SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[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, 1996
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 1-7411
ALLCITY INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
New York 13-2530665
(State of incorporation) (I.R.S. Employer Identification Number)
122 Fifth Avenue, New York, N.Y. 10011
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code 212-387-3000
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
None
Securities registered pursuant to Section 12(g) of the Act:
None
(Title of Class)
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. [x]
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days.
Yes X No
The aggregate market value of the voting stock held by nonaffiliates
of the registrant as of March 14, 1997 was $5,148,646.
The number of shares outstanding of each of the registrant's classes
of common shares, as of March 14, 1997, was 7,078,625.
DOCUMENTS INCORPORATED BY REFERENCE - None
Exhibit Index on Page 25.
TABLE OF CONTENTS
Part I
Page
Item 1- Business................................................ 1
Item 2- Properties.............................................. 10
Item 3- Legal Proceedings....................................... 10
Item 4- Submission of Matters to a Vote of Security Holders..... 10
Part II
Item 5- Market for the Registrant's Common Equity and Related
Stockholder Matters..................................... 10
Item 6- Selected Financial Data................................. 11
Item 7- Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 12
Item 8- Financial Statements and Supplementary Data............. 15
Item 9- Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure..................... 15
Part III
Item 10- Directors and Executive Officers of the Registrant...... 15
Item 11- Executive Compensation.................................. 18
Item 12- Security Ownership of Certain Beneficial Owners and
Management.............................................. 21
Item 13- Certain Relationships and Related Transactions.......... 23
Part IV
Item 14- Exhibits, Financial Statement Schedules, and Reports on
Form 8-K................................................ 23
Signatures....................................................... 24
PART I
Item 1. Business
General
Allcity Insurance Company (the "Registrant", "Allcity" or the
"Company") is a property and casualty insurer. Empire Insurance Company
("Empire"), a property and casualty insurer, owns approximately 84.6% of
the outstanding common shares of the Company and 100% of the outstanding
common shares of Centurion Insurance Company ("Centurion"). Empire's
common shares are 100% owned and controlled, through subsidiaries, by
Leucadia National Corporation ("Leucadia"). Leucadia is a diversified
financial services holding company whose shares are traded on both the
New York and Pacific Stock Exchanges and is principally engaged in
property and casualty insurance, life and health insurance, banking and
lending and manufacturing. The Company, Empire and Centurion are
sometimes hereinafter collectively referred to as the ("Group").
The Company operates in the State of New York, primarily in the New
York City metropolitan area, conducting property and casualty insurance
underwriting activities. The Company's property and casualty business is
produced through general agents, one of which is an Empire subsidiary,
local agents and insurance brokers. Substantially all of the Group's
policies are written for a one year period. The Group is licensed in New
York to write all lines of insurance that may be written by property and
casualty insurers except residual value, credit, unemployment, animal,
marine protection and indemnity insurance and ocean marine insurance.
Empire is also licensed to write insurance in Connecticut, Massachusetts,
Missouri, New Hampshire and New Jersey. Approximately 4.2% of the
Group's written premiums are produced from sources outside New York
State.
According to A.M. Best & Co. ("Best"), an insurance industry
research organization, the Group ranked 108th in total net premium
writings among property and casualty insurance companies and groups in
1995. During 1996, the Group was rated (B++)(very good) by Best and was
rated "A" (good) by Standard & Poor's Insurance Rating Services, based
on the Group's claims-paying ability. Approximately 66% of the Company's
net premiums written in 1996 were for automobile insurance coverages,
while 34% of such premiums were for commercial (other than automobile)
and personal and miscellaneous coverages. The Company's general agents
produced approximately 23% of the Company's premium revenues for the year
ended December 31, 1996.
Pooling Agreement
All insurance business written by the Company is subject to a
pooling agreement with Empire under which the Company and Empire
effectively operate as one company. The Company operates under the same
general management as Empire and has full use of Empire's personnel and
facilities. As of December 31, 1996, Empire and its subsidiaries had 810
full and part-time employees. Currently, and for all periods presented,
all premiums, losses, loss adjustment expenses and other underwriting
expenses are shared in the proportion 70% to Empire and 30% to the
Company. The pooling agreement and subsequent amendments were approved
by the New York State Insurance Department.
Narrative Description of Business
The Company's property and casualty insurance operations are
conducted in conjunction with other members of the Group. The Group
provides personal insurance coverage to automobile owners and homeowners
and commercial insurance for workers' compensation, residential real
estate, restaurants, retail establishments, livery vehicles (both
medallion and radio controlled) and several types of service contractors.
The Group has also acquired private passenger automobile and
commercial automobile assigned risk business from other insurance
companies. These contractual arrangements provide for negotiated fees
paid to the Group within parameters established by the New York Insurance
Department.
In addition, the Group receives a fee as a servicing carrier,
providing administrative services, including claims processing,
underwriting and collection activities, for the New York Public
Automobile Pool, Massachusetts Limousine/Taxi Program and New Hampshire
Commercial Automobile Insurance Procedure. These arrangements do not
involve the assumption of any material underwriting risk by the Group.
Financial Information Relating to Business Segments
The Company operates in the following business segments:
(1) Automobile lines - includes private passenger and commercial
automobile bodily injury, property damage, comprehensive and
collision insurance coverages.
(2) Commercial lines - includes commercial multiple peril, workers'
compensation, other liability, glass, burglary, disability and
inland marine insurance coverages.
(3) Miscellaneous and personal lines - includes fire and allied
lines and homeowners insurance coverages.
The following table presents business segment data, net of
reinsurance, for the three years ended December 31, 1996 (dollars in
thousands):
Premiums Premiums Losses Loss
Written Earned Incurred Ratio(a)
1996
Automobile lines $60,162 $63,558 $56,562 89.0%
Commercial lines 25,243 27,714 17,128 61.8%
Miscellaneous and personal
lines 5,606 4,801 2,697 56.2%
Total $91,011 $96,073 $76,387 79.5%
1995
Automobile lines $62,485 $61,261 $55,652 90.8%
Commercial lines 28,821 29,535 20,799 70.4%
Miscellaneous and personal
lines 4,029 3,455 1,224 35.4%
Total $95,335 $94,251 $77,675 82.4%
Premiums Premiums Losses Loss
Written Earned Incurred ratio(a)
1994
Automobile lines $60,216 $55,826 $43,825 78.5%
Commercial lines 30,334 30,387 15,435 50.8%
Miscellaneous and personal
lines 2,986 2,831 1,454 51.4%
Total $93,536 $89,044 $60,714 68.2%
<FN>
(a) Computed on a Statutory Accounting Principles ("SAP") basis
and excluding loss adjustment expenses.
For further information concerning Business Segments, see Notes 8
and 12 of the Notes to Consolidated Financial Statements, included
elsewhere herein.
Combined Ratios
Set forth below is certain statistical information for the
Company prepared in accordance with generally accepted accounting
principles ("GAAP") and SAP, for the three years ended December 31,
1996. The Loss Ratio is the ratio of incurred losses and loss
adjustment expenses to net premiums earned. The Expense Ratio is the
ratio of underwriting expenses (policy acquisition costs, commissions,
and a portion of administrative, general and other expenses attributable
to underwriting operations, net of service fee income) to net premiums
written, if determined in accordance with SAP, or to net premiums earned,
if determined in accordance with GAAP. A Combined Ratio below 100%
indicates an underwriting profit and a Combined Ratio above 100%
indicates an underwriting loss. The Combined Ratio does not include the
effect of investment income.
Year Ended December 31
1996 1995 1994
Loss Ratio:
GAAP 92.0% 95.8% 79.6%
SAP 89.3% 91.2% 80.6%
Industry(SAP)(a) N/A 78.9% 81.1%
Expense Ratio:
GAAP 22.1% 19.6% 22.9%
SAP 18.2% 16.3% 20.7%
Industry(SAP)(a) N/A 27.5% 27.3%
Combined Ratio:(b)
GAAP 114.1% 115.4% 102.5%
SAP 107.5% 107.5% 101.3%
Industry(SAP)(a) N/A 106.4% 108.4%
<FN>
(a) Source: Best's Aggregates & Averages, Property/Casualty, 1996
Edition. A comparison of industry combined ratios may not be
meaningful as a result of, among other things, differences in
geographical concentration and in the mix of property and casualty
insurance products.
(b) For 1996 and 1995, a change in the statutory accounting treatment for
retrospectively rated reinsurance agreements was the principal reason
for the difference between the GAAP Combined Ratio and the SAP
Combined Ratio. Additionally in 1996, the difference relates to the
accounting for certain expenses which are treated differently under
SAP and GAAP.
The Company's 1996 and 1995 GAAP and SAP Loss and Combined Ratios
were higher than those of 1994 and prior years due to significant loss
reserve strengthening in automobile, commercial package and workers'
compensation lines as more fully discussed in Item 7, "Management's
Discussion and Analysis of Financial Condition and Results of
Operations". Additionally, for 1995, additional payments were made on
automobile no-fault claims which had been closed prior to 1995.
Marketing and Distribution
The Group's marketing and distribution strategy emphasizes
profitability rather than volume and focuses on the production of its
voluntary business through five general agents, one of which is an Empire
subsidiary, and approximately 390 local agents and insurance brokers who
are compensated for their services by payment of commissions on the
premiums they produce. These agents and brokers also represent
competing insurance companies. Subject to regulatory approval, the Group
utilizes premium rates developed and independently filed for all
coverages with the exception of workers' compensation, for which rates
are filed by the New York Compensation Insurance Rating Board, and
assigned risk automobile business, for which rates are filed by the New
York Automobile Insurance Plan.
Reinsurance
The Company's retention on property and casualty lines of insurance
was $300,000 in 1996 and $225,000 in 1995 and 1994; for workers'
compensation business the retention was $500,000 for all three years.
Additionally, the Company carries reinsurance to protect itself against
certain catastrophic losses. Its retention of lower level losses under
such treaties is $5,000,000 for 1997 and was $3,000,000 for each of 1996,
1995 and 1994.
Effective January 1, 1997, Empire entered into a quota share
reinsurance agreement with its subsidiary, Centurion. Under this
agreement, Empire will assume 50% of the premiums and losses of Centurion
and grant Centurion a ceding commission. Under the pooling agreement,
70% of such business assumed by Empire will be retained and 30% will be
shared with the Company.
Although reinsuance does not legally discharge an insurer from its
primary liability for the full amount of the policy liability, it does
make the assuming reinsurer liable to the insurer to the extent of the
reinsurance ceded. The majority of the Company's reinsurance has been
placed with certain of the largest reinsurance companies, including (with
their Best ratings) General Reinsurance Corporation (A++) (superior),
Munich American Reinsurance Company (A+) (superior), Everest Reinsurance
Company (A)(excellent) and Zurich Reinsurance Centre, Inc.
(A)(excellent). The Company believes its reinsurers to be financially
capable of meeting their respective obligations. However, to the extent
that any reinsuring company is unable to meet its obligations, the
Company would be liable for the reinsured risks. The Company has
established reserves, which the Company believes are adequate, for any
nonrecoverable reinsurance.
Investments
Investment activities represent a significant part of the Company's
total income. Investments are managed by the Investment Committee of the
Board of Directors, which consults with outside investment advisors with
respect to a substantial portion of the Company's investment portfolio.
The Company has a diversified investment portfolio substantially
consisting of securities rated "investment grade" by established bond
rating agencies or issued or guaranteed by the U.S. Government or its
agencies. At December 31, 1996, and 1995 the average yield of the
Company's bond portfolio was approximately 6.1% and 5.8% and the average
maturity of the Company's bond portfolio was approximately 3.3 years and
2.8 years, respectively.
Tax Sharing Agreement
The Company has been included in the consolidated federal income tax
returns of Leucadia since 1993. Under the terms of the tax sharing
agreement between Leucadia and the Company, the Company computes its tax
provision on a separate return basis and is either charged its share of
federal income tax resulting from its taxable income or is reimbursed for
tax benefits resulting from its losses.
Government Regulation
The Group, like all insurance companies, is subject to regulation
involving the establishment of premium rates, standards of solvency and
minimum requirements of capital and surplus which must be maintained in
the states in which they transact business. There can be no assurance
that such regulatory requirements will not become more stringent in the
future and have an adverse effect on the Group's operations. Insurance
companies are required to file detailed annual reports with the insurance
regulatory agencies in each of the states in which they do business and
are subject to periodic examination by such agencies. The Company is
presently undergoing an examination by the New York State Insurance
Department for the period ending December 31, 1996.
The National Association of Insurance Commissioners ("NAIC") has
adopted model laws incorporating the concept of a "risk based capital"
("RBC") standard for insurance companies. Generally, the RBC formula is
designed to assess the adequacy of an insurer's statutory capital
in relation to the risks inherent in its business. The RBC formula is
used by the states as a tool to identify weakly capitalized companies for
the purpose of initiating regulatory action when capital under the
standard is judged to be inadequate. As of December 31, 1996, the
Company's RBC ratio substantially exceeded minimum requirements.
The NAIC also has adopted various ratios for insurance companies
which, in addition to the RBC ratio, are designed to serve as a tool to
assist state regulators in discovering potential weakly capitalized
companies or companies with unusual trends. The Company had certain
"other than normal" NAIC ratios for the year ended December 31, 1996.
The Company believes that there are no material underlying problems or
weaknesses in its insurance operations and that it is unlikely that
material adverse regulatory action will be taken.
The Group is a member of state insurance funds which provide certain
protection to policyholders of insolvent insurers doing business in those
states. Due to insolvencies of certain insurers in recent years, the
Group has been assessed certain amounts which have not been material and
are likely to be assessed additional amounts by state insurance funds.
The Company believes that it has provided for all anticipated assessments
and that any additional assessments will not have a material adverse
effect on the Company's financial condition or results of operations.
Competition
The Company believes that property and casualty insurers generally
compete on the basis of price, customer service, consumer recognition and
financial stability. The insurance industry has historically been
cyclical in nature, with periods of less intense price competition
generating significant profits, followed by periods of increased price
competition resulting in reduced profitability or loss. The current
cycle of intense price competition has continued for a longer period than
in the past, suggesting that the significant infusion of capital into the
industry in
recent years, coupled with larger investment returns, has been, and may
continue to be, a depressing influence on policy rates. The
profitability of the property and casualty insurance industry is affected
by many factors, including rate competition, severity and frequency of
claims (including catastrophe losses), interest rates, state regulation,
court decisions and judicial climate.
Losses and Loss Adjustment Expenses
Liabilities for unpaid losses, which are not discounted (except for
certain workers' compensation liabilities), and loss adjustment expenses
("LAE") are determined using case-basis evaluations, statistical analyses
and estimates for salvage and subrogation recoverable and represent
estimates of the ultimate claim costs of all unpaid losses and LAE.
Liabilities include a provision for losses that have occurred but have
not yet been reported. These estimates are subject to the effect of
trends in future claim severity and frequency experience. Adjustments
to such estimates are made from time to time due to changes in such
trends as well as changes in actual loss experience. These adjustments
are reflected in current earnings.
The Company relies upon standard actuarial ultimate loss projection
techniques to obtain estimates of liabilities for losses and LAE. These
projections include the extrapolation of both losses paid and incurred
by business line and accident year and implicitly consider the impact of
inflation and claims settlement patterns upon ultimate claim costs based
upon historical patterns. In addition, methods based upon average loss
costs, reported claim counts and pure premiums are reviewed in order to
obtain a range of estimates for setting the reserve levels. For further
input, changes in operations in pertinent areas including underwriting
standards, product mix, claims management and legal climate are
periodically reviewed.
In the following table, the liability for losses and LAE are
reconciled for each of the three years ended December 31, 1996. Included
therein are current year data and prior year development.
RECONCILIATION OF LIABILITY FOR LOSSES AND LAE
1996 1995 1994
(In thousands)
Liability for losses and LAE, net,
at beginning of year $142,718 $121,923 $106,115
Provision for losses and LAE for
claims occurring in the current year 80,216 80,061 73,790
Increase (decrease) in estimated losses
and LAE for claims occurring in prior
years 8,134 10,266 (2,934)
88,350 90,327 70,856
Loss and LAE payments for claims
occurring during:
The current year 27,192 23,743 20,000
Prior years 60,382 45,789 35,048
87,574 69,532 55,048
Liability for losses and LAE, net 143,494 142,718 121,923
Reinsurance recoverable 262,593 257,161 219,676
Liability for losses and LAE
at end of year as reported in
financial statements $406,087 $399,879 $341,599
The Company's liability for losses and LAE as of December 31, 1996 was
$143,494,000 determined in accordance with SAP and $406,087,000 determined in
accordance with GAAP. The difference relates to liabilities assumed by
reinsurers, which are not deducted from GAAP liabilities.
The following table presents the development of balance sheet
liabilities for 1986 through 1996. The liability line at the top of the
table indicates the estimated liability, net of reinsurance, for unpaid
losses and LAE recorded at the balance sheet date for each of the
indicated years. This liability represents the estimated amount of losses
and LAE for claims that were unpaid at each annual balance sheet date,
including provision for losses estimated to have been incurred but not
reported to the Company. The middle portion of the table shows the re-
estimated amount of the previously reported liability based on experience as
of the end of each succeeding year. As more information becomes available
and claims are settled, the estimated liabilities are adjusted upward or
downward with the effect of decreasing or increasing net income at the time
of adjustment.
The "cumulative redundancy (deficiency)" represents the aggregate change
in the estimates over all prior years. For example, the initial 1986
liability estimate has developed a $3,745,000 redundancy over ten years.
The effect on pretax income during the past three years of changes in
estimates of the liabilities for losses and LAE is shown in the
reconciliation table above.
The lower section of the table shows the cumulative amount paid with
respect to the previously recorded liability as of the end of each succeeding
year. For example, as of December 31, 1996, the Company had paid $49,207,000
of the currently estimated $50,895,000 of losses and LAE that had been
incurred, but not paid, through the end of 1986; thus an estimated $1,688,000
of losses incurred through 1986 remain unpaid as of the current balance sheet
date.
In evaluating this information it should be noted that each amount
includes the effects of all changes in amounts for prior periods. For
example, the amount of the redundancy related to losses settled in 1989, but
incurred in 1986, will be included in the cumulative redundancy amount for
years 1986, 1987 and 1988. This table does not present accident or policy
year development data. Conditions and trends that have affected development
of the liability in the past may not necessarily occur in the future.
Accordingly, it would not be appropriate to extrapolate future redundancies
or deficiencies based on this table.
Allcity Insurance Company
Analysis of Loss and Loss Adjustment Expenses Development
(Thousands of dollars)
Year ended December 31,
1986 1987 1988 1989 1990
Liability for
unpaid Losses
and Loss adjust-
ment expenses 54,640 62,013 67,154 70,567 75,420
One Year Later 54,292 59,515 64,411 68,347 74,844
Two Years Later 52,591 58,357 62,135 65,227 73,538
Three Years Later 51,044 56,650 59,859 63,792 73,151
Four Years Later 50,570 55,367 58,606 63,556 74,190
Five Years Later 49,713 54,595 59,131 63,584 76,509
Six Years Later 49,344 54,904 59,304 64,962 78,392
Seven Years Later 49,879 54,924 60,504 65,467
Eight Years Later 49,785 55,682 61,363
Nine Years Later 50,315 56,382
Ten Years Later 50,895
Cumulative Redun-
dancy (Deficiency) 3,745 5,631 5,791 5,100 (2,972)
1991 1992 1993 1994 1995 1996
84,178 96,712 106,115 121,923 142,718 143,494
83,987 96,516 103,181 132,189 150,852
83,341 97,208 112,176 140,620
85,197 103,592 118,127
88,928 108,430
92,035
(7,857)(11,718)(12,012) (18,697)(8,134)
Cumulative amount
of Liability paid
through:
One Year Later 16,307 18,133 19,242 19,744 23,681
Two Years Later 26,630 29,287 30,362 32,840 38,067
Three Years Later 34,295 36,927 39,511 42,271 50,194
Four Years Later 39,129 42,872 45,698 49,803 58,830
Five Years Later 42,402 46,734 50,434 54,602 65,025
Six Years Later 44,721 49,262 53,433 58,185 69,568
Seven Years Later 46,101 51,067 55,598 60,953
Eight Years Later 47,200 52,538 57,393
Nine Years Later 48,150 53,813
Ten Years Later 49,207
Net Liability -
End of Year
Reinsurance
Recoverable
Gross Liability -
End of Year
Net Re-estimated
Liability - Latest
Re-estimated
Recoverable - Latest
Gross Re-estimated
Liability - Latest
Gross Cumulative
Deficiency
1991 1992 1993 1994 1995
26,852 33,903 35,048 45,789 60,382
44,989 54,615 59,701 80,911
59,336 71,653 81,680
69,955 85,689
77,965
106,115 121,923 142,718
184,718 219,676 257,161
290,833 341,599 399,879
118,127 140,620 150,852
219,349 254,287 269,708
337,476 394,907 420,560
(46,643) (53,308) (20,681)
Item 2. Properties
The Group's executive and administrative offices are located on six
floors of a ten-story office building at 122 Fifth Avenue, New York, New
York 10011 and one floor of an adjoining office building at 120 Fifth
Avenue, New York, New York 10011, under leases each of which expire on
September 30, 1998.
The Group has entered into a twenty year lease agreement in an
office building, in which Leucadia has an equity interest, and will
relocate its executive and administrative offices in the summer of 1998.
The Group received certain incentives from both the City and State of New
York in connection with this lease which will be recognized over the term
of the lease.
The Group also conducts limited operations from branch offices
located in Manhattan, Mineola and Rochester, New York, Boston,
Massachusetts and Bedford, New Hampshire. The rental charged to the
Company for these facilities is prorated in accordance with the pooling
agreement described in "Pooling Agreement" under Item 1, herein.
Item 3. Legal Proceedings
The Company is party to legal proceedings that are considered to be
either ordinary, routine litigation or incidental to its business. Based
on discussion with counsel, the Company does not believe that such
litigation will have a material effect on its financial position,
results of operations or cash flows.
Item 4. Submission of Matters to a Vote of Security Holders
The information to be included under the caption "Submission of
Matters to a Vote of Security Holders" is included in the Company's Form
10-Q for the quarterly period ended September 30, 1996.
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters
(a) Market Information
The Company's common stock trades on The Nasdaq Stock Market under
the symbol "ALCI". The following table sets forth, for the calendar
quarters indicated, the high and low closing trade price per common share
as reported by the Wall Street Journal and National Association of
Securities Dealers, Inc.
High Low
1st Quarter 1997
(through March 14, 1997) $ 8 1/2 $ 7
1st Quarter 1996 9 3/8 8
2nd " " 9 1/4 7 1/2
3rd " " 8 1/4 6 1/4
4th " " 8 1/2 7
1st Quarter 1995 9 3/4 8 3/4
2nd " " 9 1/4 8 1/2
3rd " " 9 1/2 8 1/2
4th " " 9 3/4 8
(b) Holders
The number of shareholders of record of common shares at December
31, 1996 was 583.
(c) Dividends
The Company has paid no dividends on its common shares since 1975.
Without the approval of the New York State Insurance Department,
dividends are limited to the lowest of 1) 10% of surplus as computed on
a SAP basis, 2) earned surplus determined on a SAP basis and 3) adjusted
net investment income during the 36 month period prior to declaration.
At December 31, 1996, $6,957,000 was available for distribution of
dividends. The Company does not presently anticipate paying dividends
in the near future.
Item 6. Selected Financial Data
Years ended December 31
1996 1995 1994 1993(b) 1992
(Thousands of dollars, except per share amounts)
Total revenues $120,790 $117,892 $107,286 $94,632 $89,845
Income before cumulative
effects of changes in
accounting principles $2,634 $563 $6,901 $ 7,222 $8,482
Cumulative effects of
changes in accounting
principles - - - 6,171 -
Net income(a) $2,634 $563 $ 6,901 $13,393 $8,482
Per share:
Income before cumulative
effects of changes in
accounting principles $0.37 $0.08 $0.97 $1.02 $1.20
Cumulative effects of
changes in accounting
principles - - - 0.88 -
Net income (a) $0.37 $0.08 $0.97 $1.90 $1.20
<FN>
a) Net income includes net securities gains (losses) net of applicable
tax, as follows:
Gains(Losses) Per Share
1996 $ 735,000 $ 0.10
1995 (133,000) (0.02)
1994 (437,000) (0.06)
1993 918,000 0.13
1992 1,470,000 0.21
<FN>
b) The cumulative effects of changes in accounting principles related
to changes in accounting for income taxes, postretirement benefits and
retrospectively rated reinsurance contracts.
At December 31
1996 1995 1994 1993 1992
(Thousands of dollars)
Total assets(a) $653,730 $660,820 $582,508 $513,558 $236,094
Invested assets 272,992 273,548 237,878 219,608 199,220
Surplus note:
Face value 7,000 7,000 7,000 7,000 7,000
Interest 7,115 6,524 5,911 5,395 4,975
Common Shareholders'
Equity(b) 75,658 75,936 63,264 69,813 53,780
GAAP Combined Ratio 114.1%(d) 115.4%(d) 102.5% 103.5% 103.5%
SAP Combined Ratio 107.5%(d) 107.5%(d) 101.3% 101.6% 101.8%
Industry SAP Combined
Ratio NA 106.4% 108.4% 106.9% 115.7%
Premium to Surplus
Ratio (c) 1.4X 1.6X 1.7X 1.5X 1.6X
<FN>
(a) Includes approximately $334.2 million, $336.9 million, $297.5 million
and $249.8 million in 1996, 1995, 1994 and 1993, respectively, for
reinsurance receivables, the majority of which is recoverable from
Empire under the pooling agreement. Prior to December 31, 1993,
reinsurance receivables were netted against loss reserves and
unearned premiums.
(b) Includes unrealized depreciation of approximately $1.7 million in
1996 and $10.9 million in 1994, and unrealized appreciation of
approxmately $1.2 million in 1995 and $2.6 million in 1993, all
net of tax, on investments classified as avail able for sale.
(c) Premium to Surplus Ratio was calculated by dividing statutory net
premiums written by year-end statutory surplus.
(d) For 1996 and 1995, a change in the statutory accounting treatment for
retrospectively rated reinsurance agreements was the principal reason
for the difference between the GAAP Combined Ratio and the SAP
Combined Ratio. Additionally in 1996, the difference relates to the
accounting for certain expenses which are treated differently under
SAP and GAAP.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Liquidity and Capital Resources
During each of the three years in the period ended December 31,
1996, the Company operated profitably and net cash was provided from
operations. In 1996, net cash provided from operations reflected a
marked decrease primarily due to a decrease in premiums written and
a program to reduce pending claims and settle claims more quickly than
in the past which resulted in more loss and loss adjustment expense
payments.
At December 31, 1996 and 1995, the yield of the Company's bond
portfolio was 6.1% and 5.8% with an average maturity of 3.3 years and 2.8
years, respectively. Additionally, at December 31, 1996, approximately
95% of the bond portfolio was invested in issues of the U.S. Government
and its agencies with the remainder invested in investment grade
corporate and industrial issues. The Company presently anticipates
reinvesting proceeds from maturities and investment income in
substantially similar investments.
The Company believes its immediate cash needs will not require the
sale of bonds, although it may sell certain of these securities from time
to time.
Principally as a result of rising market interest rates during 1996,
the market value of the Company's available for sale bond portfolio at
December 31, 1996 was $2,572,000 below amortized cost. While this has
resulted in a decrease in shareholders' equity, it had no effect on
results of operations or cash flows.
The Company maintains cash, short-term and readily marketable
securities in an amount sufficient to satisfy its anticipated cash needs.
The Company does not presently anticipate paying dividends in the near
future and believes it has sufficient capital to meet its currently
anticipated level of operations.
Results of Operations
Revenues
Earned premium revenues of the Company increased by approximately
$1.8 million, or 1.9%, and $5.2 million, or 5.8%, in 1996 and 1995,
respectively. Beginning in the fourth quarter of 1995, higher premium
rates were charged on certain lines of business, including in 1996
amounts related to increased minimum automobile liability coverage
required by New York State. Such rate increases were largely offset
by a decrease in the number of policies in force. This decrease
primarily resulted from a depopulation of the assigned risk pools and
reduced volume in other lines of business that have not been profitable,
primarily certain specialty programs within voluntary commercial
automobile lines. In addition, increased competition, primarily in
workers' compensation and commercial package policies has reduced volume.
The increase in 1995 as compared to 1994 principally was attributable to
growth in policies in force and increased premium rates. The majority
of the growth in 1995 resulted from assigned risk service business.
Investment income has increased by approximately $1 million, or
6.5%, and $2.2 million, or 16.5%, in 1996 and 1995, respectively,
primarily as a result of growth in invested assets resulting from
positive cash flows. In 1996, the Company realized gains on the sale of
fixed maturities, primarily U.S. Treasury Notes. During 1995 and 1994,
the Company realized losses on the sale of certain investments in order
to shorten the average duration of its investment portfolio.
Service fee income decreased approximately $1.1 million, or 14%, in
1996 primarily as a result of a depopulation in the assigned risk pools,
and to a lesser extent, the non-renewal of certain service contracts with
other insurance carriers. In 1995, an increase of approximately $2.7
million, or 55%, was primarily the result of increased acquisition of
blocks of automobile assigned risk business from other insurance
companies.
Expenses
Losses incurred for 1996 were approximately $1.3 million, or 1.7%,
less than those of 1995. Losses incurred for 1995 were approximately $17
million, or 27.9%, greater than those of 1994. Based upon actuarial
studies conducted during 1996 and 1995, the Company strengthened reserves
for losses from prior accident years by approximately $8,100,000 in 1996,
primarily related to voluntary commercial automobile and commercial
package lines of business, and by approximately $10,300,000 in 1995,
primarily related to automobile and workers' compensation lines of
business. The Company continues to analyze the adequacy of its loss
reserves on a quarterly basis. Also in 1996, the Company experienced
unusually high assessments from a New York State workers' compensation
fund. Contributing to the 1995 increase in losses were additional
payments made on automobile no-fault claims which had been closed prior
to 1995.
Loss adjustment expenses for 1996 were approximately $0.7 million,
or 5.4%, less than 1995. Although, lower than 1995, loss adjustment
expenses were high due largely to increased payments for claims audits
and outside counsel for litigated claims and increased operating costs
(primarily pension and severance benefits for certain employees), a
portion of which is allocated to loss adjustment expense. Loss
adjustment expenses in 1995 were approximately $2.5 million, or 24.7%,
higher than 1994, primarily attributable to increased claims activity and
higher operating costs.
The combination of other underwriting expenses incurred and the
amortization of deferred policy acquisition costs reflected increases of
approximatley $1.7 million, or 6.6%, and $0.8 million, or 3% in 1996 and
1995, respectively. The increase in 1996 was primarily the result of
higher operating costs, primarily relating to pension and severance
benefits for certain employees, and higher systems costs as the Company
has begun a program to upgrade its processing and information systems,
some of which are currently not year 2000 compliant. The increase in
1995 was the result of increased amortization of acquisition costs
related to the growth in earned premiums.
Impact of Inflation
The Company, as well as the property and casualty insurance industry
in general, is affected by inflation. With respect to losses, the
Company's claim severity is affected by the impact of inflation on the
cost of automobile repair parts, medical costs and lost wages. The costs
of adjusting claims and other underwriting expenses have also been
adversely affected by inflationary pressures on salaries and employee
benefits. The Company receives rate increases based in part upon its
experience as well as the industry's experience. Accordingly, premium
increases generally follow the rate of inflation.
Item 8. Financial Statements and Supplementary Data
See page F1.
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
NONE
PART III
Item 10. Directors and Executive Officers of the Registrant
Pursuant to the Company's Charter and By-Laws, the Board of
Directors of the Company consists of 14 members divided into three
classes: Class I, Class II and Class III. Classes I and III consist of
five directors each and Class II consists of four directors. One class
of directors is elected in each year for a three-year term. All of the
directors of the Company are also directors of Empire and Centurion.
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
Richard G. Petitt, 48, Principal Occupation - Chairman of the
Director, Chairman of the Board and Chief Executive Officer of the
Board, President & Chief Company and Empire since March 1996
Executive Officer and President since May 1996. Chairman
of the Board and Chief Executive Officer
of Colonial Penn Life Insurance Company
("CPL") since March 1992. Previously,
President and Chief Operating Officer of
CPL from August 1991 to April 1996. Since
September 1983, has served in various
executive capacities at Leucadia and its
subsidiaries including Vice President of
Leucadia and President of the Sperry &
Hutchinson Co., Inc.
Director since March 1996; current term
expires 1999.
Martin B. Bernstein, 63, Principal Occupation - President and
Director Director of Ponderosa Fibres of America
Inc. (a pulp manufacturer for paper
producers).
Director since February 1988; current term
expires 1998.
Ian M. Cumming, 56, Principal Occupation - Presently and
Director since June 1978, Chairman of the
Board and a Director of Leucadia.
Director of Skywest, Inc. (a Utah-based
regional air carrier) since June 1986.
Director of MK Gold Company
(an international gold mining company)
since June 1995.
Director since February 1988; current
term expires 1997.
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
Thomas E. Mara, 51, Principal Occupation - Presently and
Director since May 1980, Executive Vice President
of Leucadia and Treasurer of Leucadia since
January 1993.
Director since October 1994; current
term expires 1997.
Oliver L. Patrell, 69, Principal Occupation - Independent
Director consultant. Previously, Chairman of the
Board, Chief Executive and President of
Colonial Penn Insurance Company ("CPIC")
from August 1991 to February 1996, August
1991 to May 1995 and August 1991 to May
1994, respectively. Chairman of the Board
of the Company and Empire from February
1984 to February 1996. President of the
Company and Empire from February 1983 to
August 1991. Chief Executive Officer of the
Company and Empire from February 1983 to
August 1991 and also from December 1995 to
February 1996.
Director since February 1983; current
term expires 1999.
Louis V. Siracusano, 50, Principal Occupation - Attorney with
Director McKenna, Fehringer, Siracusano &
Chianese (a law firm) for over five
years.
Director since 1985; current term
expires 1998.
Joseph S. Steinberg, 53, Principal Occupation - President since
Director January 1979 and Director since
December 1978 of Leucadia. Director of
MK Gold Company (an international gold
mining company) since June 1995. Director
since June 1988 of Jordan Industries, Inc.,
a holding company principally engaged in
manufacturing. Chairman of the Board of
CPIC since February 1996.
Director of the Company since February
1988; current term expires 1997.
Daniel G. Stewart, 78, Principal Occupation - Independent
Director consulting actuary. Previously, Senior
Vice President of Mutual Benefit Life
Insurance Company from 1985 to November
1991.
Director since 1980; current term expires
1997.
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
Lucius Theus, 74, Principal Occupation - President, The
Director U.S. Associates (consultants in civic
affairs, human resources and business
management) since 1989. Principal and
Director of the Wellness Group, Inc.
(a provider of health promotion
programs) since 1989. Corporate
Director, Civic Affairs of Allied
Corporation (a diversified industrial
company) since 1979.
Director since 1980; current term expires
1998.
Helen W. Vogel, 79, Principal Occupation - Teacher of
Director political science at the White Plains,
New York, Senior Center for over five
years.
Director since 1980; current term expires
1998.
Harry H. Wise, 58, Principal Occupation - President and
Director Director, H.W. Associates, Inc. (an
investment advisory firm). President and
Director, Madison Equity Capital Corp. (a
sponsor of private investment
partnerships).
Director since February 1988; current
term expires 1999.
Henry H. Wulsin, 49, Principal Occupation - President since
Director May 1994 and Chief Executive Officer
since May 1995 of CPIC. Previously,
Chief Operating Officer from August
1991 to May 1995 and Executive Vice
President from August 1991 to May 1994
of CPIC. Senior Vice President of the
Company and Empire from May 1988
to September 1991.
Director since 1993; current term expires
1999.
Joel M. Berlin, 53, Principal Occupation - Senior Vice President
Director, Senior Vice of marketing of the Company and Empire
President since May 1996. Previously, Chairman of
the Board and Chief Executive Officer of
the Sperry & Hutchinson Co., Inc ("S&H")
(an incentive marketing firm) from April
1993 to May 1996. President and Chief
Operating Officer of S&H from March 1992
to May 1996.
Director since 1996; current term expires
1997.
Name, Age and Position Principal Occupation, Office
with Company and Term of Office
Francis M. Colalucci, 52, Principal Occupation - Senior Vice
Director, Senior Vice President, Chief Financial Officer
President, Chief Financial and Treasurer of the Company and
Officer & Treasurer Empire since January 1996. Previously,
Vice President & Corporate Treasurer
of Continental Corporation (an insurance
holding Company) from 1991 to January 1996.
Director since October 1996; current term
expires in 1999.
Thomas A. Daffron, 58, Principal Occupation - Senior Vice
Senior Vice President President of the Company and Empire
since August 1995. Previously, Vice
President of Home Insurance Company
from July 1990 to July 1995.
Linda A. Philipps, 52, Principal Occupation - Chief Information
Senior Vice President, Officer of the Company and Empire since
Chief Information Officer June 1996. Previously, Chief Informa-
tion Officer of Banta Printing Corp. (a
commercial printing firm), from March 1996
to June 1996 and Director of Business
Development of Menasha Paper Corp. (a
manufacturer of paper and plastic products)
from March 1994 to March 1996. From August
1988 to February 1994 acted in various
operational capacities for Leucadia.
Item 11. Executive Compensation
The Company does not directly remunerate officers. Thirty percent
of salaries paid to officers and all other employees of Empire are
allocated and charged to the Company along with other operating expenses
pursuant to the pooling arrangement described above in Item 1, "Business".
Summary Compensation Table
The following table sets forth certain compensation information for
Richard G. Petitt, the Chief Executive Officer of the Company, and Andrew
W. Attivissimo, who was Chief Executive Officer of the Company in 1995,
the only executive officers whose compensation paid, or accrued for, under
the pooling arrangement exceeded $100,000 for the year ended December 31,
1996.
Summary Compensation Table
Long Term
Annual Compensation Compensation
Name and Principal
Position LTIP All Other
Salary Bonus Payouts Compensation
Year $ $ $ $
Richard G. Petitt 1996 86,674 150,000 0 8,844(a)
President & C.E.O
Andrew W. Attivissimo 1996 87,791 30,000 69,631 89,397(c)
President and C.O.O. 1995 78,906 0 30,497(b) 72,876(d)
1994 75,018 42,300 39,985(b) 79,961(e)
<FN>
(a) Includes Salary Cap Restoration Plan ($3,450), Pension Plan ($4,455)
and Company match of 401(k) plan ($939).
(b) Contributions made to a trust pursuant to the Empire Long Term
Incentive Plan.
(c) Includes Supplemental Retirement Plan ($86,698), Pension Plan
($1,856), income from Empire Long Term Incentive Plan units ($599) and
Company match of 401(K) plan ($244).
(d) Includes Supplemental Retirement Plan ($58,090), Pension Plan
($5,325), income from Empire Long Term Incentive Plan units ($9,217)
and Company match of 401(k) plan ($244).
(e) Includes Supplemental Retirement Plan ($71,558), Pension Plan
($6,187), income from Empire Long Term Incentive Plan units ($2,021)
and Company match of 401(K) plan ($195).
The Company does not directly remunerate directors. The directors
of the Company and Empire who are not employees of Empire and the Company
were paid an annual fee of $5,000. In addition, eligible directors
receive $1,500 for each joint board meeting attended. For attendance at
a meeting of a committee of the joint board, such directors receive $1,500
per meeting. In addition, each Chairperson of a Committee is entitled to
$500 per annum. All fees paid to such directors are shared in accordance
with the pooling agreement.
In February 1996, Mr. Patrell retired as Chairman of the Board of
Directors and Chief Executive Officer of the Company and Empire; he
remains a Director of Empire and the Company. Upon his retirement,
Leucadia agreed to pay to Mr. Patrell the amount of $1,000,000 of which
$333,333 was paid by Empire. Pursuant to the pooling agreement, the
Company contributed 30% of the compensation paid by Empire to Mr. Patrell.
Mr. Patrell agreed not to compete against Leucadia or its affiliated
entities for a two year period.
Mr. Attivissimo was employed pursuant to an Employment Agreement which
was to terminate on December 31, 1996. The Employment Agreement was to
continue from year to year thereafter unless the period of employment was
terminated at the end of a calendar year by either Mr. Attivissimo or
Empire on at least six months written notice. In May 1996, Mr.
Attivissimo retired from his positions as an officer and director of the
Company and Empire. Pursuant to the terms of his Employment Agreement,
Mr. Attivissimo will continue to be paid his normal salary at the rate of
$240,000 per annum until December 31, 1997. In addition, Mr. Attivissimo
received a lump sum supplemental retirement benefit of $1,901,000,
$482,375 under Empire's Long Term Incentive Plan and title to an
automobile having a book value of approximately $13,000. Pursuant to the
pooling agreement, the Company is obligated to pay 30% of the compensation
and cost of benefits payable to Mr. Attivissimo.
Pension Plan
Pensions for officers and employees of the Company are provided under
a trusteed non-contributory pension plan ("1985 Plan"). Any employee is
eligible for membership in the 1985 Plan on July 1st or January 1st of any
plan year after which he has completed one full year of service,
consisting of a minimum of 1,000 credited hours with Empire, provided they
have attained the age of 21 years by or before such date.
Members of the 1985 Plan receive a basic pension if they work until
their normal retirement date which is the last day of the month in which
they attain 65 years of age with 5 years of credited service. Any member
in the active employ of Empire may elect early retirement between 55 and
65. A member electing early retirement must have at least 10 years of
service. A monthly average of total compensation received over the
highest 5 consecutive plan or calendar years before retirement is taken
to compute benefits as follows:
1.30% of the first $833 per month of average pay, plus
1.75% of average pay over $833 per month.
The sum of these two credits is multiplied by the years of credited
service. The basic benefit amounts listed in the table below are not
subject to any deduction for Social Security benefits or other offset
amounts. The maximum benefit payable under the pension plan is $90,300
per year.
The amounts set forth in the following table show estimated annual
benefits upon retirement to which the Company contributes 30% of such cost
through the pooling agreement.
Highest
Five Year Average
Compensation at Years of Service
Retirement 10 15 20 25 30 35
$ 10,000 $ 1,300 $ 1,950 $ 2,600 $ 3,250 $ 3,900 $ 4,550
25,000 3,925 5,888 7,850 9,813 11,775 13,738
50,000 8,300 12,450 16,600 20,750 24,900 29,050
75,000 12,675 19,013 25,350 31,688 38,025 44,363
100,000 17,050 25,575 34,100 42,625 51,150 59,675
150,000 25,800 38,700 51,600 64,500 77,400 90,300
Salary Cap Restoration Plan
In 1994, Empire established a Salary Cap Restoration Plan ("SCRP")
for certain corporate officers. Under the SCRP, Empire will provide these
officers with an additional benefit, to be paid in a lump-sum upon
retirement, equal to the difference between the actuarially determined
lump-sum benefits, as computed under the 1985 Plan, of the officer's
highest five year average compensation (not to exceed $300,000, adjusted
for the cost-of-living) at retirement and the current maximum
compensation limit of $150,000. The SCRP is an unfunded plan. Under the
pooling agreement, the Company is obligated to pay 30% of the cost of the
SCRP.
Employees' Savings Plan
Empire sponsors an Employees' Savings Plan (the "Savings Plan"),
under which each eligible employee may defer a portion of their annual
compensation, subject to limitations. Empire contributes a matching
amount, subject to certain limits. In 1995, Empire matched 65% of each
participant's deferral contribution up to a maximum matching contribution
of $650. A participant may also contribute, from his after-tax dollars,
an amount, not to exceed 10% of his annual compensation. Effective July
1996, the Savings Plan was amended to allow Empire matching contributions
equal to 50% of an employee's contributions up to a maximum of 2.5% of the
employee's salary. Empire's contributions to the Savings Plan were
$524,000, 435,000 and $352,000 in 1996, 1995 and 1994, respectively. Under
the pooling agreement, the Company is obligated to provide 30% of Empire's
contributions under the Savings Plan.
Supplemental Retirement Plan
Under Empire's Supplemental Retirement Plan, eligible employees who
work until their normal retirement date, which, is the last day of the
month in which such employees attains 60 years of age, are entitled to
receive monthly benefits equal to (a) the difference between (i) one
twelfth of a stipulated percentage (the "stipulated percentage") of such
participant's final average compensation (the "base amount") and (ii) the
aggregate amount of the monthly pension and benefit entitlement such
participant would receive under Empire's Pension Plan, Savings Plan and
other employee pension benefit plans if such benefits were paid in the
form of an annuity for the life of the participant and fifty percent of
the participant's monthly Social Security benefit, multiplied, unless
otherwise specified in the plan, by (b) a fraction, not exceeding one (the
"reduction factor"), the numerator of which is the number of the
participant's years of service and the denominator of which is five.
Final average compensation is the average annual compensation paid during
any five consecutive calendar years during which the participant's
compensation was highest. The plan provides that the minimum benefit
payable is equal to the base amount multiplied by the reduction factor.
Participants remaining in the employ of the Company after the normal
retirement date continue to accrue benefits under the plan. Early
retirement, between age 55 and 60 under this plan, is permitted provided
the participant electing early retirement has at least ten years of
service. Amounts payable under the plan are payable out of the assets of
the Trust to Fund Benefits under Certain Unfunded Deferred Compensation
Plans of the Company, established effective November 1, 1987 (the "Trust
Fund"). The Trust Fund is subject to the claims of certain creditors of
the Company if the Company becomes insolvent. The Board of Directors had
designated one key employee, Andrew W. Attivissimo, to receive benefits
under the plan based on a maximum stipulated percentage of 60% and a
minimum stipulated percentages of 30%. Upon his retirement, Mr.
Attivissimo received a lump sum payment under the plan of $1,901,000.
Long Term Incentive Plan
Prior to 1996, Empire sponsored a Long Term Incentive Plan which,
based upon the attainment of certain performance goals, awarded officers
with units of participation in a compensation pool. The plan was
terminated in 1996.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Security Ownership of Certain Beneficial Owners
The following table sets forth information as of March 14, 1997 as
to the Common Shares of the Company owned of record and beneficially
by each person who owns of record, or is known by the Company to own
beneficially, more than 5% of such Common Shares.
Name and Amount and
Address of Nature of
Beneficial Beneficial Percent of
Owner Ownership Class
Empire Insurance Company 5,987,401 Common 84.6%
122 Fifth Avenue Shares owned of
New York, N.Y. 10011 record
Baldwin Enterprises, Inc. 368,607 Common 5.2%
529 East South Temple Shares owned of
Salt Lake City, Utah 84102 record
As discussed in Item 1, "Business", Leucadia (and certain of its
wholly-owned subsidiaries) may be deemed a parent of Empire and therefore
of the Company as a result of its indirect ownership of 100% of the
outstanding common stock of Empire.
Security Ownership of Management
The following table sets forth information concerning beneficial
ownership of the Company's common stock and the equity securities of
Leucadia by all directors and by directors and officers of the Company as
a group as of December 31, 1996 with respect to the Company's Common
Shares and as of March 14, 1997 with respect to Leucadia's and Empire's
securities.
Each holder shown exercises sole voting and sole investment power of the
shares shown opposite his or her name.
Name of Beneficial Amount and Nature of Percent of
Owner Beneficial Ownership Class
Andrew W. Attivissimo - -
Joel M. Berlin - -
Martin B. Bernstein - -
Francis M. Colalucci - -
Ian M. Cumming (1) - -
Thomas E. Mara - -
Oliver L. Patrell - -
Richard G. Petitt - -
Louis V. Siracusano - -
Joseph S. Steinberg (1) - -
Daniel G. Stewart - -
Lucius Theus - -
Helen W. Vogel 200 *
Harry H. Wise 1,100 *
Henry H. Wulsin - -
Directors and officers
as a group (16 persons) (2) 3,300 *
<FN>
* Less than 1% of Common Stock
<FN>
(1) Although neither Ian M. Cumming nor Joseph S. Steinberg directly owns
any shares of Common Stock of the Company, by virtue of their
respective approximately 16% and 15% interest in Leucadia each may
be deemed to be the beneficial owner of a proportionate number of the
shares of Common Stock of the Company beneficially owned by Leucadia
through its 100% ownership of Empire.
<FN>
(2) Aside from the beneficial ownership described in note 1 to this
table, seven directors and one officer beneficially own common shares
of Leucadia, which in the aggregate, represent less than 1% of
Leucadia's common stock.
Item 13. Certain Relationships and Related Transactions
See Item 1 of this report and Notes 1,3,8,9,10 and 11 of Notes to
Consolidated Financial Statements for information relating to transactions
and relationships between the Company and its affiliates.
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
(a) Financial Statements and Schedules
1. The following Financial Statements of Allcity Insurance Company
are included in item 8:
Report of Independent Accountants
Consolidated Balance Sheets as of December 31, 1996 and 1995.
Consolidated Statements of Income for the years ended December
31, 1996, 1995 and 1994.
Consolidated Statements of Changes in Shareholders' Equity Accounts
for the years ended December 31, 1996, 1995 and 1994.
Consolidated Statements of Cash Flows for the years ended December
31 1996, 1995 and 1994.
Notes to Consolidated Financial Statements.
Schedule VI - Supplemental Insurance Information Concerning
Property/Casualty Insurance Operations for the years ended December
31, 1996, 1995 and 1994.
2. The information for Schedules I, IV and V required to be filed
pursuant to Regulation S-X, Article 7 is contained in the Notes
to Consolidated Financial Statements and, therefore, these
schedules have been omitted. The information required by
Schedules III and IV of Article 7 is combined in Schedule VI -
Supplemental Insurance Information Concerning Property/Casualty
Insurance Operations. All other required schedules are not
applicable.
3. The exhibits required by Item 601 of Regulation S-K have been
filed herewith, see attached Exhibit Index.
(b) Reports on Form 8-K.
During the quarter ended December 31, 1996, there were no reports on
Form 8-K filed for the Company.
(c) Exhibits Required by Item 601 of Regulation S-K.
See attached Exhibit Index.
(d) Financial Statements Required by Regulation S-X.
See Item 14(a).
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.
ALLCITY INSURANCE COMPANY
March 28, 1997 By:FRANCIS M. COLALUCCI
Francis M. Colalucci
Director, Senior Vice President
C.F.O. & Treasurer
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 indicated and on the date set forth
above.
RICHARD G. PETTIT FRANCIS M. COLALUCCI
Richard G. Petitt Francis M. Colalucci
Director, President & C.E.O. Director, Senior Vice President
C.F.O. & Treasurer
JOSEPH S. STEINBERG MARTIN B. BERNSTEIN
Joseph S. Steinberg Martin B. Bernstein
Director Director
THOMAS E. MARA LOUIS V. SIRACUSANO
Thomas E. Mara Louis V. Siracusano
Director Director
HARRY H. WISE DANIEL G. STEWART
Harry H. Wise Daniel G. Stewart
Director Director
JOEL M. BERLIN
Joel M. Berlin
Director, Senior Vice President
EXHIBIT INDEX
The following designated exhibits, as indicated below, are either
filed herewith (if indicated by an asterisk) or have heretofore been filed
with the Securities and Exchange Commission under the Securities Act of
1933 or the Securities Exchange Act of 1934 and are incorporated herein
by reference to such filings. Reference is made to Item 8 of this Form
10-K for a listing of certain financial information and statements
incorporated by reference herein.
Exhibit Number Description of Document
3 Corporate charter, as amended, and by-laws, as
amended, of the Company (Incorporated by reference
to Exhibit 3 of the Company's Annual Report on Form
10-K for the year ended December 31, 1994).
10(a) Pooling Agreement, as amended through March 31,
1992 between Empire and the Company (Incorporated by
reference to Exhibit 10(a)-20 of the Company's Form
8 Amendment No. 1 of its annual Report for the year
ended December 31, 1981).
10(b) Lease Agreement, dated November 15, 1982, between
Empire and 122 Fifth Associates (Incorporated by
reference to exhibit 10(d) of the Company's Annual
Report on Form 10-K or the year ended December 31,
1982).
10(c) Centurion Agreement, made effective as of
August 21, 1987 by and between Empire and the
Company, and Centurion. (Incorporated by reference
to Exhibit 10(e) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1987).
10(d) Empire Mutual Executive Deferred Compensation Plan
dated November 17, 1987. (Incorporated by reference
to Exhibit 10(f) of the Company's Annual Report on
Form 10-K for the year ended December 31, 1987).
10(e) Empire Mutual Insurance Company Supplemental
Retirement Plan dated November 17, 1987.
(Incorporated by reference to Exhibit 10(g) of the
Company's Annual Report on Form 10-K for the year
ended December 31, 1987).
Exhibit Number Description of Document
10(f) Tax Allocation Agreement dated February 28, 1989 among the
Company, PHLCORP, Empire, Centurion, Oscar Katz Incorporated,
Oscar Katz Taxi Brokerage Incorporated,
Executroll Services Corporation, Empall Agency Incorporated
and Concourse Agency Incorporated. (Incorporated by reference
to Exhibit 10(m) of the Company's Annual
Report on Form 10-K for the year ended December 31, 1988).
10(g) Employment Agreement made as of January 1, 1993 by and between
by and between Empire and Andrew W. Attivissimo. (Incorporated
by reference to Exhibit 10(g) of the 10-K for the year ended
December 31, 1992).
10(i) Empire Insurance Company Salary Cap Restoration Plan dated May
26, 1994. (Incorporated by reference to Exhibit 10(i) of the
Company's Annual Report on Form 10-K for the year ended
December 31, 1994).
27* Financial Data Schedule.
ITEM 8. Financial Statements and Supplemental Data
The following financial information is submitted herein:
Page
Report of Independent Accountants F2
Consolidated Balance Sheets - December 31, 1996 and 1995 F3
Consolidated Statements of Income for the years ended
December 31, 1996, 1995 and 1994 F4
Consolidated Statements of Changes in Shareholders' Equity
for the years ended December 31, 1996, 1995 and 1994 F5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994 F6
Notes to Consolidated Financial Statements. F7
Schedule:
Schedule VI - Supplemental Insurance Information Concerning
Property/Casualty Insurance Operations for the years
ended December 31, 1996, 1995 and 1994 F26
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Allcity Insurance Company:
We have audited the consolidated financial statements and the
financial statement schedule of Allcity Insurance Company and
Subsidiary listed in the index on page F1 of this Form 10-K. These
financial statements and financial statement schedule are the
responsibility of the Company's management. Our responsibility is
to express an opinion on these financial statements and financial
statement schedule bases on our audits.
We conducted our audits in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also
includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial
position of Allcity Insurance Company and Subsidiary as of December
31, 1996 and 1995, and the consolidated results of their operations
and their cash flows for each of the three years in the period
ended December 31, 1996, in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial
statement schedule referred to above, when considered in relation
to the basic financial statements taken as a whole, presents
fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
New York, New York
February 19, 1997
CONSOLIDATED BALANCE SHEETS
ALLCITY INSURANCE COMPANY
(Thousands of dollars, except share and per share amounts)
December 31
1996 1995
ASSETS
Investments:
Available for sale (aggregate cost of
$254,645 in 1996 and $259,566 in 1995) $252,073 $261,473
Held to maturity (aggregate fair value
of $485 in 1996 and $503 in 1995) 477 478
Short term (at cost) 20,442 11,597
TOTAL INVESTMENTS 272,992 273,548
Cash 2,232 3,272
Agents' balances, less allowance for
doubtful accounts ($1,363 in 1996 and
$1,093 in 1995) 17,814 21,155
Accrued investment income 2,822 3,720
Reinsurance balances receivable 264,159 257,615
Prepaid reinsurance premiums 70,061 79,285
Equity in pools and associations 275 667
Deferred policy acquisition costs 7,707 8,578
Deferred tax benefit 13,019 10,281
Other assets 2,649 2,699
TOTAL ASSETS $653,730 $660,820
LIABILITIES
Unpaid losses $353,536 $348,832
Unpaid loss adjustment expenses 52,551 51,047
Unearned premiums 111,657 125,942
Accounts payable and accrued liabilities 2,644 1,964
Drafts payable 5,712 4,844
Due to affiliates 14,232 17,865
Unearned service fee income 5,461 5,109
Reserve for servicing carrier claim
expenses 8,043 6,910
Other postretirement benefits 3,819 3,537
Reinsurance balances payable 4,887 3,476
Other liabilities 1,415 1,834
Surplus note 14,115 13,524
TOTAL LIABILITIES 578,072 584,884
SHAREHOLDERS' EQUITY
Common stock, par value $1.00: 7,368,420
shares authorized; 7,078,625 shares issued
and outstanding in 1996 and 1995 7,079 7,079
Additional paid-in capital 9,331 9,331
Net unrealized (depreciation) appreciation
on investments (net of deferred taxes
of ($900) and $667 in 1996 and 1995,
respectively) (1,672) 1,240
Retained earnings 60,920 58,286
TOTAL SHAREHOLDERS' EQUITY 75,658 75,936
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $653,730 $660,820
<FN>
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF INCOME
ALLCITY INSURANCE COMPANY
(Thousands of dollars, except share
and per share amounts)
Year Ended December 31
1996 1995 1994
REVENUES
Premiums earned $96,073 $ 94,251 $89,044
Net investment income 16,358 15,358 13,187
Service fee income 6,608 7,683 4,958
Net securities gains and (losses) 1,130 (205) (662)
Other income 621 805 759
120,790 117,892 107,286
LOSSES AND EXPENSES
Losses 76,387 77,675 60,714
Loss adjustment expenses 11,963 12,652 10,142
Other underwriting expenses, less
deferrals of $15,333 in 1996,
$18,359 in 1995 and $17,524 in
1994 11,681 7,810 8,698
Amortization of deferred policy
acquisition costs 16,204 18,349 16,692
Interest on surplus note 591 613 516
116,826 117,099 96,762
INCOME BEFORE FEDERAL INCOME TAXES 3,964 793 10,524
FEDERAL INCOME TAXES
Current 2,501 3,050 4,305
Deferred (benefit) (1,171) (2,820) (682)
1,330 230 3,623
NET INCOME $ 2,634 $ 563 $ 6,901
Per share data, based on 7,078,625
average shares outstanding in 1996,
1995 and 1994
NET INCOME PER SHARE $0.37 $0.08 $0.97
<FN>
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
ALLCITY INSURANCE COMPANY
(In thousands)
S H A R E H O L D E R S' E Q U I T Y
Net Unrealized Total
Additional Appreciation Share-
Common Stock Paid-In (Depreciation) Retained holders'
Shares Amount Capital on Investments Earnings Equity
Balance at
January 1, 1994 7,079 $7,079 $9,331 $ 2,581 $50,822 $69,813
Net income for the
year 6,901 6,901
Change in unrealized depreciation
on investments (net of income
tax benefit of $1,803) (13,450) (13,450)
Balance at
December 31,1994 7,079 7,079 9,331 (10,869) 57,723 63,264
Net income
for the year 563 563
Change in unrealized appreciation
on investments (net of income
taxes of $1,073) 12,109 12,109
Balance at
December 31,1995 7,079 7,079 9,331 1,240 58,286 75,936
Net income
for the year 2,634 2,634
Change in unrealized depreciation
on investments (net of income
tax benefit of $1,567) (2,912) (2,912)
Balance at
December 31, 1996 7,079 $7,079 $9,331 $(1,672) $ 60,920 $75,658
<FN>
See Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
ALLCITY INSURANCE COMPANY
(Thousands of dollars)
Year Ended December 31
1996 1995 1994
NET CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 2,634 $ 563 $ 6,901
Adjustments to reconcile net income
to net cash provided by operating
activities:
Provision for deferred tax benefits (1,171) (2,820) (682)
Amortization 450 (17) 335
Provision for doubtful accounts 270 141 79
Net securities (gains) and losses (1,130) 205 662
Policy acquisition costs incurred
and deferred 871 (9) (832)
Net change in:
Agents' balances 3,071 (1,977) (1,071)
Reinsurance balances receivable (6,544) (37,761) (34,806)
Prepaid reinsurance premiums 9,224 (1,671) (12,912)
Unpaid losses and loss adjustment
expenses 6,208 58,280 50,766
Unearned premiums (14,285) 2,756 18,461
Drafts payable 868 1,408 319
Due to affiliates (3,633) (2,557) 3,274
Unearned service fees 352 853 1,206
Reserve for service carrier claims
expenses 1,133 1,660 1,448
Reinsurance balances payable 1,411 3,255 (591)
Other 2,457 (153) (156)
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,186 22,156 32,401
NET CASH FLOWS FROM INVESTING ACTIVITIES
Available for Sale:
Acquisition of fixed maturities (172,010) (107,352) (84,679)
Proceeds from sale of fixed
maturities 140,862 48,405 56,303
Proceeds from maturities of fixed
maturities 36,767 21,731 16,809
Net change in short-term investments (8,845) 14,389 (22,954)
NET CASH (USED FOR) INVESTING ACTIVITIES (3,226) (22,827) (34,521)
NET DECREASE IN CASH (1,040) (671) (2,120)
Cash at beginning of year 3,272 3,943 6,063
Cash at the end of year $ 2,232 $ 3,272 $ 3,943
Cash paid for federal income taxes $ 3,686 $ 3,714 $ 6,393
<FN>
See Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLCITY INSURANCE COMPANY
NOTE 1--ORGANIZATION
Allcity Insurance Company ("Allcity" or the "Company"), a property and
casualty insurance company, is an 84.6% owned subsidiary of Empire
Insurance Company ("Empire"). Empire Insurance Group (the "Group") is
comprised of Allcity and its subsidiary, Empall Agency, Inc. ("Empall")
and Empire and its other subsidiaries. Through various subsidiaries,
Leucadia National Corporation ("Leucadia") owns 100% of Empire's common
shares.
The property and casualty insurance business written by Empire and
Allcity is subject to a pooling agreement under which premiums, losses,
loss adjustment expenses and other underwriting expenses are shared on
the basis of 70% to Empire and 30% to Allcity. The pooling percentages
have been changed from time to time and may be changed in the future
subject to New York State Insurance Department approval. Allcity has no
employees of its own. Administrative services are provided by Empire and
30% of the related expenses are allocated to Allcity.
The Company's three business segments and principal lines of business are
(1) automobile (private passenger and commercial), (2) commercial
(commercial multi-peril, workers' compensation and other liability) and
(3) personal and miscellaneous (fire, allied and homeowners) insurance
coverages. Based on the Company's 1996 net premiums written,
approximately 66.1%, 27.7% and 6.2% of such premiums were for the
automobile, commercial and personal and miscellaneous lines of business,
respectively. The Company markets its products primarily to individuals,
retail establishments, restaurants, taxicab owners, and several types of
service contractors. A substantial portion of the Company's and Empire's
automobile business, both private passenger and commercial, is assigned
risk business acquired through contractual arrangements with other
insurance companies, some of which are competitors. These contractual
arrangements provide for service fees to the Company and Empire within
parameters established by the New York State Insurance Department. In
addition, the Company is a servicing carrier providing administrative
services in return for a fee to the New York Public Automobile Pool.
Under similar arrangements, Empire acts as a servicing carrier for the
Massachusetts Limousine/Taxi Program and the New Hampshire Commercial
Automobile Insurance Procedure. Under the pooling arrangement, the
Company assumes 30% of the fees and costs of these arrangements.
The Company and Empire are licensed to transact insurance in the State
of New York with Empire being additionally licensed in Connecticut,
Massachusetts, Missouri, New Hampshire and New Jersey. Based on 1996
direct premiums written, approximately 95.8% of the property and casualty
business written by the Company and Empire was in the State of New York.
The Company and Empire distribute their products through five general
agents, one of which is an Empire subsidiary, and 390 independent agents
and brokers. The Company's general agents produced approximately 22.7%
of the Company's 1996 premiums written.
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiary, Empall. The preparation of financial
statements in conformity with generally accepted accounting principles
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLCITY INSURANCE COMPANY
NOTE 1--ORGANIZATION--CONTINUED
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 revenues and expenses during the reporting period.
Actual results could differ from those estimates.
NOTE 2--ACCOUNTING POLICIES
Investments: Marketable debt and equity securities are designated as
either (i) "held to maturity" and carried at amortized cost, (ii)
"trading" and carried at estimated market value, which is based on quoted
market prices, with differences between cost and estimated market value
reflected in results of operations or (iii) "available for sale" and
carried at estimated market value with differences between cost and
estimated market value being reflected as a separate component of
shareholders' equity, net of deferred income tax effects.
At December 31, 1996 and 1995, investments in debt securities on deposit
with the New York State Insurance Department, which the Company has the
intent and ability to hold to maturity, are classified as "Investments
held to maturity". All other investments in debt securities are
classified as "Investments available for sale" and stated at estimated
market value. Net unrealized appreciation (depreciation) on investments
available for sale (net of deferred tax) is included as a separate
component of shareholders' equity.
Net securities gains or losses on the sale of investments are determined
on a specific identification basis and are included in revenues.
Investments with an impairment in value considered to be other than
temporary are written down to estimated net realizable value.
Unearned Premiums: Unearned premiums have been calculated using the
monthly pro rata method.
Unpaid Losses and Loss Adjustment Expenses: Liabilities for unpaid
losses, which are not discounted (except for certain workers'
compensation liabilities), and loss adjustment expenses ("LAE") are
determined using case-basis evaluations, statistical analyses and
estimates for salvage and subrogation recoverable and represent estimates
of the ultimate claim costs of all unpaid losses and LAE. Liabilities
include a provision for losses that have occurred but have not yet been
reported. These estimates are subject to the effect of trends in future
claim severity and frequency experience. Adjustments to such estimates
are made from time to time due to changes in such trends as well as
changes in actual loss experience. These adjustments are reflected in
current earnings.
Reinsurance: Unpaid losses, unpaid loss adjustment expenses and
unearned premiums are stated gross of reinsurance ceded. Premiums written
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLCITY INSURANCE COMPANY
NOTE 2--ACCOUNTING POLICIES--CONTINUED
and earned, losses and LAE incurred, and other underwriting expenses are
stated net of reinsurance ceded.
Pension Cost: Empire funds actuarially determined pension costs as
currently accrued; 30% of such pension costs are allocated to Allcity.
Policy Acquisition Costs and Premium Deficiencies: Policy acquisition
costs such as commissions, premium taxes and certain other underwriting
expenses are deferred and amortized ratably over the terms of the related
policies. Deferred policy acquisition costs are limited to their net
realizable value after consideration of investment income on the related
premium.
Participating Policies: Participating business on workers' compensation
lines constitutes approximately 8% of the Company's policies in force and
net premiums written. Amounts transferred to the participating
policyholders' funds are determined by means of specific identification
based upon premium volume and loss experience. The amount of dividends
to be paid to participating policyholders is approved quarterly by the
Board of Directors. The amount of policyholders' dividends incurred on
participating policies was $946,000, $523,000 and $452,000 in 1996, 1995
and 1994, respectively. Unpaid dividends to participating policyholders
are included as a liability in the balance sheet.
Servicing Arrangements: Service fee income from assigned risk business
acquired through contractual arrangements with other insurance companies
is recognized as revenue and earned over the life of the covered policies
on a monthly pro-rata method.
Service fee income for the administrative services, including
underwriting, policy issuance, premium collection and claims services,
provided to the New York Public Automobile Pool (the "Pool") is recorded
as a reduction to other underwriting expenses and is earned over the life
of the policies issued. The premiums and losses processed by the Company
on behalf of the Pool, which are not reflected in the consolidated
financial statements for the years ended December 31, are as follows (in
thousands):
1996 1995 1994
Premiums Earned $ 59,158 $ 60,458 $60,141
Losses Incurred 76,939 100,595 57,654
Unpaid Losses 119,223 117,736 79,695
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ALLCITY INSURANCE COMPANY
NOTE 2--ACCOUNTING POLICIES--CONTINUED
The premiums, losses and expenses of the business for which the Company
provides administrative services are reflected on the financial
statements of those insurance companies, including the Company, in New
York State which are required to participate in the Pool. In its role as
a servicing carrier, the Company is liable only for the loss adjustment
expenses which are reflected as a reserve for servicing carrier claim
expense and are determined using case basis evaluations and statistical
analyses.
Federal Income Taxes: The Company uses the liability method in providing
for income taxes. Under the liability method, deferred income taxes are
provided at the enacted tax rates for differences between the financial
statements carrying amounts and tax bases of assets and liabilities and
for carryforwards. A valuation allowance is provided if deferred tax
assets are not considered more likely than not to be realized.
Earnings Per Share: Earnings per share are based on the weighted average
number of common shares outstanding. There were no outstanding common
stock equivalents during 1996, 1995 and 1994.
Presentation: Certain prior year amounts have been reclassified to
conform with the 1996 presentation.
NOTE 3--SURPLUS NOTE
The Company issued a surplus note to Empire in 1980. The note has no due
date and does not form a part of the legal liabilities of the Company.
The surplus note provides, among other things, for interest to be accrued
on the note based on a bank's prime rate. Neither the principal amount
of the surplus note nor the accrued interest may be paid, in whole or in
part, without the consent of the Superintendent of Insurance of the State
of New York ("Superintendent") and must be repaid, in whole or in part,
when so ordered by the Superintendent.
NOTE 4--INVESTMENTS
Investment income by source is summarized as follows:
Year Ended December 31
1996 1995 1994
(Thousands of dollars)
Investment income:
Fixed maturities $15,955 $13,606 $12,465
Short-term investments 742 2,126 1,007
16,697 15,732 13,472
Less: Investment expenses 339 374 285
NET INVESTMENT INCOME $16,358 $15,358 $13,187
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 4--INVESTMENTS--CONTINUED
Investments at December 31, 1996 are summarized as follows:
Aggregate
Gross Unrealized Estimated
Amortized Appre- Depre- Market Carrying
Cost ciation ciation Value Amount
(Thousands of dollars)
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government agencies $195,470 $ 377 $2,720 $193,127 $193,127
Mortgage-backed
securities 50,619 130 377 50,372 50,372
Foreign governments 75 8 67 67
All other corporate bonds 8,481 41 15 8,507 8,507
TOTAL INVESTMENTS
AVAILABLE FOR SALE 254,645 548 3,120 252,073 252,073
Held to maturity:
U.S. Treasury securities 477 8 485 477
TOTAL INVESTMENTS
HELD TO MATURITY 477 8 485 477
Short-term (at cost) 20,442 20,442 20,442
TOTAL INVESTMENTS $275,564 $ 556 $3,120 $273,000 $272,992
Investments at December 31, 1995 are summarized as follows:
Aggregate
Gross Unrealized Estimated
Amortized Appre- Depre- Market Carrying
Cost ciation ciation Value Amount
(Thousands of dollars)
Available for sale:
U.S. Treasury securities
and obligations of U.S.
government agencies $186,100 $1,755 $ 323 $187,532 $187,532
Mortgage-backed
securities 61,444 495 155 61,784 61,784
Foreign governments 100 8 92 92
All other corporate bonds 11,922 146 3 12,065 12,065
TOTAL INVESTMENTS
AVAILABLE FOR SALE 259,566 2,396 489 261,473 261,473
Held to maturity:
U.S. Treasury securities 478 25 503 478
TOTAL INVESTMENTS
HELD TO MATURITY 478 25 503 478
Short-term (at cost) 11,597 11,597 11,597
TOTAL INVESTMENTS $271,641 $2,421 $489 $273,573 $273,548
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 4--INVESTMENTS--CONTINUED
The amortized cost and estimated market values of fixed maturities at
December 31, 1996 are shown as follows (in thousands):
Estimated
Amortized Market
Cost Value
Investments available for sale:
Due in one year or less $ 15,805 $ 15,941
Due after one year through five years 179,777 177,257
Due after five years through ten years 8,444 8,503
Sub total 204,026 201,701
Mortgage-backed securities 50,619 50,372
Sub total 254,645 252,073
Investments held to maturity:
Due after one year through five years 477 485
Short-term investments 20,442 20,442
TOTAL INVESTMENTS $275,564 $273,000
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.
The Company sold certain fixed maturities during 1996, 1995 and 1994 and
realized gross gains of $1,354,000, $343,000 and $686,000, respectively.
Gross losses of $224,000, $548,000 and $1,348,000 were realized on these
sales in 1996, 1995 and 1994, respectively.
The changes in unrealized (depreciation) appreciation on investments
available for sale in fixed maturities were $(4,479,000), $13,182,000 and
$(15,253,000) for the years ended December 31, 1996, 1995 and 1994,
respectively, before income taxes.
As of December 31, 1996 and 1995, a security with a book value of
approximately $475,000 was on deposit with the New York State Insurance
Department.
During 1996 and 1995, the Company sold call options on certain U.S.
Treasury Notes and recognized investment income of $230,000 and $140,000,
respectively. Options on U.S. Treasury Notes with notional values of
$20,000,000 and $11,000,000 were inforce at December 31, 1996 and 1995,
respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 5--STATUTORY INFORMATION
The following is a reconciliation of net income and surplus as reported
on a statutory basis to net income and shareholders' equity as determined
in conformity with generally accepted accounting principles ("GAAP
Basis") (thousands of dollars):
NET INCOME
Year Ended December 31
1996 1995 1994
Statutory basis $7,233 $ 3,311 $ 5,018
Add (deduct):
Change in deferred policy acquisition
costs (871) 9 832
Change in allowances for doubtful
accounts (270) (141) (79)
Change in policyholders' dividend reserve (450) - -
Retrospectively rated reinsurance
contracts (3,365) (4,742) 1,057
Other postretirement benefits (176) (49) (48)
Deferred tax provision 1,171 2,820 682
Interest on surplus note (591) (613) (516)
Other (47) (32) (45)
GAAP BASIS $ 2,634 $ 563 $ 6,901
SHAREHOLDERS'EQUITY AND SURPLUS
DECEMBER 31
1996 1995
Statutory surplus $69,566 $62,668
Add (deduct):
Deferred policy acquisition costs 7,707 8,578
Nonadmitted assets, less allowance
for doubtful accounts 2,352 2,266
Provision for unauthorized reinsurance 114 130
Policyholders' dividend reserve (450) -
Excess of statutory reserves over
statement reserves 291 -
Deferred tax benefit 13,019 10,281
Retrospectively rated reinsurance
contracts - 3,365
Other postretirement benefits (744) (568)
Net unrealized (depreciation)
appreciation on investments (2,572) 1,907
Surplus note (14,115) (13,524)
Other 490 833
GAAP BASIS $75,658 $75,936
The Company has paid no dividends on its common stock since 1975.
Without the approval of the New York State Insurance Department,
dividends are limited to the lowest of 1) 10% of surplus as computed on
a statutory basis 2) earned surplus determined on a statutory basis and
3) adjusted net investment income of the 36 month period prior to
declaration. At December 31, 1996, $6,957,000 was available for
distribution of dividends. The Company does not presently anticipate
paying dividends in the near future.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 6--AGENTS' BALANCES
Activity affecting the allowance for uncollectible agents' balances for
the years ended December 31, 1996, 1995 and 1994 is summarized as follows
(in thousands):
Balance at January 1, 1994 $ 873
Provision 1,364
Charge-offs, net of recoveries (1,285)
Balance at December 31, 1994 952
Provision 1,577
Charge-offs, net of recoveries (1,436)
Balance at December 31, 1995 1,093
Provision 2,089
Charge-offs, net of recoveries (1,819)
Balance at December 31, 1996 $ 1,363
NOTE 7-- LOSSES AND LAE
The Company has relied upon standard actuarial ultimate loss
projection techniques to obtain estimates of liabilities for losses and
LAE. These projections include the extrapolation of both losses paid and
incurred by business line an accident year and implicitly consider the
impact of inflation and claims settlement patterns upon ultimate claim
costs based upon historical patterns. In addition, methods based upon
average loss costs, reported claim counts and pure premiums are reviewed
in order to obtain a range of estimates for setting the reserve levels.
For further input, changes in operations in pertinent areas including
underwriting standards, product mix, claims management and legal climate
are periodically reviewed.
In the following table, the liability for losses and LAE are reconciled
for each of the three years ended December 31, 1996. Included therein are
current year data and prior year development.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 7--LOSSES AND LAE--CONTINUED
RECONCILIATION OF LIABILITY FOR LOSSES AND LAE
1996 1995 1994
(In thousands)
Liability for losses and LAE, net,
at beginning of year $142,718 $121,923 $106,115
Provision for losses and LAE for
claims occurring in the current year 80,216 80,061 73,790
Increase (decrease) in estimated losses
and LAE for claims occurring in prior
years 8,134 10,266 (2,934)
88,350 90,327 70,856
Loss and LAE payments for claims
occurring during:
The current year 27,192 23,743 20,000
Prior years 60,382 45,789 35,048
87,574 69,532 55,048
Liability for losses and LAE, net 143,494 142,718 121,923
Reinsurance recoverable 262,593 257,161 219,676
Liability for losses and LAE
at end of year as reported in
financial statements $406,087 $399,879 $341,599
Based upon actuarial studies conducted during 1996 and 1995, the Company
strengthened reserves for losses from prior accident years by
approximately $8,100,000 in 1996, primarily related to voluntary
commercial automobile and commercial package lines of business, and by
approximately $10,300,000 in 1995, primarily related to automobile and
workers' compensation lines of business. The Company continues to
analyze the adequacy of its loss reserves on a quarterly basis. Also in
1996, the Company experienced unusually high assessments from a New York
State workers' compensation fund. Contributing to the 1995 increase in
losses were additional payments made on automobile no-fault claims which
had been closed prior to 1995.
The Company has purchased annuities with various life insurance companies
for a number of settled claims. The claimants have been designated as
payees, however, the Company has a contingent liability of approximately
$2,181,000, which represents the aggregate amount of settlements with the
claimants, in the event of the failure of the various life insurance
companies to perform.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 8--REINSURANCE
The Company has obtained reinsurance coverage to reduce its risk of and
exposure to large insurance claims and catastrophes. The maximum single
risk retained by the Company was $500,000 on workers' compensation, for
all the three years, and for other property and casualty lines $300,000
in 1996 and $225,000 for 1995 and 1994, respectively. The Company also
uses reinsurance to protect itself against certain catastrophic losses.
Its retention of lower level losses under such treaties is $5,000,000 for
1997 and was $3,000,000 for 1996, 1995 and 1994. Due to the geographic
concentration of its business, the Company believes hurricanes and
windstorms are its most significant exposure to catastrophic losses.
Computer modeling programs provided by independent consultants are used
to estimate exposure to such losses. The Company believes it presently
has sufficient catastrophe reinsurance protection.
Although reinsurance does not legally discharge an insurer from its
primary liability for the full amount of the policy liability, it does
make the assuming reinsurer liable to the insurer to the extent of the
reinsurance ceded. The majority of the Company's reinsurance has been
placed with certain of the largest domestic reinsurance companies,
including (with their Best ratings) General Reinsurance Corporation (A++)
(superior), Munich American Reinsurance Company (A+) (superior), Everest
Reinsurance Company (A)(excellent) and Zurich Reinsurance Centre, Inc.
(A)(excellent). The Company believes its reinsurers to be financially
capable of meeting their respective obligations. However, to the extent
that any reinsuring company is unable to meet its obligations, the
Company would be liable for the reinsured risks. The Company has
established reserves, which the Company believe are adequate, for any
nonrecoverable reinsurance.
Effective January 1, 1997, Empire entered into a quota share reinsurance
agreement with its subsidiary, Centurion. Under this agreement, Empire
will assume 50% of the premiums and losses of Centurion and grant
Centurion a ceding commission. Under the pooling agreement, 70% of such
business assumed by Empire will be retained and 30% will be shared with
the Company.
Assets and insurance reserves at December 31, 1996 and 1995 include
$334,220,000 and $336,900,000, respectively, which represent reinsured
amounts (principally arising from the intercompany pooling agreement with
Empire) as follows (in thousands):
Ceded to
Empire Others Total
As of December 31, 1996
Prepaid reinsurance premiums $ 69,266 $ 795 $ 70,061
Reinsurance balances receivable on:
Paid losses 1,567 1,567
Unpaid losses 200,877 28,489 229,366
Unpaid loss adjustment expenses 29,991 3,235 33,226
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 8--REINSURANCE--CONTINUED
Ceded to
Empire Others Total
As of December 31, 1995
Prepaid reinsurance premiums $ 78,255 $ 1,030 $ 79,285
Reinsurance balances receivable on:
Paid losses 454 454
Unpaid losses 201,100 24,011 225,111
Unpaid loss adjustment expenses 30,441 1,609 32,050
An analysis of reinsurance premiums, losses, LAE and commissions for the
years ended December 31, 1996, 1995 and 1994 are summarized as follows
(in thousands):
Direct Assumed Ceded Net
Empire Others Empire Others
1996
Premiums earned $235,467 $ 96,073 $277 $222,909 $12,835 $96,073
Losses incurred 182,132 76,387 209 170,630 11,711 76,387
LAE incurred 13,827 11,963 72 11,679 2,220 11,963
Commissions incurred 25,556 10,987 8 23,259 2,305 10,987
Premiums written 222,467 91,011 200 210,068 12,599 91,011
Losses paid 177,454 75,938 728 170,948 7,234 75,938
Unearned premiums(a) 99,600 41,596 146 98,952 794 41,596
Unpaid losses(a) 313,469 124,170 1,987 286,967 28,489 124,170
Unpaid LAE(a) 46,080 19,324 42,845 3,235 19,324
1995
Premiums earned $233,695 $ 94,251 $569 $219,649 $14,615 $94,251
Losses incurred 188,198 77,671 555 179,410 9,339 77,675
LAE incurred 17,731 12,652 76 19,128 (1,321) 12,652
Commissions incurred 29,792 12,223 32 27,076 2,748 12,223
Premiums written 236,170 95,335 483 222,046 14,607 95,335
Losses paid 141,279 59,680 811 133,849 8,241 59,680
Unearned premiums(a) 112,599 46,657 223 111,792 1,030 46,657
Unpaid losses(a) 308,790 123,721 2,506 287,285 24,011 123,721
Unpaid LAE(a) 45,096 18,997 43,487 1,609 18,997
1994
Premiums earned $211,358 $ 87,987 $ 935 $200,619 $10,617 $ 89,044
Losses incurred 149,975 60,714 434 139,238 11,171 60,714
LAE incurred 14,144 10,142 78 12,605 1,617 10,142
Commissions incurred 29,414 12,248 51 27,011 2,454 12,248
Premiums written 229,915 93,536 781 218,960 11,736 93,536
Losses paid 107,726 46,915 665 100,077 8,314 46,915
Unearned premiums(a) 110,124 45,573 308 109,395 1,037 45,573
Unpaid losses(a) 261,871 105,730 2,763 241,725 22,909 105,730
Unpaid LAE(a) 37,945 16,193 34,617 3,328 16,193
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 8--REINSURANCE--CONTINUED
<FN>
(a) Amounts as reflected in the balance sheet can be derived by adding
together amounts for direct and assumed and subtracting from this sum
30% of the amount ceded to Empire.
The Company remains primarily liable for amounts ceded to reinsurers for
unpaid losses, LAE and unearned premiums to the extent that the assuming
reinsuring companies are unable to meet their obligations.
An analysis of the effect of reinsurance on premiums by business segment
for the years ended December 31, 1996, 1995 and 1994 are summarized as
follows (in thousands):
Percentage
Assumed Ceded of Amount
Direct from to Net Assumed
Amount Empire(a) Empire(b) Amount to Net
1996
Premiums written:
Automobile lines $131,542 $60,362 $131,742 $60,162 100.3%
Commercial lines 80,758 25,243 80,758 25,243 100.0%
Miscellaneous and
personal lines 10,167 5,606 10,167 5,606 100.0%
Total $222,467 $91,211 $222,667 $91,011
1995
Premiums written:
Automobile lines $133,427 $62,968 $133,910 $62,485 100.8%
Commercial lines 93,659 28,821 93,659 28,821 100.0%
Miscellaneous and
personal lines 9,084 4,029 9,084 4,029 100.0%
Total $236,170 $95,818 $236,653 $95,335
1994
Premiums written:
Automobile lines $127,671 $60,997 $128,452 $60,216 101.3%
Commercial lines 94,774 30,334 94,774 30,334 100.0%
Miscellaneous and
personal lines 7,470 2,986 7,470 2,986 100.0%
Total $229,915 $94,317 $230,696 $93,536
<FN>
(a)Includes $200, $483 and $781 assumed from non-affiliates in 1996,
1995 and 1994, respectively, before the effects of the pooling
agreement described in Note 1.
(b)Includes $12,599, $14,607 and $11,736 ceded to non-affiliates in
1996, 1995 and 1994, respectively, before the effects of the
pooling agreement described in Note 1.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 9--FEDERAL INCOME TAXES
The Company has been included in the consolidated federal income tax
returns of Leucadia since 1993. Under the terms of the tax sharing
agreement, members compute their tax provision on a separate return basis
and are either charged their share of federal income tax resulting from
their taxable income or are reimbursed for tax benefits resulting from
losses. As of December 31, 1996 and 1995, the Company's liability to
affiliates for income taxes was $9,780,000 and $10,965,000, respectively.
The principal components of the deferred tax asset at December 31, 1996 and
1995 were as follows (in thousands):
1996 1995
Unpaid loss and loss adjustment
expense reserves $7,644 $ 7,865
Unearned premiums 2,912 3,266
Employee benefits and compensation 1,580 1,532
Interest accrued on surplus note 2,490 2,283
Allowance for doubtful accounts 477 382
Deferred policy acquisition costs (2,697) (3,003)
Retrospectively rated reinsurance contracts - (1,179)
Unrealized depreciation (appreciation) on
investments 900 (667)
Other, net (287) (198)
Total $13,019 $10,281
The Company believes that it is more likely than not that the deferred tax
asset at December 31, 1996 will be fully realized based on the availability
of taxable income in carryback periods and future taxable income based on
the past earnings history of the Company.
For the years 1996, 1995 and 1994, the difference between the "expected"
statutory federal income tax applicable to continuing operations and the
actual income tax expense was immaterial.
NOTE 10--PENSION PLAN, POSTRETIREMENT BENEFITS AND STOCK OPTIONS
Empire has a trusteed non-contributory pension plan covering substantially
all employees. Current benefits are based on years of credited service and
the employee's highest compensation during any five consecutive plan
or calendar years before retirement. Empire's policy is to fund pension
costs on a current basis using an aggregate method.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 10--PENSION PLAN, POSTRETIREMENT BENEFITS AND STOCK
OPTIONS--CONTINUED
The following table sets forth certain information relating to Empire's
pension plan (in thousands):
1996 1995
Actuarial present value of benefit obligation:
Accumulated benefit obligation, including vested
benefits of $19,355 in 1996 and $21,054 in 1995 $ 20,043 $ 21,545
Projected benefit obligation for services
rendered to date $(26,927) $(29,975)
Plan assets at fair value (primarily bonds and
stocks) 25,700 22,349
PROJECTED BENEFIT OBLIGATION
IN EXCESS OF PLAN ASSETS (1,227) (7,626)
Unrecognized prior service cost 115 132
Unrecognized net (gain) loss from past experience
different from that assumed and effects of
changes in assumptions (797) 4,969
Unrecognized net obligation at transition date 515 644
ACCRUED PENSION COST INCLUDED
IN OTHER LIABILITIES $(1,394) $ (1,881)
Net pension cost includes the following components (in thousands):
Year Ended December 31
1996 1995 1994
Service cost-benefits earned during the period $1,862 $1,887 $2,051
Interest cost on projected benefit obligation 2,098 1,792 1,642
Actual return on plan assets (2,120) (3,745) 372
Deferred gain (loss) on plan assets 556 2,535 (1,536)
Net amortization and deferral 298 196 358
NET PERIODIC PENSION COST $2,694 $ 2,665 $2,887
In accordance with the pooling agreement, the Company's share of accrued
pension cost and net periodic pension cost is 30% of the amounts reflected
above. In determining the actuarial present value of the projected
benefit obligation, the Company utilized discount rates of 7.5% for 1996,
7.0% for 1995 and a rate of increase in future compensation levels of 5%
in 1996 and 6.5% in 1995, respectively. The expected long-term rate of
return on plan assets was 7.0% during 1996 and 1995.
Empire provides certain health care and life insurance benefits for
retired employees. During 1996, Empire amended the eligility requirement
to only those employees who had at least ten years of service and were at
least 50 years of age as of October 1, 1996. Prior to this amendment,
substantially all of Empire's employees were eligible for such benefits
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 10--PENSION PLAN, POSTRETIREMENT BENEFITS AND STOCK
OPTIONS--CONTINUED
if they reached normal or early retirement age while still working for
Empire. As a result of this amendment, the accumulated postretirement
benefit obligation was reduced by approximately $1,919,000 which will be
amortized over the average remaining service period of the remaining
active participants. Those benefits are provided through an insurance
company whose premiums are based on the cost of benefits paid during the
year.
The following table sets forth certain information relating to Empire's
unfunded substantive plan for postretirement benefits (in thousands):
1996 1995
Actuarial present value of accumulated
postretirement benefit obligation:
Retirees $ (5,325) $ (8,159)
Fully eligible active plan participants (1,742) (1,743)
Other active plan participants (450) (2,218)
(7,517) (12,120)
Unrecognized net (gain) loss from past
experience different from that assumed
and effects of changes in assumptions (5,213) 329
ACCRUED POSTRETIREMENT BENEFITS COST $(12,730) $(11,791)
For the years ended December 31, 1996, 1995 and 1994, net postretirement
benefits cost included the following components (in thousands):
1996 1995 1994
Service cost--benefits earned during the period $ 309 $ 234 $ 249
Interest cost on projected benefit obligation 970 866 817
NET PERIODIC POSTRETIREMENT BENEFITS COST $1,279 $1,100 $1,066
In accordance with the pooling agreement, the Company's share of accrued
postretirement benefit cost and net periodic postretirement benefit cost
is 30% of the amounts reflected above. In determining the accumulated
postretirement benefit obligation at December 31, 1996 and 1995, Empire
utilized discount rates of 7.5% and 7.0%, respectively. The assumed health
care cost trend rates used in measuring the accumulated postretirement
benefit obligation were 14% for 1995 and 13% for 1996 declining to an
ultimate rate of 8% by 2001. If the health care cost trend rates were
increased by 1%, the accumulated postretirement benefit obligation as of
December 31, 1996 and 1995 would have increased by approximately $338,000
and $544,000, respectively, before the effects of the pooling agreement.
The effect of a 1% change in the estimated aggregate of service and
interest cost for 1996, 1995 and 1994 would be immaterial.
In 1987, Empire established a Supplemental Retirement Plan ("SERP") for
certain senior officers. Under the SERP, Empire makes contributions to a
trust account for the benefit of eligible senior officers. Eligible
officers will receive benefits determined in accordance with the formulas
and other provisions of the SERP agreement based on prior salary. Empire
expensed $1,073,000 and $700,000 during 1996 and 1994, respectively, and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 10--PENSION PLAN, POSTRETIREMENT BENEFITS AND STOCK
OPTIONS--CONTINUED
had income of $697,000 in 1995 due to a reduction in accruals. Pursuant to
the pooling agreement the Company is obligated to contribute 30% of the
payments made under the SERP.
In 1994, Empire established a Salary Cap Restoration Plan ("SCRP") for
certain corporate officers. Under the SCRP, Empire will provide these
officers with an additional benefit, to be paid in a lump-sum upon
retirement, equal to the difference between the actuarially determined
lump-sum benefits, as computed under the 1985 Plan, of the officer's
highest five year average compensation (not to exceed $300,000) at
retirement and the current maximum compensation limit of $150,000. The
SCRP is an unfunded plan. During 1995, Empire had income of $274,000 due
to an accrual reduction and, during 1996 and 1994, expensed $90,000 and
$394,000, respectively. Under the pooling arrangement, the Company is
obligated to pay 30% of the cost of the SCRP.
Empire sponsors an Employees' Savings Plan (the "Savings Plan"),
under which each eligible employee may defer a portion of their annual
compensation, subject to limitations. Empire contributes a matching
amount, subject to certain limits. In 1995, Empire matched 65% of each
participant's deferral contribution up to a maximum matching contribution
of $650. A participant may also contribute, from his after-tax dollars,
an amount, not to exceed 10% of his annual compensation. Effective July
1996, the Savings Plan was amended to allow Empire matching contributions
equal to 50% of an employee's contributions up to a maximum of 2.5% of the
employee's salary. Empire's contributions to the Savings Plan were
$524,000 $435,000 and $352,000 in 1996, 1995 and 1994, respectively. Under
the pooling arrangement, the Company is obligated to provide 30% of
Empire's contributions under the Savings Plan.
In 1985, Allcity adopted the Allcity Insurance Company 1985 Incentive
Stock Option Plan ("SOP") for officers and key employees. Under this
plan, 368,420 shares were reserved for future options that may be granted
to acquire common shares at the market price at date of grant. On October
1, 1986 options were granted to acquire a total of 312,250 common shares
at an exercise price of $1.50 per common share. The plan expired in 1995.
Prior to 1996, Empire sponsored a Long Term Incentive Plan which,
based upon the attainment of certain performance goals, awarded officers
with units of participation in a compensation pool. The plan was
terminated in 1996.
NOTE 11--LEASES
The Group's executive and administrative offices are located on six
floors of a ten-story office building at 122 Fifth Avenue, New York, New
York 10011 and one floor of an adjoining office building at 120 Fifth
Avenue, New York, New York 10011, under leases each of which expire on
September 30, 1998.
The Group has entered into a twenty year lease agreement, in an
office building, in which Leucadia has an equity interest, and will
relocate its executive and administrative offices in the summer of 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 11--LEASES--CONTINUED
The Group received certain incentives from both the City and State of New
York in connection with this lease which will be recognized over the term
of the lease.
Future minimum rentals, which exclude escalation amounts, on non-
cancelable leases in the aggregate for each of the next five years and
thereafter are as follows (in thousands):
1997 $ 2,058
1998 2,361
1999 4,906
2000 4,906
2001 4,906
Thereafter 106,970
Total $126,107
Rental expense for the Group for the years 1996, 1995 and 1994 was
$3,166,000, $2,848,000 and $2,978,000, respectively. The Company pays 30%
of these rental charges in accordance with the pooling agreement.
NOTE 12-BUSINESS SEGMENTS
Allcity operates in three business segments--automobile lines, commercial
lines and miscellaneous and personal lines. Results by business segment
for each of the three years ended December 31, 1996 are summarized as
follows (in thousands):
1996 Premiums Underwriting
Earned Gain (Loss)
Automobile lines $63,558 $(10,822)
Commercial lines 27,714 (2,998)
Miscellaneous and personal lines 4,801 266
TOTAL FROM UNDERWRITING $96,073 (13,554)
Net investment income, net securities gains,
other income and interest on surplus note 17,518
INCOME BEFORE FEDERAL INCOME TAXES $ 3,964
1995 Premiums Underwriting
Earned Gain (Loss)
Automobile lines $61,261 $ (9,965)
Commercial lines 29,535 (5,147)
Miscellaneous and personal lines 3,455 560
TOTAL FROM UNDERWRITING $94,251 (14,552)
Net investment income, net securities losses,
other income and interest on surplus note 15,345
INCOME BEFORE FEDERAL INCOME TAXES $ 793
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 12--BUSINESS SEGMENTS--CONTINUED
1994 Premiums Underwriting
Earned Gain (Loss)
Automobile lines $55,826 $(4,876)
Commercial lines 30,387 2,531
Miscellaneous and personal lines 2,831 101
TOTAL FROM UNDERWRITING $89,044 (2,244)
Net investment income, net securities losses,
other income and interest on surplus note 12,768
INCOME BEFORE FEDERAL INCOME TAXES $10,524
<FN>
Direct investment portfolios are not maintained for each segment and,
accordingly, allocation of assets to each segment is not performed.
Five general agents, one of which is an Empire subsidiary, produced
approximately 23%, 21% and 23% of Allcity's premiums for the years ended
December 31, 1996, 1995 and 1994, respectively. All of Allcity's business
is conducted in New York State.
NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's only material financial instruments are investments for
which the fair values (estimated market value) are disclosed in Note 4,
and the surplus note and short-term investments, for which the carrying
amount approximates fair value.
NOTE 14 -- LITIGATION
The Company is party to legal proceedings that are considered to be either
ordinary, routine litigation or incidental to its business. Based on
discussion with Counsel, the Company does not believe that such litigation
will have a material effect on its financial position, results of
operations or cash flows.
NOTE 15 -- RELATED PARTIES
See Notes 1, 3, 8, 9, 10 and 11 regarding Allcity's relationships with the
Group and Leucadia.
NOTE 16--SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS
The following is a summary of unaudited quarterly results of operations
for 1996, 1995 and 1994 (in thousands of dollars, except per share
amounts):
1996
1st 2nd 3rd 4th
Total revenues $30,884 $30,714 $30,600 $28,592
Net income 556 497 780 801
Net income per share 0.08 0.07 0.11 0.11
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED
ALLCITY INSURANCE COMPANY
NOTE 16--SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS--CONTINUED
1995
1st 2nd 3rd 4th
Total revenues $28,273 $30,091 $29,852 $29,676
Net income (loss) 698 590 299 (1,024)
Net income (loss) per share 0.10 0.08 0.04 (0.14)
Actuarial studies conducted during the fourth quarter 1995 and in each
quarter of 1996 indicated a need for additional reserves. Accordingly, in
the fourth quarter 1995, the Company raised reserves to indicated levels
producing a loss for the quarter.
ALLCITY INSURANCE COMPANY
SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION
CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS
(Thousands of dollars)
________________________________________________________________________________
_____COL. A_________ COL. B________COL. C_______COL. D*______COL. E____COL. F___
Reserves
for Unpaid
Deferred Claims Discount
Policy and Claim if any
Acquisition Adjustment Deducted in Unearned Earned
Segment Costs Expenses Column C(a) Premiums Premium
Year Ended 12/31/96:
Automobile lines $4,318 $206,706 $ 66,050 $ 63,558
Commercial lines 2,654 194,000 $104 39,090 27,714
Miscellaneous and
personal lines 735 5,381 ___ 6,517 4,801
TOTAL $7,707 $406,087 $104 $111,657 $ 96,073
Year Ended 12/31/95:
Automobile lines $5,057 $199,550 $ 74,194 $ 61,261
Commercial lines 3,042 195,098 $ 75 46,402 29,535
Miscellaneous and
personal lines 479 5,231 ___ 5,346 3,455
TOTAL $8,578 $399,879 $ 75 $125,942 $ 94,251
Year Ended 12/31/94:
Automobile lines $5,044 $165,348 $ 70,234 $55,826
Commercial lines 3,170 170,537 $ 83 48,681 30,387
Miscellaneous and
personal lines 355 5,714 ___ 4,271 2,831
TOTAL $8,569 $341,599 $ 83 $123,186 $89,044
COL G COL H COL I COL J COL K COL L
Claims and Claim Paid
Adjustment Expenses Amortization Claims
Incurred Related to of Deferred and
Net (1) (2) Policy Other Claim
Investment Current Prior Acquisition Operating Premiums Adj.
Income(b) Year Years Costs Expenses Written Expenses
$ 9,561 $58,256 $6,443 $ 9,854 $ (180) $60,162 $62,446
6,370 19,251 1,434 5,293 4,782 25,243 22,483
427 2,709 257 1,057 511 5,606 2,645
$16,358 $80,216 $8,134 $16,204 $ 5,073 $91,011 $87,574
$ 8,875 $56,931 $13,656 $11,016 $(3,045) $62,485 $57,891
6,137 21,399 (3,183) 6,530 2,589 28,821 10,174
346 1,731 (207) 803 583 4,029 1,467
$15,358 $80,061 $10,266 $18,349 $127 $95,335 $69,532
$ 7,371 $50,742 $ (216) $10,131 $ 33 $60,216 $37,269
5,526 21,198 (2,581) 5,891 3,368 30,334 16,428
290 1,850 (137) 670 339 2,986 1,351
$ 13,187 $73,790 $(2,934) $16,692 $3,740 $93,536 $55,048
<FN>
(a)Liabilities for losses for certain long-term disability payments under
workers' compensation insurance are discounted at a maximum of 6%. The
liabilities discounted are deemed insignificant and do not have a material
effect on reported income.
(b)Allocations of Net Investment Income and Other Operating Expenses are
based on a number of assumptions and estimates and results would change if
different methods were applied. Other Operating Expenses are reflected net of
Service Fee Income.
*Information required by Schedule III - Supplementary Insurance Information has
been incorporated within this schedule.