-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, CP8Qlx/W9B9f55JsM+dlXh9tJPuxr60Sb3xcJVqGBrrH8sSNboJy6+dxLKLCEN9I fpPdG4gZCK+RDdBt+qoqLg== 0000003642-99-000006.txt : 19990409 0000003642-99-000006.hdr.sgml : 19990409 ACCESSION NUMBER: 0000003642-99-000006 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 DATE AS OF CHANGE: 19990407 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ALLCITY INSURANCE CO /NY/ CENTRAL INDEX KEY: 0000003642 STANDARD INDUSTRIAL CLASSIFICATION: 6331 IRS NUMBER: 132530665 STATE OF INCORPORATION: NY FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 001-07411 FILM NUMBER: 99583900 BUSINESS ADDRESS: STREET 1: 122 FIFTH AVE CITY: NEW YORK STATE: NY ZIP: 10011 BUSINESS PHONE: 2123873000 10-K 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K [S] [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, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] For the transition period from to Commission file number 1-7411 ALLCITY INSURANCE COMPANY (Exact name of registrant as specified in its charter) New York 13-2530665 (State of incorporation) (I.R.S. Employer Identification Number) 335 Adams Street, Brooklyn, N.Y. 11201-3731 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code 718-422-4000 Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered None Securities registered pursuant to Section 12(g) of the Act: None (Title of Class) Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x] Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No The aggregate market value of the voting stock held by nonaffiliates of the registrant as of March 15, 1999 was $5,382,128. The number of shares outstanding of each of the registrant's classes of common shares, as of March 15, 1999, was 7,078,625. DOCUMENTS INCORPORATED BY REFERENCE - None Exhibit Index on Page 26 Total number of pages 60 TABLE OF CONTENTS Part I Page Item 1- Business ........ 1 Item 2- Properties ........10 Item 3- Legal Proceedings ........10 Item 4- Submission of Matters to a Vote of Security Holders ........10 Part II Item 5- Market for the Registrant's Common Equity and Related Stockholder Matters ....... 11 Item 6- Selected Financial Data ....... 11 Item 7- Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 13 Item 7A- Quantitative and Qualitative Disclosures about Market Risk .... 17 Item 8- Financial Statements and Supplementary Data ....... 18 Item 9- Changes in and Disagreements with Accountants on Accounting and Financial Disclosure ....... 18 Part III Item 10- Directors and Executive Officers of the Registrant ....... 19 Item 11- Executive Compensation ....... 21 Item 12- Security Ownership of Certain Beneficial Owners and Management ....... 23 Item 13- Certain Relationships and Related Transactions ....... 25 Part IV Item 14- Exhibits, Financial Statement Schedules, and Reports on Form 8-K ....... 26 Signatures ....... 27 -i- PART I Item 1. Business General Allcity Insurance Company (the "Registrant", "Allcity" or the "Company") is a property and casualty insurer. Empire Insurance Company ("Empire"), a property and casualty insurer owns approximately 84.6% of the outstanding common shares of the Company and 100% of the outstanding common shares of Centurion Insurance Company ("Centurion"). Empire's common shares are 100% owned and controlled, through subsidiaries, by Leucadia National Corporation ("Leucadia"). Additionally, Leucadia indirectly owns an additional 5.3% of the outstanding common shares of the Company. The Company, Empire and Centurion are sometimes hereinafter collectively referred to as the Group. The Company operates in the State of New York, primarily in the New York City metropolitan area, conducting property and casualty insurance underwriting activities. The Company's voluntary business 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 seven general agents, one of which is owned by Empire, and approximately 379 local agents and insurance brokers presently acting under agreements with the Group. These agents and brokers also represent other competing insurance companies. Empire's wholly owned general agent is its largest producer and generated approximately 12% of the Group's total premium volume for the year ended December 31, 1998. Substantially all of the Group's policies are written for a one-year period. The Group is licensed in New York to write most lines of insurance that may be written by a property and casualty insurer. The Group specializes in personal and commercial property and casualty insurance business. The Group provides personal automobile and homeowners insurance and commercial insurance coverage for vehicles (including medallion and radio-controlled livery vehicles), workers' compensation, multi-family residential real estate, and various other business classes. Empire is also licensed to write insurance in Connecticut, Massachusetts, Missouri, New Hampshire and New Jersey. Approximately 4% of the Group's written premiums are produced from sources outside New York State. The Group's general agents produced approximately 32% of the Company's premium revenues for the year ended December 31, 1998. For the years ended December 31, 1998, 1997 and 1996, net earned premiums for the Company were $67.5 million, $80.9 million and $96.1 million, respectively. The decline in the net earned premiums is primarily due to the continuing reduction in the assigned risk business and reductions in certain commercial lines. During the year ended December 31, 1998, approximately 57%, 30% and 13% of net earned premiums were derived from automobile lines, commercial lines and miscellaneous and personal lines, respectively. According to A.M. Best & Co. ("Best"), an insurance industry research organization, the Group ranked 129th in total net premium writings among property and casualty insurance companies and groups in 1997. In February 1999, Standard & Poor's Insurance Rating Services ("S & P") rated the Group (BBB+) (Good), based on the Group's claims-paying ability. In 1998, the Group was rated (B+) (Very Good) by Best and was assigned an (A) (Exceptional) financial stability rating by Demotech, Inc., an insurance rating agency service. As with all ratings, S & P, Best and Demotech, Inc. ratings are subject to change at any time. The Group has acquired blocks of assigned risk business from other insurance companies (the "service business") relating to private passenger and commercial automobile insurance. These contractual arrangements, which are negotiated for one or two year periods, provide for fees paid to the Group within parameters established by the New York State Insurance Department. In addition, the Group received a fee for providing administrative services, including claims processing, underwriting and collection activities, for the New York Public Automobile Pool ("NYPAP") and the Massachusetts Taxi and Limousine Pool. These latter arrangements do not involve the assumption of any material underwriting risk by the Group. Effective February 28, 1998, the Group ceased serving as a servicing carrier for the NYPAP, thereby enabling the Group to concentrate its resources on its core non-service businesses and redeploy certain resources previously dedicated to the NYPAP. -1- In 1998, a new president and chief executive officer was named at the Group and, effective in 1999, the business was reorganized into three divisions: the Small Business Division, the Personal Lines and Residual Markets Division and the Mid-Market Division. Each of these divisions has separate management teams responsible for all marketing, sales and underwriting decisions within their divisions. The reorganization is designed to provide a greater degree of accountability for underwriting results and to create a closer relationship with agents and customers of the Group. The Small Business Division will primarily focus on commercial package products for small businesses; the Personal Lines and Residual Market Division will primarily concentrate on personal automobile and homeowners insurance; and the Mid-Market Division will focus on commercial auto, commercial package and workers' compensation insurance for larger accounts. On a quarterly basis, the Group reviews and adjusts its estimated loss reserves for any changes in trends and actual loss experience. Included in the Company's results for 1998 was approximately $12.9 million for reserve strengthening related to losses from prior accident years. The Group will continue to evaluate the adequacy of its loss reserves and record future adjustments to its loss reserves as appropriate. Beginning in 1996, the Group has taken certain steps to improve its operations, including systems enhancements and actions relating to pricing and improved underwriting and claims handling; these efforts have continued into 1999. In addition, the Group may initiate additional changes in the future. The Group believes that the results of these efforts taken to date will not be known for some time, given the nature of the property and casualty insurance business and the inherently long period of time involved in settling claims. Pooling Agreement All insurance business written by the Company is subject to a pooling agreement with Empire under which the Company and Empire effectively operate as one company. The pooling agreement and subsequent amendments were approved by the New York State Insurance Department. The Company operates under the same general management as Empire and has full use of Empire's personnel, information technology systems and facilities. As of December 31, 1998, Empire and its subsidiaries had 712 full and part-time employees. Currently, and for all periods presented, all premiums, losses, loss adjustment expenses and other underwriting expenses are shared on the basis of 70% to Empire and 30% to the Company. Financial Information Relating to Business Segments For all periods presented, the Company's operations are presented in the following business segments: (1) Automobile lines - includes private passenger and commercial automobile bodily injury, property damage, comprehensive and collision insurance coverages. (2) Commercial lines - includes commercial multiple peril, workers' compensation, other liability, glass, burglary, and inland marine insurance coverages. (3) Miscellaneous and personal lines - includes fire and allied lines and homeowners insurance coverages. -2- The following table presents business segment data, net of reinsurance, for each of the three years ended December 31, (in thousands, except loss ratio information):
Losses Premiums Premiums and LAE Loss Written Earned Incurred Ratio 1998 Automobile lines $ 31,392 $ 38,446 $ 35,668 92.8% Commercial lines 18,281 20,490 28,726 140.2% Miscellaneous and personal lines 8,386 8,576 5,195 60.6% Total $ 58,059 $ 67,512 $ 69,589 103.1% 1997 Automobile lines $ 44,484 $ 50,677 $ 54,186 106.9% Commercial lines 22,107 23,289 23,389 100.4% Miscellaneous and personal lines 8,438 6,925 4,470 64.6% Total $ 75,029 $ 80,891 82,045 101.4% 1996 Automobile lines $ 60,162 $ 63,558 $ 64,699 101.8% Commercial lines 25,243 27,714 20,685 74.6% Miscellaneous and personal lines 5,606 4,801 2,966 61.8% Total $ 91,011 $ 96,073 $ 88,350 92.0%
[S] For further information concerning Business Segments, see Notes 8 and 12 of the Notes to Consolidated Financial Statements, included elsewhere herein. Combined Ratios Set forth below is certain statistical information for the Company prepared in accordance with generally accepted accounting principles ("GAAP") and statutory accounting principles ("SAP"), for the three years ended December 31, 1998. The Loss Ratio is the ratio of net incurred losses and loss adjustment expenses to net premiums earned. The Expense Ratio is the ratio of underwriting expenses (policy acquisition costs, commissions, and a portion of administrative, general and other expenses attributable to underwriting operations, net of service fee income) to net premiums written, if determined in accordance with SAP, or to net premiums earned, if determined in accordance with GAAP. A Combined Ratio below 100% indicates an underwriting profit and a Combined Ratio above 100% indicates an underwriting loss. The Combined Ratio does not include the effect of investment income. -3-
Years Ended December 1998 1997 1996 Loss Ratio: (a) GAAP 103.1% 101.4% 92.0% SAP 103.1% 101.4% 89.3% Industry (SAP) (b) N/A 72.8% 78.4% Expense Ratio: GAAP 26.3% 17.9% 22.1% SAP 31.3% 17.2% 18.2% Industry (SAP) (b) N/A 28.8% 27.4% Combined Ratio: (c) GAAP 129.4% 119.3% 114.1% SAP 134.4% 118.6% 107.5% Industry (SAP) (b) N/A 101.6% 105.8% (a)Includes Loss and Loss Adjustment Expenses. (b)Source: Best's Aggregates & Averages, Property/Casualty, 1998 Edition. Industry Combined Ratios may not be fully comparable as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (c)For 1998, the difference in the accounting treatment for curtailment gains relating to defined benefit pension plans was the principal reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1996, a change in the statutory accounting treatment for retrospectively rated reinsurance agreements was the principal reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. Additionally, for all three years, the difference relates to the accounting for certain costs, which are treated differently under SAP and GAAP. For further information about the Company's combined ratios see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report.
[S] Marketing and Distribution [S] The Group's marketing and distribution strategy emphasizes profitability rather than volume and focuses on the production of its voluntary business through seven general agents, one of which is an Empire subsidiary, and approximately 379 local agents and insurance brokers presently acting under agreements with the Group. These agents and brokers also represent competing insurance companies. Subject to regulatory approval, the Group utilizes premium rates developed and independently filed for all coverages with the exception of workers' compensation, for which rates are filed by the New York Compensation Insurance Rating Board, and assigned risk automobile business, for which rates are filed by the New York Automobile Insurance Plan. Reinsurance The Company's maximum retained limits for each of the years ended December 31, 1998, 1997 and 1996, on property and casualty lines of insurance and for workers' compensation business was $0.3 million and $0.5 million, respectively. Additionally, the Company has entered into certain excess of loss and catastrophe treaties to protect itself against certain losses. Its retention of lower level losses under such treaties is $7.5 million for 1999 and 1998, $5.0 million for 1997 and $3.0 million for 1996. Effective January 1, 1997, Empire entered into a quota share reinsurance agreement with its subsidiary, Centurion. Under this agreement, Empire will assume 50% up to July 1, 1997 and 75% thereafter of the effective period premiums and losses of Centurion and grant Centurion a ceding commission. Under the pooling agreement, 70% of such business assumed will be retained by Empire and 30% will be shared with the Company. -4- 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 has been placed with certain of the largest reinsurance companies, including (with their respective Best ratings) General Reinsurance Corporation (A++) (superior), American Re-Insurance Company (A++) (superior), Partner Re Co., Ltd. (A+) (superior), IPC Re Ltd. (A) (excellent), CAT Ltd. (A) (excellent) and Zurich Reinsurance (North America), Inc. (A) (excellent). The Company believes its reinsurers to be financially capable of meeting their respective obligations. However, to the extent that any reinsuring company is unable to meet its obligations, the Company would be liable for the reinsured risks. Investments Investment activities represent a significant part of the Company's total income. Investments are managed by the Investment Committee of the Board of Directors, which consults with outside investment advisors with respect to a substantial portion of the Company's investment portfolio. The Company has a diversified investment portfolio primarily consisting of securities rated "investment grade" by established bond rating agencies or issued or guaranteed by the U.S. Government or its agencies. At December 31, 1998, 1997 and 1996, the average yield of the Company's bond portfolio was approximately 5.8%, 5.9% and 6.1%, respectively, and the average maturity of the Company's bond portfolio was approximately 3.2 years for 1998 and 3.3 years for 1997 and 1996. Tax Sharing Agreement The Company has been included in the consolidated federal income tax returns of Leucadia since 1993. Under the terms of the tax sharing agreement between Leucadia and the Company, the Company computes its tax provision on a separate return basis and is either charged its share of federal income tax resulting from its taxable income or is reimbursed for tax benefits resulting from its losses. Government Regulation The Group, like all insurance companies, is subject to detailed regulation and supervision involving the establishment of premium rates, approval of policy forms, standards of solvency and minimum requirements of capital and surplus, which must be maintained in the states in which they transact business. There can be no assurance that such regulatory requirements will not become more stringent in the future and have an adverse effect on the Group's operations. Insurance companies are required to file detailed annual reports with the insurance regulatory agencies in each of the states in which they do business and are subject to periodic examination by such agencies. 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 or what impact it would have on the Company's operations. The National Association of Insurance Commissioners ("NAIC") has adopted model laws incorporating the concept of a "risk based capital" ("RBC") requirement for insurance companies. Generally, the RBC formula 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. As of December 31, 1998, the Company's RBC ratio exceeded minimum requirements. The NAIC also has adopted various ratios for insurance companies which, in addition to the RBC ratio, are designed to serve as a tool to assist state regulators in discovering potential weakly capitalized companies or companies with unusual trends. While the Company's operations had certain "other than normal" NAIC ratios for the year ended December 31, 1998, the Company believes that there are no material underlying problems or weaknesses in its operations and that it is unlikely that material adverse regulatory action will be taken. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Pratices and Procedures manual as the NAIC's primary guidance on Statutory accounting. The NAIC is now considering amendments to the Codification guidance that would also be effective upon implementation. The NAIC has recommended an effective date of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current -5- statutory accounting in some areas. It is known whether the New York Insurance Department will adopt the Codification, and whether the Department will make any changes to that guidance. The Company has not estimated the potential effect of the Codification guidance if adopted by the Department. The Group is a member of state insurance funds, which provide certain protection to policyholders of insolvent insurers doing business in those states. Due to insolvencies of certain insurers in recent years, the Group has been assessed certain amounts which have not been material and are likely to be assessed additional amounts by state insurance funds. The Company believes that it has provided for all anticipated assessments and that any additional assessments will not have a material adverse effect on the Company's financial condition or results of operations. Competition The 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 unendorsed, which may give such other companies a competitive advantage. Federal administrative, legislative and judicial activity may result in changes to federal banking laws that increase the ability of national banks to offer insurance products in direct competition with the Company. The Company is unable to determine what effect, if any, such changes may have on the Company's operations. The Company believes that property and casualty insurers generally compete on the basis of price, customer service, consumer recognition, product design, product mix and financial stability. The industry has historically been cyclical in nature, with periods of less intense price competition generating significant profits, followed by periods of increased price competition resulting in reduced profitability or loss. The current cycle of intense price competition has continued for a longer period than in the past, suggesting that the significant infusion of capital into the industry in recent years, coupled with larger investment returns, has been, and may continue to be, a depressing influence on policy rates. In addition, the Company is experiencing increased competition from low cost insurance providers that write personal lines business on a direct response basis through direct mail and telemarketing. The profitability of the property and casualty insurance industry is affected by many factors, including rate competition, severity and frequency of claims (including catastrophe losses), interest rates, state regulation, court decisions and judicial climate, all of which are outside of the Company's control. Loss and Loss Adjustment Expenses Liabilities for unpaid losses, which are not discounted (except for certain workers' compensation liabilities), and loss adjustment expenses ("LAE") are determined using case-basis evaluations, statistical analyses and estimates for salvage and subrogation recoverable and represent estimates of the ultimate claim costs of all unpaid losses and LAE. Liabilities include a provision for losses that have occurred but have not yet been reported. These estimates are subject to the effect of trends in future claim severity and frequency experience. Adjustments to such estimates are made from time to time due to changes in such trends as well as changes in actual loss experience. These adjustments are reflected in current earnings. The Company relies upon standard actuarial ultimate loss projection techniques to obtain estimates of liabilities for losses and LAE. These projections include the extrapolation of both losses paid and incurred by business line and accident year and implicitly consider the impact of inflation and claims settlement patterns upon ultimate claim costs based upon historical patterns. In addition, methods based upon average loss costs, reported claim counts and pure premiums are reviewed in order to obtain a range of estimates for setting the reserve levels. For further input, changes in operations in pertinent areas including underwriting standards, product mix, claims management and legal climate are periodically reviewed. -6- In the following table, the liability for losses and LAE of the Company, are reconciled for each of the three years ended December 31, 1998. Included therein are current year data and prior year development.
RECONCILIATION OF LIABILITY FOR LOSSES AND LAE 1998 1997 1996 (In thousands) SAP liability for losses and LAE, net of reinsurance, at beginning of the year $ 145,260 $ 143,494 $ 142,718 Provision for losses and LAE for claims occurring in the current year 56,698 73,741 80,216 Increase in estimated losses and LAE for claims occurring in prior years 12,891 8,304 8,134 69,589 82,045 88,350 Loss and LAE payments for claims occurring during: Current year 19,203 23,804 27,192 Prior years 55,875 56,475 60,382 75,078 80,279 87,574 SAP liability for losses and LAE, net of reinsurance 139,771 145,260 143,494 Reinsurance recoverable 294,461 272,266 262,593 Liability for losses and LAE at the end of year as reported in the financial statements (GAAP) $ 434,232 $ 417,526 $ 406,087
[S] The table on the following page presents the development of balance sheet liabilities for 1988 through 1998. The liability line at the top of the table indicates the estimated liability, net of reinsurance, for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years. This liability represents the estimated amount of losses and LAE for claims that were unpaid at each annual balance sheet date, including provision for losses estimated to have been incurred but not reported to the Company. The middle portion of the table shows the re-estimated amount of the previously reported liability based on experience as of the end of each succeeding year. As more information becomes available and claims are settled, the estimated liabilities are adjusted upward or downward with the effect of decreasing or increasing net income at the time of adjustment. The "cumulative redundancy (deficiency)" represents the aggregate change in the estimates over all prior years. For example, the initial 1988 liability estimate has developed a $3.0 million redundancy over ten years. The effect on pretax income during the past three years of changes in estimates of the liabilities for losses and LAE is shown in the reconciliation table above. The lower section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. For example, as of December 31, 1998, the Company had paid $59.6 million of the currently estimated $64.1 million of losses and LAE that had been incurred for the 1988 calendar year, thus an estimated $4.5 million of losses incurred for 1988 remain unpaid as of the current balance sheet date. -7- In evaluating this information it should be noted that each amount shown for "cumulative redundancy (deficiency)" results includes the effects of all changes in amounts for prior periods. For example, the amount of the deficiency related to losses settled in 1991, but incurred in 1988, will be included in the cumulative redundancy or deficiency amount for years 1988, 1989 and 1990. 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 would not be appropriate to extrapolate future redundancies or deficiencies based on this table. For further discussion of the Company's loss development experience, see Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" of this Report. -8- Analysis of Loss and Loss Adjustment Expenses Development (In thousands)
Years ended December 31, 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 $67,154 $70,567 $75,420 $84,178 $96,712 $106,115 $121,923 $142,718 $143,494 $145,260 $139771 Liability Re- estimated as of: One year later 64,411 68,347 74,844 83,987 96,516 103,181 132,189 150,852 151,798 158,152 - Two years later 62,135 65,227 73,538 83,341 97,208 112,176 140,620 160,686 163,378 - - Three years later 59,859 63,792 73,151 85,197 103,592 118,127 150,434 172,650 - - - Four years later 58,606 63,556 74,190 88,928 108,430 124,375 160,542 - - - - Five years later 59,131 63,584 76,509 92,035 112,988 132,606 - - - - - Six years later 59,304 64,962 78,392 95,273 118,446 - - - - - - Seven years later 60,504 65,467 80,040 99,467 - - - - - - - Eight years later 61,363 66,298 83,670 - - - - - - - - Nine years later 61,780 68,877 - - - - - - - - - Ten years later 64,134 - - - - - - - - - - Cumulative Redundancy/ (Deficiency) 3,020 1,690 (8,250) (15,289) (21,734) (26,491) (38,619) (29,932) (19,884) (12,892) - Cumulative Amount of Liability Paid Through: One year later $19,242 $19,744 $23,681 $26,852 $33,903 $ 35,048 $ 45,789 $ 60,382 $ 56,475 $ 55,875 - Two years later 30,362 32,840 38,067 44,989 54,615 59,701 80,911 95,190 94,062 - - Three years later 39,511 42,271 50,194 59,336 71,653 81,680 105,977 121,900 - - - Four years later 45,698 49,803 58,830 69,955 85,689 97,917 124,645 - - - - Five years later 50,434 54,602 65,025 77,965 95,938 109,083 - - - - - Six years later 53,433 58,185 69,568 83,886 102,416 - - - - - - Seven years later 55,598 60,953 72,683 88,139 - - - - - - - Eight years later 57,393 62,737 75,932 - - - - - - - - Nine years later 58,495 64,409 - - - - - - - - - Ten years later 59,591 - - - - - - - - - - Gross Liability - - - End of year $290,833 $341,599 $399,879 $406,087 $417,526 $434,232 Reinsuranc 184,718 219,676 257,161 262,593 272,266 294,461 Net Liability - End of year as shown above $106,115 $121,923 $142,718 $143,494 $145,260 $139,771 Gross Re- Estimated Liability - - - Latest $397,264 $474,175 $508,601 $500,274 $483,450 - Re-estimated Reinsurance - - - Latest 264,658 313,633 335,951 336,896 325,298 - Net Re - - -estimated Liability - - - Latest $132,606 $160,542 $172,650 $163,378 $158,152 - Gross Cumulative (Deficiency) $(106,431)$(132,576)$(108,722) $(94,187) $(65,924) -
-9- Item 2. Properties The Group has entered into a twenty year lease aggreement, consisting of 286,510 square feet, in an office building located at 335 Adams Street in Brooklyn, New York, in which Leucadia has an equity interest. The Group received certain incentives from both the City and State of New York in connection with this lease, which will be recognized over the term of the lease. Empire has subleased 133,140 square feet of the office space to its parent, Leucadia at the similar terms as in the original lease. The Group also conducts limited operations from branch offices located in Manhattan and Rochester, New York, Boston, Massachusetts and Bedford, New Hampshire. The rental charged to the Company for these facilities is prorated in accordance with the pooling agreement described in "Pooling Agreement" under Item 1, herein. Item 3. Legal Proceedings The Company is party to legal proceedings that are considered to be either ordinary, routine litigation or incidental to its business. Based on discussion with counsel, the Company does not believe that such litigation will have a material effect on its financial position, results of operations or cash flows. Item 4. Submission of Matters to a Vote of Security Holders The following matters were submitted to a vote of shareholders at the Company's 1998 Annual Meeting of Shareholders held on October 19, 1998: a) Election Of Directors: Number of Shares in favor [S] Class II Directors, term expires 2001: [S] Martin B. Bernstein 4,329,299 Louis V. Siracusano 4,329,299 Lucius Theus 4,329,299 Robert V. Toppi 4,329,299 [S] Class III Directors, term expires 1999: James E. Jordan 4,329,299 Joseph A. Orlando 4,329,299 [S] Class I Directors continuing in office: Ian M. Cumming Thomas E. Mara Joseph S. Steinberg Daniel G. Stewart [S] Class III Directors continuing in office: Francis M. Colalucci Harry H. Wise b) No other matter was voted upon at the meeting. -10- PART II Item 5. Market for the Registrant's Common Equity and Related Stockholder Matters (a) Market Information The Company's common stock trades on The NASDAQ National Stock Market under the symbol "ALCI". The following table sets forth, for the calendar quarters indicated, the high and low closing trade price per common share as reported by the Wall Street Journal and National Association of Securities Dealers, Inc..
High Low 1st Quarter 1999 $ 8 1/8 $ 7 (Through March 15, 1999) 1st Quarter 1998 7 1/2 6 3/4 2nd " " 9 1/4 7 1/3 3rd " " 8 7 4th " " 8 7 1st Quarter 1997 8 1/2 7 2nd " " 11 7 3rd " " 11 1/4 9 1/4 4th " " 9 3/4 6 1/2
[S] (b) Holders The number of shareholders of record of common shares at December 31, 1998 was 520. [S] (c) Dividends The Company has paid no dividends on its common shares since 1975. The New York Insurance Law prohibits New York domiciled property and casualty companies from paying dividends except out of earned surplus. Without the approval of the New York State Insurance Department, no New York domestic property/ casualty insurer may declare or distribute any dividend to shareholders which, together with any dividends declared or distributed by it during the preceding twelve months, exceeds the lesser of (1) 10% of surplus to policyholders as shown by its last statutory annual statement, or (2) one hundred percent of adjusted net investment income during such period. At December 31, 1998, $7,280,000 was available for distribution of dividends. The Company does not presently anticipate paying dividends in the near future. [S] 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 Item 7, "Management Discussion and Analysis of Financial Condition and Results of Operations," of this report: Year ended December 31, 1998 1997 1996 1995 1994 (In thousands, except per share amounts)
Total Revenues $ 92,070 $ 102,624 $ 120,790 $ 117,892 $ 107,286 Net Income/(Loss) (a) $ 504 $ (83) 2,634 $ 563 $ 6,901 Basic and Diluted Earnings/(Loss) share: Income/(Loss) (a) $ 0.07 $ (0.01) $ 0.37 $ 0.08 $ 0.97
-11- Item 6. Selected Financial Data, continued a) Net income includes net securities gains (losses), net of applicable tax, as follows (in thousands, except per share amounts):
Gains(Losses) Per Share 1998 $ 3,951 $ 0.56 1997 (125) (0.02) 1996 735 0.10 1995 (133) (0.02) 1994 (437) (0.06)
[S] At December 31, 1998 1997 1996 1995 1994 (In thousands, except ratio information)
Total assets $ 605,704 $ 640,249 $ 653,730 $ 660,820 $ 582,508 Invested assets 234,039 271,736 272,992 273,548 237,878 Surplus note: Face value 7,000 7,000 7,000 7,000 7,000 Acrued Interest 8,300 7,710 7,115 6,524 5,911 Common Shareholders' Equity(a) 78,200 78,164 75,658 75,936 63,264 GAAP Combined Ratio(b) 129.4% 119.3% 114.1% 115.4% 102.5% SAP Combined Ratio (b) 134.4% 118.6% 107.5% 107.5% 101.3% Industry SAP Combined Ratio (c) N/A 101.6% 105.8% 106.4% 108.4% Premium to Surplus Ratio (d) 0.8X 1.1X 1.4X 1.6X 1.7X (a)Includes unrealized appreciation of approximately $0.5 million in 1998, $0.9 million in 1997 and $1.2 million in 1995, and unrealized depreciation of approximately $1.7 million in 1996 and $10.9 million in 1994, all net of tax, on investments classified as available for sale. (b)For 1998, the difference in the accounting treatment for curtailment gains relating to defined benefit pension plans was the principal reason for the difference between the GAAP Combined Ratio and the SAP Combined Ratio. For 1996 and 1995, a change in the statutory accounting treatment for retrospectively rated reinsurance agreements was the principal reason for the difference between the GAAP Combined Ratios and the SAP Combined Ratios. Additionally, for 1998, 1997 and 1996, the difference relates to the accounting for certain costs, which are treated differently under SAP and GAAP. (c)Source: Best's Aggregates & Averages, Property/Casualty, 1998 Edition. Industry Combined Ratios may not be fully comparable as a result of, among other things, differences in geographical concentration and in the mix of property and casualty insurance products. (d)Premium to Surplus Ratio was calculated by dividing annual statutory net premiums written by year-end statutory surplus.
-12- Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations [S] The purpose of this section is to discuss and analyze the Company's financial condition, liquidity and capital resources and results of operations. This analysis should be read in conjunction with the financial statements and related notes which appear in Item 14, "Exhibits, Financial Statement Schedules, and Reports of Form 8-k" of this Report. Liquidity and Capital Resources In 1998 and 1997, net cash was used for operations as a result of a decrease in premiums written and a program to reduce pending claims. At December 31, 1998 and 1997 the yield of the Company's fixed maturities portfolio was 5.8% and 5.9%, respectively, with an average maturity of 3.2 and 3.3 years for 1998 and 1997, respectively. Additionally, the Company maintains a diversified investment portfolio of securities, of which at December 31, 1998, approximately 92% of the fixed maturities portfolio was invested in issues of the U.S. Government and its agencies with the remainder primarily invested in investment grade corporate and industrial issues. The Company presently anticipates reinvesting the majority of proceeds from maturities and investment income in substantially similiar investments. The Company maintains cash, short-term and readily marketable securities and anticipates that the cash flow from investment income and maturities of fixed maturities will be sufficient to satisfy its anticipated cash needs. The Company does not presently anticipate paying dividends in the near future and believes it has sufficient capital to meet its currently anticipated level of operations. [S] Results of Operations [S] For the years ended December 31, 1998, 1997 and 1996, net earned premium revenues of the Company were $67.5 million, $80.9 million and $96.1 million, respectively. In 1998, the decline in earned premium revenues was primarily due to a decline in the number of assigned risk automobile pool contracts acquired due to competition and the depopulation of the assigned risk automobile pools ($7.4 million) and a reduction in certain lines, principally voluntary commercial automobile ($2.6 million), private passenger automobile ($1.8 million), commercial package policies ($1.3 million) and workers,compensation ($1.1 million), due to tighter underwriting standards, re-underwriting and increased competition. In addition, earned premium revenues were reduced by $0.6 million for premiums due under retrospectively rated reinsurance contracts written for 1995 and prior accident years as the Company re-estimated the premium due based upon its current estimate of loss ratios for 1995 and prior accident years. In 1997, earned premium revenues declined primarily due to a depopulation of the assigned risk pools ($9.5 million) and a reduction in certain commercial lines, principally voluntary commercial automobile ($3.1 million) and workers' compensation ($2.6 million) due to competition, reunderwriting and repricing. In addition, earned premium revenues were reduced in 1997 by $1.7 million to record premiums due under retrospectively rated reinsurance contracts written for 1995 and prior accident years. The Company re-estimated the premium due based upon its then current estimate of loss ratios for 1995 and prior accident years. Partially offsetting these reductions was an increase in certain voluntary personal lines, principally private passenger automobile and homeowners. -13- During the three years ended December 31, 1998, the Company earned $3.4 million, $5.7 million and $6.6 million, respectively, in service fee income from its service business. The decline in service fee income is principally due to the decline in the number of assigned risk contracts acquired by the Company, pool depopulation, and its resignation from the NYPAP. The Company's combined ratios as determined under GAAP and SAP were as follows:
Years Ended December 31, 1998 1997 1996 GAAP 129.4% 119.3% 114.1% SAP 134.4% 118.6% 107.5%
[S] The combined ratios of the Company increased in 1998, primarily due to the reduction in premium volume at a rate greater than the reduction in net underwriting and other costs. In addition, the reduction in servicing fees in 1998 negatively affected the expense ratios. Included in the Company's results for 1998, 1997 and 1996 were approximately $12.9 million, $8.3 million and $8.1 million, respectively, for reserve strengthening related to losses from prior accident years. During 1998, the Company reviewed the adequacy of the reserves carried for its open claims, files, focusing on workers' compensation, commercial auto and other commercial liability lines of business. Such reviews are part of the Company's normal ongoing practice. Particular emphasis during this review was placed on reserves carried for the workers' compensation line of business. As part of the review, substantially all open workers' compensation claim files were reviewed for every accident year up to and including 1998. The Company also conducted a comprehensive review of reserves carried for other commercial liability lines of business, in which approximately 28% of the open claim files were reviewed, with a primary focus on accident years 1995 to 1997. As a result of these reviews, the Company revised its assumptions regarding average claims costs and probable ultimate losses and, accordingly, reserves were strengthened by $3.9 million for workers' compensation and $4.2 million for other commercial liability lines of business. Additionally, during 1998 the Company reorganized the commercial auto claims department. As part of this realignment, more complex claims files were reviewed by the most experienced claims examiners and assumptions regarding average claims severity and probable ultimate losses were revised and reserves were strengthened by $4.2 million for commercial automobile lines of business. The 1997 reserve strengthening included approximately $3.3 million for commercial package lines of business and approximately $2.1 million for voluntary commercial automobile lines of business. During 1997, the Company reviewed the adequacy of the reserves carried for its open claims' files, as part of its normal ongoing practice, focusing on the commercial package, general liability and commercial automobile lines of business. As a result of this review and the continued unfavorable development of prior accident years losses, particularly the 1992 through 1994 accident years, the Company revised its assumptions regarding future increases in average claims severity and reserves were strengthened. The 1996 reserve strengthening included approximately $6.0 million for voluntary commercial automobile lines of business and approximately $2.4 million for commercial package lines of business. Beginning in 1992, the Company entered into new market segments of the voluntary commercial business, including specialty programs for sanitation trucks, gas stations, fuel oil deliveries and limousines. Initially, the Company based its loss ratio estimate upon its experience with similar lines of business, industry statistics and standard actuarial ultimate loss projection techniques, which consider expected loss ratios. During 1996, claims began to develop unfavorably and the Company used such claim development to revise the assumptions that formed the basis of actuarial studies and reserves were increased. With respect to commercial package lines, general liability claims for business written in 1992 through 1994 also developed unfavorably. These claims showed an increased frequency of losses as well as an increase in the time between the date the loss occurred and when the loss was reported compared to prior experience. General liability claims are susceptible to the emergence of losses over an extended period of time. -14- For the lines of business discussed above, as well as all other property and casualty lines of business, the Company employs a variety of standard actuarial ultimate loss projection techniques, statistical analyses and case-basis evaluations to estimate its liability for unpaid losses. The actuarial projections include an 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. These estimates are performed quarterly and consider any changes in trends and actual loss experience. Any resulting change in the estimate of the liability for unpaid losses, including those discussed above, is reflected in current year earnings during the quarter the change in estimate is identified. The reserving process relies on the basic assumption that past experience is an appropriate basis for predicting future events. The probable effects of current developments, trends and other relevant matters are also considered. Since the establishment of loss reserves is affected by many factors, some of which are outside the Company's control or affected by future conditions, reserving for property and casualty claims is a complex and uncertain process, requiring the use of informed estimates and judgments. As additional experience and other data become available and are reviewed, the Company's estimates and judgments may be revised. While the effect of any such changes in estimates could be material to future results of operations, the Company does not expect such changes to have a material effect on its liquidity or financial condition. In management's judgment, information currently available has been appropriately considered in estimating the Company's loss reserves. The Company will continue to evaluate the adequacy of its loss reserves on a quarterly basis, incorporating any future changes in trends and actual loss experience, and record adjustments to its loss reserves as appropriate. Investment income has decreased by approximately $1.2 million or 7.5% in 1998 as compared to a decrease of $0.7 million, or 4.1% in 1997, and an increase of $1.0 million or 6.5% in 1996, primarily as a result of lower invested assets due to a decrease in premiums written and a program to reduce pending claims during 1998 and 1997, and higher invested assets resulting from positive cash flows in 1996. During 1998, the Company had realized capital gains of $6.1 million principally from gains recognized on the sale of fixed maturities, primarily U.S. Treasury Notes. During 1997, the Company recorded $0.2 million in realized capital losses in the normal course of managing its investment strategy. In 1996, the Company realized gains of $1.1 million on the sale of fixed maturities, primarily U.S. Treasury Notes. The combination of other underwriting expenses incurred and the amortization of deferred policy acquisition costs reflected an increase of approximately $1.0 million or 4.9% in 1998, a decrease of $7.8 million, or 27.8% in 1997, and an increase of $1.7 million, or 6.6% in 1996. The increase in 1998 was largely the result of expenses relating to the move of the Company's executive and administrative offices to Brooklyn, New York and higher underwriting costs relating to surveys and audits of insureds records in connection with the Company's reunderwriting efforts offset in part by $2.0 million pension curtailment gain. The decrease in 1997 was primarily the result of lower operating costs, primarily relating to pension and severance benefits for certain employees, and a decrease in the provision for servicing carriers expenses in connection with the NYPAP, offset by higher systems costs. The increase in 1996 was the result of higher operating costs primarily relating to pension and severance benefits for certain employees coupled with higher systems costs. Impact of Inflation The Company, as well as the property and casualty insurance industry in general, is affected by inflation. With respect to losses, the Company's claim severity is affected by the impact of inflation on the cost of automobile repair parts, medical costs and lost wages. The costs of adjusting claims and other underwriting expenses have also been affected by inflationary pressures on salaries and employee benefits. The Company receives rate increases based in part upon its experience as well as the industry's experience. Accordingly, premium increases generally follow the rate of inflation. -15- Year 2000 and Information Technology Systems The Company, as well as most corporations in general, is affected by the problems associated with information technology systems and their ability to correctly capture and process date specific information in connection with the year 2000. The year 2000 issue is the result of computer programs being written using two digits (rather than four) to define the applicable year. Any programs that have time-sensitive software may recognize a date using "00" as the year 1900 rather than the year 2000, which could result in miscalculations or system failures. The Group continues to evaluate its information technology systems to determine the potential impact of the year 2000. In 1996, the Group began to evaluate its information technology systems and their ability to support future business needs. The Group engaged the services of outside consultants who recommended various solutions that included a new policy management system. This led to a decision to acquire new policy management and accounting systems. These systems provide enhanced functionality and improved processing for underwriting, claims, billing, collection, reinsurance, reporting, and accounting and are designed to be year 2000 compliant. Throughout 1998 and 1997, the Group sought the assistance of outside consultants who made further recommendations to ensure compliance, which included upgrades and improvements to desktop computers and local applications. These recommendations would also result in improved productivity, increased reliability, and expanded functionality. The Groups decision in 1996 for system replacement requires the new policy management system to be functional by October 1998 since renewals for certain annual policies expiring on or after January 1, 2000 will begin renewing approximately 90 days prior to the policy's effective date. The new policy management system was successfully migrated into production during 1998 for all new and renewal business. Insurance companies need to maintain historical information concerning premiums, claims, and other related policy information for many years. Currently, the historical database for information maintained by the Group prior to the migration of the new policy system remains on a non-compliant year 2000 "legacy" database. The Group expects to migrate this data to its new policy system during the third quarter of 1999. The Group had also decided in 1996 to replace its accounting system which was installed during the first quarter 1999. The Group believes the policy management and accounting systems will support the year 2000 processing capabilities. Although a significant portion of the Group's current systems are year 2000 compliant, the Group formed a year 2000 readiness team to further increase the Group's state of readiness. The team, which meets regularly, is developing a contingency plan to address any actual failures that may occur thereby minimizing any outages in operational functions. The Group expects to complete this plan before the end of the second quarter of 1999. The team is also charged with the responsibility of monitoring all material elements of compliance including assessment, hardware, software and application environments; testing; and correction implementation. The Group has made inquiries of third parties with whom it has material relationships as to the year 2000 compliance of such third parties. Many of such parties have reported plans to be fully compliant by the end of 1999 and most have reported substantial progress at the end of 1998. However, at this time the Company cannot predict the effect of the year 2000 issue on its material third parties or the impact any deficiency in the year 2000 readiness of such parties could have on the Group. Through December 1998, expenses incurred by the Group in connection with the year 2000 issue (excluding expenses related to the Group's acquisition of new systems, which was not motivated by the year 2000 concerns) did not exceed $100,000. Based upon current information, the Group does not expect that the year 2000 issue will have a material effect on its consolidated financial position or consolidated results of operations. -16- Cautionary Statement for Forward-Looking Information Statements included in this Report may contain forward-looking statements. Such forward-looking statements are made pursuant to the safe-harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements may relate, but are not limited, to projections of revenues, income or loss, capital expenditures, fluctuations in insurance reserves, plans for growth and future operations (including year 2000 compatibility), competition and regulation as well as assumptions relating to the foregoing. Forward-looking statements are inherently subject to risks and uncertainties, many of which cannot be predicted or quantified. When used in this Report, the words "estimates", "expects", "anticipates", "believes", "plans", "intends" and variations of such words and similar expressions are intended to identify forward-looking statements that involve risks and uncertainties. Future events and actual results could differ materially from those set forth in, contemplated by or underlying the forward-looking statements. The factors that could cause actual results to differ materially from those suggested by any such statements include, but are not limited to, those discussed or identified from time to time in the Company's public filings, including general economic and market conditions, changes in domestic laws, regulations and taxes, changes in competition and pricing environments, regional or general changes in asset valuation, the occurrence of significant natural disasters, the inability to reinsure certain risks economically, the adequacy of loss reserves, prevailing interest rate levels, weather related conditions that may affect the Company's operations, the difficulty in identifying hardware and software that may not be year 2000 compliant, the lack of success of third parties to adequately address the year 2000 issue, vendor delays and technical difficulties affecting the Company's ability to upgrade or replace its hardware and/or software for year 2000 compliance, and changes in the composition of the Company's assets and liabilities through acquisitions or divestitures. Undue reliance should not be placed on these forward-looking statements, which are applicable only as of the date hereof. The Company undertakes no obligation to revise or update these forward-looking statements to reflect events or circumstances that arise after the date of this Report or to reflect the occurrence of unanticipated events. Item 7A. Quantitative and Qualitative Disclosures about Market Risk The following includes "forward-looking statements" that involve risk and uncertainties. Actual results could differ materially from those projected in the forward-looking statements. The Company's market risk arises principally from interest rate risk related to its investment portfolio. The Company does not enter into material derivative financial instrument transactions. The Company's investment portfolio is primarily classified as available for sale, and consequently, is recorded on the balance sheet at fair value with unrealized gains and losses reflected in shareholders' equity. Included in the Company's investment portfolio are fixed income securities, which comprised approximately 78% of the Company's total investment portfolio at December 31, 1998. These fixed income securities are primarily rated "investment grade" or are U.S. governmental agency issued or guaranteed obligations, although limited investments in "non-rated" or rated less than investment grade securities have been made from time to time. The estimated weighted average remaining life of these fixed income securities was approximately 3.2 years at December 31,1998. The Company's fixed income securities, like all fixed income instruments, are subject to investment rate risk and will fall in value if market interest rates increase. Expected maturities will differ from contractual maturities because the borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The Company manages the investment portfolio to preserve principal, maintain a high level of quality, comply with applicable insurance industry laws and regulations and achieve an acceptable rate of return. In addition, the Company considers the duration of its insurance reserves in comparison with that of its investments. -17- Expected Maturity Date 1999 2000 2001 2002 2003 Thereafter Total Fair Value
Rate Sensitive Assets: Available for Sale Fixed Income Securities: U.S. Government $26,052 $36,966 - $81,028 - $42,997 $187,043 $187,043 Weighted Average Interest Rate 5.38% 6.03% - 6.38% - 5.97% - - Other Fixed Maturities: Rated Investment Grade $ 806 $ 604 $860 - $1,664 $ 6,148 $ 10,082 $ 10,082 Weighted Average Interest Rate 7.75% 6.50% 7.88% - 7.14% 7.19% - - Rated Less Than Investment Grade/Not Rate $ 806 $ 802 $746 $814 $1,622 - $4,790 $4,790 Weighted Average Interest Rate 6.63% 6.25% 5.88% 6.75% 6.81% - - - - Held to Maturity Fixed Income Securities: U.S. Government - - - $502 - - $502 $502 Weighted Average Interest Rate - - - 6.37% - - - -
[S] Item 8. Financial Statements and Supplementary Data See page F1. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure NONE -18- PART III Item 10. Directors and Executive Officers of the Registrant Pursuant to the Company's Charter and By-Laws, the Board of Directors of the Company consists of 13 members divided into three classes: Class I, Class II and Class III. Class I consists of five directors and Class II and III each consist of four directors. Joel Berlin resigned from the Boards of the Group in January 1999 and was replaced by Ms. Carmen M. Rivera in March 1999. Ms. Carmen M. Rivera will serve until the 1999 Annual Meeting of Shareholders. One class of directors is elected in each year for a three-year term. All of the directors of the Company are also directors of Empire and Centurion. Name, Age and Position Principal Occupation, Office with Company and Term of Office [S] Robert V. Toppi, 61, Principal Occupation - President and Chief Director, President Executive Officer of the Company, Empire and and Chief Executive Centurion since August 1998. Previously, Resident Officer Vice President of the Greater New York district with Aetna Casualty and Surety Company. Class II Director since August 1998; current term expires 2001. Martin B. Bernstein, 65, Principal Occupation - President and Director Director of Ponderosa Fibres of America, Inc.(A pulp manufacturer for paper producers). Class II Director since February 1988; current term expires 2001. Ian M. Cumming, 58, Principal Occupation - Presently and since June Director 1978, Chairman of the Board and a Director of Leucadia. Director of Skywest, Inc. (a Utah-based regional air carrier) since June 1986. Director of MK Gold Company (an international gold mining company) since June 1995. Class I Director since February 1988; current term expires 2000. James E. Jordan, 55, Principal Occupation - Financial Consultant, Director The Jordan Company. Previously, President of the William Penn Co. from 1986 until 1997. Class III Director since 1997; current term expires 1999. Thomas E. Mara, 53, Principal Occupation - Presently and Director since May 1980, Executive Vice President of Leucadia and Treasurer of Leucadia since January 1993. Class I Director since October 1994; current term expires 2000. Louis V. Siracusano, 52, Principal Occupation - Attorney with Director McKenna, Fehringer, Siracusano & Chianese (a law firm) for over seven years. Class II Director since 1985; current term expires 2001. Joseph A. Orlando, 43, Principal Occupation - Chief Financial Officer Director of Leucadia since 1996 and Vice President of Leucadia since 1994. Class III Director since 1998; current term expires 1999. -19- Name, Age and Position Principal Occupation, Office with Company and Term of Office [S] Joseph S. Steinberg, 55, Principal Occupation - President of Leucadia since Director, Chairman of the January 1979 and Director of Leucadia since Board December 1978. Director of MK Gold Company since June 1995. Director since June 1988 of Jordan Industries, Inc., a holding company principally engaged in manufacturing. Director of HomeFed Corporation, a California real estate developer, since August 1998. Class I Director since February 1988; current term expires 2000. Daniel G. Stewart, 80, Principal Occupation - Independent consulting Director actuary. Previously, Senior Vice President of Mutual Benefit Life Insurance Company from 1985 to November 1991. Class I Director since 1980; current term expires 2000. Lucius Theus, 76, Principal Occupation - President, The U.S. Director Associates (consultants in civic affairs, human resources and business management) since 1989. Principal and Director of the Wellness Group, Inc. (a provider of health promotion programs) since 1989 Corporate Director, Civic Affairs of Allied Corporation (a diversified industrial company) since 1979. Class II Director since 1980; current term expires 2001. Carmen M. Rivera, 52, Principal Occupation - Senior Vice President of Director & Senior Small Business Division at Empire since November, Vice President 1998. Previously, Select Manager in the N.Y.C. office at the Travelers Property Casualty Corporation. Class I Director since March 1999; current term expires 1999. Harry H. Wise, 60, Principal Occupation - President and Director, Director H.W. Associates, Inc. (an investment advisory firm). President and Director, Madison Equity Capital Corp. (a sponsor of private investment partnerships). Class III Director since 1988; current term expires 1999. Francis M. Colalucci, 54, Principal Occupation - Executive Vice President, Director, Executive Vice Chief Financial Officer and Treasurer of the President, Chief Financial Company and Empire since March 1, 1999. Officer & Treasurer Senior Vice President, Chief Financial Officer and Treasurer since January 1996. Previously, Vice President & Corporate Treasurer of Continental Corporation (an insurance holding Company) from 1991 to January 1996. Class III Director since October 1996; Current term expires in 1999. R. Scott Conant, 48, Principal Occupation - Senior Vice President, Senior Vice President, Claims for the Company and Empire since September Claims 1997. Previously, Senior Vice President of Home State Holdings, Inc (an insurance holding company) from August 1996 to September 1997. Previously, Manager & Consultant for KPMG Peat Marwick, from February 1995 to August 1996. -20- Item 11. Executive Compensation Summary Compensation Table The following table sets forth certain compensation information for Robert V. Toppi, currently the Chief Executive Officer of the Company, Richard G. Petitt and Andrew W. Attivissimo who were prior Chief Executive Officers of the Company, the only executive officers whose compensation paid, or accrued for, under the pooling arrangement exceeded $100,000 for the years ended December 31, 1998, 1997 and 1996.
Summary Compensation Table Long Term Annual Compensation Compensation Name and Principal LTIP All Other Position Salary Bonus Payouts Compensation Year $ $ $ $ Robert V. Toppi 1998 (a) (a) (a) (a) President & C.E.O Richard G. Petitt 1997 105,969 90,000 - 6,767 (b) Chairman, President& C.E.O. 1996 86,674 150,000 - 7,494 (c) Andrew W. Attivissimo President & C.O.O. 1996 87,791 30,000 69,631(b) 89,397(d) (a) Mr. Toppi receives no compensation from the Company. He is compensated directly by Leucadia. (b) Includes Salary Cap Restoration Plan ($2,303), Pension Plan ($3,264), and Company match of 401(k) Plan ($1,200). (c) Includes Salary Cap Restoration Plan ($2,100), Pension Plan ($4,455) and Company match of 401(k) plan ($939). (d) Contributions made to a trust pursuant to the Empire Long Term Incentive Plan.
The Company does not directly remunerate directors. The directors of the Company and Empire who are not employees of Empire and the Company were paid an annual retainer of $5,000. In addition, eligible directors receive $1,500 for each joint board meeting attended. For attendance at a meeting of a committee of the joint board, such directors receive $1,500 per meeting. In addition, each Chairperson of a committee is entitled to $500 per annum. All fees paid to such directors are shared in accordance with the pooling agreement. In 1998, Mr. Richard G. Petitt retired as Director, Chairman of the Board, President and Chief Executive Officer of the Company and the Group. He was succeeded by Mr. Toppi who is President and C.E.O. and a director. Mr. Steinberg succeeded Mr. Petitt as chairman of the board. In February 1996, Mr. Patrell retired as Chairman of the Board of Directors and Chief Executive Officer of the Company and Empire; he was a Director of the Company and the Group before resigning on January 1, 1998. Upon his retirement, Leucadia agreed to pay to Mr. Patrell the amount of $1,000,000 of which $333,333 was paid by Empire. Pursuant to the pooling agreement, the Company contributed 30% of the compensation paid by Empire to Mr. Patrell. Mr. Patrell agreed not to compete against Leucadia or its affiliated entities for a two year period. Mr. Attivissimo was employed pursuant to an Employment Agreement, which terminated on December 31, 1996. The Employment Agreement was to continue from year to year thereafter unless the period of employment was terminated at the end of a calendar year by either Mr. Attivissimo or Empire on at least six months written notice. In May 1996, Mr. Attivissimo retired from his positions as an officer and director of the Company and the Group. Pursuant to the terms of his Employment Agreement, Mr. Attivissimo continued to be paid his normal salary at the rate of $240,000 per annum through December 31, 1997. In addition, Mr. Attivissimo received $1,901,000 in a lump sum supplemental retirement benefit, $482,375 under Empire's -21- Long Term Incentive Plan and title to an automobile having a book value of approximately $13,000. Pursuant to the pooling agreement, the Company is obligated to pay 30% of the compensation and cost of benefits paid to Mr. Attivissimo. Pension Plan Pensions for officers and employees of the Company were provided under a non contributory defined benefit pension plan "prior plan". Any employee was eligible for membership in the plan on January 1st or July 1st of any plan year after which they had completed one full year of service, consisting of a minimum of 1,000 credited hours with Empire, provided they had attained the age of 21 years by or before such date. Members of the prior plan received a basic pension if they worked until their normal retirement date, which was the last day of the month in which they attained 65 years of age with 5 years of, credited service. Any member in the active employ of Empire may have elected early retirement between 55 and 65. A member electing early retirement must have had at least 10 years of service. A monthly average of total compensation received over the highest 5 consecutive plan or calendar years before retirement was taken to compute benefits as follows: 1.30% of the first $833 per month of average pay, plus 1.75% of average pay over $833 per month. The sum of these two credits was multiplied by the years of credited service. The basic benefit amounts listed in the table below were not subject to any deduction for Social Security benefits or other offset amounts. The maximum benefit payable under the pension plan was $96,400 per year. Benefits accrued under the plan were frozen as of December 31, 1998. The prior plan was merged with the Leucadia plan effective January 1, 1999. As a result of the curtailment of the pension benefits in 1998, the Group recognized a gain of $6,548,000. In accordance with the pooling aggreement, the Company's share of the curtailment gain is 30%. The amounts set forth in the following table show estimated annual benefits upon retirement to which the Company contributes 30% of such cost through the pooling agreement.
Highest Five Year Average Compensation at Years of Service Retirement 10 15 20 2 30 35 $ 10,000 $ 1,300 $ 1,950 $ 2,600 $ 3,250 $ 3,900 $ 4,550 25,000 3,925 5,888 7,850 9,813 11,775 13,738 50,000 8,300 12,450 16,600 20,750 24,900 29,050 75,000 12,675 19,013 25,350 31,688 38,025 44,363 100,000 17,050 25,575 34,100 42,625 51,150 59,675 160,000 27,500 41,300 55,100 69,000 82,600 96,400
[S] Effective January 1, 1999, Empire adopted a non-contributory defined benefit contribution plan. The contributions, ranging from 2% - 16% of employees' current pension plan compensation, are based on the age and service of the employee with Empire. These contributions will accumulate for participants on a tax-deferred basis. Participants will have choices to direct the investment of their contributions to their accounts. Salary Cap Restoration Plan In 1994, Empire established a Salary Cap Restoration Plan ("SCRP") for certain corporate officers. Under the SCRP, Empire provided these officers with an additional benefit, to be paid in a lump-sum upon retirement, equal to the difference between the actuarially determined lump-sum benefits, as computed under the Prior Pension Plan, of the officer's highest five year average compensation (not to exceed $320,000, adjusted for the cost-of-living) at retirement and the current maximum compensation limit of $160,000. The SCRP was an unfunded plan. Along with the defined benefit plan, the benefits under SCRP were curtailed as of December 31, 1998. -22- Employees' Savings Plan Empire sponsors an Employees' Savings Plan (the "Savings Plan"), under which each eligible employee may defer a portion of their annual compensation, subject to limitations. Empire contributes a matching amount, subject to certain limits. In 1996, Empire matched 65% of each participant's deferred contribution up to a maximum matching contribution of $813. A participant may also contribute, from his after-tax dollars, an amount, not to exceed 10% of his annual compensation. Effective July 1996, the Savings Plan was amended to allow Empire matching contributions equal to 50% of an employee's contributions up to a maximum of 2.5% of the employee's salary. Empire's contributions to the Savings Plan were $420,000, $438,000, and $524,000 in 1998, 1997 and 1996, respectively. Under the pooling agreement, the Company is obligated to provide 30% of Empire's contributions to the Savings Plan. Supplemental Retirement Plan Under Empire's Supplemental Retirement Plan ("SERP"), eligible employees who work until their normal retirement date, which, is the last day of the month in which such employees attain 65 years of age, are entitled to receive monthly benefits equal to (a) the difference between (i) one twelfth of a stipulated percentage (the "stipulated percentage") of such participant's final average compensation (the "base amount") and (ii) the aggregate amount of the monthly pension and benefit entitlement such participant would receive under Prior Plan, Savings Plan and other employee pension benefit plans if such benefits were paid in the form of an annuity for the life of the participant and fifty percent of the participant's monthly Social Security benefit, multiplied, unless otherwise specified in the SERP, by (b) a fraction, not exceeding one (the "reduction factor"), the numerator of which is the number of the participant's years of service and the denominator of which is five. Final average compensation is the average annual compensation paid during any five consecutive calendar years during which the participant's compensation was highest. The SERP provides that the minimum benefit payable is equal to the base amount multiplied by the reduction factor. Participants remaining in the employ of the Company after the normal retirement date continue to accrue benefits under the SERP. Early retirement, between age 55 and 65 under the SERP, is permitted provided the participant electing early retirement has at least ten years of service. Amounts payable under the SERP are paid from the Trust to Fund Benefits under Certain Unfunded Deferred Compensation Plans of the Company, established effective November 1, 1987 (the "Trust Fund"). The Trust Fund is subject to the claims of certain creditors of the Company if the Company becomes insolvent. The Board of Directors had designated one key employee, Andrew W. Attivissimo; to receive benefits under the SERP based on a maximum stipulated percentage of 60% and a minimum stipulated percentage of 30%. In 1996, Mr. Attivissimo received a lump sum payment under the SERP of $1,901,000. Item 12. Security Ownership of Certain Beneficial Owners and Management Security Ownership of Certain Beneficial Owners The table on the following page sets forth information as of March 15, 1999 as to the Common Shares of the Company owned of record and beneficially by each person who owns of record, or is known by the Company to own beneficially, more than 5% of such Common Shares. -23-
Name and Amount and Address of Nature of Beneficial Beneficial Percent of Owner Ownership Class Empire Insurance Company 5,987,401 Common 84.6% 335 Adams Street Shares owned of Brooklyn, N.Y. 11201 record Baldwin Enterprises, Inc. 373,607 Common 5.3% 529 East South Temple Shares owned of Salt Lake City, Utah 84102 record
[S] As discussed in Item 1, "Business", Leucadia (and certain of its wholly-owned subsidiaries) may be deemed a parent of Empire and therefore of the Company as a result of its indirect ownership of 100% of the outstanding common stock of Empire. Security Ownership of Management The following table sets forth information concerning beneficial ownership of the Company's common stock and the equity securities of Leucadia by all directors and by directors and officers of the Company as a group as of December 31, 1998 with respect to the Company's Common Shares and as of April 9, 1998 with respect to Leucadia's and Empire's securities. -24- Each holder shown exercises sole voting and sole investment power of the shares shown opposite his or her name. Name of Beneficial Amount and Nature of Percent of Owner Beneficial Ownership Class Martin B. Bernstein - - Francis M. Colalucci - - R. Scott Conant - - Ian M. Cumming (1) - - James E. Jordan - - Thomas E. Mara - - Joseph A. Orlando - - Carmen M. Rivera - - Louis V. Siracusano - - Joseph S. Steinberg (1) - - Daniel G. Stewart - - Lucius Theus - - Robert V. Toppi - - Harry H. Wise - - Directors and executive Officers as a group - - (22 persons) (2) [S] (1) Although neither Ian M. Cumming nor Joseph S. Steinberg directly owns any shares of common stock of the Company, by virtue of their respective interest of approximately 15.5% and 14.2% in Leucadia, each may be deemed to be the beneficial owner of a proportionate number of the shares of Common Stock of the Company beneficially owned by Leucadia through its 100% ownership of Empire. [S] (2) Aside from the beneficial ownership described in note 1 to this table, five directors and one officer beneficially own common shares of Leucadia, which in the aggregate, represent less than 1% of Leucadia's common stock. [S] Item 13. Certain Relationships and Related Transactions [S] See Item 1 of this report and Notes 1, 3, 8, 9, 10 and 11 of Notes to Consolidated Financial Statements for information relating to transactions and relationships between the Company and its affiliates. -25- PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K (a) Financial Statements and Schedule 1. The following Financial Statements of Allcity Insurance Company are included in item 8: Report of Independent Accountants Consolidated Balance Sheets as of December 31, 1998 and 1997. Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996. Consolidated Statements of Cash Flows for the years ended December 31,1998, 1997 and 1996. Notes to Consolidated Financial Statements. 2. The information for Schedules I, IV and V required to be filed pursuant to Regulation S-X, Article 7 is contained in the Notes to Consolidated Financial Statements and, therefore, these schedules have been omitted. The information required by Schedules III and IV of Article 7 is combined in Schedule VI - Supplemental Insurance Information Concerning Property/ Casualty Insurance Operations. All other required schedules are not applicable. Schedule IV - Supplemental Insurance Information Concerning Property/ Casualty Insurance Operations for the years ended December 31, 1998, 1997 and 1996. 3. The exhibits required by Item 601 of Regulation S-K have been filed herewith, see attached Exhibit Index. (b) Reports on Form 8-K. During the quarter ended December 31, 1998, there were no reports on Form 8-K filed for the Company. (c) Exhibits Required by Item 601 of Regulation S-K. See attached Exhibit Index. (d) Financial Statements Required by Regulation S-X. See Item 14(a). -26- Signatures Pursuant to the requirements of Section 13 or 15 (d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ALLCITY INSURANCE COMPANY March 30, 1999 By:/s/ Francis M. Colalucci Francis M. Colalucci Director, Executive Vice President, C.F.O. & Treasurer Pursuant to the requirements of the Securities Exchange Act of 1934, this reporthas been signed below by the following persons on behalf of the registrant and in the capacities indicated and on the date set forth above. /s/ Robert V. Toppi /s/ Francis M. Colalucci Robert V. Toppi Francis M. Colalucci Director, President & C.E.O. Director, Executive Vice President, C.F.O. & Treasurer /s/ Joseph S. Steinberg /s/ Martin B. Bernstein Joseph S. Steinberg Martin B. Bernstein Director, Chairman of the Board Director /s/ Louis V. Siracusano /s/ Harry H. Wise Louis V. Siracusano Harry H. Wise Director Director /s/ Daniel G. Stewart /s/ Thomas E. Mara Daniel G. Stewart Thomas E. Mara Director Director /s/ Ian M. Cumming /s/ James E. Jordan Ian M. Cumming James E. Jordan Director Director /s/ Lucius Theus /s/ Carmen M. Rivera Lucius Theus Carmen M. Rivera Director Director, Senior Vice President /s/ Joseph A. Orlando Joseph A. Orlando Director -27- EXHIBIT INDEX The following designated exhibits, as indicated below, are either filed herewith (if indicated by an asterisk) or have heretofore been filed with the Securities and Exchange Commission under the Securities Act of 1933 or the Securities Exchange Act of 1934 and are incorporated herein by reference to such filings. Reference is made to Item 8 of this Form 10-K for a listing of certain financial information and statements incorporated by reference herein. [S] Exhibit Number Description of Document [S] 3 Corporate charter, as amended, and by-laws, as amended, of the Company (Incorporated by reference to Exhibit 3 of the Company's Annual Report on Form 10-K for the year ended December 31, 1994). 10(a) Pooling Agreement, as amended through March 31, 1992 between Empire and the Company (Incorporated by reference to Exhibit 10(a)-20 of the Company's Form 8 Amendment No. 1 of its annual Report for the year ended December 31, 1981). 10(c) Centurion Agreement, made effective as of August 21, 1987 by and between Empire and the Company, and Centurion. (Incorporated by reference to Exhibit 10(e) of the Company's Annual Report on Form 10-K for the year ended December 31, 1987). 10(d) Empire Mutual Executive Deferred Compensation Plan dated November 17, 1987. (Incorporated by reference to Exhibit 10(f) of the Company's Annual Report on Form 10-K for the year ended December 31, 1987). 10(e) Empire Mutual Insurance Company Supplemental Retirement Plan dated November 17, 1987. (Incorporated by reference to Exhibit 10(g) of the Company's Annual Report on Form 10-K for the year ended December 31, 1987). -28- Exhibit Number Description of Document 10(f) Tax Allocation Agreement dated February 28, 1989 among the Company, PHLCORP, Empire, Centurion, Empire Livery Services, Inc., Executroll Services Corporation, and Empall Agency Incorporated. (Incorporated by reference to Exhibit 10(m) of the Company's Annual Report on Form 10-K for the year ended December 31, 1988). 10(g) Employment Agreement made as of January 1, 1993 Empire and Andrew W. Attivissimo. (Incorporated by reference to Exhibit 10(g) of the 10-K for the year ended December 31, 1992). 10(h) Empire Insurance Company Salary Cap Restoration Plan dated May 26, 1994. (Incorporated by reference to Exhibit 10(i) of the Company's Annual Report on Form 10-K for the December 31, 1994). 10(i) Quota Share Reinsurance Agreement between Empire Insurance Company and Centurion Insurance Company (Incorporated by reference to Exhibit 10(i) of the company's Annual Report on Form 10-K for the year ended December 31, 1997). 10(j) Lease agreement dated June 27, 1996 between Empire Insurance Company and Brooklyn Renaissance Plaza L.L.C., as Landlord, BRPII L.L.C as sub-landlord (Incorporated by reference to Exhibit 10(a) of the company's quarterly report on Form 10-Q for the quarter ended March 31, 1997). 27* Financial Data Schedule -29- ITEM 8. Financial Statements and Financial Statement Schedule Page The following financial information is submitted herein: Report of Independent Accountants F2 Consolidated Balance Sheets as of December 31, 1998 and 1997 F3 Consolidated Statements of Operations for the years ended December 31, 1998, 1997 and 1996 F4 Consolidated Statements of Changes in Shareholders' Equity for the years ended December 31, 1998, 1997 and 1996 F5 Consolidated Statements of Cash Flows for the years ende December 31, 1998, 1997 and 1996 F6 Notes to Consolidated Financial Statements. F7-F28 Financial Statement Schedule: Schedule VI- Supplemental Insurance Information Concerning Property/Casualty Insurance Operations for the years ended December 31, 1998, 1997 and 1996 F29 -F1- REPORT OF INDEPENDENT ACCOUNTANTS [S] February 18, 1999 [S] To the Board of Directors and Shareholders of Allcity Insurance Company: [S] In our opinion, the consolidated financial statements listed in the index appearing under item 14(a) (1) (2) of this Form 10-K, present fairly, in all all material respects, the financial position of Allcity Insurance Company and Subsidiary as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles. In addition, in our opinion, the financial statement schedule listed in the index appearing under item 14(a) (1) (2) of this Form 10-K, present fairly in all respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements and financial statements schedule based on our audits. We conducted our audits of these statements in accordance with generally accepted auditing standards which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatements. An audit includes examining on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. [S] [S] PRICEWATERHOUSECOOPERS LLP [S] New York, New York -F2- CONSOLIDATED BALANCE SHEETS ALLCITY INSURANCE COMPANY AND SUBSIDIARY (In thousands, except share and per share amounts)
December 31, ASSET 1998 1997 Investments: Fixed maturities Available for sale (amortized cost of $181,214 in 1998 and $268,091 in 1997) $181,729 $269,055 Held to maturity (fair value of $502 in 1998 and $497 in 1997) 502 485 Equity securities available for sale 176 447 Short-term 20,186 1,749 Other Invested Assets 31,446 - TOTAL INVESTMENTS 234,039 271,736 Cash 390 2,863 Agents' balances, less allowance for doubtful accounts ($1,817 in 1998 and $1,561 in 1997) 10,015 13,109 Accrued investment income 3,662 2,942 Reinsurance balances receivable 295,994 273,280 Prepaid reinsurance premiums 37,691 55,074 Deferred policy acquisition costs 5,365 7,079 Deferred tax benefit 11,101 11,462 Due from affiliates 3,010 - Other assets 4,437 2,704 TOTAL ASSETS $605,704 $640,249 LIABILITIES Unpaid losses $382,109 $361,341 Unpaid loss adjustment expenses 52,123 56,185 Unearned premiums 63,972 90,807 Drafts payable 3,912 4,983 Due to affiliates - 14,427 Unearned service fee income 2,240 4,539 Reserve for servicing carrier claim expenses 1,730 3,701 Reinsurance balances payable 885 4,825 Other liabilities 5,233 6,567 Surplus note 15,300 14,710 TOTAL LIABILITIES 527,504 562,085 SHAREHOLDERS' EQUITY Common stock, $1 par value: 7,368,420 shares authorized; 7,078,625 shares issued and outstanding in 1998 and 1997 7,079 7,079 Additional paid-in capital 9,331 9,331 Accumulated other comprehensive income net of deferred taxes of $242 and $494 in 1998 and 1997, respectively 449 917 Retained earnings 61,341 60,837 TOTAL SHAREHOLDERS' EQUITY 78,200 78,164 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $605,704 $640,249 See Notes to Consolidated Financial Statements.
-F3- CONSOLIDATED STATEMENTS OF OPERATIONS ALLCITY INSURANCE COMPANY AND SUBSIDIARY (In thousands, except share and per share amounts)
Year Ended December 31, 1998 1997 1996 REVENUES Premiums earned $67,512 $80,891 $96,073 Net investment income 14,523 15,694 16,358 Service fee income 3,389 5,696 6,608 Net securities gains and(losses) 6,079 (192) 1,130 Other income 567 535 621 92,070 102,624 120,790 LOSSES AND EXPENSES Losses 62,282 68,901 76,387 Loss adjustment expenses 7,307 13,144 11,963 Other underwriting expenses, less deferrals of $11,697 in 1998, $14,616 in 1997 and $15,333 in 1996 7,705 4,886 11,681 Amortization of deferred policy acquisition costs 13,411 15,245 16,204 Interest on surplus note 591 595 591 91,296 102,771 116,826 INCOME/(LOSS) BEFORE FEDERAL INCOME TAX 774 (147) 3,964 FEDERAL INCOME TAXES Current (benefit)/expense (343) (227) 2,501 Deferred expense/(benefit) 613 163 (1,171) 270 (64) 1,330 NET INCOME/(LOSS) $ 504 $ (83) $ 2,634 Per share data, based on 7,078,625 Average shares outstanding in 1998, 1997 and 1996 BASIC and DILUTED EARNINGS/(LOSS)PER SHARE $ 0.07 $ (0.01) $ 0.37 See Notes to Consolidated Financial Statements.
-F4- CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY ALLCITY INSURANCE COMPANY AND SUBSIDIARY (In thousands)
SHAREHOLDERS' EQUITY Total Additional Share- Common Stock Paid-In Comprehensive Retained holders' Shares Amount Capital Income Earnings Equity Balance at January 1,1996 $7,079 $7,079 $9,331 $1,240 $58,286 $75,936 Comprehensive Income: Net income for the year 2,634 2,634 Net change in unrealized (loss) on investments (net of deferred benefit of $1,567) (2,912) (2,912) Comprehensive Income/(loss) (278) Balance at December 31, 1996 7,079 7,079 9,331 (1,672) 60,920 75,658 Net loss for the year (83) (83) Net change in unrealized gain on investments (net of deferred taxes of $1,394) 2,589 2,589 Comprehensive Income 2,506 Balance as of December 31, 1997 7,079 7,079 9,331 917 60,837 78,164 Comprehensive Income: Net income for the year 504 504 Unrealized holding gain arising during the period (net of deferred tax of $767) 1,425 1,425 Less reclassification of net securities gains included in net income (net of deferred tax of $1,019) (1,893) (1,893) Comprehensive Income 36 Balance as of December 31, 1998 $7,079 $7,079 $9,331 $ 449 $61,341 $78,200
-F5- [S] CONSOLIDATED STATEMENTS OF CASH FLOWS ALLCITY INSURANCE COMPANY AND SUBSIDIARY (In thousands)
Year Ended December 31, 1998 1997 1996 NET CASH FLOWS FROM OPERATING ACTIVITIES Net income/(loss) $ 504 $ (83) $ 2,634 Adjustments to reconcile net income/(loss) to net cash(used for)/provided by operating activities: Provision for deferred tax benefits 613 163 (1,171) Amortization of deferred policy acquisition costs 13,411 15,245 16,204 Provision for doubtful accounts 256 198 270 Net securities(gains) and losses (6,079) 192 (1,130) Policy acquisition costs incurred and deferred (11,697) (14,616) (15,333) Net change in: Agents' balances 2,838 4,507 3,071 Reinsurance balances receivable (22,714) (9,121) (6,544) Prepaid reinsurance premiums 17,383 14,987 9,224 Unpaid losses and loss adjustment expenses 16,706 11,439 6,208 Unearned premiums (26,835) (20,850) (14,285) Drafts payable (1,071) (729) 868 Due to and (from) affiliates (17,437) 195 (3,633) Unearned service fees (2,299) (922) 352 Reserve for service carrier claims expenses (1,971) (4,342) 1,133 Reinsurance balances payable (3,940) (62) 1,411 Other (2,526) (413) 2,907 NET CASH (USED FOR)/PROVIDED BY OPERATING ACTIVITIES (44,858) (4,212) 2,186 NET CASH FLOWS FROM INVESTING ACTIVITIES Available for Sale: Acquisition of fixed maturities (246,375) (147,423) (172,010) Acquisition of other invested assets (31,446) - - Proceeds from sale of fixed maturities 323,177 120,272 140,862 Proceeds from maturities of fixed maturities 15,466 13,301 36,767 Net change in short-term investments (18,437) 18,693 (8,845) NET CASH PROVIDED BY/(USED FOR) INVESTING ACTIVITIES 42,385 4,843 (3,226) NET(DECREASE)/INCREASE IN CASH (2,473) 631 (1,040) Cash at beginning of year 2,863 2,232 3,272 Cash at the end of year $ 390 $ 2,863 $ 2,232 Cash paid for federal income taxes $ 2,242 $ 1,428 $ 3,686 See Notes to Consolidated Financial Statements.
-F6- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ALLCITY INSURANCE COMPANY AND SUBSIDIARY [S] NOTE 1-ORGANIZATION [S] Allcity Insurance Company ("Allcity" or the "Company") is a property and casualty insurer and includes the results of its subsidiary, Empall Agency, Inc. ("Empall"). Empire Insurance Company ("Empire"), a property and casualty insurer owns approximately 84.6% of the outstanding common shares of the Company and 100% of the outstanding common shares of Centurion Insurance Company ("Centurion"). Empire's common shares are 100% owned and controlled, through subsidiaries, by Leucadia National Corporation ("Leucadia"). Additionally, Leucadia indirectly owns an additional 5.3% of the outstanding common shares of the Company. The Company, Empire and Centurion are sometimes hereinafter collectively referred to as the Group. The property and casualty insurance business written by Empire and Allcity is subject to a pooling agreement under which premiums, losses, loss adjustment expenses and other underwriting expenses are shared on the basis of 70% to Empire and 30% to Allcity. The pooling percentages have been changed from time to time and may be changed in the future subject to New York State Insurance Department approval. Allcity has no employees of its own. Empire provides administrative services and 30% of the related expenses are allocated to Allcity. The Company's three business segments and principal lines of business are (1) automobile (private passenger and commercial), (2) commercial (commercial multi-peril, workers' compensation and other liability) and (3) miscellaneous and personal (fire, allied and homeowners) insurance coverage. Based on the Company's 1998 net earned premiums, approximately 57%, 30% and 13% of such premiums were for the automobile, commercial and miscellaneous and personal lines of business, respectively. The Company markets its products primarily to individuals, retail establishments, restaurants, livery and taxicab owners, and several types of service contractors. A portion of the Company's and Empire's automobile business, both private passenger and commercial, is assigned risk business acquired through contractual arrangements with other insurance companies, some of which are competitors. These contractual arrangements, which are negotiated for one or two year periods, provide for fees paid to the Group within parameters established by the New York State Insurance Department. In addition, the Group received a fee for providing administrative services, including claims processing, underwriting and collection activities, for the New York Public Automobile Pool ("NYPAP") and the Massachusetts Taxi and Limousine Pool. These latter arrangements do not involve the assumption of any material underwriting risk by the Group. Effective February 28, 1998, the Group ceased serving as a servicing carrier for the NYPAP, thereby enabling the Group to concentrate its resources on its core non-service businesses and redeploy certain resources previously dedicated to the NYPAP. Under the pooling arrangement, the Company assumes 30% of the fees and costs of these arrangements. [S] -F7- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 1--ORGANIZATION-CONTINUED The Company and Empire are licensed to transact insurance in the State of New York with Empire being additionally licensed in Connecticut, Massachusetts, Missouri, New Hampshire and New Jersey. Based on 1998 direct premiums written, approximately 4% of the property and casualty business written by the Company and Empire was from sources outside New York State. The Company and Empire distribute their products through seven general agents, one of which is an Empire subsidiary, and independent agents and brokers. Empire's wholly-owned general agent is its largest producer and generated approximately 12% of its total earned premium volume for the year ended December 31, 1998. The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Empall. The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NOTE 2- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Investments: Fixed maturities are designated as either (i) "held to maturity" and carried at amortized cost, (ii) "trading" and carried at estimated market value, which is based on quoted market prices, with differences between cost and estimated fair value reflected in results of operations or (iii) "available for sale" and carried at estimated fair value with differences between cost and estimated fair value being reflected as accumulated other comprehensive income, net of deferred income tax effects. Equity securities are designated as available for sale and carried at estimated fair values with differences between cost and estimated fair value reflected as accumulated other comprehensive income, net of deferred income tax. Other invested assets are designated as trading securities. Short-term investments are carried at cost which approximate fair value. At December 31, 1998 and 1997, investments in fixed maturities on deposit with the New York State Insurance Department, which the Company has the intent and ability to hold to maturity, are classified as "Investments held to maturity". All other investments in fixed maturities and equity securities at those dates are classified as "Investments available for sale" and stated at estimated fair market value. Net unrealized appreciation (depreciation) on investments available for sale (net of deferred tax/(benefit)) is included as accumulated other comprehensive income. Investment income is reported when earned. Net securities gains or losses on the sale of investments are determined on a specific identification basis and are included in revenues. Investments with an impairment in value considered to be other than temporary are written down to estimated net realizable value. -F8- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 2--ACCOUNTING POLICIES-CONTINUED Unearned Premiums: Unearned premiums have been calculated predominantly using he daily pro rata method for the business processed on the Point system for new and renewed business recorded in 1998. All other premiums have been calculated using the monthly pro rata method. Unpaid Losses and Loss Adjustment Expenses: Liabilities for unpaid losses, which are not discounted (except for certain workers' compensation liabilities), and loss adjustment expenses ("LAE") are determined using case-basis evaluations, statistical analyses and estimates for salvage and subrogation recoverable and represent estimates of the ultimate claim costs of all unpaid losses and LAE. Liabilities include a provision for losses that have occurred but have not yet been reported. These estimates are subject to the effect of trends in future claim severity and frequency experience. Adjustments to such estimates are made from time to time due to changes in such trends as well as changes in actual loss experience. These adjustments are reflected in current earnings. Reinsurance: Unpaid losses, unpaid loss adjustment expenses and unearned premiums are stated gross of reinsurance ceded. Premiums written and earned, losses and LAE paid and incurred, and other underwriting expenses are stated net of reinsurance ceded. Pension Cost: Empire funds actuarially determined pension costs as currently accrued; 30% of such pension costs are allocated to Allcity. Policy Acquisition Costs: Policy acquisition costs such as commissions, premium taxes and certain other underwriting expenses are deferred and amortized ratably over the terms of the related policies. Deferred policy acquisition costs are limited to their net realizable value after consideration of investment income on the related premium. If recoverability of such costs from future premiums and related investment income is not anticipated, the amounts not considered recoverable are charged to operations. Participating Policies: Participating business on workers' compensation lines constitutes approximately 4.9% of the Company's policies in force and net premiums written. Amounts transferred to the participating policyholders' funds are determined by means of specific identification based upon premium volume and loss experience. The amount of dividends to be paid to participating policyholders is approved quarterly by the Board of Directors. The amount of policyholders' dividends recorded on participating policies was $78,000, $315,000 and $946,000, in 1998, 1997 and 1996, respectively. Unpaid dividends to participating policyholders are included as a liability in the consolidated balance sheets. Servicing Arrangements: Service fee income from assigned risk business acquired through contractual arrangements with other insurance companies is recognized as revenue and earned over the life of the covered policies on a monthly pro-rata method. [S] -F9- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 2--ACCOUNTING POLICIES-CONTINUED Service fee income for the administrative services, including underwriting, policy issuance, premium collection and claims services, provided to the NYPAP is recorded as a reduction to other underwriting and loss adjustment expenses and is earned over the life of the policies issued. The premiums and losses processed by the Company on behalf of the NYPAP, which are not reflected in the consolidated financial statements for the years ended December 31, are as follows (in thousands):
1998 1997 1996 Premiums Earned $ 4,091 $ 29,076 $ 59,158 Losses Incurred 23,543 50,745 76,939 Unpaid Losses 70,469 98,150 119,223
[S] The premiums, losses and expenses of the business for which the Company provides administrative services are reflected on the financial statements of those insurance companies, including the Company, in New York State which are required to participate in the NYPAP. In its role as a servicing carrier, the Company is liable only for the loss adjustment expenses which are reflected as a reserve for servicing carrier claim expense and are determined using case basis evaluations and statistical analyses. Federal Income Taxes: The Company uses the liability method in providing for income taxes. Under the liability method, deferred income taxes are provided at the enacted tax rates for differences between the financial statements carrying amounts and tax bases of assets and liabilities and for carryforwards. A valuation allowance is provided if deferred tax assets are not considered more likely than not to be realized. Earnings Per Share: Earnings per share ("EPS") are based on the weighted average number of common shares outstanding. There were no outstanding common stock equivalents during 1998, 1997 and 1996 and therefore, basic and diluted EPS are the same. New Pronouncements: As of January 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income. This statement establishes standards for the reporting and disclosure of comprehensive income and its components (revenues, expenses, gains and losses) in the consolidated financial statements. SFAS No. 130 requires that all items required to be recognized under accounting standards as components of comprehensive income be reported in a financial statement that is displayed with the same prominence as other financial statements. The purpose of reporting comprehensive income is to report the change in equity of a business enterprise for the period from transactions and other events and circumstances from nonowner sources. It includes all changes in equity during a period except those resulting from investments by owners and distributions to owners. These items include unrealized appreciation (depreciation) of investments, which is currently reported as other accumulated comprehensive income in the balance sheet. -F10- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 2--ACCOUNTING POLICIES-CONTINUED As of January 1, 1998 the Company adopted Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information" ("SFAS No. 131"). This statement requires that companies report certain information about their operating segments in the financial statements including information about the products and services from which revenues are derived, the geographic areas of operations, and information about major customers. In connection with the adoption of SFAS No. 131, the Company has identified three reportable segments:1) automobile lines; 2) commercial lines; and 3) miscellaneous and personal lines. The operating segments were determined based on the way management allocates resources and assesses performance. Statement of Financial Accounting Standards No. 132, "Employers' Disclosures about Pensions and Other Postretirement Benefits" ("SFAS No. 132") was issued in February, 1998 and requires the following additional disclosures for employers' pensions and other retiree benefits: (1) A reconciliation of beginning and ending balances of the benefit obligation. (2) A reconciliation of the fair value of the plan assets. (3) The effect of a one percentage point decrease in the assumed health care cost trend rates on a)the aggregate of the service and interest cost components of net periodic post retirement health care benefit cost and b)the accumulated post retirement benefit obligation for health care benefits. SFAS No. 132 does not have any effect on the financial position or results of operations of the Company. In January, 1998, the Accounting Standards Executive Committee of the American Institute of Certified Public Accountants issued Statement of Position 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments" ("SOP 97-3"), which is effective for fiscal years beginning after December 15, 1998, and provides guidance for determining when an insurance company should recognize a liability for guaranty-fund and other insurance related assessments and how to measure that liability. The financial position and operating results of the Company is not expected to be materially affected by this statement. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS No. 133") was issued in June 1998 and requires that all derivative financial instruments be recognized as either assets or liabilities in the statement of financial position. SFAS No. 133 will be effective for fiscal years beginning after June 15, 1999, with initial application as of the beginning of the first quarter of the fiscal year. The Company is currently evaluating the impact to its financial statements. -F11- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 2--ACCOUNTING POLICIES-CONTINUED Presentation: Certain prior year amounts have been reclassified to conform with the 1998 presentation. NOTE 3--SURPLUS NOTE The Company issued a surplus note to Empire in 1980. The surplus note provides, among other things, for interest to be accrued on the principal of the note based on a bank's prime rate at the end of the calendar quarter. Neither the principal amount of the surplus note nor the accrued interest may be paid, in whole or in part, without the consent of the Superintendent of Insurance of the State of New York ("Superintendent") and must be repaid, in whole or in part, when so ordered by the Superintendent. NOTE 4-INVESTMENTS Investment income by source is summarized as follows:
Year Ended December 31, 1998 1997 1996 (In thousands) Investment income: Fixed maturities $12,702 $15,627 $15,955 Other invested Assets 1,445 - - Short-term investments 715 385 742 14,862 16,012 16,697 Less: Investment expenses 339 318 339 NET INVESTMENT INCOME $14,523 $15,694 $16,358
[S] Investments at December 31, 1998 are summarized as follows:
Esti- Gross Unrealized mated Amortized Appre- Depre- Fair Cost ciation ciation Value (In thousands) Available for sale: U.S. Treasury securities and obligations of U.S. government agencies $145,061 $ 365 $ 284 $145,142 Mortgage-backed securities 21,302 413 - 21,715 Foreign governments 909 26 - 935 All other corporate bond 13,942 206 211 13,937 Total Fixed Maturities 181,214 1,010 495 181,729 Equity securities - 176 - 176 TOTAL INVESTMENTS AVAILABLE FOR SALE 181,214 1,186 495 181,905 Held to maturity: U.S. Treasury securities 502 - - 502 TOTAL INVESTMENTS HELD TO MATURITY 502 - - 502 Short-term 20,186 - - 20,186 Other invested assets 31,446 - - 31,446 TOTAL INVESTMENTS $233,348 $1,186 $495 $234,039
-F12- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 4--INVESTMENTS CONTINUED Investments at December 31, 1997 are summarized as follows:
Gross Unrealized Estimated Amortized Appre- Depre- Fair Cost ciation ciation Value (In thousands) Available for sale: U.S. Treasury securities and obligations of U.S. government agencies $218,088 $1,327 $ 596 $218,819 Mortgage-backed securities 29,437 298 113 29,622 Foreign governments 15,143 121 77 15,187 All other corporate bonds 5,423 7 3 5,427 Total Fixed Maturities 268,091 1,753 789 269,055 Equity securities - 447 - 447 TOTAL INVESTMENTS AVAILABLE FOR SALE 268,091 2,200 789 269,502 Held to maturity: U.S. Treasury securities 485 12 - 497 TOTAL INVESTMENTS HELD TO MATURITY 485 12 - 497 Short-term 1,749 - - 1,749 TOTAL INVESTMENTS $270,325 $2,212 $ 789 $271,748
[S] The amortized cost and estimated fair values of fixed maturities (including short term securities) at December 31, 1998 are shown as follows (in thousands):
Amortized Fair Cost Value Investments available for sale: Due in one year or less $ 27,620 $ 27,663 Due after one year through five years 121,586 121,562 Due after five years through ten years 30,892 30,975 Sub total 180,098 180,200 Mortgage-backed securities 21,302 21,715 Sub total 201,400 201,915 Investments held to maturity: Due after one year through five years 502 502 TOTAL $201,902 $202,417
[S] Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. The Company sold certain fixed maturities during 1998, 1997 and 1996 and realized gross gains of $6,227,000, $216,000 and $1,354,000, respectively. Realized gross losses of $91,000, $298,000 and $224,000 were realized on these sales in 1998, 1997 and 1996, respectively, before income taxes. In 1997, the Company realized a gross gain of $129,000 before taxes, from the conversion of a portion of stock received from a trade organization membership, Insurance Services Offices, into a stock company. -F13- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 4--INVESTMENTS CONTINUED The changes in unrealized appreciation/(depreciation) on investments available for sale in fixed maturities were $(720,000) and $3,983,000 for the years ended December 31, 1998 and 1997, respectively, before income taxes. As of December 31, 1998 and 1997, a security with an amortized cost of approximately $502,000 and 485,000, respectively, was on deposit with the New York State Insurance Department. During 1998 and 1997, the Company sold call options on certain U.S. Treasury Notes and recognized investment losses of $57,000 and $239,000, respectively. NOTE 5--STATUTORY INFORMATION The following is a reconciliation of net (loss)/income and surplus as reported on a statutory basis to net income /(loss) and shareholders' equity as determined in conformity with generally accepted accounting principles ("GAAP Basis") (in thousands):
Years Ended December 31, 1998 1997 1996 Statutory net (loss)/income $ (50) $ 505 $7,233 Add (deduct): Change in deferred policy acquisition costs (1,714) (628) (871) Change in allowances for doubtful accounts (256) (198) (270) Policyholders' dividends 90 60 (450) Retrospectively rated reinsurance contracts - - (3,365) Pension plan curtailment gain 1,964 - - Capitalized systems development costs 1,440 600 Other postretirement benefits 210 276 (176) Deferred tax (expense)/benefit (613) (163) 1,171 Interest on surplus note (591) (595) (591) Other 24 60 (47) GAAP Basis $ 504 $ (83) $2,634
-F14- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 5--STATUTORY INFORMATION -CONTINUED
DECEMBER 31, 1998 1997 (In thousands) Statutory Shareholders' Equity and Surplus $72,701 $70,088 Add (deduct): Deferred policy acquisition costs 5,365 7,079 Nonadmitted assets, less allowance for doubtful accounts 1,919 1,984 Capitalized systems development costs 2,040 600 Provision for unauthorized reinsurance 205 108 Policyholders' dividends (300) (390) Excess of statutory reserves over statement reserves - 1,143 Deferred tax benefit 11,101 11,462 Other postretirement benefits (257) (467) Net unrealized appreciation on investments 515 964 Surplus note (15,300) (14,710) Other 211 303 GAAP Basis $ 78,200 $78,164
[S] The Company has paid no dividends on its common shares since 1975. The New York Insurance Law prohibits New York domiciled property and casualty companies from paying dividends except out of earned surplus. Without the approval of the New York State Insurance Department, no New York domestic property/casualty insurer may declare or distribute any dividend to shareholders which, together with any dividends declared or distributed by it during the preceeding twelve months, exceeds the lessor of (1) 10% of surplus to policyholders as shown by its last statutory annual statement or (2) one hundred percent of adjusted net investment income during such period. At December 31, 1998 $7,280,000 was available for distribution of dividends. The Company does not presently anticipate paying dividends in the near future. In 1998, the NAIC adopted the Codification of Statutory Accounting Principles guidance, which will replace the current Accounting Pratices and Procedures manual as the NAIC's primary guidance on statutory accounting. The NAIC is now considering amendments to the Codification guidance that would also be effective upon implementation. The NAIC has recommended an effective date of January 1, 2001. The Codification provides guidance for areas where statutory accounting has been silent and changes current statutory accounting in some areas. It is known whether the New York Insurance Department will adopt the Codification, and whether the Department will make any changes to that guidance. The Company has not estimated the potential effect of the Codification guidance if adopted by the Department. -F15- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 6--AGENTS' BALANCES Activity affecting the allowance for uncollectible agents' balances for the years ended December 31, 1996, 1997 and 1998 is summarized as follows (in thousands):
Balance at January 1,1996 $1,093 Provision 2,089 Charge-offs, net of recoveries (1,819) Balance at December 31,1996 1,363 Provision 1,470 Charge-offs, net of recoveries (1,272) Balance at December 31,1997 1,561 Provision 1,362 Charge-offs, net of recoveries (1,106) Balance at December 31,1998 $1,817
[S] NOTE 7-UNPAID LOSSES AND LAE [S] The Company has relied upon standard actuarial ultimate loss projection techniques to obtain estimates of liabilities for losses and LAE. These projections include the extrapolation of both losses paid and incurred by business line and accident year and implicitly consider the impact of inflation and claims settlement patterns upon ultimate claim costs based upon historical patterns. In addition, methods based upon average loss costs, reported claim counts and pure premiums are reviewed in order to obtain a range of estimates for setting the reserve levels. For further input, changes in operations in pertinent areas including underwriting standards, product mix, claims management and legal climate are periodically reviewed. -F16- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 7--UNPAID LOSSES AND LAE - CONTINUED In the following table, the liability for losses and LAE are reconciled for the three years ended December 31, 1998, 1997 and 1996. Included therein are current year data and prior year development.
RECONCILIATION OF LIABILITY FOR LOSSES AND LAE 1998 1997 1996 (In thousands) SAP liability for losses and LAE, net, of reinsurance, beginning of year $145,260 $143,494 $142,718 Provision for losses and LAE for claims occurring in the current year 56,698 73,741 80,216 Increase in estimated losses and LAE for claims occurring in prior years 12,891 8,304 8,134 69,589 82,045 88,350 Loss and LAE payments for claims occurring during: The current year 19,203 23,804 27,192 Prior years 55,875 56,475 60,382 75,078 80,279 87,574 SAP liability for losses and LAE, net of reinsurance 139,771 145,260 143,494 Reinsurance recoverable 294,461 272,266 262,593 Liability for losses and LAE at end of year as reported in financial statements (GAAP) $434,232 $417,526 $406,087
[S] Based upon actuarial studies conducted during 1998, 1997 and 1996 the Company strengthened reserves for losses from prior accident years by approximately $12.9 million in 1998 primarily related to commercial liability, commercial auto and workers' compensation lines, by approximately $8.3 million in 1997, primarily related to commercial package and voluntary commercial automobile lines of business and by approximately $8.1 million in 1996, primarily related to commercial package and voluntary commercial automobile lines of business. [S] The Company has purchased annuities with various life insurance companies for number of settled claims. The claimants have been designated as payees; however, the Company has a contingent liability of approximately $3.4 million which represents the aggregate amount of settlements with the claimants, in the event of the failure of the various life insurance companies to perform. -F17- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 8--REINSURANCE The Company has obtained reinsurance coverage to reduce its risk of and exposure to large insurance claims and catastrophes. The Company retained $0.5 million on workers' compensation and $0.3 million for property and casualty lines for all three years. The Company also uses reinsurance to protect itself against certain catastrophic losses. Its retention of lower level losses under such treaties is $7.5 million for 1999 and 1998, $5.0 million for 1997 and $3.0 million for 1996. Due to the geographic concentration of its business, the Company believes hurricanes, windstorms and civil disturbances are its most significant exposure to catastrophic losses. Computer modeling programs provided by independent consultants are used to estimate exposure to such losses. The Company believes it presently has sufficient catastrophe reinsurance protection. Although reinsurance does not legally discharge an insurer from its primary liability for the full amount of the policy liability, it does make the assuming reinsurer liable to the insurer to the extent of the reinsurance ceded. The majority of the Company's reinsurance has been placed with certain of the largest reinsurance companies, including (with their A. M. Best ratings) General Reinsurance Corporation (A++) (superior), American Re-Insurance Company (A++) (superior), Partner Re Co., Ltd. (A+)(superior), IPC Re Ltd. (A) (excellent), CAT Ltd. (A)(excellent) and Zurich Reinsurance (North America), Inc. (A)(excellent). The Company believes its reinsurers to be financially capable of meeting their respective obligations. However, to the extent that any reinsuring company is unable to meet its obligations, the Company would be liable for the reinsured risks. The Company has established reserves, which the Company believes are adequate, for any non-recoverable reinsurance. Effective January 1, 1997, Empire entered into a quota share reinsurance agreement with its subsidiary, Centurion. Under this agreement, Empire will assume 50% up to July 1, 1997 and 75% thereafter of the effective period premiums and losses of Centurion and grant Centurion a ceding commission. Under the pooling agreement, 70% of such business assumed will be retained by Empire and 30% will be shared with the Company. Assets and insurance reserves at December 31, 1998 and 1997 (including $333.7 million and $328.4 million, respectively, which represent reinsured amounts principally arising from the intercompany pooling agreement with Empire) are as follows (in thousands):
Ceded to Empire Others Total As of December 31, 1998 Prepaid reinsurance premiums $ 37,477 $ 214 $ 37,691 Reinsurance balances receivable on: Paid losses - 1,534 1,534 Unpaid losses 217,958 39,633 257,591 Unpaid loss adjustment expenses 32,235 4,634 36,869
-F18- NOTES TO CONSOLIDATED FINANCIAL STAEMENTS -- CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 8 - REINSURANCE -- CONTINUED
Ceded to Empire Others Total As of December 31, 1997 Prepaid reinsurance premiums $ 54,476 $ 598 $ 55,074 Reinsurance balances receivable on: Paid losses - 1,014 1,014 Unpaid losses 204,023 32,758 236,781 Unpaid loss adjustment expenses 31,671 3,814 35,485
[S] An analysis of reinsurance premiums, losses, LAE and commissions for the years ended December 31, 1998, 1997 and 1996 are summarized as follows (in thousands):
Direct Assumed Ceded Net Empire Others Empire Others 1998 Premiums earned $142,065 $ 67,512 $100 $135,419 $ 6,746 $67,512 Losses incurred 173,235 62,282 409 155,446 18,198 62,282 LAE incurred 17,202 7,307 74 15,963 1,313 7,307 Commissions incurred 15,886 8,438 10 14,795 1,101 8,438 Premiums written 117,449 58,059 48 111,135 6,362 58,059 Losses paid 146,208 62,323 655 135,539 11,324 62,323 LAE paid 15,576 12,755 74 15,157 493 12,755 Unearned premiums(a) 53,720 26,281 33 53,539 214 26,281 Unpaid losses(a) 349,699 124,518 1,303 311,369 39,633 124,518 Unpaid LAE(a) 50,685 15,253 - 46,051 4,634 15,253 1997 Premiums earned $191,175 $ 80,891 $ 142 $178,488 $12,829 $80,891 Losses incurred 170,395 68,901 195 155,122 15,468 68,901 LAE incurred 16,345 13,144 62 15,489 918 13,144 Commissions incurred 22,121 10,666 4 20,271 1,854 10,666 Premiums written 169,911 75,029 81 157,359 12,633 75,029 Losses paid 161,192 68,512 634 150,628 11,198 68,512 LAE paid 13,368 11,767 62 13,090 340 11,767 Unearned premiums(a) 78,336 35,733 85 77,823 598 35,733 Unpaid losses(a) 322,671 124,559 1,548 291,461 32,758 124,559 Unpaid LAE(a) 49,058 20,700 - 45,244 3,814 20,700 1996 Premiums earned $235,467 $ 96,073 $277 $222,909 $12,835 $96,073 Losses incurred 182,132 76,387 209 170,630 11,711 76,387 LAE incurred 13,827 11,963 72 11,679 2,220 11,963 Commissions incurred 25,556 10,987 8 23,259 2,305 10,987 Premiums written 222,467 91,011 200 210,068 12,599 91,011 Losses paid 177,454 75,938 728 170,948 7,234 75,938 LAE paid 12,843 11,636 72 12,321 593 11,636
(a) Amounts as reflected in the consolidated balance sheet can be derived [S] -F19- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 8--REINSURANCE-CONTINUED by adding together amounts for direct and assumed and subtracting from this sum 30% of the amount ceded to Empire. The Company remains primarily liable for amounts ceded to reinsurers for unpaid losses, LAE and unearned premiums to the extent that the assuming reinsuring companies are unable to meet their obligations. An analysis of the effect of reinsurance on premiums by business segment for the years ended December 31, 1998, 1997 and 1996 are summarized as follows (in thousands):
Percentage Assumed Ceded of Amount Direct from to Net Assumed Amount Empire(a) Empire(b) Amount to Net 1998 Premiums written: Automobile lines $ 49,028 $31,439 $ 49,076 $31,391 100.2% Commercial lines 56,979 18,282 56,979 18,282 100.0% Miscellaneous and personal lines 11,442 8,386 11,442 8,386 100.0% Total $117,449 $58,107 $117,497 $58,059 1997 Premiums written: Automobile lines $ 85,701 $44,565 $85,782 $44,484 100.2% Commercial lines 73,455 22,107 73,455 22,107 100.0% Miscellaneous and personal lines 10,755 8,438 10,755 8,438 100.0% Total $169,911 $75,110 $169,992 $75,029 1996 Premiums written: Automobile lines $131,542 $60,362 $131,742 $60,162 100.3% Commercial lines 80,758 25,243 80,758 25,243 100.0% Miscellaneous and personal lines 10,167 5,606 10,167 5,606 100.0% Total $222,467 $91,211 $222,667 $91,011 (a)Includes $48, $81 and $200 assumed from non-affiliates in 1998, 1997 and 1996, respectively, before the effects of the pooling agreement described in Note 1. (b)Includes $6,362, $12,633 and, $12,599 ceded to non affiliates in 1998, 1997 and 1996, respectively, before the effects of the pooling agreement described in Note 1.
[S] NOTE 9--FEDERAL INCOME TAXES The Company has been included in the consolidated federal income tax returns o Leucadia since 1993. Under the terms of the tax sharing agreement, members compute their tax provision on a separate return basis and are either charged their share of federal income tax resulting from their taxable income or are reimbursed for the tax benefits resulting from losses. As of December 31, 1998 and 1997, the Company's liability to affiliates for income taxes was $5,533,00 and $8,125,000, respectively. -F20- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 9--FEDERAL INCOME TAXES -- CONTINUED The principal components of the deferred tax asset at December 31, 1998 and 1997 were as follows (in thousands):
1998 1997 Unpaid loss and loss adjustment expense reserves $7,365 $7,576 Unearned premiums 1,840 2,501 Employee benefits and compensation 791 1,221 Interest accrued on surplus note 2,905 2,698 Allowance for doubtful accounts 636 547 Deferred policy acquisition costs (1,878) (2,478) Unrealized appreciation on investments (242) (494) Investment in Ramius LLP 459 - Capitalized system development costs (714) (210) Other, net (61) 101 Total $11,101 $11,462
[S] The Company believes that it is more likely than not that the deferred tax asset at December 31, 1998 will be fully realized based on the availability of taxable income. For the years 1998, 1997 and 1996, the difference between the "expected" statutory federal income tax applicable to continuing operations and the actual income tax expense are as follows:
1998 1997 1996 Expected federal income tax $ 271 $ (51) $1,388 Other (1) (13) (58) Actual federal income tax $ 270 $ (64) $1,330
[S] NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS [S] Empire had a trusteed non-contributory defined benefit pension plan covering substantially all employees. The benefits were based on years of credited service and the employees' highest compensation during any five consecutive plan or calendar years before retirement. Empire's policy was to fund pension costs on a current basis using an aggregate method. -F21- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS -- CONTINUED The following tables set forth certain information relating to Empire's non-contributory defined benefit pension plan (in thousands):
December 31, 1998 1997 Reconciliation of the benefit obligation Projected Benefit Obligation at beginning of year $27,765 $26,927 Service Cost 1,794 1,628 Interest Cost 1,906 1,985 Actuarial loss 323 1,733 Benefits paid (2,521) (4,508) Curtailment gain (7,231) - Projected Benefit Obligation at end of yea $22,036 $27,765 Reconciliation of the fair value of plan assets Fair value of plan assets at beginning of year $25,152 $25,700 Actual return on plan assets 1,637 2,838 Employer contributions 925 1,122 Benefits paid (2,521) (4,508) Fair value of plan assets at end of year $25,193 $25,152 Funded Status Actuarial present value of benefit obligation: Accumulated benefit obligation, including vested benefits of $21,188 in 1998 and $19,355 in 1997 $22,036 $20,763 Projected benefit obligation for services rendered to date (22,036) (27,765) Plan assets at fair value (primarily bonds and stocks) 25,193 25,152 PROJECTED BENEFIT OBLIGATION LESS THAN(IN EXCESS OF)PLAN ASSETS 3,157 (2,613) Unrecognized prior service cost 82 98 Unrecognized net gain from past experience different from that assumed and effects of Changes in assumptions (340) (103) Unrecognized net obligation at transition date 258 386 PREPAID PENSION/(ACCRUED) $ 3,157 $(2,232)
-F22- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS --CONTINUED
Components of net pension cost: Years Ended December 31, 1998 1997 1996 Service cost-benefits earned during the period $1,794 $1,628 $1,862 Interest cost on projected benefit obligation 1,906 1,985 2,098 Actual return on plan assets (1,637) (2,838) (2,120) Deferred (loss) gain on plan assets (124) 1,039 556 Net amortization and deferral 145 145 298 NET PERIODIC PENSION COST $2,084 $1,959 $2,694 Discount rate 6.75% 7.0% 7.5% Rate of Increase in future compensation N/A 5.0% 5.0% Long-term rate of return on plan assets 7.50% 7.0% 7.0%
[S] Benefits accrued under the plan were frozen as of December 31, 1998. The prior plan was merged with the Leucadia plan effective January 1, 1999. As a result of the curtailment of the pension benefits in 1998, the Group recognized a gain of $6,548,000. In accordance with the pooling agreement, the Company's share of prepaid pension/accrued and net periodic pension cost is 30% of the amounts reflected above. Effective January 1, 1999, Empire adopted a defined contribution plan. The contributions, ranging from 2% - 16% of employee's current pension eligible compensation, are based on age and service life of the employees of Empire. These contributions will accumulate for participants on a tax deferred basis. Participants will have choices to direct the investment of the contribution to their accounts. Empire provides certain health care and life insurance benefits for retired employees. During 1996, Empire amended the eligibility requirement to only those employees who had at least ten years of service and were at least 50 years of age as of October 1, 1996. Prior to this amendment, substantially all of Empire's employees were eligible for such benefits if they reached normal or early retirement age while still working for Empire. As a result of this amendment, the accumulated postretirement benefit obligation was reduced by approximately $7,602,000, which is being amortized over three years. Those benefits are provided through an insurance company whose premiums are based on the cost of benefits paid during the year. -F23- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS --CONTINUED The following table sets forth certain information relating to Empire's unfunded substantive plan for postretirement benefits (in thousands):
1998 1997 Reconciliation of the benefit obligation Accumulated postretirement obligation at beginning of year $4,729 $4,574 Service cost 29 23 Interest cost 370 330 Actuarial loss 770 31 Benefits paid (324) (229) Accumulated postretirement obligation at end of year $5,574 $4,729 Funded Status Actuarial present value of accumulated postretirement benefit obligation: Retirees $(4,022) $(3,538) Fully eligible active plan participants (1,074) (544) Other active plan participants (478) (647) (5,574) (4,729) Unrecognized net gain from past experience different from that assumed and effects of changes in assumptions (1,634) (4,938) ACCRUED POSTRETIREMENT BENEFITS COST $(7,208) $ (9,667)
[S]
Components of net postretirement benefits 1998 1997 1996 Service cost--benefits earned during the period $ 29 $ 23 $ 309 Interest cost on projected benefit obligation 370 330 970 Amortization of curtailment gain (2,533) (3,168) - Net amortization and deferral - (19) - PERIODIC POSTRETIREMENT BENEFITS (INCOME) COST $(2,134) $(2,834) $1,279
-F24- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS -- CONTINUED In accordance with the pooling agreement, the Company's share of accrued postretirement benefit cost and net periodic postretirement benefit (income) cost is 30% of the amounts reflected above and is included in other liabilities. In determining the accumulated postretirement benefit obligation at December 31, 1998 and 1997, Empire utilized discount rates of 6.75% and 7.0%, respectively. The assumed health care cost trend rates used in measuring the accumulated postretirement benefit obligation were 8% for 1998 declining to an ultimate rate of 6% by 2000. If the health care cost trend rates were increased by 1%, the accumulated postretirement benefit obligation as of December 31, 1998 would have increased y approximately $350,000, before the effects of the pooling agreement. If the health care cost trend rates were decreased by 1%, the accumulated postretirement benefit obligation as of December 31, 1998 would have decreased by approximately $297,000 before the effect of the pooling agreement. The effect of a 1% increase and decrease in the estimated aggregate of service and interest cost for 1998, 1997 and 1996 would be immaterial. In 1987, Empire established a Supplemental Retirement Plan ("SERP") for certain senior officers. Under the SERP, Empire makes contributions to a trust account for the benefit of eligible senior officers. Eligible officers will receive benefits determined in accordance with the formulas and other provisions of the SERP agreement based on prior salary. As a result of the retirement of a former president, Empire expensed $1,073,000 during 1996. Pursuant to the pooling agreement the Company is obligated to contribute 30% of the payments made under the SERP. In 1994, Empire established a Salary Cap Restoration Plan ("SCRP") for certain corporate officers. Under the SCRP, Empire will provide these officers with an additional benefit, to be paid in a lump-sum upon retirement, equal to the difference between the actuarially determined lump-sum benefits, as computed under the Pension Plan, of the officer's highest five year average compensation (not to exceed $320,000) at retirement and the current maximum compensation limit of $160,000. The SCRP is an unfunded plan. In 1998, 1997, and 1996 Empire expensed $74,000, $17,000 and $90,000, respectively. Along with the defined benefit plan, the benefits under SCRP were curtailed as of December 31, 1998. Under the pooling arrangement, the Company is obligated to pay 30% of the cost of the SCRP. -F25- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 10--PENSION PLAN AND POSTRETIREMENT BENEFITS -- CONTINUED Empire sponsors an Employees' Savings Plan (the "Savings Plan"), under which each eligible employee may defer a portion of their annual compensation, subject to limitations. Empire contributes a matching amount, subject to certain limits. In 1996, Empire matched 65% of each participant's deferral contribution up to a maximum matching contribution of $813. A participant may also contribute, from after-tax dollars, an amount, not to exceed 10% of annual compensation. Effective July 1996, the Savings Plan was amended to allow Empire matching contributions equal to 50% of an employee's contributions up to a maximum of 2.5% of the employee's salary. Empire's contributions to the Savings Plan were $420,000, $438,000 and $524,000 in 1998, 1997 and 1996, respectively. Under the pooling arrangement, the Company is obligated to provide 30% of Empire's contributions under the Savings Plan. NOTE 11--LEASES The Group has entered into a twenty year lease agreement, consisting of 286,510 square feet, in an office building located at 335 Adams Street in Brooklyn, New York, in which Leucadia has an equity interest. The Group received certain incentives from both the City and State of New York in connection with this lease, which will be recognized over the term of the lease. Empire has subleased 133,140 square feet of the office space to its parent, Leucadia at the similar terms as in the original lease. Empire has guaranteed the payment of lease rent by its wholly-owned subsidiary Gould Dente Agency ("Gould"). Gould relocated its offices to the new office building with Empire. In accordance with the guarantee, in 1998, $2.0 million of a $2.3 million liability for lease abandonment costs established by Empire in 1997 was reversed upon release by the landlord from its obligation. Under the pooling agreement, the Company is obligated for 30% of this transaction. -F26- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS-CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 11--LEASES--CONTINUED Future minimum rentals, which exclude escalation amounts, on non-cancelable leases in the aggregate for each of the next five years and thereafter are as follows (in thousands):
Lease Sublease Net 1999 $ 4,906 $ 2,280 $ 2,626 2000 4,906 2,280 2,626 2001 4,906 2,280 2,626 2002 4,906 2,280 2,626 2003 5,029 2,337 2,692 Thereafter 97,035 45,092 51,943 Total $121,688 $56,549 $65,139
[S] Rental expense for the Group for the years 1998, 1997 and 1996 was $3.3 million, $3.3 million and $3.2 million, respectively. The Company is obligated to pay 30% of these rental charges in accordance with the pooling agreement. NOTE 12--BUSINESS SEGMENTS Allcity operates in three business segments--automobile lines, commercial lines and miscellaneous and personal lines. Results by business segment for each year ended December 31, 1998, 1997 and 1996 are summarized as follows (in thousands):
Premiums Underwriting 1998 Earned Gain(Loss) Automobile lines $38,446 $ (5,922) Commercial lines 20,490 (14,536) Miscellaneous and personal lines 8,576 654 TOTAL FROM UNDERWRITING $67,512 (19,804) Net investment income, net securities gains other income and interest on surplus note 20,578 INCOME BEFORE FEDERAL INCOME TAXES $ 774 1997 Automobile lines $50,677 $(8,015) Commercial lines 23,289 (7,842) Miscellaneous and personal lines 6,925 268 TOTAL FROM UNDERWRITING $80,891 (15,589) Net investment income, net securities losses, other income and interest on surplus note 15,442 (LOSS) BEFORE FEDERAL INCOME TAXES $ (147) 1996 Automobile lines $63,558 $(10,822) Commercial lines 27,714 (2,998) Miscellaneous and personal lines 4,801 266 TOTAL FROM UNDERWRITING $96,073 (13,554) Net investment income, net securities gains, other income and interest on surplus note 17,518 INCOME BEFORE FEDERAL INCOME TAXES $ 3,964
-F27- NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--CONTINUED ALLCITY INSURANCE COMPANY AND SUBSIDIARY NOTE 12--BUSINESS SEGMENTS-CONTINUED Direct investment portfolios are not maintained for each segment and, accordingly, allocation of assets to each segment is not performed. Seven general agents, one of which is an Empire subsidiary, produced approximately 32%, 28%, and 23% of Allcity's premiums for the years ended December 31, 1998, 1997 and 1996, respectively. All of Allcity's business is conducted in the State of New York. NOTE 13--FAIR VALUE OF FINANCIAL INSTRUMENTS The Company's only material financial instruments are investments for which the fair values are disclosed in Note 4, and the surplus note and short-term investments, for which the carrying amount approximates fair value. NOTE 14 -- LITIGATION The Company is party to legal proceedings that are considered to be either ordinary, routine litigation or incidental to its business. Based on discussion with Counsel, the Company does not believe that such litigation will have a material effect on its financial position, results of operations or cash flows. NOTE 15 -- RELATED PARTIES See Notes 1, 3, 8, 9, 10 and 11 regarding Allcity's relationships with the Group and Leucadia. NOTE 16--SUMMARY OF UNAUDITED QUARTERLY RESULTS OF OPERATIONS The following is a summary of unaudited quarterly results of operations for 1998, 1997 and 1996 (in thousands, except per share amounts):
1998 1st 2nd 3rd 4th Total Revenues $24,168 $22,029 $21,998 $ 23,875 Net Income/(Loss) 110 (851) (10) 1,255 Basic and Diluted Earnings/(Loss) Per Share 0.02 (0.12) (0.01) 0.18 1997 1st 2nd 3rd 4th Total Revenues $28,108 $26,560 25,826 $ 22,130 Net Income/(Loss) 856 (162) 49 (826) Basic and Diluted Earnings/(Loss) Per Share 0.12 (0.02) 0.01 (0.12) 1996 1st 2nd 3rd 4th Total Revenues $30,884 $30,714 $30,600 $ 28,592 Net Income 556 497 780 801 Basic and Diluted Earnings Per Share 0.08 0.07 0.11 0.11
-F28- ALLCITY INSURANCE COMPANY SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS (Thousands of dollars)
COL. A COL. B COL. C COL. D* COL. E COL. F COL. G COL. H Reserves Claims and Claim for Unpaid Adjustment Expenses Deferred Claims Discount Incurred related to Policy and Claim if any Net (1) (2) Acquisition Adjustment Deducted in Unearned Earned Investment Current Prior Segment Costs Expenses Column C(a) Premiums Premiums Income (b) Year Years Year Ended 12/31/98: Automobile lines $2,222 $180,716 - $27,700 $38,446 $7,613 $37,703 $(2,035) Commercial lines 2,143 240,732 307 28,110 20,490 6,087 14,108 14,618 Miscellaneous and personal lines 1,000 12,784 - 8,162 8,576 823 4,887 308 $5,365 $434,232 $307 $63,972 $67,512 $14,523 $56,698 $12,891 Year Ended 12/31/97: Automobile lines $3,339 $205,353 - $46,780 $50,677 $ 8,881 $53,995 $ 191 Commercial lines 2,577 203,383 123 35,827 23,289 6,072 15,907 7,482 Miscellaneous and personal lines 1,163 8,790 - 8,200 6,925 741 3,839 631 $7,079 $417,526 $ 123 $90,807 $80,891 $15,694 $73,741 $ 8,304 Year Ended 12/31/96: Automobile lines $4,318 $206,706 - $66,050 $63,558 $ 9,561 $58,256 $ 6,443 Commercial lines 2,654 194,000 104 39,090 27,714 6,370 19,251 1,434 Miscellaneous and personal lines 735 5,381 - 6,517 4,801 427 2,709 257 $7,707 $406,087 $ 104 $111,657 $96,073 $16,358 $80,216 $ 8,134 (a) Liabilities for losses for certain long - term disability payments under wokers' compensation insurance are discounted at a maximum of 6%. The liabilities discounted are deemed insignificant and do not have a material effect on reported income. (b) Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied. Other Operating Expenses are reflected net of service fee income. *Information required by Schedule III - Supplementary Insurance Information has been incorporated within this schedule.
[S] -F29- ALLCITY INSURANCE COMPANY SCHEDULE VI - SUPPLEMENTAL INSURANCE INFORMATION - CONTINUED CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS (Thousands of dollars)
COL. A COL. I COL. J COL. K COL. L* Amortization Paid of Deferred Claims Policy Other and Claim Acquisition Operating Premiums Adjustment Segment Costs Expenses (b) Written Expenses Year Ended 12/31/98: Automobile lines $ 6,635 $ 2,064 $31,391 $50,767 Commercial lines 4,624 1,678 18,282 21,396 Miscellaneous and personal lines 2,152 574 8,386 2,915 $13,411 $ 4,316 $58,059 $75,078 Year Ended 12/31/97: Automobile lines $ 8,371 $(3,864) $44,484 $54,649 Commercial lines 5,118 2,619 22,107 22,580 Miscellaneous and personal lines 1,756 435 8,438 3,050 $15,245 $ (810) $75,029 $80,279 Year Ended 12/31/96: Automobile lines $ 9,854 $ (180) $60,162 $62,446 Commercial lines 5,293 4,742 25,243 22,483 Miscellaneous and personal lines 1,057 511 5,606 2,645 $16,204 $5,073 $91,011 $87,574 (a) Liabilities for losses for certain long - term disability payments under wokers' compensation insurance are discounted at a maximum of 6%. The liabilities discounted are deemed insignificant and do not have a material effect on reported income. (b) Allocations of Net Investment Income and Other Operating Expenses are based on a number of assumptions and estimates and results would change if different methods were applied. Other Operating Expenses are reflected net of service fee income. *Information required by Schedule III - Supplementary Insurance Information has been incorporated within this schedule.
[S] -F29 Continued- EX-27 2
7 12-MOS DEC-31-1998 DEC-31-1998 201,915 502 502 176 0 0 234,039 390 295,994 5,365 605,704 434,242 63,972 0 0 0 0 0 7,079 71,121 605,704 67,512 14,523 6,079 3,956 62,282 13,411 7,705 774 270 504 0 0 0 504 0.07 0.07 417,526 56,698 12,891 19,203 55,875 434,232 12,891
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