses of $1.4 million above the 42 43 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE N--RISK BASED CAPITAL -- (CONTINUED) amounts reflected in the 1999 statutory annual statement as filed with the Ohio Department of Insurance. ANIC has not been required to file an amended 1999 statutory annual statement. The Company was already in discussion with the Ohio Insurance Department regarding its 1998 RBC calculation, and its expected December 31, 1999 calculation. Following a targeted examination held in January, 2000 by the Ohio Department, the Department is planning to visit the Company in the early Spring, 2000 for a mandatory examination to review and comment on corrective actions already taken and further planned actions by the Company's new management. On March 8, 2000, ANIC received a letter from the Department requesting that the Company file a RBC plan by April 18, 2000. On March 29, 2000, management met with the Ohio Department of Insurance. As a result of the meeting, ANIC has agreed to take the following corrective steps: (1) beginning in March 2000, ANIC will file an abbreviated monthly statutory financial report with the Ohio Department of Insurance; (2) ANIC will continue its current strategy to no longer write any new or renewal business in any state until a further agreement can be made with the Department; and (3) ANIC will file a RBC financial plan which includes the run-off of the existing business as well as management's expected plan for both raising capital and entering into the non-standard auto business. In the future, the Company intends for ANIC to insure a portion of the non-standard auto business produced by the Company's recently acquired agencies. The Company expects this owned agency business to grow and be successful both in terms of producing after-tax profits for its own agency operating segment, as well as producing profitable non-standard auto business for ANIC. The Company also expects the AIM acquisition will produce profitable service-fee business from underwriting management, managing general agency fees, and claims administration. Finally, management acknowledges the need for additional capital for ANIC and is considering various alternatives, including utilization of the credit facility described in Note Q and other sources of capital. NOTE O - QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED) Quarterly consolidated results of operations for 1999 and 1998 are summarized as follows:
First Second Third Fourth Quarter Quarter Quarter Quarter ------- ------- ------- ------- (Thousands of dollars, except per share data) 1999 Premiums written $ 8,539 $ 6,689 $ 3,918 $ 2,613 Premiums earned 5,873 6,469 5,150 2,807 Loss and loss adjustment expense incurred 4,325 7,144 5,408 7,045 Net loss (1,259) (4,905) (4,288) (6,793) Net loss per common share: Basic and assuming dilution (.15) (.57) (.50) (.80)
43 44 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE O -QUARTERLY CONSOLIDATED RESULTS OF OPERATIONS (UNAUDITED) - (CONTINUED) 1998 Premiums written $ 13,791 $ 11,141 $ 8,772 $ 9,581 Premiums earned 4,883 5,413 3,746 1,958 Loss and loss adjustment expense incurred 3,869 4,368 3,570 7,420 Net loss (508) (851) (647) (8,445) Net loss per common share: Basic and assuming dilution (.06) (.10) (.08) (.99)
The increase in loss and loss adjustment expense in the fourth quarters of 1999 and 1998 are the result of actuarial reviews of reserves which produced a strengthening of reserves for continuing lines of business. NOTE P - COMPREHENSIVE INCOME The following reconciles the components of other comprehensive income for the years ended December 31, 1999, 1998 and 1997:
1999 1998 1997 ----- ----- ----- (Thousands of dollars) Net unrealized holding gains (losses) Arising during the period $(1,071) $ 303 $ 283 Less: Net reclassification adjustments for gains (losses) included in net income $ 101 $ (29) $ 411 ------ ----- ----- Net unrealized gains (losses) on securities Arising during the period $ (970) $ 274 $ 694 ====== ===== =====
NOTE Q - SUBSEQUENT EVENTS On January 14, 2000, the Company acquired 100% of the stock of Allegiance Insurance Managers, LTD. (AIM). Gerald H. Pastor, FCAS, President, CEO and principal shareholder of AIM was elected President & CEO of ACCEL's subsidiary, ANIC in October, 1999 and of ACCEL in November, 1999. In consideration for the acquisition, ACCEL has issued 529,040 shares of its common stock to shareholders of AIM, other than Pastor, and will issue an additional 997,036 shares to Pastor upon and subject to receipt of clearance by the Ohio Department of Insurance. Should the forgoing clearance not be received, ACCEL will issue to Pastor such other consideration as may be mutually agreed upon by ACCEL and Pastor, which may include a lesser number of shares of ACCEL common stock (subject to the foregoing clearance) and/or other securities. Under the terms of the transaction, ACCEL will also issue up to an additional 2,180,110 shares of its common stock to the shareholders of AIM if the combined business meets certain performance criteria over the six years after the acquisition. If the business does not achieve certain cumulative earnings by December 21, 2002, the former AIM shareholders will return 763,038 shares to ACCEL. AIM operates as an underwriting manager, managing general agency, and claims administrator for various programs, companies and clients. It will continue to expand its operations in these areas. ANIC has placed all of its underperforming products in run-off. Going forward, the primary focus of ACCEL and ANIC will be the non-standard automobile line of business, a business in which AIM and Pastor are proficient. ANIC has consolidated its administrative offices with AIM in Simsbury, Connecticut. Also on January 14, 2000, ACCEL completed arrangements for a credit facility of $5,000,000. Terms of the facility are 10% interest payable quarterly, plus 280,000 warrants per $1,000,000 borrowed, at a price of $2.00 per share. All monies owed under the facility will be due in full by December 31, 2003. Applicable warrants will expire on December 31, 2004. On January 19, 2000 ACCEL acquired the assets of Payless Insurance Agencies ("Payless"). Payless is comprised of two locations in the Fort Lauderdale/Broward County area, specializing in non-standard automobile insurance. On January 20, 2000 ACCEL acquired substantially all of the assets of Unistar Florida Holdings, Inc. ("Unistar"),representing 49 agency locations throughout the state of Florida, also specializing in non-standard automobile insurance. ACCEL paid approximately $4,500,000 for all agencies acquired. 44 45 PART III ITEM 9. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURES Not Applicable. ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The executive officers, their respective ages and business experience are as follows: Raymond H. Deck (77), Chairman of the Board; Gerald H. Pastor (48), President and Chief Executive Officer; Thomas J. Renwick (51), Senior Vice President; Richard A. Lawrence (50), Vice President, Treasurer and Chief Financial Officer; Kathleen J. Wilson (48), Vice President and Secretary. Mr. Deck was named Chairman of the Board effective October 1, 1998. He has been an outside Director of the Company since 1990. He also serves as President of Chase Insurance Enterprises, Inc., Hartford, Connecticut. Mr. Pastor joined the Company on October 5, 1999, when he was appointed a member of the Board of Directors, and President and Chief Executive Officer of the Company's subsidiary, Acceleration National Insurance Company. On November 16, 1999, he was elected President and Chief Executive Officer of the Company. He also serves as President and Chief Executive Officer for Allegiance Insurance Managers, Ltd. Mr. Renwick joined the Company on October 5, 1999, when he was appointed a member of the Board of Directors of Acceleration National Insurance Company. On October 6, 1999, Mr. Renwick was appointed Senior Vice President of ANIC. On November 16, 1999, Mr. Renwick was elected Senior Vice President of ACCEL. Prior to his election, Mr. Renwick was Senior Vice President, COO and Head of Claims for Allegiance Insurance Managers, Ltd. Mr. Lawrence joined Allegiance as a financial and accounting consultant to guide Acceleration National Insurance Company's wind-down of operations in Texas and subsequent move to Connecticut. Mr. Lawrence joined the Company on October 5, 1999, when he was appointed a member of the Board of Directors of Acceleration National Insurance Company. On November 16, 1999, he was elected Vice President, Treasurer and Chief Financial Officer of ACCEL. Ms. Wilson joined the Company on October 5, 1999, when she was appointed a member of the Board of Directors and Corporate Secretary of Acceleration National Insurance Company. On October 6, 1999, Ms. Wilson was appointed Vice President of ANIC. On November 16, 1999 she was elected Vice President and Corporate Secretary of ACCEL. Prior to her election, Ms. Wilson was Vice President, Systems, Administration and Controller for Allegiance Insurance Managers, Ltd. 45 46 The following table sets forth certain information relating to the directors of the Company:
Number of shares of Common Stock owned beneficially, directly or indirectly, on Names, Position with the January 31, 2000, (except Company and Age Principal Occupation for past Director as otherwise noted) (1) Percent (as of January 31, 2000) five years/other Directorships Since of Class - ------------------------------ ----------------------------------- ---------- ----------------------------- ---------- David T. Chase President and Director of 1985 4,348,648 (5) 46.2 Director, 61 D. T. Chase Enterprises, Inc., (2) Hartford, CT. Douglas J. Coats Former President and Chief 1995 173,660 1.8% Director, 67 Executive Officer of the Company until November 15, 1999. Prior thereto he was Executive Vice President of the Company since May 23, 1995. Prior thereto he was Executive Vice President of Ranger Insurance Company, Houston, TX since August, 1987. Raymond H. Deck Chairman of the Board of the 1990 348,787 3.7% Director, 77 Company since October, 1998. (2) (3) (4) President of Chase Insurance Enterprises, Inc., Hartford, CT. Richard Desich President of Mid-Ohio Securities 1997 41,350 * Director, 64 Corp., Elyria, OH (2) (3) (4) Gregory Grusse Vice President of JPR Resources, 1999 0 * Director, 38 Inc. (3) Gerald H. Pastor President and Chief Executive 1999 0 (6) President, Chief Officer of the Company since Executive Officer November 16, 1999. Prior thereto and Director, 48 he was President and Chief Executive Officer of Allegiance Insurance Managers, Ltd., Simsbury, CT John P. Redding Senior Vice President, 1997 7,000 * Director, 41 David T. Chase Enterprises, (2) (4) Inc., Hartford, CT Thomas J. Renwick Senior Vice President of the 1999 218,738 2.3% Senior Vice President and Company since November 16, 1999. Director, 51 Prior thereto he was Senior Vice President, Chief Operations Officer and Head of Claims for Allegiance Insurance Managers, Ltd., Simsbury, CT
46 47
Number of shares of Common Stock owned beneficially, directly or indirectly, on Names, Position with the January 31, 2000, (except Company and Age Principal Occupation for past Director as otherwise noted) (1) Percent (as of January 31, 2000) five years/other Directorships Since of Class - ------------------------------ ----------------------------------- ---------- ----------------------------- ---------- Robert N. Worgaftik President of MW Financial 2000 106,825 1.1% Director, 49 Group, Ltd. All Directors and Officers as a group (11 persons) 5,291,116 56.2%
(1) On January 31, 2000, there were 9,084,006 shares of the Company's Common Stock issued and outstanding. Except as noted, includes shares owned by spouse, minor children or certain other family members, or held as custodian or trustee for the benefit of spouse or children, or owned by corporations of which such person is an officer or principal stockholder, over which shares such directors have sole or shared voting or investment power. With respect to the Directors, includes an aggregate of 305,000 shares which are subject to immediately exercisable options. Of the 305,000 shares subject to options, the following Directors have options to purchase the number of shares indicated after their names: Mr. Chase, 13,000; Mr. Coats, 165,000; Mr. Deck, 113,000; Mr. Desich, 7,000; and Mr. Redding, 7,000. (2) Member of Executive Committee (Mr. Deck, Chairman). (3) Member of Audit Committee (Mr. Grusse, Chairman). (4) Member of Compensation Committee (Mr. Desich, Chairman). (5) See footnotes (2) and (5) at pages 50 and 51 herein. (6) In consideration for the acquisition by the Company of Allegiance Insurance Managers, Ltd., on January 14, 2000, ACCEL will issue an additional 997,036 shares to Pastor upon, and subject to receipt of, clearance by the Ohio Department of Insurance. Should the foregoing clearance not be received, ACCEL will issue to Pastor such other consideration as may be mutually agreed upon by ACCEL and Pastor, which may include a lesser number of shares of ACCEL common stock (subject to the foregoing clearance) and/or other securities. * Less than 1% of outstanding Common Stock. ITEM 11. EXECUTIVE COMPENSATION SUMMARY The following table is a summary of certain information concerning the compensation awarded or paid to, or earned by, the Company's current Chief Executive Officer and each of the Company's other most highly compensated executive officers whose total annual salary and bonus for the fiscal year ended December 31, 1999, exceeded $100,000 (the "named executives") during each of the last three fiscal years:
SUMMARY COMPENSATION TABLE - ---------------------------------------------------------------------------------------------------------------------- Annual Compensation Long Term Compensation -------------------------- -------------------------------------- Securities All Other Year Name, Age, and Principal Position Salary Bonus Underlying Compensation ($) ($) Options/SAR's (#) ($) (1) - ------------ --------------------------------------- ------------ ------------- -------------------- ----------------- 1999 Gerald H. Pastor, 48 (2) 57,692 -- -- -- 1998 President and Chief Executive Officer -- -- -- -- 1997 -- -- -- -- 1999 Douglas J. Coats, 66 (3) 216,947 -- -- 9,516 1998 President and Chief Executive Officer 162,728 -- 30,000 6,318 1997 137,500 -- 30,000 12,980 1999 Walter J. Kozuch, 46 (4) 95,892 20,000 -- 5,280 1998 Vice President and Chief Program 80,801 -- 10,000 1,996 1997 Manager -- -- -- --
(1) Represents approximate amounts contributed on behalf of each such executive to the Acceleration Retirement Savings and Stock Ownership Plan. 47 48 (2) Mr. Pastor was appointed President and Chief Executive Officer of Acceleration National Insurance Company on October 5, 1999, and was elected President and Chief Executive Officer of ACCEL International Corporation on November 16, 1999. (3) Mr. Coats served as President and Chief Executive Officer of the Company for the period October 1, 1998 through November 15, 1999. He continues to serve as Director for the Company and as Chairman of the Board of Acceleration National Insurance Company. (4) Mr. Kozuch joined Acceleration National Insurance Company in February, 1998 as Assistant Vice President, Actuarial Services. He was promoted to Vice President, Actuarial Services in December, 1998. He currently serves both on the Board of Directors of ANIC and as Vice President and Chief Program Manager. The following table sets forth information concerning individual grants of options to purchase the Company's Common Stock made to the named executives in 1999:
OPTION GRANTS IN LAST FISCAL YEAR - ---------------------------------------------------------------------------------------------------------------------- Potential Realizable Value INDIVIDUAL GRANTS IN 1999 at Assumed Annual Rates of Stock Price Appreciation for Option Term - ---------------------------------------------------------------------------------------------------------------------- Number of Percent of Securities Total Underlying Options Exercise or Options/ Granted to Base Price Expiration SARs Employees in ($ Sh) (1) Date 5% ($) 10% ($) Name Granted (#) Fiscal Year - ---------------------------- ------------- ---------------- -------------- ------------- --------------- ------------- No option grants were made to any employees of the Company during 1999.
(1) Market price of the Company's Common Stock on date of grant. The following table sets forth certain information regarding individual exercises of stock options during 1999 by each of the named executives:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FY-END OPTION VALUES - ---------------------------------------------------------------------------------------------------------------------- Shares Value Acquired Realized Number of Securities Value of Unexercised Name on (Mkt. Price Underlying Unexercised In-The-Money Options at Exercise at Exercise Options at Fiscal year End (1) (#) Less Fiscal Year End(#) Exercise Price) Exercisable Unexercisable Exercisable Unexercisable - --------------------------- ----------- ------------- ------------------ -------------- ----------------- ------------- Gerald H. Pastor 0 N/A N/A N/A N/A N/A Douglas J. Coats 0 N/A 165,000 N/A N/A N/A Walter J. Kozuch 0 N/A 5,000 5,000 N/A N/A
(1) Intended to represent the amount by which the market price of the Company's Common Stock on December 31, 1999 ($1.00) exceeded the exercise prices of unexercised options on that date. On December 31, 1999, none of the options outstanding for any of the named executives exceeded the market price of the Company's Common Stock. 48 49 ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the named executive's beneficial ownership of the Common Stock of the company as of January 31, 2000:
Shares of Common Stock of Company Beneficially Owned ------------------------------------------ Title of Class Name of Officer Number (1) (2) Percent of Class --------------------------- ------------------------------- --------------------- -------------------- Common Stock Gerald H. Pastor N/A 9.57% Common Stock Walter J. Kozuch 5,000 *
(1) In consideration for the acquisition by the Company of Allegiance Insurance Managers, Ltd., on January 14, 2000, ACCEL will issue an additional 997,036 shares to Pastor upon, and subject to receipt of, clearance by the Ohio Department of Insurance. Should the foregoing clearance not be received, ACCEL will issue to Pastor such other consideration as may be mutually agreed upon by ACCEL and Pastor, which may include a lesser number of shares of ACCEL common stock (subject to the foregoing clearance) and/or other securities. The percentage shown for Mr. Pastor is as if the 997,036 common shares were issued. (2) The amounts shown represent the total shares owned outright by such individuals together with shares which are issuable upon the exercise of all stock options which are currently exercisable. Specifically, the following individuals have the right to acquire the shares indicated after their names, upon the exercise of such stock option: Mr. Pastor: N/A; Mr. Kozuch 5,000. * Less than 1% of outstanding Common Stock. The following table sets forth certain information as of January 31, 2000 (except as otherwise noted) with respect to stockholders known to the Company to be the beneficial owners of more than five percent (5%) of any class of the Company's voting securities:
Name and Address Amount of Percent Title of Class of Beneficial Owner Beneficial Ownership (1) of Class - -------------- ------------------- ------------------------- -------- Common Stock David T. Chase 4,348,648 Shares (2) 47.9% D. T. Chase Enterprises, Inc. One Commercial Plaza Hartford CT 06103 Arnold L. Chase 1,167,824 Shares (3) 12.9% D. T. Chase Enterprises, Inc. One Commercial Plaza Hartford CT 06103 The Darland Trust 1,167,824 Shares (4) 12.9% P. O. Box 472 St. Peter's House, Le Bordage St. Peter Port Guernsey GYI6AX Channel Islands Rhoda L. Chase 2,000,000 Shares (5) 22.0% c/o Chase Enterprises, Inc. One Commercial Plaza Hartford CT 06103 Spitzer Profit Sharing and 750,250 Shares (6) 8.3% Savings Plan 150 E. Bridge Street Elyria OH 44035
(1) Except as otherwise noted, the Company has no reason to believe that any beneficial owner listed above does not have sole voting and investment power with respect to these shares. 49 50 (2) Includes 13,000 shares of Common Stock subject to immediately exercisable options. According to a Schedule 13D filed with the Commission, Mr. David T. Chase has, to the extent temporarily transferred to him, sole power to vote and dispose of 880,000 shares of Common Stock loaned to him by his wife, Rhoda L. Chase (the "Rhoda Chase Borrowed Shares") and shares the power to dispose or to direct the disposition of (i) 1,120,000 shares beneficially owned by Rhoda L. Chase (ii) 1,167,824 shares beneficially owned by his son, Arnold L. Chase, and (iii) 1,167,824 shares beneficially owned by The Darland Trust (the "Trust"), a trust whose beneficiaries are his daughter, Cheryl A. Chase, and her children. (3) According to a Schedule 13D filed with the Commission, Mr. Arnold L. Chase shares the power to dispose or to direct the disposition of the 1,167,824 shares owned by him with Mr. David T. Chase and has the sole power to vote or direct the vote of such shares. Such shares are also included in the above table in Mr. David T. Chase's shares. (4) According to a Schedule 13D filed with the Commission, the Trust shares the power to dispose or to direct the disposition of the 1,167,824 shares owned by it with Mr. David T. Chase and has the sole power to vote or direct the vote of such shares. Such shares are also included in the above table in Mr. David T. Chase's shares. (5) According to a Schedule 13D filed with the Commission, Rhoda L. Chase has the sole power to vote or to direct the vote of all such shares, except to the extent that she may be deemed to have temporarily transferred the sole power to vote or to direct the vote of the 880,000 Rhoda Chase Borrowed Shares to David T. Chase. Rhoda L. Chase shares the power to dispose or to direct the disposition of 1,120,000 of the shares of Common Stock owned by her with David T. Chase. Rhoda L. Chase has the sole power to dispose or to direct the disposition of the Rhoda Chase Borrowed Shares, except to the extent that she may be deemed to have temporarily transferred such power to David T. Chase. The shares of Common Stock owned by Rhoda L. Chase are also included in the above table in David T. Chase's shares. (6) Spitzer Profit Sharing and Savings Plan under agreement dated December 31, 1973, is an employee Benefit Plan, Pension Fund subject to the provisions of the Employee Retirement Income Security Act of 1974. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Not Applicable. 50 51 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K ITEM 14 (a) (l) AND (2)--INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULES COVERED BY INDEPENDENT AUDITORS' REPORT The following consolidated financial statements of ACCEL International Corporation and subsidiaries are included in Item 8: Independent Auditors' Report Consolidated balance sheets--December 31, 1999 and 1998 Consolidated statements of operations--Years ended December 31, 1999, 1998 and 1997 Consolidated statements of common stockholders' equity--Years ended December 31, 1999, 1998 and 1997 Consolidated statements of cash flows--Years ended December 31, 1999, 1998 and 1997 Notes to consolidated financial statements The following financial statement schedules of ACCEL International Corporation and subsidiaries are included in Item 14 (d): Schedule I -- Summary of Investments - Other than Investments in Related Parties Schedule II -- Condensed Financial Information of Registrant Schedule III -- Supplementary Insurance Information Schedule IV -- Reinsurance Schedule V -- Supplemental Information Concerning Property-Casualty Insurance Operations All other schedules to the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable or the required information is provided in the consolidated financial statements, and the schedules therefore have been omitted. 51 52 ITEM 14 (c)--EXHIBITS (3) Articles of Incorporation and By-Laws. 3.1 Restated Certificate of Incorporation of the Registrant. (Incorporated by reference to Exhibit (3)1(g) of Registrant's Report on Form 10-K for the year ended December 31, 1989.) 3.2 By-laws of Registrant. (Incorporated by reference to Exhibit B of the Registrant's definitive Proxy Statement as filed with the Commission on June 9, 1978.) 3.3 Amendment to Article III, Section 3.02 of the Registrant's By-Laws as passed by the Board of Directors of the Registrant on December 1, 1978. (Incorporated by reference to Exhibit (9)(b) of the Registrant's Report on Form 10-Q for the quarter ended March 31, 1979.) 3.4 Amendment to Article II, Section 2.04 of the Registrant's By-Laws as passed by the Board of Directors of the Registrant on October 23, 1981. (Filed with the Registrant's Amendment #1 to the Registration Statement on Form S-7 as Exhibit (4)3(c) and incorporated herein by reference.) 3.5 Amendment to Article II, Section 2.02 of the Registrant's By-Laws as approved by the Board of Directors of the Registrant on June 18, 1985. (Incorporated by reference to Exhibit (3) 2(d) to Registrant's Report on Form 10-K for the year ended December 31, 1985.) 3.6 Amendment to Article II, Section 2.02 of the Registrant's By-Laws as approved by the Board of Directors of the Registrant on March 29, 1988. (Incorporated by reference to Exhibit (3)2(e) of Registrants Report on Form 10-K for the year ended December 31, 1989.) 3.7 Amendment to Article VIII and the redesignation and alteration of the former Article VIII as Article IX. (Incorporated by reference to Exhibit (3)2(f) of Registrant's Report on Form 10-K for the year ended December 31, 1989.) (10) Material Contracts. Previously filed Material Contracts which are either terminated or deemed to be in the ordinary course of business to the Registrant are no longer identified. 10.1 Verification of coverage of current Directors and Officers Liability Policy for ACCEL International Corporation as issued by Reliance Insurance Company, indicating coverage for the period from November 27, 1998 to November 27, 1999. 10.2 The Company's 1982 Incentive Stock Option Plan. (Incorporated by reference to Exhibit A to the Company's definitive Proxy Statement for the 1982 annual meeting of stockholders of the Company.) 10.3 The Company's 1987 Incentive Stock Option Plan. (Incorporated by reference to Exhibit (10) 7. to the Registrant's Report on Form 10-K for the year ended December 31, 1987.) 52 53 (10) 10.4 The Company's first restatement of the 1987 Cont. Stock Incentive Plan. (Incorporated by reference to Exhibit A to the Company's definitive Proxy Statement for the 1990 annual meeting of stockholders of the Company.) 10.5 The Company's 1996 Stock Incentive Plan. (Incorporated by reference to Exhibit A to the Company's definitive Proxy Statement for the 1996 annual meeting of stockholders of the Company.) 10.6 Termination Agreement with Consumers Life Insurance effective July 31, 1996. (Incorporated by reference to Form 10-K for year ended December 31, 1996.) 10.7 Amendment to Termination Agreement with Consumers Life Insurance Company effective October 9, 1996. (Incorporated by reference to Form 10-K for year ended December 31, 1996.) 10.8. Stock Acquisition Agreement dated October 20, 1997 by and among ACCEL International Corporation, Lyndon Life Insurance Company and Lyndon Insurance Group, Inc. (Incorporated by reference to the Proxy Statement filed in connection with the Special Shareholders' meeting held December 30, 1997.) 10.9. Asset Purchase Agreement dated October 20, 1997 by and among ACCEL International Corporation, Acceleration National Insurance Company, and Lyndon Life Insurance Company. (Incorporated by reference to the Proxy Statement filed in connection with the Special Shareholders' meeting held December 30, 1997.) 10.10. Amendment No. 1 to Stock Acquisition Agreement dated January 2, 1998 by and among ACCEL International Corporation, Acceleration National Insurance Company, Lyndon Life Insurance Company and Lyndon Insurance Group, Inc. (Incorporated by reference to the Form 8-K dated December 31, 1997.) (21) Subsidiaries of the Registrant 21.1 See Organizational Chart - all such Companies are incorporated herein by reference and are presently doing business under their respective INCORPORATED NAMES. (23) 23.1 Consent of Independent Auditors' (24) 24.1 Powers of Attorney (27) 27.1 Financial Data Schedule incorporated herein by reference to the EDGAR filing of the Registrant for the year ended December 31, 1999. 53 54 ITEM 14 (d)--SCHEDULES SCHEDULE I - SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN RELATED PARTIES ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES DECEMBER 31, 1999
- ----------------------------------------------------------------------------------------------------- Column A Column B Column C Column D - ----------------------------------------------------------------------------------------------------- Amount at which shown in the Fair Balance Type of Investment Cost* Value Sheet ------- ------- ------- (Thousands of dollars) Available for sale securities: Fixed maturities: United States government and government agencies and authorities $ 8,521 $ 8,445 $ 8,445 States, municipalities and political subdivisions 40 41 41 Mortgage and asset-backed securities 10,103 9,728 9,728 All other corporate bonds 2,928 2,798 2,798 ------- ------- ------- Total 21,592 21,012 21,012 Short-term investments 1,358 1,358 1,358 ------- ------- ------- Total investments $22,950 $22,370 $22,370 ======= ======= =======
* Original cost of equity securities, adjusted for any permanent write down, and, as to fixed maturities, original cost reduced by repayments and adjusted for amortization of premiums or accrual of discounts. See accompanying independent auditors' report. 54 55 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT BALANCE SHEETS ACCEL INTERNATIONAL CORPORATION (PARENT COMPANY)
December 31, 1999 1998 -------- -------- (Thousands of dollars) ASSETS Investments $ -- $ 4,748 Cash 199 883 Notes and receivables from consolidated subsidiaries* 382 -- Investments in subsidiaries* 4,845 18,579 Receivable from sale of discontinued and disposed of operations -- 703 Other 192 337 -------- -------- $ 5,618 $ 25,250 ======== ======== LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Accounts payable and other liabilities $ 78 $ 98 Notes and accounts payable to subsidiaries* 86 1,477 Payable related to discontinued operations 34 53 Current federal income tax 534 521 -------- -------- 732 2,149 ======== ======== Common stockholders' equity: Common stock 947 947 Additional paid-in capital 32,659 32,659 Accumulated deficit (including undistributed loss of subsidiaries and affiliates: 1999--$12,800,000; 1998--$9,700,000) (21,178) (3,933) Treasury shares at cost (6,962) (6,962) Accumulated other comprehensive income (loss) (580) 390 -------- -------- 4,886 23,101 -------- -------- $ 5,618 $ 25,250 ======== ========
* Eliminated in consolidation The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of ACCEL International Corporation and subsidiaries. See accompanying independent auditors' report. 55 56 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENTS OF OPERATIONS ACCEL INTERNATIONAL CORPORATION (PARENT COMPANY)
Year Ended December 31, 1999 1998 1997 -------- -------- -------- (Thousands of dollars) INCOME Net investment income: Dividends from subsidiaries $ -- -- $ 5,011 Interest 17 144 -- Realized gains 252 -- 226 Equity in income of affiliated company -- (189) -- Other income 228 294 8 -------- -------- -------- 497 249 5,245 EXPENSES General, administrative, taxes, licenses and fees 4,977 1,288 488 Interest -- -- 1,532 -------- -------- -------- 4,977 1,288 2,020 -------- -------- -------- INCOME (LOSS) BEFORE INCOME TAXES AND OTHER ITEMS (4,480) (1,039) 3,225 Federal income taxes (benefit) -- (270) 286 Other item -- equity in undistributed net income (loss) of consolidated subsidiaries (12,765) (9,682) 8,673 Other item -- undistributed net income (loss) of former subsidiaries -- -- (10,497) -------- -------- -------- NET INCOME (LOSS) $(17,245) $(10,451) $ 1,115 ======== ======== ========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of ACCEL International Corporation and subsidiaries. See accompanying independent auditors' report. 56 57 SCHEDULE II - CONDENSED FINANCIAL INFORMATION OF REGISTRANT STATEMENT OF CASH FLOWS ACCEL INTERNATIONAL CORPORATION (PARENT COMPANY)
Year Ended December 31, 1999 1998 1997 -------- -------- -------- (Thousands of dollars) OPERATING ACTIVITIES: Income (loss) from continuing operations $(17,245) $(10,451) $ 7,015 Adjustments to reconcile income (loss) from continuing operations to net cash (used in) provided by operating activities: Change in notes and receivables due from subsidiaries (382) 1 (2) Change in notes and accounts payable due to subsidiaries and former subsidiaries (1,391) (2,281) 578 Change in other assets, other liabilities and accrued income taxes 822 (4,899) (266) Interest paid in kind -- -- -- Equity in (gains) losses of subsidiaries 12,765 9,682 (8,673) Equity in income of affiliated company -- 189 -- Provision for amortization of goodwill -- -- 65 -------- -------- -------- Net cash (used in) provided by continuing operations (5,431) (7,759) (1,283) Net cash (used in) provided by discontinued operations -- 28,816 1,221 -------- -------- -------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (5,431) 21,057 (62) -------- -------- -------- INVESTING ACTIVITIES: Equity method investment, net 4,747 (4,936) -- -------- -------- -------- NET CASH USED IN INVESTING ACTIVITIES 4,747 (4,936) -- -------- -------- -------- FINANCING ACTIVITIES: Repayment of notes payable -- (15,000) -- Repayment of notes to subsidiary -- -- -- Issuance of Common Stock under Stock Option Plan -- 52 107 Issuance of Common Stock under Rights Offering -- -- -- Repurchase of treasury shares -- (363) -- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES -- (15,311) 107 -------- -------- -------- NET INCREASE (DECREASE) IN CASH (684) 810 45 Cash at beginning of year 883 73 28 -------- -------- -------- CASH AT END OF YEAR $ 199 $ 883 $ 73 ======== ======== ======== Supplemental schedule of non-cash financing activities: Transfer of note payable to ALIC--Note E $ -- $ -- $ 15,000 ======== ======== ========
The condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of ACCEL International Corporation and subsidiaries. See accompanying independent auditors' report. 57 58 SCHEDULE III - SUPPLEMENTARY INSURANCE INFORMATION ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------- Column A Column B Column C Column D Column E - -------------------------------------------------------------------------------- December 31, -------------------------------------------------------- Other Deferred Reserve for policy policy future claim and acquisition policy Unearned benefits costs benefits premiums payable ------- ------- ------- ------- (Thousands of dollars) 1999 Property/Casualty $ 280 $ -- $ 3,125 $59,421 Corporate -- -- -- -- ------- ------- ------- ------- TOTAL $ 280 $ -- $ 3,125 $59,421 ======= ======= ======= ======= 1998 Property/Casualty $ 2,803 $ -- $12,449 $49,535 Corporate -- -- -- -- ------- ------- ------- ------- TOTAL $ 2,803 $ -- $12,449 $49,535 ======= ======= ======= ======= 1997 Property/Casualty $ 3,112 $ -- $29,986 $22,028 Corporate -- -- -- -- ------- ------- ------- ------- TOTAL $ 3,112 $ -- $29,986 $22,028 ======= ======= ======= =======
- ------------------------------------------------------------------------------------------------------------- Column F Column G Column H Column I Column J Column K - ------------------------------------------------------------------------------------------------------------- Year ended December 31, -------------------------------------------------------------------------------------- Benefits, Amortization claims, of deferred Net invest- losses and policy Other Premium ment settlement acquisition operating Premiums revenue income(1) expenses costs (2) expenses written ------- ------- ------- ------- ------- ------- (Thousands of dollars) 1999 Property/Casualty $20,299 $ 1,604 $23,922 $ 2,523 $10,677 $21,759 Corporate -- 269 -- -- 2,561 -- ------- ------- ------- ------- ------- ------- TOTAL $20,299 $ 1,873 $23,922 $ 2,523 $13,238 $21,759 ======= ======= ======= ======= ======= ======= 1998 Property/Casualty $16,000 $ 1,967 $19,227 $ 308 $ 8,381 $43,285 Corporate -- 139 -- -- 1,288 -- ------- ------- ------- ------- ------- ------- TOTAL $16,000 $ 2,106 $19,227 $ 308 $ 9,669 $43,285 ======= ======= ======= ======= ======= ======= 1997 Property/Casualty $18,717 $ 2,764 $15,373 $(1,733) $11,617 $40,897 Corporate -- 226 -- -- 1,913 -- ------- ------- ------- ------- ------- ------- TOTAL $18,717 $ 2,990 $15,373 $(1,733) $13,530 $40,897 ======= ======= ======= ======= ======= =======
(1) For all years, net investment income includes realized capital gains and losses. (2) Represents the net (increase) decrease in deferred policy acquisition costs. See accompanying independent auditors' report. 58 59 SCHEDULE IV - REINSURANCE ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES
Column A Column B Column C Column D Column E Column F - -------------------------------------------------------------------------------------------------------------------------- Percentage Ceded to of amount Gross other Assumed from assumed to amount companies other companies Net amount net - -------------------------------------------------------------------------------------------------------------------------- (Thousands of dollars) Year Ended December 31, 1999: Premiums Property and casualty $ 17,140 $ (6,789) $ 4,619 $ 14,970 30.9% ============== =============== =============== =============== ============== Year Ended December 31, 1998: Premiums Property and casualty $ 37,872 $ (27,300) $ 5,413 $ 15,985 33.9% ============== =============== =============== =============== ============== Year Ended December 31, 1997: Premiums Property and casualty $ 38,848 $ (17,118) $ 2,049 $ 23,779 8.6% ============== =============== =============== =============== ==============
See accompanying independent auditors' report. 59 60 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACCEL INTERNATIONAL CORPORATION BY: /S/ Richard A. Lawrence ----------------------------------- Richard A. Lawrence Vice President, Chief Financial Officer and Treasurer DATE: April 14, 2000 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated..
SIGNATURE TITLE DATE --------- ----- ---- /S/ David T. Chase* Director March 2, 2000 - ---------------------------- David T. Chase /S/ Douglas J. Coats* Director March 2, 2000 - ---------------------------- Douglas J. Coats /S/ Raymond H. Deck* Director and Chairman of the Board March 2, 2000 - ---------------------------- Raymond H. Deck /S/ Richard Desich* Director March 13, 2000 - ---------------------------- Richard Desich /S/ Gregory Grusse* Director March 2, 2000 - ---------------------------- Gregory Grusse /S/ Richard A. Lawrence* Vice President, Chief Financial Officer and Treasurer March 2, 2000 - ---------------------------- (principal financial and accounting officer) Richard A. Lawrence /S/ Gerald H. Pastor* Director, President and Chief Executive Officer March 6, 2000 - ---------------------------- (principal executive officer) Gerald H. Pastor /S/ Thomas J. Renwick* Director, Senior Vice President March 3, 2000 - ---------------------------- Thomas J. Renwick /S/ John P. Redding* Director March 2, 2000 - ---------------------------- John P. Redding /S/ Robert N. Worgaftik* Director March 2, 2000 - ---------------------------- Robert N. Worgaftik *By: /S/ Kathleen J. Wilson March 13, 2000 ---------------------------------- Kathleen J. Wilson Attorney-in-Fact
60 EX-27 2 EX-27
7 This schedule contains summary information extracted from ACCEL International Corporation's Annual Report on Form 10-K for the year ended December 31, 1999 and is qualified in its entirety by reference to such Form 10-K. US DOLLARS 12-MOS DEC-31-1999 JAN-01-1999 DEC-31-1999 1 21,012 0 0 0 0 0 22,370 45,671 0 280 73,035 59,421 3,125 0 0 0 0 0 32,659 (21,758) 73,035 20,299 1,772 101 266 23,922 2,523 10,235 (17,245) 0 (17,245) 0 0 0 (17,245) (2.02) (2.02) 49,535 21,252 2,670 8,918 8,902 59,421 (2,670)
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