-----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, Fs69Wyxjboe7XjZzXYmvis2NPiR/j7sdqb7hZHr/8QlILbZAIK4kOQgIEDLETuU1 xw4xgudVya27v4Pf+cpbbg== 0000950129-99-002274.txt : 19990518 0000950129-99-002274.hdr.sgml : 19990518 ACCESSION NUMBER: 0000950129-99-002274 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990331 FILED AS OF DATE: 19990517 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ACCEL INTERNATIONAL CORP CENTRAL INDEX KEY: 0000001985 STANDARD INDUSTRIAL CLASSIFICATION: LIFE INSURANCE [6311] IRS NUMBER: 310788334 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-08768 FILM NUMBER: 99625306 BUSINESS ADDRESS: STREET 1: 12603 SOUTHWEST FREEWAY STREET 2: SUITE 315 CITY: STAFFORD STATE: TX ZIP: 77477 BUSINESS PHONE: 2815659010 MAIL ADDRESS: STREET 1: 12603 SOUTHWEST FREEWAY STREET 2: SUITE 315 CITY: STAFFORD STATE: TX ZIP: 77477 FORMER COMPANY: FORMER CONFORMED NAME: ACCELERATION CORP DATE OF NAME CHANGE: 19870814 10-Q 1 ACCEL INTERNATIONAL CORPORATION - 3/31/99 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED MARCH 31, 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.) 12603 S.W. FRWY, STE. 315, STAFFORD, TEXAS 77477 - ------------------------------------------- ---------- (Address of principal executive offices) (Zip Code) 281-565-8010 ------------------------------- (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 April 30, 1999, there were 8,554,966 shares of Common Stock, $.10 par value per share outstanding. 2 COMMISSION FILE NO. 0-8162 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES MARCH 31, 1999 INDEX
PART I -- FINANCIAL INFORMATION Item 1. Financial Statements Page ---- Unaudited Consolidated Balance Sheets (March 31, 1999 and December 31, 1998) 3 - 4 Unaudited Consolidated Statements of Operations (Three months ended March 31, 1999 and 1998) 5 Unaudited Consolidated Statements of Common Stockholders' Equity (Three months ended March 31, 1999 and year ended December 31, 1998) 6 Unaudited Consolidated Statements of Cash Flows (Three months ended March 31, 1999 and 1998) 7 Notes to Unaudited Consolidated Financial Statements 8 - 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 - 16 PART II -- OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K 16 Signature 16
2 3 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS
March 31, December 31, 1999 1998 ------------ ------------ (Thousands of dollars) ASSETS Investments: Investments available for sale, at fair value: Fixed maturities (cost: 1999--$27,564,000; 1998--$29,953,000) $ 27,673 $ 30,343 Short-term investments (cost: 1999--$1,912,000; 1998--$1,204,000) 1,912 1,204 Other invested assets 4,725 4,747 ------------ ------------ 34,310 36,294 Cash 822 2,587 Receivables: Premiums in process of transmittal, less allowance (1999--$200,000; 1998--$200,000) 7,069 7,975 Amounts due from reinsurers 42,592 36,877 Amounts due from former subsidiaries 13 65 ------------ ------------ 49,674 44,917 Accrued investment income 259 282 Prepaid reinsurance premiums 3,627 5,913 Deferred policy acquisition costs 2,404 2,803 Equipment--at cost, less accumulated depreciation (1999--$1,737,000; 1998--$1,673,000) 443 474 Leasehold improvements, less accumulated amortization (1999--$16,000; 1998--$13,000) 22 24 Receivable from sale of discontinued and disposed of operations 703 703 Other assets 416 621 ------------ ------------ 7,874 10,820 ------------ ------------ Total assets $ 92,680 $ 94,618 ============ ============
3 4 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED BALANCE SHEETS--(CONTINUED)
March 31, December 31, 1999 1998 ------------ ------------ (Thousands of dollars) LIABILITIES AND COMMON STOCKHOLDERS' EQUITY Policy Reserves and Liabilities: Unearned premium reserves $ 10,062 $ 12,449 Insurance claims 49,767 49,535 ------------ ------------ 59,829 61,984 Other Liabilities: Amounts withheld for others 2,182 2,118 Deferred reinsurance commissions 905 1,508 Amounts due reinsurers 5,575 3,583 Accounts payable and other liabilities 2,456 2,162 Payable to former subsidiaries -- 3 Current federal income taxes 172 159 ------------ ------------ 11,290 9,533 ------------ ------------ 71,119 71,517 ------------ ------------ Commitments and Contingencies -- Note E Redeemable Preferred Stock: Authorized shares--1,000,000; no issued or outstanding shares -- -- Common stockholders' equity: Common stock, $.10 par value Authorized shares (1999--15,000,000; 1998--15,000,000) Issued shares (1999--9,468,196; 1998--9,468,196) 947 947 Additional paid-in capital 32,659 32,659 Retained earnings (accumulated deficit) (5,155) (3,800) Less treasury shares at cost (1999--913,230; (6,962) (6,962) 1998--913,230) Accumulated other comprehensive income 72 257 ------------ ------------ Net common stockholders' equity 21,561 23,101 ------------ ------------ Total liabilities and common stockholders' equity $ 92,680 $ 94,618 ============ ============
See notes to unaudited consolidated financial statements. 4 5 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31, 1999 1998 ----------- ----------- (Thousands of dollars, except per share data) REVENUE: Gross premiums written $ 8,539 $ 13,791 Less reinsurance ceded 2,768 8,185 ----------- ----------- Net premiums written 5,771 5,606 (Increase) decrease in unearned premium reserves 102 (723) ----------- ----------- Premiums earned 5,873 4,883 Net investment income: Interest and dividends 475 664 Realized gains (losses) 1 (53) Equity in income of affiliated company (22) -- Other income 18 125 ----------- ----------- 6,345 5,619 ----------- ----------- BENEFITS AND EXPENSES: Loss and loss adjustment expenses 4,325 3,869 Commissions and selling expenses 1,711 2,211 Reinsurance expense recovery (772) (1,528) General and administrative 1,549 1,290 Taxes, licenses and fees 392 519 (Increase) decrease in deferred policy acquisition costs 399 (234) ----------- ----------- 7,604 6,127 ----------- ----------- INCOME (LOSS) BEFORE FEDERAL INCOME TAXES (1,259) (508) Federal income taxes: Current expense -- -- Deferred expense -- -- ----------- ----------- -- -- ----------- ----------- NET INCOME (LOSS) $ (1,259) $ (508) =========== =========== Earnings per common share--basic/assuming dilution: Net income (loss) $ (0.15) $ (0.06) =========== =========== Weighted average number of common shares outstanding 8,554,966 8,607,908 =========== ===========
See notes to unaudited consolidated financial statements. 5 6 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF COMMON STOCKHOLDERS' EQUITY (Thousands of dollars)
Retained Accumulated Additional earnings Common other Common paid-in (accumulated stock held comprehensive stock capital deficit) in treasury income Net ---------- ---------- ---------- ---------- ---------- ---------- Balances at December 31, 1997 $ 944 $ 32,610 $ 6,518 $ (6,599) $ 116 $ 33,589 Comprehensive income (loss): Net loss -- -- (10,451) -- -- (10,451) Other comprehensive income (loss), net: Change in unrealized appreciation on investment securities -- -- -- -- 141 141 ---------- ---------- ---------- ---------- ---------- ---------- Other comprehensive income -- -- -- -- 141 141 ---------- ---------- ---------- ---------- ---------- ---------- Comprehensive income (loss) -- -- (10,451) -- 141 (10,310) Change in valuation allowance for unrealized appreciation on investment securities -- -- 133 -- 133 Purchase of 115,810 shares as treasury stock -- -- -- (363) -- (363) Issuance of 3,900 shares of Common Stock under Common Stock Option Plan 3 49 -- -- -- 52 ---------- ---------- ---------- ---------- ---------- ---------- Balances at December 31, 1998 947 32,659 (3,800) (6,962) 257 23,101 Comprehensive income (loss): Net loss -- -- (1,259) -- -- (1,259) Other comprehensive income (loss), net: Change in unrealized appreciation on investment securities -- -- -- -- (185) (185) ---------- ---------- ---------- ---------- ---------- ---------- Other comprehensive income -- -- -- -- (185) (185) ---------- ---------- ---------- ---------- ---------- ---------- Comprehensive income (loss) -- -- (1,259) -- (185) (1,444) Change in valuation allowance for unrealized appreciation on investment securities -- -- (96) -- -- (96) ---------- ---------- ---------- ---------- ---------- ---------- Balances at March 31, 1999 $ 947 $ 32,659 $ (5,155) $ (6,962) $ 72 $ 21,561 ========== ========== ========== ========== ========== ==========
See notes to unaudited consolidated financial statements. 6 7 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31, 1999 1998 ----------- ----------- (Thousands of dollars) OPERATING ACTIVITIES: Net income (loss) $ (1,259) $ (508) Adjustments to reconcile net income (loss) to net cash (used in) provided by operating activities: Equity method investment, net 22 -- Change in premiums receivable 906 936 Change in accrued investment income 23 (77) Change in prepaid reinsurance premiums 2,286 1,524 Change in premium deposits held 64 (24) Change in unearned premium reserves (2,387) (14,668) Change in insurance claim reserves 232 2,834 Change in amounts due to and from reinsurers (3,723) (3,691) Change in other assets, other liabilities and accrued income taxes 561 (289) Accrual of discount on bonds (4) (7) Amortization of premium on bonds 8 17 Amortization of deferred policy acquisition costs 2,803 5,957 Policy acquisition costs deferred (2,404) (6,191) Reinsurance commissions earned (1,508) (4,412) Reinsurance commissions received 905 4,602 Provision for depreciation and amortization 65 56 Net realized gains (losses) on investments 1 (53) ----------- ----------- Net cash used in continuing operations (3,409) (13,994) Net cash provided by discontinued operations -- 39,756 ----------- ----------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES (3,409) 25,762 ----------- ----------- INVESTING ACTIVITIES: Sale of investments available for sale 4,453 5,641 Purchase of investments available for sale (2,777) (13,832) Other, net (32) (209) ----------- ----------- NET CASH (USED IN) PROVIDED BY INVESTING ACTIVITIES 1,644 (8,400) ----------- ----------- FINANCING ACTIVITIES: Repayment of notes payable -- (15,000) Issuance of common stock under stock option plan -- 9 Repurchase of treasury shares -- (306) ----------- ----------- NET CASH (USED IN) PROVIDED BY FINANCING ACTIVITIES -- (15,297) ----------- ----------- NET INCREASE (DECREASE) IN CASH (1,765) 2,065 Cash at beginning of period 2,587 1,589 ----------- ----------- CASH AT END OF PERIOD $ 822 $ 3,654 =========== ===========
See notes to unaudited consolidated financial statements. 7 8 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS MARCH 31, 1999 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, 1998. 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. The Company's investment in an affiliate owned more than 20 percent, but not in excess of 50 percent, is reported using the equity method. DESCRIPTION OF BUSINESS: ACCEL is an insurance holding company incorporated in Delaware. The Company is engaged in the underwriting and sale of property/casualty insurance products, concentrating on commercial lines of business. The Company offers various policies covering long-haul trucking, charter bus, and limousine fleets, as well as other specialized products tailored to other groups such as crane operators and gun dealers. The Company offers 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. ACCOUNTING ESTIMATES: In preparing the unaudited consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the date of the unaudited consolidated financial statements and revenues and expenses for the reporting period. Actual results could differ significantly from those estimates. The most significant estimates include those used in determining deferred policy acquisition costs and the liability for insurance claims. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. The estimates are continually reviewed and adjusted as necessary. Such adjustments are generally reflected in current operations. INVESTMENTS: The Company classifies its fixed maturity and equity securities as available for sale, therefore these securities are carried at fair value and the unrealized appreciation or depreciation is reported as a separate component of common stockholders' equity after giving effect to applicable income taxes. Short-term investments, which include U. S. Treasury securities, commercial paper and certificates of deposit are carried at fair value which approximates cost. The investment in USA Insurance Group, Inc., the parent company of Transportation Insurance Specialists, the Company's general agent, in which the Company has a 25% interest is accounted for utilizing the equity method where the cost of the investment is adjusted for the Company's proportionate share of the investee's undistributed earnings or losses as well as any dividends paid by the investee. Amortization of the amount by which the investment in USAIG exceeds the Company's share of the underlying net assets is being amortized on the straight-line method over 10 years. 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. 8 9 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE A--SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) 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: Leasehold improvements are carried at cost less accumulated amortization. Amortization is provided using the straight-line method over the term of the five year lease. PREMIUM INCOME RECOGNITION AND UNEARNED PREMIUM RESERVES: Unearned premium reserves on property and casualty products are calculated on the pro rata method. INSURANCE CLAIMS: The liabilities for insurance claims are determined using statistical analyses and represent estimates of the ultimate net cost of all reported and unreported claims that are unpaid at year end. Considerable variability is inherent in such estimates and actual results will likely differ from those estimates. FEDERAL INCOME TAXES: ACCEL and its subsidiaries file a consolidated federal income tax return. The provision for income taxes is based on income for financial reporting purposes, after permanent differences. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under this method, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce the deferred tax assets to the amounts expected to be realized. REINSURANCE: Reinsurance premiums ceded and reinsurance recoveries on 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 PER COMMON SHARE: Net income (loss) per common share is computed using the weighted average number of common shares outstanding during the period. RECLASSIFICATIONS: Certain amounts in the 1998 unaudited consolidated financial statements have been reclassified to conform with the 1999 presentation. 9 10 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE B -- SALE OF AUTO AFTERMARKET GROUP Effective December 31, 1997, ACCEL sold 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 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 agreements provided that within 125 days after the closing, the sales price for the Target Corporations would be decreased or increased by the amount, if any, by which the Target Corporations' combined GAAP stockholder's equity as of December 31, 1997 was less than or greater than, respectively, $31.6 million. As of December 31, 1997, the combined GAAP stockholder's equity of the Target Corporations was $32.1 million which resulted in a net sales price of approximately $41 million. The "Receivable from sale of discontinued and disposed of operations" ("Receivable from sale") of approximately $.7 million represents the difference between the net sales price of $41 million and the initial sales price of $40.5 million and approximately $.2 million related to the cession of vehicle extended service contract reserves to Lyndon Property. The Company has filed a legal action seeking declaratory judgment relief relating to disagreement with Lyndon concerning the exact amount of the net sales price. Accordingly, the receivable from sale may be more or less than $.7 million. The Company believes the resolution of the matter will not have a material adverse effect on the financial condition or results of operations of the Company. 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. NOTE C--REINSURANCE The Company has entered into reinsurance contracts associated with its property and casualty lines which transfer a percentage of risk to the related reinsurer. The Company also has agreements which transfer risks after a predetermined loss amount has been reached. Unearned premium reserves associated with these agreements at March 31, 1999 and December 31, 1998 are $3.6 million and $5.9 million, respectively, and the liability for insurance claims is $33.9 million and $33.4 million at March 31, 1999 and December 31, 1998, respectively. The following data summarizes certain aspects of the Company's reinsurance activity for 1999 and 1998. Premiums written and earned in 1999 and 1998 are summarized as follows:
Three Months Ended March 31, 1999 1998 ----------------------- ------------------------ Written Earned Written Earned --------- --------- --------- --------- (Thousands of dollars) Direct $ 6,848 $ 9,032 $ 12,696 $ 10,892 Assumed 1,691 1,894 1,095 926 Ceded (2,768) (5,053) (8,185) (6,935) --------- --------- --------- --------- Net $ 5,771 $ 5,873 $ 5,606 $ 4,883 ========= ========= ========= =========
Loss and loss adjustment expenses incurred in 1999 and 1998 are summarized as follows:
Three Months Ended March 31, 1999 1998 --------- --------- (Thousands of dollars) Direct $ 8,923 $ 8,472 Assumed 1,004 571 Ceded (5,602) (5,174) --------- --------- Net loss and loss adjustment expenses $ 4,325 $ 3,869 ========= =========
10 11 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE D--SEGMENT INFORMATION The Company operates primarily in the property/casualty insurance industry within the United States. 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, income (loss) before income taxes and identifiable assets by segment are summarized as follows:
Three Months Ended March 31, 1999 1998 --------- --------- (Thousands of dollars) Revenue: Property/Casualty $ 6,341 $ 5,391 Corporate 4 228 --------- --------- Total $ 6,345 $ 5,619 ========= ========= Income (loss) before income taxes: Property/Casualty $ (938) $ (505) Corporate (321) (3) --------- --------- Total $ (1,259) $ (508) ========= =========
March 31, December 31, 1999 1998 --------- --------- (Thousands of dollars) Identifiable assets: Property/Casualty $ 86,228 $ 87,934 Corporate 6,452 6,684 --------- --------- Total $ 92,680 $ 94,618 ========= =========
NOTE E--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, except that recent developments in the long-term care insurance litigation discussed below involve one or more theories of damages which if decided against defendants, including the Company, might ultimately prove material. 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 11 12 ACCEL INTERNATIONAL CORPORATION AND SUBSIDIARIES NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(CONTINUED) NOTE E--COMMITMENTS AND CONTINGENCIES --(CONTINUED) 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 to reargue. No decision has yet been rendered on the motion to renew. The Superintendent also filed a Notice of Appeal of the Court's Decision and Order dismissing the complaint. ANIC will continue to defend vigorously against the Superintendent's lawsuit. In November 1997, suit 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 regarding an alleged promise not to raise premiums "too much". Said long-term care insurance business was entirely reinsured to and assumed by Commonwealth Life Insurance Company ("Commonwealth") of Louisville, Kentucky, in 1991. The matter was tendered to Commonwealth to defend on behalf of ALIC pursuant to the applicable provisions of the reinsurance agreement between the parties, and Commonwealth also tendered the matter back to ALIC. The allegations of fraud and misrepresentation at the time of sale of the long-term care policies are based on alleged statements that premiums "would not be raised too much" even though the policy on its face stated that the "Company reserves the right to increase premiums at anytime." Moreover, premiums were increased subsequent to the reinsurance of the business to Commonwealth by ALIC, and the increases appear to have been approved by the proper regulatory authority. Plaintiffs amended their complaint to set forth allegations that the policies were intentionally underpriced and/or poorly underwritten, so as to justify premium increases and induce policy lapses. The Company and Commonwealth are cooperating to vigorously defend the matter. Joint motions to dismiss and to strike the class action allegations were filed in the U.S. District Court, District of North Dakota, Southeastern Division. The Court acted to deny all pending motions without prejudice to refiling until development of the record occurred. The parties have undertaken to conduct discovery to develop the record as directed by the Court. Based thereon, the Company filed a motion for summary judgment. On March 16, 1999, the Court issued a Memorandum and Order denying Defendant's motion for summary judgment and granting Plaintiff's motion for class certification. The Company petitioned for interlocutory appeals of both rulings which were subsequently denied. These recent developments involve one or more theories of damages which if decided against defendants, including the Company, might ultimately prove material although management cannot currently estimate a range of potential loss. At a recent status conference on the matter, a definition of the class was established by the Court which reduced the membership of the class by approximately 50 percent and the Court fixed October 4, 1999 as the trial date. In the event the plaintiffs prevail, the Company believes that it has a basis on which to seek indemnification from Commonwealth. On March 3, 1999, a complaint was filed in the Circuit Court of Pinellas County, Florida to represent a class of all Florida purchasers of long-term care insurance sold by ALIC. The allegations are similar to the allegations in the North Dakota litigation above. No response to the complaint has yet been filed by the Company. The Company intends to deny any liability therein and to continue to defend its interests vigorously in these matters. 12 13 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating Results for the Three Months Ended March 31, 1999 and 1998 OPERATING RESULTS The loss before federal income taxes for the three months ended March 31, 1999 was $1.3 million compared to a loss of $508,000 for the same period in 1998. Although the Company's dollar loss was greater in 1999 than in 1998, the loss ratio improved as discussed further below. Because the earned premium for 1999 was greater, the loss ratio, even though lower than in 1998, when combined with expenses produced a higher dollar net loss. The Company's continuing product lines, including commercial auto and other niche products, produced a positive underwriting margin in the first quarter of 1999 of approximately $.1 million while net investment income contributed $475,000. These contributions were primarily offset by general and administrative expenses of $1.5 million and taxes, licenses and fees other than premium taxes of $.2 million. The Company's commercial auto program produced $7.7 million of gross premiums in the first quarter of 1999 compared to $10.9 million in the first quarter of 1998. This decrease was attributable to certain types of commercial auto insurance which the Company is no longer writing, including large fleets, paratransit vehicles and business in under-performing territories. The Company is focusing its ongoing efforts in commercial auto on insuring charter buses and small fleets which the Company defines as fleets of 1 to 25 vehicles. The net loss and loss adjustment expense ratio was 73.6% for the first quarter of 1999 as compared to 79.2% for the same period in 1998. This improvement in the loss ratio reflects that the underwriting actions taken in the fourth quarter of 1998 to discontinue writing large fleets, paratransit and business in under-performing territories are beginning to have a favorable impact on the Company's loss ratio. Gross premiums for the first quarter of 1999 included $.1 million of vehicle extended service contract business (which was fully ceded) compared to $2.5 million in the same period in 1998. Excluding the fully ceded vehicle extended service contract business, commissions and selling expenses as a percent of gross premiums were comparable between 1999 and 1998. Reinsurance expense recoveries decreased $.8 million or 49.5% in 1999 as compared to 1998 due to the fact that the Company negotiated a lower reinsurance premium rate by removing the reinsurance ceding commission clause from its reinsurance contracts. Therefore, the Company's deferred reinsurance commissions and reinsurance expense recoveries decreased in 1999 as compared to 1998. The Company's general and administrative expenses increased by $259,000 or 20.1% in the first three months of 1999 compared to the same period in 1998. This increase was largely due to fluctuations in several expense items, including an increase in guaranty association expenses of $112,000, primarily consisting of payments to one state and the inclusion in 1998 of a benefit totaling $79,000 related to reimbursement of operating costs from another insurer for shared services which was non-recurring in 1999. The Company adopted the reporting requirements of Statement of Position ("SOP") 97-3, Accounting by Insurance and Other Enterprises for Insurance-Related Assessments, in the first quarter of 1999. The effect of adopting SOP 97-3 on net income was immaterial. The change in deferred policy acquisition costs from an increase of $.2 million in the first quarter of 1998 to a decrease of $.4 million for the same period in 1999 was consistent with the decrease in gross premium writings as amortization of the asset exceeded new additions. REVENUE Gross premium writings for the first quarter of 1999 were $8.5 million compared to $13.8 million for 1998. Premiums written decreased by $2.8 million for the new property and casualty programs and decreased $2.4 million for the vehicle extended service contract program (which is fully ceded to Lyndon Property). Net premium earned was $5.9 million and $4.9 million for the first quarter of 1999 and 1998, respectively. The increase in 1999 compared to 1998 was primarily due to the change in the Company's retention under its reinsurance contracts. As of January 1, 1999, the Company increased its loss retention to $250,000 from the previous level of $100,000 which had the effect of ceding less premium to the reinsurers thereby increasing the Company's premiums earned over the underlying policy periods. The first quarter of 1999 represented the first quarter the additional premiums retained by the Company earned for the Company's benefit as opposed to earning for the reinsurer's benefit. The increase in net premium earned from 1998 to 1999 was also due to the completion of the earnings cycle in the first quarter of 1999 for policies written in 1998 which have since been non-renewed or cancelled as discussed previously. 13 14 STRATEGIC PARTNERSHIP The Company's Board of Directors has engaged Advest, an investment banking firm, to assist the Company in finding a strategic partner or purchaser for itself or its insurance subsidiaries, with an eye to enhancing overall shareholder value. LIQUIDITY AND CAPITAL RESOURCES The Company's cash flows from operations have generally been adequate for its current operating needs. The Company's long haul trucking and charter bus business generally is written for a term of one year with the casualty claim-related liabilities extending beyond that period. The Company'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 "available for sale" fixed maturity securities at March 31, 1999 and December 31, 1998 included 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 March 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 the Ohio Department of Insurance ("Ohio Department"). Based on this regulation, ANIC would require Ohio Department approval to pay any dividend to ACCEL during 1999. 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. Effective April 1, 1998, the Company purchased a 25% interest in the common stock of USA Insurance Group, Inc., the parent company of Transportation Insurance Specialists, the Company's general agent, for $5 million. This investment is included in other invested assets and is accounted for using the equity method. Amortization of the amount by which the investment in USAIG exceeds the Company's share of the underlying net assets is being amortized on the straight-line method over 10 years. 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. 14 15 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 is unable at this time to determine what impact, if any this project will have on the statutory surplus of ANIC. YEAR 2000 CONSIDERATION The Company is aware of the issues associated with the programming code in existing computer systems as the millennium (Year 2000) approaches. The Company's plan for assessment and renovation of these issues is grouped by hardware, system and operating software, application system software, end-user decision support software, telecommunications, office (non-information technology) systems, service provider relationships and business partner relationships. Within each grouping, components representing mission-critical operations to the Company have been prioritized. Hardware, operating software, application software, telecommunications, and key business partner relationships necessary to conduct the basic business of the Company have progressed beyond the renovation phase and are being validated or implemented. Success to date is demonstrated in the fact that throughout the first quarter of 1999, the Company has processed policies with expiration dates beyond the end of the century. Additionally, the Company is performing final assessments of supportive components within each group to verify that normal life cycles and third party provider efforts have matured to compliance levels. The Company expects little renovation will be required from this phase other than completion of its general ledger system implementation which is scheduled to be completed by the end of the second quarter of 1999. Since January 1996, the Company has incurred approximately $145,000 in costs associated with the Year 2000 project. The Company expects to incur approximately $20,000 in remaining costs prior to the project's anticipated completion by the end of the second quarter of 1999. Continual contact and assessment of the Company's key partners and vendors will continue throughout 1999 and early 2000 to insure readiness is maintained. Management is in constant appraisal of the project status and is supportive and committed to successful completion. Based on the Company's current state of readiness and project progress, management has determined that the effect on the Company's financial condition and earnings is not material. Should any of the Company's benchmarks be compromised from the planned completion timetables, the Company has contingency plans in the form of contractual resource relationships, which will be activated to accelerate the delinquent task. 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. 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. 15 16 Significant interest rate risk sensitive instruments as of March 31, 1999 were:
TOTAL FAIR 1999 2000 2001 2002 2003 Thereafter TOTAL VALUE - ---------------------------------------------------------------------------------------------------------------------- (Millions of dollars) INVESTMENTS IN FIXED MATURITY SECURITIES Principal Amount $2.1 $3.9 $7.5 $7.9 $3.6 $2.3 $27.3 $27.7 Book Value 2.1 3.9 7.6 7.9 3.7 2.4 27.6 Average Interest Rate 6.8% 6.9% 6.5% 6.6% 6.4% 6.7% 6.6% 6.2% SHORT-TERM INVESTMENTS Principal Amount $1.9 -- -- -- -- -- $1.9 $1.9 Book Value 1.9 -- -- -- -- -- 1.9 Average Interest Rate 4.7% -- -- -- -- -- 4.7% 4.7%
PART II. OTHER INFORMATION ITEM 6. Exhibits and Reports on Form 8-K (b) No reports on Form 8-K have been filed by the Registrant during the quarter ended March 31, 1999. 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 DATED: May 14, 1999 BY: /s/ Cindy Moore ------------------ ---------------------------- Cynthia A. Moore Senior Vice President, Chief Financial Officer and Treasurer* * Ms. Moore has been duly authorized to execute the report on behalf of the Registrant. 16 17 INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION - -------- ----------- 27 Financial Data Schedule
EX-27 2 FINANCIAL DATA SCHEDULE
7 This schedule contains summary information extracted from ACCEL International Corporation's March 31, 1999 Form 10-Q and is qualified in its entirety by such financial statements. 3-MOS DEC-31-1999 JAN-01-1999 MAR-31-1999 27,673 0 0 0 0 0 34,310 822 0 2,404 92,680 49,767 10,062 0 0 0 0 0 947 0 92,680 5,873 475 1 18 4,325 399 2,880 (1,259) 0 (1,259) 0 0 0 (1,259) (0.15) (0.15) 0 0 0 0 0 0 0
-----END PRIVACY-ENHANCED MESSAGE-----