Back to GetFilings.com
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, 1993
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: 1-5721
LEUCADIA NATIONAL CORPORATION
- ---------------------------------------------------------------------------
(Exact Name of Registrant as Specified in its Charter)
New York 13-2615557
- ------------------------------------- -----------------------------------
(State or Other Jurisdiction of (I.R.S. Employer Identification
Incorporation or Organization) No.)
315 Park Avenue South
New York, New York 10010
(212) 460-1900
- ---------------------------------------------------------------------------
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
Securities registered pursuant to Section 12(b) of the Act:
Name of Each Exchange
Title of Each Class on Which Registered
- ------------------------------------- -----------------------------------
Common Shares, par value $1 per share New York Stock Exchange
Pacific Stock Exchange
10-3/8% Senior Subordinated Notes due New York Stock Exchange
June 15, 2002
5-1/4% Convertible Subordinated New York Stock Exchange
Debentures due February 1, 2003
7-3/4% Senior Notes due August 15, New York Stock Exchange
2013
Securities registered pursuant to Section 12(g) of the Act:
None.
- ---------------------------------------------------------------------------
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes [x] No [_]
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statement incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K [_].
Aggregate market value of the voting stock of the registrant held by non-
affiliates of the registrant at March 16, 1994 (computed by reference to
the last reported closing sale price of the Common Stock on the New York
Stock Exchange on such date): $621,552,120.
On March 16, 1994, the registrant had outstanding 27,948,823 shares of
Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE:
Certain portions of the registrant's definitive proxy statement pursuant to
Regulation 14A of the Securities Exchange Act of 1934 in connection with
the 1994 annual meeting of shareholders of the registrant are incorporated
by reference into Part III of this Report.
PART I
Item 1. Business.
------ --------
THE COMPANY
GENERAL
The Company is a financial services company principally engaged,
through its subsidiaries, in personal and commercial lines of property
and casualty insurance, life and health insurance primarily marketed
directly to older individuals, banking and lending, incentive services
and manufacturing. The Company concentrates on profitability and
maximizing cash flow in order to build long-term shareholder value,
rather than emphasizing volume or market share. Shareholders' equity
has grown from a deficit of approximately $7,657,000 at December 31,
1978 (prior to the acquisition of control of and significant ownership
interest in the Company by both the Company's Chairman and President),
to a positive shareholders' equity of approximately $907,856,000 at
December 31, 1993, equal to a book value per common share of negative
$.22 at December 31, 1978 and $32.54 at December 31, 1993,
respectively. Income before income taxes and the cumulative effects
of accounting changes for 1993 was $176,868,000, the highest in the
history of the Company.
The Company's principal operations are its insurance businesses,
where it is a specialty markets provider of property and casualty and
life insurance products to niche markets. The Company's principal
personal lines insurance products are automobile insurance, homeowners
insurance, graded benefit life insurance marketed primarily to the age
50-and-over population and variable annuity products. The Company's
principal commercial lines are property and casualty products provided
for multi-family residential real estate, retail establishments, and
taxicabs in the New York metropolitan area. For the year ended
December 31, 1993, the Company's insurance segments contributed
approximately 80% of total revenue and, at December 31, 1993,
constituted approximately 81% of consolidated assets.
The Company's insurance subsidiaries have a diversified
investment portfolio of securities, substantially all of which are
issued or guaranteed by the U.S. Treasury or by U.S. governmental
agencies or are rated "investment grade" by Moody's Investors Service
Inc. ("Moody's") and/or Standard & Poor's Corporation ("S&P").
Investments in mortgage loans, real estate and non-investment grade
securities represented in the aggregate less than 1% of the insurance
subsidiaries' aggregate portfolio at December 31, 1993.
The Company's banking and lending operations primarily consist of
making instalment loans funded by customer banking deposits
("Deposits") insured by the Federal Deposit Insurance Company (the
"FDIC"). The Company has established a niche market for automobile
loans to individuals with poor credit histories. Based on its
experience with such loans, the Company concluded that excellent
opportunities exist for a successful expansion of this business.
Accordingly, during 1993 the Company increased, on a controlled basis,
its investment in such loans. The Company intends to expand this
business in 1994. The Company's incentive services operations consist
primarily of trading stamp operations. The Company's manufacturing
operations primarily manufacture products for the "do-it-yourself"
home improvement market and for industrial and agricultural markets.
At December 31, 1993, the Company had aggregate minimum tax loss
carryforwards of approximately $197,000,000. The amount and
availability of tax loss carryforwards are subject to certain
qualifications, limitations and uncertainties, including, with respect
to its consolidated subsidiary, Phlcorp, Inc. ("Phlcorp"), tax sharing
payments pursuant to a tax settlement agreement with the Internal
Revenue Service and the Department of Justice.
The Company also has investments, including non-controlling
equity interests representing more than 5% of the outstanding capital
stock of several public companies. Additionally, the Company
continuously
evaluates the retention and disposition of its existing operations and
investigates possible acquisitions of new businesses in order to
maximize its ultimate economic value to shareholders.
As used herein, the term "Company" refers to Leucadia National
Corporation, a New York corporation organized in 1968, and its
subsidiaries, except as the context otherwise may require.
3
Financial Information About Industry Segments
---------------------------------------------
Certain information concerning the Company's operations is
presented in the following table.
Year Ended December 31,
-------------------------------
1993 1992 1991(a)
---- ---- ----
(In millions)
Revenues:
--------
Property and Casualty Insurance $ 842.1 $ 849.0 $ 476.0
Life Insurance 286.3 395.5 257.6
Banking and Lending 38.2 56.4 43.9
Incentive Services 46.0 96.9 98.3
Manufacturing 173.8 168.8 161.8
Corporate and Other (b) 21.7 6.4 49.1
-------- -------- --------
$1,408.1 $1,573.0 $1,086.7
======== ======== ========
Income (loss) before income taxes:
---------------------------------
Property and Casualty Insurance $ 135.5 $ 108.4 $ 65.3
Life Insurance 54.5 63.7 27.1
Banking and Lending 12.6 17.4 (0.7)
Incentive Services 29.2 14.1 7.8
Manufacturing (2.2) (6.6) (0.8)
Corporate and Other (b) (52.7) (53.4) (3.7)
-------- -------- --------
$ 176.9 $ 143.6 $ 95.0 (a)
======== ======== ========
Identifiable assets employed:
----------------------------
Property and Casualty Insurance $2,169.6 $1,843.3 $1,910.7
Life Insurance 1,610.5 1,857.0 2,030.9
Banking and Lending 262.6 268.9 279.7
Incentive Services 42.9 41.2 72.3
Manufacturing 101.0 105.8 103.0
Corporate and Other (b)(c) 502.7 214.4 193.5
-------- -------- --------
$4,689.3 $4,330.6 $4,590.1
======== ======== ========
At December 31, 1993, the Company and its consolidated subsidiaries had
4,372 full-time employees.
_______________________
(a) Includes Colonial Penn Group, Inc. ("CPG") from date of acquisition
(August 16, 1991). On a pro forma (unaudited) basis giving effect to
the acquisition of CPG only, income before income taxes for 1991 would
have been approximately $141,613,000.
(b) Includes Jordan Associated Companies (described below), gains (losses)
from certain investments and amounts related to a subsidiary, Cambrian &
General ("Cambrian"). See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
(c) Principally consists of cash, investments, receivables and, at December
31, 1993, the deferred income tax asset of $114,001,000.
3
INSURANCE OPERATIONS
GENERAL
The Company engages in the personal property and casualty and the
life and health insurance businesses on a nationwide basis and
specializes in the commercial property and casualty insurance business
in the New York metropolitan area. The Company's principal insurance
subsidiaries consist of the CP Group, Charter National Life Insurance
Company ("Charter") and the Empire Group. The CP Group consists of
Colonial Penn Life Insurance Company ("CPL"), Colonial Penn Franklin
Insurance Company ("Franklin"), Colonial Penn Heritage Insurance
Company ("Heritage"), Colonial Penn Insurance Company ("CPI") and
Intramerica Life Insurance Company ("Intramerica"). The Empire Group
consists of Empire Insurance Company ("Empire"), Empire's subsidiary,
Allcity Insurance Company ("Allcity") and Colonial Penn Madison
Insurance Company ("Madison"). In conducting its insurance
operations, the Company focuses primarily on profitability and
persistency rather than volume.
A.M. Best Company ("Best"), an independent rating agency, has
rated CPL, Charter, and Empire "A" (excellent), Intramerica "A-"
(excellent) and CPI, Franklin and Heritage "NA-5" (indicating a
previously rated company which has experienced a significant change in
ownership, management or book of business, as a result of which its
operating experience may be interrupted). Demotech, Inc., an
independent rating agency, has rated CPI, Franklin and Heritage "A"
(exceptional). Ratings may be revised or withdrawn at any time.
Restructuring of CP Group
The Company's insurance operations were significantly increased
as a result of the Company's acquisition of CPG on August 16, 1991.
The Company acquired CPG for an aggregate cash purchase price of
approximately $128,000,000, including costs. For the year ended
December 31, 1992 and for the period from August 16, 1991 to December
31, 1991, CPG contributed approximately $131,757,000 and $59,995,000,
respectively, to the Company's consolidated pre-tax income, including
gains on sales of securities (approximately $23,543,000 and
$16,323,000, respectively) and exclusive of financing costs. Due to
changes in the Company's insurance operations it is not practicable to
provide meaningful comparable information for CPG for 1993. At the
acquisition date, after giving effect to a cash contribution by the
seller prior to the closing of approximately $49,827,000, CPG had
unaudited shareholder's equity, determined in accordance with
generally accepted accounting principles ("GAAP"), of approximately
$391,000,000 (or approximately $263,000,000 in excess of the purchase
price) and the CP Group had combined unaudited statutory capital and
surplus for regulatory purposes determined in accordance with
statutory accounting principles ("SAP") of approximately $225,100,000.
This acquisition was accounted for as a purchase and the consolidated
financial statements included in this Report include the operations of
CPG since August 16, 1991.
Historically, the CP Group marketed most of its insurance
products directly to individuals without the use of commissioned
agents through "direct response marketing" methods. Direct response
marketing includes any form of marketing in which a company and a
customer deal directly with each other rather than through an
insurance agent. Direct response marketing methods include print
advertising, radio and television advertising, direct mail,
telemarketing and customer referral programs. Typical direct response
marketing campaigns utilize a variety of these methods in a planned
sequence. The costs of certain of these marketing efforts were
substantial and the Company believes were not justified by the CP
Group's previous operating results. As a result, during the Company's
restructuring of the CP Group, the CP Group substantially refined and
reduced its marketing efforts. The Company believes that smaller and
more focused direct response marketing campaigns have resulted in
lower unit costs, resulting in more profitable operations, albeit with
an initial substantial
4
reduction in new business. The Company believes that as a result of
its restructuring efforts, which are complete, together with the
Company's operating experience, the Colonial Penn P&C Group (as
defined below) has become a low cost provider of automobile and
homeowners insurance to its niche markets, enabling it to charge
competitive rates, which should aid the Colonial Penn P&C Group in
obtaining new business and retaining existing business. Furthermore,
as a result of the Colonial Penn life insurance companies' favorable
experience in obtaining new business, the Company has increased its
direct response marketing of graded benefit life products, generating
significant new premiums at acceptable acquisition costs.
The Company believes that its restructuring efforts described
above have increased the CP Group's profitability without impairing
service to existing policyholders.
PROPERTY AND CASUALTY INSURANCE
The Company's principal property and casualty insurance
operations are conducted through CPI, Franklin and Heritage
(collectively, the "Colonial Penn P&C Group") and through the Empire
Group. The Colonial Penn P&C Group, which maintains its headquarters
in Valley Forge, Pennsylvania, is licensed in all 50 states, the
District of Columbia, Puerto Rico and the U.S. Virgin Islands and
writes insurance throughout most of the United States. The Colonial
Penn P&C Group has regional offices in Devon, Pennsylvania, Tampa,
Florida and Phoenix, Arizona. The Empire Group is licensed in twenty-
three states and operates primarily in the New York metropolitan area.
During the year ended December 31, 1993, approximately 80%, 13%
and 7% of net earned premiums of the Company's property and casualty
insurance operations were derived from personal and commercial
automobile lines of insurance, commercial lines of insurance (other
than automobile insurance) and personal lines of insurance (other than
automobile insurance), respectively. Total property and casualty
insurance net earned premiums for the year ended December 31, 1993
aggregated approximately $712,000,000, of which approximately
$452,600,000 was attributable to the Colonial Penn P&C Group.
Set forth below is certain statistical information for the
Company's property and casualty operations for each of the three years
in the period ended December 31, 1993 prepared in accordance with GAAP
and SAP. The Combined Ratio is the sum of the Loss Ratio and the
Expense Ratio. A Combined Ratio below 100% indicates an underwriting
profit and a Combined Ratio above 100% indicates an underwriting loss.
The Loss Ratio is the ratio of losses and loss adjustment expenses
incurred to net premiums earned. Incurred losses include a provision
for claims which have occurred but have not yet been reported. The
Expense Ratio is the ratio of underwriting expenses (policy
acquisition costs, including commissions, and a portion of
administrative, general and other expenses attributable to
underwriting operations) to net premiums written, if determined in
accordance with SAP, or to net premiums earned, if determined in
accordance with GAAP. Certain accident and health insurance business,
which is included in the statutory results of operations of the
property and casualty insurance segment and is reflected in the SAP
Combined Ratio, is reported in the life insurance segment for
financial reporting purposes and therefore is not included in the GAAP
Combined Ratios reflected herein. The Combined Ratio does not reflect
the effect of investment income on the results of operations.
5
YEAR ENDED DECEMBER 31,
-----------------------------
1993 1992 1991(A)
---- ---- -------
Loss Ratio:
GAAP . . . . . . . . . . . . . . . . . . . . . . . 76.9% 82.3% 82.9%
SAP . . . . . . . . . . . . . . . . . . . . . . . 76.1% 85.3% 82.0%
Industry (SAP) (b) . . . . . . . . . . . . . . . . N/A 88.1% 81.1%
Expense Ratio:
GAAP . . . . . . . . . . . . . . . . . . . . . . . 20.0% 19.4% 19.2%
SAP . . . . . . . . . . . . . . . . . . . . . . . 17.6% 17.5% 21.3%
Industry (SAP) (b) . . . . . . . . . . . . . . . . N/A 27.6% 27.7%
Combined Ratio (c):
GAAP . . . . . . . . . . . . . . . . . . . . . . . 96.9% 101.7% 102.1%
SAP . . . . . . . . . . . . . . . . . . . . . . . 93.7% 102.8% 103.3%
Industry (SAP) (b) . . . . . . . . . . . . . . . . N/A 115.7% 108.8%
_______________
(a) Includes Colonial Penn P&C Group from date of acquisition.
(b) Source: Best's Insurance Management Reports, Property/Casualty, March 25, 1993. A comparison to
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.
(c) For 1993, the difference in the treatment of certain costs for GAAP and SAP purposes was a principle
reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1992, the
results of the accident and health insurance business, which (as described above) are reflected in
the SAP Combined Ratio but are not reflected in the GAAP Combined Ratio, had a non-recurring income
item which reduced the SAP Combined Ratio. In addition, in 1992 certain income credits were
recognized only for GAAP purposes.
The Company believes, based on published reports, that the Colonial
Penn P&C Group's SAP Expense Ratio for 1992, the last year for which
annual industry data is available, is among the lowest in the
industry.
The Colonial Penn P&C Group
The Colonial Penn P&C Group's primary business is providing
private passenger automobile and homeowners insurance coverage to the
age 50-and-over population. The Colonial Penn P&C Group's goal is to
be one of the lowest cost providers to this market.
Substantially all of the policies are written for a one-year
period. However, in many states CPI and Franklin offer a "guaranteed
lifetime protection" provision in its automobile policies whereby,
subject to certain exceptions, policyholders who are age 50 and older
are guaranteed that CPI and Franklin will renew their policies at
rates then in effect for the insured's appropriate classification.
6
Net earned premiums for the Colonial Penn P&C Group for the year
ended December 31, 1993 were concentrated in the states listed below:
Percentage of Net
State Earned Premiums
----- -----------------
Automobile (1): California (2) 19%
----------
Florida 17
New York 13
Connecticut 7
Arizona 7
All others 37
---
Total 100%
===
Homeowners: Florida 23%
----------
California (2) 17
New York 10
Arizona 6
Pennsylvania 6
All others 38
---
Total 100%
===
______________
(1) Does not include net earned premiums with respect to involuntary
automobile insurance, i.e., mandatory assumed risks, which generally
relate to the amount of writings in the applicable state.
(2) For a discussion of legislation relating to California property and
casualty operations, see "Insurance Operations-General-Government
Regulation."
Prior to 1988, CPI wrote as primary insurer or as a reinsurer
certain commercial property and casualty insurance business known as
"Special Risks." The Special Risks business consisted of a variety of
diverse commercial lines including, among other things, general
corporate liability policies issued to public and corporate entities,
residual value insurance on leased automobiles, collision insurance to
car leasing and rental businesses and professional and directors and
officers liability insurance. CPI had realized significant losses in
the Special Risks business prior to the acquisition date and had
provided for significant additional losses from time to time, both as
to policy benefits and non-recoverable reinsurance receivables. The
nature of most of this insurance involves exposures which can be
expected to develop over a relatively long period of time before a
definitive determination of ultimate losses and loss adjustment
expenses can be established. As a result, losses with respect to this
block are particularly difficult to predict accurately. Based in part
upon a recently completed independent actuarial review, the Company
believes that the policy reserves for the Special Risks block
reflected in the consolidated balance sheet at December 31, 1993
(approximately $74,900,000, before reinsurance) are adequate. In
evaluating and administering the Special Risks portfolio, the Company
has used its experience gained from the management of certain of the
WMAC Companies (as defined below), which also involves managing the
run-off of a closed block of commercial property and casualty
insurance business. The Company intends to manage the run-off of the
Special Risks block and does not intend to offer this aspect of
commercial lines insurance either as an insurer or reinsurer. The
WMAC Companies are certain legal subsidiaries of Phlcorp which are or
have been under the control of the Wisconsin Insurance Commissioner
due to the rehabilitation and liquidation proceedings (which were
initiated prior to the Company's acquisition of Phlcorp) of certain of
Phlcorp's non-consolidated subsidiaries (the "WMAC Companies").
7
The Empire Group
The Empire Group provides personal insurance coverage to
automobile owners and homeowners and commercial insurance primarily
for residential real estate, restaurants, retail establishments,
taxicabs (both medallion and radio-controlled) and several types of
service contractors.
For the years ended December 31, 1993, 1992 and 1991, net earned
premiums and commissions for the Empire Group aggregated approximately
$259,400,000, $243,100,000 and $210,700,000, respectively.
Substantially all of the Empire Group policies are written in New York
for a one-year period; however, some policies are issued for three
years with provision for re-rating the policy for premium purposes at
each policy anniversary date. The Empire Group is licensed in New
York to write all lines of insurance that may be written by a property
and casualty insurer except residual value, credit, unemployment,
animal and marine protection and indemnity insurance and ocean marine
insurance.
The Empire Group has acquired blocks of private passenger
automobile and commercial automobile assigned risk business from
insurance companies required or volunteering to terminate such
coverage. These contractual arrangements provide for fees to the
Empire Group within parameters established by the New York Insurance
Department. In addition, the Empire Group acts for a fee as a
"servicing carrier," providing administrative services, including
claims processing, underwriting and collection activities, for the New
York Public Automobile Pool. This latter arrangement does not involve
the assumption of any material underwriting risk by the Empire Group.
As is true with the Company's other insurance subsidiaries, the
Empire Group's marketing strategy emphasizes profitability rather than
volume. The business of the Empire Group is produced through general
agents, local agents and insurance brokers, who are compensated for
their services by payment of commissions on the premiums they
generate. There are five general agents, one of which is owned by
Empire, and approximately 426 local agents and insurance brokers
presently acting under agreements with the Empire Group. These agents
and brokers also represent other competing insurance companies.
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 through December 31 of each year. 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 to represent changes in loss experience (and are
reflected in current earnings).
In the following table, the liability for losses and LAE of the
Company's property and casualty insurance subsidiaries are reconciled
for each of the three years ended December 31, 1993. Included therein
are current year data and prior year development.
8
RECONCILIATION OF LIABILITY FOR LOSSES AND
LOSS ADJUSTMENT EXPENSES
1993 1992 1991
---- ---- ----
(In thousands)
Net liability for losses
and LAE at
beginning of year $ 904,326 $938,384 $251,401
---------- -------- --------
Amounts related to the
Colonial Penn P&C Group
at date of acquisition - - 689,458
---------- -------- --------
Provision for losses and
LAE for claims occurring
in the current year 624,048 619,691 320,511
Decrease in estimated
losses and LAE for
claims occurring in
prior years (84,382) (41,912) (1,909)
---------- -------- --------
Total incurred losses
and LAE 539,666 577,779 318,602
---------- -------- --------
Losses and LAE payments for
claims occurring during:
Current year 236,369 239,055 131,247
Prior years 318,541 372,782 189,830
---------- -------- --------
554,910 611,837 321,077
---------- -------- --------
889,082 904,326 938,384
Reserve deducted above for
insurance not considered
collectible 41,065 34,273 41,998
---------- -------- --------
930,147 938,599 980,382
Reinsurance recoverable (a) 121,721 - -
---------- -------- --------
Liability for losses and LAE
at end of year as reported
in financial statements $1,051,868 $938,599 $980,382
========== ======== ========
_____________
(a) For 1992 and 1991, liability for losses and LAE is shown net of
reinsurance recovable.
The Company's property and casualty insurance subsidiaries rely
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 consistent range of estimates for setting the reserve
levels. For further input, loss reserve committees periodically
9
mix, claims management and legal climate. Such input sometimes leads
to modifications of the statistical projections.
The Company's property and casualty insurance subsidiaries'
liability for losses and LAE as of December 31, 1993 was $910,657,000
determined in accordance with SAP and $1,051,868,000 determined in
accordance with GAAP. The reconciling differences principally relate
to liabilities assumed by reinsurers, which are not deducted from GAAP
liabilities (approximately $163,000,000) reduced by approximately
$15,000,000, net, included in accounts other than property and
casualty loss reserves for GAAP and approximately $6,000,000 for
salvage and subrogation.
The tables below present the development of balance sheet
liabilities for 1983 through 1993 and include periods prior to
acquisition for each of the Empire Group and the Colonial Penn P&C
Group. The adjusted liability line of the table indicates the
estimated liability 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 provisions for losses
estimated to have been incurred but not reported to the Company's
property and casualty companies. The middle section of the table
shows the re-estimated amount of the previously recorded liability
based on experience as of the end of each succeeding year. The
estimate is increased or decreased as more information becomes known
about the frequency and severity of claims. 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. Thus, for
the year 1985, the Empire Group table indicates that an estimated
$8,887,000 of losses remain unpaid as of December 31, 1993 (the
difference between the currently estimated $155,727,000 of re-
estimated liability for that year and the $146,840,000 paid through
December 31, 1993).
The effect on 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 "cumulative redundancy (deficiency)" represents the aggregate
change in the estimates over all prior years. For example, the
initial 1983 liability estimate indicated on the Empire Group table
($153,342,000) has been re-estimated during the course of the
succeeding ten years, resulting in a re-estimated liability at
December 31, 1993 of $131,556,000, or a redundancy of $21,786,000. If
the re-estimation of liability exceeded the liability initially
established, a cumulative deficiency would be indicated.
As noted in the Colonial Penn P&C Group table below, the loss and
LAE development of the Colonial Penn P&C Group from 1985 through 1989
resulted in cumulative deficiencies, indicating that the established
reserves for policy claims and LAE were less than subsequently
determined to be necessary. The Colonial Penn P&C Group provided
additional reserves related to prior years' claims of approximately
$107,100,000 in 1990 and $35,100,000 in 1989. Prior to its
acquisition by the Company, and in part as a result of the unfavorable
loss development, the Colonial Penn P&C Group reviewed its loss ratio
and experience on a state-by-state basis, and initiated procedures to
improve underwriting standards, increase rates (subject to necessary
regulatory approvals) and withdraw from certain states with
unfavorable experience, where permissible, on financially acceptable
terms. The Company used the knowledge and experience gained from
managing Empire and certain of the WMAC Companies to review the
adequacy of the Colonial Penn P&C Group reserves and concluded that
the existing reserves were adequate.
The Company believes that the Empire Group's conservatism in
establishing reserves and CP Group's conservatism and improved claims
management procedures since acquisition have contributed significantly
to the creation of the redundancies included in the tables below.
10
In evaluating this information, it should be noted that each
amount shown for "cumulative redundancy (deficiency)" includes the
effects of all changes in amounts for prior periods. For example, the
amount of the redundancy (deficiency) related to losses settled in
1987, but incurred in 1983, will be included in the cumulative
redundancy (deficiency) amount for 1983, 1984, 1985 and 1986. This
table is not intended to and does not present accident or policy year
loss and LAE development data. Conditions and trends that have
affected development of the liability in the past may not necessarily
occur in the future. Accordingly, it may not be appropriate to
extrapolate future redundancies or deficiencies based on these tables.
Because of substantial differences in the development of reserves
of the Colonial Penn P&C Group and the Empire Group, loss and LAE
development data of the Colonial Penn P&C Group and the Empire Group
are each presented separately.
11
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE EMPIRE GROUP)
Year Ended December 31,
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
Adjusted Liability for
Unpaid Losses and
Loss Adjustment
Expenses $153,342 $156,434 $165,713 $182,133 $206,709 $222,814 $235,223 $251,401 $280,679 $322,615 $353,937
Liability
Re-estimated as of:
One Year Later $137,663 $142,474 $160,728 $180,975 $198,384 $213,671 $227,832 $249,492 $280,020 $322,037 $ -
Two Years Later 132,899 144,504 162,962 175,305 194,530 206,088 217,432 245,141 277,866
Three Years Later 134,144 143,635 156,870 170,152 188,843 198,500 212,649 243,849
Four Years Later 132,019 139,113 157,001 168,574 184,564 194,324 211,859
Five Years Later 128,440 139,441 155,413 165,717 181,990 196,070
Six Years Later 129,010 139,584 154,045 164,487 183,015
Seven Years Later 130,173 139,435 154,151 166,266
Eight Years Later 130,236 139,741 155,727
Nine Years Later 130,295 141,054
Ten Years Later 131,556
Cumulative Redundancy $ 21,786 $ 15,380 $ 9,986 $ 15,867 $ 23,694 $ 26,744 $ 23,364 $ 7,552 $ 2,813 $ 578 $ -
======== ======== ======= ======== ======== ======== ======== ======== ======== ======= ========
Cumulative Amount
of Liability
Paid Through:
One Year Later $ 43,859 $ 44,056 $ 51,795 $ 54,359 $ 60,446 $ 64,140 $ 65,822 $ 78,954 $ 89,559 $113,309 $ -
Two Years Later 68,999 74,265 83,249 88,770 97,627 101,206 109,479 126,908 150,043
Three Years Later 89,415 95,527 106,348 114,322 123,092 131,705 140,916 167,330
Four Years Later 103,773 110,368 123,275 130,433 142,910 152,330 166,023
Five Years Later 112,319 120,479 132,618 141,346 155,786 168,117
Six Years Later 117,591 126,094 139,276 149,079 164,213
Seven Years Later 120,781 130,015 143,926 153,681
Eight Years Later 123,286 132,600 146,840
Nine Years Later 125,126 134,881
Ten Years Later 126,980
Gross liability -
end of year $394,709
Reinsurance 40,772
--------
Net liability - $353,937
end of year as ========
shown above
12
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSE DEVELOPMENT (THE COLONIAL PENN P&C GROUP)
Year Ended December 31,
1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
---- ---- ---- ---- ---- ---- ---- ---- ---- ---- ----
(In thousands)
Adjusted Liability
for Unpaid Losses
and Loss
Adjustment
Expenses $229,700 $215,200 $217,000 $324,700 $386,200 $ 410,500 $ 448,800 $626,300 $657,700 $581,711 $535,145
Liability
Re-estimated
as of:
One Year Later $197,900 $193,200 $236,500 $352,600 $389,900 $ 445,600 $ 555,900 $659,800 $616,400 $497,911 $ -
Two Years Later 190,700 198,800 245,900 340,600 409,000 506,800 588,600 619,600 574,000
Three Years Later 193,700 203,500 241,600 338,700 443,700 535,600 563,800 614,000
Four Years Later 197,000 200,000 248,100 359,400 467,300 522,800 565,800
Five Years Later 194,500 197,100 231,200 384,000 459,400 526,700
Six Years Later 193,900 193,500 257,600 375,700 464,700
Seven Years Later 195,000 199,200 250,800 381,300
Eight Years Later 195,700 201,100 255,900
Nine Years Later 197,300 202,900
Ten Years Later 198,000
Cumulative
Redundancy
(Deficiency) $ 31,700 $ 12,300 $(38,900) $(56,600) $(78,500) $(116,200) $(117,000) $ 12,300 $ 83,700 $ 83,800 $ -
======== ======== ======== ======== ======== ========= ========= ======== ======== ======== ========
Cumulative Amount
of Liability
Paid Through:
One Year Later $103,500 $105,500 $126,200 $177,100 $207,700 $ 243,300 $ 258,500 $279,300 $283,200 $205,200 $ -
Two Years Later 150,600 156,600 178,500 249,800 304,000 353,300 387,500 432,500 390,100
Three Years Later 175,300 177,500 208,600 288,700 356,800 419,900 467,500 492,900
Four Years Later 184,900 187,600 227,600 313,700 393,100 462,200 496,400
Five Years Later 188,700 195,600 213,100 332,700 416,800 476,400
Six Years Later 191,800 187,000 223,000 343,600 425,500
Seven Years Later 192,500 190,800 227,800 349,200
Eight Years Later 193,100 192,700 231,100
Nine Years Later 193,800 194,400
Ten Years Later 194,900
Gross liability-
end of year $657,159
Reinsurance 122,014
--------
Net liability - $535,145
end of year as ========
shown above
13
LIFE INSURANCE
The Company's principal life insurance subsidiaries are Charter,
CPL and Intramerica. For the year ended December 31, 1993, the
Company's principal life insurance products were "Graded Benefit Life"
and variable annuity insurance products. Through its various
subsidiaries, the Company is licensed in all 50 states, the District
of Columbia, Puerto Rico, Guam and the U.S. Virgin Islands and
generally writes its life and health products in most of the United
States. Total direct life insurance in force as of December 31, 1993
was approximately $2.7 billion.
The following table reflects premiums earned on the Company's
life and health insurance products (except investment oriented
products) and premium receipts on variable annuity and other
investment oriented products for each of the three years in the period
ended December 31, 1993. Variable annuity and other investment
oriented product premium receipts are not recorded as revenue under
GAAP but are recorded in a manner similar to a deposit, and are
included below.
Year Ended December 31,
----------------------------------------
1993 1992 1991 (1)
---- ---- ----
(In thousands)
Graded Benefit Life $109,838 $109,552 $ 36,230
Variable Annuity Products 81,484 58,207 25,804
Other Investment
Oriented Products 6,828 9,828 17,360
Agent-sold Medicare
Supplement Products (2) 47,364 62,724 23,159
Other Health Products 18,992 22,367 8,538
Other 495 1,847 626
-------- -------- --------
Total (3) $265,001 $264,525 $111,717
======== ======== ========
__________________
(1) Excludes premium receipts on life insurance products of the CP Group
prior to the acquisition date (August 16, 1991).
(2) Effective December 31, 1992, the Company ceased marketing Medicare
Supplement products through agents.
(3) Excludes premium receipts (refunds) in 1993, 1992 and 1991 (since the
acquisition date) of $(1,655,000), $28,745,000 and $57,142,000,
respectively, on reinsurance of certain ordinary life policies and group
life and health insurance contracts underwritten by other insurance
companies and assumed by the life insurance subsidiaries.
Life and Health Insurance Products
Graded Benefit Life. "Graded Benefit Life" is a guaranteed-issue
product. These modified-benefit, whole life policies are offered on
an individual basis primarily to persons age 50 to 80, principally in
face amounts of $350 to $10,000, without medical examination or
evidence of insurability. Premiums are paid as frequently as monthly.
Graded Benefit Life is marketed using direct response marketing
techniques. New policyholder leads are generated primarily from
television advertisements. Consistent with its present marketing
program, the Company intends to concentrate its marketing efforts
towards soliciting new policyholders where the cost is justified,
upgrading existing policyholders' policy packages and obtaining
referrals from existing policyholders. The Company believes that
premiums on new business written in 1994 will exceed reductions due to
death and lapses.
14
During late l993, the Company began offering certain
policyholders a rider to their existing Graded Benefit Life policy.
This "Accelerated Benefit Rider" pays a policy benefit if the
policyholder is suffering from a terminal illness. Initial results
are promising and the Company expects to offer this rider to
additional policyholders on a limited basis. The Company is exploring
the development of other new products.
Investment Oriented Products. During 1993, the principal
investment oriented product offered by the Company's life insurance
subsidiaries was a no-load variable annuity ("VA") product. The VA
product is marketed as an investment vehicle to individuals seeking to
defer, for federal income tax purposes, the annual increase in their
account balance. Premiums from this VA product either are invested at
the policyholders' election in unaffiliated mutual funds where the
policyholder bears the entire investment risk or in a fixed account
where the funds earn interest at rates determined by the Company. The
Company's VA product is currently marketed in conjunction with a
mutual fund manager. The Company is pursuing cooperative arrangements
with other money managers to distribute its VA product.
Prior to 1991, the investment oriented products sold by the
Company included, among others, single premium deferred annuity
("SPDA") and single premium whole life ("SPWL") products. During
1992, the Company concluded that the profitability of its existing
blocks of SPDA and SPWL businesses were unlikely to achieve acceptable
operating results in the future. For a discussion of the reinsurance
of certain of these products, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
Medicare Supplement. Medicare Supplement products are health
insurance products primarily designed to supplement medicare benefits
for the older population on an underwritten guaranteed renewable
basis. Prior to l993, the Company's Medicare Supplement products were
marketed primarily through insurance agents. As a result of recent
federal and state legislation mandating standardization of Medicare
Supplement products (thereby enhancing an individual's ability to
compare various Medicare Supplement products), this market has become
more competitive. The Company is no longer actively marketing
Medicare Supplement products, but is offering renewals of its non-
standardized products to its policyholders. National health care
reforms are currently under consideration. It is not possible to
predict whether any reforms will be enacted, and, if enacted, what
effect such reforms might have on the Company's Medicare Supplement
products.
INSURANCE OPERATIONS - GENERAL
Investments
Investment activities represent a significant part of the
Company's insurance related revenues and profitability. Investments
are managed by the Company's investment advisors under the direction
of, and upon consultation with, the Company's several investment
committees.
The Company's insurance subsidiaries have a diversified
investment portfolio of securities substantially all of which are
rated "investment grade" by Moody's and/or S&P or issued or guaranteed
by the U.S. Treasury or by governmental agencies. The Company's
insurance subsidiaries do not generally invest in less than
"investment grade" or "non-rated" securities, real estate or
mortgages, although the Company's insurance subsidiaries may from time
to time make such investments in amounts not expected to be material.
For additional information concerning the Company's investments, see
"Notes to Consolidated Financial Statements."
15
The composition of the Company's insurance subsidiaries'
investment portfolio as of December 31, 1993 and 1992 was as follows:
PROPERTY AND CASUALTY LIFE AND HEALTH
--------------------- ---------------------
1993 1992 1993 1992
---- ---- ---- ----
(Dollars in thousands)
Bonds and notes (a):
U.S. Government and agencies . . . . . . . . . 75% 79% 75% 63%
Rated investment grade (b) . . . . . . . . . . 22 20 19 24
Non rated - other . . . . . . . . . . . . . . - - 1 1
Rated less than investment grade . . . . . . . - - - 1
Policyholder loans . . . . . . . . . . . . . . . - - 2 10
Equity securities . . . . . . . . . . . . . . . . 1 - 1 -
Other, principally accrued interest . . . . . . . 2 1 2 1
--- --- --- ---
Total . . . . . . . . . . . . . . . . . 100 % 100 % 100% 100%
=== === === ===
Estimated average yield to maturity
of bonds and notes (c) . . . . . . . . . . . . 6.2 % 7.0 % 6.2% 7.6%
Estimated average remaining life of bonds
and notes (c) . . . . . . . . . . . . . . . . . 4.5 yrs. 5.9 yrs. 5.1 yrs. 5.8 yrs.
Carrying value of investment portfolio . . . . . $1,650,085 $1,387,644 $779,739 $1,240,275
Market value of investment portfolio . . . . . . $1,651,411 $1,411,478 $780,867 $1,271,185
_________________
(a) Exclusive of investments held for sale at December 31, 1992, "U.S. Government and agencies" would
have represented 69% of the property and casualty segment's investment portfolio and 59% of the life
and health segment's investment portfolio and "Rated investment grade" would have represented 19% of
the property and casualty segment's investment portfolio and 22% of the life and health segment's
investment portfolio. Investments held for sale represented 10% of the property and casualty
investment portfolio and 6% of the life and health investment portfolio at December 31, 1992.
(b) As rated by Moody's and/or S&P.
(c) Exclusive of trading securities in 1993, which are not significant, and investments held for sale in
1992.
Reinsurance
The Company currently obtains reinsurance for certain of its life
insurance policies and property and casualty insurance policies.
Among the Company's major reinsurers (and their respective Best
ratings) are General Reinsurance Corporation (A++), Lincoln National
Life Insurance Co. (A+), Munich American Reinsurance Company (A++) and
Hartford Fire Insurance Company (A+). Reinsurance is obtained for
investment oriented products for face amounts in excess of $500,000
per life. The life insurance subsidiaries generally do not obtain
reinsurance for the Graded Benefit Life products because these
policies generally do not exceed $10,000 face amount. The Colonial
Penn P&C Group obtained reinsurance for casualty risks in excess of
$2,000,000 in 1993 ($1,000,000 in 1992). Most Colonial Penn P&C Group
automobile policies do not have policy limits in excess of $100,000
per risk and $300,000 per accident. The Empire Group's maximum limit
retained for workers' compensation was $500,000 from July 1, 1992
through December 31, 1993 and $200,000 from January 1, 1991 through
June 30, 1992 and for other property and casualty lines, the maximum
limit retained was $225,000 for 1993 and $175,000 for each of 1992 and
1991. Additionally, the Company's property and casualty insurance
subsidiaries have entered into certain excess of loss and catastrophe
treaties to protect against certain losses. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations." 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 Company's reinsurance
generally has been placed with certain of the largest reinsurance
companies, which the Company believes 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's
insurance subsidiaries would be liable for the reinsured risks.
Additionally, certain of CPI's Special Risks reinsurers have
experienced financial difficulty and some are in rehabilitation
proceedings. CPI has
16
established reserves, which the Company believes are adequate, for
nonrecoverable reinsurance on its Special Risks block of insurance.
In 1992, 1993 and 1994, unusually severe natural disasters
occurred, including Hurricane Andrew (1992), the Midwest floods and
California fires (1993) and the Los Angeles Earthquake (1994). These
events have resulted in unprecedented industry-wide losses. The
Company's insurance subsidiaries also suffered losses as a result of
certain of these occurrences, although reinsurance reduced the
economic loss to the Company of Hurricane Andrew. However, as a
result of the industry's losses, the Company has seen a notable
decrease in the availability of catastrophe reinsurance at reasonable
rates, particularly at low levels of deductibility. Although the
Company has completed its 1994 reinsurance program at acceptable upper
loss limits, the insurance subsidiaries in 1993 and 1994 were unable
to obtain 1992 levels of deductibility at reasonable cost.
Accordingly, the Company increased its retention of lower level
losses. The Company did not incur catastrophic losses in excess of
its retained limits in 1993 and to date in 1994. Further, in 1992 the
Company did not incur losses in excess of its maximum reinsurance.
Competition
The insurance industry is a highly competitive industry, in which
many of the Company's competitors have substantially greater financial
resources, larger sales forces, more widespread agency and broker
relationships, and more diversified lines of insurance coverage.
Additionally, certain competitors market their products with
endorsements from affinity groups, while the Company's products are
for the most part unendorsed, which may give such other companies a
competitive advantage.
VA products are subject to regulation both as insurance policies
and as securities. As a result, the introduction of a VA product
involves significant regulatory and administrative efforts over a
substantial period of time. The Company expects sales of its no-load
VA product to be cyclical, generally following the securities markets.
The attractiveness of VA products as an investment vehicle is closely
linked to the tax status of such products. Typically, increases in
account values of VA products are not taxed until distributed in the
form of either surrenders or annuity payments. The taxable portion of
any such distribution is taxed as ordinary income.
The property and casualty insurance industry has historically
been cyclical in nature, with periods of less intense price competi-
tion and high underwriting standards generating significant profits,
followed by periods of increased price competition and lower under-
writing standards resulting in reduced profitability or loss. Price
competition has been significant in recent years. The cyclicality and
competitive nature of the property and casualty insurance business
historically have contributed to significant industry-wide quarter-to-
quarter and year-to-year fluctuations in underwriting results and net
income. Its profitability is affected by many factors, including rate
competition, severity and frequency of claims, interest rates, state
regulation, court decisions and judicial climate, all of which are
outside the Company's control.
Government Regulation
Insurance companies are subject to detailed regulation and
supervision in the states in which they transact business. Such
regulation pertains to matters such as approving policy forms and
various premium rates, minimum reserves and loss ratio requirements,
the type and amount of investments, minimum capital and surplus
requirements, granting and revoking licenses to transact business,
levels of operations and regulating trade practices. There can be no
assurance that such regulatory requirements will not become more
stringent in the future and have an adverse effect on the Company's
operations. The majority of the Company's property
17
and casualty insurance operations are in states requiring prior
approval by regulators before proposed rates may be implemented.
Certain states have indicated that they may change the bases (e.g.,
age, sex and geographic location) on which rates traditionally have
been established. Rates proposed for life insurance generally become
effective immediately upon filing. Insurance companies are required
to file detailed annual reports with the supervisory agencies in each
of the states in which they do business, and are subject to
examination by such agencies at any time. Due to the savings and loan
crisis and the seizure by state insurance regulators of certain large
financially unstable insurance companies, there has been some erosion
of confidence in all financial institutions, including insurance
companies. Increased regulation of insurance companies at the state
level and new regulation at the federal level is possible, although
the Company cannot predict the nature or extent of any such
regulation.
The National Association of Insurance Commissioners ("NAIC") has
adopted model laws incorporating the concept of a "risk based capital"
requirement for insurance companies, although the model law is not
intended to apply to property and casualty insurance companies until
year end 1994 financial statements are available. Generally, Risk
Based Capital ("RBC") is designed to measure 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 an early warning
tool to identify weakly capitalized companies for the purpose of
initiating regulatory action.
The RBC formula develops a risk adjusted target level of
statutory surplus for insurers by applying certain factors to various
asset, premium and reserve items. Higher factors are applied to more
risky items and lower factors are applied to less risky items. Thus,
the target level of statutory surplus varies not only as a result of
the insurer's size, but also on the risk profile of the insurer's
operation.
The RBC model laws provide for four incremental levels of
regulatory attention for insurers whose surplus is below the
calculated RBC target. These levels of attention range in severity
from requiring the insurer to submit a plan for corrective action to
actually placing the insurer under regulatory control.
Each of the Company's insurance subsidiaries' RBC ratio as of
December 31, 1993 substantially exceeded the 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. Generally, life insurance companies having three or more
of such ratios outside their "normal" range may be indicative of a
weakly capitalized company. Two of the Company's life insurance
subsidiaries, Charter and CPL, had three or more "other than normal"
NAIC ratios for the year ended December 31, 1993. Charter had five
"other than normal" ratios in l993, four of which resulted from
reinsurance of the SPWL block of business described under
"Management's Discussion and Analysis of Financial Condition and
Results of Operations," while CPL had four "other than normal" ratios
in l993, three of which resulted from reinsurance transactions,
including a transaction with an affiliate. The Company believes that
there are no underlying problems or weaknesses at Charter or CPL and
that, in view of the strong capital and RBC ratios of Charter and CPL
and their strong and conservative investment portfolios, it is
unlikely that material adverse regulatory action will be taken.
On November 8, 1988, California voters passed Proposition 103, an
insurance initiative which requires a 20% rollback in insurance rates
for policies written or renewed during the twelve month period
beginning November 8, 1988 (the "rollback period") and provided that
changes in insurance premiums after November 8, 1989 must be submitted
for approval by the California Insurance Commissioner prior to
implementation. While the Proposition has the most significant impact
on automobile insurance, some of its provisions also apply to
18
other types of property and casualty insurance. In May 1989, the
California Supreme Court held that insurance companies may not be
deprived of a "fair return." In June 1991, the current California
Insurance Commissioner issued revised regulations regarding the
rollback period which established an allowable after-tax return of 10%
for the rollback period. These regulations were held unconstitutional
by the Los Angeles Superior Court in February 1993, because each
insurer was entitled to an individual hearing to determine its fair
level of profit. The California Insurance Commissioner has appealed
this decision, which remains sub judice. The Company has not yet
----------
received any order or determination requiring it to refund any
premiums collected. Based upon its operating results in the relevant
years, the Company believes the Colonial Penn P&C Group should not be
assessed for any rollback rebate and, if assessed a significant
amount, intends to vigorously oppose such determination. Voluntary
automobile net earned premiums in California represent approximately
8.9% of the Company's total property and casualty net earned premiums.
Proposition 103 does not apply to premiums earned on involuntary
coverage. It is possible that other states may attempt similar
initiatives, although the Company is unable to predict whether and to
what extent such regulation may be proposed or adopted.
In early 1990, New Jersey adopted new laws to depopulate the
deficit-ridden Automobile Joint Underwriting Association (the "JUA"),
the New Jersey insurance pool for high-risk drivers. The New Jersey
statute, among other things, abolished the JUA, established the Market
Transition Facility (the "MTF") as a temporary successor to the JUA,
established quotas for depopulation of the MTF and required all
automobile insurers to share in the losses of the MTF based on their
depopulation share of the JUA, as set by the New Jersey Department of
Insurance. The MTF deficit is currently estimated to be $917 million.
Based on that amount, the Colonial Penn P&C Group would be assessed
approximately $11,100,000. In February 1994, the Colonial Penn P&C
Group paid approximately $5,300,000 of this possible assessment into a
court mandated escrow account. The balance of this possible
assessment has been provided for in the Company's December 31, 1993
balance sheet. The New Jersey Insurance Department has adopted
regulations which would permit an insurer, with the approval of the
Insurance Department, to recover amounts paid to the MTF through
surcharges to policyholders; however, there can be no assurance that
the Colonial Penn P&C Group would be permitted to surcharge its
policyholders for all or even part of any assessment.
The Company's insurance subsidiaries are members 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 Company's
insurance subsidiaries have 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.
BANKING AND LENDING
GENERAL
The Company's banking and lending operations primarily are
conducted through its national bank subsidiary, American Investment
Bank, N.A. ("AIB"); two wholly owned industrial loan corporations (the
"ILCs"), American Investment Financial ("AIF") and Governor Financial
("GF"); and Transportation Capital Corp. ("TCC"), a small business
investment company, which is a 99% owned subsidiary of the Company.
AIB and the ILCs take money market and other non-demand deposits that
are eligible for insurance provided by the FDIC within its applicable
limitations. At December 31, 1993, AIB and the ILCs had Deposits of
$173,365,000 compared to $186,339,000 at December 31, 1992. In
January 1994, the deposits and certain
19
assets of GF were combined into AIF. AIB and AIF currently have
several deposit-taking and lending facilities and an administrative
office in the Salt Lake City area. TCC, which is not a significant
subsidiary of the Company, makes collaterialized loans to operators of
medallion taxicabs and limousines.
At December 31, 1993, the Company's consolidated banking and
lending operations had outstanding loans (net of unearned finance
charges) of $205,744,000 compared to $169,552,000 at December 31,
1992. The increase was financed primarily from proceeds of the sale
of the Company's consumer loan offices sold in 1992. See
"Management's Discussion and Analysis of Financial Conditions and
Results of Operations." At December 31, 1993, approximately 36% were
loans to individuals generally collateralized by automobiles;
approximately 26% were unsecured loans to individuals acquired from
others in connection with investments in limited partnerships;
approximately 23% were unsecured loans to executives and
professionals; approximately 9% were loans to small business concerns
collateralized principally by taxicab medallions and other personal
property; approximately 5% of the loans were instalment loans to
consumers, substantially all of which were collateralized by real or
personal property; and approximately 1% were loans generally
collateralized by non-residential real estate.
It is the Company's policy to charge to income an allowance for
losses which, based upon management's analysis of numerous factors,
including current economic trends, aging of the loan portfolio and
historical loss experience, is deemed adequate to cover reasonably
expected losses on outstanding loans. At December 31, 1993, the
allowance for loan losses for the Company's entire loan portfolio was
approximately $8,341,000 or 4.1% of the net outstanding loans,
compared to approximately $6,973,000 or 4.1% of net outstanding loans
at December 31, 1992.
The funds generated by the Deposits are primarily used to make
instalment loans, including collateralized personal automobile loans
to individuals who have difficulty in obtaining credit. These
automobile loans are made at interest rates above those charged to
individuals with good credit histories. In determining which
individuals qualify for these loans, the Company takes into account a
number of highly selective criteria with respect to the individual as
well as the collateral to attempt to minimize the number of defaults.
Additionally, the Company monitors these loans and takes prompt
possession of the collateral securing such loans in the event of a
default. For the three year period ended December 31, 1993, the
Company generated an aggregate of approximately $100,754,000 of these
loans (approximately $51,000,000 during 1993). At December 31, 1993,
the allowance for loan losses for this portfolio was approximately
$4,399,000 or 6% of net outstanding loans; actual loss experience has
been approximately 1.4% per year of average outstanding loans. The
Company is satisfied with the results of this loan portfolio and
believes that there is an opportunity for successful growth in this
niche market. The Company intends to expand its business in this
area.
COMPETITION
The Company's lending operations compete with banks, savings and
loan associations and credit unions, many of which are able to offer
financial services on very competitive terms, credit card issuers and
consumer finance companies. Additionally, substantial national
financial services networks have been formed by major brokerage firms,
insurance companies, retailers and bank holding companies. Some
competitors have substantial local market positions; others are part
of large, diversified organizations.
GOVERNMENT REGULATION
The Company's principal lending operations are subject to
detailed supervision by state authorities, as well as federal
regulation pursuant to the Federal Consumer Credit Protection Act and
regulations promulgated
20
by the Federal Trade Commission. The Company's banking operations are
subject to extensive federal and state regulation and supervision by,
among others, the Office of the Comptroller of the Currency (the
"OCC"), the FDIC and the State of Utah. AIB's primary federal
regulator is the OCC, while the primary federal regulator for the ILCs
is the FDIC. AIB and AIF have substantially similar assets. With
FDIC approval on January 31, 1994, AIF purchased a substantial portion
of the assets and assumed all of the deposit liabilities as well as a
significant amount of the remaining liabilities of GF. Following this
transaction, GF retained its ILC charter but terminated its FDIC
insurance and thus its right under Utah law to accept deposits.
The Competitive Equality Banking Act of 1987 ("CEBA") places
certain restrictions on the operations and growth of AIB and restricts
further acquisitions of banks and savings institutions by the Company.
CEBA does not restrict the growth of the ILCs as currently operated.
INCENTIVE SERVICES
GENERAL
For the year ended December 31, 1993, the Company's incentive
services business was conducted by The Sperry and Hutchinson Company,
Inc. ("S&H"). In early 1993, the Company contributed the net assets
of S&H Motivation, Inc. ("SHM") to a new joint venture formed with an
unrelated motivation services company and provided a $3,000,000 line
of credit to the joint venture in exchange for a 45% equity interest
in the joint venture. Operations of the motivation services business
historically have not been significant and are not expected to be
significant in the future.
S&H distributes Green Stamps to retailers under license
agreements that give the retailer an exclusive franchise for a
particular category of retail establishment in a particular geographic
area. Customers of participating retailers receive Green Stamps when
they purchase goods and services.
Since 1969, when annual sales for the trading stamp industry as a
whole peaked, S&H's trading stamp business has been steadily
declining. The Company believes that there is a substantial
likelihood that the declining trend in trading stamp sales will
continue. The Company has attempted, but has not succeeded in,
developing new uses for its trading stamp business.
REDEMPTION RESERVE-LIQUIDITY
When trading stamps are sold, S&H receives cash and accrues as a
liability the estimated obligation to deliver merchandise and/or cash
associated with those stamps. Demands for redemption generally occur
over a considerable period of time. The loss of customers usually
results in an acceleration of redemptions and requires the expenditure
of available funds to provide the merchandise and/or cash required for
such redemptions.
At December 31, 1993 and 1992, the liability for unredeemed
trading stamps reflected in the Company's consolidated balance sheets
was approximately $58,541,000 and $74,964,000, respectively. The most
recent statistical studies of trading stamp redemptions have indicated
that the historical pattern of redemptions has changed and that the
recorded liability for unredeemed trading stamps is in excess of the
amount that ultimately will be required to redeem trading stamps
outstanding. The amount of this excess may be different than
indicated by these studies. Accordingly, the Company is amortizing
the apparent excess over
21
a five year period. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
COMPETITION
The Company's incentive services businesses compete primarily
with other incentive companies and other forms of promotional and
merchandising techniques other than trading stamps. Retail establish-
ments, for example, frequently utilize store coupons, special
advertising programs, games, extra services and related programs.
MANUFACTURING
The Company's manufacturing operations consist primarily of the
manufacture of bathroom vanities and related products for the "do-it-
yourself" market, through its General Marble division, and padding,
absorbent, erosion control and proprietary plastic netting products
for various industrial and agricultural uses, through its Fibers and
Plastics divisions.
In 1990, the Company acquired a factory in North Carolina and in
1991 equipped it with state-of-the-art manufacturing machinery for its
General Marble division. This facility was designed to enable the
Company to improve the quality of its products, to manufacture certain
of its products on a "ready-to-assemble" basis and to expand capacity.
General Marble's products are sold through manufacturers'
representatives primarily to home improvement centers. The
inefficiencies and start up costs associated with bringing this
facility to full production, together with pricing pressures, have
adversely affected results of operations for this segment.
The Fibers and Plastics divisions manufacture and market padding,
absorbent and erosion control products, which may be reinforced with
plastic netting, for the furniture, automotive, erosion control and
maintenance industries and thermoplastic netting used for a variety of
purposes including, among other things, construction, packaging,
agriculture, carpet backing and filtration.
The manufacturing operations are subject to a high degree of
competition, generally on the basis of price, service and quality.
Additionally, these manufacturing operations are dependent on cyclical
industries, including the construction industry, which have been
adversely effected by recent economic conditions. Through its various
manufacturing divisions, the Company holds patents on certain
improvements to the basic manufacturing processes and on applications
thereof. The Company believes that the expiration of these patents,
individually or in the aggregate, is unlikely to have a material
effect on the business of its manufacturing operations.
OTHER OPERATIONS AND INVESTMENTS
The Company also owns non-controlling equity interests
representing, at December 31, 1993, more than 5% of the outstanding
capital stock of each of the following domestic public companies:
Carmike Cinemas, Inc. ("Carmike") (approximately 9% of Class A
shares), Jones Plumbing Systems, Inc. ("Jones") (approximately 21%),
Jordan Industries, Inc. ("JII") (approximately 11%) and Olympus
Capital Corporation (approximately 18%).
22
The Company owns interests in two foreign power companies:
Compania Boliviana de Energia Electrica, S.A. - Bolivian Power Company
Limited ("Bolivian Power") and through Canadian International Power
Company Limited Liquidating Trust, The Barbados Light and Power
Company Limited. The Company's investments in the power companies
were recorded at an aggregate of approximately $5,208,000 at December
31, 1993. The shares of Bolivian Power are traded on the New York
Stock Exchange. In November 1993, the Company sold 750,000 common
shares of Bolivian Power in an underwritten public offering. The
Company currently owns approximately 719,206 common shares of Bolivian
Power, representing approximately 17% of Bolivian Power's outstanding
common shares.
In 1990, the Company received the stock of certain of the WMAC
Companies that had been under the control of the Wisconsin Insurance
Commissioner. The Company is unable to predict when Commercial Loan
Insurance Company ("CLIC") and WMAC Credit Insurance Corporation
("Credit"), two WMAC Companies which constitute substantially all of
the WMAC Companies' remaining value expected from the assets under the
control of the Wisconsin Insurance Commissioner, will be returned to
its control. The Company estimates that the fair value to the Company
of the net tangible assets yet to be received is approximately
$32,800,000 in excess of their recorded carrying value at December 31,
1993.
A subsidiary of the Company is a partner in The Jordan Company
and Jordan/Zalaznick Capital Company. These partnerships each
specialize in structuring leveraged buyouts in which the partners are
given the opportunity to become equity participants. John W. Jordan
II, a director of the Company, is the managing partner of the two
partnerships. Since 1982, the Company has invested an aggregate of
$25,870,000 in these partnerships and related companies and, through
December 31, 1993, has received approximately $62,398,000 (consisting
of cash, interest bearing notes and other receivables) relating to the
disposition of investments and management and other fees. At December
31, 1993, through these partnerships, the Company had interests in an
aggregate of 15 companies (the "Jordan Associated Companies"), which
are carried in the Company's consolidated financial statements at
$13,620,000. The Jordan Associated Companies include JII, Carmike and
Jones.
Item 2. Properties.
------ ----------
Through its various subsidiaries, the Company owns the following
significant properties: an office building in Clayton, Missouri
(approximately 66,000 sq. ft.), which is leased to unaffiliated
parties; an office building in Valley Forge, Pennsylvania (approxi-
mately 94,800 sq. ft.) located on land leased from a third party to a
subsidiary of the Company; two offices in Salt Lake City, Utah
(totaling approximately 74,000 sq. ft.); three multi-tenant office
buildings in Indianapolis, Indiana (totaling approximately 444,000 sq.
ft.) which are leased (or are available for lease) to unaffiliated
parties; and a warehouse in Fort Worth, Texas (approximately 256,000
sq. ft.) that is leased to a third party. In addition, subsidiaries
of the Company own nine facilities (totaling approximately 1,208,000
sq. ft.) primarily used for manufacturing and storage located in
Georgia, New Jersey, New York, North Carolina, Pennsylvania, Wisconsin
and Canada.
The Company's subsidiaries lease numerous manufacturing,
warehousing, office and headquarters facilities. The facilities vary
in size and have leases expiring at various times, subject in certain
instances to renewal options. See Note 15 of Notes to Consolidated
Financial Statements.
23
Item 3. Legal Proceedings.
------ -----------------
PHLCORP TENDER OFFER
Seven class action complaints were filed against the Company and
others in connection with the Company's tender offer to purchase up to
5,200,000 common shares of Phlcorp, which expired in February 1988,
and have been consolidated into one action in the United States
District Court for the Southern District of New York (the "Southern
District"), entitled In re PHLCORP Securities Tender Offer Litigation
------------------------------------------------
(Civil Action No. 88 Civ. 0306 (SS)) ("In Re Phlcorp").
-------------
The consolidated and amended class action complaint (the
"Complaint") seeks damages (in an unspecified amount), imposition of a
constructive trust and costs and disbursements of the action.
Several of the claims were dismissed in 1988 as a result of
defendants' motion to dismiss. The remaining claims allege that
defendants violated the Securities Exchange Act of 1934, as amended,
by causing Phlcorp's directors to issue a recommendation to accept the
Company's tender offer, which incorrectly represented that the
directors' recommendation was based on a determination that the
Company's offer was fair and that defendants breached their fiduciary
duties in connection with the tender offer. A class of plaintiff
minority shareholders, who owned shares of Phlcorp on January 21,
1988, has been certified.
Upon completion of discovery, with the exception of discovery of
experts, defendants filed a motion for Summary Judgment. Prior to the
time defendants' reply brief was due, the parties reached an agreement
in principle for the settlement of the action. A stipulation of
settlement was submitted to the Court for its approval on January 24,
1994. At a conference on February 2, 1994, the Court entered an order
requiring (a) plaintiffs to mail notice of the proposed settlement to
class members by February 22, 1994, (b) class members to submit any
objections to the settlement by April 15, 1994 and (c) a hearing to
determine whether the settlement should be approved to be held on
April 29, 1994. Because of the settlement agreement, defendants
withdrew their summary judgment motion, without prejudice to renew the
motion in the event that the court does not approve the settlement.
Defendants believe that the material allegations of these
complaints are without merit and, if not settled, intend to defend
these actions vigorously.
EMPIRE TRANSACTIONS
Beginning in 1988, four separate actions were commenced in the
Supreme Court, New York County relating to Empire's conversion from a
mutual to a stock company, a 1988 reverse stock split, a subsequent
odd lot cash tender offer and adoption of Empire's Section 7118 Plan
in l991. Empire, Phlcorp and ten of Empire's directors are named as
defendants in some or all of these actions.
While the Company believes the material allegations of these
actions are without merit, these actions have been settled pursuant to
Court approval. The settlement, which will become final during the
second quarter of l994, unless appealed, will have no material effect
on the Company.
PHLCORP MERGER
Three actions were filed by minority shareholders of Phlcorp in
connection with the August 17, 1992 proposal by the Company to Phlcorp
that the Company acquire all outstanding Phlcorp shares not already
owned
24
by it and its subsidiaries and the October 12, 1992 public
announcement that the Company and Phlcorp had reached an agreement in
principle with respect to the merger of Phlcorp (then a 63.1% owned
public subsidiary of the Company) with and into a wholly owned
subsidiary of the Company (the "Phlcorp Merger"). The actions name
the Company and/or Phlcorp and their directors as defendants. Two of
the actions were brought in the Supreme Court of the State of New
York, County of New York, and one was filed in the Pennsylvania Court
of Common Pleas, Philadelphia County. The Pennsylvania action has
been voluntarily discontinued.
The amended class action complaints in the New York action
contain similar allegations, inter alia, that the Company, aided and
abetted by its directors, breached its fiduciary duties purportedly
owed to Phlcorp's minority shareholders by using its position as
controlling shareholder of Phlcorp to effect the Merger on terms which
do not reflect the true value of Phlcorp Shares, by failing to
disclose material facts concerning Phlcorp's assets, businesses, and
future prospects, and by timing the October 12 Proposal to coincide
with an abnormally high stock price of Leucadia and an artificially
depressed Phlcorp stock price. In addition, one of the New York
actions asserts a derivative claim brought on behalf of Phlcorp for
corporate waste under state law.
In November and December 1992, defendants moved to dismiss the
New York actions. In early December 1992, plaintiffs' request for a
preliminary injunction barring consummation of the Phlcorp Merger, was
denied.
The parties have entered into settlement negotiations. On
February 19, 1993, the court denied defendants' motions to dismiss the
New York actions as moot in light of settlement negotiations. The
court indicated that plaintiffs would be able to re-open the cases by
way of an order to show cause if the cases are not in fact settled.
On September 5, 1993, the parties entered into a memorandum of
understanding to settle the matter subject to plaintiffs conducting
confirmatory discovery and the court's approval of the settlement.
Defendants believe that the material allegations of these
complaints are without merit and, if not settled, intend to defend
these actions vigorously.
OTHER PROCEEDINGS
In addition to the foregoing, the Company and its subsidiaries
are parties to legal proceedings that are considered to be either
ordinary, routine litigation incidental to their business or not
material to the Company's consolidated financial position.
The Company does not believe that any of the foregoing actions
will have a material adverse effect on its consolidated financial
position or consolidated results of operations.
Item 4. Submission of Matters to a Vote of Security Holders.
------ ---------------------------------------------------
Not applicable.
25
Item 10. Executive Officers of the Registrant.
------- ------------------------------------
All executive officers of the Company are elected at the
organizational meeting of the Board of Directors of the Company held
annually and serve at the pleasure of the Board of Directors. As of
March 16, 1994, the executive officers of the Company, their ages, the
positions held by them and the periods during which they have served
in such positions were as follows:
NAME AGE POSITION WITH LEUCADIA OFFICE HELD SINCE
---- --- ---------------------- -----------------
Ian M. Cumming . . . . . . . . . . 53 Chairman of the Board June 1978
Joseph S. Steinberg . . . . . . . . 50 President January 1979
Thomas E. Mara . . . . . . . . . . 48 Executive Vice President May 1980;
and Treasurer January 1993
Lawrence S. Hershfield . . . . . . 37 Executive Vice July 1993
President
Norman P. Kiken . . . . . . . . . . 51 Vice President and October 1977
Comptroller
Paul J. Borden . . . . . . . . . . 45 Vice President August 1988
Mark Hornstein . . . . . . . . . . 46 Vice President July 1983
Ruth Klindtworth . . . . . . . . . 59 Secretary and Vice President- February 1976;
Corporate Administrator January 1990
C. Bruce Miller . . . . . . . . . . 62 Vice President January 1989
Joseph A. Orlando . . . . . . . . . 38 Vice President January 1994
David K. Sherman . . . . . . . . . 28 Vice President August 1992
Mr. Cumming has served as a director and Chairman of the
Board of the Company since June 1978. In addition, he has served as a
director of Bolivian Power since March 1987, as Chairman of the Board of
Bolivian Power since September 1988 and as a director of Allcity since
February 1988. Mr. Cumming has also been a director of Skywest, Inc.,
a Utah-based regional air carrier, since June 1986.
Mr. Steinberg has served as a director of the Company since
December 1978 and as President of the Company since January 1979. In
addition, he has served as a director of Bolivian Power since March
1987, as a director of Allcity since February 1988 and as a director
of JII since June 1988.
Mr. Mara joined the Company in April 1977 and was elected Vice
President of the Company in May 1977. He has served as Executive Vice
President of the Company since May 1980 and as Treasurer of the
Company since January 1993. Mr. Mara also served as Treasurer of the
Company from April 1981 to April 1985.
Mr. Hershfield has served as Executive Vice President of the
Company since July 1993 and prior thereto served as Vice President of
the Company since April 1990. Mr. Hershfield has also served as a
director of Bolivian Power since January 1992. From 1981 to April
1990, he served in a variety of executive positions with the Company's
subsidiary, BRAE Corporation (formerly a public company), including
President, Executive Vice President and Vice President.
Mr. Kiken, a certified public accountant, was employed by Coopers
& Lybrand, certified public accountants, from 1969 until he joined the
Company in October 1977 as Vice President and Comptroller.
Mr. Borden joined the Company as Vice President in August 1988
and has served in a variety of other capacities with the Company and
its subsidiaries.
26
Mr. Hornstein joined the Company as Vice President in July 1983
and has also served as Secretary of Bolivian Power since July 1988.
Ms. Klindtworth has been employed by the Company since July 1960
and was appointed Assistant Secretary in May 1973. She has served as
Secretary of the Company since February 1976, as Vice President-
Corporate Administrator of the Company since January 1990 and prior
thereto had served as Assistant Vice President-Corporate Administrator
of the Company since February 1979.
Mr. Miller has served as Vice President of the Company since
January 1989. He has also served as Executive Vice President of a
subsidiary of the Company for more than the past five years.
Mr. Orlando, a certified public accountant, has served as Vice
President of the Company since January 1994. Mr. Orlando served in a
variety of capacities with the Company and its subsidiaries since
1987, including serving as Chairman of S & H.
Mr. Sherman has served as Vice President of the Company since
August 1992. For the five years prior, he served in a variety of
capacities with the Company and its subsidiaries.
27
PART II
Item 5. Market for Registrant's Common Equity and Related
-------------------------------------------------
Stockholder Matters.
-------------------
(a) Market Information.
------------------
The common shares of the Company (the "Common Shares") are traded
on the New York Stock Exchange and Pacific Stock Exchange under the
symbol LUK. The following table sets forth, for the calendar periods
indicated, the high and low sales price per Common Share on the
consolidated transaction reporting system, as reported by the Dow
Jones Historical Stock Quote Reporter Service. On January 8, 1993,
the Company effected a two-for-one stock split of the Common Shares in
the form of a 100% stock dividend (the "Stock Split"). The dividend
was paid to shareholders of record immediately following the close of
business on December 31, 1992. Per share amounts set forth in this
Report have been adjusted to reflect the Stock Split.
COMMON SHARE
------------
HIGH LOW
---- ---
1992
----
First Quarter . . . . . . . . . . . . . $26.69 $18.32
Second Quarter . . . . . . . . . . . . 25.94 22.00
Third Quarter . . . . . . . . . . . . . 35.25 23.75
Fourth Quarter . . . . . . . . . . . . 41.00 30.75
1993
----
First Quarter . . . . . . . . . . . . . $51.25 $38.63
Second Quarter . . . . . . . . . . . . 43.75 36.00
Third Quarter . . . . . . . . . . . . . 47.75 39.25
Fourth Quarter . . . . . . . . . . . . 44.50 38.75
1994
----
First Quarter (through March 16, 1994) $43.63 $39.25
(b) Holders.
-------
As of March 16, 1993, there were approximately 6,918 record
holders of the Common Shares.
(c) Dividends.
---------
The Company declared and paid on December 15, 1993, a dividend of
$.25 per Common Share and on December 31, 1992, a dividend of $.20 per
Common Share. Prior thereto, the Company had not paid any cash
dividends on the Common Shares since January 1, 1973. In connection
with the Phlcorp Merger, the Company agreed to consider, but has not
made any commitment to, paying annual dividends in the future. The
payment of dividends in the future is subject to the discretion of the
Board of Directors and will depend upon general business conditions,
legal and contractual restrictions on the payment of dividends and
other factors that the Board of Directors may deem to be relevant.
In connection with the declaration of dividends or the making of
distributions on, or the purchase, redemption or other acquisition of
Common Shares, the Company is required to comply with certain
restrictions contained in certain of its debt instruments.
28
Item 6. Selected Financial Data.
------ -----------------------
The following selected financial data have been summarized from
the Company's consolidated financial statements and are qualified in
their entirety by reference to, and should be read in conjunction
with, such consolidated financial statements and "Management's
Discussion and Analysis of Financial Condition and Results of
Operations," below.
YEAR ENDED DECEMBER
---------------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
(In thousands, except per share amounts)
SELECTED INCOME STATEMENT DATA: (a)
Revenues $1,408,058 $1,573,015 $1,086,748 $674,914 $659,061
Interest expense (b) 39,465 38,507 36,925 34,604 43,961
Provision for insurance losses and
policy benefits 789,752 896,673 558,127 232,986 225,999
Income from continuing operations
before income taxes and cumulative
effects of changes in accounting
principles 176,868 143,553 95,030 78,938 34,805
Income from continuing operations
before cumulative effects of changes
in accounting principles 116,259 130,607 94,830 65,010 22,567
Income (loss) from discontinued operations
less applicable income taxes - - - (17,670) 41,744
Income before cumulative effects of
changes in accounting principles 116,259 130,607 94,830 47,340 64,311
Cumulative effects of changes in
accounting principles 129,195 - - - -
Net income 245,454 130,607 94,830 47,340 64,311
Per share:
Primary earnings (loss) per common and dilutive
common equivalent share:
Continuing operations before
cumulative effects of changes in
accounting principles $3.97 $5.35 $4.00 $2.68 $ .85
Discontinued operations - - - (.73) 1.56
Cumulative effects of changes in accounting
principles 4.41 - - - -
----- ----- ----- ----- -----
Net income $8.38 $5.35 $4.00 $1.95 $2.41
===== ===== ===== ===== =====
Fully diluted earnings (loss) per common
share:
Continuing operations before
cumulative effects of changes
in accounting principles $3.89 $5.33 $3.97 $2.68 $ .84
Discontinued operations - - - (.73) 1.52
Cumulative effects of changes in accounting
principles 4.20 - - - -
----- ----- ----- ----- -----
Net income $8.09 $5.33 $3.97 $1.95 $2.36
===== ===== ===== ===== =====
29
AT DECEMBER 31,
-------------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
SELECTED BALANCE SHEET DATA: (a)
Cash and investments $2,989,384 $3,371,624 $3,627,542 $1,741,273 $1,632,340
Total assets 4,689,272 4,330,580 4,590,096 2,406,438 2,244,678
Debt, including current maturities 401,335 225,588 220,728 208,458 120,428
Customer banking deposits 173,365 186,339 194,862 176,366 126,114
Common shareholders' equity 907,856 618,161 365,495 268,567 257,735
Book value per common share $32.54 $22.12 $15.89 $11.82 $9.84
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------
1993 1992 1991 1990 1989
---- ---- ---- ---- ----
SELECTED INFORMATION ON PROPERTY AND CASUALTY
INSURANCE OPERATIONS (Unaudited): (a)(c)(d)
GAAP Combined Ratio 96.9% 101.7% 102.1% 105.2% 105.3%
SAP Combined Ratio 93.7% 102.8% 103.3% 100.8% 102.3%
Industry SAP Combined Ratio (e) N/A 115.7% 108.8% 109.5% 109.2%
Premium to Surplus Ratio (f) 1.6x 2.0x 2.2x 1.4x 1.9x
_________________________
(a) Data includes acquired companies from date of acquisition and has been reclassified for discontinued operations.
(b) Includes interest on customer banking deposits.
(c) Combined Ratios and the Premium to Surplus Ratios include CPG for the relevant periods since August 16, 1991.
(d) Certain accident and health insurance business, which is included in the statutory results of operations of the
property and casualty insurance segment and is reflected in the SAP Combined Ratio, is reported in the life insurance
segment for financial reporting purposes and therefore is not included in the GAAP Combined Ratios reflected herein.
The Combined Ratio does not reflect the effect of investment income on results of operations. For 1993, the
difference in the treatment of costs for GAAP and SAP purposes was a principle reason for the difference between the
GAAP Combined Ratio and the SAP Combined Ratio. For 1992, the results of the accident and health insurance business,
which (as described above) are reflected in the SAP Combined Ratio but are not reflected in the GAAP Combined Ratio,
had a non-recurring income item which reduced the SAP Combined Ratio. In addition, in 1992 certain income credits
were recognized only for GAAP purposes.
(e) Source: Best's Insurance Management Reports, Property/Casualty Supplement, March 25, 1993. A comparison to industry
average 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.
(f) Premium to Surplus Ratio was calculated by dividing statutory property and casualty insurance premiums written by
statutory capital at the end of the year.
30
Item 7. Management's Discussion and Analysis of Financial Condition
-----------------------------------------------------------
and Results of Operations.
-------------------------
LIQUIDITY AND CAPITAL RESOURC