-----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, HZJPpZuRwc1Pd6tQNDTc8b8KqDfLWy1KJucvsb2SGDxnopKYyExnjvMeTfEpRHWF o3/tDUz7z0rjq3s5Xguajg== 0000889812-96-000317.txt : 19960402 0000889812-96-000317.hdr.sgml : 19960402 ACCESSION NUMBER: 0000889812-96-000317 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960401 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: US CAPITAL GROUP INC CENTRAL INDEX KEY: 0000807906 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 133357749 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 000-15373 FILM NUMBER: 96543249 BUSINESS ADDRESS: STREET 1: 7 CAMBRIDGE DRIVE CITY: TRUMBLE STATE: CT ZIP: 06611 BUSINESS PHONE: 2033731006 MAIL ADDRESS: STREET 1: 7 CAMBRIDGE DR CITY: TRUMBULL STATE: CT ZIP: 06611 FORMER COMPANY: FORMER CONFORMED NAME: PAN ATLANTIC INC DATE OF NAME CHANGE: 19920703 FORMER COMPANY: FORMER CONFORMED NAME: PAN ATLANTIC RE INC DATE OF NAME CHANGE: 19890814 10-K 1 ANNUAL REPORT UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark one) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED) For the fiscal year ended December 31, 1995. OR - --- 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 0-15373 U.S. CAPITAL GROUP INC. (Exact name registrant as specified in its charter) Delaware 13-3357749 (State of other jurisdiction of Incorporation) (I.R.S. Employer Identification No.) c/o U.S. Capital Insurance Company Two Manhattanville Rd., Purchase, N.Y. 10577- 2118 Tel: (914) 694-4757 Securities registered pursuant to Section 12(g) of the Act: Title of Class Name of Exchange on Which Registered Common Stock, $.10 par value OTC Bulletin Board 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 __ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K, or any amendment to this Form 10-K. __ The aggregate market value on March 27, 1995 of the voting stock held by non-affiliates of the registrant was approximately $181,000. There were 560,546 shares outstanding of the Registrant's Common Stock, $.10 par value as of March 25, 1995. DOCUMENTS INCORPORATED BY REFERENCE (to the extent set forth in the part indicated) Portions of Registrant's Proxy Statement for the Annual Meeting of Shareholders scheduled to be held on May 22, 1996 are incorporated by reference in Parts I and III. Definitive copies of said Proxy Statement will be filed with the Securities and Exchange Commission within the period required by the Instructions to Form 10-K. U.S. CAPITAL GROUP INC. Table of Contents PAGE ITEM NUMBER - ---- ------ PART I 1. Business....................................................... 2 2. Properties..................................................... 14 3. Legal Proceedings.............................................. 14 4. Submission of Matters to a Vote of Security Holders............ 15 PART II 5. Market for the Registrant's Common Stock and Related Stockholder Matters............................................ 16 6. Selected Financial Data........................................ 17 7. Management's Discussion and Analysis of Financial Condition and Results of Operations...................................... 18 8. Financial Statements and Supplementary Data.................... 23 9. Changes in Accountants and Disagreements with Accountants on Accounting and Financial Disclosure............................ 23 PART III 10. Directors and Executive Officers............................... 24 11. Executive Compensation......................................... 24 12. Security Ownership of Certain Beneficial Owners and Management. 24 13. Certain Relationships and Related Transactions................. 24 PART IV 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K........................................................ 25 Signatures...................................................... 27 PART I Item 1. Business-- Recent Developments. - -------------------- In December 1995, U.S. Capital Group Inc. ("USCG") relocated its principal subsidiary, U.S. Capital Insurance Company, to Two Manhattanville Road, Purchase, New York 10577-2118. On November 9, 1995 USCG and its subsidiaries entered into a settlement agreement with Republic Insurance Company ("Republic") in order to settle the various disputes between the parties ("the Settlement"). These disputes and certain unfavorable arbitration awards were referenced in USCG's 10K for the fiscal year ended December 31, 1994 at Note I to the financial statements. The Settlement provides for a restructuring of the complex business relationship between the parties. This matter is further discussed below at "Item 3. Legal Proceedings" at page 14 and at "Note I" to the "Notes to the Consolidated Financial Statements." History. - ------- USCG and its subsidiaries (collectively the "Company") is comprised of property and casualty insurance and reinsurance companies, reinsurance underwriting services companies, and a computer software company, operating in the United States, Bermuda, and Europe. In 1987, the Pan Atlantic companies became subsidiaries of U.S. Capital Group, Inc. which then sold common shares of the Company in a public offering. In 1988 and 1989, management implemented a series of changes in the Company's underwriting operations and redirected the focus of the Company's resources. The changes included the commencement of the Company's private passenger automobile and commercial lines insurance operations in New York; a diminished role for reinsurance underwriting, and in 1989, the sale of the Company's subsidiaries in Ireland and the cessation of underwriting in the U.K. market. General Description of Business. - -------------------------------- The Company's principle subsidiary, U.S. Capital Insurance Company ("USCIC"), is predominately a private passenger automobile insurer. In 1995, USCIC commenced underwriting some commercial automobile, and a minimal amount of commercial liability and property insurance. USCIC mainly writes in the states of New York, California, and Louisiana. Private Passenger Automobile-- USCIC writes private passenger automobile liability and physical damage insurance in the states of New York and California. In New York, USCIC offers private passenger automobile policies to the preferred driver for both liability and physical damage coverage, and also for liability coverage alone. The program in California targets the sub-standard driver, who typically will have up to 4 points on their motor vehicle report. USCIC is also required, under Proposition 103, to offer competitive insurance on the "good driver." Physical damage only policies are also available. USCIC is subject to receiving assignments from the New York and California assigned risk pools, which are based upon USCIC's percentage of total automobile writings in the particular state. Commercial Automobile Liability-- USCIC's underwrites commercial automobile liability and physical damage policies in New York, Louisiana, and California. Coverage is provided generally to small to medium sized trucking firms, delivery trucks for both wholesalers and retailers, and service vehicles for contractors with a traveling radius of no more than 500 miles. No long haul trucking is accepted. Commercial Multiple Peril-- USCIC's commercial multiple peril program offers coverage to small to medium sized residential, service and retail businesses in the state of New York. Other Liability-- USCIC underwrites general liability exposures associated with trucking terminals in conjunction with its commercial automobile program to cover the incidental public liability exposure in the states of California, Louisiana and New York. For some years, USCIC has offered asbestos abatement liability policies to small contractors specializing in asbestos abatement in New York, Pennsylvania, Virginia, Florida and Delaware. The policies cover premise and job site liability, products and completed operations, as well as personal and advertising injury, fire damage, and medical expenses. However, this program is winding down as the need for asbestos abatement and the related coverage recedes. A USCIC program in California offers general liability coverage to small artisan contracting firms, usually with three or four employees, which perform mostly maintenance work. USCIC underwrites a professional liability policy for lawyers and real estate agents. Coverage is offered to law firms with ten or fewer lawyers, in Michigan, Illinois, Wisconsin, and Ohio. The real estate errors and omissions liability policy provides coverage for claims arising out of a wrongful act in rendering professional services. The policy is written for firms with less than 20 licensees, located in Florida, Illinois, Michigan and Wisconsin. Surety-- In March, 1994, USCIC discontinued offering surety bonds to small contractors, and has no plans to re-enter this line of business. The following tables present the gross premiums written and the net premiums written with respect to the principal risks insured by USCIC for the years indicated: Gross Premiums Written (dollars in millions) Year Ended December 31, ---1995--- ---1994--- ---1993--- Amt. % Amt. % Amt. % ----- ---- ----- ---- ----- ---- Private Passenger Automobile........ $42.0 64% $18.1 71% $29.5 81% Commercial Automobile............... 20.8 31 5.8 23 2.8 8 Commercial Multiple Peril........... .4 1 .2 1 -- -- Other Liability..................... 1.9 3 1.0 4 1.7 5 Surety.............................. -- -- .3 1 1.7 5 Miscellaneous Lines................. .4 1 -- -- .3 1 ----- ---- ----- ---- ----- ---- $65.5 100% $25.4 100% $36.0 100% ===== ==== ===== ==== ===== ==== Net Premiums Written (dollars in millions) Year Ended December 31, ---1995--- ---1994--- ---1993--- Amt. % Amt. % Amt. % ----- ---- ----- ---- ----- ---- Private Passenger Automobile........ $26.0 54% $18.1 74% $29.5 86% Commercial Automobile............... 19.5 41 5.1 21 2.5 7 Commercial Multiple Peril........... .3 1 .1 1 -- -- Other Liability..................... 1.5 3 .8 3 1.1 3 Surety.............................. (.1) -- .3 1 1.3 4 Miscellaneous Lines................. .5 1 -- -- -- -- ----- ---- ----- ---- ----- ---- $47.7 100% $24.4 100% $34.4 100% ===== ==== ===== ==== ===== ==== Rating. - ------- USCIC currently has a "B+" ("Very Good") rating as determined by A.M. Best Rating Service, Property/Casualty 1995 Edition ("Best's"), which is Best's third highest rating. Best's 1996 ratings have not been published, however management is anticipating USCIC's rating to be down graded as a result of the decrease in surplus reflected in the December 31, 1995 statutory statement. The Best's rating is based upon factors of concern to policyholders and should not be considered an indication of the degree or lack of risk involved in an equity investment in an insurance group. Competition. - ------------ The insurance business is highly competitive, and USCIC competes with numerous major insurance companies. These include local independent companies and subsidiaries or affiliates of established worldwide insurance companies. Competition in the types of property and casualty business in which USCIC engages is based upon many factors. These factors include perceived overall financial strength, absolute size, premiums charged, limits capacity, Best's ratings, services offered, underwriting expertise and quality of claims management. The number of jurisdictions in which an insurance company is licensed to do business is also a factor. Regulation. - ----------- USCIC is subject to regulation under the insurance statutes, including holding company statues, of jurisdictions in which it conducts business, including New York where USCIC is domiciled. Such statutes and regulations are designed to protect insurance companies and policyholders rather than stockholders. Among other areas of focus, insurance statutes and regulations applicable to USCIC serve to limit the amount of dividends that can be paid without prior regulatory notification and approval, impose restrictions on the amount and type of investments USCIC may hold, prescribe solvency standards that must be met and maintained, require filing of annual or other reports with respect to USCIC's financial condition and other matters, and provide for certain periodic examinations of its operations and financial condition. Recently, the insurance and reinsurance regulatory framework has been subject to increased scrutiny by the National Association of Insurance Commissioners (the "NAIC"), state legislatures and insurance regulators, and the United States Congress. State legislatures have considered or enacted legislation that alters and, in many cases, increases state authority to regulate insurance companies and holding company systems. The NAIC and state insurance regulators have been re-examining existing laws and regulations, with an emphasis on insurance company solvency and investment issues. In an ongoing effort to improve solvency regulation, the NAIC and individual states have enacted certain laws and changes regarding financial statements. Recently, the NAIC adopted a model risk-based capital act intended to provide a tool for regulators to evaluate the capital of insurers and reinsurers with respect to the risks assumed by them and to determine whether there is a perceived need for possible corrective action. The nature of any corrective action depends upon the extent of the calculated risk-based capital deficiency. Although the risk-based capital requirements have not been adopted by any state, in a related action the NAIC adopted a proposal that requires insurers to report the results of their risk-based capital calculations as part of 1994 and subsequent statutory annual statements that are filed with state regulatory authorities. USCIC's risk-based capital level, as calculated in accordance with the NAIC model act and included in its 1995 statutory annual statement, was within the average range of domestic insurance companies, thereby requiring no regulatory action. USCG is an insurance holding company. Under the holding company structure, USCG is dependent upon the ability of its principal operating subsidiary, USCIC, for transfer of funds in the form of tax reimbursements and cash dividends. Such transactions, including the payment of cash dividends by USCIC, are subject to restrictions imposed by New York Insurance Law. Generally, USCIC may pay cash dividends only out of its statutory earned surplus. However, the maximum amount of cash dividends that may be paid in any twelve month period without prior approval of the New York Insurance Department is the lesser of net investment income, or 10% of defined statutory surplus, as such terms are defined in the New York Insurance Law. USCIC did not pay out any dividends in 1995, 1994, or 1993. Underwriting. - ------------- Underwriting opportunities are presented to USCIC through brokers and producers for commercial risks, directly and through the independent producer system for personal lines such as automobile. Such opportunities are evaluated on the basis of a number of underwriting factors, including the past experience of the program and the level of exposure for a line of business. As part of the underwriting process, the Company's underwriters analyze the historical data, anticipate future loss levels, and estimate other costs which may not be evident in the historical experience. Programs under way are closely monitored as they progress. If projected profit levels are not reached, then a change in terms is proposed, or the Company may cease its involvement. USCIC performs on-site underwriting and claims reviews and audits of a producer or broker where deemed necessary to determine the quality of a producer's underwriting operation. Marketing. - ---------- USCIC uses several means of marketing, depending upon the line of business. The New York preferred private passenger automobile coverage is marketed principally directly to the public through radio advertising, print inserts, and direct mail. In California the policies are marketed through independent producers. USCIC's Commercial Automobile, Other Liability and Commercial Multiple Peril Programs are marketed through selected independent producers and brokers who are specialists in these lines of business. Claims. - ------- USCIC's claims philosophy stresses the prompt and equitable investigation, evaluation, and resolution of claims. This is accomplished through proactive technical and administrative supervision, training, and interactive consultation with underwriting personnel, which stress timely and accurate verification of coverage, determination of liability, and estimation of damages. This routinely involves coordination with independent appraisers, adjusters, investigators and attorneys. Reserves. - --------- USCIC establishes loss reserves for the maximum probable cost of all losses when notice of a claim is first received. Reserves are subject to adjustment as additional information is made available. The loss reserves include reserves for reported losses, incurred but not reported losses ("IBNR"), and loss adjusting expense ("LAE"). Reserves for IBNR losses generally are established on the basis of actuarial analysis of statistical information used to project ultimate losses. USCIC utilizes the services of an independent actuary to review the adequacy of USCIC's loss reserves. Loss reserves are only estimates at a point in time of what the insurance company expects to pay on losses, based upon facts and circumstances then known. The ultimate liability may exceed or be less than such estimates. Estimates are not precise insofar as, among other things, they are based upon predictions of future events and estimates of future trends in claim severity and frequency, and other variable factors, which include inflation, escalation of repair costs and medical expenses, the size of jury awards, and the content of judicial decisions. During the loss settlement period, which, in some cases, may last several years, additional facts regarding individual claims may become known. Accordingly, it can become necessary to refine and adjust the estimates of liability on a claim either upward or downward. Since USCIC writes lines of business that are relatively short tailed as compared with some other lines of business within the insurance industry, this potential adjustment is minimized. Even then, ultimate liability may exceed or be less than the revised estimates. The risk that adjustments to reserves will be required is greater during the formative period for relatively new programs in which USCIC currently operates. This is because the statistical basis for estimating reserves for such programs is inherently less reliable than the statistical basis for reserve estimations of a program with a longer loss history. USCIC regularly adjusts its reserves as necessary. Any upward adjustment in reserves will have an adverse effect on the Company's earnings and shareholders' equity. The table below provides a reconciliation of beginning and ending GAAP ("Generally Accepted Accounting Principles") loss and loss adjustment expense reserves, including IBNR, for the period 1993 through 1995. In 1993, the Company adopted SFAS No. 113, "Accounting for Reinsurance of Short-Duration and Long Duration Contracts." In accordance with this SFAS, the Company's reinsurance receivables, prepaid reinsurance receivables, and prepaid reinsurance premiums are reported as assets and are no longer netted against unearned premiums and the liability for losses and loss adjustment expenses. The Company did not, nor was it required to, restate prior years. USCG does not discount reserves. (Year Ended December 31) 1995 1994 1993 ---- ---- ---- (Dollars in thousands) Net Unpaid Losses and LAE at beginning of period.. $ 85,967 $ 93,036 $ 91,258 Add-- Provision for Losses and LAE for claims occurring in the current year.............................. 23,942 14,772 22,532 Increase in estimated Losses and LAE for claims occurring in prior years......................... 6,143 324 4,058 -------- -------- -------- Total............................................ 116,052 108,132 117,848 -------- -------- -------- Less-- Losses and LAE payments for claims occurring during: The current year................................. 13,056 8,768 14,223 Prior years...................................... 34,172 13,397 10,589 -------- -------- -------- Total............................................ 47,228 22,165 24,812 -------- -------- -------- Net Unpaid Losses and LAE at end of period........ 68,824 85,967 93,036 Reinsurance recoverable........................... 38,451 36,810 41,587 -------- -------- -------- Gross Unpaid Losses and LAE at end of period...... $107,275 $122,777 $134,623 ======== ======== ======== The Company believes, based upon currently available information, that USCG's reserves for Losses and LAE are adequate to cover ultimate net cost of Losses and LAE on reported and unreported claims. However, there can be no assurance that such estimates will prove to be adequate. To the extent that such estimates are not adequate, increases in reserves for losses arising from occurrences in prior years will be required, thereby adversely affecting the Company's future reported earnings and shareholders' equity. The table on the following page presents the development of USCG's domestic GAAP reserves from 1986 through 1995 for its United States insurance subsidiaries. Foreign insurance and reinsurance subsidiaries are not included since the statutory reporting requirements in their countries of domicile do not provide for reserve development analysis comparable to that required under statutory reporting in the United States. The top line of the table shows the reserves at the balance sheet date for each of the indicated years, and represents the estimated amounts of Losses and LAE for claims arising in the current and all prior years that are unpaid at the balance sheet date, including IBNR. The upper portion of the table shows the re-estimated amount of the previously recorded reserve, based upon experience as of the end of each succeeding year. The estimate may change as more information becomes known about the frequency and severity of claims from individual years. The cumulative redundancy or deficiency represents the aggregate change in the estimates over all prior years. The lower portion of the table shows the cumulative amounts paid, as of successive years, with respect to that reserve liability. In evaluating the information in the table on the following page, it should be noted that each amount includes the effects of all changes in amounts of prior periods. For example, if a Loss paid in 1988 in the amount of $150,000 was first reserved in 1986 at $100,000, the $50,000 deficiency (Loss minus original estimate) would be included in the cumulative deficiency in each of the years 1986-1987 shown in the table. This table does not represent accident or policy year development data. Conditions and trends that have affected development of reserves in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future deficiencies, based upon this table. U.S. CAPITAL GROUP AND SUBSIDIARIES DEVELOPMENT OF DOMESTIC GAAP RESERVES Year Ended December 31, 1995
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 ---- ---- ---- ---- ---- ---- ---- ---- ---- ---- Liability for Unpaid Loss and LAE 17,768 18,401 19,048 24,592 25,610 21,301 21,742 23,909 15,874 22,124 Liability Re-estimated as of: 1 Year Later 18,048 16,338 18,808 18,946 19,485 28,038 31,338 24,516 26,600 2 Years Later 21,154 18,358 18,254 19,900 27,458 30,644 31,569 31,583 3 Years Later 21,828 17,813 17,518 25,127 27,048 31,515 31,720 4 Years Later 20,827 19,167 18,787 24,473 27,662 33,201 5 Years Later 23,484 17,765 15,803 25,326 27,981 6 Years Later 20,643 17,913 15,904 25,068 7 Years Later 20,744 17,969 16,023 8 Years Later 20,768 18,140 9 Years Later 20,839 Cumulative Redundancy (Deficiency) (3,071) 261 3,025 (476) (2,371) (11,900) (9,978) (7,674) (10,726) ====== === ----- ----- ------- --------- ------- ------- -------- Cumulative Amount of Liability Paid through: 1 Year Later 4,303 4,081 2,522 4,733 5,798 12,603 10,052 8,461 4,685 2 Years Later 7,671 5,215 3,511 9,109 14,081 15,666 12,279 13,365 3 Years Later 8,201 8,726 7,316 19,019 14,580 17,371 14,121 4 Years Later 9,918 11,530 12,773 21,475 15,017 19,578 5 Years Later 12,189 15,728 11,100 22,434 15,800 6 Years Later 14,592 16,072 11,194 22,459 7 Years Later 14,614 16,361 11,355 8 Years Later 14,527 16,343 9 Years Later 14,505
Reinsurance of Primary Business. Insurance companies enter into reinsurance arrangements primarily to increase premium capacity, and to reduce and spread the risk of loss on insurance written. USCIC has reinsurance on its commercial liability lines of business and on its New York private passenger automobile liability and physical damage business. USCIC's reinsurance agreements are all written on a treaty basis. USCIC cedes its risk to reinsurers both through reinsurance brokers and directly. The ceding of risks underwritten by USCIC does not legally discharge USCIC from liability for any part of the risk reinsured, and USCIC will be required to absorb the full amount of the loss associated with the reinsured risk if the reinsurance company is unable to or fails to meet its reinsurance obligations for any reason. A Security Committee comprised of executive officers of USCIC is responsible for evaluating the financial condition of reinsurance companies prior to the commencement of underwriting activities, and at least annually thereafter. The security review process is administered in part by adhering to financial guidelines formulated to assess the reinsurers' ability to satisfy future claims obligations. All reinsurers are subject to ongoing evaluation to ensure that there have been no significant changes in their financial condition. In the case of reinsurance companies that either do not satisfy USCIC's financial guidelines or are in liquidation or rehabilitation proceedings, a reserve for actual and potential non-recovery is established, which includes a provision for paid and unpaid claims and claims expense, inclusive of IBNR claims. The reserve for non-recoveries is continually reviewed and updated to reflect current activity and developments. While reinsurance may vary by contract and by line of business, the following summarizes USCIC's maximum net retentions on any one claim: Gross Line Net Retention ---------- ------------- General Casualty Treaty $1,000,000 First $250,000 Commercial Property $4,000,000 Pro Rata $250,000 Other Liability $2,000,000 Pro Rata $250,000 Commercial Automobile $1,100,000 Maximum $250,000 The reinsurance on the New York Private Passenger Automobile book of business is a quota share of the business written after July 1, 1995 with 100% of the unearned premium reserve at July 1, 1995 being ceded to the reinsurer. The maximum reinsurance recoverable under this treaty is 130% of net ceded premiums written, inclusive of allocated loss adjusting expense, but not to exceed $21,500,000. Investments. Strategy and guidelines for the management of the investment portfolios of the Group and its subsidiaries are set by the Investment Committee. The Committee supervises the implementation of the guidelines by management and its outside investment advisors. The established guidelines and procedures are designed both to ensure compliance with applicable regulatory requirements and to provide flexibility to accommodate changes in market conditions. Regulatory compliance prescribes the type, quality and concentration of securities that are held in the portfolios of the licensed insurance subsidiaries. For the years ended December 31, 1995, 1994 and 1993, a substantial portion of USCG's investments were fixed income securities rated as "investment grade" by Moody's Investors Services. The following table provides certain information regarding types of investments and investment income. In 1993, the Company adopted SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities." In complying with the Statement, the Company has classified its 1995 1994 and 1993 investments into a category labeled "securities available for sale", which are adjusted to reflect market value. 1995 1994 1993 ---- ---- ---- (Dollars in thousand ,except percentages) Total investments at end of period.......... $84,656 $90,783 $ 108,999 ======= ======= ========= Investment income........................... $ 6,067 $ 6,714 $ 7,477 Realized investment gains................... 960 264 4,527 ------- ------- -------- Total investment income and realized gains.. $ 7,027 $ 6,978 $ 12,004 ======= ======= ========= Average annual yield on investments......... 6.92% 7.68% 6.86% ======= ======= ========= The table below sets forth at December 31, a summary of investments of USCG. (Dollars in thousands, except percentages)
1995 1994 1993 ---- ---- ----- TYPE OF INVESTMENTS: $ % $ % $ % ------- ---- ------- ---- -------- ---- U.S. Treasury & other government issues............ $18,075 22% $17,735 20% $ 24,798 23% Foreign governments............ 2,933 3% 2,000 2% 3,976 4% Corporate Securities........... 27,024 32% 30,411 33% 35,558 33% Mortgage-backed Securities.. 22,338 26% 16,322 18% 22,602 20% Equity securities.............. -- -- 631 1% 5,017 5% Short-term..................... 14,287 17% 23,684 26% 17,047 15% ------- ---- ------- ---- -------- ---- Total....................... $84,657 100% $90,783 100% $108,999 100% ======= ==== ======= ==== ======== ====
(Dollars in thousands except percentages)
1995 1994 1993 ---- ---- ----- MATURITIES ANALYSIS: $ % $ % $ % ------- ---- ------- ---- --------- ----- One year or less............... $15,313 18% $29,728 33% $ 18,439 18% Over one year through three years................. 7,509 9% 11,222 13% 11,285 11% Over three years through ten years................... 31,887 38% 22,708 25% 25,870 25% Over ten years................. 29,949 35% 26,494 29% 48,394 46% ------- ---- ------- ---- -------- ---- Total.................... $84,657 100% $90,152 100% $103,988 100% ======= ==== ======= ==== ======== ====
Employees. USCG employed 127 individuals at the end of 1995 at the Company's offices in Purchase and Medford, New York, and a staff of 7 individuals in Galway, Ireland. None of USCG's employees are represented by a labor union and USCG believes that its employee relations are good. Segmentation. Financial information relating to the types of business and services provided by the Company is included in "Note N" to the "Notes to the Consolidated Financial Statements". Executive Officers of the Registrant. The executive officers of the registrant are its directors who are employees of the registrant or its subsidiaries, with respect to whom information is incorporated herein by reference to the Notice of Annual Meeting of Stockholders and Proxy Statement for the May 22, 1996 Annual Meeting of Stockholders (the "1996 Proxy Statement"). Item 2. Properties-- In 1995 the business activities of USCG and its subsidiaries was conducted through leased office space located in White Plains, Purchase, and Medford, New York; Trumbull, Connecticut; and Galway, Ireland. No difficulty is anticipated in negotiating renewals on leases expiring or in finding other satisfactory space if warranted. Insurance company management is currently maintained at the company's Purchase, New York office. Item 3. Legal Proceedings-- On November 9, 1995 USCG and its subsidiaries entered into a settlement agreement with Republic Insurance Company ("Republic") in order to settle the various disputes between the parties ("the Settlement"). These disputes and certain unfavorable arbitration awards were referenced in USCG's 10K for the fiscal year ended December 31, 1994 at "Note I" to the "Notes to the Consolidated Financial Statements." The Settlement provides for a restructuring of the complex business relationship between the parties: the transfer to Republic of the control and administration of reinsurance policies bound in Republic's name by certain subsidiaries of USCG; the payment of a liability, carried by USCG of $5,400,000, over ten years without interest, the payment being secured by a pledge of all the shares of USCG's principal subsidiary, U.S. Capital Insurance Company, with the option to discharge this obligation at any time by payment of the net present value of the amount outstanding: the commutation and release of the reinsurance obligations of various insurance company subsidiaries of USCG to Republic, some of which are immediate and others of which are to be determined at a future date; the commutation and immediate release of all Republic's reinsurance obligations to USCG's subsidiaries; the payment by Republic and other entities as parties to the settlement of up to $3,340,698 to a USCG subsidiary; and the transfer to Republic of USCG's equity interest in GoldStreet Syndicate Corporation in the amount of $4,297,026. The Settlement provides further for a number of continuing obligations on behalf of USCG, the performance of which determine the extent and exact timing of the release from the arbitration awards referenced above as well as from certain other contractual and reinsurance obligations. See " "Note I" to the "Notes to the Consolidated Financial Statements." The Company or its subsidiaries are parties to various other lawsuits generally arising in the normal course of the Company's insurance, reinsurance and management businesses. The Company does not believe that the eventual outcome of any such litigation will have a materially adverse effect on the financial condition or business of the Company or its subsidiaries. The Company's subsidiaries are regularly engaged in the investigation and defense of claims arising out of its insurance and reinsurance business. Item 4. Submission of Matters to a Vote of Security Holders-- Not Applicable. PART II Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters--Market Information The common stock ($.10 par value) of USCG is traded through the OTC Bulletin Board under the symbol "USCG". As of March 27, 1996, there were 40 shareholders of record, which include 26 shareholders of record of USCG, and 14 shareholders of record of the predecessor Pan Atlantic Inc. who have not yet exchanged their shares for USCG certificates. Pursuant to a July 1993 stock split, one share of USCG was declared exchangeable for each four shares of Pan Atlantic Inc.. The Company had in excess of 250 beneficial shareholders. For the periods presented below, the high and low prices of the Common Stock were as follows: 1995 1994 ----------------- ---------------- HIGH LOW HIGH LOW ------ ------ ------ ------ First Quarter $3.00 $3.00 $8.38 $6.75 Second Quarter No Trades $7.63 $6.50 Third Quarter $4.12 $4.00 $7.25 $5.00 Fourth Quarter $3.50 $.75 $4.88 $2.00 Item 6. Selected Financial Data
Year Ended December 31, (in thousands except percentage and per share data) 1995 1994 1993 1992 1991 ---- ---- ---- ---- ---- INCOME STATEMENT DATA-- Net premiums written $48,462 $25,119 $34,308 $28,452 $19,699 ====== ====== ====== ====== ====== Earned premiums 37,533 21,554 35,445 27,446 20,998 Reinsurance service fees (99) 614 837 1,295 775 Other income 1,651 969 698 705 574 Investment income 6,067 6,714 7,477 6,946 8,157 Realized investment gains 960 264 4,527 4,181 1,098 Loss and loss adjustment expenses 30,086 15,096 26,590 23,382 17,439 Operating costs and expenses 25,530 15,337 22,230 21,991 19,432 Income (loss) before income taxes minority interests (9,504) (318) 164 (4,800) (5,269) Minority interest (6) 506 196 293 412 ------- ------- ------- ------- -------- Net Income (Loss) ($9,510) $ 188 $ 360 ($ 4,507) ($ 4,857) ======= ======= ======= ======== ======== PER SHARE DATA-- Net Income (Loss) ($16.97) $ .33 $ .63 ($ 7.92) ($ 8.54) ======= ======= ======= ======== ======== Number of shares of Common Stock outstanding 560,546 560,546 568,896 568,896 568,896 BALANCE SHEET DATA-- Investments and cash $ 84,657 $ 90,831 $109,011 $ 93,578 $ 94,514 Total assets $155,831 $193,259 $210,875 $155,625 $165,261 Reserves for unpaid losses and loss adjustment expenses $107,275 $122,777 $134,623 $ 91,258 $ 92,156 Bank note payable -- -- -- -- $ 1,077 Total stockholders' equity $ 6,016 $ 8,068 $ 18,200 $ 14,409 $ 16,702 CERTAIN GAAP FINANCIAL RATIOS-- Combined Ratio 117.5% 123.3% 131.0% 155.1% 152.7% Net Premiums Written to Surplus Ratio .88:1 .58:1 .67:1 .57:1 .37:1
Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-- Overview - -------- USCG is a holding company which, through its subsidiaries, engages in primary insurance underwriting, reinsurance underwriting, and a range of services to other insurance and reinsurance companies. Primary insurance underwriting is being generated by U.S. Capital Insurance Company ("USCIC"), which accounted for 98% of the USCG's earned premiums in 1995 and 90% of total revenues in 1995. The other Companies in USCG whose books of business are currently in run off are Pan Atlantic Investors Ltd. ("PAIL"), Pan Atlantic Insurance Company ("PAICO"), and Pan Atlantic Reinsurance Company, Ltd ("PARCO"). Consolidated net loss in 1995 amounted to $9.5 million or $16.97 per share, as compared to net income of $.2 million or $.33 per share in 1994 and net income of $.4 million or $.63 per share in 1993. Included in the $9.5 million net loss at year end 1995 is an approximately $13.4 million loss attributable to the recognition of the Settlement agreement. See "Note I" to the "Notes to the Consolidated Financial Statements". Primary Insurance Underwriting - ------------------------------ Written Premium USCIC has been predominately a New York private passenger automobile insurer. In 1995, USCIC's underwriting activities included commercial automobile, general liability, professional liability and property liability. USCIC mainly writes in the states of New York, California and Louisiana. Gross premiums written in 1995 were $65.5 million, as compared to $25.4 million in 1994 and $36.0 million in 1993. Net premium writings for those years were $47.7 million, $24.4 million and $34.4 million, respectively. The decrease in the premium volume in 1994 resulted primarily from the cancellation of an assumed auto program in Louisiana which, although profitable, had become too large for a principally direct writing company. USCIC's plan in 1995 was to replace the canceled Louisiana program with commercial business and with private passenger automobile insurance from independent producers. This change of business source is responsible for the volatility in USCIC's earned premium income, which increased in 1995 to $37.1 million after a decrease from $35.5 million in 1993 to $20.8 million in 1994. In 1995 earned premium increased to $37.1 million as premiums for non-standard automobile business in California increased by approximately $7.9 million. Additionally, the Company's non-standard private passenger automobile business in the state of Texas produced earned premiums of $3.1 million, as compared to $0.4 million in 1994. When gross premium volume in 1995 exceeded expectations, management reacted in the third and fourth quarter of 1995 by curtailing its business sources. This included ending the flow of business from all except one New York producer of private passenger automobile policies; curtailing USCIC's short term automobile rental program in New York; and ending the non-standard automobile program in Louisiana and Texas, and the small auto dealers and garage keepers program in California. Underwriting Results USCIC combined loss and expense ratio for 1995 was 110.8% as compared to 103.3% in 1994 and 114.7% in 1993. Statutory underwriting loss from operations was $7.6 million in 1995, $2.1 million in 1994 and $4.9 million in 1993. The 1995 underwriting loss from operations was due principally to adverse development on two programs in run-off since 1993 and 1994, and the Company's strengthening of its Incurred-But-Not-Reported ("IBNR") reserves by $7.1 million on a gross basis and $5.9 million on a net basis. Overall combined ratio was 7.5% over 1994, but was improved by 3.9% over 1993. The 16.5% increase in the loss ratio between 1995 and 1994 was offset by a 7.9% decrease in the underwriting expense ratio. The loss adjusting expense ratio decreased by approximately 1%. The loss and loss adjustment expenses incurred on a statutory basis as a percentage of earned premiums were 88.5% in 1995, 73.1% in 1994, and 86.7% in 1993. This significant increase in the loss and loss adjustment expense incurred ratio between 1995 and 1994 is a direct result of the adverse development on canceled programs of approximately $3.2 million and an increase in IBNR of approximately $5.9 million. Underwriting expenses increased $4.1 million in 1995, of which assigned risk expense accounted for $1.1 million. The balance of the increase is due to expenses incurred on the increased premium volume written by the Company in 1995, such as commissions and premium taxes. Investment Income - ----------------- USCG's investment portfolio generated net dividends and interest income of $6.1 million in 1995, compared to $6.7 million in 1994 and $7.5 million in 1993. The decrease is due primarily to lower interest rates in 1995 and the sale of securities valued at $9.2 million on an amortized cost basis, to meet operational needs in 1995. These figures do not include realized capital gains of $1.0 million in 1995, $0.3 million in 1994, and $4.5 million in 1993. At December 31, 1995, USCG's invested assets were distributed as follows: cash equivalents - 26%; Treasury issues - 24%; mortgaged backed issues - - 34%; foreign issues - 3%; corporate issues - 29%; and equities - 1%. The weighted average maturity of the portfolio was approximately 7.0 years; with a weighted average current yield of approximately 6.6%, as compared to 7.7% in 1994, and 7.5% in 1993. In 1993, USCG adopted SFAS Statement 115, "Accounting for Certain Investments in Debt and Equity Securities." In complying with the statement, USCG has classified its fixed maturity investments and its equity securities into a category entitled "securities available for sale." Such securities are adjusted to reflect market value. Unrealized investment gains and losses on securities available for sale are credited or charged directly to shareholders' equity, net of applicable tax provisions or credits. The net unrealized gain on securities available for sale was $1.7 million in 1995, as compared to an unrealized loss of $5.6 million in 1994, and an unrealized gain of $4.0 million in 1993. USCG does not purchase fixed maturity investments with a view to resale. Accordingly, the "available for sale" classification does not denote a trading account. Liquidity and Capital Resources-- - ------------------------------- USCG is a holding company, receiving cash principally through sales of equities, borrowings, and dividends from its subsidiaries, some of which are subject to dividend restrictions described in "Note L" to the "Consolidated Financial Statements". The ability of insurance and reinsurance companies to underwrite insurance and reinsurance is based upon maintaining liquidity and capital resources sufficient to pay claims and expenses as they become due. The primary sources of liquidity for USCG subsidiaries are funds generated from insurance and reinsurance premiums, investment income, commission and fee income, and proceeds from sales and maturities of portfolio investments. The principal expenditures are for payment of losses and loss adjustment expenses, operating expenses, and commissions. At December 31, 1995, USCG's total assets of $155.8 million were distributed as follows: 54.7% - cash and investments; 34.5% - receivables; and other assets - 10.8%. All of the subsidiaries maintain liquid operating positions and follow investment guidelines that are intended to provide for an acceptable return on investment while preserving capital and maintaining sufficient liquidity to meet their obligations. USCIC, the principal insurance underwriter, maintains a sufficient margin of capital and surplus to ensure its unimpaired ability to write insurance and assume reinsurance. Cash flow generated from (absorbed by) operations for 1995, 1994 and 1993 was $(16.7) million, $(8.9), and $7.2 million, respectively. Cash from all Company operations has been adequate to meet obligations and, at this time, is believed by management to be adequate for the foreseeable future. See "Item 3. Legal Proceedings" and "Note I" to the Consolidated Financial Statements". Federal Income Taxes-- - -------------------- The Company incurred net losses in 1995 which will carry forward as net operating losses to be utilized against future net income. As a result of an audit for federal income tax years through June 30, 1990, USCG received refunds of $262,000 and $594,000 in 1995 and 1996, respectively, for net operating loss carry backs to the tax year ended June 30, 1987. Equity in GoldStreet-- - -------------------- As of September 30, 1995, the company's minority interest in GoldStreet Syndicate Corporation was transferred to Republic. The results of GoldStreet's operations for the nine months ended September 30, 1995 are included in the Company's statement of operations, using the equity method of accounting. For the nine months ended September 30, 1995 and the years ended December 31, 1994, and 1993, the Company's equity in GoldStreet's net income was $(6,000), $506,000, and $196,000, respectively. Regulation-- - ---------- In its ongoing effort to improve solvency regulation, the National Association of Insurance Commissioners ("NAIC") and individual states have enacted certain laws and financial statement changes. The most recent activity was aimed at greater disclosure of an insurer's reliance upon reinsurance and changes in its reinsurance programs, and tighter rules on accounting for certain overdue reinsurance. The NAIC adopted a model risk-based capital act intended to provide a tool for regulators to evaluate the capital of insurers and reinsurers with respect to the risks assumed by them, and to determine whether there is a perceived need for corrective action. The nature of the corrective action depends upon the extent of the calculated risk-based capital deficiency. Although the risk-based capital requirements have not been adopted by any state, in a related action the NAIC adopted a proposal that requires insurers to report the results of their risk-based capital calculations as part of 1994 and subsequent statutory annual statements filed with the state regulatory authorities. USCIC and PAIL's risk-based capital level, as calculated in accordance with the NAIC model act and included in their 1995 statutory annual statements, were within the average range of domestic insurance companies, and thus do not indicate any need of corrective action. Impact of Inflation-- - ------------------- Property and casualty insurance premiums are established before the total losses and loss adjustment expenses, or the extent to which inflation may affect such expenses, are known. Consequently, USCG attempts, in establishing its premiums, to anticipate the potential impact of inflation. However, for competitive and regulatory reasons, USCG may be limited in raising its premium levels commensurate with anticipated inflation. In such an event USCG, rather than its insureds, would absorb inflation costs. Inflation also affects the rate of investment return on the investment portfolio, with a corresponding effect on the investment income. Recent Accounting Pronouncements-- - -------------------------------- The Company adopted SFAS No. 112, "Employers Accounting for Post Employment Benefits". This Statement requires employers to recognize an obligation for all benefits provided to former and inactive employees after employment but before retirement. Examples of these benefits include, but are not limited to, severance pay, continuation of health care benefits, and leaves of absence benefits. The adoption of this statement in 1994 did not have a material impact upon the financial statements of the Company. The FASB has issued Statement No. 114, "Accounting by Creditors for Impairment of a Loan". This statement requires that an impaired loan be measured on the basis of the present value of expected future cash flows, using the loans effective interest rate and Statement No. 118, "Accounting by Creditors for Impairment of a Loan - Income Recognition and Disclosures", which amends Statement No. 114 methods of recognizing interest income on impaired loans. Both of these Statements are effective for fiscal years beginning after December 15, 1994, and did not have a material impact on the financial statements of the Company. The Company adopted SFAS No. 119, "Disclosure about Derivative Financial Instruments and Fair Value of Financial Instruments". The adoption of this Statement in 1994 had no material impact on the financial statements of the Company, and the Company had no derivative activities to disclose. The Company also adopted the American Institute of Certified Public Accountants' Statement of Position 94-5, "Disclosure of Certain Matters in the Financial Statements of Insurance Enterprises" and 94-6, "Disclosures of Certain Significant Risks and Uncertainties." During 1995, the FASB issued Statement No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of", which requires that an impairment loss be recognized when the expected future cash flows resulting from the use of the asset is less than the carrying amount. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 allows companies to continue to account for their stock plans in accordance with APB Opinion 25 but encourages the adoption of a new accounting method based on the estimated fair value of employee stock options. Companies electing not to follow the new fair value based method are required to provide expanded footnote disclosures, including pro forma net income and earnings per share, determined as if the company had applied the new method. SFAS No. 123 is required to be adopted prospectively for its stock option plans in accordance with APB Opinion 25 and provide supplemental disclosures as required by SFAS No. 123, beginning in 1996. ITEM 8. Financial Statements and Supplementary Data. The Consolidated Financial Statements of USCG and its subsidiary companies appear on pages F-1 through F-30, attached. Unaudited quarterly financial data is included in Note O of the Consolidated Financial Statements. Other Supplementary Data required by Item 302 of Regulation S-K is not required under the related instructions, and therefore has been omitted. ITEM 9. Changes in Accountants and Disagreements with Accountants on Accounting and Financial Disclosure. Not Applicable. PART III ITEM 10. Directors and Executive Officers of the Registrant-- Information as to "Directors and Executive Officers of the Registrant" is incorporated by reference to the caption "Directors and Executive Officers" in the definitive proxy statement involving the election of directors and other matters (the "Proxy Statement") which USCG intends to file with the Commission pursuant to Regulation 14A under the Securities Exchange Act of 1934 not later than 120 days after December 31, 1995. ITEM 11. Executive Compensation-- Information as to "Executive Compensation" is incorporated by reference to the caption "Summary Compensation of Directors and Executive Officers" in the Proxy Statement. ITEM 12. Security Ownership of Certain Beneficial Owner and Management-- Information as to "Security Ownership of Certain Beneficial Owner and Management" is incorporated by reference to the caption "Security Ownership of Certain Beneficial Owners and Management" in the Proxy Statement. ITEM 13. Certain Relationships and Related Transactions-- Information as to "Certain Relationships and Related Transactions" is incorporated by reference to the caption "Summary Compensation of Executive Officers" and "Principal Stockholders" in the Proxy Statement. PART IV Item 14. Exhibits, Financial Statement Schedules, Reports on Form 8 - K. (a) Documents 1. Index to Financial Statements U.S. CAPITAL GROUP INC. and SUBSIDIARIES Reports of Independent Certified Public Accountants: BDO Seidman, LLP................................ F-1 Price Waterhouse................................ F-3 Consolidated Balance Sheets at December 31, 1995 and 1994....................... F-5 Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and 1993.................................... F-7 Consolidated Statements of Stockholders' Equity for the years ended December 31, 1995, 1994 and 1993.................................... F-8 Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and 1993.................................... F-9 Notes to Consolidated Financial Statements........ F-11 2. Index to Financial Statement Schedules SCH I Summary of Investments Other Than Investments in Related Parties at December 31, 1995...................... S-1 SCH II Condensed Financial Information of Registrant, for the years ended December 31, 1995, 1994 and 1993...... S-2 SCH III Supplementary Insurance Information for the years ended December 31, 1995, 1994 and 1993.................... S-8 SCH IV Reinsurance for the years ended December 31, 1995, 1994 and 1993....... S-9 SCH VI Supplementary Information Concerning Property and Casualty Insurance Operations for the years ended December 31, 1995, 1994 and 1993....... S-10 All other schedules of the consolidated financial statements required by Article 7 of Regulation S-X are not required under the related instructions or are inapplicable, and therefore have been omitted. 3. Index to Exhibits 3.1 Certificate of Amendment to the Restated Certificate of Incorporation of the Company and a complete copy of the Restated Certificate of Incorporation, as amended. 3.2 By-Laws of the Company, as amended. 21 List of Subsidiaries of the Company. 29 Information from reports furnished to state insurance regulatory authorities. Exhibit 3.2 is incorporated by reference to Registration Statement No. 33-10770 and Exhibit 3.1 is incorporated by reference to Form 10-Q filed by the Company for June 30, 1989. Exhibit 21 is filed herewith. Exhibit 29, "Information from reports furnished to state insurance regulatory authorities," is omitted herefrom as such information is filed directly with the Securities and Exchange Commission. (b) Reports on Form 8-K A report on Form 8-K was filed with the Securities and Exchange Commission on November 14,1995. Reported on was "Item 5 Other Items" in which USCG described the settlement of various disputes involving the Company. Exhibit Number 21 "Other Documents Or Statements To Security Holders" was submitted which was the USCG's press release dated November 13, 1995 announcing the settlement of the various disputes in regards to the unfavorable arbitration awards. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. U.S. CAPITAL GROUP INC. (Registrant) By LIONEL J. GOETZ /s/ Lionel J. Goetz ---------------------------------- Lionel J. Goetz President & Chief Executive Officer Dated: March 27, 1996 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated. Signature/Title/Date LIONEL J. GOETZ SIMON C. K. TWIGDEN /s/ Lionel J. Goetz /s/ Simon C. K. Twigden - ------------------------- ------------------------- Lionel J. Goetz Simon C. K. Twigden Director, Chairman and Director President March 27, 1996 March 27, 1996 JONATHAN L. AUERBACH THOMAS S. JOHNSON /s/ Jonathan L. Auerbach /s/ Thomas S. Johnson - --------------------------- -------------------------- Jonathan L. Auerbach Thomas S. Johnson Director Director March 27, 1996 March 27, 1996 RONALD H. LABENSKI /s/ Ronald H. Labenski -------------------------------------- Ronald H. Labenski Director, Vice President and Treasurer March 27, 1996 REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS To the Board of Directors of U.S. Capital Group Inc. We have audited the accompanying consolidated balance sheets of U.S. Capital Group Inc. (the "Company") and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of operations, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1995. We have also audited the schedules for the each of the three years in the period ended December 31, 1995 listed in the accompanying index. These financial statements and schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedules based on our audits. We did not audit the 1995 and 1994 financial statements of a foreign subsidiary, Pan Atlantic Insurance Company, Ltd., whose statements reflect total assets of $24,070,000 and $26,884,000 and total liabilities of $19,136,000 and $22,256,000 as of December 31, 1995 and 1994, respectively, and total revenue of $1,502,000 and $1,243,000 for the years then ended. Those statements were audited by another auditor whose reports have been furnished to us, and our opinion on the 1995 and 1994 financial statements insofar as it relates to the amounts included for such subsidiary, is based solely on the reports of the other auditor. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedules are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedules. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits and the reports of the other auditor for 1995 and 1994 provide a reasonable basis for our opinions. In our opinion, based on our audits and the reports of the other auditor for 1995 and 1994, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of U.S. Capital Group Inc. and subsidiaries at December 31, 1995 and 1994, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. Also, in our opinion, based on our audits and the reports of the other auditor for 1995 and 1994, the schedules present fairly, in all material respects, the information set forth therein. As discussed in Note H to the financial statements, in March 1991, the Company's United Kingdom subsidiary, Pan Atlantic Insurance Company, Ltd., which represents approximately 82% of the consolidated equity, ceased writing insurance and is discharging its liabilities. All loss reserves and recoverable amounts from insurance companies have been established based on current information; however, changes in these estimates are dependent on future events. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. As discussed in Note G to the Financial Statements, Pan Atlantic Investors, Limited, a subsidiary of the Company, was declared insolvent by the New York Insurance Exchange, which has petitioned the Superintendent of the Insurance Department of New York State for an order of liquidation under the insurance law. Management is disputing this action and steps taken by the Company to satisfy the State are also described in Note G. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note I to the financial statements, the Company has settled an arbitration decision in connection with a dispute with a ceding insurance company which restricts the transactions of a trust fund. In addition, the Company sustained a loss in the current year whereby reducing its capital. These matters raise substantial doubt about the Company's ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent on future profitable operations and successful completion of the terms of its settlement agreement. Management's plans in regard to this matter are more fully described in Note I. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. BDO Seidman, LLP Valhalla, New York March 27, 1996 Gardner House Telephone 660 5199 Wilton Place Telecopier 660 7638 Dublin 2 I.D.E. Box No. 137 Ireland Price Waterhouse REPORT OF THE INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Pan Atlantic Insurance Company Limited We have audited the accompanying balance sheet of Pan Atlantic Insurance Company Limited as of December 31, 1995 and the related statements of income and of cash flows for the year, as prepared for use in the preparation of the consolidated financial statements of US Capital Group Inc. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by the management as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements audited by us present fairly, in all material respects and for the purpose referred to above, the financial position of Pan Atlantic Insurance Company Limited at December 31, 1995 and the results of its operations and its cash flows for the year in conformity with accounting principles generally accepted in the United States of America. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The following uncertainties raise substantial doubt about the Company's ability to continue as a going concern: (1) As discussed in Note I, the Company was instructed by the UK Insurance Industry Regulator in March 1991 to cease writing new and renewal insurance contracts and the Company has since that date become a company in run-off discharging its liabilities. (2) The Company's loss reserves of US$16,914,000 at December 31, 1995 have been established based on available current information. Future changes in these estimates may arise based on updated information. (3) As discussed in Note I, the company is dependent on the timely remittances of amounts due from certain group companies of US$14,012,000 which are subject to: - the release of sufficient surplus funds upon the final evaluation of a certain trust fund held by a group company; and - the ability to collect certain retrocessional protections from a third party who has assumed control and responsibility for the collection of these balances. The financial statements do not include any adjustments that might result from the outcome of these uncertainties. Management's plan in regard to these uncertainties are also described in Note I. PRICE WATERHOUSE DUBLIN 27 March 1996 U.S. CAPITAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except par value and number of shares) December 31 ------------------- 1995 1994 ---- ---- ASSETS Investments: Fixed maturities, available for sale, at market value (amortized cost: 1995 -- $68,630; 1994 -- $71,427) $ 70,370 $ 66,468 Equity securities, available for sale, (cost: 1995--$2; 1994--$610) -- 631 Short-term investments, at cost, which approximates market 14,287 23,684 -------- -------- Total Investments 84,657 90,783 Cash 596 48 Accrued investment income 1,349 1,325 Deferred charges -- 11,839 Premiums receivable 6,664 8,167 Reinsurance recoverable 45,096 68,500 Deferred acquisition costs 3,102 979 Investment in unconsolidated affiliate -- 4,011 Property and equipment, net 1,800 1,328 Income taxes recoverable 594 856 Prepaid reinsurance premiums 6,545 603 Other assets 5,428 4,820 -------- -------- TOTAL ASSETS $155,831 $193,259 ======== ======== (The accompanying footnotes are an integral part of the consolidated financial statements.) U.S. CAPITAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (in thousands, except par value and number of shares) December 31, ------------------ 1995 1994 ---- ---- LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Reserves for unpaid losses and loss adjustment expenses $107,275 $122,776 Reinsurance balances payable 9,990 49,176 Funds held for reinsurers 1,455 2,399 Unearned premiums 25,916 9,045 Note payable 4,000 -- Accounts payable and accrued liabilities 1,179 1,794 -------- -------- Total Liabilities 149,815 185,191 -------- -------- Commitments and Contingent Liabilities Stockholders' Equity: Preferred stock, par value $1.00 per share; authorized 250,000 shares, none issued and outstanding -- -- Common stock, par value $.10 per share; authorized 2,500,000 shares; issued 1,112,542 (including 551,996 shares in 1995 and 1994 held in treasury) 111 111 Additional paid-in capital 29,481 29,481 Unrealized appreciation (depreciation) on securities 1,738 (5,639) Foreign exchange translation adjustment 2,198 2,117 Deficit (10,953) (1,443) ------- -------- 22,575 24,627 Less: Treasury stock at cost 16,559 16,559 -------- -------- Total Stockholders' Equity 6,016 8,068 -------- -------- LIABILITIES AND STOCKHOLDERS' EQUITY $155,831 $193,259 ======== ======== (The accompanying footnotes are an integral part of the consolidated financial statements.) U.S. CAPITAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share and number of shares) Year Ended December 31, --------------------------- 1995 1994 1993 ---- ---- ---- Revenues: Earned premiums $ 37,533 $ 21,554 $ 35,445 Investment income 6,067 6,714 7,477 Realized investment gains 960 264 4,527 Underwriting fees and commissions: From affiliated companies 150 300 300 From unaffiliated companies (249) 314 537 Other Income 1,651 969 698 -------- -------- -------- Total revenue 46,112 30,115 48,984 -------- -------- -------- Losses and expenses: Loss and loss adjustment expenses 30,086 15,096 26,590 Policy acquisition costs 7,632 4,808 6,492 Underwriting, general and administrative expenses 13,046 9,348 14,373 Amortization of deferred charge 4,852 1,181 1,365 -------- -------- -------- Total losses and expenses 55,616 30,433 48,820 -------- -------- -------- INCOME (LOSS) BEFORE FOLLOWING ITEM: (9,504) (318) 164 Equity in income of unconsolidated affiliate (6) 506 196 --------- -------- -------- NET INCOME (LOSS) $ (9,510) $ 188 $ 360 ======== ======== ======== INCOME (LOSS) PER SHARE $ (16.97) $ .33 $ .63 ======== ======== ======== WEIGHTED AVERAGE SHARES 560,546 568,896 568,896 ======== ======= ======== (The accompanying footnotes are an integral part of the consolidated financial statements.) U.S. CAPITAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED DECEMBER 31, 1995, 1994, 1993 (in thousands)
Shares of Unrealized Foreign Common Stock Additional Appreciation Exchange Retained ---------------- Common Paid-In (Depreciation) Translation Earnings Treasury Stockbroker's Issued Treasury Stock Capital on Securities Adjustment (Deficit) Stock Equity ------ -------- ----- ------- ------------- ---------- -------- ----- ------ Balance, December 31, 1992 4,450 2,174 445 29,147 797 2,553 (1,991) (16,542) $14,409 Net Income - - - - - - 360 - 360 Change in unrealized appreciation on securities - - - - 3,202 - - - 3,202 Foreign currency translation adjustment - - - - - 229 - - 229 Reverse stock split (3,337) (1,630) (334) 334 - - - - - ------- ------- ----- ------- ------- ------ -------- ------- ------- Balance, December 31, 1993 1,113 544 111 29,481 3,999 2,782 (1,631) (16,542) 18,200 Net Income - - - - - - 188 - 188 Change in unrealized depreciation on securities - - - - (9,638) - - - (9,638) Foreign currency translation adjustment - - - - - (666) - - (666) Purchases of treasury stock - 8 - - - - - (17) (17) ------- ------- ----- ------- ------- ------ -------- ------- ------- Balance, December 31, 1994 1,113 552 $111 $29,481 $(5,639) $2,117 $(1,443) $(16,559) $ 8,068 ------- ------- ----- ------- ------- ------ -------- -------- ------- Net Loss - - - - - - (9,510) - (9,510) Change in unrealized depreciation on securities - - - - 7,376 - - - 7,376 Foreign currency translation adjustment - - - - - 82 - - 82 ------- ------- ----- ------- ------- ------ -------- -------- ------- Balance, December 31, 1995 1,113 552 $111 $29,481 $ 1,738 $ 2,198 $(10,953) $(16,559) $ 6,016 ------- ------- ----- ------- ------- ------ -------- -------- -------
(The accompanying footnotes are an integral part of the consolidated financial statements). U.S. CAPITAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31 -------------------------------- 1995 1994 1993 ------- --------- ------ CASH FLOWS FROM OPERATING ACTIVITIES: Net Income (Loss) $(9,510) $ 188 $360 Adjustments to reconcile net loss to net cash used by operating activities: (Increase) in accrued investment income (23) (27) (54) (Increase) in reinsurance recoverables and premiums receivable net of payables (41,048) (3,507) (5,838) (Increase) decrease in deferred acquisition costs (2,125) (474) 76 Depreciation and amortization (8) 163 216 Increase (decrease) in reserves for unpaid loss and loss adjustment expenses 11,212 (9,201) 16,372 Increase (decrease) in unearned premium reserve 16,872 4,169 (1,137) Decrease in accounts payable and accrued liabilities (469) (229) (402) Amortization of premium/discount 69 (1) (35) Increase in deferred and current income tax payable, net of refundable income taxes 262 130 100 Increase in prepaid reinsurance premiums (5,942) (603) -- Increase (decrease) in other assets (941) 47 890 Equity in net income of affiliated company 4,011 (506) (196) Realized gains (960) (264) (4,527) Commutation proceeds-deferred charge 11,839 1,181 1,365 ------ ----- ----- NET CASH FROM OPERATING ACTIVITIES (16,761) (8,934) 7,190 ------ ----- ----- NET CASH FROM INVESTING ACTIVITIES: Proceeds from sale of fixed maturities and equity securities 42,482 22,977 59,046 Purchase of fixed maturities and equity securities (37,485) (6,797) (56,784) Net increase in short-term investments 9,422 (6,637) (9,934) Disposal (purchases) of property and equipment, net (27) (1,264) (66) ------ ----- ----- NET CASH FROM INVESTING ACTIVITIES 14,392 8,279 (7,738) ------ ----- ----- U.S. CAPITAL GROUP INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (in Thousands) Year Ended December 31 -------------------------------- 1995 1994 1993 ------- --------- ------ NET CASH FROM FINANCING ACTIVITIES: Increase (decrease) in funds held, net (1,082) 681 552 Purchase of treasury stock - (17) - Increase in note payable 4,000 - - ------ ----- ----- NET CASH FROM FINANCING ACTIVITIES 2,918 664 552 ------ ----- ----- Effect of exchange rate changes on cash (1) 27 (7) ------ ----- ----- INCREASE (DECREASE) IN CASH 548 36 (3) CASH - BEGINNING OF THE PERIOD 48 12 15 ------ ----- ----- CASH - END OF THE PERIOD $ 596 $ 48 $ 12 ====== ===== ===== SUPPLEMENTAL DISCLOSURES OF CASH FLOWS INFORMATION: Cash paid during the year for: Interest $ - $ - $ - ====== ===== ===== Income taxes $ - $ - $ - ====== ===== ===== (The accompanying footnotes are an integral part of the consolidated financial statements.) U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 1995 NOTE A--ORGANIZATION AND NATURE OF BUSINESS U.S. Capital Group Inc. (the "Company") was organized under the laws of Delaware in 1971, as a shell corporation, which remained inactive until 1986, when it was purchased by the company to act as the holding company for the U.S. Capital Group Inc. The Company, through its subsidiaries, comprise a property and casualty insurance and reinsurance underwriting and services group operating from the United States and Europe. The Company, through U.S. Capital Insurance Company, specializes principally in the underwriting of insurance in the following lines of business: private passenger automobile, commercial automobile, commercial property, specialty reinsurance and other liability. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries at December 31, 1995, as follows: U.S. Capital Insurance Company (U.S.) 100%; PAG Management Inc. (U.S.) (formerly named Pan Atlantic Group, Inc.) 100%; Pan Atlantic Investors, Ltd. (U.S.) 100%; Pan Atlantic Insurance Company, Ltd. (United Kingdom) 100%; Insyst Inc. (U.S.) 100%; Pan Atlantic Underwriters, Ltd. (Bermuda) 100%; AROS Reinsurance Services Limited (United Kingdom) 100%; Atlantic Run Off Services Inc. (U.S.) 100%; Pan Atlantic Reinsurance Company (Bermuda) 100%; U.S. Capital Premium Finance Company (U.S.) 100%; and AI Service Bureau, Inc. (U.S.) 100%. The investment in GoldStreet Syndicate Corporation (GoldStreet), an affiliated company (30% owned), was carried on the equity basis of accounting until September 30, 1995, at which time the equity interest was transferred to Republic Insurance Company ("Republic"). All significant inter-company transactions are eliminated in consolidation. COMMISSIONS-- Profit commissions are based on underwriting results for each account year including the Company's estimates for incurred but not reported losses ("IBNR") on open account years. Profit commissions previously accrued are adjusted, if appropriate, in subsequent years as additional underwriting experience becomes known. INVESTMENTS-- In accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities", the Company has classified its investments into "Securities Available for Sale." Securities available for sale are reported at market value. The unrealized gains and losses of the investments in this category are credited or charged directly to shareholders' equity, net of applicable taxes. U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION (Continued) Fixed maturity investments are carried at market. Marketable equity securities, (common stocks and preferred stocks with no mandatory redemption) are carried at market. Short-term investments are carried at cost, which approximates market. Net unrealized appreciation or depreciation of equity securities is a component of stockholders' equity. Realized gains and losses are determined on a specific identification of securities sold. FEDERAL INCOME TAX-- The Company establishes, when required, deferred tax assets and liabilities for the temporary differences between the financial reporting basis and the tax basis of the Company's assets and liabilities at enacted tax rates expected to be in effect when such amounts are realized or settled. (See Footnote F) UNEARNED PREMIUM RESERVE-- Unearned premiums represent the portion of premiums written applicable to the unexpired terms of contracts in force. Unearned premium reserves are calculated by using pro rata methods or reports received from ceding companies. Accordingly, premiums written are recorded as income when earned. RESERVE FOR LOSSES AND LOSS ADJUSTMENT EXPENSES-- Losses and loss adjustment expenses are charged to income as incurred. Reserves for unpaid losses and loss adjustment expenses are based on reports received from an accumulation of case estimates for losses reported prior to year end plus a provision for losses and loss adjustment expenses incurred but not reported based upon the Company's past experience and reviews of individual policies and contracts written and expenses for investigating and adjusting claims. Such estimated liabilities are continually reviewed and revised as necessary. Changes in estimates, if any, are reflected in operations in the period determined. The liability for such losses is stated after estimated recoveries for salvage and subrogation. DEFERRED POLICY ACQUISITION COSTS-- Deferred acquisition costs represent costs that are primarily related to and vary with the production of business. These costs are principally commission and brokerage, taxes and salaries for primary insurance contracts. Such costs are deferred to the extent recoverable, after considering future investment income, and are amortized over the period in which the related premiums are earned. Policy acquisition costs included in the accompanying statements of operations are presented net of ceding commissions, commission overrides and other fees. Deferred charges arising under certain reinsurance contracts are amortized over the periods in which the related anticipated income is earned. U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION (Continued) DEPRECIATION-- Buildings are depreciated on the straight-line method over 27.5 years. Furniture and equipment are depreciated over estimated useful lives of three to ten years, on either the straight-line or double declining-balance methods. Leasehold improvements are amortized over the term of the lease. Accumulated depreciation and amortization as of December 31, 1995 and 1994 aggregated $2,450,000 and $2,521,000, respectively. Depreciation and amortization expense for the years ended December 31, 1995, 1994 and 1993 were $99,000, $195,000 and $334,000, respectively. RECEIVABLES-- The credit risk associated with the collection of premiums receivable and reinsurance recoverable amounts is an ongoing concern to the insurance and reinsurance industry. U.S. Capital Group Inc. and subsidiaries monitors on a case-by-case basis the credit worthiness of companies from which significant receivables are due. Premiums receivable are net of uncollectable balances of approximately $1,925,000. EARNINGS PER SHARE-- The Company's earnings per share are calculated based on weighed average of shares outstanding for the periods presented. No effect has been given for common stock equivalents since they are not dilutative. The company has given retroactive effect to the reverse 1 share for 4 shares stock split effected in July 1993. The Company accounts for common stock equivalents on the treasury stock method USE OF SIGNIFICANT ESTIMATES IN PREPARATION OF FINANCIAL STATEMENTS-- The preparation of financial statements in accordance with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. SIGNIFICANT ESTIMATES-- The most significant estimates in the Company's balance sheet are the determination of prepaid policy acquisition costs, reserve for insurance losses and loss adjustment expenses, and the recognition of the Republic Settlement (See Note I). Management's best estimate of prepaid policy acquisition costs is based on historical studies and assumptions made regarding costs incurred. Management's best estimate of insurance losses and loss adjustment expenses is based on past loss experience and consideration of current claim trends as well as prevailing social, economic and legal conditions. Although management's estimates are not expected to change in the near term, the costs the Company will ultimately incur could differ from the amounts assumed will be incurred based on the assumptions made. U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES, PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION (Continued) ADVERTISING-- The Company expenses the costs of advertising as incurred. Advertising expense was $229,000 in 1995, $490,000 in 1994 and $1,021,000 in 1993. STOCK OPTIONS-- In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation". SFAS No. 123 allows companies to continue to account for their stock plans in accordance with APB Opinion 25 but encourages the adoption of a new accounting method based on the estimated fair value of employee stock options. Companies electing not to follow the new fair value based method are required to provide expanded footnote disclosures, including pro forma net income and earnings per share, determined as if the company had applied the new method. SFAS No. 123 is required to be adopted prospectively for its stock option plans in accordance with APB Opinion 25 and provide supplemental disclosures as required by SFAS No. 123, beginning in 1996. Management intends to continue to account for its stock-based compensation plans in accordance with APB Opinion 25 and provide the supplemental disclosures as required by SFAS No. 123, beginning in 1996. NOTE C--INVESTMENTS Fixed maturities, equity securities and short-term investments at December 31, 1995 with a carrying value of approximately $38.7 million are pledged to banks in connection with an equivalent amount of letters of credit or trust agreements issued to ceding companies in accordance with reinsurance agreements or for various regulatory restrictions. Also, fixed maturities with a carrying value of approximately $4,547,000 are on deposit with insurance regulatory authorities. U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE C--INVESTMENTS (Continued) The components of investment income are summarized as follows: (in thousands) 1995 1994 1993 -------- -------- -------- Fixed maturities $ 5,135 6,071 $ 6,373 Equity securities -- 173 683 Short-term investments 932 470 421 -------- -------- -------- Total Investment Income $ 6,067 $ 6,714 $ 7,477 ======== ======== ======== Realized gains on sale of investments are as follows: 1995 1994 1993 -------- -------- -------- Fixed Maturities $ 1,017 $ 156 $ 2,515 Equity Securities (57) 108 2,012 -------- -------- -------- Total Realized Gains $ 960 $ 264 $ 4,527 ======== ======== ======== See chart on following page for amortized cost and estimated market value of investments held by the Company. U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE C--INVESTMENTS (Continued) The amortized cost and estimated market value of investments held by the Company are as follows:
Gross Gross Amortized Unrealized Unrealized Market December 31, 1995 Cost Gains Losses Value - ----------------- ---------- ---------- ---------- ---------- (in thousands) Fixed maturities - Bonds U.S. Treasury obligations.................. $17,381 $ 693 0 $18,074 Foreign government......................... 2,981 0 (48) 2,933 Corporate securities....................... 26,218 806 0 27,024 Mortgage-backed securities................. 22,049 289 22,338 ---------- ---------- ---------- ---------- Total Bonds available for sale 68,630 1,787 (48) 70,369 ---------- ---------- ---------- ---------- Equity securities: Common stocks.............................. 1 0 (1) 0 Preferred stocks........................... 0 0 0 0 ---------- ---------- ---------- ---------- Total Equities available for sale 1 0 (1) 0 ---------- ---------- ---------- ---------- Short-term investments....................... 14,287 0 0 14,287 ---------- ---------- ---------- ---------- Total investments $82,918 $1,787 ($49) $84,656 ========== ========== ========== ==========
Gross Gross Amortized Unrealized Unrealized Market December 31, 1994 Cost Gains Losses Value - ----------------- ---------- ---------- ---------- ---------- (in thousands) Fixed maturities - Bonds U.S. Treasury obligations................... $18,517 $ 28 (810) $17,735 Foreign government.......................... 2,311 0 (311) 2,000 Corporate securities........................ 32,720 219 (2,528) 30,411 Mortgage-backed securities.................. 17,879 2 (1,559) 16,322 ---------- ---------- ---------- ---------- Total Bonds available for sale 71,427 249 (5,208) 66,468 ---------- ---------- ---------- ---------- Equity securities: Common stocks............................... 204 0 (88) 116 Preferred stocks............................ 406 109 0 515 ---------- ---------- ---------- ---------- Total Equities available for sale 610 109 (88) 631 ---------- ---------- ---------- ---------- Short-term investments........................ 23,684 0 0 23,684 ---------- ---------- ---------- ---------- Total investments $95,721 $358 ($5,296) $90,783 ========== ========== ========== ==========
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE C--INVESTMENTS (continued) The amortized cost and estimated market value of debt securities at December 31, 1995, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Estimated Amortized Market Cost Value -------- ------- (in thousands) Less than 1 year $ 1,350 $ 1,025 1 to 5 Years 18,438 18,792 5 to 10 Years 18,320 18,905 10 Years 8,474 9,309 -------- ------- Sub-total 46,582 48,031 Mortgage-backed securities 22,048 22,338 -------- -------- TOTAL $68,630 $70,369 ======= ======= NOTE D--COMMITMENTS Rental expense for the years ended December 31, 1995, 1994 and 1993 was $656,000, $803,000 and $1,003,000 respectively. The aggregate future minimum lease payments required under non-cancelable operating leases for office space at December 31, 1995 are as follows: 1996 $ 316,915 1997 305,030 1998 279,611 ------------ Total $ 901,556 ============ In 1995, USCG relocated its principal subsidiary, USCIC, to Purchase, New York under a three year lease expiring in 1998 at approximately $25,000 per month. Subsequent to year end, the Company entered into an office lease arrangement for its personal lines automobile lines of business operations for a term of five years expiring May 31, 2001, at approximately $14,000 per month. U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE E--STOCK OPTIONS In November 1986, the Company reserved 200,000 shares of its common stock, (50,000 after the reverse 1 share for 4 shares stock split effected in July, 1993) for issuance to its directors, officers, and employees under a stock option plan. Options granted under the stock option plan become exercisable in two cumulative installments, with 50% of each option becoming exercisable one year after the date of grant and 50% of each option becoming exercisable one year thereafter. Options expire ten years after the date of grant. On May 20, 1992, the Stock Option Committee amended the exercise price of the options outstanding to $1.75 per share. Effective July 1993, the exercise price per option was adjusted to $7.00 per share to reflect the reverse stock split of 1 share for 4 shares. During 1995, certain officers and certain directors received 7,000 options pursuant to the plan at an exercise price of $8 per share. At December 31, 1995, 17,275 shares are exercisable. No options granted have been exercised to date. The following table gives retroactive effect to these transactions: Shares Outstanding Available Options for Grant Shares Option Price --------- -------- ------------ Balance, January 1, 1993 38,725 11,275 $7.00 Options forfeited 1,125 (1,125) ------- ------ Balance, December 31, 1993 39,850 10,150 $7.00 Options forfeited 3,375 (3,375) Options granted (21,000) 21,000 $8.00 ------- ------ Balance, December 31, 1994 22,225 27,775 $7.00 - $8.00 Options granted (7,000) 7,000 $8.00 ------- ------ Balance, December 31, 1995 15,225 34,775 $7.00 - $8.00 ======= ====== U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE F--INCOME TAXES The Company files a consolidated federal corporate income tax return based on a June 30 tax year. USCG's portion of certain income from foreign operations is included in United States taxable income under the applicable provisions of the Internal Revenue Code. It is management's intent that the undistributed earnings of the foreign subsidiaries not subject to such tax will be reinvested in the respective operations; therefore, federal, state and local taxes were not provided on their cumulative undistributed earnings, which amounted to approximately $16 million at December 31, 1995. Taxes paid by the Company's foreign subsidiaries have not been material. Deferred tax assets(liabilities) are composed of the following at: December 31, 1995 1994 ------------------------------------ NOL carry-forwards $5,900,000 $3,200,000 Policy acquisition costs related to unearned premium (1,531,000) (330,000) Unearned premium adjustments 1,762,000 575,000 Difference between book and tax reserves 2,345,000 2,000,000 ---------- ---------- Net deferred tax asset $8,476,000 $5,445,000 ========== ========== The domestic operations of the Company resulted in losses for 1995 which added to loss carry-forwards. The Company has established a full valuation allowance against the net deferred tax asset as it has incurred losses in previous years. At December 31, 1995, the Company had a tax loss carry-forward of approximately $17.5 million. If not used to offset future taxable income, this tax loss carry-forward will expire through the year 2010. Franchise taxes paid, primarily based on premiums, were approximately $427,000 for 1995, $434,000 for 1994, and $435,000 for 1993. U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE G--INTENTION TO DRAW ON INVESTMENT DEPOSITS Pursuant to the requirements of the Constitution and By-Laws of the New York Insurance Exchange (the Exchange) and the Insurance Laws of the State of New York, Pan Atlantic Investors Ltd. (PAIL), the Company's wholly owned subsidiary and Exchange underwriting members are contingently liable for up to a maximum of $500,000 for the unpaid contractual obligations of underwriting members found to be insolvent. In the opinion of management, based on the advice of legal counsel, the $500,000 deposit which was used by the Security Fund represents each underwriting member's maximum liability with respect to the declared insolvencies as of December 31, 1995. However, each Exchange underwriting member remains contingently liable for an additional $500,000 in the event that the Security Fund is required to pay the contractual obligations of any underwriting member of the Exchange found to be insolvent in the future. At December 31, 1991 the Exchange terminated its remaining employees and, in management's opinion, it is not likely that the Exchange will resume operations. Statutory statements at December 31, 1995 filed by PAIL indicate a statutory capital and surplus of approximately $1,038,000. PAIL capital and surplus under GAAP as at the same date was approximately $5,959,000. PAIL has been declared insolvent by the New York Insurance Exchange. The Exchange has petitioned the Superintendent of the Insurance Department of New York State for an order of liquidation under the insurance law. Management disputes this action. NOTE H--FOREIGN OPERATIONS Foreign (principally European) subsidiaries accounted for approximately 10%, 16%, and 9% of revenues in 1995, 1994 and 1993, respectively. Earned premiums underwritten by the Company on behalf of subsidiaries and companies managed by the Company aggregate, $37,533,000, $21,554,000, and $35,442,000 in 1995, 1994 and 1993, respectively, of which approximately 4%, 2% and none, related to business assumed in foreign markets in 1995, 1994 and 1993, respectively. At December 31, 1995 assets and liabilities of foreign subsidiaries before inter-company eliminations aggregated $122,841,261, and $90,557,023, respectively. Net income (loss) before income taxes of foreign subsidiaries aggregated $622,000, ($2,115,000) and $2,400,000 in 1995, 1994 and 1993, respectively. Under the provisions of Financial Accounting Standards Board Statement Number 52, the adjustment resulting from translating the financial statements of certain foreign based subsidiaries is included as a separate component of stockholders' equity. Foreign exchange gains and losses on foreign subsidiaries for which the functional currency is U.S. dollars are included in the individual items of revenues and expenses. Included in 1995, 1994 and 1993 operations are approximately $695,000, $101,000 and ($4,000), respectively of foreign currency transaction gains (losses). U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE H--FOREIGN OPERATIONS (Continued) PAICO acted as an insurance company authorized to transact all non-life classes of direct and reinsurance business. However, on March 12, 1991, PAICO received notice from the Secretary of State for Trade and Industry pursuant to sections 37 and 45 of the Insurance Companies Act 1982 to refrain from effecting (including renewing) any contract of insurance on or after March 18, 1991. PAICO's continued solvency is contingent on its ability to collect reinsurance balances owing from other USCG subsidiaries of US$14,384,000. Management intends to continue PAICO's ongoing program of commutations and continues to discharge its liabilities. NOTE I--CONTINGENCIES On November 9, 1995 USCG and its subsidiaries entered into a settlement agreement with Republic Insurance Company ("Republic") in order to settle the various disputes between the parties (the "Settlement"). The Settlement provides for a restructuring of the complex business relationship between the parties: the transfer to Republic of the control and administration of reinsurance policies bound in Republic's name by certain subsidiaries of USCG; the payment of a liability, carried by USCG of $5,400,000, over ten years without interest, the payment being secured by a pledge of all the shares of USCG's principal subsidiary, U.S. Capital Insurance Company, with the option to discharge this obligation at any time by payment of the net present value of the amount outstanding: the commutation and release of the reinsurance obligations of various insurance company subsidiaries of USCG to Republic, some of which are immediate and others of which are to be determined at a future date; the commutation and immediate release of all Republic's reinsurance obligations to USCG's subsidiaries; the payment by Republic and other entities as parties to the settlement of up to $3,340,698 to a USCG subsidiary; and the transfer to Republic of USCG's equity interest in GoldStreet Syndicate Corporation in the amount of $4,297,026. The Settlement provides further for a number of continuing obligations on behalf of USCG, the performance of which determine the extent and exact timing of the release from the arbitration awards referenced in the December 31, 1994 10K of the Company as well as from certain other contractual and reinsurance obligations. In particular, pending the payment to Republic of the $5.4 million referred to above, the Settlement incorporates various covenants on USCG, including a requirement to maintain the consolidated net worth of USCG to the level of 100% of the amount owed to Republic, as well as certain other restrictions on borrowings, capital expenditures, dividends, premium writings, and asset sales. During 1987 the Company assumed indirectly from certain former PAG Reinsurance Underwriting Syndicate (the "PAG Syndicate") members the loss and loss adjustment expense reserve obligations relating to the 1984 and prior underwriting years, and the 1985 and 1986 business, written by the PAG Syndicate on their behalf, for cash and other consideration. Investments aggregating $34,000,000 are held in trusts by two of the Company's subsidiaries to pay claims related to the policies reinsured by Republic. Provided there are no events of default under the terms of the Settlement, the Company and Republic have agreed to defer commutation of the liabilities secured by the trusts until at least June 30, 1997. In the event that the value of the assets in the trusts on the date Republic exercises the commutation option is greater than Republic's valuation of the trust fund obligations, Republic shall distribute the excess trust funds to the Company's subsidiaries less any unpaid obligations owed to Republic, as per the terms of the Settlement. The difference between the value of assets held in the trusts and the estimate of trust fund obligations as of December 31, 1995 is carried as a deferred liability. The Company or its subsidiaries are parties to various other lawsuits generally arising in the normal course of the Company's insurance, reinsurance and management businesses. The Company does not believe that the eventual outcome of any such litigation will have a materially adverse effect on the financial condition or business of the Company or its subsidiaries. The Company's subsidiaries are regularly engaged in the investigation and defense of claims arising out of its insurance and reinsurance business. In an ongoing effort to improve solvency regulation, the National Association of Insurance Commissioners ("NAIC") and individual states have enacted certain laws and financial statement changes. The NAIC adopted a model risk-based capital act intended to provide a tool for regulators to evaluate the capital of insurers and reinsurers with respect to the risk assumed by them and determine whether there is a perceived need for possible corrective action. The nature of the corrective action depends upon the extent of the calculated risk-based capital act has not yet been widely adopted, in a related action, the NAIC adopted a proposal that requires insurers and reinsurers to report the results of their risk-based capital calculations as part of the 1994 and subsequent statutory annual statements filed with state regulatory authorities. Based on industry analysis provided by the NAIC, all domestic insurance companies in the USCG fell within the average risk-based capital level and require no regulatory action. NOTE J--REINSURANCE Pan Atlantic Reinsurance Company Limited ("PARCO"), U.S. Capital Insurance Company, Pan Atlantic Investors Limited ("PAIL"), and Pan Atlantic Insurance Company ("PAICO") cede risks to other reinsurers and remain contingently liable to the extent that reinsuring companies are unable to meet their obligations on these agreements. Pursuant to the Financial Accounting Standards Board SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts", the Company's balance sheet recognizes reinsurance receivables and prepaid reinsurance premiums as assets. Reinsurance recoverable is presented net of a provision for uncollectible amounts of $5,378,000 in 1995 and $6,021,000 in 1994. The effects of Retrocession activity on premiums written and earned is set forth below in thousands:
Premiums Premiums Written Earned Year Ended December 31, Year Ended December 31, ---------------------------------- --------------------------------- 1995 1994 1993 1995 1994 1993 ---- ---- ---- ---- ---- ---- Direct $59,748 $24,881 $20,360 $45,075 $20,628 $21,581 Assumed 7,444 1,231 15,590 5,245 1,504 16,078 Ceded (18,730) (993) (1,642) (12,787) (578) (2,214) ------- ------- ------- ------- ------- ------- Net $48,462 $25,119 $34,308 $37,533 $21,554 $35,445 ======= ======= ======= ======= ======= =======
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE J--REINSURANCE (Continued) The incurred and paid activity for insurance losses and loss adjustment expenses is as follows:
Year Ended December 31, 1995 1994 1993 ---- ---- ---- (000 Omitted) Net Unpaid Losses and LAE at beginning of period....... $ 85,967 93,036 $ 91,258 Add-- Provision for Losses and LAE for claims occurring in the current year.................................... 23,942 14,772 22,532 Increase in estimated Losses and LAE for claims occurring in prior years............................... 6,143 324 4,058 -------- -------- -------- Total.................................................. 116,052 108,132 117,848 -------- -------- -------- Less-- Losses and LAE payments for claims occurring during: The current year....................................... 13,056 8,768 14,223 Prior years............................................ 34,172 13,397 10,589 -------- -------- -------- Total.................................................. 47,228 22,165 24,812 -------- -------- -------- Net Unpaid Losses and LAE at end of period............. 68,824 85,967 93,036 Reinsurance recoverable................................ 38,451 36,810 41,587 -------- -------- -------- Gross Unpaid Losses and LAE at end of period........... $107,275 $122,777 $134,623 ======== ======== ========
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE K--INVESTMENT IN UNCONSOLIDATED AFFILIATE In accordance with the Settlement agreement described in Note I, the equity interest in GoldStreet was transferred to Republic at September 30, 1995. The table below summarizes the balance sheets of GoldStreet at December 31, 1995 and 1994 and its Statements of Operations for each of the three years ended December 31, 1995, 1994 and 1993: (in thousands) BALANCE SHEETS December 31 ------------------------ ASSETS 1995 1994 ---- ---- Investments $ 0 $25,042 Other assets 0 4,179 ------ ------- TOTAL $ 0 $29,221 ====== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Unpaid losses and loss adjustment expenses $ 0 $15,743 Other liabilities 0 180 ------ ------- Total Liabilities 0 15,923 ------ ------- Total Stockholders' Equity 0 13,298 ------ ------- TOTAL $ 0 $29,221 ====== =======
(in thousands) STATEMENTS OF OPERATIONS Year Ended December 31 -------------------------------------------- 1995 1994 1993 --------- ----- ------ Revenues: Earned premiums $ -- $1,040 $ 22 Net investment income -- 1,725 2,914 -------- ------- -------- Total -- 2,765 2,936 -------- ------- -------- Expenses: Losses and loss adjustment expense -- 1,370 (261) Other underwriting expenses 6 349 391 --------- ------- -------- Total 6 1,719 130 --------- ------- -------- Income before federal income taxes & extraordinary gain (6) 1,046 2,806 Federal income tax (benefit) 0 (650) 796 ------- ------ ------ NET INCOME $ (6) $1,696 $2,010 ========= ======= ======
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE L--RESTRICTIONS OF INSURANCE SUBSIDIARIES STOCKHOLDERS' EQUITY The payment of cash dividends by U.S. Capital, PAIL, PARCO, and PAICO is subject to statutory restrictions imposed by each of the jurisdictions in which these subsidiaries operate. Generally, cash dividends may be paid only out of statutory earned surplus subject to certain other limitations. The amount which may be paid to the holding company during 1995 without obtaining insurance department approval is approximately $7 million. At December 31, 1995, none of the consolidated assets could be transferred in the form of loans or advances to the parent company without prior regulatory approval. Set forth below is a reconciliation of net income and surplus as determined under statutory accounting practices (SAP) to net income and stockholders' equity as determined under generally accepted accounting principles (GAAP) for the Company's reinsurance and insurance subsidiaries.
Year Ended December 31 ------------------------------------------- 1995 1994 1993 ---- ---- ---- (in thousands) SAP net income (loss) in reinsurance and insurance subsidiaries $(9,919) $ 218 $ 2,466 GAAP Adjustments: Change in deferred acquisition costs 2,124 474 (76) Change in deferred taxes - 176 (179) Accrual of income on reinsurance deposits 165 423 151 Amortization of goodwill (68) (69) (69) Equity accounting for SAP (180) 233 175 Other, net 286 (101) (2,538) ------- -------- ------- GAAP Net Income (Loss) of Reinsurance and Insurance Subsidiaries (7,592) (1,354) (70) Net Income (Loss) of Other Subsidiaries (1,918) (1,166) 430 --------- --------- ------- NET INCOME (LOSS)-GAAP BASIS $ (9,510) $ 188 $ 360 ========= ======= =======
U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE L--RESTRICTIONS OF INSURANCE SUBSIDIARIES STOCKHOLDERS' EQUITY (Continued) December 31, ---------------------- 1995 1994 ------- -------- SAP surplus of reinsurance and insurance subsidiaries $31,202 $36,305 GAAP adjustments: Deferred acquisition costs 3,103 978 Goodwill -- 68 Non-admitted assets under SAP 6,657 3,458 Reinsurance transactions recorded as deposits under GAAP -- 2,454 Taxes (23) (266) SAP accounting for unrealized gain -- (875) GAAP accounting for investment in unconsolidated affiliate -- 1,150 ---------- ---------- Equity of reinsurance and insurance subsidiaries included in the accompanying financial statements 40,939 43,272 Equity of other subsidiaries 16,720 16,862 Consolidating eliminations (51,643) (52,066) STOCKHOLDERS' EQUITY GAAP BASIS $ 6,016 $ 8,068 ======== ======= NOTE M--OTHER ASSETS The components of other assets are as follows: December 31 ------------------------ 1995 1994 ------- ------ (in thousands) Reinsurance transactions recorded as deposits $ -- $2,744 Investment in Miller Tabak Hirsch & Co., at cost 309 309 Other receivables 3,828 408 Receivable from managed company 68 68 Commissions receivable 1,223 1,223 Goodwill -- 68 -------- ------ TOTAL $5,428 $4,820 ======= ====== U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE N--BUSINESS SEGMENTS INFORMATION The Company and its subsidiaries operate within the reinsurance and insurance industry in three identifiable segments: (i) primary insurance (ii) reinsurance underwriting and (iii) reinsurance services. In the primary insurance underwriting segment, the Company provides property and casualty insurance coverage to insureds primarily in the United States, principally coverage of automobile liability and third-party liability with the balance being commercial and personal property business. In the reinsurance underwriting segment, the Company provided reinsurance to property and casualty insurers and reinsurers operating within the United States and Europe. In the reinsurance services segment, the Company provides underwriting management and reinsurance-related services to reinsurers operating as underwriting members on the New York Insurance Exchange, and to a group of affiliated and unaffiliated foreign and domestic reinsurers.
Year Ended December 31 ---------------------------- 1995 1994 1993 ------- ------ ------ (in thousands) Primary insurance underwriting: Net premium earned $33,169 $20,031 $21,581 Investment income 2,166 2,235 1,903 Realized gains 830 382 1,982 Other income 1,089 352 -- ------- ------- ------- Total primary insurance underwriting $37,254 $23,000 $25,466 ======= ======= ======= Reinsurance underwriting: Net premium earned $ 4,364 $ 1,523 $13,863 Investment income 3,401 4,434 5,139 Realized gains 125 113 2,348 Other income 238 548 813 --------- ------- ------- Total reinsurance underwriting $ 8,128 $ 6,618 $22,163 ========= ======= =======
US. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE N--BUSINESS SEGMENTS INFORMATION (Continued)
Year Ended December 31 --------------------------- 1995 1994 1993 ----- ----- ----- (in thousands) Reinsurance services: Service fees $ 1,830 $ 2,522 $ 2,876 Investment income 63 26 382 Realized gains - (214) - Other income (83) 95 81 ------- ------- ------- Total reinsurance services $ 1,810 $ 2,429 $ 3,339 ======= ======= ======= Total all segments $47,192 $32,047 $50,968 Corporate investment income 443 3 54 Inter-segment eliminations (1,929) (1,908) (2,038) ------- ------- ------- Total $45,705 $30,142 $48,984 ======= ======= ======= Income (loss) from operations before federal income taxes and equity in income of unconsolidated affiliate: Primary insurance underwriting segment $(4,085) $ 990 $ 427 Reinsurance underwriting segment (3,911) 216 (678) Reinsurance services segment (1,861) (1,475) 364 Corporate overhead, net 353 (49) 51 ------- ------- ------- Total $(9,504) $ (318) $ 164 ======== ======= =======
PAG Management Inc. ("PAG") provided Pan Atlantic Investors, Ltd. ("PAIL") with underwriting management services and received a management fee. PAG's operations are included in the reinsurance services segment and PAIL's operations are included in the reinsurance underwriting segment. December 31 ------------------- 1995 1994 ---- ---- (in thousands) Identifiable assets: Primary insurance $ 61,687 $ 46,519 Reinsurance underwriting 139,533 149,120 Reinsurance services and corporate 4,478 74,438 Investment in unconsolidated affiliate - 4,011 Inter-segment eliminations (58,914) (80,829) -------- -------- Total $146,784 $193,259 ======== ======== U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued) NOTE O--UNAUDITED QUARTERLY FINANCIAL DATA The following is a summary of unaudited quarterly results of operations and per share data for 1995 and 1994 (in thousands except per share amounts)
1995 ----------------------------------------------- 1st 2nd 3rd 4th --- --- ---- --- Operations Premiums and Other Income $7,901 $11,055 $13,166 $6,962 Net Investment Income 2,030 1,236 1,051 1,749 Realized Gains (Losses) 91 188 (71) 751 Net Income (Loss) 193 98 (7,856) (1,946) Per Share Data Net Income (Loss) $ .35 $ .18 $(14.01) $(3.47) 1994 -------------------------------------------------- Operations Premiums and Other Income $5,343 $4,544 $5,756 $7,494 Net Investment Income 1,825 1,589 1,676 1,624 Realized Gains (223) 248 285 (46) Net Income (Loss) 562 672 (346) (700) Per Share Data Net Income (Loss) $ .99 $ 1.18 $ (.61) $(1.23) The third quarter 1995 loss reflects the Settlement agreement referred to in Note I. SCHEDULE I U.S. CAPITAL GROUP INC. AND SUBSIDIARIES SUMMARY OF INVESTMENTS OTHER THAN INVESTMENTS IN RELATED PARTIES (In thousands) December 31, 1995 ----------------------------- Column A Column B Column C Column D - ------------------------------------------ -------- -------- -------- Amount at Which Shown in the Balance Type of Investment Cost Value Sheet - ------------------------------------------ -------- ------- ------- Fixed maturities - Bonds U.S. Treasury securities and obligations of U.S. government agencies............ 17,381 18,074 18,074 Foreign governments...................... 2,981 2,933 2,933 Corporate Securities..................... 26,218 27,024 27,024 Mortgaged-backed securities.............. 22,049 22,338 22,338 ------ ------ ------ 68,630 70,369 70,369 Total Fixed Maturities Equity securities: Common stocks............................ 1 0 0 Nonredeemable preferred stocks........... 0 0 0 ------ ------ ------ Total Equity Securities 1 0 0 ------ ------ ------ Short-term investments..................... 14,287 14,287 ------ ------ TOTAL INVESTMENTS $82,918 $84,656 ------- ------- SCHEDULE II U.S. CAPITAL GROUP INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED BALANCE SHEETS (in thousands) December 31 ----------------------- 1995 1994 ------ ------- ASSETS Bonds $ 175 $ 166 Cash 596 48 Investment in subsidiaries 6,066 18,465 Other assets 309 Income taxes recoverable 594 856 ------ ------- TOTAL ASSETS $7,740 $19,535 ====== ======= LIABILITIES AND STOCKHOLDERS' EQUITY Liabilities: Other Liabilities -- 27 Due to subsidiaries 1,724 11,440 ------ ------- Total Liabilities $1,724 $11,467 ------ ------- Stockholders' equity: Preferred stock, par value $1.00 per share; authorized 250,000 shares, none issued Common stock, par value $.10 per share; authorized 2,500,000 shares; issued 1,112,542 (including 551,996 shares in 1994 and 543,646 shares in 1993 in treasury) 111 111 Additional paid-in capital 29,481 29,481 Unrealized appreciation (depreciation) on equity securities 1,738 (5,639) Foreign exchange translation adjustment 2,198 2,117 Deficit (10,953) (1,443) Treasury stock (16,559) (16,559) ------ ------- Total Stockholders' Equity 6,016 8,068 ------ ------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 7,740 $19,535 ======== ======= SCHEDULE II U.S. CAPITAL GROUP INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME (in thousands) Year Ended December 31 ---------------------------------- 1995 1994 1993 ------- ------- ------- Revenues: Investment Income $ 437 $ 19 $ 38 Realized gain (loss) 6 (17) 8 ------- ------- ------- Total Revenue 443 2 46 ------- ------- ------- Expenses: General and administrative 90 52 91 ------- ------- ------- Total 90 52 91 ------- ------- ------- INCOME (LOSS) BEFORE EQUITY IN SUBSIDIARIES 353 (50) (45) Equity in net income (loss) of subsidiaries (9,857) 238 405 ------- ------- ------- NET INCOME (LOSS) $(9,504) $ 188 $ 360 ======== ===== ====== SCHEDULE II U.S. CAPITAL GROUP INC. AND SUBSIDIARIES CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF CASH FLOWS (in thousands) Year Ended December 31 ---------------------------------- 1995 1994 1993 ------- ------- ------- OPERATING ACTIVITIES: Net income (loss) $(9,504) $188 $ 360 Equity in net (income) loss of subsidiaries 9,857 (238) (405) Change in income taxes recoverable 262 145 84 Change in other assets (308) - 84 Change in other liabilities (27) 27 - ------- ------- ------- Net Cash Provided By Operating Activities 280 122 123 ------- ------- ------- INVESTING ACTIVITIES - Sale (purchase) of bonds (29) 421 (607) ------- ------- ------- Net Cash Provided (Used) By Investing Activity (29) 421 (607) ------- ------- ------- FINANCING ACTIVITIES: Change in due from subsidiaries 297 (507) 481 ------- ------- ------- Net Cash Provided (Used) By Financing Activities 297 (507) 481 ------- ------- ------- INCREASE (DECREASE) IN CASH 548 36 (3) CASH - BEGINNING OF THE PERIOD 48 12 15 ------- ------- ------- CASH - END OF THE PERIOD $ 596 $ 48 $ 12 ======= ======= ======= SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION: Cash paid during the year for: Interest $ - $ - $ - ======= ======= ======= Income taxes $ - $ - $ - ======= ======= ======= U.S. CAPITAL GROUP INC. AND SUBSIDIARIES NOTES TO CONDENSED FINANCIAL INFORMATION OF REGISTRANT NOTE A--ORGANIZATION AND NATURE OF BUSINESS U.S. Capital Group Inc. (the "Company") was organized under the laws of Delaware in 1971, as a shell corporation, which remained inactive until 1986, when it was purchased by the company to act as the holding company for the U.S. Capital Group Inc. The Company, through its subsidiaries, comprise a property and casualty insurance and reinsurance underwriting and services group operating from the United States and Europe. The Company, through U.S. Capital Insurance Company, specializes principally in the underwriting of insurance in the following lines of business: private passenger automobile, commercial automobile, commercial property, specialty reinsurance and other liability. NOTE B--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES The accompanying consolidated financial statements include the accounts of the Company and its subsidiaries at December 31, 1995, as follows: U.S. Capital Insurance Company (U.S.) 100%; PAG Management Inc. (U.S.) (formerly named Pan Atlantic Group, Inc.) 100%; Pan Atlantic Investors, Ltd. (U.S.) 100%; Pan Atlantic Insurance Company, Ltd. (United Kingdom) 100%; Insyst Inc. (U.S.) 100%; Pan Atlantic Underwriters, Ltd. (Bermuda) 100%; AROS Reinsurance Services Limited (United Kingdom) 100%; Atlantic Run Off Services Inc. (U.S.) 100%; Pan Atlantic Reinsurance Company (Bermuda) 100%; U.S. Capital Premium Finance Company (U.S.) 100%; and AI Service Bureau, Inc. (U.S.) 100%. The investment in GoldStreet Syndicate Corporation (GoldStreet), an affiliated company (30% owned), was carried on the equity basis of accounting until September 30, 1995, at which time the equity interest was transferred to Republic Insurance Company ("Republic"). All significant inter-company transactions are eliminated in consolidation. NOTE C--INTENTION TO DRAW ON INVESTMENT DEPOSITS Pursuant to the requirements of the Constitution and By-Laws of the New York Insurance Exchange (the Exchange) and the Insurance Laws of the State of New York, Pan Atlantic Investors Ltd. (PAIL), the Company's wholly owned subsidiary and Exchange underwriting members are contingently liable for up to a maximum of $500,000 for the unpaid contractual obligations of underwriting members found to be insolvent. In the opinion of management, based on the advice of legal counsel, the $500,000 deposit which was used by the Security Fund represents each underwriting member's maximum liability with respect to the declared insolvencies as of December 31, 1995. However, each Exchange underwriting member remains contingently liable for an additional $500,000 in the event that the Security Fund is required to pay the contractual obligations of any underwriting member of the Exchange found to be insolvent in the future. At December 31, 1991 the Exchange terminated its remaining employees and, in management's opinion, it is not likely that the Exchange will resume operations. Statutory statements at December 31, 1995 filed by PAIL indicate a statutory capital and surplus of approximately $1,038,000. PAIL capital and surplus under GAAP as at the same date was approximately $5,959,000. USCG has petitioned the Superintendent of the Insurance Department of New York State to allow PAIL to be merged into USCIC. NOTE D--CONTINGENCIES On November 9, 1995 USCG and its subsidiaries entered into a settlement agreement with Republic Insurance Company ("Republic") in order to settle the various disputes between the parties ("the Settlement"). The Settlement provides for a restructuring of the complex business relationship between the parties; the transfer to Republic of the control and administration of reinsurance policies bound in Republic's name by certain subsidiaries of USCG; the payment of a liability, carried by USCG of $5,400,000, over ten years without interest, the payment being secured by a pledge of all the shares of USCG's principal subsidiary, U.S. Capital Insurance Company, with the option to discharge this obligation at any time by payment of the net present value of the amount outstanding; the commutation and release of the reinsurance obligations of various insurance company subsidiaries of USCG to Republic, some of which are immediate and others of which are to be determined at a future date; the commutation and immediate release of all Republic's reinsurance obligations to USCG's subsidiaries; the payment by Republic and other entities as parties to the settlement of up to $3,340,698 to a USCG subsidiary; and the transfer to Republic of USCG's equity interest in GoldStreet Syndicate Corporation in the amount of $4,297,026. The Settlement provides further for a number of continuing obligations on behalf of USCG, the performance of which determine the extent and exact timing of the release from the arbitration awards referenced in the December 31, 1994 10K of the Company as well as from certain other contractual and reinsurance obligations. In particular, pending the payment to Republic of the $5.4 million referred to above, the Settlement incorporates various covenants on USCG, including a requirement to maintain the consolidated net worth of USCG to the level of 100% of the amount owed to Republic, as well as certain other restrictions on borrowings, capital expenditures, dividends, premium writings, and asset sales. During 1987 the Company assumed indirectly from certain former PAG Reinsurance Underwriting Syndicate (the "PAG Syndicate") members the loss and loss adjustment expense reserve obligations relating to the 1984 and prior underwriting years, and the 1985 and 1986 business, written by the PAG Syndicate on their behalf, for cash and other consideration. Investments aggregating $34,000,000 are held in trusts by two of the Company's subsidiaries to pay claims related to the policies reinsured by Republic. Provided there are no events of default under the terms of the Settlement, the Company and Republic have agreed to defer commutation of the liabilities secured by the trusts until at least June 30, 1997. In the event that the value of the assets in the trusts on the date Republic exercises the commutation option is greater than Republic's valuation of the trust fund obligations, Republic shall distribute the excess trust funds to the Company's subsidiaries less any unpaid obligations owed to Republic, as per the terms of the Settlement. The difference between the value of assets held in the trusts and the estimate of trust fund obligations as of December 31, 1995 is carried as a deferred liability. The Company or its subsidiaries are parties to various other lawsuits generally arising in the normal course of the Company's insurance, reinsurance and management businesses. The Company does not believe that the eventual outcome of any such litigation will have a materially adverse effect on the financial condition or business of the Company or its subsidiaries. The Company's subsidiaries are regularly engaged in the investigation and defense of claims arising out of its insurance and reinsurance business. In an ongoing effort to improve solvency regulation, the National Association of Insurance Commissioners ("NAIC") and individual states have enacted certain laws and financial statement changes. The NAIC adopted a model risk-based capital act intended to provide a tool for regulators to evaluate the capital of insurers and reinsurers with respect to the risk assumed by them and determine whether there is a perceived need for possible corrective action. The nature of the corrective action depends upon the extent of the calculated risk-based capital act has not yet been widely adopted, in a related action, the NAIC adopted a proposal that requires insurers and reinsurers to report the results of their risk-based capital calculations as part of the 1994 and subsequent statutory annual statements filed with state regulatory authorities. Based on industry analysis provided by the NAIC, all domestic insurance companies in the USCG fell within the average risk-based capital level and require no regulatory action.
Schedule III U.S. CAPITAL GROUP INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1995, 1994, AND 1993 SUPPLEMENTARY INSURANCE INFORMATION (in thousands) Unpaid Claims Claim Underwriting, Deferred and Claim Gross Other Net and Claim Policy General and Net Acquisition Adjustment Unearned Claims Earned Investment Adjustment Acquisition Administrative Premium Segment Costs Expenses Premiums Payable Premiums Income Expenses Costs Expenses Written - ---------- --------- -------- -------- ------- -------- --------- ---------- ---------- ----------- ------- Year ended December 31, 1993: Reinsurance underwriting $ -- $113,782 $ 300 $ -- $13,863 $ 5,139 $11,059 $ 2,406 $ 7,579 $13,948 Reinsurance Services -- -- -- -- - 51 -- -- 2,975 -- Primary underwriting 505 20,841 4,576 -- 21,582 1,905 15,531 3,286 6,222 20,360 Corporate expense/income -- -- -- -- - 382 -- -- 91 -- Intercompany eliminations -- -- -- -- - -- -- (1,000) (1,129) -- -------- -------- ------- ----- ------- ------- ------- ------- ------- ------- TOTAL $ 505 $134,623 $ 4,876 $ -- $35,445 $ 7,477 $26,590 $ 4,692 $15,738 $34,308 ======== ======== ======= ===== ======= ======= ======= ======= ======= ======= Year ended December 31, 1994: Reinsurance underwriting $ -- $105,179 $ 215 $ -- $ 1,523 $ 4,434 $ 501 $ 1,374 $ 4,621 $ 1,249 Reinsurance services -- -- -- -- - 26 -- -- 3,904 -- Primary underwriting 979 17,598 8,830 -- 20,031 2,235 14,595 682 6,733 23,869 Corporate expense/income -- -- -- -- - 19 -- -- 52 -- Intercompany eliminations -- -- -- -- - -- -- (1,000) (1,002) -- -------- -------- ------- ----- ------- ------- ------- ------- ------- ------- TOTAL $ 979 $122,777 $9,045 $ -- $21,554 $ 6,714 $15,096 $1,056 $14,308 $25,118 ======== ======== ======= ===== ======= ======= ======= ======= ======= ======= Year ended December 31, 1995: Reinsurance Underwriting $ -- $ 84,540 $ 2,414 $ -- $ 4,364 $ 3,401 $(2,281) $ 1,627 $12,698 $ 6,561 Reinsurance Services -- -- -- -- - 63 -- -- 4,108 -- Primary Underwriting 3,103 22,735 23,502 -- 33,169 2,166 32,367 3,568 5,404 41,901 Corporate expense/income -- -- -- -- - 437 -- -- 90 -- Intercompany eliminations -- -- -- -- - -- -- (1,000) (1,366) -- -------- -------- ------- ----- ------- ------- ------- ------- ------- ------- TOTAL $3,103 $107,275 $25,916 $ -- $37,533 $ 6,067 $30,086 $ 4,195 $20,934 $48,462 ======== ======== ======= ===== ======= ======= ======= ======= ======= =======
SCHEDULE 1V U.S. CAPITAL GROUP INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 REINSURANCE (in thousands) Ceded Percentage to Assumed of Amount Gross Other from Other Net Assumed Description Amount Companies Companies Amount to Net - ----------- ------- --------- ---------- ------- ---------- Year Ended December 31, 1993 Property and liability insurance premiums $21,582 $ 2,048 $15,911 $35,445 45% ======= ======= ======= ======= === Year Ended December 31, 1994: Property and liability insurance premiums $20,628 $ 619 $ 1,545 $21,554 7% ======= ======= ======= ======= === Year Ended December 31, 1995: Property and liability insurance premiums $45,075 $21,881 $14,339 $37,533 38% ======= ======= ======= ======= ==== Schedule VI U.S. CAPITAL GROUP INC. AND SUBSIDIARIES YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993 SUPPLEMENTARY INFORMATION CONCERNING PROPERTY--CASUALTY INSURANCE OPERATIONS (in thousands)
Reserves for Unpaid Claims Discount Deferred and Claims if Any Gross Net Acquisition Adjustment Deducted in Unearned Earned Affiliation with Registrant Costs Expense Column C Premium Premiums - --------------------------- ----------- ------------- ----------- --------- -------- Year ended December 31, 1993: Consolidated property-casualty entities $ 505 $134,623 $ - $ 4,876 $34,445 Unconsolidated property-casualty entities Proportionate share of registrant and its subsidiaries' 50% or less earned property-casualty equity investees - 2,720 - - 6 ------- -------- ------- ------- ------- TOTAL $ 505 $137,343 $ - $ 4,876 $34,451 ======= ======== ======= ======= ======= Year ended December 31, 1994: Consolidated property-casualty entities $ 979 $122,777 $ - $ 9,045 $21,554 Unconsolidated property-casualty entities Proportionate share of registrant and its subsidiaries' 50% or less earned property-casualty equity investees - 1,446 - - 310 ------ -------- ------- ------- ------- TOTAL $ 979 $124,223 $ - $ 9,045 $21,864 ====== ======== ======= ======= ======= Year ended December 31, 1995: Consolidated property-casualty entities $3,103 $107,275 $ - $25,916 $37,533 Unconsolidated property-casualty entities Proportionate share of registrant and its subsidiaries' 50% or less earned property-casualty equity investees - - - - - ------ -------- ------- ------- ------- TOTAL $3,103 $107,275 $ - $25,916 $37,533 ====== ======== ======= ======= ======= Claim and Claim Adjustment Expenses Incurred Relative to Paid ---------------------- Claims Net Policy and Claim Net Investment Current Prior Acquistion Adjusting Premiums Affiliation with Registrant Income Year Years Costs Expenses Written - --------------------------- ---------- --------- ------- ----------- ----------- --------- Year ended December 31, 1993: Consolidated property-casualty entities $ 7,477 $22,532 $ 4,058 $ 4,692 $27,822 $34,308 Unconsolidated property-casualty entities Proportionate share of registrant and its subsidiaries' 50% or less earned property-casualty equity investees 482 - (78) (5) 575 6 ------- ------- ------- ------- ------- ------ TOTAL $ 7,959 $22,532 $ 3,980 $ 4,687 $28,397 $34,314 ======= ======= ======= ======= ======= ======= Year ended December 31, 1994: Consolidated property-casualty entities $ 6,714 $14,772 $ 324 $ 1,056 $22,165 $25,118 Unconsolidated property-casualty entities Proportionate share of registrant and its subsidiaries' 50% or less earned property-casualty equity investees 509 - 474 5 290 310 ------- ------- ------- ------- ------- ------- TOTAL $ 7,223 $14,772 $ 798 $ 1,061 $22,455 $25,428 ======= ======= ======= ======= ======= ======= Year ended December 31, 1995: Consolidated property-casualty entities $ 6,067 $23,942 $ 6,144 $ 4,195 $46,206 $48,462 Unconsolidated property-casualty entities Proportionate share of registrant and its subsidiaries' 50% or less earned property-casualty equity investees - - - - - - ------- ------- ------- ------- ------- ------ TOTAL $ 6,067 $23,942 $ 6,144 $ 4,195 $46,206 $48,462 ======= ======= ======= ======= ======= =======
EX-21 2 SUBSIDIARIES OF THE COMPANY Name of Corporation Ownership % Jurisdiction - ------------------- ----------- ------------ U.S. Capital Group Inc. 100% Delaware U.S. Capital Insurance Company 100% New York Atlantic Run Off Services Inc. 100% Connecticut INSYST, Inc. 100% Connecticut PAG Management Inc. 100% Delaware Pan Atlantic Investors Ltd. 100% New York Pan Atlantic Underwriters Ltd. 100% Bermuda Pan Atlantic Reinsurance Company Limited(2) 73% Bermuda Pan Atlantic Insurance Company Limited(3) 67.33% United Kingdom AROS Reinsurance Services Limited 100% United Kingdom (1) An additional 12.94% is owned by Pan Atlantic Investors Ltd. (2) The remaining 27% is owned by Pan Atlantic Underwriters, Ltd. (3) The remaining 32.67% is owned by Pan Atlantic Underwriters, Ltd. March 15, 1995 Exhibit 21 EX-27 3 ARTICLE 7 FDS FOR 10-K
7 The schedule contains summary financial information extracted from the consolidated financial statements and is qualified in its entirety by reference to such financial statements. 1,000 YEAR DEC-31-1995 DEC-31-1995 68,630 0 70,370 14,287 0 0 84,657 596 67,476 3,102 155,831 107,275 25,916 12,624 0 4,000 111 0 5,905 0 155,831 37,533 6,067 960 1,552 0 4,852 50,764 (9,504) 0 0 (6) 0 0 (9,510) 16.97 0 0 0 0 0 0 0 0
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