-----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, EpEPcnxhZVrk/PbU95Pte+3itONu2lTwlPXpDqyhObGASmKrxk/WT2JgZKGhymSO jwUfigw2Y6Z2XVCkXW6wKA== /in/edgar/work/20000821/0000914039-00-000401/0000914039-00-000401.txt : 20000922 0000914039-00-000401.hdr.sgml : 20000922 ACCESSION NUMBER: 0000914039-00-000401 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 20000630 FILED AS OF DATE: 20000821 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCEL INTERNATIONAL CORP CENTRAL INDEX KEY: 0000001985 STANDARD INDUSTRIAL CLASSIFICATION: [6311 ] IRS NUMBER: 310788334 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08768 FILM NUMBER: 707118 BUSINESS ADDRESS: STREET 1: 75 WEST ST CITY: SIMSBURY STATE: CT ZIP: 06070 BUSINESS PHONE: 8608437600 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-Q 1 e10-q.txt FORM 10-Q 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED JUNE 30, 2000 [ ] 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, CT 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 whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No As of July 31, 2000, there were 9,084,004 shares of Common Stock, $.10 par value per share outstanding. 2 COMMISSION FILE NO. 0-8162 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES JUNE 30, 2000 INDEX PART I -- FINANCIAL INFORMATION
Item 1. Financial Statements Page ---- Consolidated Balance Sheets June 30, 2000 (unaudited) and December 31, 1999 3 - 4 Consolidated Statements of Operations Three months and six months ended June 30, 2000 (unaudited) and 1999 5 Consolidated Statements of Common Stockholders' Equity Three months and six months ended June 30, 2000 (unaudited) and year ended December 31, 1999 6 Consolidated Statements of Cash Flows Three months and six months ended June 30, 2000 (unaudited) and 1999 7 Notes to Unaudited Consolidated Financial Statements 8 - 13 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 14 - 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 19 Signature 20 Exhibit 27.0 21
2 3 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
June 30, December 31, 2000 1999 (Unaudited) ASSETS (Thousands of dollars) Investments Investments available for sale, at fair value: Fixed maturities (cost: 2000--$12,615,000; 1999--$21,592,000) $12,241 $21,012 Short-term investments, at cost (which approximates market value) 1,048 1,358 ------- ------- 13,289 22,370 Cash -- -- Receivables: Premiums in process of transmittal, less allowance (2000--$0; 1999--$359,000) -- 1,637 Amounts due from reinsurers 34,591 45,671 Other accounts receivable 1,113 -- ------- ------- 35,704 47,308 Accrued investment income 172 234 Prepaid reinsurance premiums 2,309 1,918 Deferred policy acquisition costs -- 280 Equipment--at cost, less accumulated depreciation (2000--$632,000; 1999--$436,000) 708 444 Other assets 983 481 Intangible assets 6,126 -- ------- ------- 10,298 3,357 ------- ------- Total assets $59,290 $73,035 ======= =======
(Continued) See notes to unaudited consolidated financial statements 3 4 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS -- (CONTINUED)
June 30, December 31, 2000 1999 (Unaudited) LIABILITIES AND STOCKHOLDERS' EQUITY (Thousands of dollars, except share data) Policy Reserves and Liabilities: Unearned premium reserves $ 2,324 $ 3,125 Insurance claim reserves 44,816 59,421 -------- -------- 47,141 62,546 Other Liabilities: Notes payable 5,512 -- Bank overdrafts 382 3,714 Amounts withheld for others 747 122 Unearned commissions 289 -- Deferred reinsurance commissions -- 114 Amounts due reinsurers 777 828 Accounts payable and other liabilities 956 653 Consideration payable related to acquisitions 769 -- Current federal income taxes 172 -------- -------- 9,433 5,603 -------- -------- 56,573 68,149 -------- -------- 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 (2000 and 1999--15,000,000) Issued shares (2000--9,997,234; 1999--9,468,196) 1,000 947 Additional paid-in capital 33,538 32,659 Accumulated deficit (24,484) (21,178) Less treasury shares at cost (2000 and 1999--913,230) (6,962) (6,962) Accumulated other comprehensive loss (374) (580) -------- -------- Net stockholders' equity 2,718 4,886 -------- -------- Total liabilities & stockholders' equity $ 59,290 $ 73,035 ======== ========
See notes to unaudited consolidated financial statements. 4 5 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended June 30, Six Months Ended June 30, 2000 1999 2000 1999 ----------- ----------- ----------- ----------- (Thousands of dollars, except per share data) REVENUE: Gross premiums written $ 1,284 $ 6,689 $ 1,616 $ 15,228 Less reinsurance ceded 1,652 403 1,754 3,171 ----------- ----------- ----------- ----------- Net premiums written (368) 6,286 (138) 12,057 Decrease in unearned premium reserves 327 183 1,192 285 ----------- ----------- ----------- ----------- Net premiums earned (41) 6,469 1,054 12,342 Net investment income: Interest and dividends 302 466 592 941 Net realized capital (losses) gains (68) -- (307) 1 Equity in loss of affiliated company -- (43) -- (65) Service fee revenue 246 -- 869 -- Commission revenue 2,892 -- 5,157 -- Other income 108 (108) 154 (90) ----------- ----------- ----------- ----------- 3,440 6,784 7,519 13,129 ----------- ----------- ----------- ----------- BENEFITS AND EXPENSES: Loss and loss adjustment expenses 97 7,144 1,009 11,469 Commissions and other sales 1,439 1,438 2,210 3,149 Reinsurance expense recovery (3) (701) (114) (1,473) General and administrative expenses 3,864 1,359 6,481 2,908 Restructuring cost 252 1,676 414 1,676 Taxes, licenses and fees 152 298 278 690 Amortization expense 134 -- 250 -- Interest expense 110 -- 190 -- Decrease in deferred policy acquisition costs 59 475 280 874 ----------- ----------- ----------- ----------- 6,105 11,689 10,997 19,293 ----------- ----------- ----------- ----------- LOSS BEFORE FEDERAL INCOME TAXES (2,665) (4,905) (3,478) (6,164) Federal income taxes: Current (benefit) -- -- (172) -- Deferred expense -- -- -- -- ----------- ----------- ----------- ----------- -- -- (172) -- ----------- ----------- ----------- ----------- NET LOSS $ (2,665) $ (4,905) $ (3,306) $ (6,164) =========== =========== =========== =========== Net loss per common share--basic $ (0.29) $ (0.57) $ (0.37) $ (0.72) Net loss per common share--assuming dilution $ (0.29) $ (0.57) $ (0.37) $ (0.72) =========== =========== =========== =========== Weighted average number of common shares outstanding 9,084,004 8,554,966 9,043,531 8,554,966 =========== =========== =========== ===========
See notes to unaudited consolidated financial statements. 5 6 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (Thousands of dollars)
Accumulated Additional Common other Common paid-in Accumulated stock held in comprehensive stock capital deficit treasury loss Net ------ ------- -------- ------- ----- -------- Balances at December 31, 1998 $ 947 $32,659 $ (3,933) $(6,962) $ 390 $ 23,101 Comprehensive loss: Net loss -- -- (17,245) -- -- (17,245) Other comprehensive loss- change in net unrealized losses on investment securities -- -- -- -- (970) (970) ------ ------- -------- ------- ----- -------- Comprehensive loss -- -- (17,245) -- (970) (18,215) ------ ------- -------- ------- ----- -------- Balances at December 31, 1999 $ 947 $32,659 $(21,178) $(6,962) $(580) $ 4,886 Comprehensive loss: Net loss -- -- (3,306) -- -- (3,306) Other comprehensive income- change in net unrealized losses on investment securities -- -- -- -- 206 206 ------ ------- -------- ------- ----- -------- Comprehensive loss -- -- (3,306) -- 206 (3,100) Issuance of 529,040 shares of Common Stock for Allegiance Insurance Managers purchase 53 530 -- -- -- 583 Issuance of 858,200 warrants for Common Stock in conjunction with Notes Payable to Accel Finance Co. -- 349 -- -- -- 349 ------ ------- -------- ------- ----- -------- Balances at June 30, 2000 (Unaudited) $1,000 $33,538 $(24,484) $(6,962) $(374) $ 2,718 ====== ======= ======== ======= ===== ========
See notes to unaudited consolidated financial statements. 6 7 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30, 2000 1999 -------- ------- (Thousands of dollars) OPERATING ACTIVITIES: Loss from continuing operations $ (3,306) $(6,164) Adjustments to reconcile income (loss) from continuing operations to net cash used in by operating activities: Equity method investment, net -- 65 Change in premiums receivable 1,637 3,334 Change in accrued investment income 62 20 Change in prepaid reinsurance premiums (391) 3,749 Change in premium deposits held -- (526) Change in unearned premium reserves (801) (4,034) Change in insurance claim reserves (14,605) (1,420) Change in amounts due to and from reinsurers 11,029 (1,154) Change in other assets, other liabilities and accrued income taxes (831) 1,828 Accrual of discount on fixed maturity securities -- (21) Amortization of premium on fixed maturity securities 40 35 Amortization of deferred policy acquisition costs 280 875 Policy acquisition costs deferred -- -- Reinsurance commissions earned (114) (887) Reinsurance commissions received -- -- Provision for depreciation and amortization 410 130 Net realized losses on investments 307 1 -------- ------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (6,283) (4,169) INVESTING ACTIVITIES: Sale of investments available for sale 8,945 6,468 Purchase of investments available for sale -- (5,516) Purchase and sale of Short-Term Investments, net 440 630 Change in intangible assets (6,126) -- -------- ------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 3,259 1,582 -------- ------- FINANCING ACTIVITIES: Change in bank overdrafts (3,332) -- Issuance of notes payable 5,512 -- Change in accrual of payable related to acquisitions 769 Warrants issued 349 -- Repayment of notes payable (274) -- -------- ------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES 3,024 -- -------- ------- NET INCREASE (DECREASE) IN CASH -- (2,587) Cash at beginning of year -- 2,587 -------- ------- CASH AT END OF PERIOD $ -- $ -- ======== =======
See notes to unaudited consolidated financial statements. 7 8 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS JUNE 30, 2000 NOTE A--SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION: The accompanying unaudited consolidated financial statements of ACCEL International Corporation ("ACCEL") and subsidiaries (collectively referred to herein as the "Company") have been prepared in accordance with generally accepted accounting principles ("GAAP") for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X which, as to the insurance company subsidiary, differ in some respects from statutory accounting practices prescribed or permitted by state insurance departments. Accordingly, they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for all periods presented are not necessarily indicative of the results that may be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's Annual Report on Form 10-K for the year ended December 31, 1999. PRINCIPLES OF CONSOLIDATION: The accompanying unaudited consolidated financial statements include the accounts of ACCEL and its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in the unaudited consolidated financial statements. DESCRIPTION OF BUSINESS: ACCEL is an insurance holding company incorporated in Delaware. Through the Company's wholly-owned subsidiary, Acceleration National Insurance Company (ANIC), ACCEL was engaged in the underwriting and sale of property-casualty insurance products, primarily concentrating, up to mid-1999, on commercial automobile business. Before ANIC announced, on July 2, 1999, 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. ANIC offered these products through general agents. Management is pursuing efforts to either restructure and recapitalize ANIC so that it can re-enter the insurance marketplace, or sell ANIC. ANIC is subject to competition from other insurers in the property and casualty business. ANIC is also subject to regulation by the insurance departments of states in which it is licensed, and undergoes periodic examinations by those departments. Beginning May 2, 2000, the Ohio Department of Insurance ("the Department"), the domiciliary regulator of ANIC, began an examination of the financial affairs of ANIC for the years 1998 and 1999. On May 4, 2000, ANIC received an order of supervision from the Department ( see Note F). Because of ANIC's Risk Based Capital position at December 31, 1999, the Department requested the Company to file a "as-is" RBC Plan by April 18, 2000, and a RBC Plan including an additional capital assumption by May 15, 2000. The Company complied with both of the Department's requests by the due dates. As of the filing date of this Form 10-Q, the Department has neither accepted nor denied the Company's filings. Through its January 2000 purchase of Allegiance Insurance Managers (AIM) and Accelerated Agency Group (AAG), ACCEL also operates in the property and casualty non-standard auto insurance agency business, and provides various property and casualty insurance services including underwriting management, actuarial support and claims administration. PURCHASE TRANSACTIONS: On January 14, 2000, the Company acquired 100% of the stock of Allegiance Insurance Managers. 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 assumed net liabilities of approximately $300,000 and 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. A liability has been established at June 30, 2000 for the value of the consideration to be issued to Pastor in the amount of approximately $770,000. 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 31, 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 and is seeking either additional capital or a sale of the company. Going forward, the primary focus of ACCEL and ANIC will be the non-standard automobile line of business. 8 9 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) Also on January 14, 2000, ACCEL completed arrangements for a credit facility of $5,000,000 from a related party. 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. As of June 30, 2000, $3.1 million of the facility has been drawn down and used for either agency purchases or working capital, resulting in the issuance of 858,200 warrants. A portion of the proceeds received on the credit facility has been allocated to the warrants issued and has been recorded as additional paid-in capital. 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. On May 21, 2000, ACCEL acquired the assets of Capitol Insurance Agency & Tax Service, Inc. ("Capitol"). Capitol is comprised of one location in West Palm Beach, FL, also specializing in non-standard automobile insurance. For all agencies acquired, ACCEL paid approximately $4,975,000 in cash and notes. All agency asset acquisitions were accounted for utilizing purchase accounting and resulted in the recording of intangible assets of approximately $4,692,000. ACCOUNTING ESTIMATES: In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the unaudited consolidated financial statements and revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. The most significant estimates include those used in determining the liability for insurance claims and claims adjustment expense reserves. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. The estimates are continually reviewed and adjusted as necessary. Such adjustments are generally reflected in current operations. INVESTMENTS: The Company classifies its fixed maturity and equity securities as available for sale, therefore these securities are carried at fair value and the unrealized appreciation or depreciation is reported as a separate component of common stockholders' equity after giving effect to applicable income taxes. Short-term investments, which include U.S. Treasury securities, commercial paper and certificates of deposit are carried at fair value which approximates cost. Realized gains and losses on the disposal of investments are determined by specific identification and are included in the unaudited consolidated statements of operations. When an other than temporary decline in value is recognized, the specific investment is carried at estimated realizable value and its original book value is reduced to reflect such impairment of the investment. Such reductions in book value are reflected in realized investment losses for the period in which they were written down. For mortgage backed securities, 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. The Company has been a net-seller of its fixed income portfolio during the first six months of 2000. The net sale of securities reduced the Company's fixed maturity available for sale portfolio by $8.8 million for the six months ended June 30, 2000. At June 30, 2000, the available for sale fixed income portfolio is $12.2 million. However, $4.9 million of this is on deposit with various state regulators and is generally unavailable to fund the operations of ANIC. 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. INTANGIBLE ASSETS; Intangible assets includes goodwill and other intangible assets associated with purchase transactions, and are amortized over their respective lives, up to ten years. PREMIUM INCOME RECOGNITION AND UNEARNED PREMIUM RESERVES: Unearned premium reserves on property-casualty products are calculated on the pro rata method. 9 10 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) COMMISSION AND OTHER SALES INCOME RECOGNITION AND UNEARNED COMMISSIONS: Commissions and other sales revenues are recorded as income on a cash basis. Unearned commissions are estimated for that portion of the commission revenue that is due to premium finance and other producer entities and recorded as a liability and a reduction of commission and other sales income. 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 unaudited consolidated statements of operations. STOCK OPTION PLANS: Prior to January 1, 1996, the Company accounted for its stock option plans in accordance with the provisions of Accounting Principles Board ("APB") Opinion No. 25, Accounting for Stock Issued to Employees, and related interpretations. As such, compensation expense would be recorded on the date of grant only if the current market price of the underlying stock exceeded the exercise price. On January 1, 1996, the Company adopted 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. EARNINGS (LOSS) PER COMMON SHARE: Net income (loss) per common share is computed using the weighted average number of common shares outstanding during the period. NOTE B -- 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. The Company has entered into reinsurance contracts associated with its property - - casualty business. 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. Unearned premium reserves associated with these agreements at June 30, 2000 and December 31, 1999 are $2.3 million and $1.9 million, respectively, and the liability for insurance claims ceded under these agreements is $29.4 million and $40.0 million at June 30, 2000 and December 31, 1999, respectively. 10 11 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE B -- REINSURANCE - (CONTINUED) The following data summarizes certain aspects of the Company's reinsurance activity for 2000 and 1999: Premiums written and earned in 2000 and 1999 are summarized as follows:
WRITTEN EARNED ----------------------------------------------- ----------------------------------------------- Period Ended June 30, Six Months Ended Three Months Ended Six Months Ended Three Months Ended 2000 1999 2000 1999 2000 1999 2000 1999 ------- -------- ------- ------- ------- -------- ------- ------- (Thousands of dollars) Direct $ 1,558 $ 11,823 $ 1,460 $ 4,975 $ 1,882 $ 18,353 $ 785 $ 9,321 Assumed 58 3,405 (176) 1,714 559 3,723 326 1,829 Ceded (1,754) (3,171) (1,652) (403) (1,387) (9,734) (1,152) (4,681) ------- -------- ------- ------- ------- -------- ------- ------- Net $ (138) $ 12,057 $ (368) $ 6,286 $ 1,054 $ 12,342 $ (41) $ 6,469 ======= ======== ======= ======= ======= ======== ======= =======
Loss and loss adjustment expenses incurred in 2000 and 1999 are summarized as follows:
Six Months Ended Three Months Ended June 30, June 30, 2000 1999 2000 1999 ---- ---- ---- ---- (Thousands of dollars) Direct $4,199 $18,888 $1,979 $9,965 Assumed 401 2,272 329 1,268 Ceded (3,591) (9,691) (2,211) (4,089) ------- --------- ------- ------- Net $1,009 $11,469 $ 97 $7,144 ====== ======= ====== =======
NOTE D--SEGMENT INFORMATION ACCEL operates in the property-casualty insurance industry within the United States. Through its January 2000 purchases, the Company is also in the property-casualty agency business and in the insurance services business including underwriting management, actuarial consulting and claims administration. Except for certain claims handling fees between ANIC and AIM, 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. Information relating to revenue, loss before income taxes and identifiable assets by segment are summarized as follows:
Six Months Ended Three Months Ended June 30, June 30, 2000 1999 2000 1999 ------- -------- ------- ------- (Thousands of dollars) (Thousands of dollars) Revenue: Property/Casualty Insurance $ 1,497 $ 13,271 $ 351 $ 6,930 Insurance Agencies 5,174 -- 2,910 Insurance Services 841 -- 172 -- Corporate 7 (142) 7 (146) ------- -------- ------- ------- Total $ 7,519 $ 13,129 $ 3,440 $ 6,784 ======= ======== ======= ======= Income (loss) before federal income taxes Property/Casualty $(1,915) $ (5,280) $(1,196) $(4,342) Insurance Agencies (732) -- (588) -- Insurance Services (486) -- (604) -- Corporate (345) (884) (276) (563) ------- -------- ------- ------- Total $(3,478) $ (6,164) $(2,664) $(4,905) ======= ======== ======= =======
11 12 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE D--SEGMENT INFORMATION - (CONTINUED)
June 30, December 31, 2000 1999 -------- ------------ (Thousands of dollars) Identifiable assets: Property/Casualty $51,480 $72,629 Insurance Agencies 5,474 -- Insurance Services 2,061 -- Corporate 275 406 ------- ------- Total $59,290 $73,035 ======= =======
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. NOTE E--COMMITMENTS AND CONTINGENCIES The "Galaxy" New York Liquidation Bureau Suit: In July 1991, the Company acquired 100% of RGL. Galaxy Insurance Company ("Galaxy"), a wholly owned subsidiary of RGL, wrote commercial property and casualty insurance, 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. 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. On July 17, 2000, the Company was notified that the Appellate Court ruled against the dismissal by the New York State Supreme Court. Subsequently, the Company and the Superintendent have agreed to suspend any motions in this matter for a period of 45 days. ANIC will continue to defend vigorously against the Superintendent's lawsuit. 12 13 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE E--COMMITMENTS AND CONTINGENCIES -(CONTINUED) The North Dakota-Lyndon Matter: 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 a 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. 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. NOTE F -- SUBSEQUENT EVENT In May 2000, the State of Ohio Department of Insurance (the "Ohio DOI") issued an Order of Supervision appointing a Supervisor of ANIC under Ohio Revised Code Section 3903 (A) or (B). ANIC may not dispose of, convey, or encumber any of its assets, withdraw from bank accounts or lend any of its funds without prior approval of the Supervisor. There are further limitations on entering into new contracts or transactions by ANIC without such prior approval. The term of the Supervision is for 60 days and is automatically renewed until lifted by the Ohio DOI. At the same time, the Ohio DOI began a financial examination of ANIC's statutory books and records. The action was taken by the Ohio DOI pursuant to the Authorized Control Level Risk Based Capital position of ANIC as of December 31, 1999. Management of the Company believes the Order of Supervision will not have a material adverse impact on the Company's current operations since ANIC has essentially written no new business since the summer of 1999. Furthermore, the Company acknowledges the need for additional capital and is considering various alternatives, including utilization of the remaining credit facility described in note A, a possible sale of ANIC, or other investor sources of capital. In addition to the actions taken by the Ohio DOI, the company has been notified by seven other states in which it is licensed that it no longer can write additional business in these states without prior written approval. As a result of the preliminary financial examination by the Ohio DOI, the Company has recorded $558,000 of additional expense in the June 30, 2000 financial statements. On August 4, 2000, A.M. Best Company revised ANIC's "Best Rating" from B- (Fair) to a rating of E (Under Regulatory Supervision). Management of the Company believes the change in the A.M. Best rating will not have a material adverse impact on the Company's current operations since ANIC has written no new business since the summer of 1999, except for certain 100%-ceded aviation policies. 13 14 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Results for the Three and Six Months Ended June 30, 2000 and 1999 OVERVIEW ACCEL International Corp. ("ACCEL" or "the Company") is a publicly traded holding company headquartered in Simsbury, Connecticut. Its principal operating subsidiaries underwrite property-casualty business, sell non-standard automobile insurance, and provide certain services to the property-casualty insurance company marketplace. ACCEL conducts its business through three principal operating entities. Acceleration National Insurance Company ("ANIC") underwrites U.S. property-casualty insurance, although ANIC is currently in run-off and is under supervision of the Ohio Department of Insurance. On August 4, 2000, A.M. Best Company revised ANIC's "Best Rating" from B- (Fair) to a rating of E (Under Regulatory Supervision). Management of the Company believes the change in the A.M. Best rating will not have a material adverse impact on the Company's current operations since ANIC has written no new business since the summer of 1999, except for certain 100%-ceded aviation policies. Accelerated Agency Group ("AAG") produces non-standard automobile insurance under the Unistar trade name in Florida. And Allegiance Insurance Managers ("AIM") provides underwriting, actuarial and claims services to the property-casualty insurance company marketplace. ACQUISITIONS On January 14, 2000, the Company acquired 100% of the stock of Allegiance Insurance Managers. 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. Also on January 14, 2000, ACCEL completed arrangements for a credit facility of $5,000,000 from a related party. 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. At June 30, 2000, $3.1 million has been drawn down from the facility and 858,200 warrants have been issued. 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. On May 21, 2000, ACCEL acquired the assets of Capitol Insurance Agency & Tax Service, Inc. ("Capitol"). Capitol is comprised of one location in West Palm Beach, FL also specializing in non-standard automobile insurance. ACCEL paid approximately $4,975,000 in cash and notes for all agencies acquired. All agency asset acquisitions were accounted for utilizing purchase accounting and resulted in the recording of intangible assets of approximately $4,692,000. CONSOLIDATED RESULTS OF OPERATIONS QUARTER AND SIX MONTHS ENDED JUNE 30, 2000 COMPARED WITH QUARTER AND SIX MONTHS ENDED JUNE 30, 1999 The Company announced on July 2, 1999 it would cease writing or renewing its current lines of commercial property-casualty business due to its loss experience from 1998 and 1999. Management is pursuing efforts to restructure or sell the insurance company. REVENUES Total revenues for the six months ended June 30, 2000 decreased 41% to $7.7 million, compared to $13.1 million for the same period in 1999. For the quarter ended June 30, 2000, total revenues decreased 47% to $3.6 million, compared to $6.8 million for the same quarter in 1999. The Company ceased writing new policies of insurance and is non-renewing its in-force policies. The net unearned premium reserve at June 30, 2000 is $2.3 million, a reduction of $6.1 million from the June 30, 1999 unearned premium reserve of $8.4 million. The net premiums written for the six months ending June 30, 2000 are $(138,000) compared to the six months ending June 30, 1999 of $12.1 million. Included in ACCEL's consolidated results of operations for 2000 are AAG's and AIM's operating results. NET PREMIUMS EARNED Net premiums earned for the six months ended June 30, 2000 were $1.1 million, compared to $12.3 million in 1999, a 90% decrease. For the quarter ended June 30, 2000, net premiums earned were $(41,000), compared to $6.5 million in 1999. The Company's insurance operations are in run-off, except for a certain aviation risks program, which is 100% ceded to three A.M. Best + Company "A" rated reinsurers.. The decrease in 2000 compared to 1999 was due to the Company's announcement and subsequent management of its run-off property-casualty activity. ACCEL's new focus is on non-standard automobile insurance markets. The Company will sell this line of business, including ancillary products, through its owned agencies producing commission income and fees. The Company will also provide to property and casualty non-standard automobile insurance companies, other related services including actuarial, underwriting and claims management, producing service fee revenue. 14 15 NET INVESTMENT INCOME ACCEL's net investment income for the six months ended June 30, 2000 was $592,000 compared to $941,000 for the same period in 1999. For the quarter ended June 30, 2000, net investment income was $302,000 compared to $466,000 in 1999, a 35% decrease. The overall decrease in net investment income in the first six months of 2000 was due to run-off property-casualty loss and loss adjustment expense payments that have decreased the invested asset base, and the fact that ANIC is not currently writing any new or renewal property-casualty business. NET REALIZED INVESTMENT (LOSSES) GAINS ACCEL net realized capital losses for the six months ended June 30, 2000 were $307,000 or $(.03) per basic and diluted share, compared to a net realized capital gain of $1,000 for the same period in 1999. For the quarter ended June 30, 2000, net realized capital losses were $68,000 or $(.01) per basic and diluted share, compared to no net realized capital gains or losses during the same quarter in 1999. After-tax net realized capital losses resulted primarily from the sale of securities in the first six months to fund loss and loss adjustment expense payments. Due to the significant amount of available net operating loss carryforwards, the tax benefits normally associated with these losses can not be recorded. SERVICE FEE, COMMISSION AND OTHER INCOME Service fee, commission, and other income for the six months ended June 30, 2000 was $6.2 million, compared to a loss of $90,000 in the same period in 1999. For the quarter ended June 30, 2000, service fee, commission, and other income was $3.2 million, compared to a loss of $108,000 for the same quarter in 1999. Service fee revenue was $900,000 in the first six months of 2000 and $246,000 in the quarter ended June 30, 2000. This increase reflects the inclusion of AIM's service fee business in 2000. Commission revenue from AAG's operations was $5.0 million in the first six months of 2000 and $2.9 million in the quarter ended June 30, of 2000. LOSS AND LOSS ADJUSTMENT EXPENSES INCURRED ACCEL's loss and loss adjustment expenses incurred for the six months ended June 30, 2000 was $1.0 million, compared to $11.5 million in the same period in 1999. For the quarter ended June 30, 2000, loss and loss adjustment expenses incurred was $97,000, compared to $7.1 million for the same period in 1999. The decrease is principally attributable to the decrease in premium volume because of the Company's position in run-off property-casualty insurance business. POLICY ACQUISITION COSTS ACCEL's deferred policy acquisition costs for the six months ended June 30, 2000 were $280,000, compared to $874,000 in the same period in 1999. For the quarter ended June 30, 2000, deferred policy acquisition costs were $59,000 compared to $475,000 for the same period in 1999. The decrease in the expense of $594,000 in the six month period ending June 30, 2000 compared to the same time period last year, is principally attributable to the decrease in premium volume because of the ANIC's run-off property and casualty insurance business. There are no remaining policy acquisition costs deferred as of June 30, 2000. UNDERWRITING EXPENSES During the first six months of 2000, ANIC recorded underwriting expenses of $2.1 million, compared to $5.3 million in the same period in 1999. For the quarter ended June 30, 2000, underwriting expenses were $1.4 million, compared to $2.4 million for the same period in 1999. Underwriting expenses consist of commissions, general and administrative expense, and taxes licenses and fees, offset by reinsurance expense recoveries. The decrease in the expense of $3.2 million during the first six months of 2000, and the decrease in the expense of $1 million for the second quarter, compared to the same time periods in 1999, are principally attributable to the decrease in premium volume because of the ANIC's run-off property and casualty insurance business. The remainder of the Company's general and administrative expense was attributable to AAG ($3.8 million in the first six months and $2.2 million in the second quarter) and to AIM ($.7 million in the first six months and $.2 million in the second quarter) RESTRUCTURING COST Restructuring costs for the first six months of 2000, were $414,000, compared to $1.7 million in the same period in 1999. For the quarter ended June 30, 2000, restructuring costs were $252,000, compared to $1.7 million for the same period in 1999. Restructuring costs consist of salary and other personnel termination benefits and the costs associated with scaling back operations of the insurance company while in a run-off mode. The decrease in the expense of $1.3 million during the first six months of 2000, and the decrease in the expense of $1.4 million for the second quarter, compared to the same time periods in 1999, are principally attributable to the decrease in insurance processing activity because of the ANIC's run-off property and casualty insurance business. INTANGIBLE AMORTIZATION Intangible amortization, which includes amortization of goodwill and other intangibles, for the first six months of 2000, was $250,000, and $134,000 for the quarter ended June 30, 2000. This increase reflects the inclusion, through purchase, of AAG's and AIM's businesses in 2000. INTEREST EXPENSE Interest expense for the first six months of 2000, was $190,000 and $110,000 for the quarter ended June 30, 2000. This increase reflects the interest on notes payable used to finance the purchase of AAG's and AIM's businesses in 2000. 15 16 INCOME TAX BENEFIT Income tax benefit for the first six months of 2000 was $172,000, compared with no income tax benefit for the same time period in 1999. There was no income tax benefit recorded in the quarters ended June 30 for either year. For the first six months of 2000, ACCEL recorded an income tax benefit of $172,000 for the release of current taxes previously recorded and remaining on the December 31, 1999 balance sheet. There is no current federal income tax liability because of NOL carryforwards available to the consolidated group. The Company has not established a net deferred tax asset because its history of net operating losses makes realization uncertain. NET LOSS For the first six months of 2000, ACCEL generated a net loss of $3.3 million, compared to a net loss of $6.2 million for the same period in 1999. For the quarter ended June 30, 2000, the net loss was $2.7 million compared with a net loss of $4.9 million for the comparable period in 1999. The basic and diluted net loss per share was a loss of $(.37) for the six months ended June 30, 2000 and $(.29) for the quarter ended, as compared to basic and diluted net loss per share of $(.72) and $(.57) respectively, for the same periods in 1999. LIQUIDITY AND CAPITAL RESOURCES For the first six months of 2000, the Company has experienced negative operating cash flow of $6.3 million. Since ANIC's insurance operations are in run-off, the Company has had to be a net-seller of its fixed income portfolio during the first six months of 2000, and the net cash provided by investing activities was $10.0 million. These net sales of securities reduced the Company's fixed maturity available for sale portfolio by $8.8 million for the six months ended June 30, 2000, and by $1.6 million during the quarter ended June 30, 2000. At June 30, 2000, the available for sale portfolio is $12.2 million; however $4.9 million of this is on deposit with various state regulators and is generally unavailable to fund the operations of ANIC. Therefore, free available for sale securities are $7.3 million. Also, the start-up operations of the agency business of AAG, have consumed cash during the transition period to the Company's new ownership. The Company has had to use $1.0 million from the credit facility established in January 2000, to support current working capital needs. Currently, management continues to see a net negative cash flow from all operations for the third quarter 2000, which will require the Company to either sell securities or borrow again from the credit facility during the third quarter. The Company expects both AIM and AAG to produce positive cash flow in the fourth quarter 2000. The Company's "available for sale" fixed maturity securities at June 30, 2000 and December 31, 1999 include collateralized mortgage obligation securities and asset-backed collateralized securities. The mortgage and asset-backed securities are subject to risks associated with variable prepayments. As such, those securities may have a different actual maturity and yield than planned at the time of purchase. The degree to which a security is susceptible to either gains or losses is influenced by the difference between its amortized cost and par value, relative sensitivity of the underlying mortgages to prepayment risk in a changing interest rate environment and relative priority of the securities in the overall securitization. The Company limits the extent of its risks on fixed maturity securities by generally avoiding securities whose cost significantly exceeds par, by purchasing securities which are backed by stable collateral, and by concentrating on securities that 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 June 30, 2000 the Company did not have a significant amount of higher risk mortgage or asset backed securities that 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 the Ohio Department of Insurance ("Ohio Department"). Based on this regulation, ANIC would require Ohio Department approval to pay any dividend to ACCEL during 2000. AAG has not reached the point in its operations where it can pay any dividends to ACCEL. The estimates for policy reserves are continually under review and adjusted as necessary as experience develops or new information becomes known; such adjustments are included in current operations. These liabilities are necessarily subject to the impact of future changes in claim severity, frequency and other factors. Although considerable variability is inherent in such estimates, based on recent evaluations management believes that the current level of policy reserves will be adequate to cover anticipated claim liabilities. Accordingly, the ultimate amounts required for settlement of policy benefits may vary significantly from the amounts included in the accompanying unaudited consolidated financial statements. 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 subsidiary of the Company) and a suit against ALIC by three long-term care policyholders, see "Note E" in the Notes to Unaudited Consolidated Financial Statements. 16 17 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. SAFE HARBOR DISCLOSURE In connection with the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, ACCEL sets forth below cautionary statements identifying important risks and uncertainties that could cause its actual results to differ materially from those that might be projected, forecasted or estimated in its "forward-looking statements" within the meaning of Section 27A of the securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, made by or on behalf of ACCEL in this Quarterly Report on Form 10-Q and in press releases, written statements or documents filed with the Securities and Exchange Commission, or in its communications and discussions with investors and analysts in the normal course of business through meetings, phone calls and conference calls. Such statements may include, but are not limited to, projections of premium revenue, investment income, other revenue, losses, expenses, earnings (including earnings per share), cash flows, plans for future operations, common stockholders' equity (including book value per share), investments, financing needs, capital plans, dividends, plans related to products or services of ACCEL and estimates concerning the effects of litigation or other disputes, as well as assumptions for any of the foregoing and generally expressed with the words such as "believes," "estimates," "expects," "anticipates," "plans," "projects," "forecasts," "goals," "could have" "may have," and similar expressions. ACCEL, as a matter of policy, does not make any specific projections as to future earnings nor does it endorse any projections regarding future performance that may be made by others. Forward-looking statements involve known and unknown risks and uncertainties, which may cause ACCEL's results to differ materially from such forward-looking statements. These risks and uncertainties include, but are not limited to, the following: - - Changes in the level of competition in the domestic primary insurance market that effect the volume or profitability of ACCEL's property-casualty business. These changes include, but are not limited to, changes in the intensity of price competition, the entry of new competitors, existing competitors exiting the market and the development of new products by new and existing competitors; - - Changes in the demand for reinsurance, including changes in ceding companies' risk retentions that effect the cost of ACCEL's reinsurance purchases; - - The ability of ACCEL to execute its strategies in its property-casualty, agency and service operations; - - Adverse development on property-casualty loss and loss adjustment expense liabilities related to business written in prior years, including, but not limited to, evolving case law, changing government regulations, newly reported claims, new theories of liability or new insurance and reinsurance contract interpretations; - - Lower than expected reinsurance recoveries on unpaid losses, including, but not limited to, losses due to a decline in the creditworthiness of ACCEL's reinsurers; - - Increases in interest rates, which may cause a reduction in the market value of ACCEL's fixed income portfolio, and its common stockholders' equity; - - Decreases in interest rates which may cause a reduction of income earned on new cash flow from operations and the reinvestment of the proceeds from sales or maturities of existing investments; - - Changes in the composition of ACCEL's investment portfolio; - - Adverse results in litigation matters; - - The impact of mergers and acquisitions; and - - Changes in ACCEL's capital needs. In addition to the factors outlined above that are directly related to ACCEL's businesses, ACCEL is also subject to general business risks, including, but not limited to, adverse state or federal legislation and regulation, adverse publicity or news coverage, changes in general economic factors and the loss of key employees. The factors set forth above should be considered in connection with any forward-looking statement contained in this Quarterly Report. The important factors that could effect such forward-looking statements are subject to change, and ACCEL does not intend to update any forward-looking statement or the foregoing list of important factors. By this cautionary note ACCEL intends to avail itself of the safe harbor from liability with respect of forward-looking statements provided by Section 27A and Section 21E referred to above. 17 18 QUANITATIVE 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 June 30, 2000 were:
TOTAL FAIR 2000 2001 2002 2003 2004 Thereafter TOTAL VALUE (Millions of dollars) INVESTMENTS IN FIXED MATURITY SECURITIES Principal Amount $ 0.77 $ 5.13 $ 2.55 $ 0.40 0.50 $ 3.14 $12.25 $12.25 Book Value (amortized cost) 0.77 5.17 2.58 0.40 0.52 3.17 12.62 Average Interest Rate 5.95% 6.24% 5.69% 6.79% 6.27% 7.01% 6.32% 7.17% SHORT-TERM INVESTMENTS Principal Amount $ .93 -- -- -- -- -- $ 1.14 $ 1.14 Book Value .93 -- -- -- -- -- 1.14 Average Interest Rate 6.26% -- -- -- -- -- 6.26% 6.26%
18 19 PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (a) Exhibits 27.0 Financial Data Schedule (b) Reports on Form 8-K filed during the quarter ended June 30, 2000: None. 19 20 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACCEL INTERNATIONAL CORPORATION (Registrant) DATED: August 21, 2000 BY: /s/ Gerald H. Pastor BY: /s/ Richard A. Lawrence -------------------------------------- ---------------------------- Gerald H. Pastor Richard A. Lawrence *President and Chief Executive Officer *Vice President, Chief Financial Officer and Treasurer * Have been duly authorized to execute the report on behalf of the Registrant. 20 EX-27 2 ex27.txt EXHIBIT 27
7 This schedule contains summary information extracted from ACCEL International Corporation's Quarterly Report on Form 10-Q for the quarter ended June 30, 2000 and is qualified in its entirely by reference to such Form 10-Q. 6-MOS DEC-31-2000 JAN-01-2000 JUN-30-2000 12,241 0 0 0 0 0 13,289 0 34,591 0 59,290 44,816 2,324 0 0 5,512 0 0 34,538 (31,820) 59,290 1,054 592 (307) 6,180 1,009 280 9,708 (3,478) (172) (3,306) 0 0 0 (3,306) (0.37) (0.37) 59,421 928 14,100 305 5,281 44,475 45
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